Emergency SME Revitalization and Governance Project. I. Key development issues and rationale for Bank involvement

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: Emergency SME Revitalization and Governance Project Region Africa Sector Private Sector Project ID P Borrower(s) Republic of Cote d Ivoire Implementing Agency Agence de Promotion des Exportations APEX CI Environment Category [ ] A [] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared March 26, 2009 Estimated Date of April 7, 2009 Negotiations Authorization Estimated Date of Board May 28, 2009 Approval I. Key development issues and rationale for Bank involvement Key Development Issues Côte d Ivoire has been undergoing a prolonged period of political instability since a military coup broke out in December The country split in two parts, with the rebel forces holding the north and the west and the Government in control of the broad southern and central regions, with French and UN forces acting as a buffer between the two. On March 7, 2007 a power sharing agreement (the Ouagadougou Accord) was reached between the principal parties. The Accord sets out a roadmap for disarmament, demobilization and reintegration (DDR), the dismantling of militias, reunification of the country, and preparations for elections in A new transition Government was formed in early April 2007; and a supplemental Ouagadougou Accord was endorsed in November 2007 to accelerate implementation of the roadmap, especially the reunification of the army. Some progress has been made in the re-installment of prefectural authorities and the re-deployment of the public administration and service provision in the Western, Northern and Western regions. Implementing the roadmap for the presidential elections will be challenging. The elections scheduled for November 2008 have been postponed to a further date. The conflict and political instability have taken a heavy toll on growth and poverty. In , average real GDP growth turned negative (-0.4 percent) and was well below the rest of UEMOA (4.1 percent) and sub-saharan Africa (SSA, 4.9 percent). During this period, Côte d Ivoire s real per capita GDP fell by a cumulative 15 percent. As concerns about the political and security situation grew and external financing dwindled, public and private investment dropped from 13.7 percent of GDP in to 10.3 percent during , well below the average levels in UEMOA (20.3 percent) and sub-saharan Africa (18.5 percent). Private sector activity was scaled back, especially in industry, and by 2006 real GDP was some 35

2 2 percent below its pre-crisis trend level. The partition of the country disrupted trade within the country and undermined Côte d Ivoire s role as a transit country. The financial sector was adversely affected by the crisis; the quality of bank loans portfolios declined (in part because of government arrears to the private sector), and the already weak judicial system deteriorated further. With frequent changes in Government, political and security concerns dominating the attention of officials, an important share of public expenditures was executed outside regular budget procedures using discretionary treasury advances. As a result, accountability weakened and the composition of spending did not conform to the budget. With the recent growth of the informal sector, tax evasion and fraud have also increased. Most indicators of governance worsened. 1 Economic activity remains well below pre-crisis levels, constrained, inter alia, by the lack of access to credit, infrastructure and social services. More generally, the investment climate remains depressed and only few foreign investors have decided to return to the country following the exodus during the conflict. Rationale for Bank involvement Cote d Ivoire benefit from the existence of a private sector that is better developed than all but a handful of Sub-Saharan African countries and has traditionally been the engine of stability, growth and jobs for West Africa. However, in the aftermath of the country s prolonged political and social crisis, the private sector and related institutions that remain fundamental to the country and sub-region s economic health and stability, continue to operate well below capacity and are in jeopardy, hampering the Government s economic recovery and social stability efforts. The current global financial crisis and recession, with its potential impact to further depress Cote d Ivoire s economy, has increased the urgency for donors, including the World Bank, to intervene in assisting the Government and private sector in mitigating this impact. As it seeks to implement the Ouagadougou Peace Accords first signed in March 2007, including disarming, demobilizing and reintegrating (DDR) ex-combatants, dismantling militias, reuniting the country and preparing for elections 2, the transition Government s emergency economic and social recovery agenda also includes efforts to improve private sector confidence as it enhances transparency and capacity of state institutions. The Bank is supporting the latter efforts through sector investment operations, including an IDA Economic Governance and Recovery Grant (development policy grant). The Government s emphasis on also restoring private sector confidence and capacity reflects how integral it is for recovery, particularly in a country where growing unemployment in the 1990s contributed to social and political tensions that led eventually to the crisis of the early 2000s. The Government has requested Bank support to help jump-start the private sector, especially small and medium enterprises (SMEs) that make up the backbone of the local economy and job creation. A Bank mission in November 2008 met with Government and stakeholders to discuss 1 For example, the Transparency International Corruption Perception Index (CPI), which relates to perceptions of the degree of corruption as seen by business people and country analysts, showed a decline in the country s ranking from 75th in 1999 out of 99 countries to 150th in 2007 out of 180 countries. 2 Elections were to take place in November 2008 and have been postponed to late 2009 for technical and logistical issues.

