IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-39590) ON A CREDIT IN THE AMOUNT OF SDR15 MILLION (US$22 MILLION EQUIVALENT) TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-39590) ON A CREDIT IN THE AMOUNT OF SDR15 MILLION (US$22 MILLION EQUIVALENT) TO THE REPUBLIC OF KENYA FOR A Report No: ICR2496 MICRO, SMALL AND MEDIUM ENTERPRISE COMPETITIVENESS PROJECT December 20, 2012 Finance and Private Sector Unit Africa Region

2 CURRENCY EQUIVALENTS (Exchange Rate Effective June 30, 2012) Currency Unit = Kenya Shilling (Ksh) US$1.00 = Ksh US$ 1.00 = SDR 0.66 January 1 - December 31 ABBREVIMPACT ASSESSMENTTIONS AND ACRONYMS BDS BPC CAS DFID EBITDA ERRs ESW FSDT GBSN GDP GoK IDA IFC ICR ISRs IR IRR M&E MFIs MoTI MoI MSE MSMEs MTR NPV NBFIs PBK PAD PDO PMC QCBS RCF SACCOs Business Development Services Business Plan Competition Country Assistance Strategy Department for International Development Earnings before Interest, Taxes, Depreciation and Amortization Economic Rate Returns Economic Sector Work Financial Sector Deepening Trust Global Business School Network Gross Domestic Product Government of Kenya International Development Association International Finance Corporation Implementation Completion Report Implementing Status and Results Reports Intermediate Results Internal Rate of Return Monitoring and Evaluation Microfinance Institutions Ministry of Trade and Industry Ministry of Industrialization Micro and Small Enterprise Micro, Small and Medium-sized Enterprises Medium Term Review Net Present Value Non-bank Financial Institutions Pyrethrum Board of Kenya Project Appraisal Document Project Development Objectives Project Management Contractor Quality and Cost Based Selection Risk Capital Fund Savings and Credit Cooperatives ii

3 SSC TA TIPs TVET SME Solution Center Technical Assistance Technical Implementation Partners Technical, Vocational and Educational Training Vice President: Makhtar Diop Country Director: Johannes Zutt Sector Manager: Irina Astrakhan Project Team Leader: Yira Mascaró ICR Team Leader: Xiaofeng Hua iii

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5 REPUBLIC OF KENYA Micro, Small and Medium Enterprise Competitiveness Project Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph TABLE OF CONTENTS 1. Project Context, Development Objectives and Design Key Factors Affecting Implementation and Outcomes Assessment of Outcomes Assessment of Risk to Development Outcome Assessment of Bank and Borrower Performance Lessons Learned Comments on Issues Raised by Borrower/Implementing Agencies/Partners Annex 1. Project Costs and Financing Annex 2. Outputs by Component Annex 3. Economic and financialanalysis Annex 4. Bank Lending and Implementation Support/Supervision Processes Annex 5. BenefiarySurvey Results Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR Annex 7. List of Supporting Documents MAP iv

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7 A. Basic Information D A T A S H E E T Country: Kenya Project Name: Micro, Small, and Medium Enterprise Competitiveness Project Project ID: P L/C/TF Number(s): IDA ICR Date: 12/20/2012 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment: XDR 15.00M Disbursed Amount: XDR 10.82M Revised Amount: XDR 10.82M Environmental Category: C Implementing Agencies: Ministry of Industrialization FSD Kenya GBSN Center Kenya BPI Kenya Deloitte Kenya PWC Kenya Kenya Institute of Education Cofinanciers and Other External Partners: B. Key Dates Process Date Process Original Date Revised / Actual Date(s) Concept Review: 01/15/2004 Effectiveness: 12/17/ /17/2004 Appraisal: 03/30/2004 Restructuring(s): 12/28/ /29/2012 Approval: 07/13/2004 Mid-term Review: 02/28/ /28/2009 Closing: 06/30/ /30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Risk to Development Outcome: Bank Performance: Borrower Performance: Moderately Satisfactory Substantial Moderately Satisfactory Moderately Satisfactory v

8 C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Moderately Satisfactory Overall Bank Overall Borrower Moderately Satisfactory Performance: Performance: Moderately Satisfactory C.3 Quality at Entry and Implementation Performance Indicators Implementation QAG Assessments Indicators Performance (if any) Potential Problem Project Yes at any time (Yes/No): Problem Project at any time (Yes/No): DO rating before Closing/Inactive status: Yes Moderately Satisfactory Quality at Entry (QEA): Quality of Supervision (QSA): None None Rating D. Sector and Theme Codes Original Actual Sector Code (as % of total Bank financing) Central government administration 5 0 General industry and trade sector SME Finance Sub-national government administration 5 0 Vocational training Theme Code (as % of total Bank financing) Improving labor markets Micro, Small and Medium Enterprise support Regulation and competition policy 25 3 Rural markets Tax policy and administration 13 0 E. Bank Staff Positions At ICR At Approval Vice President: Makhtar Diop Callisto E. Madavo Country Director: Johannes C.M. Zutt Makhtar Diop Sector Manager: Irina Astrakhan Demba Ba Project Team Leader: Yira J. Mascaro Vyjayanti Tharmaratnam Desai vi

