Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No: 46220-MZ

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 16.8 MILLION (US$25 MILLION EQUIVALENT)

TO THE

REPUBLIC OF MOZAMBIQUE

FOR A

COMPETITIVENESS AND PRIVATE SECTOR DEVELOPMENT PROJECT

January 15,2009

Finance and Private Sector Development Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. Its contents may not otherwise be disclosed without World

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CURRENCY EQUIVALENTS (Exchange Rate Effective (November 18,2008)

Currency Unit = New Mozambique Metical (MZN) US$1 = MZN24 .31 U S $ l = SDR0.672

AfDB AGOA B C I BDS BIM C E M CEPAGRI C F A A CPIA CPS DANIDA DB DPTUR EA ESHTI

e-S IS TAFE

ESMF ESMP EU FDI FIAS FM FSTAP GAP1

GDP GASP GEF GMU G o M GTZ IBRD

FISCAL YEAR January1 - December31

ABBREVIATIONS AND ACRONYMS

African Development Bank Africa Growth and Opportunity Act Bank o f Commerce and Investment (Banco Comercial e de Investimentos) Business Development Services International Bank o f Mozambique (Banco Intemacional de Moqambique) Country Economic Memorandum Centre for the Promotion o f Agriculture Country Financial Accountability Assessment Country Policy and Institutional Assessment Country Partnership Strategy Danish International Development Agency Doing Business Provincial Directorate o f Tourism Environmental Assessment Superior College for Tourism and Hospitality in Inhambane (Escola Superior de Hospitalidade e Turismo de Inhambane) Electronic- Public Financial Management System (Sist. D e Administraqao Financeira do Estado) Environmental and Social Management Framework Environmental and Social Management Plan European Union Foreign Direct Investment Foreign Investment Advisory Service Fiduciary Management Financial Sector Technical Assistance Program Small Investment Promotion Agency (Gabinete de Promoqao de Pequenos Investimenos) Gross Domestic Product Private Sector Support Unit, M I C Global Environmental Facility Grant Management Unit Government o f Mozambique German Technical Corporation International Bank for Reconstruction and Development

.. 11

FOR OFFICIAL USE ONLY Investment Climate Assessment Implementation Completion and Results Report International Development Association International Federation o f Accountants International Finance Corporation Inspectorate General o f Finance Mozambique National Institute for Agriculture Research International Monetary Fund Informal Sector Survey National Institute o f Standardization and Quality Information Technology Institute for the Promotion o f Exports German Development Bank Monitoring and Evaluation Mozambique Competitiveness and Private Sector Development Project Ministry o f Industry and Commerce Matching Grant Program Ministry o f Industry and Commerce Director o f Administration and Finance Ministry o f Coordination and Environment Ministry o f Agriculture Ministry o f Tourism Ministry o f Finance Ministry o f Planning and Development Mozambique SME Initiative National Advisory Committee Norwegian Aid Poverty Reduction Support Strategy Project Concept Note Project Development Objectives Public Expenditure Tracking Survey Participating Financial Institutions Public Finance Management Public Financial Management (PFM) Performance Measurement Framework Project Information Document Integrated Education Perform Program (Programa Integrado da Reforma da Educaqao Profissional) Project Implementation Unit Enterprise Development Project (Project0 para o Desenvolvimento Empres ari al) Project Preparation Facility Public-Private Partnership Department o f Planning and Finance Poverty Reduction Strategy Credit Private Sector Development Private Sector Working Group Report on Observance o f Standards and Codes

I C A ICR IDA IFAC IFC IGF IIAM IMF INFOR

I T IPEX KFW M&E MCPSD M I C MGP M I C DAF M I C O A MINAG MITUR M O F M P D MSI NAS N O W PARPA PCN PDO PETS PFI PFM PFM PEFA PID PIREP

P l U PODE

PPF PPP PPPF PRSC PSD PSWG ROSC

m o Q

This document has a restricted distribution and may be used by recipients only in the performance o f their official duties. I t s contents may not be otherwise disclosed without World Bank authorization.

RPF RSF SADC SBD SECO SME S N V TFCA TFCATDP TOR U N D O us U S A I D WB

Resettlement Policy Framework Risk Sharing Facility Southern African Development Community Standard Bidding Documents Swiss Aid Small and Medium Enterprises Netherlands Development Organization Trans frontier Conservation Areas Transfrontier Conservation Area and Tourism Development Project Terms o f Reference United Nations Industrial Development Organization United States United States Agency for International Development World Bank

Vice President: Obiageli Katryn Ezekwesili

Sector Director: Mari lou Jane Uy Sector Manager: Gerard0 Corrochano

Country Director: Michael Baxter

Task Team Leader: Mazen Bouri

i v

MOZAMBIQUE Competitiveness & Private Sector Development

CONTENTS

Page

STRATEGIC CONTEXT AND RATIONALE. ................................................................. 1 I . A . B . C .

I1 . A . B . C . D . E . F .

I11 . A . B . C . D . E . F .

I V . A . B . C . D . E . F . G .

Country and sector issues .................................................................................................... 1

Rationale for Bank involvement .......................................................................................... 4

Higher level objectives to which the project contributes .................................................... 5

PROJECT DESCRIPTION .............................................................................................. 6 Lending instrument .............................................................................................................. 6

Program objective and Phases: ............................................................................................ 7 Project development objective and key indicators .............................................................. 7

Project components., ........................................................................................................... -7 Lessons learned and reflected in the project design .......................................................... 13

Alternatives considered and reasons for rejection ............................................................. 14

IMPLEMENTATION ..................................................................................................... 16 Partnership arrangements .................................................................................................. 16

Institutional and implementation arrangements ............................................................... -16

Monitoring and evaluation o f outcomeshesults ................................................................ 17

Sustainability ..................................................................................................................... 17

Critical risks and possible controversial aspects ............................................................... 18

Loadcredit conditions and covenants .............................................................................. -21

APPRAISAL SUMMARY .............................................................................................. 22 Economic and financial analysis ...................................................................................... -22

Technical ........................................................................................................................... 22

Fiduciary ............................................................................................................................ 23

Social ................................................................................................................................. 23

Environment ..................................................................................................................... -23

Safeguard Policies ............................................................................................................. 24

Policy Exceptions and Readiness ...................................................................................... 25

V

Annex 1: Country and Sector or Program Background .......................................................... 26

Annex 2: Mapping o f Donor Programs in Support of PSD in Mozambique ......................... 42

Annex 3: Overall Results Framework and Monitoring ........................................................... 46

Annex 4: Detailed Project Description ...................................................................................... 53

Annex 5: Project Costs ................................................................................................................ 71

Annex 6: Implementation Arrangements .................................................................................. 73

Annex 7: Financial Management and Disbursement Arrangements ..................................... 76

Annex 8: Procurement Arrangements ....................................................................................... 90

Annex 9: Economic and Financial Analysis ............................................................................ 102

Annex 10: Safeguard Policy Issues ........................................................................................... 109

Annex 11: Project Preparation and Supervision .................................................................... 114

Annex 12: Documents in the Project File ................................................................................ 116

Annex 13: Statement of Loans and Credits ............................................................................. 117

Annex 14: Country at a Glance ................................................................................................ 119

Annex 15: Map Moz 33451 ....................................................................................................... 121

vi

MOZAMBIQUE

Total:

MZ-COMPETITIVENESS & PS DEVELOPMENT

14.57 15.09 29.66

PROJECT APPRAISAL DOCUMENT

AFRICA

AFTFP

Date: January 15th, 2009 Country Director: Michael Baxter Sector Manager: Gerard0 M. Corrochano

Team Leader: Mazen Bouri Sectors: General industry and trade sector (70%);Micro- and SME finance (30%) Themes: Small and medium enterprise support (P);Regulation and competition policy (S);Other financial and private sector development (S) Environmental screening category: Partial Assessment

Project ID: P106355

Lending Instrument: Specific Investment Loan

[ ]Loan [XI Credit [ ] Grant [ ] Guarantee [ 3 Other:

For Loans/Credits/Others: Total Bank financing (US$m.): 25.00

Borrower: Republic o f Mozambique

Responsible Agency: Ministry o f Industry and Commerce Praca 25 de Junho, No. 300,7# Andar Mozambique Tel: (258-21) 427-204

v i i

Annual Cumulative

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 in Inhambane, and improved horticulture sk i l ls through a new training centre in Nampula.

0.50 4.70 6.80 6.00 4.60 2.40 0.50 5.20 12.00 18.00 22.60 25.00

Component 2- Elevate the business enabling environment by (i) supporting reforms to improve Mozambique’s Doing Business indicators, (ii) investing in the standardquality related services, (iii) strengthening the accounting profession

Component 3- Implement, monitor and evaluate each component to ensure efficiency and maximize effectiveness o f a l l components.

Which safeguard policies are triggered, if any? Re$ PAD I K F., 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:

. I .

V l l l

!e$ PAD III. F. loard presentation: February 5th, 2009 ,o adcredi t effectiveness : uly 1,2009 :ovenants applicable to project implementation:

'he Conditions o f Effectiveness consist o f the following:

0 The Recipient has established the PIU at MIC, with a structure, equipment, hnctions and responsibilities acceptable to IDA, including a Project coordinator, a financial management specialist and a procurement specialist, al l 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 and record 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 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 as a condition o f disbursement for the training centre banana fm establishment and operating costs.

bated covenants are the following:

External auditors for the project to be hired 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. STRATEGIC CONTEXT AND RATIONALE

A. Country and sector issues

1. Mozambique has staged a remarkable recovery from a devastating c iv i l 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 i t s pre-war levels, and incomes have risen considerably. The poverty headcount fel l from 69 percent in 1997 to 54 percent in 2003. O n 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, and certain manufacturing sub-sectors. Another significant 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 i s s t i l l inadequate; there are serious unmet education and health needs; and poverty rates remain high. Approximately 54 percent o f the population o f 21 mi l l ion remains below the poverty line, according to the latest 2007 estimate. The urban working population i s expected to grow at 4 percent annually 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 s t i l l high, declined faster than urban poverty rates. The situation would have been exacerbated by the recent increase in food and fue l prices and the return o f migrant workers from South Afr ica which has increased tensions in major urban centers.

3. I t is unclear now, having completed the f i rst generation reforms, whether the growth rates wi l l continue to be sustained or be as poverty-reducing as before. If Mozambique i s to sustain i t s growth rate, continue to improve i t s l ow GDP per capita, and harness the opportunities provided by regional trade integration, i t i s essential to broaden the base o f 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 in sectors where Mozambique has a comparative advantage, and supporting small and medium enterprises (SMEs), which generate the greatest number o f jobs.

The Private 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 sel l 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 3 1,735 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 f i r m s employing 10-99 workers. Additionally, with the exception o f the

1

mega-projects, the export performance o f Mozambican f i r m s 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 al l essential if Mozambique i s to diversify i t s exports and lessen i t s dependency on mega-proj ects. Additionally, developing linkages between SMEs and large investments would also help in expanding the benefits o f these investments. W h i l e there has been increasing linkages between the mega-projects and smaller firms , new mega-projects are coming to Mozambique and there i s st i l l much work to be done to expand linkages between SMEs and mega-projects.

5. Agriculture continues to play a significant role in this predominantly rural country, making i t 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 i s 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 in which Mozambique has an inherent comparative advantage. I ts 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 j ob 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 Afr ica Development Community (SADC) o f loth out o f 14th on 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 i t 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 Doing Business reports.

7. The 2008 Investment climate Assessment (ICA) data reveal that the most prominent obstacle that f i r m s mention are the practices o f informal competition. Specifically, the I C A found that 78 percent o f f i r m s compete against unregistered or informal f i rms. Informal f i rms, 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 f i rms. O n the other hand, informal f i r m s 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, i t should be recognized that informality i s not likely to go away completely.

8. The second major constraint identified by the I C A survey was access to finance (it was the f i rst constraint in the 2003 survey). The I C A revealed that, for small enterprises, only 1 percent o f working capital and 1 percent o f investment in fixed assets were bank financed whereas for medium enterprises i t 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 ski l ls in SMEs. While there are some indications o f increased bank competition and interest in lending to smaller f i rms, 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 Afr ica Development Community (SADC)3, which envisions a customs union by 2010 and a common market by 201 5.

10. In response 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 (INFOR 2004) by the National Statistics Institute, 90 percent o f employments i s in the informal sector, and o f those, 91 percent i s concentrated in the informal agricultural sector.

See Annex I for additional details on sectors covered by the CEM. 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, i t i s expected that 85 percent o f products would go to tariff zero from January 2008.

3

3

11. To further complement the strategy, the Council o f Ministers in June 2008 adopted an action plan which provides a road map 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 i s 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 in agriculture, tourism, as wel l 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 in the strategy development process and whether the capacity wil l exist to implement the far-reaching reforms envisaged in some o f these documents. I t i s also important for pol icy 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. In this 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 in realization o f results for business owners and workers.

B. Rationale for Bank involvement

13. The Government o f Mozambique, through the Ministry o f Industry and Commerce (MIC), requested World Bank support for a new Private Sector Development (PSD) operation which wil l assist in the 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 G o M and the donor community and has 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 in recent years being the 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 f i r m s to training and advisory services, promoting linkages with mega-projects, enhancing access to finance, and capacity building o 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 pol icy reform and implementation. With regards to access to finance, the PODE’s Implementation and completion Results Report

4

(ICR) concluded that stand-alone credit l ines have not been an effective instrument for promoting sustainable access to finance by SMEs. The I C R 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, building the capacity o f f i r m s to borrow, and keeping the design o f any financing mechanism simple.

15. The World Bank and the International Finance Corporation (IFC) have related programs 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 lending to SMEs4. The proposed MCPSD project would complement both the FSTAP and IFC initiatives by building capacity o f smaller f i r m s 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 build the capacity o f public sector institutions that are crucial for export promotion and wil l assist in the local implementation o f pol icy 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 pol icy 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 European Union (EU), Norwegian Aid ( N O W ) , Swiss Aid, and others5. The Bank has been active in the 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 f the 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 Program i s close to signing its first agreement with one o f the leading banks in Mozambique. ’ Annex 2 provides an overview of the different donor interventions in the private sector in Mozambique.

5

Figure 1 : Investment Climate Reforms and Poverty Reduction

creation Investment

(domestic and foreign)

-+ Economic

.... Poverty -+ reduction

...........................................................................................

The proposed project i s consistent with the World Bank Country Partnership Strategy (CPS) for Mozambique (2008-201 1) and would help in achieving Pillar I11 goals o f promoting sustainable and broad-based growth. The project would contribute to the realization o f the fol lowing four CPS result areas which are based on the PARPA 11:

0 ImDroving the business environment: through reducing barriers to business entry and cost o f doing business and promoting access to finance for SMEs .

0 Promoting the develoDment o f human resources at a l l levels: through strengthening the skills o f the owners and managers o f S M E s and building the 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 and promoting exports o f high value agricultural products

0 Positioning Mozambique as a world class tourism destination: through increasing participation o f local companies and SMEs in tourism investment and improving government capacity to regulate and oversee this sector.

11. PROJECT DESCRIPTION

A. Lending instrument

18. The MCPSD project would be financed through a specific investment loan with an International Development Association (IDA) allocation US$25 mi l l ion equivalent. An investment loan i s the most suitable instrument for financing the combination o f reforms, capacity building and investment activities envisaged under the project. The project duration i s expected to be for five years. The IDA financing is expected to catalyze additional funding as follows:

0 From Government : The Government wil l provide physical facilities to the project implementation unit in Maputo 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 U S $ 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 i t s 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 been preliminary discussions with Irish Aid in supporting business environment reforms envisaged under the project; however, if that i s realized, i t would take the form o f parallel financing with a distinct set o f activities.

B. Program objective and Phases:

Not applicable.

C. Project development objective and key indicators

19. The objective o f the Project is to improve the business environment 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 in the 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 wi l l benefit the following groups:

0 Small and Medium Enterprises and their workers who would benefit under matching grant Program

0 Tourism and tourism-related businesses in the province o f Inhambane 0 Tropical f ru i ts producers and workers throughout the country 0 Local business service providers, business associations, and training institutes

National and local government agencies, including M I C and i t s 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 o f Exports, etc), Ministry o f Tourism and i t s agencies , Ministry o f Agriculture and i t s agencies, Order o f Professional Accountants, and the Governorates o f Nampula and Inhambane.