3 3 short-term and long-term priorities to respond to this request. On the basis of these consultations, the Bank has designed an Emergency Small Enterprise Revitalization and Governance Project outlined below which could pave the way for longer-term actions that would be the basis of an IDA operation to support growth under the next CAS. The project is part of a broader targeted response by the Bank outlined in the April 2008 Interim Strategy Note (ISN). The Bank Strategy is based on three pillars: (i) supporting stabilization of the crisis and assisting the Government in addressing key conflict factors (through implementation of the Ouagadougou accord); (ii) assisting war-affected populations through support for community rehabilitation and the provision of basic social services; and (iii) assisting economic recovery and reform by focusing on economic governance reforms, institutional building, fostering demand for governance and accountability and supporting sustained economic growth. As indicated in the ISN, the key to a long term solution to the crisis is improving governance and transparency, which are prerequisites for improved resource management. Hence, the first area of focus of Bank support was on fostering economic governance reform in order to stimulate private sector confidence, investment and growth. The Bank is supporting Government efforts through sector investment operations, and development policy grants, the first of which, the Economic Governance and Recovery Grant has been approved. The proposed project is a critical element of the support being provided by international partners to the implementation of the initial phases of Ouagadougou Peace Agreement, and of the reengagement of the international community in Côte d Ivoire. Its supports a strategic framework and the key elements of this international re-engagement with Côte d Ivoire which seeks to create an enabling environment for security and strengthen the institutional environment for elections; mitigate economic and social costs and safeguard economic fundamentals II. Proposed objective The objective of the project is to help revitalize the private sector, notably SMEs and contribute to job creation. III. Preliminary Description Summary of Project Components The project has three mutually-reinforcing components, namely, (a) strengthening SMEs through the provision of financial and non financial services; (b) improvement of the business environment through targeted reforms of key government regulations affecting business and of key institutions; (c) strengthening policymaking for growth and providing support for project implementation. Annex 1 of this Report includes a detailed project description. Component 1: Strengthening SMEs through the provision of financial and non-financial Services (US$11.6million)

4 4 The objective of this component is to strengthen SMEs which were affected by the crisis by (i) providing technical advice and training through a matching grant program to help rehabilitate existing SMEs, (Enterprise Revitalization Fund (Fonds d Appui à la Revitalisation des Entreprises- FARE); and (ii) contributing to reducing the financial constraints faced by SMEs through the purchase of a portion of the debt obligations of the Government vis-à-vis SMEs. SMEs will deposit portion of their funds made available through the purchase of the arrears into a cooperative fund created (Fonds de Cautionnement Mutuel - FCM/PME) by SMEs. The Fund s mandate is to guarantee or extend short term working capital loans to its member SMEs. The loans to be extended by the fund will be on market rates to ensure its sustainability. Component 2: Improving the Business Environment (US$4.4million) Activities under this component aim to support in the introduction of reforms which could be easy to implement and have a quick impact on the business environment and thus assist the Government in meeting its objective of promoting competitiveness and encouraging private investment. Activities include (i) the establishment of a Commercial Court in Abidjan and associated training and (ii) improvements in regulatory framework for business including the establishment of a one-stop shop for business creation (guichet unique) and support to the publicprivate dialogue. The component will also help implement recommendations of the study on racketing facing private entities since the crisis. Under the component, the project will fund a communication campaign and main recommendations including (i) the creation of a complaint center for alleged victims of harassment; (ii) identification of law enforcement officers in charge of official control by issuing fraud proof identification cards. Component 3: Institutional Support and Support for Project Implementation (US$2.4million) This component aims to provide the analytical framework which will permit improved policies for growth. It will (i) finance studies to assist in the formulation of a private sector strategy; to improve competitiveness, and help define modalities to implement the public private partnership; and (ii) provide support project implementation. Eligibility for Processing Under OP/BP 8.0 The use of OP 8.0 is justified for two principal reasons. First, the project addresses two of the objectives highlighted in the OP, namely (i) restoring the means of production and economic activities by addressing major adverse economic and/or social impact particularly on SMEs; and (ii) establishing and/or preserving institutional and/or human capital. Second, the application of streamlined procedures allows for expedited project processing in direct response to the urgent needs of the Government to tackle unemployment issues, which is at the root of the crisis.. To accelerate implementation and reduce fiduciary risks, IDA funding would be disbursed through an existing private institution, APEX-CI. APEX-CI continued to operate during the crisis and retains the competencies required to implement the project.

5 5 To accelerate implementation and reduce fiduciary risks, IDA funding would be disbursed through an existing institution, the Agence de Promotion des Exportations de Côte d Ivoire (APEX-CI), which, implemented with success the IDA PSD operation from 1999 to 2005 and possesses relevant experience. IV. Safeguard Policies that might apply Safeguard Policies Triggered by the Project Yes No TBD Environmental Assessment (OP/BP 4.01) [ ] [X ] Natural Habitats (OP/BP 4.04) [ ] [X] Pest Management (OP 4.09) [ ] [X] Physical Cultural Resources (OP/BP 4.11) [ ] [X ] Involuntary Resettlement (OP/BP 4.12) [ ] [X] Indigenous Peoples ( OP/BP 4.10) [ ] [X] Forests (OP/BP 4.36) [ ] [X] Safety of Dams (OP/BP 4.37) [ ] [X] Projects in Disputed Areas (OP/BP 7.60) * [ ] [X] Projects on International Waterways (OP/BP 7.50) [ ] [X] Piloting the Use of Borrower Systems to Address Environmental and Social Issues in Bank-Supported Projects (OP/BP 4.00) [ ] [X] * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas

6 6 V. Tentative financing Source ($m.) Borrower/Recipient 3 IDA 15 Total 18 VI. Contact Point Contact: Djibrilla A. Issa Title: Senior Financial Sector Specialist Tel: dissa1@worldbank.org