9 ICR Team Leader: ICR Primary Author: Xiaofeng Hua Xiaofeng Hua F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The Project aims to increase productivity and employment in participating micro, small and medium enterprises (MSMEs). This objective will be achieved by strengthening financial and non-financial markets to meet the demand of MSMEs, strengthening support for employable skills and business management, and reducing critical investment climate constraints in MSMEs. The project will focus on key value chains and on both formal small and medium enterprises and informal microenterprises that have high potential for dynamic growth, including "graduation" from informal to formal status. Revised Project Development Objectives (as approved by original approving authority) Not Applicable (a) PDO Indicator(s) Indicator Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years Indicator 1 : At least 2,500 new jobs created in participating MSMEs Value quantitative or Qualitative) Zero (0.00) 2,500 1,450 Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) The number 1,450 is the documented number of jobs created in the end-ofproject impact assessment, and should be viewed as the floor for the total number of jobs created under the Project. Indicator 2 : Value added per worker increases by 20 percent in participating MSMEs Value C1A 7% quantitative or Qualitative) Zero(0.00) 20% C1B 60% C2A 320% Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) There was a slight discrepancy in the wording of the indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator in this Datasheet is the modified one. vii

10 (b) Intermediate Outcome Indicator(s) Indicator Indicator 1 : Baseline Value Original Target Values (from approval documents) Formally Revised Target Values Actual Value Achieved at Completion or Target Years At least 70 percent of financial institutions receiving grants from the Financial Sector Deepening Trust meet or exceed their business plan targets Value (quantitative or Qualitative) 0.00 At least 70% 46% Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) Indicator 2 : Value (quantitative or Qualitative) The 46% is based on the available information. In general, FSDT had significant impact on Kenyan financial institutions transformation and outreach as confirmed by a January 2010 independent impact assessment of the program. At least US$11.5m in loans and quasi-equity investment to SMEs disbursed through SME risk capital fund and facilitated through targeted technical assistance, with loan loss rate below 10% 0.00 At least US$11.5 million in loans and quasi-equity investment >10% loan loss US$17 million in loans and quasiequity investment (gross) 7.5% loan loss Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) A comprehensive supply chain strategy, which responds to market, technical, Indicator 3 : human resource and financial needs of key players along the entire supply chain, is created for at least three sectors. Value (quantitative or Qualitative) 0.00 at least 3 sectors 4 sector strategies (Coffee, Cotton-to- Garment, Leather and Pyrethrum) Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) Indicator 4 : Increased subcontracting in local supply chains providing at least 50% increase in the level of local sourcing Value (quantitative or Qualitative) 0.00 At least 50% 1,000% Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) Indicator 5 : Agreement on training levy scheme, legislation and implementation plan viii

11 Value (quantitative or Qualitative) 0.00 An agreement ix An agreement reached on the restructuring strategy and implementation plan Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) There was a minor discrepancy in the wording of this indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator used in this Datasheet is the modified one. Indicator 6 : 100 new business case studies introduced into the Borrower's universities' business school curriculum Value (quantitative or Qualitative) new business case studies 137 cases developed Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) There was a minor discrepancy in the wording of this indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator used in this Datasheet is the modified one. Indicator 7 : Case-based instruction is routinely used in at least one required course in each of the three business schools. Value (quantitative or Qualitative) Case-based instruction rarely used in business schools Case-based instructions in three business schools Case-based instruction was routinely used in the three participating universities' executive business education programs. Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) At least 200 eligible entrepreneurs apply to the business plan competition in the Indicator 8 : first year, with at least a 5% increase in the number of eligible applicants annually Value (quantitative or Qualitative) 0.00 At least 200 applicants 2,092 applicants in 1st round 3,493 applicants in 2nd round An increase of 67% between 1st and 2nd rounds Date achieved 06/15/ /14/ /30/2012 Comments (incl. % achievement) Indicator 9 : Bank core indicator - Direct project beneficiaries

12 Value (quantitative or Qualitative) ,136 Date achieved 06/15/ /30/2012 Comments (incl. % achievement) Indicator 10 : Bank core indicator - Female beneficiaries Value (quantitative or Qualitative) Date achieved 06/15/ /30/2012 Comments (incl. % achievement) Indicator 11 : This number 561 is the female beneficiaries under C1B only, including female entrepreneur investees and those received technical assistance. No consistent tracking of the number of female beneficiaries under the other subcomponents is available. Bank core indicator - Volume of Bank Support: Institutional Development - SME Value (quantitative or Qualitative) 0.00 US$2 million US$7.9 million Date achieved 06/15/ /28/ /30/2012 Comments (incl. % achievement) Indicator 12 : Value (quantitative or Qualitative) The end-results included IDA support of C1B, C2A and C2C; hence covering both SMEs and micro-enterprises. Bank core indicator - Volume of Bank Support: Institutional Development - Microfinance 0.00 US$5.75 million US$2.2 million Date achieved 06/15/ /28/ /30/2012 Comments The end-results was the IDA financing for C1A; hence covering all types of (incl. % financial institution beneficiaries. achievement) Indicator 13 : Bank core indicator- Volume of Bank Support: Enabling Environment - SME Value (quantitative or Qualitative) 0.00 US$0.5 million Date achieved 06/15/ /28/2009 Comments Monitoring stopped for this indicator after the discontinuation of the original (incl. % Component Three. achievement) x