D. Project components

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 pol icy 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 in the private sector in Mozambique.

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. In order for these synergies to materialize, the project’s implementation arrangements must be flexible with adequate capacity, open communications, and clear accountabilities for al l 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 wil l be an integral element for the project’s implementation, and ultimately, success. The implementation arrangements are brief ly presented here and are hrther elaborated in Sections I11 and Annex IV.

Component One: Improving Enterprise Competitiveness (US$14.39 million IDA)

22. growth through the fol lowing three sub-components:

This component would enhance the competitiveness o f S M E s and promote broad based

Promoting Access to Business Development Services KJS$6.46 mi l l ion IDA contribution and U S $ 4.16 mi l l ion beneficiary contribution):

23. This sub-component would enhance S M E s growth and competitiveness. This would be achieved by promoting access to S M E s to business services providers for the delivery o f consultancy, advisory, and linkage services. Under this sub-component, IDA would finance grants for S M E s and provision o f goods and consulting services for running the 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 S M E s not supported.

24. complement each other:

The sub-component wil l deliver these two proposed activities to SMEs, intended to

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 limited period to plan and execute a sales growth plan

25. component:

Beneficiary S M E s wil l have to meet the following criteria to access support under this sub-

Be vested with legal personality, dedicated to for prof i t activities, and domiciled in the country.

The decree defines micro and small and medium enterprises as follows: Micro: Have at least two o f the fol lowing three characteristics: (i) less than 25 employees; (ii) less than US$25,000 init ial investment ; (iii) less than 10 KVA power installed. Small: Have at least two o f the fol lowing three characteristics: (i) Between 26 and 124 employees; (ii) init ial Investment betweenUS$25,to US$2.5 mill ion; (iii) Power capacity installed between 10 to 500 KvA and Medium: Have at least two o f the fol lowing three characteristics: (i) Between 126 and 250 employees; (ii) init ial Investment betweenUS$ 2.5 m i l l i on and US$10 mil l ion; (iii) Power capacity installed between 500 to 1000 KvA.

8

0 Produce a plan for business growth indicating a set o f actions i t intends to undertake to achieve increased sales.

0 No SME may receive more than US$70,000 in grants in aggregate.

26. the grants will be available to SMEs in al l sectors.

The main target o f the sub-component will be SMEs in the manufacturing sector though

Representative Organization Grants

27. representative organizations in the private sector for one o f the fol lowing purposes:

In addition to the above products, 75 percent cost-sharing grants wil l be made available to

0 To build the capacity o f the organization to better serve i t s members and thus to build i t s strength, membership base, and subscription income. To develop new services to be sold to members, thereby increasing i t s usefulness to them, and building financial strength. To commission outside expert studies, surveys, research papers, etc., in support o f submissions to G o M and its agencies that are aimed at improving the regulatory environment facing members.

0

28. This type o f grants wil l 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

0

A r e vested with legal personality in Mozambique and domiciled in the country. Have elected officers in accordance with their by-laws Present a plan for purposes o f building capacity in the organization, developing new services, and/or seeking technical assistance to improve the business environment facing i t s members.

29. All grants (for SMEs and private sector representative organizations) wil l be paid o n a reimbursement basis. The management and administration details for the provision o f these grants wil l be set forth in the Operational Manual for the Project.

Promoting Tourism Sector in Inhambane (US$5.01 mil l ion)

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 o f the country. There i s 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 Improving public sector service provision in the tourism sector through support to the development and implementation o f a tourism strategy and tourism master and marketing plans for the province including, inter alia, aspects o f tourism planning and zoning, institutional development, pol icy 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 in Inhambane, (ii) provision o f equipment to training institutes, (iii) recruitment o f 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.

Establishing a Tropical f ru i ts training center in Nampula (US$2.92 mi l l ion IDA and 0.5 mi l l ion Govt./Private Sector Contribution)

3 1. 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 wel l as o f interest for the domestic high end market due to growing demand o f the middle class in cities as wel l 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 in this, this sub-component wil l 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 wil l be established as a non- prof i t 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 wil l be reflected in the operation o f the Board which wil l 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 wil l provide the 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 center and i t s training and ancillary activities. As long as the Centre continues to function the use o f the ~~~ ~~

The Transfrontier Conservation Areas and Tourism Development Project (TFCATDP) i s supporting specific conservation areas in the province. 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.

10

combined facilities would continue to be managed by the Board. While the centre wil l operate in a public-private fashion, the centre’s assets wil l 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 wil l constitute the training grounds o f the centre. Furthermore, support wil l be given to management and personnel resources o f the training centre including study tours, training; a tropical h i t advisor wil l be funded in the establishment year. The project wil l also support the banana farm operating costs in the f i rst year. The training wil l 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 wil l be done with the aim o f achieving Rainforest Alliance certification. The init ial training focus wil l be in Nampula but this is planned to be a national training center, as there are other banana investments taking place or being negotiated in other parts o f the country that can also benefit from this learning. I t 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 been tested. This way the centre would help in achieving the Government’s Rural Industrialization Strategy goals o f promoting the development o f value-added export-oriented agricultural products in rural areas o f Mozambique

Component Two: Improving the Business Enabling Environment (US$5.3 million)

33. This component wil l support GoM’s effort to improve the business enabling environment. In particular, the component wil l 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, streamlining the business licensing regime and business tax administration; and facilitating trade as wel l as enhancing public-private dialogue. Fol lowing 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 f technical assistance, training and goods to support the GoM’s effort to update trade-related legislation and policies, streamline

Annex 2 presents the results o f the Donor Mapping Exercise and Annex 4 : Detailed Project Description provides a 9

table with the agreed division o f responsibilities between the Doing Business Reform Unit, FIAS, and IDA.

11

procedures, systems and build capacity to government agencies involved in trade, such as Customs and Institute for the Promotion o f 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 f one-stop shops.

Public-Private Dialogue: (US$200,000): Provision o f consu’ltancies, training, goods and technical assistance to strengthen public-private dialogue mechanisms.

35. This subcomponent wi l l remain responsive to provide training, consultancies, and goods for support to the implementation o f the Government’s Business Environment and SME Strategies.

S u p ~ o r t to Oualitv/Standards Infrastructure (US$SOO,OOO)

36. Mozambique aims to broaden i t s export portfolio and that wil l require targeting markets o f higher quality products. Quality may be secured in many ways, but strict adherence to recognized standards i s 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, 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 wil l 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 wil l 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 pol icy making. In addition to the costs associated with human resources and training materials o f the twinning institution, the project will finance l imited investment in IT 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, a l l 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 wil l 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 wil l provide technical assistance, training, and goods to the Order o f Professional Accountants o f Mozambique to enable i t to function as a modem professional accountancy body.

Component Three: Project Management, Monitoring, and Evaluation (US$3.66 million)

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 pol icy 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 P I U 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 build the capacity o f M I C in these 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 implementation o 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. Lessons learned and reflected in the project design

39. The PODE Project I C R 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:

lo PODE ICR Rating for Development Objective was Moderately Satisfactory. This rating was confirmed by the IEG Review.

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40. Building Capacity for Reforms: The project design reflects the fact that for pol icy 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 implementation process.

41. Selectivity, both sectorally and geographically: W h i l e the project wil l 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 wil l have a national reach but wil l focus on priority and activities. The two sub- components on tourism and horticulture wil l be geographically focused. The business environment component wi l l complement these initiatives and wil l focus on few reforms which have high potential to be realized and high impact on the private sector.

42. Sustainability and Ownership: One o f the lessons o f PODE i s 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 wil l 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 f i r m s 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 i s 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 wil l be located within M I C with the goal o f eventually mainstreaming the project management functions.

43. Project Management Capacity: The previous PSD project had experienced significant project management constraints, including in procurement 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 wi l l 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 o f counterpart staff.

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F. Alternatives considered and reasons for 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 in the 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 in Mozambique are quite different than the situation existing in 1998-99 when the previous project 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 IDA policies 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 in the near future. Therefore, the project wi l l not be including this activity and would seek to refer clients to the IFC program and would also assist SME borrowers 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 s t i l l 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 building activities and not support infrastructure development. However, i t 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 in the case o f the supporting the one-stop shops and training centers in Inhambane and the development o f the quality training centre in Nampula.

47. Finally, there was consideration as to whether al l the project’s components would be limited to 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 pol icy reform, i t was agreed that there i s a continued need to pursue reforms actively at the national level while supporting implementation at the regional level.

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111. IMPLEMENTATION

A. Partnership arrangements (if applicable)

B. Institutional and implementation arrangements

48. The G o M wil l borrow US$25 mi l l ion 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 wil l provide overall strategic advice and counsel to the project. The Committee wil l be chaired by the Minister o f Industry and Commerce and wil l consist o f high-level representatives from Government and the private sector in equal number. Government representatives wi l l 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 wil l include business associations, financial institutions, and private investors. The committee wil l 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 wil l be delegated to a professional PIU which wil l be housed at M IC . The PIU wil l 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 al l fiduciary requirements (procurement, financial management, environmental screening, monitoring and evaluation and reporting) are successfully maintained. I t wil l be responsible for financial management and coordinate project accounting, maintain overall records and manage disbursements for the IDA project. The PIU wil l produce quarterly financial monitoring reports and annual financial statements and ensure their timely audit in accordance with International Auditing Standards. The P I U wil l 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 wil l 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 P I U staff wil l 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 th is 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 P I U in carrying out i t s responsibilites, satellite PIUs wil l 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 wil l be recruited at the P I U in addition to a Small Business Advisor, and an Environmental Specialist. In Nampula, the staff o f the tropical f ru i ts 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. In each o f these two

16

provinces, provincial level Advisory Committees wil l be established which wil l 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 wi l l double as the Nampula provincial level Advisory Committee. These committees wil l provide advice and support to the project’s activities and wil l help to promote local ownership and ensure that activities remain responsive to local needs. Annual action plans wil l 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. W h i l e the PIU wil l be in charge o f the overall management, coordination, fiduciary and reporting o f the project, i t wil l 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. Monitoring and evaluation of outcomes/results

52. The monitoring and evaluation (M&E) system wil l 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 PIU will be responsible for conducting M&E activities. Baseline data and target values for al l the agreed indicators wil l be verified and confirmed by the PIU in partnership 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 wil l be quarterly reports and annual reports prepared by the Project Coordinator and presented to the Advisory Committee and IDA. These reports wil l 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 wil l be submitted to the World Bank and shared with other development partners as required. A mid-term review wil l be carried out at the ha l f way point o f the project. An Implementation Completion Report (ICR) wil l be undertaken after completion o f the 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 Integration which has a focus on accelerating and diversifying Mozambique’s exports. The G o M has been fully committed to the project and views i t 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.

Description of risk

54. Sustainability o f project outcomes would be assured when there is:

Mitigation measures

0

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 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 and procure needed services

55. Towards these goals, the project design emphasizes capacity building in al l 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 al l project management functions, the project hopes to leave behind a 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. Critical risks and possible controversial aspects

Risk factors

I. Country andl

Macroeconomic framework

On track wi th IMF program since 1987. Fiscal and monetary policies pursue external and internal balance. Further improvements in macroeconomic management in 2007. Monetary Policy Committee introduced in 2007. Fiscal policy i s consistent wi th macro stability and debt sustainability.

Notwithstanding strong macro performance, there i s risk related to due to the sharp increase in food and fuel prices. The world financial and economic

Country teams and economists actively engage with Government on macro management. Country team engages with the Monetary Policy Committee.

The macroeconomic impact o f the shocks i s expected to be manageable. The WB’s PRSC 5 operation w i l l support the Government’s mitigation response package, focusing on the most vulnerable people.

Rating of residual

risk

L o w

18

Country fiduciary management

Country Procurement systems

11-Sector Specifi

Sector Governance, Policies, and Institutions

crises may also translate into a general contraction o f the demand for basic products and services (including agricultural products and tourism), and o f the investment in new.markets.

Ma jo r weaknesses exist in the FM environment (staffing, operating system, reporting), resulting primarily f rom l o w capacity. While the Government’s reform program aims to strengthen accounting and audit capacity through the recruitment and training o f FM specialists and accountants, this i s s t i l l a long way f rom being achieved. Although the new integrated financial information management system (e-SISTAFE) has n o w been rol led out t o a l l ministries at central level, it is st i l l in the process o f cascading down to provincial and district level as we l l as other government institutions. User training i s uneven, meaning that i t is not yet operating at i t s optimal level. N e w procurement l aw and regulations, capacity bui lding program has started and procurement system i s more transparent with Ethics Code sanctions and appeal mechanisms included in the approved procurement Law. Regulatory unit (UFSA) in MOF operational. SBDs issued acceptable with few reservations.

R i s k s

Business Regulatory Environment: There has been modest progress in the business environment, updating the commercial code, lowering the cost and t ime for business start-ups, automating the commercial registry, simplifying tax payments, and adding f lexibi l i ty t o labor regulations. However, Mozambique’s business environment remains restrictive with an overall ranking o f 141 for 2008. I t will be important to maintain the momentum for reforms which should be broadened to encompass business licensing, inspections (labor, health, environment, etc), customs clearance time, and tax requirements/ reimbursement . Financial Sector: The quality o f risk management

The project, through the WB Group, will monitor the effects o f the crisis into Mozambique, while strategies and investment projects promoted under t h i s 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 strengthen PFM systems (including the revenue collection systems), which increase transparency and reduce the country’s vulnerabil ity to fiscal slippage. The government i s committed to the reform program, and has introduced a new legal and regulatory framework that i s underpinned by the introduction and r o l l out o f the integrated financial management system (e-SISTAFE). Introduction o f e-SISTAFE wil l contribute to improvements in budget execution and reduced off-budget expenditures. The process has the full support o f the Development Partners, with WB support currently channeled through the ongoing Public Sector Reform Project, as we l l as the upcoming decentralization project (phase II), that wil l also strengthen financial planning and management at local levels.

Capacity building program started countrywide. Procurement website operational. Need for more capacity building and assistance at the UFSA. The government has started the development o f a monitoring system for the assessment o f the quality o f procurement and enforcement o f the Procurement Regulation. Bank teams wi l l inonitor h o w the new system works.

Through pol icy dialogue and participation in for a such as the Financial and Private Sector Work ing Groups, the Bank wil l continue to promote broad and effective pol icy reforms by the Government o f Mozambique. The Government has recently passed a five year p lan to improve the business environment and i s in the process o f enacting reforms to decrease minimum capital requirements, streamline business inspections, and accelerate business licensing through the one-stop shops. These should have result in an improvement in the Do ing Business Ranking.

Moderate

Moderate

Moderate

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I

I 111. Operation-specific Risks

in financial institutions has improved together with I the better performing portfolio, but the size and depth o f the financial sector remains a binding constraint.

Country Ownership o f Program /Project

Technical Design

Implementation Capacity

Sustainability

The project i s fully compatible with the GoM’ priorities to generate jobs and reduce poverty through private sector development. The project w i l l contribute to the realization o f Government’s PARPA I1 strategy through its focus on SMEs, export promotion, and the priority sectors identified for growth. The project would support the GoM’s strategy for improving the business environment, MIC’s strategy for and the strategy for SME development The project responds to market needs as identified by the Investment Climate Assessment and the CEM and the individual components/sub-components have been designed with a view to catalyze market-led growth and deal with obstacles that may impede such growth.

The project w i l l support a range o f instruments (business services, capacity building and infrastructure development), w i l l have two geographically based sectoral sub-components (tourism and agriculture), and w i l l involve multiple partners, in both the private and public sectors.

There i s a risk that the project implementation unit and the technical implementing units for the different components w i l l be challenged due to weak capacity.

There i s a risk that the business environment

MIC, with support from the Bank, i s leading the project preparation. Stakeholder consultation, including with private sector representatives, are being conducted to validate the demand for the matching grant sub-component; field consultations in the two regions o f focus are also being held. The approaches developed are building on a range o f diagnostic work, including value chain studies, I C A and Doing Business reports, the C E M and the Accounting & Auditing ROSC. The project team’s technical specialists wi th the are working closely wi th government, private sector, and other donors to ensure that the final design reflects the needs, conditions and capacities o f the government and the private sector.

