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Document of

The World Bank

Report No. 15062-ZIM

STAFF APPRAISAL REPORT

ZIMBABWE

ENTERPRISE DEVELOPMENT PROJECT

APRIL 4, 1996

Macro, Industry and Finance DivisionSouthern Africa DepartmentAfrica Region

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CURRENCY EQUIVALENTS(as of March 1996)

Currency Unit Zimbabwe DollarUS$1.00 = Zim$9.53

GLOSSARY

ADB African Development BankAFC Agriculture Finance CorporationBLR Base Lending RateBSD Banking Supervision Departnent (Reserve Bank)CAS Country Assistance StrategyCBZ Commercial Bank of ZimbabweCGC Credit Guarantee CompanyCGA Credit Guarantee AgencyCIDA Canadian International Development AgencyCPI Consumer Price IndexCREDSURE Credit Insurance of ZimbabweCSO Central Statistical OfficeCZI Confederation ofZimbabwe IndustriesEDP Enterprise Development ProjectEPSS Export Promotion Support ServiceEPZ Export Processing ZoneESAP Economic Structural Adjustment ProgamFCAs Foreign Currency AccountsFDI Foreign Direct InvestmentFl Financial InstitutionGDP Gross Domestic ProductGOZ Government of ZimbabweICR Inmplementation Completion ReportIDA International Development Association[PR Inward Processing RebateJV Joint VenturesLA Licencing AgreementLIBOR London InterBank Offering RateMIS Management Information SystemMOIC Ministry of Industry and CommerceMMF Matchmaker FundMM Matchmaking Management ContractorNCDs Negotiable Certificate of DepositsNGO Non-Government OrganizationsNORAD Norwegian Agency for Development CooperationPF Is Participating Financial IntermediariesPN Promissory NotePSIP Public Sector Investment ProgramPlTC Public Telecommunications Corporation of ZimbabweRBZ Reserve Bank of ZimbabweRPED Regional Program for Enterprise DevelopmentSA Special AccountSBAI Subsector Business Associations InitiativeSBU Small Business UnitSEDCO Small Enterprise Development CorporationSME Small and Medium EnterpriseSMSE Small and Microenterprise Development ProjectSOE Statement of ExpenditureSSEs Small Scale EnterprisesT/MA Technical and/or Marketing AgreementsUDI Unilateral Declaration of IndependenceLIK United KingdomLUSAID US Agency for international DevelopmentZABO Zimbabwe Association of Business OrganizationsZDB Zimbabwe Developing BankZIC Zimbabwe Investment CenterZISCO Zimbabwe Iron and Steel CompanyZMGS ZimTrade Matching Grant SchemeZNCC Zimbabwe National Chamber of CommerceZSE Zimbabwe Stock Exchange

METRIC EQUIVALENTS

I meter (m) = 3.28 feetI square meter (sq. m) 10.76 square feetI kilonmeter (km) = 0.62 milesI square kilometer (sq. k) = 0.386 square miles

GOVERNMENT OF ZIMBABWE FISCAL YEARJuly I- June 30

ZIMBABWEENTERPRISE DEVELOPMENT PROJECT

Table of Contents

Loan and Project Summary

1. INTRODUCTION .................................................................... ]1

2. THE PRIVATE SECTOR ......................................................... 2

A. Description of the Private Sector ......................................................... 2

B. The Policy Environment ......................................................... 4

C. Enterprise Finance and Financing Constraints ......................................................... 7

D. The Export Sector .......................................................... 7

E. Small and Medium Enterprises .......................................................... 9

F. Business Support Services - Information Linkages and Market Intelligence ............................ I 1

3. FINANCIAL MARKETS AND THEIR REGULATION ......................................................... 13

4. THE PROJECT ........................................................ 16

A. Origin and Relation with Country Assistance Strategy ......................................................... 16

B. Lessons Learned From Past Experience ......................................................... 17

C. Project Objectives ........................................................ 17

D. Project Description ........................................................ 18

E. Project Cost and Financing Plan ......................................................... 25

F. Project Implementation ........................................................ 26

G. Environment ........................................................ 31

H. Project Benefits and Risks ........................................................ 32

5. AGREEMENTS TO BE REACHED AND RECOMMENDATION ..................................................... 33

This report is based on the findings of an IDA Appraisal mission which visited Zimbabwe in October1995. The mission was led by Mark Dorfman (Task Manager) and was comprised of Kapil Kapoor (Co-Task Manager, AFIZB), Brian Levy (AFlMI), Yung Whee Rhee and Judith Brandsma (PSD), and KafuAwunyo (LEGAF). Georgette Johnson provided secretarial support. Ataman Aksoy and Barbara Kafkaare the managing Division Chief and Country Operations Manager, respectively, for the operation. Thisproject was prepared under the direction of Katherine Marshall, Director, AF 1.