13 G. Ratings of Project Performance in ISRs No. Date ISR Archived DO xi IP Actual Disbursements (USD millions) 1 11/19/2004 Satisfactory Satisfactory /23/2005 Satisfactory Satisfactory /20/2005 Satisfactory Satisfactory /19/2006 Moderately Moderately Unsatisfactory Unsatisfactory /21/2006 Satisfactory Moderately Satisfactory /29/2007 Satisfactory Moderately Satisfactory /20/2007 Satisfactory Moderately Satisfactory /25/2008 Moderately Moderately Unsatisfactory Unsatisfactory /30/2008 Moderately Moderately Unsatisfactory Unsatisfactory /29/2009 Moderately Satisfactory Moderately Satisfactory /22/2009 Moderately Satisfactory Moderately Satisfactory /26/2010 Moderately Satisfactory Moderately Satisfactory /10/2011 Moderately Satisfactory Moderately Satisfactory /03/2012 Moderately Satisfactory Moderately Satisfactory /11/2012 Moderately Satisfactory Moderately Satisfactory H. Restructuring (if any) Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 12/28/2009 N MS MS 8.30 IP Reason for Restructuring & Key Changes Made Main reasons: Only 20% of the planned outputs were achieved Disbursement was only 27% 3 years into project implementation Component Three was not performing Key changes: Component Three removed Component Four merged with new Component 3 on government counterpart capacity building and project management IDA financing reallocated

14 Restructuring Date(s) Board Approved PDO Change ISR Ratings at Restructuring DO Amount Disbursed at Restructuring in USD millions 06/29/2012 MS MS IP Reason for Restructuring & Key Changes Made Main reasons: The Project would not be able to fully utilize the IDA financing of US$22 million equivalent Cancellation of IDA credit proceeds of a project in a client country within a WB fiscal year will allow the utilization of the funding for the country program. Key changes: US$6 million of IDA financing for the Project was cancelled. I. Disbursement Profile xii

15 1. Project Context, Development Objectives and Design 1.1 Context at Appraisal 1. Country and sector background: Kenya was on the road to economic recovery in after two decades of economic mismanagement and decline. The economic rehabilitation was guided by a private-sector driven recovery strategy. 1 This Government of the Republic of Kenya (GOK) strategy saw the development of Micro, Small and Medium-sized Enterprises (MSMEs) as a main contributor towards income increase and job creation. The importance of the MSME sector in Kenya is evident from the 1999 national Micro and Small Enterprise (MSE) survey which indicated there were 1.3 million MSEs which accounted for 18.4 percent of GDP. 2 Most (64 percent) of the MSEs were in trade, followed by services (15 percent). Manufacturing was the third largest sector for MSEs (13 percent). The survey also found that 99 percent of the MSEs employed less than 10 workers, and the remaining one percent was in the range of employees. In , the MSE sector registered an increase of almost 40 percent in job creation (5.1 million employees). 3 Meanwhile, larger enterprises job creation was stagnant, having only added 20,000 jobs to a total employment of 1.76 million. 2. Constraints to MSME development: At appraisal, several major obstacles to MSME development were identified. The first one was the limited access to finance. In Kenya, the financial market was polarized. At one end of the spectrum, dozens of commercial banks and licensed non-bank financial institutions (NBFIs) serviced a narrow portion of the formal economy; and on the other, over 5,000 microfinance institutions (MFIs) and savings and credit cooperatives (SACCOs) provided microfinance loans to groups of individuals or households. Commercial banks required well-secured collateral and did not have good information on entrepreneurs project quality, while most SMEs found it difficult to come up with adequate collateral. MFIs and SACCOs typically financed activities of quick but meager turnovers (e.g. petty trade) or other household income improving businesses. Those small financial institutions did not have the financial strength and institutional capacity to finance MSME growth, to say nothing of startup MSMEs. Equity financing initiatives in Kenya (and elsewhere in Africa) suffered a lack of exit opportunities for investors and high processing cost of large amount of small investments. 3. At the time of project preparation, a Bank sponsored ESW analyzed some key value chains including those for coffee, cotton to garments and pyrethrum. 4 The study revealed that the domestic markets failed to provide mutual support systems and value 1 GOK: Economic Recovery Strategy for Wealth and employment Creation, Central Bureau of Statistics: National Micro and Small Enterprise Baseline Survey, Central Bureau of Statistics: Economic Survey 2003 which included domestic servants in the definition of the informal sector and the statistics from this survey were used as a proxy for SME employment. 4 The World Bank: Kenya Growth and Competitiveness, (Report No KE), January 27,

