PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Borrower(s) Implementing Agency PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Environment Category Date PID Prepared October 27, 2008 Date of Appraisal October 28, 2008 Authorization Date of Board Approval February 5, Country and Sector Background MZ-Competitiveness & PS Development Report No.: AB4226 AFRICA General industry and trade sector (70%);Micro- and SME finance (30%) P Republic of Mozambique Ministry of Industry and Commerce Praca 25 de Junho, No. 300, 7# Andar Maputo Mozambique Tel: (258-21) [ ] A [X] B [ ] C [ ] FI [ ] TBD (to be determined) Mozambique has staged a remarkable recovery from a devastating civil war that ended in the early 90s and has successfully completed an ambitious program of first generation reforms. Since 1992, infrastructure has been improved and is now approaching its pre-war levels, and incomes have risen considerably. The poverty headcount fell from 69 percent in 1997 to 54 percent in On average the economy grew by 8 percent annually since 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 of Government expenditures), healthy agricultural growth, and fast expansion in tourism, construction, and certain manufacturing sub-sectors. Another significant factor was the authorities success in attracting mega-projects in aluminum smelting, natural gas, and titanium mining. Nevertheless, the country remains poor (US $ 310 per capita income in 2006); infrastructure is still inadequate; there are serious unmet education and health needs; and poverty rates remain high. Of the estimated 18 million Mozambicans in 2003, nearly 10 million were below the poverty line. The urban working population is expected to grow at 4 percent until 2010, underscoring the need for 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 of migrant workers from South Africa which has increased tensions in major urban centers.

2 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. If Mozambique 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 of Mozambique s (GoM) second Poverty Reduction Support Strategy (PARPA II) covering , placed the private sector as the main engine for investment, growth, and employment. Realizing the vision set out in the PARPA II requires improving 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 of jobs. The Private Sector: A Snapshot The Mozambican private sector can be characterized by two distinct types of 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 On the other hand are the vast majority of 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 of these firms were small, employing less than 10 employees, and 9 percent were medium firms employing workers. Additionally, with the exception of the mega-projects, the export performance of Mozambican firms has been weak with only 7 percent of manufacturing output in 2003 exported. Expanding manufacturing output, improving quality of produce, and tapping into international markets are all essential if Mozambique is 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 of these investments; while there has been increasing linkages between the mega-projects and smaller firms there remains great potential for deepening and expanding these linkages. Agriculture continues to play a significant role in this predominantly rural country, making it the second largest contribution to GDP growth over the past decade, after the mega-projects, and employing nearly 80 percent of the workforce, much of them engaged in informal subsistence activities. With the majority of 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 of a strategy for broadening the private sector. The plethora of Mozambique s cultural, historic and natural attractions makes tourism a tradable sector in which 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 of coral fringed coastline offer compelling job creation and economic growth opportunities.

3 Private Sector Development: Challenges and Opportunities Despite some modest efforts at reform, Mozambique s business environment remains restrictive with a global ranking of 141 out of 181 and a regional ranking within SADC of 10th out of 14 th on the 2008 Doing Business Indicators. This continues to hinder business registration, expansion, and sustainability. In 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 is awareness of the private sector of these reforms and strengthening public sector capacity to implement the reforms aspects that are not fully captured through Doing Business reports. The 2008 ICA data reveals that the most prominent obstacle that firms mentioned has been the practices of informal competition. Specifically, the ICA found that 78 percent of firms compete against unregistered or 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 of other formal firms. On the other hand, informal firms have made a major contribution to job creation and poverty reduction in the past ten years 1. A strategy that seeks to further understand the dynamics of informality, distinguishes between rural and urban informality, and points the way to bringing in the informal sector to the formal sector is crucial to broaden the base of the private sector. Simultaneously, it should be recognized that informality is not likely to go away completely. Therefore, pragmatic approaches that can help informal firms through linkages with larger firms would be equally important. The second major constraint identified by the ICA survey was access to finance (it was the first constraint in the 2003 survey). The ICA revealed that for small enterprises, only 1 percent of working capital and 1 percent of investment in fixed assets were bank financed whereas for medium enterprises it was at only 4 percent and 5 percent respectively. The 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 of increased bank competition and interest in lending to smaller firms, lack of financing remains a major bottleneck for SME development. The forthcoming 2008 CEM highlights continued constraints inhibiting private sector competitiveness, including shortage of skills, inadequate access to land, burdensome customs and tax administration procedures, and lack of standards and certification for exports 2. The CEM 1 According to the 2004 Informal Sector Survey (INFOR 2004) by the National Statistics Institute, 90 percent of employments is in the informal sector, and of those, 91 percent is concentrated in the informal agricultural sector. 2 See Annex I for additional details on sectors covered by the CEM.