The project P I U will be located within the M I C and w i l l be mandated to both carry out the project management functions and to build M I C capacity. Housing the P I U in M I C would help in ensuring the sustainability o f the capacity built. The management o f the matching grant subcomponent would be contracted to private sector-oriented manager/advisors. Th is would be consistent wi th the market-oriented approach that the project i s taking. PPF funding i s being used to finance the core P I U functions and to provide training on project management as well as procurement and financial management. National and provincial level advisory committees w i l l be established to facilitate communication, information sharing and buy-in for the project’s activities. Satellite PIUs will be established in Nampula and Inhambane to ensure smooth implementation and adherence to Bank guidelines.

Bank supervision missions w i l l include technical specialist who would be complemented with country-based sector staff. The Bank’s fiduciary team i s located in the country office and w i l l conduct regular follow- up (both during and out o f supervision missions) for the project’s fiduciary management The project has programmed significant

Low

Moderate

Moderate

Moderate

20

reforms passed may be reversed in the future or that the capacity to implement the reforms may not be present.

The business services supported by the matching grant program for SMEs may not continue fol lowing project closure.

The training centre in Nampule may not be financially sustainable fol lowing project closure

The major risks wil l relate to the Use o f Country systems for the implementation o f the project activities. This i s one o f the p i l o t projects proposed to go onto the CUT, and the problems o f l o w staff capacity in FM, constraints related to timing o f budgeting and finalization and inclusion o f project work plans in the budget, wil l affect the smooth implementation. Disbursement at the provincial level also raises the risk. Procurement Unit within the Ministry o f Industry and Commerce has been recently created in the framework o f the N e w Procurement Regulations in Mozambique; The capacity to handle procurement under local regulation i s l imi ted and no pr ior experience with Bank Procurement Procedures.

Social and environmental safeguards I provincial level

Lack o f environmental and social management capacity at the implementing agency and at the

I I as we l l as other relevant stakeholders. IV. Overall Risk Rating: MODERATE

capacity building for bo th government and the private sector representatives and is supporting strengthened public-private dialogue. This i s t o ensure that (i) public sector capacity exists; (ii) stronger private sector perspective in pol icy making process.

The matching grant program i s designed to introduce SMEs to business service providers and to build the capacity o f business providers to serve SMEs.

A business p lan for the Nampula Training Centre would be developed in the first year o f the project with projections for financial self- sufficiency at project conclusion. Progress against the p lan wi l l be monitored. Qualif ied FM specialist will be recruited at the Maputo PIU and at the two satellite PIUs in Nampula and Inhmabane as we l l as accountant for the Grant Sub-component. These staff will ensure that project financial management adheres to IDA requirements and will also provide o n the j o b training to Government counterpart FM staff.

Moderate

Recruit a senior procurement specialist with qualifications and experience acceptable to the Bank. Provide adequate furniture and basic for UGEA staff. Establish an adequate procurement f i l ing record keeping system with detailed described in the Operations Manual. Prepare a Procurement Manual and should clearly lay out a l l procurement procedures applicable under the project.

Training Program for Environmental Focal Points at the implementing agency and the Governors' offices in the participating provinces I

High

The project wil l support an Environmental L o w

F. Loadcredit conditions and covenants

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, a l l 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

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.

e

e

e

59.

e

e

IV.

The 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 f disbursement o f grants.

Recruitment o f a project coordinator and an FM specialist for the Inhambane PIU as a condition o f disbursement for this sub-component.

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.

Dated covenants are the following:

External auditors for the project to be hired within 3 months o f effectiveness.

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.

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 mi l l ion 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 and job 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 inhibiting private-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 pol icy 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 al l 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 in Annexes 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. K e y 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 wi l l have an emphasis on the involvement and consultation o f communities in investment planning and promotion decisions and this could become a pi lot for the rest o f the country. The tropical fruit centre in Nampula wil l promote best practice in safe pesticide use and wil l 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 f training centers and rehabilitation o f existing government facilities) in the 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 in Nampula Province in the context o f support for the establishment o f the public-private tropical f ru i ts 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 G o M wil l fund the resettlement costs (if any) 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 implementers in (i) the identification o f potential adverse environmental and social impacts 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 EA reports; (v) public consultations; (vi) review and clearance o f screening results and separate EA reports; and (vii) environmental monitoring and reporting in the context o f the 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 wil l 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 wil l 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 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.

69. Mozambique and at the World Bank’s Infoshop on October 29,2008.

The ESMF (with the PMP as an attachment) and the RPF have been disclosed in

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 4.1 1) Involuntary Resettlement (OP/BP 4.12) Indigenous Peoples (OP/BP 4.10)

24

Forests (OP/BP 4.36) [I [XI Safety o f Dams (OPBP 4.37) [I [XI Projects in Disputed Areas (OPBP 7.60)* [ I [X I Projects on International Waterways (OP/BP 7.50) [I [XI

G. Policy Exceptions and Readiness There are no policy exceptions.

* By supporting the proposedproject, the Bank does not intend to prejudice the f inal determination of the parties' claims on the disputed areas

25

Annex 1 : Country and Sector or Program Background MOZAMBIQUE: MZ-Competitiveness & PS Development

1. Mozambique has staged a dramatic recovery from the damage o f the c iv i l war. Since 1992, infrastructure has been improved and i s now approaching its pre-war levels, and incomes have risen considerably. The poverty headcount fel l 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 s t i l l inadequate; there are serious unmet education and health needs; and poverty rates remain high. Approximately 54% o f the population o f 21 mi l l ion 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 with job creation.

3. Mozambique has the potential to overcome these challenges by building o n 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 f jobs.

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 f i rms, 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 f i r m s 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 in 2003 exported. Further, while there has been increasing linkages between the mega-projects and smaller f i rms, 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 10th out 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.

Private Sector Constraints

Business Regulations 6. As mentioned in the main PAD section, the G o M has indicated i t s awareness o f the need to improve the business environment through a five-year Strategy and Action Plan for Business Environment Reforms. I t has also enacted reforms in the 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 in 2006 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 i t s 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 new judges, 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 required to fundamentally change the landscape for the private sector. Indeed, in the recent Doing Business ranking, Mo.zambique’s overall ranking slipped by two points to 141. The fol lowing table presents the results o f the just released 2009 Doing Business Report for Mozambique and compares that with i t s SADC” peers.

” SADC region compromises Angola, Botswana, the Democratic Republic o f Congo, Lesotho, Madagascar, Malawi, Mauritius, Mozambique, Namibia, South Africa, Swaziland, Tanzania, Zambia and Zimbabwe.

28

Doing Business 2009 and 2008 Reports *The overall ranking for 2008 has been recalculated to reflect the inclusion of new countries for 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 i t s immediate neighbors. Even in areas where Mozambique has made some recent advances, such as contract enforcement and labor regulations, i t st i l l ranks poorly compared within i t s 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, pol icy level reforms should be coupled with improved public sector capacity to deliver services in a 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 f i r m s are more likely to complain about access to finance than any other firm. Large and small f i r m s voiced more concerns about competition from informal f i r m s than other f i rms. 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 f i r m s located in Maputo than those operating outside o f Maputo; size seems to have an impact on f i rms ’ perception o f corruption; larger f i r m s are more l ikely to complain about corruption than smaller ones; and manufacturing f i r m s or f i r m s operating outside Maputo are more l ikely to report energy supply as a serious issue than f i r m s operating in other sectors or those operating in Maputo.

29

10. I t i s 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 2nd to 6th position and labor legislation from 1 lth to 15th; on the other hand, crime, tax rates and transport moved up in the ranking, being perceived as more important constraints.

ICA Survey Comparison Business Perceptions o f Obstacles - 2003-2008

Ma jo r or Severe Obstacles to -g Ranking Business in 2008 in 2003

~

Practices o f Informal Competit ion 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 Poli t ical Instabil ity 14

courts 16 Labor Regulation 15 11

Source: ICA Surveys

Access to Finance

11. the second in the 2008 I C A Survey. The key findings from the 2008 survey are as follows:

Lack o f finance ranked as the first most important constraint in the 2003 I C A survey and

e

e

e

12.

Although 78 percent o f f i r m s surveyed had effective demand for credit, only 13 percent o f f i rms 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). 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). Financing for investment by f i r m s 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.

Commercial banks (primarily foreign-owned) dominate the financial sector. The three largest banks alone account for over 80 percent o f total bank assets. In 2007, the largest banks - the Banco Intemacional de Mopmb ique (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 thirteen commercial banks licensed to operate in Mozambique, most are concentrated in Maputo and provide services primarily to 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 s t i l l concentrated in Maputo Ci ty and o f the 128 existing districts in the country; only 28 districts have bank branches, culminating in a poor distribution o f banking services 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 l o w levels o f financial intermediation, high profi t margins (helped on i t s 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 (and noting that interest earned on T-bills are tax free) also put an upward pressure o n 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 U S A I D 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 U S A I D study provides anecdotal evidence for the l imited 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 banking system.

15. The data reported above has implications on how businesses are financed. The fol lowing 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.

l2 See Financial Sector Constraints o n Private Sector Development in Mozambique, by Nathan Associates for USAID , June 2007.

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Investment Financing: Micro Small Medium Large Total

Purchased Fixed Assets in 2006 26.1 31.4 39.7 66.7 33.9

Percentage financed by internal fundshetained earnings

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 Afr ica this shows that alternative sources o f credit are l imited in Mozambique, and given that informal credit markets are not well-established makes i t even more important to address credit constraints facing firms, especially small and medium firms, in the formal financial system.

Challenge of Informality

17. Mozambican businesses in the 2008 I C A survey identified competition f rom the informal sector as the top constraint to their operations. W h i l e unfair competition is wel l known as one o f the undesirable consequences from informality, this result i s somewhat surprising as competition with informal f i r m s is rarely identified-in Afr ica 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 f i r m s 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 pol icy 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

l3 This result seems to be fair ly robust when considering different breakdowns o f the sample (industry, size, employment growth performance, etc).

Empir ical evidence shows that higher levels o f regulatory burden are correlated with lower growth and higher informali ty rates. However, the quality o f regulation matters and can mitigate i t s harmful effects o n growth. See Loyaza, Oviedo, and Serven (2004).

14

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 i t s regional competitors. Despite the recent improvements, infrastructure s t i l l 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 i t s sales in infrastructure-related costs. When compared to most o f its regional peers, total costs are l ow but the direct component o f costs i s the second highest ranked level o f expenditure.

Infrastructure costs as share o f the 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 by the 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 in 2003 by more than 60 percent o f f i rms. It was reported as the second main obstacle to business, after cost and access to financial services. Currently, only 24.7 percent o f the f i r m s 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 wel l perceived, but despite the improvements i t 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 f i r m s outside Maputo seem particularly constrained by the quality and reliability o f electricity services. Losses due to inadequate provision are also highly unequal across f i rms. Average losses in regions outside Maputo are twice as high as in the 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 in the sector but expose some continued weaknesses, in particular in rural and peri-urban areas outside the capital region.

22. Transport: Mozambique’s internal market i s too small in size and in purchasing power to sustain increases in production 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 f i rm’s international competitiveness. Unfortunately, Mozambican f i r m s s t i l l perceive transportation as an obstacle to investment. Despite the reforms in the sector, the absolute perception o f f i r m s about the sector changed very l i t t le 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 in 2003. In relative terms, transportation increased in importance as an obstacle to business, moving from the fourteenth position in 2003 to the seventh in 2008. Larger f i r m s and firms outside Maputo are the most constrained by transportation problems.

23. Mozambique’s performance is quite weak when compared with i t s regional peers; Malawi i s the only country in which a larger percentage o f f i r m s consider transportation as an important constraint. The real costs o f transportation justify the perception o f f i rms. Transportation remains 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 f i r m s reported production losses from theft or breakage during transportation. The percentage i s even higher for large f irms, at least 33 percent experienced losses. Almost one hal f o f f i r m s report that the quality o f roads i s not suitable for their activities; this share reaches 75 percent among large f i rms.

24. Customs and Trade Logistics: Sixteen years after the c iv i l war ended Mozambique has successfully completed an ambitious program o f “first generation” reforms, including trade and customs reforms. Mozambique’s trade pol icy has improved and i s 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 s t i l l fragile logistics. The trade across borders index presented in the following figures combines

De Wulf and Sokol(2004) provide a good description o f Mozambique’s Custom Reform. I S

34

procedures, regulations and costs o f trade reported in the Doing Business database. Mozambique’s performance i s slightly superior to i t s closest neighbors (Malawi, Angola and Zambia), but it is s t i l l 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 s t i l l 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 s t i l l has one o f the lowest shares o f sales export in the comparison group. Mozambican f i r m s export only 2 percent o f total sales, one fifth o f the average share o f exports in the region.

26. Telecommunication: Telecommunication is perceived by f i r m s 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 f i r m s reporting telecommunication as a major problem decreased further in 2008. This improvement in f i rms’ perception is consistent with the transformations that have occurred in the sector. Despite improvements, the provision o f communication services is s t i l l quite unequal across the country. 65 percent o f fixed lines are concentrated in Maputo and only 1 percent o f total lines serve rural areas. The country’s performance i s similar to i t s regional peers in access to mobile phones (1 1.2 subscribers/lOO individuals) and internet (0.9 users/l00 individuals). However, Mozambique’s statistics for al l three services (mobile, fixed-line and internet) are s t i l l significantly below those for middle income countries. Internet usage i s st i l l relatively l o w and unequal amongst Mozambican firms. Only 28 percent o f f i r m s 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 f irms, approaching the use in middle income countries. The quality o f internet services also varies with firm size. H a l f o f large firms have access to high speed internet, but only 30 percent o f small f i r m s 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 high levels o f poverty and low levels o f literacy. Yet much o f the responsibility lies with the small and geographically concentrated supply.

Sector-Specific Issues and Challenges

27. In addition to the business environment constraints highlighted by the Doing Business and I C A reports, there i s a growing consensus o f the need to also consider sector-specific issues in the 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 re foms 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 in which Mozambique has an inherent comparative advantage. I t s 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 j o b creation and economic growth opportunities. Indeed, Mozambique’s tourism industry has grown at a rate o f 13 percent per annum since 1999 and the number o f international tourists visiting the country in 2004 was estimated at 500,000 compared to just over 300,000 in 2001,

29. However, tourism’s contribution to GDP in Mozambique is below average, particularly for coastal countries. Direct tourism revenue was recently calculated at 1.8% o f GDP16 (US$ 144 mi l l ion in export earnings in 2006) putting Mozambique well below some high performing countries in the region (e.g. Tanzania 9.7%, South Afr ica 7.6%, and Mauritius 32%) and less than hal f the average for Sub-Saharan Afr ica (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 length of stay per foreign tourist (Days)

Seychelles

Tanzania

South Africa

Mauritius

Namibia

Kenya

Botswana

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Mozambique

0 500 100 150 200 0 0 0

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30. Overall tourism volumes were estimated at nearly ha l f a mi l l ion in 2004 and official statistics claim over a mi l l ion tourists in 200617, but i t should be mentioned that the number o f ports o f entry where data i s collected doubled in 2005. W h i l s t it i s dif f icult to assess growth rates due to this unreliable data, one mi l l ion visitors are significant and i t i s important to understand why the economic performance i s relatively poor, or, as the data shows, why expenditure per tourist and length o f stay per tourist are as l ow as they are.

August 2007: The Economic Contribution o f Tourism in Mozambique, Sam Jones and Hanifa Ibrahimo, Ministkrio 16

de Planificaqiio e Desenvolvimento, Mozambique.

No report has officially been published; this figure i s mentioned in the budget speech and in the statistical abstract 17

o f 2006.

36

3 1. Indications from various studiesI8 including a FIAS Value Chain Assessment in 2006 and the tourism chapter o f the 2008 C E M 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 in current tourism businesses; c) sub-optimal use o f existing resources and attractions.

Agribusiness

32. Agriculture continues to play a significant role in this 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 in rural areas, sustaining agricultural growth i s vital to poverty reduction. Agribusiness in Mozambique has very good potential considering that the country offers some special advantages to agribusiness investors-including i t s extensive undeveloped, fertile farm land, i t s abundance o f water for irrigation, i t s diverse agro-ecological environments suitable for growing a variety o f agricultural products, its close proximity to the largest export market in Sub-Saharan Afr ica ( e.g. South Africa) and i t s 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 f ru i ts sub-sector (horticulture) illustrates wel l the challenges and potential for most agribusinesses.