16 chain linkages. Coffee farming suffered from poor labor skills. Coffee processing techniques at coffee farmers cooperatives were inefficient. The cooperatives often delayed payments to farmers for months while charging the latter interest on loans. Coffee farmers did not receive feedback on product quality from marketing agencies which were an important player in moving processed coffee to auction floors. Cotton production yields were low: realized production was less than 10 percent of the potential of available cotton land. Cotton farmers were poorly equipped with technical skills and could not afford pesticides and agrochemicals. Seeds provided by ginneries were in poor quality, leading to low quality of cotton. Reject rates on shop floors were high and ginning equipment was outdated. The pyrethrum sector was controlled by the Pyrethrum Board of Kenya (PBK) which failed to provide quality inputs to farmers but controlled the price of their crop. The administrative costs accounted for the entire cost of pyrethrum farming. In all those value chains, public-private consultations were irregular or did not fully involve the main stakeholders along the value chains. 4. There was a mismatch between training offered by Kenya s formal technical, vocational and educational (TVET) institutions and MSMEs skills needs. TVET only provided about 20 percent of training with the rest provided within the MSME sector. Literacy of the Kenyan labor force was among the highest in Sub-Saharan Africa, but labor productivity of Kenya s manufacturing sector declined from the 1990s. One contributing factor was the problems in the prevalence, level and quality of skills development and technical training. The country s long existent Industrial Training Levy scheme was designed to offset under-investments in training due to labor mobility. Levies collected from firms with more than five workers funded a dedicated industrial training fund and the levy payers could get the cost of pre-approved training programs reimbursed by that fund. However, the scheme had become obsolete and could not meet Kenya enterprises needs in a more diversified economy. 5. The business and regulatory environment for Kenya s MSMEs remained cumbersome and costly. While the introduction of the single business permit in 2000 combined 16 individual locally issued business licenses into one, there were still 11 separate procedures for business registration which was estimated to take about 60 days on average. In order to operate officially, a business would need to obtain two general licenses: the single business permit, and the trade license from the Ministry of Trade and Industry (MOTI). Almost every business activity required a special license. All the licenses required fee payments and most had to be renewed annually. The licensing system was prone to rent-seeking and was quite costly to MSMEs. In addition, there were numerous taxes and fees which should be simplified to encourage more MSMEs to move into the formal sector, and meanwhile reduce the Government s tax administration burdens. 6. Bank assistance program: To support the GOK s Economic Recovery Strategy, the Bank adopted a Country Assistance Strategy (CAS) in June 2004 and stimulating economic growth featured high in the reengagement strategy. Around the same time, the 2

17 Bank approved a joint IDA/IFC MSME pilot program for Africa (December 2003). 5 This pilot program intended to better integrate IDA s and IFC s expertise, resources and instruments to: (i) increase access to finance for MSMEs; (ii) build capacity in MSMEs; and (iii) promote business environment reforms. 7. The Project: Against this country and sector background, the Bank approved the Kenya Micro, Small and Medium Enterprise Competitiveness Project (the MSME project or the Project) in July 2004 as a direct response to the identified main bottlenecks of the MSME sector development in Kenya. The Project was the second of the Joint IDA-IFC MSME Program. Detailed discussions of the Project as a main Bank response to the developmental needs of Kenya s MSMEs are provided in the relevant sections of the ICR. 1.2 Original Project Development Objectives (PDO) and Key Indicators 8. The PDO as presented in the Project Appraisal Document (PAD) was as follows: 6 The Project aims to increase productivity and employment in participating micro, small and medium enterprises (MSMEs). This objective will be achieved by strengthening financial and non-financial markets to meet the demand of MSMEs, strengthening support for employable skills and business management, and reducing critical investment climate constraints in MSMEs. The project will focus on key value chains and on both formal small and medium enterprises and informal microenterprises that have high potential for dynamic growth, including "graduation" from informal to formal status. 9. The PDO in the Development Credit Agreement (DCA) was similar. 10. The achievement of the PDO was to be measured by two Outcome Indicators: At least 2,500 new jobs created in participating MSMEs, and Value added per worker increases by 20 percent in participating MSMEs. 11. At appraisal, the following Intermediate Results (IR) were established, and for which 11 indicators adopted (see the Datasheet of this ICR for details): Component One: Increase in commercially sustainable delivery of financial services to MSMEs Component Two: (i) Increase in specialized value adding links in supply chains; (ii) Technical, legal, and regulatory framework for redesigning the Industrial Training Levy Scheme is established; and (iii) Improved business management education 5 The Program Framework Document for a Joint IDA/IFC Micro, Small, and Medium Enterprise Development Pilot Program for Africa (IDA/SecM ). The first project approved under the program was the Nigeria MSME Project. 6 Quotations on the outcome and intermediate results indicators are from the PAD (Report No: KE, June 15, 2004). 3