4 confirms the need to further reform the business environment while emphasizing the importance of complementing general reform efforts with sector-specific reforms. Finally, the CEM 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 of dealing with these issues is the regional trade integration within the Southern Africa Development Community (SADC) 3, which envisions a customs union by 2010 and a common market by In response to stronger advocacy by the private sector and international partners advice, the Government of Mozambique (GoM) has embarked on a five year strategy to improve the business environment. The Ministry of Industry and Commerce remains the focal point for business 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 of 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 of 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; (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 To further complement the strategy, the Council of Ministers in June 2008 adopted an action plan which provides a road map of timelines, reform actions, indicators of achievement, and the responsible agencies under each of the main pillars of the business environment reform strategy. MIC has also recently developed a strategy for SME development that was adopted by the Council of Ministers in The SME strategy is supposed to complement that overall business environment strategy and focuses on specific areas of support needed for SMEs, through promoting access to finance, improving SME management and technical capacity, and ensuring that reforms are supportive of SME development. The Government has also been working on sector-specific strategies in agriculture, tourism, as well as an overall approach to dealing with trade integration. While these strategies can signal an understanding of the challenges and a seriousness to undertake changes, it is not clear what the level of consultation has been both within Government and with the private sector at large in the strategy development process and whether the capacity will exist to implement the far-reaching reforms envisaged in some of these documents. It is also important that policy development be coupled with results on the ground for them to be validated by the public, gain credibility in the eyes of investors (whether large or small), and establish a virtuous cycle of reforms yielding results that spur on more reforms. It is in supporting the Government in the process of informing needed reforms, building capacity for 3 SADC region compromises Angola, Botswana, the Democratic Republic of Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe. As a first step towards regional trade integration, it is expected that 85 percent of products would go to tariff zero from January 2008.

5 implementation, and assisting in realization of results for business owners and workers that the World Bank, working in concert with other international partners, can play a catalytic role. 2. Objectives The project s overall objective will be to improve the business environment andenhance the competitiveness of targeted enterprises. This will be achieved by: (i) reducing the cost of doing business through support to GoM reforms and capacity building of key public sector agencies (ii) developing and strengthening the capacity of local intermediaries to deliver business services in targeted sectors; (iii) and piloting region specific interventions in tourism and horticulture sectors. Indicators include results at the enterprise level such as increased sales; results at the intermediary level such as number of new business services to SMEs; and at the policy level such as through improved Doing Business ranking. 3. Rationale for Bank Involvement The Government of Mozambique, through the Ministry of Industry and Commerce (MIC), requested Bank support for a new PSD operation which will assist in the business environment reform efforts, in implementing the strategy to deal with greater international and regional trade integration, and in strengthening the small business sector. The Bank is regarded as the key interlocutor on PSD and business environment issues by the GoM and the donor community and has provided advice and technical input into the development of the strategy on business environment and the SME support strategy. The Bank s engagement in private sector development has been long-standing, with the most significant intervention in recent years being the PoDE Enterprise Development Project, a 6-year multi-donor project which concluded in June PoDE aimed to broaden private sector participation by strengthening the access of Mozambican firms to training and advisory services, promoting linkages with mega-projects, enhancing access to finance, and capacity building of key public agencies and business associations. A first broad-based program following the structural adjustments of 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 underdeveloped 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 of 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 ICR concluded that stand-alone credit lines has not been an effective instrument for promoting sustainable access to finance by SMEs. The ICR recommended that future interventions in this area consider both the financing and technical assistance aspects of access to finance, including working closely with selected financial institutions, building the capacity of firms to borrow, and keeping the design of any financing mechanism simple.