33. Before independence and the onset o f the c iv i l war, Mozambique was an exporter o f tropical f ru i ts 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 m i x 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 industry requires more than just 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 pol icy framework are some o f the bottlenecks that need to be addressed in order to build up a tropical f ru i ts industry. In the last couple o f years the major expansion in investment has been in bananas,

182006 Mintel Mozambique: Travel and Tourism Intelligence: Report on the tourism market; 2007 Ministry o f Planning and Development, and DANIDA: The Tourism Economy in Mozambique: Size, Impacts

and Implications; 2005 MITUR: Transfrontier Conservation Areas; Economic Potential o f Tourism in Mozambique; Final Report, Exec Summary and Appendices

37

primarily targeted on the South African market. Building on this, other plantings are being made in l i tchi - 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 in Europe 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 EU markets until 2012l 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 i t i s free to import necessary fabrics from anywhere in the 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. In 2005, Lesotho with 2.2 mi l l ion in population exported US$ 494 mi l l ion worth o f apparels, Swaziland which has only a 1.1 mi l l ion population exported US$ 190 mi l l ion worth o f apparels, while Mozambique’s population o f 20.2 mi l l ion 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 minimum wage in the apparel industry). Furthermore technical processes should be improved. So i t is also a question o f capacity building in this industry, giving the workers the sk i l ls 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 al l 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 i t 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 building o f high-end luxury homes as wel l 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 st i l l 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 mi l l ion 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 l ow labor costs for most o f the workforce, construction costs in Maputo are more than 30% higher than in South Afr ica (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 and wood - even steel has to be imported.

39

Annex 2: Major Related Projects Financed by the Bank and/or other Agencies MOZAMBIQUE: MZ-Competitiveness & PS Development

1. The project was designed with a view to maximizing the complementarities with other Bank Group and donor related initiatives. With l imited IDA resources, the project aims to leverage its different components and serve as a pi lot for scale-up and replication. This wil l be discussed in detail in Annex 4 - Detailed Project Description. This Annex wil l provide a brief overview o f PSD-related projects in Mozambique.

World Bank Group Projects”

2. Financial Sector Technical Assistance Project (FSTAP): The overall development objective o f the project i s to improve the soundness o f the Mozambican Banking Sector and to improve public debt management. This wil l be supported by (i) strengthening the banking sector, 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 f i rst 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 wil l 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 wil l reinforce enabling conditions for community-oriented, private sector investment in environmentally and socially sustainable tourism.

4. The Programa Integrado da Reforma da Educacao Profissional (PIREP) (or Technical and Vocational Training Reform Program) is a pi lot program fbnded by the World Bank that aims to restructure al l vocational courses in Mozambique through a demand led, stakeholder driven process to develop financially sustainable courses. This i s a US$37.5 mi l l ion government program that started in July 2007 and wil l be implemented over 5 years. PIREP is targeting 4-5 tourism sub-sectors, which wil l probably include bar and restaurants; catering; housekeeping. The courses wil l be developed for technical schools (equivalent to secondary schools).

5. value-chain approach to supporting investments in irrigation and related agriculture infrastructure.

Market-Driven Irrigation Project: This project is currently being prepared and wil l adopt a

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 o f Bank 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, Registering Property and Enforcing Contracts

7. IFC Mozambique Projects: The IFC has an active portfolio in Mozambique, both o n the technical assistance and the investment side. 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 investment is Inhambane which i s also the area o f focus under the 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 Afr ica M S M E program which will provide a m i x o f technical assistance and l ine o f credit to banks to promote their lending to SMEs; one partner bank was selected and i t i s expected that the program would become operational by end o f 2008.

Other Donor Projects

9. In order to aid in information sharing, promote donor coordination, and minimize 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 in the 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 in PSD.

41

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Annex 4: Detailed Project Description 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. based growth through the following three sub-components:

This component would enhance the competitiveness o f S M E s in and promote broad

Promoting Access to Business Development Services (US$ 6.46 mi l l ion IDA contribution and US$4.16 mi l l ion beneficiary contribution):

3. This sub-component would enhance S M E s growth and competitiveness. This would be achieved by promoting access to S M E s to business services providers for the delivery o f consultancy, advisory, and linkage services. IDA would finance grants for S M E s and provision o f goods and consulting services for running the 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 S M E s not supported.

4. complement each other:

The sub-component wil l deliver these two proposed activities to SMEs, intended to

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 defined by the same decree to buy specialized outside expertise [training, consulting, etc., including related travel expenses for delivery o f these services]; Free mentoring/advice for a limited period to SMEs to plan and execute a sales growth plan

0

5. sub-component:

Beneficiary S M E s will have to meet the following criteria to access support under this

2o The decree defines micro and small and medium enterprises as follows: Micro: Have at least two o f the fol lowing three characteristics: (i) less than 25 employees; (ii) less than US$25,000 init ial investment ; (iii) less than 10 KVA power installed. Small: Have at least two o f the fol lowing three characteristics: (i) Between 26 and 124 employees; (ii) init ial Investment betweenUS$25,000 m i l l i on to U S 2 . 5 mil l ion; (iii) Power capacity installed between 10 to 500 KvA and Medium: Have at least two o f the fol lowing three characteristics: (i) Between 126 and 250 employees; (ii) init ial Investment betweenUS$ 2.5 m i l l i on and US$10 mil l ion; (iii) Power capacity installed between 500 to 1000 KvA.

53

0 Be vested with a legal personality within Mozambique, dedicated to for profit activities, and domiciled in the country. Produce a plan for business growth indicating a set o f actions i t intends to undertake to achieve increased sales.

0 Have at least two o f the following three characteristics: (i) Up to 250 employees; (ii) initial Investment up to US$lO million; (iii) Power consumption up to 1000 KvA

0 Finally, no SME may receive more than US$70,000 in grants in aggregate.

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 al l sectors, the project wil l actively seek out and promote the program to SMEs in the manufacturing sector. While there i s no minimum grant size, n o firm or group o f f i r m s under common control may receive more than $75,000 in grants, in total.

7. promotion o f this sub-component:

Based on the demand analysis, the following opportunities were identified for the early

Building on the development work targeting Mozal during PODE, the grant management unit wil l target f i r m s in developing supply to large new projects, including the Tete coal project, the Arcelor Mit ta l steel project, the Tantanite heavy sands project, and others. Services o f relevance could include preparing for quality certification [ I S 0 90001; specialized internal training for staff, to build product acceptance; plus external training for marketing staff in how to deal with these large, sophisticated customers.

0 Building on GoM’s investment in a cold chain in the Moamba area (in Maputo Province), assistance could be targeted at small producers o f fresh vegetables and h i t s in steadily displacing imported produce being currently used by hotels & restaurants in Maputo; 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 Wor ld Hotel Link. Similarly, this ministry i s actively encouraging community tourism ventures, particularly within conservation areas. These can be similarly assisted, and with similar services.

0

54

Later, building on the IFC-supported Tourism Anchor Investment Program, the sub- component could assist firstly smaller f i r m s 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 f i rm’s current situation and plans a significant set o f measures that are likely to lead to 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, in principle, 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 i s to assist the firm to carry out al l the measures in i t s plan, using i t s own resources where appropriate, and using grant-assisted outside resources where this makes more sense.

9. The objective is private-sector growth. Client firms wil l 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 f i r m s and to representative organizations. But i t i s also almost inevitable that many o f the specialized services that are crucial to building competitiveness wil l come from outside, particularly South Africa. I t i s important to note, however, that domestic BDS suppliers that are not commercial entities wil l be equally eligible as any other firm for support from the sub-component in order to build their 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, i t 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 in some developed economies that used to operate such subsidies.

11. The sustainability that wil l be achieved wil l 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 the public, sector.

Representative Organization Grants

12. representative organizations in the private sector for the following purposes:

In addition to the above products, 75% cost-sharing grants wil l be made available to

0 To build the capacity o f the organization to better serve its members and thus to build i t s strength, membership base, and subscription income.

55

To develop new services to be sold to members, thereby increasing i t s usefblness to them, and building financial strength. To commission outside expert studies, surveys, research papers, etc., in support o f submissions to G o M and its agencies that are aimed at improving the regulatory environment facing members.

0

13. This type o f grants wil l 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 A r e vested with legal personality in Mozambique and domiciled in the country. 0 Have elected officers in accordance with their by-laws 0 Present a plan for purposes o f building capacity in the organization, developing new

services, and/or seeking technical assistance to improve the business environment facing i t s members.

14. As mentioned, grants wil l cover a generous 75% o f eligible costs, but with one important proviso. The total grants extended to an organization within one o f i t s 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 o f operational independence. I t 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 wil l therefore wil l be staffed by individuals recruited from the private sector. The manager o f the Unit wil l be answerable to the Project Coordinator. The Wor ld Bank wil l monitor closely the continuing performance and independence o f this Unit. I t i s expected that the manager o f the Unit wil l 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 wil l bring to the task direct experience in providing consulting and/or mentoring services to private firms.

16. This sub-component wi l l be directed by an Operational Manual that wil l be incorporated in the overall Project Manual. Systems wil l be developed to ensure compliance with the terms o f this manual but with the minimum possible paperwork and complexity. All grants (for SMEs and private sector representative organizations) wi l l be paid on a reimbursement basis. The program should be so simple to access that i t wil l appeal to even the smallest formal firm. Applicants wil l be encouraged to apply on-line and to communicate with the Unit by email wherever possible.

17. Every firm applying to the Unit wil l be paid an initial diagnostic visit on a strictly “first- come, first-serve” basis. After that, however, the manager wi l l 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 wil l commit to quarterly and annual activity plans, establishing detailed verifiable indicators o f activity. These wil l be monitored closely by the Project Coordinator, the Advisory Committee and by regular Bank supervision missions. In the early months o f the program there wil l be intensive promotion o f the program in al l 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 wil l work closely with a sister World Bank Group Initiative, the IFC Afr ica Micro, Small and Medium Finance (AMSME) Program2'. There i s a clear complementarity that will be pursued between 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 SME borrowers 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 wil l help build a pipeline o f referrals to the other. Regular communication and information sharing and as a first step, i t 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 hold joint workshops to pol icy makers and private sector representatives to inform them o f the availability o f these two programs for SME development.

Promoting Tourism Sector in Inhambane (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 st i l l far from realizing i t s tourism potential or even matching the performance o f neighboring countries in Africa. Studies have shown23 this poor performance, only 2.5% o f GDP versus a regional average o f 6.5%, i s largely a result o f 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 in Mozambique 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 i s 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 Program has 3 main components: (i) Long Term and other Financing: IFC provides long term financing to financial institutions in various 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 in Mozambique and will make an US$8.5 investment to B C I Fomento to incentivize the Bank to increase its M S M E lending portfolio. The program wi l l work with B C I Fomento over five years and i s expected to help i t grow its SME portfolio

22 For example, the G o M 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

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

repared a Strategic Plan for Tourism Development in Mozambique (SPTDM) (2004-2013).

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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 in Mozambique. The town o f Inhambane is one o f the most attractive historical coastal towns o f Southern Afr ica reflecting an intriguing history dating back to the first millennium. The Great Limpopo Transfrontier Conservation Area, which wil l include Zinave National Park in Inhambane Province in i t s second phase, represents exciting opportunities for the hrther development o f eco-tourism and the integration o f the eco- tourism product o f the hinterland into coastal tourism.

20. The provincial government i s supportive o f tourism development and has prioritized the sector within i t s 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 o n the mainland. W h i l s t this kind o f tourism typically (in other coastal destination such as Mombasa, Diani, Kilifi and Mal indi in Kenya and Pemba in Mozambique and Dar es Salaam in Tanzania) provides abundant inc,ome generating opportunities for local entrepreneurs, there i s l i t t le evidence o f this in Inhambane Province. Local fishermen do operate dhow trips for tourists, however only one o f these i s an officially registered and licensed operator.

2 1. The rationale for supporting tourism-related j ob 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 wil l have little overlap with the proposed project activities; however the improved quality of potential investment climate o f the protected areas wil l 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 o n initiating a large private sector investment and as such wil l 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 i t has a role in 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.

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22. In line wi th 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 j ob creation and increased incomes in tourism-related activities in Inhambane Province. To achieve these results the project wil l 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 in two main areas; improved public sector service provision in the tourism sector, expanding the tourism-related private sector supply chain capacity.

23. In the public sector, the project wil l 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 al l the relevant public stakeholders to improve the business environment and investment climate for tourism in the province. The project wil l 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 wil l 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, pol icy and regulation, statistics (building on a framework for a tourism statistical information system already created under the TFCATDP, the project wil l 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 priori ty 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 wil l 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 wil l 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 wil l also fund for a two-year period a Maputo-based tourism pol icy advisor to advice on impact o f licensing reform for tourism businesses, promote streamlined regulations for new investors, and share lessons learns f rom the province with national pol icy makers.

25. In the private sector, the project wil l expand the tourism-related supply chain through (i) rehabilitation o f training facilities in Inhambane, (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 wil l work closely with existing projects and organizations active in the tourism sector, particularly the TFCATDP Community Enterprise Fund, IFC’s Anchor Investments Program, S N V , GAPI, CARE, ESHTI, and DANIDA. The project proposes to work closely with these organizations to provide technical support in the

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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 mil l ion IDA Contribution and 0.5 mi l l ion 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 wil l 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 in rural areas o f Mozambique taking advantage o f new investments and this sub-component wil l contribute to this goal.

27. The investments in banana production wil l initially take place in the 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 skil ls. Banana investors wil l need trained workers in the form o f supervisors and mid- level managers to undertake the cultivation o f high quality bananas. These people wil l either have to be brought to the region or they wil l have to be trained in the 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 human resources necessary to export tropical fruits; and (b) to increase Mozambique’s exports o f tropical fruits. To that end, this sub-component wil l support the establishment o f a national training centre in tropical fruit operations. The training centre wi l l initially be focused on banana production and handling but will eventually diversify into other tropical fruits. The training centre wi l l 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 wil l constitute the training grounds o f the centre. Furthermore support wil l 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 wil l also be funded in the establishment year. The project wil l also support the banana farm operating costs in the f i rst year.

29. The proposed Training Centre would be established in Nampula and provide short-course (4 to 6 weeks/course), intensive training on commercial banana operations and management for prospective supervisors and junior managers. Safe pesticide handling practices wil l 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 wil l include investors in Nampula but also the banana plantations already existing in Maputo. This sub-industry targets the South Afr ican market rather than Chiquita and the project wil l thereby spread the leaming benefits f rom the Nampula banana

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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 o n 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 mi l l ion per year). The farm would be managed as a separate unit, but would provide an effective, practical and comprehensive training environment for the intended trainees. Successfil graduates from the courses would receive formal certification o f their qualifications from IIAM and thus be nationally recognized.

31. The Training Centre would accommodate up to 30 trainees at a time. In the f i rst 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 f i l l - t ime. 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 and transport that may benefit other tropical fmit operations. Mozambique therefore has a keen interest in securing that the knowledge transfer that wil l occur with the start o f production o f Chiquita bananas wil l benefit the entire tropical fruit industry.

33. In due course, and once 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. I t i s 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 init ial activities, the satisfaction o f demand from the Nampula banana industry, wil l require the development o f a curriculum that satisfies the demand o f new users. The services provided by the training centre wil l also include advisory services to tropical fruit operations.

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34. The Training Centre wi l l 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 wil l 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 al l training courses wil l be to instill management techniques into the trainees’ everyday activities so that once employed in commercial positions they wil l 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 wil l be established as a non-profit private organization. I t wil l 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 wi l l be reflected in the operation o f the Board which wil l 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 wil l 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. W h i l e the centre wil l 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 and junior 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.

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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 wil l advance reforms based on the Business Environment Strategy, build the capacity o f key agencies that wil l pay a catalytic role in improving service provision for exports, and strengthen and broaden public-private dialogue.

Support to Business Environment Strategy (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 init ial ly 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 (iii) facilitating trade. Following discussions with G o M and an extensive mapping exercise undertaken with the Private Sector Working Group, the fol lowing 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 between the FIAS and IDA teams:

8

Starting a business

Dealing with licenses

Property Registration

Paying taxes

Trading across borders

Protecting investors

Minimum capital requirement

Combining procedures, issue occupancy permit with f inal inspection, silence i s consent (long-term)

Optional use o f notaries, reduction o f transfer fee, standardized forms, notaries optional Reduction o f t ime and number o f tax payments

Abolish PSI, ED1 system, introduce e-manifest, working hours o f border crossing, scanning,

N e w securities l a w

~ ,Q> \:

______m____. . . .

IDA

FIAS Product i R~CPSD project Potential intervention One stop shop/BAU reform for business

Supporting the capacity o f the B A U s for business

start-up facil i tation services for SMEs Business licensingiregulatory reform/ E-licensing/ l icensing database (to include forms, procedures, instructions, etc.)