18 Component Three: Improved regulatory environment for doing business in Kenya 1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 12. There was no revision of the PDO and the Outcome Indicators. 13. The Intermediate Result of the original Component 3 (Improving Business and Regulatory Environment) and the associated three indicators were dropped when the original component was cancelled by the project restructuring in December Five Bank-wide core indicators on IDA credit disbursement and number of beneficiaries were added as additional Intermediate Results before December 2009 (but the one on disbursement for business environment improvement was dropped after the first project restructuring). The core indicators are listed in the Datasheet of this ICR. The rest of the Results and the related IR indicators remained unchanged as designed, although there were minor alignment in the wording of the indicators between the PAD and the Results Framework used in the Implementing Status and Results Reports (ISRs) at the 2009 project restructuring. 1.4 Main Beneficiaries 15. The primary target group of the Project was Kenya s MSMEs. 7 The Project was also expected to benefit employees of the beneficiary MSMEs and farmers of the value chains to be supported through various capacity building activities and business development services. There was no revision of the main beneficiaries. 1.5 Original Components 16. At approval, the Project had four components including five sub-components, as follows: 17. Component One (C1) Access to Finance (US$10.5 million equivalent): This Component was designed to address the identified access to finance constraints faced by Kenya s MSMEs. The Component consisted of two subcomponents. 18. Subcomponent A(C1A) Financial Sector Deepening (US$4 million equivalent of IDA financing) was to co-finance technical assistance under a financial Sector Deepening Trust (FSDT or FSD Kenya) 8, in particular those FSDT projects which would support MFIs moving up-market and commercial banks moving down-market, with a view to 7 At appraisal, this economic group was broadly defined by the number of workers. Firms that employed workers were considered as medium-sized, those with workers were small-sized, and microsized firms had a workforce of 1-9 employees. The 2009 MSME legislation uses the same definitions in addition to definitions in terms of annual turnover and capital investment. 8 The FSDT was later named FSD Kenya. 4

19 making available financial products and services suitable to MSMEs. The British Government s Department for International Development (DFID) was to provide US$10-15 million for the establishment of the FSDT. 19. Subcomponent B(C1B) SME Risk Capital and Technical Assistance Fund (US$6.5 million equivalent of IDA financing) aimed to bridge the gap between SMEs and the banking world. The Risk Capital Fund (RCF) was to be established by a group of investors including the Bank Group s International Finance Corporation (IFC), and would offer a mix of debt, equity and quasi-equity products to eligible investees. The IDA credit would finance a portion of the fund s operational expenses and a parallel technical assistance (TA) fund available to the RCF investees. The IDA credit would also finance a separate TA Fund for technical assistance to SME investees of other riskcapital funds. In addition to the IDA financing for technical assistance activities, the US$15 million Kenya RCF was funded by IFC and other private investments. 20. Component Two (C2) Strengthening Enterprise Skills and Market Linkage (US$6.5 million equivalent): The objective of this Component was to address the identified market failures to provide skills which would match MSME needs, and offer adequate information and linkages to MSMEs and farmers at the lower end of the value chains. This Component consisted of three subcomponents. 21. Subcomponent A(C2A) Pilot Value Chain Based Matching Grant Program (US$4 million equivalent of IDA financing) was a supply-side response to MSMEs limited access to business development services, and the lack of linkages between MSMEs and from MSMEs to markets. Under the matching grant, the IDA credit proceeds would provide partial financing for eligible training and knowledge-based services for improving MSME competitiveness, and the rest of the cost was to be borne by grant receivers. The grants would provide upon the approval of a value-chain based business plan jointly developed by the main players along the value chain. 22. Subcomponent B(C2B) Restructuring of the Industrial Training Levy Scheme (US$0.5 million equivalent of IDA financing) aimed to modernize the long-existed scheme to meet the demand for skills in the growing economic sectors. Under this subcomponent a study would be financed to recommend on: (i) a new industrial skills funding strategy; (ii) a new legal, regulatory and institutional framework to support effective delivery of industrial skills; (iii) a future levy fund governance structure and institutional arrangements; and (iv) the upgrading of the industrial training qualification structure. 23. Subcomponent C (C2C) Global Business School Network/Improving opportunities and training for entrepreneurs and MSMEs (US$2. million equivalent of IDA financing) was to (i) introduce a Business Plan/Innovation Competition modeled on the Development Marketplace; 9 and to (ii) support the local Global Business School 9 The Development Marketplace is a ten-year World Bank Institute s program that provides grant funding for the development and testing of innovative initiatives. 5

20 Network (GBSN) Center to develop locally relevant cases and short courses for effective training of MSME owners and managers in at least three business schools Component Three (C3) Improving the Business Environment (US$2 million equivalent): This Component (US$2 million equivalent) was a response to the identified investment climate constraints. It was expected to contribute to the reduction of compliance costs for the formal sector and provide incentives for the MSMEs in the informal sector to become formal economic entities. This objective was to be achieved through simplification of the GOK s tax regime for micro and small businesses and consolidation of business startup regulations through a one-stop window approach. 25. Component Four (C4) (US$2.5 million equivalent): The original project design also included a Component Four to finance project management related activities, including: i) institutional capacity building and M&E; and ii) a private sector Project Management Contractor (PMC). 1.6 Revised Components 26. The original Component Three was dropped at project restructuring in December The original Component Four became Component Three Institutional Capacity Building and Project Management to finance increased capacity building activities of the Ministry of Industrialization (MOI, project owner) 11 and the PMC contract. 1.7 Other significant changes 27. Based on a reassessment of the reduced funding needs, the December 2009 restructuring also reallocated the balance of IDA credit proceeds for the original Component Three (US$2 million) and part of the IDA financing for C1B (US$1 million) to Component Two and the new Component Three (. As a result, the IDA financing for Component 1 decreased to US$9.5 million; that for Component Two increased to US$8.1 million; and a total of US$3.45 million was allocated to finance the new Component Three. 28. The June 2012 restructuring cancelled US$6 million of the IDA credit proceeds when it became clear that the Project would not be able to utilize the balance by the closing date, while the Kenya country program could benefit from the availability of cancelled IDA funds before the conclusion of the fiscal year. 29. The closing date of the Project was extended once, from December 31, 2009 to June 30, GBSN stands for Global Business School Network. The IFC sponsored the non-profit GBSN to strengthen business schools in the developing countries in MOI was the legal entity for the overall project when the Ministry of Trade and Industry (MOTI) was split into two ministries in MOTI was the main Government counterpart and project owner at appraisal and the first three years of project implementation. 6