6 The Bank and the IFC have related programs in Mozambique that have an impact on private sector development. An ongoing Financial Sector Technical Assistance Program (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 MSME Program which provides financing and technical assistance to private banks to catalyze lending to SMEs 4. The proposed project would complement both the FSTAP Project and IFC initiatives by building capacity of smaller firms to borrow, supporting the accounting and financial reporting training for SMEs, and promoting bank lending to SMEs through a risk sharing mechanism. With regards to the investment climate, the MCPSD project would work with 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 build the capacity of public sector institutions that are crucial for export promotion and will assist in the local implementation of policy reforms. As mentioned earlier, capacity to implement reforms is a major gap which the new project can help to address. The Bank also supports infrastructure development (specifically power, telecom, and transportation) and the education sector. The project would complement these initiatives by ensuring that the private sector perspective is being considered and by strengthening SMEs to take opportunities of PPPs in these areas. The project will also seek synergies with the planned Agriculture Market-Led Irrigation Project. The donor community regards the World Bank as the leading partner for PSD issues. The World Bank has been working in partnership with the 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 USAID, the EU, NORAD, Swiss Aid, and others 5. The Bank has been active in the Private Sector Working Group (PSWG) which provides a forum for dialogue with government and coordination of donor initiatives; the project can help to strengthen the role of the PSWG. Numerous partners have approached the Bank during the project s preparation to explore opportunities for parallel financing of the project s activities, including those such as the Africa Development Bank, Irish Aid and Danish Aid that are looking to scale-up their activities in PSD. These opportunities are being actively pursued. 4 The IFC SME Initiative will be transferred to a private contractor out over the next year. The Africa MSME Program is close to signing its first agreement with one of the leading banks in Mozambique. 5 Annex 2 provides an overview of the different donor interventions in the private sector in Mozambique.

7 4. Description The project would consist of two technical components (promoting broad-based growth in targeted sectors and regions; 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. So, the regional tourism and horticulture sub-components would inform the policy development process at the national level and, subsequently, would support the implementation of these reforms at the provincial level. Finally, the capacity building activities provided to the customs and quality agencies would complement the activities under the matching grant and sector-specific sub-components to promote SME exports. In order for these synergies to materialize, the project s implementation arrangements 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 equal 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 further elaborated in Sections III and Annex IV. Component One: Improving Competitiveness (US$ million) This component would enhance the competitiveness of SMEs and promote broad based growth in selected regions through the following three sub-components: Business Growth Scheme (US$ 5 million IDA Contribution and US$ 3 million beneficiary contribution) This sub-component would enhance SMEs growth and competitiveness in priority sectors. This would be achieved by promoting access to SMEs to of business services providers for the delivery of consultancy, advisory, and linkage services. The single over-riding aim of the Scheme is to maximize the rate of sales growth in client firms, compared to the rate of growth in firms not supported. The Scheme will deliver two products to individual firms, intended to complement each other: 50% cost-sharing grants, to buy specialized outside expertise [training, consulting, etc., as with PODE FCO]; Free hand-holding, or mentoring, helping each firm to plan and execute a growth plan, stage by stage typically based on quarterly firm visits. These two products will be available to any privately-controlled commercial entity, operating legally within Mozambique, with a priority for SMEs as defined by the Ministry of Industry and Commerce. These products will also be available for to co-operatives, so long as they are commercial in nature [eg. production co-op s, community tourism co-op s], and also for sole