Business taxation reform, focus o n improving tax administration

Support the establishment o f the computerized risk management, communications, and legislative reform

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9 Enforcing contracts

40. The two reform areas targeted for support under this sub-component are:

Bankruptcy and Insolvency Law, introduce case management, special courts for bankruptcy

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 o f imports and exports, and improve governance. Specifically, IDA will finance activities in the following three areas:

Policy, Legislation and Procedures (US$800,000) - The issues identified under policy, legislation, and procedures required to improve the overall regulatory and trade facilitation framework.

9 Inefficiencies Identified 9 In June 2006, the government proposed a law

for the acceptance o f electronic transactions.

9 There i s no clear definition o f technical, functional or proposed commercial scope for the development/replacement o f the Single Window and Declaration Processing ‘back office’ svstems

9 There i s a need to improve definition o f roles, responsibilities and levels o f authority for Customs personnel. The working hours and places o f attendance o f the Customs administration (Mon - Fri 0700 to 1500) are not flexible enough to meet the demands o f the trading community. Turnaround time for decisions to be made by Customs on for instance origin, valuation and tariff clarification

9 Trade obligations are not very clear in the legislation and administrative regulations.

9 Customs legislation needs updating particularly in terms o f regional integration wi th neighbouring countries where the legal base i s according to English law. Limited use o f simplified customs procedures Customs requires prescribed forms and does not accept incomplete commercial documents ‘in lieu’. Customs needs to revise forms as a number o f declaration related forms are in use and i t i s an onerous process for the traders although a

9

9

9 9

P

9 Carry out an assessment o f the legal implications 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) Develop a process model o f al l o f the end to end trade facilitation and regulatory control business functions and map to SW/TIMS systems replacement.

9

9 Carry out organizational review and job profiling

9 Assess costfbenefit o f 2417 service provision

9 Examine the capacity o f Customs and specify functional requirements for database design

9 Review drafting and identify support publication

9 Review laws and regulations in the context o f regional integration.

9 P

Review and draft simplified procedures Review in the light o f simplified procedures and authorized economic operator proposal.

Carry out a review o f forms and make proposals for redesign

9

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number o f the forms are the result o f legacy systems.

> The Trade community sees the continued presence o f the PSI company after 18 years as a cost and time impediment to legitimate trade. The Trade community would l ike to see Customs operate as the lead agency at the border.

>

> The Trade community would l ike to see a significant reduction in inspection and an easing o f the mandatory usage o f container scanning Customs do not apply automated Risk Assessment for inspection selections. The Trade reports a level o f inspection at between 20 and 30%.

Duty payment remains a manual operation.

The current procedure for duty drawback / duty suspension and VAT rebate i s lengthy and inefficient.

> Trader computer records are not used in customs control processes. Post Clearance Audit i s not used as part o f an ongoing investigation. IPEX’s efforts o n behalf o f the business community continue to be hampered by poor information capacity and l imi ted consultative 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 in support o f i t s programme o f work.

> Carry out impact assessment and establish a transition p lan

> Examine the extent to which Customs can perform b c t i o n s o n behalf o f other Agencies (e.g. permits, licenses, risk assessment, inspections etc.) and prepare proposal for consideration. An assessment needs to be carried out as to the extent to which this init iative i s acting as a barrier to trade and i ts costhenefit contribution to regulatory control.

> Determine a pol icy and procedure for Risk Management (identification, assessment, selection and results monitoring). Review in the light o f SW/T IMS replacement and specify functional process requirements

> Establish the feasibil i ty o f introducing electronic payment in the l ight o f SW/T IMS replacement

> Review current procedure, identi fy improvements and propose performance metrics

Develop P C A procedure and develop training materials

>

>

> Provide training to I P E X staff, strengthen their market information capacity, and establish better consultative mechanism with the private sector

P Inefficiencies Identified P S U D D O ~ ProDosed > The importance o f trade facil i tation and good > Develop Communication Plan

working relations with business i s not made clear at a l l levels o f the Customs organization.

a l l relevant Customs Personnel are kept fully up-to-date with significant national and international trade developments.

between the business community (Trade Associations) and Customs.

> There are no procedures in place to ensure that > Training Plan and

> Memoranda o f Understanding do not exist P Develop MOU template

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9 A Customs Consultative Committee exists between Customs and the CTA but there i s a need to identify a broader range o f stakeholders and to create a better governance structure and procedure for this forum.

The current IT HR capacity i s 60 staff covering the needs o f Customs and Tax.

Customs has capacity to project manage, quality assure and contract manage developments such as the SW/TIMS replacement

9

9

0 ICT (US $ I, 400,000) - The issues identified under this sub component o f I C T required to improve the immediate technical capacity o f Customs to provide a more responsive service to the business community

banks.

9 Carry out stakeholder analysis and define governance structure and procedure

9 An assessment o f future IT staffing requirements needs to be conducted in the light o f proposed future developments. Provide a resident project management advisor and functional expert t o support Mozambique Customs in the design and implementation o f their Single Window and back office systems

9

9 There i s a l imited level o f service support available for the trade to seek advice on Customs procedures.

> Establish a Customer Relationship Management capability and Customer Support centre

9 The physical infrastructure and capacity at border crossings needs updating.

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 wil l be prepared and used as a guide to design init ial project activities and provide baseline for measuring progress

9 Carry out a site survey o f a l l customs sites with. a v iew to physical infrastructure developments

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9 Although the organization o f the AT i s integrated, the systems for Customs and Tax remain discrete and not integrated.

k A dependency s t i l l exists whereby the PSI company maintains the reference data for declaration processing.

9 Examine the harvesting opportunities that may exist f r o m the existing system replacement.

9 Develop a suite o f reference databases for business registry, valuation, tar i f f management, origin certificates, legislation management.

Support to Oualitv/Standards Infrastructure (US$ 500,000)

43. Mozambique aims to broaden i t s export portfolio and that wil l 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 and metrology. Towards this goal, this sub- component wi l l 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 wi l l 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 pol icy making. In addition to the costs associated with human resources and training materials o f the twinning institution, the project wil l finance l imited investment in IT technology to assist the training activities.

44. Other developing countries have faced and sti l l 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 l ikely include careful consideration o f how INNOQ operates in a 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. I t i s important that the arrangement i s 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 wi l l consist o f training and coaching o f INNOQ personnel primarily in demand assessment and pol icy 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 wil l finance limited investment in IT technology to assist the training activities. The EU also supports INNOQ. A new 3-year project starting in 2008 wil l 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 pol icy design perspective that wil l complement and enrich the existing donor interventions in standard pol icy in Mozambique.

Strengthening - the Accountancy Profession (US$ 600.000)

46. This activity will support the pillar o f financial reporting infrastructure for the private sector. Currently, a l l 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

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otherwise facilitated cash-flow based lending. This sub-component wil l 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 wil l provide technical assistance, training, and goods to the Order o f Professional Accountants o f Mozambique to enable i t to function as a modem professional accountancy bodyThe twinning arrangement wil l provide technical assistance to the new professional body in various areas including the following areas:

Prepare and implement a strategic plan for development o f the accountancy profession in l ine with recent international developments; Design and implement internationally comparable governance and hnct ioning arrangements for strong organizational effectiveness o f the professional body; Strengthen professional standards by putting in place arrangements for professional education, qualifying examination and practical training arrangements; Put in place institutional arrangements for sustainable continuing professional development activities; Conduct audit firm practice review and provide assistance to the audit f i r m s to build capacity for improving the quality o f audit by al l audit firms, specifically focusing o n capacity building o f the small and medium sized audit practices; Take necessary steps for the professional body's full compliance with the membership obligations o f P A C . Provide assistance with the development and issuance o f implementation guidance on International Financial Reporting Standards (IFRS) and International Standard on Auditing (ISA) for the public interest entities Provide assistance with the implementation o f simplified financial reporting requirements by the small and medium-sized enterprises Develop specialized training programs and deliver the training programs in different 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 i s the Ministry o f Industry and Commerce (MIC). M I C i s the focal point for business pol icy 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 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 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 f whether to mainstream the PIU at M I C would be made at that point.

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48. W h i l e M I C would be the project’s main focal point, the project would also collaborate with other ministries such as Ministry o f Planning and Development, Ministry o f Tourism, the Ministry o f Agriculture, Ministry o f Finance and others to help i t achieve i t s objectives. A Project Advisory Committee at the national level wi l l be established and would include representatives from MIC, Ministry of Planning and Development, Ministry o f Tourism, Ministry o f Agriculture, Ministry o f 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 wil l act as the local P I U in that province; provincial level advisory committees would also be established to promote ownership and provide guidance to the project’s activities in these two provinces24. The provincial coordinators would report to the PIU coordinator in Maputo. This component would cover the costs o f the implementation o f :

e

e

e

e

e

e

49.

Strengthening o f MIC capacity and that o f other Government agencies involved in the Project

Provision o f training to PIU and M I C staff on IDA’S procurement and financial management policies and procedures;

Project audits

Project studies, including performance reviews and impact the implementation o f a program o monitor and evaluate the Project results;

Financing o f PIU’s: Operating Costs; and

The provision o f technical assistance and training to staff responsible for the implementation o f the ESMF and RPF through the short-term Environmental Specialist at the P I U

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 wil l 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 related to agreed pol icy reform goals.

50. Finally, the Government is in the process o f establishing an S M E 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 i t s 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

24 In the case o f activities in Nampula, i t i s expected that the Training Center’s board o f governors would also act as the Project’s provincial level advisory committee.

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assistance are not available internally, the agency wil l operate as a referral agency. So, for instance, where an SME requires assistance with entering into export markets, it wil l be referred to IPEX, the export promotion agency. A similar relationship is envisaged between the matching grant sub-component and the SME Institute. Thus, the SME Institute is l ikely to become an important source o f referrals for the private sector for a range o f products and services.

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Annex 5: Project Costs

MOZAMBIQUE: MZ-Competitiveness & PS Development

6.46 1.1. Promoting Access to Business Development Services

4.16 10.62

Environment 2.1. Business Environment Reforms 2.2. Sumort to Ouali tdStandards Infrastructure

4.2 4.2 0.50 0.50

2.3 Strengthening the Accounting Professions Component 3: Support to Project Implementation

0.60 0.60 3.66 3.66

? .

Unal located PPF Refund

71

1.05 1.05 0.6 0.6

Total Project Costs 25.00 I 23.66

(million) Taxes) (1) Consultant’s Services, Goods, Operating Costs, 12.84 100% Works, and Training for Management o f Sub-components 1.1 and 1.3 and Components 2 and 3 I (2) SME Grants

a. for micro-enterprises 1 .o 70%

b. for small and medium enterprises 3 .O 5 0% (3) Representative Organization Grants 0.5 75%

(4) Tourism in Inhambane ( Consultants’ Services, Goods, 5.01 100%

(5) Training Centre Banana Farm Establishment 1 .oo 100%

Operating Costs, Training, and Works )

(Consultants’ Services, Operating Costs, Training, and

I gFkk!fund o f Preparation Advance 0.6 100%

72

Annex 6: Implementation Arrangements MOZAMBIQUE: MZ-Competitiveness & PS Development

1. The G o M wil l borrow US$ 25 mil l ion from IDA for the project’s implementation. The project’s duration i s expected to be for five years from 2009-2013. The project wil l be overseen by a National Advisory Committee which wil l provide overall strategic advice and counsel to the project. The Committee will be chaired by the Minister o f Industry and Commerce and wil l consist o f high-level representatives from Government and the private sector. Government representatives wil l include the Ministers (or hisiher 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 the SME Institute. Private sector representatives wil l include business associations, financial institutions, and private investors. The committee wil l meet on a quarterly basis and wil l 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 P I U which wil l be housed at M I C . The PIU act as the committee’s secretariat and wil l 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 wil l 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 PIU project 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 fol lowing 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 in the different project management hnctions. Annual action plans wil l 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 wil l 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 and reporting the results to the PlU.

4. The PIU wil l be in charge o f overseeing the fiduciary and overall reporting for the project, in line with Bank Guidelines. To assist i t in this task, satellite PIUs will be established in Inhambane and Nampula to oversee and implement the activities in these two provinces. In Inhambane, i t i s expected that a local coordinator and an accountant wil l be recruited at the PIU in addition to a Small Business Advisor, and an Environmental Specialist. In Nampula, the staff o f the tropical h i t s training center will double as the provincial project implementation unit

73

with the director o f 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 wil l be established which wil l 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 wil l double as the Nampula provincial level Advisory Committee. These committees wil l provide advice and support to the project’s activities and wil l help to promote local ownership and ensure that activities remain responsive to local needs.

5 . The environmental specialist in Inhambane wil l 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 in the design o f school curriculas to include environmental issue. In Nampula, safe pesticide handling practices will be an integral part o f the curriculum taught. Pesticide handling training wil l be done with the aim o f achieving Rainforest Alliance certification.

6. As noted above, the PIU wil l be responsible for ensuring that al l fiduciary requirements(procurement, financial management, environmental screening, monitoring and evaluation and reporting) are successfully maintained. I t wil l be responsible for financial management and coordinate project accounting, maintain overall records and manage disbursements for the IDA project. The PIU wil l produce quarterly financial monitoring reports and annual financial statements and ensure their timely audit in accordance with International Auditing Standards. While the P I U wil l be in charge o f the overall management, coordination, fiduciary and reporting o f the project, i t wil l rely on the technical input and advice for the development o f consultants’ TORS and 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 1 on the fol lowing page for project organigram).

Monitoring and evaluation of 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 wil l be responsible for conducting M&E activities. Baseline data and target values for al l the agreed indicators wil l be verified and confirmed by the P I U in partnership and collaboration with the designated technical staff in each implementing agency. The P I U wil l remain responsible for the data collection, analysis, and reporting o f the agreed project development outcome indicators. The primary monitoring mechanism wil l be quarterly reports and annual reports prepared by the Project Coordinator and presented to the Advisory Committee and IDA. These reports wil l 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 wil l be carried out at the hal f way point o f the project. An Implementation Completion Report (ICR) wi l l be undertaken after completion o f the project.

74

Figure 1: Project Organigram

--+

Project Advisory Committee (Chaired by Minister of Industry and

Commerce)

Project Implementation Unit (Project Coordinator, Procurement Specialist, Financial Management Specialist, Monitoring &Evaluation) 4

-

Component One

Sub-component 1 .l: Grant Management Unit

I Component Two

Sub-Component 2.1.2: Business Licensing Reform

Sub-Component 2.2: Quality and Standards (INNOQ)

(GASP) -

-

Sub-Component 1.2: lnhambane Project Implementation

Nampula Training Centre Management Unit

Trade Facilitation Reform

Sub-Component 2.3: Strengthening Accounting t (Order of Accountants)

75

Annex 7: Financial Management and Disbursement Arrangements MOZAMBIQUE: MZ-Competitiveness & PS Development

INTRODUCTION AND BACKGROUND

1. The financial management assessment was carried out in accordance with the Financial Management Practices Manual issued by 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 wil l ensure: (1) that the project funds are used only for the intended purposes in an 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, in order to avert the previous capacity related problems,

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 P F M PEFA Strengthened Approach (2006), which itself was a fol low up to the country’s f i rst 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 o f 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 i t s 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 hnct ional classifier into the budget; (iii) introduced restrictions on bank accounts held by public institutions; (iv) started to incorporate off-budget revenues as wel l 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 P F M systems and processes, particularly in the areas of:

0

0 Cash Management; 0

0 Revenue Collection and Management.

Payroll, Procurement, and Internal Controls;

Donor Practices, especially predictability o f budget support disbursements;

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 i s a Public Expenditure Tracking Survey (PETS) in the 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.