21 2. Key Factors Affecting Implementation and Outcomes 2.1 Project Preparation, Design and Quality at Entry 30. General design features: A series of analytical work of the GOK and the Bank Group fed into project design. 12 The Project factored in the findings and recommendations of those studies, and aimed to address the identified main bottlenecks of MSME development in Kenya. The design clearly took into account the lessons learnt by the Bank Group, other donors and the GOK, as well as the international experience in supporting MSME growth, which featured high in the GOK s Economic Recovery Strategy. 31. The Project was the second of a Joint IDA/IFC MSME Program which was to introduce innovations in MSME financing and support of market linkages. The design of this Project was based on the framework of the joint program. IFC brought to the project design instruments for supporting MSME development which were evolved through years of direct interactions with the market. The IFC contribution to the project design was reflected in the introduction of SME risk capital financing model from South Africa and the technical assistance to the Risk Capital Fund impact assessment IFC s locallybased SME Solution Center and the case-study based business education through the Global Business School Network. IDA contributed to the project design with sector analysis on MSMEs operating environment, good access to policy makers, and experience in supporting beneficiary capacity building. Notable examples of IDA contribution to the project design included: (i) the co-sponsoring of FSD Kenya; (ii) the addition of technical assistance to the investees of the Risk Capital Fund; (iii) the financing of business development services through a matching grant; and (iv) the Development Marketplace style business plan competitions. 32. Project objectives: The PDO was succinct in defining the expected outcomes (increased productivity and jobs at the participating MSMEs). There was a causal relationship between the PDO and the designed activities. If the expected results of the main interventions at the firm level were achievable within the lifetime of the Project, the designed main activities would directly contribute to the achievement of the PDO. Improved access to finance including risk capital financing would enable the participating MSMEs to survive and expand. Business development services would enable the participating MSMEs to expand plantation acreage, improve product quality, and get better pricing from buyers along the value chains. Those activities, when successfully implemented, would result in more jobs and higher sales or profits at the participating MSMEs. 33. Scope of the Project: The scope covered the main constraints to the MSME development in Kenya. However, this added complexity to the Project. There appears to 12 In addition to the reports referred to in Footnote # 1-4, reports considered for project design included: GOK: Micro and Small Enterprise Sessional paper; the FIS Administrative Barriers study; and the IMF/Bank Financial Sector Assessment Program, for example. 7

22 have been a misinterpretation of the lesson on the need for an integrated approach to support MSME development. The integrated approach to put all MSME-related interventions under one program would be more appropriate at the country level, but could make the scope of a Specific Investment Loan (SIL) operation too complex for a client with limited institutional capacity. Some of the designed interventions, in particular those aimed to improve the business and regulatory environment, might not directly lead to the achievement of the PDO within the lifetime of the project, due to policy lags. Adoption of new laws may take time (decision lag); adopted laws may not be effectively implemented (implementation lag); and implemented laws may not immediately impact the job demand and labor productivity of the participating MSMEs (impact lag). 34. Implementation arrangements: The primary owner of the Project and the main Government counterpart was the Ministry of Industrialization (MOI) which was formed in 2008 after a reorganization of the previous Ministry of Trade and Industry (MOTI). The MOI (represented by a small project secretariat) was to provide policy guidance, and coordinate between the main stakeholders of the Project. The public private sector Project Steering Committee was envisaged as a forum for information sharing and consensus building on main project issues. Neither the MOI nor the Steering Committee had experience in IDA financed projects, which could have been alleviated if the design were to provide more intensive capacity building support under the Project. 35. The Project assigned project implementation of the firm-level interventions to various Technical Implementation Partners (TIPs, which were private sector contractors engaged in accordance with the Bank procurement guidelines). This proved to be crucial for project implementation. Two inter-governmental agency task forces were responsible for the implementation of the two main country-level interventions (investment climate improvement and training levy regime reform). The Project s financial and procurement management (as well as the overall M&E) was entrusted to a private sector accounting firm, called the Project Management Contractor (PMC). At the time of project appraisal, corruption within the Government was a serious concern. The outsourcing of project management was to mitigate the risk. However, it appears that the principle-agent relationship was not well established through clear fiduciary arrangements (such as the reporting line, the ownership of project information and outputs, and the contractual remedies when the agent fails to perform). As the contractor was a private sector firm (as compared to an individual consultant), it had to follow the firm s internal review and clearance procedures, in addition to the Government and Bank procedures. This could cause delays in procurement and disbursement, but the risk was not factored into the project design. 36. Risk and risk mitigation: Country-level risks to the success of the Project were identified and a few of them became the main factors affecting project implementation, such as the risk related to the ownership of the training levy. However, the mitigation of this risk, like most of the country-level risks identified at appraisal would depend on factors beyond the Project (e.g. overlapping roles of government agencies for MSME 8