8 traders, operating commercial businesses for profit. These two products can be used to support any commercial activity contributing to the economy of Mozambique, and operating for profit, including commercial agriculture and commercial fishing. A third product will be for the benefit of representative organizations of the private sector, such as chambers, trade associations and professional bodies.cost-sharing grants will be made available, again in order to buy outside services. These will be for three specified purposes: To build the capacity of the organization to better serve its members, and thus to build its strength, membership base, and subscription income. To develop new services to be sold to members, thus increasing its usefulnessto them, and building financial strength. To commission outside expert studies, surveys, research papers, etc., in support of submissions to GoM and its agencies, aimed at improving the regulatory environment facing members. Grants will cover a more generous 75% of eligible costs, but with one important proviso. The total grants extended to an organization within one of 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. Promoting Tourism Sector in Inhambane (US$ 6.5 million) This sub-component proposes a regional approach to promoting broad-based growth in a selected region using tourism as an entry point. The goal is to leverage existing initiatives and deliver an integrated package of 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. The project proposes to pilot this regional approach in Inhambane Province. There is compelling evidence that Inhambane Province represents the best opportunity to test such an approach for results in this sector. It is the province with the most attractive tourism resources and with the highest growth rates in terms of investments and tourist numbers. In addition, two other World Bank Group projects are working on related aspects of tourism development in the province. The rationale for this subcomponent is that it would contribute to ensuring that the other two Bank Group projects achieve broader development impacts beyond their objectives; in this case increased employment and income generation in the local economy. The project proposes interventions in two main areas: Improved public sector service provision in the tourism sector through support to the development and implementation of a tourism strategy and tourism master and marketing plans for the province including, inter alia, aspects of tourism planning and zoning, institutional development, light infrastructure development, policy and regulation, statistics and data collection, market development, land registration database and enhanced environmental protection, and strengthening the provincial one-stop shops. Many of these activities have already been identified during project preparation

9 while other will be completed following the strategy s completion, which is expected within one year of project launch. Expanding the tourism-related private sector supply chain through building the capacity of local training institutes (through curriculum development, training of trainers, learning equipment) to provide training in needed areas (languages, tour operations, boat operations, diving, fishing, artisanal and crafts development, vocational hospitality skills, language, business development, business operations, marketing, catering, construction, carpentry, and maintenance, etc); support to local tourism private sector associations, who will be assisted to increase their relevance to their constituency, including for instance establishing an ombudsman and review process to address complaints and concerns raised by the private sector in relation to the implementation of legislation, policy and regulations. Public-Private Tropical fruits training institute in Nampula (US$ 2.75 million) 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 of high future export potential for Mozambique as well as of interest for the domestic high end market due to growing demand of the middle class in cities as well as from the tourism industry. Quality is an essential part of a strategy to target these markets alongside other factors such as supply consistency, input availability and access to finance. To aid in this, this sub- component will support the establishment of a national quality training centre in Nampula specialized in tropical fruit operations. The training centre will be a public-private partnership which will collaborate intensively with the international banana marketing company Chiquita which has recently announced a major investment in the province and would contribute to the centre through the development of training material and the provision of trainers. The Training Centre would be governed by a Board of Governors with one representative from each of the public and private stakeholders (Ministry of Agriculture, local government, CEPAGRI (Centre for the Promotion of Agriculture), IIAM (the Mozambique National Institute of Agriculture Research), and each of the banana investors, including Matanuska, and Chiquita. The public-private partnership nature of the project will be reflected in the operation of the Board which will serve (a) as governing board for the training institute; and (b) as a forum for the discussion of institutional and policy-related constraints to the development of a tropical fruit industry. IDA, through this sub-component will support the investment in buildings, facilities, equipment, materials for the training centre itself, as well as the establishment of a 100 ha banana farm which will constitute the training grounds of the centre. Furthermore, support will be given to management and personnel resources of the training centre including scholarships. The project will also support the banana farm operating costs in the first year. The initial training focus will be in Nampula but this is planned to be a national institute and there are other banana investments taking place in other parts of the country that can benefit from this learning. It is also envisaged that the training center would eventually diversify into other tropical fruits including mango, pineapple and papaya, once the model has been tested. Component Two: Improving the Business Enabling Environment (US$ 7.75 million)