INSTITUTIONAL ARRANGEMENTS

8. The Ministry o f Industry and Commerce wil l be the lead implementing ministry. A National Advisory Committee will be established and wil l provide overall strategic advice and guidance, and wil l be chaired by the Ministry o f Industry and Commerce. I t s composition will include high-level representatives from Government and the private sector in equal number. Government representatives wil l 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 P I U wil l act as the committee secretariat and wil l 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 wil l be delegated to a professional P I U which wil l be embedded in the MIC. In the first phase o f the project, the PIU wil l be staffed with a f i l l - 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 Industry and Commerce. To achieve this, the terms o f reference o f the P I U staff wil l 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.

10. The P I U wil l be in charge o f overseeing the fiduciary and overall reporting for the project, in l ine with Bank Guidelines. To assist i t in this task, satellite PIUs wil l be established in Inhambane and Nampula to oversee and implement the activities in these two provinces. In Inhambane, i t is expected that a local coordinator and an accountant wil l be recruited and will be

77

housed at the governorate. The Nampula Institute’s management wil l 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 wil l be established which wil l consist o f representatives from both public and private sector stakeholders. These committees wil l 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.

11. To manage the matching grant component, a separate ‘Grant Management Unit’ (GMU) will be contracted, reporting to the PIU. The GMU will be an independent professional unit set up to manage the grants in accordance with a ‘grants management manual’ to be designed for the purpose.

OVERALL POLICY GUIDANCE FOR 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 f rom start to mid term, i t i s expected that the DAF will exercise its control through the PIU FM Specialist mentioned above. The DAF’s duties wi l l include:

0

0

0

0

establishing indicators o f progress and performance in planning and financial management providing a platform for discussion and monitoring the indicators ensuring proper review and fol low up where necessary o f work plans, financial reports and audit reports 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 al l 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 l i s t o f their assets every year and a final l i s t 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 o f 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 s t i l l low, due partly to 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 wil l be undertaken to minimize the incidence o f corruption during implementation o f the project:

78

Reimbursement approach to matching grants: 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% in case o f business associations). PFM system development : To enhance the use o f national systems in the management o f the credit proceeds, as well as ensure adherence to laid done procedures and controls, al l funds flow, accounting, and reporting for the M I C and Inhambane provincial activities wil l be through e-Sistafe, the government IFMIS. Advances will only be considered for the GMU and Nampula Training Institute, both o f which wil l not be accessible through e- SISTAFE;

0 External Audit: The TOR s for the auditors wil l include specific responsibilities towards the detection and reporting o f fraud and corruption in project activities.

0

15. pillars for achieving growth with equity, namely:

The above steps are anchored in the Mozambique country assistance strategy’s three

i) Strengthening governance; ii) iii)

Spurring broad-based economic growth by improving the business environment; Improving the provision o f services, particularly to the poor.

RISK ASSESSMENT

16. The financial management arrangements should be strong enough to: (i) ensure that funds are used only for their intended purposes in an 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 f low rapidly, adequately, regularly and predictably; (iv) enable project management to monitor the efficient implementation o f the MCPSD; and to (v) safeguard the assets and resources procured using project funds.

17. In order to ensure a strong financial management system, the implementing units should have an adequate number and m i x 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 i t s 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 f rom the Risk Rating Summary. This identifies the key risks that management may face in achieving the project’s objectives, together with the appropriate ratings. I t also outlines the risk mitigating measures that are incorporated into the project design.

79

8 m

0 00

E E

-1 i t -

-

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 i t is expected that activities in the provinces wil l be accounted for through e-SISTAFE for Inhambane, while a stand alone system, preferably one in use by other stand alone colleges, wil l be designed and installed at the Nampula training institute as part o f the project’s strengthening o f that institute. An appropriate grants management and accounting system wil l be designed and installed to manage the matching grants component (grants manual being finalized).

Strengths and Weaknesses

20. The main strength o f the arrangement i s use o f the government accounting system, which enables the seamless incorporation o f the project activities into the ministry’s ongoing work. This in particular allows incorporation o f 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 main weakness wil l relate to the strength, in that this i s one o f the pi lot projects to be put on CUT. I t is expected that there wil l 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. I t i s hoped that the inclusion o f the specialist advisors wil l help mitigate the bureaucratic drag that might slow down project execution.

Funds Flow Mechanisms and Disbursement of funds

22. The project will operate one Designated Account as follows:

0 US $ Designated Account maintained in the Central bank, and managed by the 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 wil l be disbursed as follows:

i) On C U T - The main PIU and Inhambane Provincial Component. These wil l be channeled through the Government 'single treasury account, CUT, following national procedures. Thus hnding requirements for the Inhambane provincial component wil l be accessed directly through the C U T at the Inhambane Provincial level. Off C U T - The Nampula Training Centre, because Recipient's Government Public Financial Management System (e-SISTAFE) i s not yet available in i t s area o f

ii)

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 wil l be opened for these two components. Requests for advances will be made to M I C on a quarterly basis, based o n approved work plans. Fol low up advances wil l be based on satisfactory retirement with the PIU at M I C o f preceding requests. The commercial bank accounts wi l l be managed by the ‘provincial PIU’ in Nampula and the Grant Management Unit respectively. Hiring o f the requisite FM staff for these units wil l be made a disbursement condition for each component, as will identification o f point FM staff to handle project matters in Inhambane.

Disbursement

24. The project wil l use Report- based disbursement procedures to operate effectively through the CUT. This wil l be effected by producing quarterly disbursement IFRs .Disbursements wil l 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 wi l l be disbursed into the DA to cover eligible expenditure.

25. withdrawal o f the proceeds o f the Credit.

The Bank issued a “Disbursement Letter” which specifies the additional instructions for

FINANCIAL MANAGEMENT

INTERNAL CONTROL AND ACCOUNTING PROCEDURES

26. Accounting wil l 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 M I C PIU and Inhambane provincial office as indicated earlier. Accounting Procedures for the Grant Mnagement Unit and the training Centre in Nampula wil l be different as they wil l 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 al l the FM manuals wi l l be regarded as disbursement conditions for the respective component. The manual for the main P I U is meant to be produced by the FM Specialist to be hired by the PPF.

ACCOUNTING SYSTEM

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 in accordance 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 wil l be required for any new staff hired to satisfy requirements o f the project. Ongoing support wil l 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 in record keeping, and enhances efficiency in preparing reports.

29. The project wil l support the establishment o f professional college administration for the Training Centre in Nampula. As part o f this professionalization, an FM person wil l 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 wil l be designed, accounting staff hired, and an appropriate accounting system installed.

30. Documentation wil l 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.

REPORTING ARRANGEMENTS

31. The objective o f the reporting system i s to enable the production o f sufficiently detailed and regular information to assist in the 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 a l l project activities into a single report. This wil l 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 wil l be prepared and submitted to the Bank within 45 days o f the end o f each calendar quarter reported on. The financial reports wil l 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 Activi ty 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 Inhambane and Nampula, as well as the Grants Mangement Unit, wil l fol low largely o n 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 wil l be required to report to the main PIU within 30 days o f the end o f the quarter to enable the main P I U 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 wi l l be prepared and submitted to 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.

OVERSIGHT ARRANGEMENTS: AUDITS

INTERNAL AUDITING

34. The Ministry o f Finance plays a central role in the management o f public finances and in the coordination o f the implementation o f SISTAFE. I t s organizational structure includes an Inspectorate General o f Finance (IGF). For operational purposes, the IGF is split into three geographical teams based in Maputo, Nampula, and Beira, with each team covering provinces in the southern, northern, and central regions respectively. Any internal audit reports produced wil l be used to compliment bank supervision efforts, as well as give guidance on audit emphasis for the external audit (below).

EXTERNAL AUDITING

35. The Tribunal Administrativo (TA) is constitutionally mandated to audit a l l 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 f i r m s would be unable to access e-SISTAFE without this assistance). Where the audit i s subcontracted, the selected external auditor wil l be acceptable to IDA and wil l 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. G o M wil l prepare the audit terms o f reference in consultation 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 wil l be issued and wil l cover al l project income and expenditures, Designated Accounts and quarterly reports. Any firm o f auditors subcontracted to carry out the audit wil l meet IDA’S requirements in terms o f independence, qualifications and experience.

FM Action 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); 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) Install a formal accounting system for the Nampula training Centre and the GMU (main P I U to manage, by the time disbursement i s required for the respective component);

0

0

87

0 Contract project external auditors (MIC, within 3 months o f effectiveness)

Conditionality:

Effectiveness

0 Engagement o f the FM Specialist for the main PIU and Completion o f the FM Procedures 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.

Dated Covenants

0 External auditors for the project to be hired within 3 months o f effectiveness,

Fin an cia1 Coven ants

37. A financial management system, including records and accounts wi l l be maintained by the M I C and related implementing agencies for the l i fe o f the project. Financial Statements wil l be prepared in a format acceptable to IDA, and wil l be adequate to reflect resources and expenditures o f the project, in accordance with sound accounting practices.

Supervision Plan

38. Supervision wil l be risk based, and wil l include: review o f quarterly IFRs; review o f annual audited financial statements and management letter as well as timely fol low up o f issues arising; and participation in project supervision missions as appropriate. The Bank Financial Management Specialist in charge o f the MCPSDP wil l play a key role in monitoring the timely implementation o f the financial management arrangements. As a substantial risk project, a minimum o f two supervision missions will be fielded per year.

Conclusions

88

39. The overall conclusion o f 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 o f 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 o f IFRs and annual financial reports; and (iii) TORs o f audits2’; iv) hiring and installation o f the appropriate accounting systems in the case o f the Training Centre and the GMU. The timing o f the implementation o f the recommendations i s per the conditionalities above.

25 Agreement on the format o f IFRs and annual financial reports and TORs o f audits were concluded during the project negotiations

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Annex 8: Procurement Arrangements 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 M a y 2004 revised October 2006; and "Guidelines: Selection and Employment of Consultants by World Bank Borrowers" dated M a y 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 in the Procurement Plan. The Procurement Plan wil l be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

2. The Government and World Bank, with the support o f the KfW and the Afr ican 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" o n fraud and corruption to ensure enforcement and limit abuse and a capacity-building system for public procurement mainstreamed into the national systems.

3. Procurement of 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 I C B contracts are l ikely 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 I C B contracts are l ikely to be procured under this credit.

5. National Competitive Bidding (NCB): N C B 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

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following exceptions: (a) Domestic preference wil l not apply, even when foreign bidders submit bids; (b) no bidder, foreign or domestic shall be precluded from participating in N C B 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 o f non-consulting services: Non-consulting services procured under this project would include very l imited contracts estimated to cost less than $75,000 per contract: printing materials, publications o f tourism legislation, and publication o f Tourism Strategy Reports. These wil l 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 o f 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 l i s t 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 pi lot for the rest o f the country. The tropical h i t centre in Nampula wil l promote best practice in safe pesticide use and wil l 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 f i r m s wi l l 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. complex or highly specialized assignment.

Quality Based Selection (QBS) wil l be used for selecting consultants for assignments o f

11. Least-Cost Selection (LCS) wil l be used for selecting consultants for assignments o f 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. be in accordance with paragraphs 3.9 to 3.12 o f the Consultant Guidelines.

Single Source Selection (SSS) may be employed with prior approval o f the Bank and wil l

14. accordance with the provisions o f paragraphs 5.1 to 5.4 o f the Guidelines.

All services o f individual consultants (IC) wil l be procured under individual contracts in

15. All terms o f reference (TOR) for the selection o f firms and individual consultants, regardless o f the estimated cost o f the assignment, wi l l be subject to Bank review and no- objection.

16. Training: This category would cover al l 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 required to 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, wil l be required only on annual basis.

17. maintenance costs for vehicles and equipment; travel costs o f project unit staff, among others.

Operating Costs: Operating costs shall consist o f office supplies; operation and

18. Grants: Grants for SME and private sector representative organizations under the matching grant sub-component will be provided and al l the arrangement wil l 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 capacity to implement procurement

20. Procurement activities wil l be carried out by the UGEA at the M I C that is under Permanent Secretary. The Permanent Secretary wil l act as the Competent Authority to make decisions and s ign on behalf o f the Ministry as defined in the Mozambican Procurement Regulation Decree 5412005. UGEA i s staffed by a Head o f Department and four (4) procurement officers, responsible for all procurement activities o f the Ministry and wil l 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 in Bank 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

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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 in premises that s t i l l 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, i t 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 minimum fiduciary requirements by UGEA will be jeopardized.

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. I t i s therefore required that during that f i rs t 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 Bank requirements under the Project.

25. The Ministry does have an Internal Control unit that wil l enhance the check and balances for the Procurement activities. Nevertheless the internal control procedures at the Ministry wil l need to be updated to include the UGEA activities and, additionally, the unit should be exposed to procurement to adequately carry out i t s activities.

26. The current record keeping and filing system i s not up to standard and i t needs an urgent enhancement to ensure that procurement records are adequate filed and easily retrieved and accessible when necessary and for auditing purposes.

27. The Procurement section o f the Operations Manual should detail the approval requirements during the 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 wil l 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.

Mitigation Measures

Recruit a senior procurement specialist with qualifications and experience acceptable to the Bank -PIU should have clearly defined roles and responsibility for each staff, including a detailed j ob description; - Head o f UGEA should not be involved in actual procurement but concentrate in quality control; - Permanent Secretary to exercise a much closer

Table A: Procurement Management Action Plan. By When

Effectiveness

Effectiveness;

Continuous;

I not defined.

oversight responsibility to UGEA Ministry should expedite the provision o f

provided with adequate working environment

Continuous; Effectiveness

Record keeping r adequate furniture and basic equipment such as computers, telephone, fax machine, photocopier and printers for UGEA staff.

Establish an adequate procurement filing record keeping system with detailed described in the Operations Manual

A Procurement Manual should be prepared and should clearly lay out al l procurement procedures applicable under the project and includes the approval arrangements by the Ministry and other Governmental Institutions

Procurement Manual

Procurement activities not carried out efficiently

Inadequate Contract MonitoringKontrol Systems

Effectiveness

Effectiveness

UGEA should prepare a detailed Procurement plan to be used as a management tool and record al l major steps in the procurement process, including the approvals. The Plan should be updated at east every quarter. Internal monitoring and control system shall be updated. The format and requirements o f reporting and applicable models shall be established

Continuous

Continuous

94

29. Given the lack o f previous experience under Bank fiduciary requirement, the absence o f 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 o f carrying out procurement. However, since the UGEA is not at present adequately mainstreamed within the Ministry, the procurement risk i s l ikely to remain High. The Bank should exercise close supervision o f the project during the f i rs t 24 months. It i s recommended that quarterly supervision missions are carried out during the f i rst year after Effectiveness. The mission should address the issues found by recommending measures that wil l reduce the procurement risk. During the mission, at least twice per year for the f i rst 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: Thresholds for Procurement Methods and Prior Review

Expenditure Category

1. Works

2. Goods and Services (other than Consultants’ Services)

3 .Consultants’Services Firms

4. Individuals

Contract Value Threshold (US$) >2,000,000 100,000 - 2,000,000

<100,000

>300,000 75,000 - 300,000

<75,000

>200,000 <200,000

>75,000 <75,000 All

Procurement Method

I C B N C B

Shopping

I C B N C B

Shopping Direct Contracting

QCBS, QBS LCS, QBS and CQS

Single Source Fixed Budget

I C I C Single Source

Contracts Subject to Prior Review (US$)

All First two contracts and al l above $500,000 None

All First two contracts and al l above $200,000 None All

All First two contracts and al l above $100,000

All All

All First two contracts All

C. Procurement Plan

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3 1. 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. I t wil l also be available in the project’s database and in the Bank’s external website. The Procurement Plan wil l be updated in agreement with the Project Team annually or as required to reflect the actual project implementation needs and improvements in institutional capacity.

3 Estimated

cost

D. Details of the Procurement Arrangements Involving International Competition

1. Goods, Works, and Non Consulting Services

4 5 6 Procurement Review Expected

Method by Bank Bid-Opening Ref. No.