23 development). It appears that the complexity of the Project scope could have been reduced if those factors and the challenges in mitigating the risks were adequately reflected in project design. There was no discussion at appraisal of the project-level risks, in particular the limited institutional capacity of the main government counterpart in managing IDA financed projects. The risk of a poorly performing PMC was overlooked, or at least not sufficiently mitigated by performance based contracts. Those project-level risks turned out to be major obstacles to project implementation. 2.2 Implementation 37. Role of TIPs: All but two main activities of the Project were implemented by the TIPs. 13 For instance, TIPs designed the operational policies of the Risk Capital Fund and TA Fund and the scope and approach of interventions under the Value Chains. They engaged and exercised oversight of consultants, and organized stakeholder workshops and training events. Most of the TIPs demonstrated a strong commitment to their respective subcomponents. They brought to the Project the private sector insights and innovations. They were the main force behind the good results achieved at project closure. Two TIPs also benefited from the timely support of the IFC s field-based SME Solution Center (SSC) and GBSN Kenya center in terms of identifying eligible investees (C1B) and providing guidance to the development of local case studies. The value chain TIP benefitted from hands-on support from specialized consultants that was co-financed by a Japanese grant Project restructuring: The December 2009 project restructuring could be considered as a turning point in project implementation. Project implementation started in December 2004 when the IDA credit became effective. However, up to June 2008 only about 20 percent of the expected results were achieved with an IDA financing disbursement rate of 16 percent. 15 At the same time, project implementation under the original Component Three suffered long delays in the selection of a suitable consultant. The performance of the eventually selected consultant turned to be unsatisfactory. By mid-2009 it became clear that the Component was overtaken by the parallel GOK reforms. The IFC s FIMPACT ASSESSMENTS/ICA program had been assisting the Government to carry out reforms in licensing, tax regulations and procedures. The mandate of setting up a one-stop-service (OSS) function was assigned by law to the Kenya Investment Authority while the consultant engaged under the Project reported to the MOI via the PMC. The Kenya Revenue Authority adopted a flat tax rate for small firms under a new Turnover Tax in A number of Mid-Term Review assessments in form the analytical basis of the restructuring. 13 Component 1 was implemented by two TIPs except for the technical assistance for other fund managers which was implemented by the IFC. Component 2 was implemented by three TIPs, except for Subcomponent C which was implemented by a government task team. The original Component 3 was implemented by another government task team. 14 The SSC program has been wound up recently and the GBSN center earlier. 15 Priodos & Facet Project Operational Audit and Impact Assessment contractor: Report on the Second Operational Audit, May Source Client Connection, net of Special Account advance which was included in the disbursement table of the Datasheet. 9

24 39. The 2009 restructuring (i) reduced the complexity in project design by discontinuing the original Component Three; (ii) reallocated the IDA credit proceeds among the main activities to provide more financing for those subcomponents in need; 16 and (iii) extended the original project closing date for two and half years to June 30, Those changes were crucial to the eventual achievement of the project objectives. The June 2012 restructuring was mainly to cancel the unutilized IDA funds (see Section 1.7 for further information). 40. Overall business environment improvement: Thanks to the reforms in the business and regulatory environment, Time for Starting a Business reduced from 60 days in 2003 to 34 days in 2009, and Cost of Starting a Business as a percentage of income per capita declined from 52 percent to 37 percent during the same period. 17 Those improvements achieved by the Government (while the original Component Three was suffering delays) were a main factor for the decision to cancel the component at the 2009 restructuring. 41. Improved market for MSME financing: The financial services market in Kenya witnessed significant improvement during the project implementation period. The FSD Kenya s contributions made the market more client-oriented. This in general benefited the project implementation. A particular example was the adoption of the SACCO Law (led by an intervention under another Bank project 18 ), and the program s institutional development support (e.g. SACCO automation). Thanks to the law, the sector was regulated from 2011 onward. With the institutional support, the beneficiary SACCOS was in a better position to move upmarket. Another example of an improving environment was the enhancement of the MFI regulatory framework thanks to a new regulation on microfinance institutions (MFIs), and the FSD Kenya program s direct support to MFIs. 42. Procurement delays: By design the Project had only one main type of procurement activities selection of consultants under five QCBS packages and a few other packages. However, except for three contracts (for the PMC, the GBSN and the matching grant manager), the selection of the consultants suffered various degrees of delays. The TIPs for Component One were engaged only in December 2006, more than two years after project initiation, and the engagement of the consultant for the business plan competition did not take place until February Those early delays were mainly caused by the unfamiliarity of the Bank procurement guidelines and the review procedures on the part of the government counterpart and the PMC, which resulted in the long time taken to build consensus within the GOK for the selection of the TIPs. 16 The increased allocations were funded by the funding released by the cancellation of the original C3, and the reduction of the funding originally allocated to C1A and C1B. The main activities under C1 were performing well with lower IDA financing needs than what was originally anticipated. 17 For details, please refer to the Project Paper on project restructuring dated December 28, 2009, and the Doing Business in Kenya of 2004 and The Financial and Legal Sector Technical Assistance Project - FLSTAP 10