10 This component will support GoM s effort to improve the business enabling environment. Specifically, the component will advance specific reforms based on the Business Environment Strategy, build the capacity of key agencies that will pay a catalytic role in improving service provision for exports, and strengthen and broaden public-private dialogue. Support to Business Environment Reforms (US$ 5.75 million): Working with the Bank s Investment Climate Team for Africa (FIAS), this sub-component would support the reforms envisioned in the Government of Mozambique s business environment reform strategy through initially working on (i) supporting reforms to improve Mozambique 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 facilitating trade. The two reform areas targeted for support under this sub-component are: 1. Trade Logistics Facilitation: Facilitating trade logistics through comprehensive reform effort which would include: (i) support to the single window initiative through training, software development, office and computer equipment, and renovation works at Customs; (ii) strengthening the audit, research, risk assessment and strategic management capacity at Customs through training; (iii) review and streamlining of legislation and customs procedures 2. Licensing Reform: Streamlining the licensing regulations and implementation for businesses through development of a licensing database, e-licensing capabilities, and strengthening of one-stop shops. This work would incorporate a comprehensive licensing review to be undertaken jointly with FIAS. Support to Quality/Standards Infrastructure (US$ 400,000) Mozambique aims to broaden its export portfolio and that will necessitate aiming for markets of higher quality products. Quality may be secured in many ways, but strict adherence to standards is always part of the answer. The Mozambican government has recognized this and is, with the assistance of the EU, UNIDO, SECO and other supporting the National Institute of Standardization and Quality (INNOQ). A key challenge is the strong need for good priority making and for creating marked demand-driven services in the fields of standardization, certification and metrology. Towards this goal, this sub-component will support the provision of standards-related services by INNOQ in a way that is private-market led and that promotes exports in key sectors. This will be done through a capacity building arrangement with a middle income country institution will build INNOQ s capacity to assess demand for its services and to make priorities in service provision. Strengthening the Accounting Profession (US$1 million)

11 This activity will support the pillar of 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 of qualified accountants and trained accounting technicians. SMEs are especially affected. This sub-component will build on the recently concluded Accounting and Audit ROSC and support the establishment of a capacity building arrangement between the newly established professional accountancy body (Order of Professional Accountants Strengthening Public-Private Dialogue (US$ 600,000) This sub-component would strengthen local business and industry associations to promote greater private sector participation in the policy reform process. Component Three: Project Implementation, Monitoring, and Evaluation (US$ 1.25 million) The main technical counterpart for the project is the Ministry of Industry and Commerce (MIC). MIC is 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. In the first phase of the project, a project implementation unit (PIU) would be established and would consist of a project coordinator, procurement specialist, a financial management specialist, and a monitoring and evaluation specialist. The long-term goal would be to mainstream the PIU within MIC. 5. Financing ($m.) Source: BORROWER/RECIPIENT 3 International Development Association (IDA) 25 Total Implementation The GoM will borrow US$ 25 million from IDA for the project s implementation. The project s duration is expected to be for five years from 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 Ministry of Industry and Commerce and will consist of high-level representatives from Government and the private sector in equal number. Government representatives would include Ministry of Planning and Development, Ministry of Finance, Bank of Mozambique, Ministry of Tourism, Ministry of Agriculture; private sector representatives would include business associations, financial institutions, and private investors. The committee would meet on a quarterly basis and would review the Project s progress against the agreed performance indicators and would address any issues that could adversely impact s the project implementation or attainment of its objectives. MIC s Private Sector Support Unit (CASP) will act as the committee s secretariat and will be responsible to report to the committee,