230,000

Contract (Description)

(Prior / Post) Date NCB Prior June 09

I

G-01-2009 I Vehicles for

G-02-2009 implementation units IT Equipment for 133,000

71,500

I one-stop shops G-05-2009 I Printing, publication, and

NCB Prior Jun-09

N S Post Jun-09 G-03-2009

G-04-2009

implementation units and one-stop shops Office Equipment for implementation units and one-stop shops Office Furniture for implementation units and

99,900

65,000

60,000

5,000

100,000

40,200

14,800

5,150

20,000

NCB Post Juri-09

NS Post Sep 09

NS Post Oct 09

N S Post Dec-09

NCB Prior Oct-09

N S Post Jan- 10

N S Post Jan- 10

N S Post Jan- 10

Jan- 1 0 N S Post

G-06-2009

G-07-2009

W-08-2009

G-09-20 10

G- 10-20 10

G-11-20 10

G- 12-20 10

96

translation o f licensing manuals Printing Materials for Small Business and Tourism Product Development Printing Materials for EIA Training Rehabilitation o f l-stop shop in Vilanculo IT Equipment for tourism statistics ,tourism university, land database Office Equipment for tourism statistics and university, land database Office Furniture for tourism statistics & land database offices GIS Software and

G-13-20 10

G-14-20 10

G- 15-20 10

G- 16-20 10

G-17-20 10

G-18-20 10

G-19-2010

G-20-20 10

W-2 1-20 10

W-22-2010

W-23-20 10

W-24-2009

G -25-20 10

Equipment for Land Registration Database Printing Materials for Training o f Trainers on

45,000 N S Post Jan 10

Tourism Services Publication o f Tourism 3 8,000 N S Post Jan- 10 Strategy Reports, Tourism Legislation and Regulation (1 Stop Shops) RepeatersKommunication Equipment for the Marine

20,000 N S Post Jul 10

Protected Areas Network Vehicles for Tourism

Processing and Training Center associated to the

140,000 NCB Post Jul 1 0 Training Center, Nampula center and Greenhouse Center Training Materials: printouts, DVDs for Training Center associated to the Greenhouse and processing center in Inhambane Printing training manuals for Tourism Training Center K I T o f Kitchen training center for (Tourism Training Center) Equipment for Processing Center (cold storage; scales) Construction and Maintenance o f Tourism

1,800

4,200 N S Post Oct-10

63,500 N S Post Oct-10

32,000 NS Post Oct-10

36,000 N S Post Mar- 10

Training Center Construction o f the 80,000 N S Post Jul 10

97

Greenhouse in Inhambane Construction o f 40 200,000 NCB Prior Jul 10 Greenhouses Training Center 140,000 NCB Post Dec-09 Rehabilitation I T Equipment for 45,000 N S Post Mar- 10 Nampula Training Center Office Equipment for Nampula Training Center Centre Furniture for Nampula Training Center Farm Office Building

25,000 N S Post Mar- 10

25,000 N S Post Mar- 10

100,000 NCB Post Dec-09

W-29-20 10

W-30-2009

Farm Packhouse 200,000 NCB Post Feb-10 Construction Farm Establishment, 375,000 NCB Post Sep-09 ploughing, draining, road

G -3 1-20 10

(a) Contract estimated to cost above $500,000 equivalent for works and $200,000 equivalent for goods and services per contract and al l direct contracting wil l 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.

establishment , e tc) Equipment for Farm 170,000 NCB Post Jan- 10

G -32-2010 G -33-2010

Ref. No.

irrigation system Plantation Equipment 50,000 NS Post Jan- 10 Tissue culture dants 100.000 NCB Post Jan- 10

Description of Assignment

1 2

Estimated Amount

3 4 5

Selection Method

C-0 1-2009

Review by Bank (Prior I Post)

Manager for Matching Grant 110,000 IC Prior

C-02-2009 C-03-2009 C-04-2009 C-05-2009

Unit First Business Advisor 60,000 IC Post

Second Business Advisor 60,000 IC Post Finance and Admin Officer 30,000 IC Post Consultant for Development 58,500 IC Post

C-06-20 10

C-08-20 10

Inhambane Translator Manuals for 1 Stop- 18,000 IC Post

72,000

C-07-20 10

Post

Shops in Ihambane Consultancy for the 192,500 CQS Prior Implementation of Tourism Statistics System (including staff training, pilot survey, data quality control) GIS Specialist Consultant to Train Field Assessors for Land

6

IC

Expected Proposals

Submission

Registration Database

Registration Database

Planning o f Technical Tourism

C-09-2010 Field Assessor for Land 50,000

C-10-2009 Consultant for Design and 9,000

Date April 09

IC Post

IC Post

April 09

April 09 April 09 July 09

Jan 10

Jan 10

Jan 10

Jan 10

July 09

98

C-11-2010

C-12-20 10

C-13-2009

C-14-2010

C-15-2010

Training Facility Upgrade Contract for Management the 225,000 Technical Tourism Training Center in Inhambane Management o f Greenhouse 108,000 and Processing Center in Inhambane Consultant for Development o f 13,500 a Greenhouse and Processing Center in Inhambane Consultant for Environmental 8,000 Impact Assessment for Land Acquisition Translator training manuals for 4,800 Tourism Training Center

‘2-23-2009 I Administrative staff- I 15,000

C-16-20 10

C-16-2009

C-17-2009

C-18-2009 C-19-2009 C-20-2009

C-2 1-2009

C-22-2009

Training for Tourism Service 180,000 Providers Project Manager- Coordinator 75,000 Inhambane P IU Small business development 50,000 advisor/Training Coordinator Inhambane P I U Legal Consultant-Maputo P IU 50,000 Accountant-Inhambane P I U 30,000 Environmental and M P A 40,000 specialist (EM capacity building)-Inhambane PIU Driver-Inhambane PIU 20,000

Driver-Inhambane PIU 20,000

Tropical Fruit Advisor

the Nampula Training Centre and Demonstration Farm for 3

I C

I C

I C

sss

C-26-2009 Advice on trade policy, 800,000

2-27-2009 i Provision o f training and 1,500,000

legislative, and regulatory reforms

Post July 09

Post July 09

Post July 09

Prior Ju~-09 C-24-2009

technical capacity o f Customs to provide a more responsive

Inhmabane PIU 45,000

Prior Dec 10

July 09

2-28-2009

I C

resident advisors for Customs Improve the immediate 1,400,000

I Post

QCBS

Dec 10

Prior June-09

Oct-10 TFT- I I Jan lo

QCBS

July 09

July 09

IlV 09

I Prior I June-09 QCBS

99

C-29-2009

C-30-2010

C-3 1-2010

C-32-2009

C-33-2009

service to the business community Review and streamlining of 75,000 IC Prior existing business licensing procedures and preparation of manual Consultancy to design 300,000 QCBS Prior interactive, application form, develop a national database of business licenses, and, and design and install I T system Legal reform and promotion of 75,000 IC Prior revised regulations for tourism businesses Twinning Arrangement for 500,000 QBS Prior INNOQ Twinning Arrangement for 600,000 QBS Prior Order o f Professional

April 09

Feb 20 10

C-34-2009

Dec- 10

June-09

June-09

April-09

April -0 9

April-09

June-09

Accountants Project Coordinator 125,000 IC Prior

June-09 April-09

April-09

June-09

Oct-2009 June 20 10

(a) Consultancy services estimated to cost above $100,000 equivalent per contract for f i r m s and $100,000 equivalent per contract for Individual consultant and single source selection o f consultants wil l be subject to prior review by the Bank.

(b) Short l i s ts composed entirely o f national consultants: Short l i s ts 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.

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(c) If it established during supervision that the performance o f UGEA has improved, the threshold will be increased through the Procurement Plan.

101

Annex 9: Economic and Financial Analysis

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 pi lot ing 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 in poverty.

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 i t s stream o f benefits. Therefore in keeping with common practices in the appraisal o f project o f this type, a m i x o f quantitative and qualitative techniques has been used to analyze the economic benefits and costs o f the project.

Component 1 : Imwoving: Enterprise Competitiveness

3. Improving Enterprise Competitiveness component o f this project has been designed in a manner that on one hand i t 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 ski l ls 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 in the local economy.

4. In order to get a quantitative sense, a conventional methodology i s 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) and economic rate o f return (ERR) in a “with” and “without” project framework based o n 10-year forecast time frame. NPV i s positive when ERR i s greater than the assumed discount rate.26 The NPV i s the decision criteria. Table A.9.1 shows the aggregate estimates o f economic cost-benefit analysis o f component 1

26 Opportunity cost o f capital i s 10% in most o f World Bank Projects.

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Summary of Benefits and Costs

Benefits (US $ mn)

Table A.9.1: Economic Analysis -Component 1

Present Values o f Flows

Ne t Economic-Financial

44.86

costs (US $ mn) 10.26

Net Benefits (US $ mn) 7 ERR (%)

34.60

48%

Component1 :Improving Enterprise Competitiveness (i) Matching Grant Sub-component

Notes: The discount rate used for above economic analysis i s 12%. The results above are based on 10-year forecast time frame.

Present Value o f Flows Benefits Costs N e t Benefits ERR (%) 44.86 10.26 34.60 48% 7.24 3.57 3.66 31%

Base Case Results

(ii) Promoting Tourism Sector in Inhambane

(iii) Tropical fruits training Centre in Nampula

5. The NPV for component 1 where benefits can be quantified i s 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 f i rms. 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 f project.

18.21 3.47 14.24

19.41 2.71 16.69

36%

69%

6. From the above subcomponent results, we can see that ERRS are greater than discount rate o f 12%, which shows that the results for component 1 are robust. The relatively high ERR for tropical f ru i ts training institute i s on account o f current l ow volumes o f banana export from Nampula province. Therefore the support to this initiative would result in significant one-time shift in the level o f export proceeds from banana.

103

Assumptions:

7. African countries, the following assumptions were made:

Based on the information from field visits and experience from similar projects in other

i.

.. 11 9

... 111.

iv.

V.

vi.

vii.

I t i s assumed that the financial costs and benefits can be equated with the economic costs and benefits o f the project sub components.

The discount rate used for the economic analysis i s 12% based on the standard assumption that the opportunity cost o f capital i s 10% in most o f World Bank Projects.27

The project impact i s expected to start materializing during project implementation, The maximum impact o f the project wil l be reached once the relevant capacity, institutions and investment climate are strengthened. Keeping this in view, a 10-year forecast time frame i s used.

The additional output created by assisted f i r m s is defined as the difference between the level o f output achieved by f i r m s assisted by the projects and the level o f output these same firms would have achieved otherwise.

Under the Matching Grant Sub-component, i t 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. In Uganda, the Private Sector Competitiveness Project I1 used 5 times the grant amount. Considering innovation o f other components o f the project that involve initial testing o f activities, a conservative estimate o f multiple o f 2 i s appropriate for Mozambique.

For the sub component on support to tourism sector in Inhambane i t 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 l ine with the current long term average growth rate o f tourism in Mozambique.2829

A stable macroeconomic environment with price and exchange rate stability i s also assumed.

Table A.9.3: Results by Sub components (8-year forecast horizon) Present Value o f F lows

Handbook o n Economic Analysis o f Investment Operations, OPR, M a y 2006 27

28 Source: UN WTO Tourism Highlights, 2008 edition.

29 S N V , Baseline Study o n Tour ism and Socio-Economic Development in Inhambane, Maputo, December 2007

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Componentl :Improving Enterprise Competitiveness (i) Matching Grant Sub-component

Benefits Costs Ne t Benefits ERR (%)

6.56 3.58 2.98 30% 33.87 10.26 23.61 46%

30%

69%

(ii) Promoting Tourism Sector in Inhambane

(iii) Tropical h i t s training Centre in Nampula

8. Another scenario consists in adopting a more aggressive discount factor in acknowledgement o f fact that in the event o f interest rates rise combine with exchange rate depreciation, the discount rate o f 12% is not sufficiently conservative.

11.48 3.47 7.50

15.84 2.71 13.13

Componentl :Improving Enterprise Competitiveness (i) Matching Grant Sub-component

(ii) Promoting Tourism Sector in Inhambane

(iii) Tropical h i t s training Centre in Nampula

Component Two: Improving the Business Enabling Environment:

Present Value of Flows Benefits Costs Net Benefits ERR (YO) 32.64 9.46 23.18 40% 5.64 3.24 2.41 25%

12.44 3.60 8.84 29%

14.56 2.63 11.93 61%

9. Due to catalytic role and diverse nature o f activities that are envisaged under component two, a qualitative analysis o f the cost-benefits i s done to provide u s e h l insights on each sub- component.

Support to Business Environment Strategy:

Trade Facilitation

10. Recent studies have shown that the ability o f countries to deliver goods and services on time at lowest possible costs i s 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 p e r ~ e n t . ~ ' 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 i t 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

30 World Bank Policy Research Working Paper 3703, Key issues in Trade Facilitation, Summary of World BanMEU workshops in Dhaka and Shanghai, September 2005 31Simeon Djankov et al, Trading on Time, January 26,2006

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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, pol icy environment, and systems works at customs, is l ikely to strengthen risk assessment techniques (rather than inspection o f individual consignments). This would result in reduced time, resources and levels o f error. I t i s estimated that upon completion o f project, the number o f 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.

Licensing Reform

11. The FIAS 2006 study o n 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 strengthening o f one-stop shops along with a joint comprehensive licensing review i s wel l 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 o f new businesses; reduced time for business start up; and reduced cost (as currently, in the absence o f information on requirements and standards, businesses often learn about the standard after a violation i s made and a f ine 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 documentation have 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 e m p l ~ y m e n t ) ~ ~ . Also, i t can have some impact o n reducing the size o f informal economy thereby allowing those f i r m s to access to wider markets as well as finance.34

Strengthening Public-Private Dialogue

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 i t has helped the government in improving its own communication, coordination and internal accountability.

32 FIAS, Study o n the Impact o f Taxes, Customs, Licenses and other Fees o n the Investment Climate, Mozambique, September 2006. 33 See DCED, Supporting Business Environment Reforms, Practical Guidance for Development Agencies,2008 edition 34 See for example: http://www.csd.bg/news/bertinenova.pdf and http://n-u. worldbank,ornidocumentslpublicpolicviournal/3 13Klapper.pdf

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Support to QualityEtandard Infrastructure

13. The support to the National Institute o f Standardization and Quality (INNOQ) through training and coaching o f INNOQ personnel in demand assessment and pol icy 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 wel l as per unit price 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 f i r m s that are involved in horticulture 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

Strengthening the Accounting Profession

15. A study on World Bank’s Accounting and Auditing ROSC Program has 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 member of International Federation o 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 f rom the formal financial sector by lowering the barrier o f high information and borrowing but i t 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: Transforming Kenya’s Fresh Vegetable Trade in the Context o f Emerging Food Safety and other Standards in Europe”, World Bank, Agriculture and Rural Development Discussion Paper No. 2. Washington, D.C. 36 John Hegarty et al., Implementation o f International Accounting and Auditing Standards, Lessons learned from the World Bank’s Accounting and Auditing ROSC Program, September 2004 37 This can be achieved by shifting gradually from collateral-based lending decisions to lending decisions which are based on the financial performance o f the prospective borrower

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17. In summary, significant economic benefit i s expected to be derived from this project. Broadly, the project wi l l create a business environment conducive to enterprise creation and growth and wil l improve SMEs credit market efficiency, which wil l respond to market opportunities. In particular, the project will:

0

0

Increase production and output o f the firms in the SME sector, which wil l increase the number o f formal SMEs and create more j ob opportunities; 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 in improving i t s business environment.

Ultimately, through i t s economy wide demonstration effect, the project i s l ikely to generate benefits for a much larger number o f SMEs, with wider implications for private sector growthjob creation and poverty reduction.

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Annex 10: Safeguard Policy Issues MOZAMBIQUE: MZ-Competitiveness & PS Development

1. 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 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 Environmental Assessment

2. The project has triggered OP 4.01 due to the planned rehabilitatiordconstruction 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 priori ty 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 in Nampula Province.

3. Since the exact locations o f future sub-projects and their potential adverse environmental and social impacts could not be identified prior to appraisal o f the proposed project, 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, By Cy FI); 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 al l future sub-projects to ensure they are environmentally and socially sustainable.

5. This environmental and social screening process wil l guide future sub-project implementers in (i) the identification o f potential adverse environmental and social impacts 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.

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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 i t s 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 wil l appoint an environmental specialist who wil l 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 and reporting the results to the PIU.

OP 4.09 Pest Management

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 the project’s banana plantation as well as the importance o f integrated pest management (IPM) in future operations. Safe and proper pest management and use for tropical f ru i ts 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 f project management by the Maputo-based P I U and 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 bud moth (Decadurchis flavistriatu). Coconut scale (Aspidiotus destructor) i s 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 i t i s a vector o f the banana bunchy top virus. In addition, 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 f ixit laden banana plants wi l l topple over in high winds. The key banana diseases are: banana bunchy top virus, Wilt and Black leaf streak.