25 Contract renewals after the December 2009 project restructuring took an average of six months. The multi-layer process of review and clearance was found to be a main factor of the delays. 19 This was particularly true for the implementation of the technical assistance for other fund managers (C1B); the training levy restructuring (C2C); and the business environment improvement (the original Component Three). The delays reflected the general weaknesses in Kenya s public procurement system, in particular in the institutional capacity and the functioning of the procurement market. 20 On the other hand, the split of the previous Ministry of Trade and Industry into the Ministry of Trade and the Ministry of Industrialization was a main factor that was out of the control of the Project. 43. Disbursement delays: Disbursements against contracts were delayed from time to time. The delays affected the TIPs financial management and the timeliness of the capacity building activities and the business development services. The multi-layer review and clearance process was a factor. While the PMC was responsible to manage the local currency project account (about 65 percent of project costs were in local currency), the replenishment of the account was up to the MOI, which also had to go through the government internal clearance procedures established by the Treasury. Delinquencies in budgeting for the local account, such as those in and towards the end of the Project, also caused serious payments disruptions. When the project account was not replenished in time, payments to the expensed activities were delayed. In the case of the FSDT subcomponent (C1A), the delays were caused by a lack of alignment between the Bank guidelines and the Government s procedures; as well as between the Government procedures and the book-keeping practice of the multi-donor trust fund. 44. Project management capacity: The delays in procurement and disbursement once again revealed that the institutional capacity of the MOI as the project owner should have been strengthened early on in project implementation. The outsourcing of the procurement and financial management functions weakened the oversight by the MOI. The private sector contractor, like the main government counterpart, did not have much experience in IDA financed projects and the uneven performance of the PMC further affected project management in procurement, financial management and M&E. The problem was highlighted in the Med -Term Review (MTR) and the PMC contract renewal after the 2009 restructuring enhanced the monitoring of PMC performance. 45. Personnel changes: The Permanent Secretary of the main Government counterpart was replaced at least three times throughout the project implementation period. A replacement of the Permanent Secretary in late 2005 in particular led to 19 A procurement package together with the related procurement documents had to be reviewed and/or cleared by the PMC, the Project Secretariat and the MOI before it was sent for IDA review and noobjection. 20 Kenya Public Procurement Oversight Authority: Assessment of Procurement System in Kenya, October

26 months of delays as the project design and personnel arrangements was subjected to another round of reviews. 46. Political crisis: The end-2007 early-2008 political crisis in Kenya affected project implementation, in particular for the Business Development Services (BDS) activities under the cotton-to-garment value chain in a couple of provinces. While the first round of the main procurement activities was completed before the breakout of the crisis, the turmoil affected the disbursement pace and the collection of the baseline data for the project M&E, since consultants could not travel to Kenya until late The travel difficulties at the time also affected the pace of project implementation under the other subcomponents. 47. Other: Droughts in affected the results of the value chain interventions in terms of contracted cotton planting acreage and reduced coffee produce. 2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 48. M&E indicators: The design of the M&E indicators represented an effort to quantify the expected results and make them specific and measurable. The design of the M&E indicators also reflected the early stage of the Bank Group s efforts to refocus on results. The PDO outcome indicators were quite typical economic measurements of competitiveness over the medium to long term. There were minor discrepancies in the wording of the second outcome indicator and the two intermediate results indicators (regarding C2B and C2C) between the PAD and the DCA. The indicators were realigned by the 2009 project restructuring. 49. Outcome indicators: The two outcome indicators turned out to be quite challenging for project M&E in addition to the limited M&E capacity at the overall project level. It appears that the first PDO Outcome Indicator ( at least 2,500 new jobs created ) was set too high to be achieved within the normal life of a Bank financed project in Kenya (5 years). The Outcome Indicator was based on the experience of BP Ltd South Africa. However, South Africa s MSME workforce was much larger than that in Kenya. 21 The economic share of South African SMEs was also much higher (>50 percent of GDP in South Africa vs. >18 percent in Kenya). 22 Furthermore, at the time of project appraisal, the South Africa risk capital financing scheme had been in operation for more than 20 years while a similar model was not yet introduced in Kenya. With the benefit of hindsight, it would have been more realistic if the employment indicator had taken into consideration the differences in the size of the economy and the sector between Kenya and South Africa. In addition, the job creation indicator proved to be difficult to 21 By the South Africa Small Business Act 1996 (amended in 2004), micro enterprise employs 1-20 workers, small enterprise workers and medium enterprise workers (except for the agriculture sector). Kenya s definition of MSMEs in terms of employment is similar to South Africa s MSME definition for the agriculture sector. 22 Abor and Cartney, Issues in SME Development in Ghana and South Africa, International Research Journal of Finance and Economics, ISSN Issue 39 (2010) 12