12 coordinate the committee meetings, liaise with the other ministries as necessary, and keep records of the meetings proceedings. It is recognized that MIC currently has weak implementation capacity to immediately manage a project of this scope. Therefore, the day to day management of the project will be delegated to a professional PIU which will be housed at MIC. The PIU will be staffed with a full-time project coordinator, procurement specialist, financial management specialist, monitoring and evaluation specialist, and administrative support staff. The PIU project coordinator will report to the National Director of CASP. The goal is to mainstream the project management activities into MIC; this would be done following an assessment of MIC s capacity after project mid-term review. As mentioned earlier, the terms of reference of the PIU staff will include provision of training to counterparts at MIC (and other involved ministries) to build their capacity in the different project management functions. The PIU will be in charge of 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 in Inhambane and Nampula to oversee and implement the activities in these two provinces. In Inhambane, it is expected that a local coordinator, local procurement officer, and an accountant will be recruited and will be housed at the governorate. A similar structure will be established for the training centre sub-component in Nampula. The provincial coordinators would report to the Maputobased coordinator. In each of these two provinces, provincial level Advisory Committees will be established which will consist of representatives from both public and private sector stakeholders. 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. While the PIU will be in charge of the overall fiduciary and reporting of the project, it will not be responsible for the technical implementation of all the components. Rather the technical implementation, including the development of consultants TORs and technical specification for the procurement of goods and works, will be delegated to the executing agencies in charge of each of the identified components as follows: The business scheme program will be implemented by a private management contractor which will use private sector trainers and consultants to deliver the requested business services by SMEs. This is in line with best practice in this area. MIC s Private Sector Support Unit will implement the activities related to the coordination of business environment reforms and the support to the development of PSD-related strategies The trade facilitation sub-component will be implemented by the customs agency ; the support to the quality sub-component will be implemented by INNOQ; the accounting sub-component will be implemented by the Order of Professional Accountants. 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

13 project. The PIU will produce quarterly financial monitoring reports and annual financial statements and ensure their timely audit in accordance with International Auditing Standards. A. Monitoring and evaluation of outcomes/results 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 result framework intended to be useful for both project management and World Bank supervision. This framework focuses on the project development objective 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 in partnership and collaboration with the designated technical staff in each implementing agency; the goal is to have this agreed to during appraisal. The PIU will remain responsible for the data collection, analysis, and reporting of 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 Steering Committee. 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 of the project. An Implementation Completion Report (ICR) will be undertaken after completion of the project. 6. Sustainability The project is supporting the GoM s vision as articulated in PARPA II of having the private sector as the main engine of growth, investment, and employment. The project s components are under-pinned in the Business Environment Reform Strategy and the SME Strategy, both of which have been adopted by the Government over the past year. The project would also contribute to the realization of the Government s strategy for dealing with Regional Trade Integration which 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 of broadening private sector-led growth. Equally important, the private sector has 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 of focus and has been supportive of the project s goals. Sustainability of project outcomes would be assured when there is: 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 Enhanced capacity of local business service providers to provide needed business and advisory services to SMEs and the ability of SMEs to seek and procure needed services

14 Towards these goals, the project design emphasizes capacity building in all of 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 of 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 MIC with a goal to eventually mainstreaming all project management functions, the project hopes to leave behind a strengthened management and administrative capacity within the Ministry 7. Lessons Learned from Past Operations in the Country/Sector The PODE Project ICR presented a number of lessons on the technical design as well as the implementation and fiduciary level. 6 The following lessons from PODE have been incorporated: 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 of any changes. Therefore, the focus of the business environment component is on strengthening public sector capacity to implement reforms (such as through capacity support to the one-stop shops and the customs agency) and strengthening public-private dialogue, particularly outside the capital region. Further, the project s tourism and agribusiness subcomponents would provide support for public sector capacity at the provincial level, which has been a weak link in the reform implementation process. Complementarities in Interventions: One issue that had arisen in previous PSD interventions (and not only in Mozambique) is the need to make project components more complementary to each other so that the impact of the project can be enhanced and efficiencies realized. So, for example, the business growth scheme would target SMEs in the sectors that are being supported by the tourism and horticulture sub-components. On the policy side, the policy reforms that are being advocated at the national level would also be tracked and supported at the provincial level through the tourism and agribusiness sub-components in Inhambane and Nampula; furthermore, business environment reforms would not only be generic but also sector-specific so they could support the sectors of focus. Selectivity, both sectorally and geographically: While the project will several subcomponents 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 high impact on the private sector. Sustainability and Ownership: One of the lessons of PODE is the need to plan for sustainability in the early stage of the project; real government and private sector ownership of 6 PODE ICR Rating for Development Objective was Moderately Satisfactory. This rating was confirmed by the IEG Review.