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 l ike 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

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in cycles o f approximately 8 to 10 weeks. The plastic bags that are used to protect the roots o f 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 i t 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 arrangements for 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) control o f migratory pests.

14. Pesticide regulation came into effect in March 2002. I t 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 a l l the pesticides used in the country. There i s a strong desire to monitor al l 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 in most countries but can be found in Mozambique. 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 and the distribution o f pesticides 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 wil l be required. The success o f IPM depends largely on developing and sustaining institutional and human capacity 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 o n 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 i s constrained by lack o f skills, awareness, funding and enforcement o f regulatory mandates. I t i s particularly true for Mozambique.

18. For the project, there i s no defined responsibility, and i t appears that it would be split between MINAG and MICOA. I t 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 M I C O A 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, in participation 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 f the farm within Mozambique.

20. The PMP includes a number o f recommendations such as

Review o f current pesticide management practices in Mozambique 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 o f al l laws and regulations related to pesticides in Mozambique; 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 o f the I P M activities in Mozambique; Preparation o f an action plan to scale-up the existing national I P M strategy with the final aims at reducing the use o f pesticides in key areas, such as cotton, tobacco or vegetable; Awareness raising in the mass media;

112

e Preparation o f communication and awareness manuals for the farmers and populations who are at risk;

W h i l e this project i s not expected to finance the implementation o f these national-level recommendations which are beyond the scope o f the PMP provisions for the Nampula Centre, the MCPSD would coordinate with other departments in the Bank such as Agriculture and Rural Development to advance the needed pol icy dialogue in these areas and explore financing possibilities. Additionally, the implementation o f the pest management plan at the training centre farm could act as a model to be replicated in other parts o f the country.

OP 4.12 Involuntary Resettlement

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, land or any fixed or movable asset acquired or possessed temporarily or permanently by people affected by involuntary resettlement by these activities. The G o M wil l fund the resettlement costs (if any) under the RPF.

113

Annex 11: Project Preparation and Supervision MOZAMBIQUE: MZ-Competitiveness & PS Development

Planned Actual PCN review 10/25/2007 10/25/2007 Initial PID to PIC 9/28/2007 Initial ISDS to PIC 12/04/2007 Appraisal 10/23/2008 Negotiations 12/01/2008 BoardRVP approval 02/05/2009 Planned date o f effectiveness 07/01/2009 Planned date o f mid-term review 06/30/2011

12/06/2007 12/06/2007 10/29/2008 12/04/2008

Planned closing date 11/30/2014

Key institutions responsible for preparation o f the project:

Ministry o f Industry and Commerce, Ministry o f Tourism, Ministry o f Environmental Coordination, Ministry o f Planning and Development, Ministry o f Finance, Ministry o f Agriculture, Governorates o f Inhambane and Nampula, Private Sector Associations

Bank staff and consultants who worked on the project included:

Name Title Unit Mazen Bour i PSD SpecialistProject TTL AFTFP Samuel Maimbo Shaun Mann Anna Spencely Paramita Dasgupta Niraj Verma Gerard McLinden Thomas Joseph Doyle Michael Friss Jensen Lourdes Pagaran Andrew Osei Asibey Chaoying Liu Antonio Chamuco Amos Malata Jonathan Nyampukapa Edeltraut Gilgan-Hunt Yvette L. Djachechi Eduardo Br i to Suzanne Morr is Laura Corder0 Yesherag Dagne Adelina Mucavele

Senior-Financial Sector Specialist Tourism Development Specialist Tourism Development Specialist Senior PSD Specialist Financial Sector Specialist Senior Trade Facilitation Specialist Trade Facilitation Specialist Senior Economist Senior Operations Officer Senior Monitoring and Evaluation Specialist Evaluation Officer Procurement Specialist Procurement Analyst Financial Management Specialist Environment Specialist Senior Social Development Specialist Country Lawyer Disbursement Officer PSD Consultant Program Assistant Team Assistant

AFTFP AFTFP AFTFP F IAS SASFP P R M T R PRMTR P R M T R AFTRL AFTRL AFTFP AFTPC AFTPC AFTFM ASPEN AFTCS LEGAF LOAFC AFTFP AFTFP A F c s 2

114

Bank funds expended to date on project preparation: 1. Bank resources: US$lOO,OOO (variable) 2. Trust funds: 3. Total: US$lOO,OOO

Estimated Approval and Supervision costs: 1. Remaining costs to approval:US$25,000 2. Estimated annual supervision cost: US$115,000

115

Annex 12: Documents in the Project File MOZAMBIQUE: MZ-Competitiveness & PS Development

1. Investment Climate Assessment Program (2003)

World Bank (2003). Mozambique Industrial Perfonnance 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 Reducing Poverty, Report No. 32615-MZ ,World Bank, Washington DC.

5. Mozambique Competitiveness and Private Sector Project Concept Note

World Bank (2008). Project Concept Note on Mozambique Competitiveness and Private Sector Project, Washington DC.

6. Doing Business Reports

World Bank (2008). Doing Business 2008, Washington DC.

7. Country Assistance Strategy (2008-201 1)

World Bank (2008). Country Assistance Strategy for Mozambique, Washington DC.

8. Mapping o f Donor Projects and Programmes in support o f GoM Strategy to Improve the Business Environment,” Private Sector Working Group Mozambique (2008)

9. United States Agency for International Development (2008). “Mapping o f Donor Projects and Programmes in Support o f GoM Strategy to Improve the Business Environment”. Private Sector Working Group Mozambique, Washington DC.

116

Annex 13: Statement of Loans and Credits

MOZAMBIQUE: MZ-Competitiveness & PS Development

Difference between expected and actual

disbursements Original Amount in US$ Millions

Project ID FY Purpose IBRD IDA SF GEF Cancel. Undisb. Orig. Frm. Rev’d

PI04566 PO96332 PO83325 PO93 165 PO87347 PO86169 PO71465 PO8261 8 PO01 807 PO691 83

PO78053 PO72080 PO69824 PO73479 PO42039 PO52240

2008

2007 2007 2006 2006 2006 2006 2005 2004 2004

2003 2003

2002 2002 2000 1999

MZ-Water Services & Inst. Support Maputo Municipal Development Program MZ-APL2 Roads &Bridges MZ-Market Led Smallholder Dev (FY06) MZ Tech & Voc Edu & Training (FY06) MZ-Financial Sector TA Project MZ-TFCA & Tourism Dev (FY06) MZ-Beira Railway S I L (FY05) MZ-Decentr Planning &Fin SIL (FY04) MZ - Energy Reform and Access SiL (FY04) MZ-HIV/AIDS Response SIL (FY03) MZ: Pub Sec Reform (FY03)

MZ-Higher Education S I M (FY02) MZ-Corn Sec Reform MZ-Railway & Port Resh (FYOO) MZ-Natl Water 2 (FY99)

Total:

0.00

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

0.00 0.00

0.00 0.00 0.00

0.00

15.00 30.00

100.00 20.00 30.00 10.50 20.00

110.00 42.00 40.26

55.00 25.60

60.00 14.90

100.00

75.00

0.00 0.00 0.00 16.26 0.70 0.00 0.00 0.00 0.00 25.92 4.97 0.00 0.00 0.00 0.00 101.71 11.91 0.00 0.00 0.00 0.00 20.19 2.88 0.00

0.00 0.00 0.00 29.79 6.82 0.00 0.00 0.00 0.00 8.99 -0.08 0.00 0.00 0.00 0.00 18.31 1.46 0.00

0.00 0.00 0.00 42.44 -10.70 0.00 0.00 0.00 0.00 9.48 3.32 0.00 0.00 3.09 0.00 35.75 28.17 -1.42

0.00 0.00 0.00 26.55 9.07 0.00 0.00 0.00 0.00 9.65 5.15 0.00 0.00 0.00 0.00 21.41 -4.85 0.00 0.00 0.00 0.00 3.72 1.30 -0.55 0.00 0.00 0.00 8.18 1.99 -2.54 0.00 0.00 0.00 7.22 -15.78 -1.72

~~ ~ _ _ _ _ _ ~ _ _ _ _ ~ ~

0.00 748.26 0.00 3.09 0.00 385.57 46.33 - 6.23

MOZAMBIQUE STATEMENT OF IFC’s

Held and Disbursed Portfolio In Millions o f U 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 0.1 I 0.00 0.00 0.00 0.1 1 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

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Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic.

Total pending commitment: 0.00 0.00 0.00 0.00

118

Annex 14: Country at a Glance

119

Mozambique at a glance 9124l08

POVERTY and SOCIAL Mozamblaue

2007 P o p lation, midyear (millions) GNI cer capita (Atlas method, US$) GNI (Atlasmehod, US$billions)

Averaae annual aowth,200147 Population I%) Laborfore (%)

Most recent estirnateflatestvearavailable.200147) Poverty (% of powlation belownational mvertv line) Urban population (% oftolelpwlation) Life emectancv at birth (years) Infant mcntalitv (per 1,000 live births) Child malnutrition (% dchildmn under 5) Access to an improved water sourw (% ofpopulation) Literacv (% of population a m 1%) Gross Drimaw enrollment (% ofschod-aw populakn) k le Female

KEY ECONOMK: RATIOS and LONG-TERM TRENDS

GDP (US$ billions) Gross capital formatiorVGDP & p r t s o f g d s and serviceslGDP Gross domesticsavingslGDP Gross national sawwslGDP

Current acccunt balancelGDP Interest wvmentslGDP Total debt/GDP Total debt servicelexports Present value of debtlGDP Present value of de btlexports

(averme annual am&) GDP GDP percapita Exports of goods and services

1987

2.4 17.0 6.6

-7.7 -14.9 -29.4

0.8 175.3 23.5

1987-97 1997-07

4.2 7.7 1.6 5.2

12.6 18.9

21.4 330 7.1

2.3 1.8

54 36 42 96 21 42

105 113 97

1997 3.8

20.6 13.4 9.3 4.6

-16.3 1 .I

203.4 19.2

2006

8 5 6.3 8 .O

Sub- Saharan

Africa

800 952 76 2

2.5 2.6

36 51 94 27 58 59 94 99 88

2006 7.0

19.0 40.7 13.0 3.2

-16.0 0.4

46.9 1.9

10.1 23.9

2007

7.3 5.3

-8.2

Low. inwrne

1,296 5 78 749

2.2 2.7

32 57 a5 29 68 61 94

100 89

2007

7.8 19.2 38.6 12.3 2.8

-16.5

2007-11

7.0 5.9

10.0

Development dlamond'

Life erpectanq

T GNI Gross per primary capita en rdl men1

Access to improved water source

-Mozambique ~ Low-income gmup

Economic ratios'

Trade

T

I i

Indebtedness

Mozambique Low-income mu^

I

STRUCTURE of the ECONOMY

(% of GDP) pgriculbrre Industry

Services

Household final consumDtion exwndibrre General mv't final consumDtion expenditure Imports of goods and services

Manufacturing

(average annual gm&)

Industry

Services

Household final consumDtion excendibrtt? General gov't final consumption expendibrre Gross capital formation Imports of gcnds and services

Pg riculbr re

Manufactun np.

1987 1997

44.1 34.9 21.4 17.8

9.8 34.4 47.4

96.7 83.9 11.1 6.8 31.4 24.6

1907-97 199747

2.6 5.3 1.9 13.9 4.5 13.7 4.6 6.6

3.0 5.1 -0.2 -1.8 5.3 7.2 2.6 5 .O

2006 2007

27.6 27.6 26.6 25.7 16.3 15.2 45.8 46.7

76.1 75.6 10.9 12.1 46.6 45.6

2006 2007

10.9 6.6 9.1 6.6 6.0 5.0 7.9 6.4

8.4 8.6 8.4 17.2

13.1 4.2 10.0 -2.1

IGrowth ofcapltal and GDP (%) 1

-GCF -GDP I Growth of exports and imports (%) 60 r

Note: 2007 data are preliminary estimates. This table was mduced from the Development Economics LDB database.

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Montes NamuleMontes Namule(2,419 m)(2,419 m)

Mo

za

mb

iq

ue

Pl a

i n

M o z a m b i q u e

P l a t e a u

MAPUTOMAPUTO

G A Z AG A Z A

S O F A L AS O F A L A

T E T ET E T E

Z A M BZ A M B É Z I AZ I A

N A M P U L AN A M P U L A

C A B OC A B OD E L G A D OD E L G A D O

N I A S S AN I A S S A

Limpopo

INHAMBANEINHAMBANE

MANICAMANICA

GuijaGuija

MassingirMassingir

ChicualacualaChicualacuala

MapaiMapai

MoambaMoamba

EspungaberaEspungabera

ChiguboChigubo

MachaílaMachaíla

PandaPanda

GorogosaGorogosa

SenaSena

ChangaraChangara

CatandicaCatandica

InhamingaInhaminga

MontepuezMontepuez

MuedaMueda

MarrupaMarrupa

CaturCatur

MetangulaMetangula

Alto MolócueAlto Molócue

RibáuRibáuè

GuruGurué

CuambaCuamba

NamacurraNamacurra

MocubaMocuba

MoatizeMoatize

SongoSongoZumboZumbo

FíngoFíngoè

FurancungoFurancungo

MualadziMualadzi

MilangeMilange

LichingaLichinga

ChimoioChimoio

TeteTete

NampulaNampula

ChibitoChibito

MatelaMatela

Monte BingaMonte Binga(2,438 m) (2,438 m)

To To LusakaLusaka

To To PetaukePetauke

To To LilongweLilongwe

To To MangocheMangoche

To To MtwaraMtwara

To To ZombaZomba

To To BlantyreBlantyre

To To ChipataChipata

To To MutokoMutoko

To To HarareHarare

To To MasvingoMasvingo

To To MasvingoMasvingo

To To RutengaRutenga

To To MessinaMessina

To To NelspruitNelspruit

To To MbabaneMbabane

S O U T HS O U T HA F R I C AA F R I C A

SWAZILANDSWAZILAND

Z I M B A B W EZ I M B A B W E

Z A M B I AZ A M B I A

T A N Z A N I AT A N Z A N I A

MALAWIMALAWI

LakeLakeMalawiMalawi

Zitundo

Manhica

Guija

Massingir

Chicualacuala

Mapai

Moamba

Nova Mambone

Espungabera

Inhassôro

Vilanculos

Chigubo

Machaíla

Inharrime

Panda

Chibito

Gorogosa

Sena

Changara

Catandica

Inhaminga

Pebane

Angoche

Nacala

Montepuez

MuedaMocimboada Praia

Marrupa

Catur

Metangula

Alto Molócue

Ribáuè

Gurué

Cuamba

Namacurra

Mocuba

Moatize

SongoZumbo

Fíngoè

Furancungo

Mualadzi

Milange

Moçambique

Xai-Xai

Matela

Beira

Chimoio

Quelimane

Tete

Nampula

Inhambane

Pemba

Lichinga

MAPUTO

S O U T HA F R I C A

SWAZILAND

Z I M B A B W E

Z A M B I A

T A N Z A N I A

MALAWI

MAPUTO

G A Z A

S O F A L A

T E T E

Z A M B É Z I A

N A M P U L A

C A B OD E L G A D O

N I A S S A

INHAMBANE

MANICAINDIAN OCEAN

Lago deCahora Bassa

LakeMalawi

Lugenda

Messalo

Lúrio

Ligonha

Licungo

Zambeze

Buzi

Save

Changane

Zambeze

Limpopo

To Lusaka

To Petauke

To Lilongwe

To Mangoche

To Mtwara

To Zomba

To Blantyre

To Chipata

To Mutoko

To Harare

To Masvingo

To Masvingo

To Rutenga

To Messina

To Nelspruit

To Mbabane

Mo

za

mb

iq

ue

Pl a

i n

M o z a m b i q u e

P l a t e a u

Monte Binga(2,436 m)

Montes Namule(2,419 m)

30° E 35° E

30° E 35° E 40° E

25° S

20° S

15° S

10° S

25S

20° S

15° S

10° S

MOZAMBIQUE

0 50 100 150

0 50 100 150 Miles

200 Kilometers

IBRD 33451R1

JANUARY 2007

MOZAMBIQUESELECTED CITIES AND TOWNS

PROVINCE CAPITALS

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other information shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, o r any endo r s emen t o r a c c e p t a n c e o f s u c h boundaries.