15 project components and processes is essential for sustaining the interventions envisioned. These are cross-cutting themes and are factored into the design of each component. The mechanism for sustainability will differ per the interventions envisioned. The business growth scheme aims to catalyze the delivery of business services to SMEs and its sustainability depends on the market players (i.e. training and consultancy firms) continuing the delivery of these services beyond project end. On the other hand, the sustainability of reforms is linked to continued Government commitment to the reform goals and the continuation of the capacity built to oversee and implement the reforms enacted. The project implementation unit will be located within MIC with the goal of eventually mainstreaming the project management functions. Project Management Capacity: The previous PSD project had experienced significant project management constraints, including in procurement and financial management. A special audit was conducted that concluded that the capacity to manage the project was extremely weak and that key functions were understaffed; this had an adverse affect on the project s results, especially on the sustainability aspect. The MCPSD project is utilizing the Project Preparation Facility (PPF) funds to build capacity at MIC on procurement, financial management, and project coordination. As mentioned in the previous section, the goal will be to eventually mainstream the PIU functions fully at MIC though in the initial stage the project will fund the key fiduciary and monitoring and evaluation positions. The project funded staff would have two goals: (i) to ensure smooth implementation project activities in line with Bank guidelines; and (ii) to build capacity of counterpart staff. 8. Safeguard Policies (including public consultation) A. Environment Potential adverse environmental and social impacts such as soil and water pollution, pesticide poisoning, loss of vegetation, soil erosion and traffic accidents are anticipated under component 1 due to the funding of (a) light infrastructure activities (rehabilitation of existing government facilities, final hook-up/distribution of electricity lines especially electricity connections, repaving and rehabilitation of existing roads that are critical for the access to tourism sites, solid waste management) in the context of support for priority elements of Mozambique s tourism master and marketing plan and tourism strategy; and (b) the construction of a new Training Center and development of a 100 ha banana plantation for training purposes in Nampula Province in the context of support for the establishment of the public-private tropical fruits training institute. Since the exact locations of future sub-projects and their potential adverse environmental and social impacts could not be identified prior to appraisal of the proposed project, 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 applied in the event that future sub-projects involve land acquisition which could lead to loss of livelihoods and/or land among the population living in the project area.

16 The ESMF outlines an environmental and social screening process to be applied by qualified personnel to all future sub-projects. This screening process will guide future sub-project implementers in (i) the identification of potential adverse environmental and social impacts including the need for land acquisition - through the use of the Environmental and Social Screening Form; (ii) the determination of 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 EA reports; (v) public consultations; (vi) review and clearance of screening results and separate EA reports; and (vii) environmental monitoring and reporting in the context of the project s M&E system. 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; (c) a summary of 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 of training activities at the banana plantation. To ensure effective implementation of the ESMF, the project will (a) appoint Environmental Focal Points at the Ministry of Industry and Commerce (MIC) as well as the Governors offices in the provinces participating in this project; (b) fund relevant environmental training for (i) Environmental Focal Points at the MIC and Governors offices, (ii) selected staff at municipalities where training facilities are to be rehabilitated/constructed; (iii) key members of the MIC Project Steering Committee; and (iv) other relevant stakeholders; (c) pest management training will be provided under component 1 (sub-component for the public-private tropical fruits training institute); and (d) coordinate its environmental activities with the Ministry of Coordination and Environment (MICOA). These recommendations will be discussed during appraisal. B. Safeguard Policies The project has triggered OP 4.01 Environmental Assessment, OP 4.09 Pest Management, and OP 4.12 Involuntary Resettlement; the environmental category is B. Safeguard issues are limited to impacts related to the provision of light infrastructure and the construction and operation of a banana plantation (100 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). As discussed in section E, the RPF outlines the policies and procedures to be followed in the event that a sub-project involves land acquisition. The ESMF outlines an environmental and social screening process that will allow for the identification, mitigation and monitoring of potential adverse environmental and social impacts of future sub-projects. The ESMF includes a PMP to be applied during training operations at the banana plantation. To ensure effective implementation of the ESMF, the project will fund relevant environmental training. Component 1 - public-private tropical fruits training institute will support relevant pest management training.