TEXT TABLES

Table 1: Racial Origin by Firm Size ....................................... 10Table 2: Interest Rates and Spreads ....................................... 14Table 3: Estimated Project Costs and Financing Plan ................... ..................... 26Table 4: Procurement ........................................ 29Table 5: Disbursements ....................................... 30Table 6: Estimated IDA Disbursements ....................................... 30

SUPPORTING ANNEXES

A. Business Services ........................................ 35B. Finance Component ....................................... . 53C. Institutional Development Component .................. ...................... 71D. Outline of Project Functions ......................................... 79E. Operation of the Administrative Secretariat ........................................ 80F. Project Implementation Schedule ........................................ 81G. Summary of Procurement Arrangements ....................................... 86H. Summary of Disbursement Arrangements ....................................... 87I. Project Supervision Plan ....................................... 88J. Economic Analysis - Project Performance Indicators ....................... ................ 92K. Documents Available in the Project File ........................................ 100

MAP IBRD-26057R


CREDIT AND PROJECT SUMMARY

Borrower: Government of Zimbabwe

Implementing Agency: Ministry of Industry and Commerce

Beneficiaries: Private Sector Enterprises, Participating Financial Institutions

Poverty: This project does not represent a program of targeted interventions and thusdoes not have a poverty category. The project is expected to offer asignificant improvement in poverty alleviation through sustainableemployment generation by emerging enterprises, including the generation ofapproximately 2,700 jobs.

Amount: SDR 47.5 million (US$70 million equivalent)

Terms: Standard IDA Terms (40 Year Maturity, 10 Years Grace, 0.75% Interest)

Commitment Fee: 0.50% on undisbursed balances, beginning 60 days after signing, less anywaiver

On-lending Terms: * SME Financing: Funds provided to Participating Financial Intermediaries(PFIs) at the average cost of funds of the commercial banking system;

* Export Financing: Funds provided to PFIs at an average variable-rate costof US$ funds of the banking system from abroad, currently LIBOR +0.875%; and

* Rates to final borrowers freely negotiated between PFIs and their clients.

Financing Plan: See paras. 4.28-4.29.

Net Present Value: $52 Million at a discount rate of 12% (economic rate of return of 25%); seeAnnex J.

Staff Appraisal 15062-ZIMReport:

Map: IBRD-26057R

Project Identification 35628No.:

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


STAFF APPRAISAL REPORT

1. INTRODUCTION

1.1 Zimbabwe is a relatively large Southern Africa country with a total area of about390,700 square kilometers and a strong natural resource base. Its population of about 10.4million people (1992) has a significant natural population increase (3.1% per annum) and 28% ofthe population lives in urban areas. Zimbabwe's principal economic activities are manufacturing(29% of GDP in 1993), agriculture (about 15%), mining and quarrying (about 7%), distribution,hotels and restaurants (11%) and other services, the remaining 38%. The rate of growth ofoutput in the post-independence period has been modest, averaging about 2.5% per annum,reasonably evenly-spread across major sectors, uneven over time and, unfortunately, below therate of population growth. In the first decade after independence, economic policies continuedthe pre-independence focus on an inward orientation, including strict controls on foreignexchange allocation, investment and prices, as well as controls on wages and labor. Long-termmacroeconomic trends generally have been characterized by economic stability, with importsubstitution policies contributing to the emergence of a large and diversified manufacturing baseand self-sufficiency in food staples and agricultural raw materials.

1.2 The economic structure which characterized Zimbabwe prior to independence in1980 continued thereafter -- a small number of highly vertically-integrated firms run by whitesand multinational corporations controlled the bulk of the productive capacity, while most blackZimbabweans remained subsistence farmers or holders of subsistence microenterprises. Thepolicy framework solidified and perpetuated this bipolar economic structure.

1.3 Faced with an increasing dead-end in growth in aggregate demand, in 1991 theGovernment embarked upon a significant structural adjustment and liberalization program, theEconomic Structural Adjustment Program (ESAP) which entailed far-reaching reforms toaccelerate economic growth and broaden participation. While economic performance during1991 was encouraging, a severe drought in 1992 and again in 1994 caused output levels todecline. Incomes were severely eroded, resulting in a drastic decline in purchasing power. Theshortfall in domestic demand, compounded by the tight monetary stance of the Government andthe resulting high interest rates, delayed the recovery process which only started to take hold inthe second half of 1993.

1.4 The reforms adopted under the ESAP began a process of liberalization wherebyresource allocation in Zimbabwe has become increasingly market-based and many of the legalbarriers to enterprise development have been removed. However, these reforms represent theinitiation of a process that requires a continuing series of steps to improve the regulatoryframework, macroeconomic incentive framework, and the implementation capacity to manage amarket economy. Since then, there has been some instability in exchange rates and pricesbecause of remaining barriers, recurrent drought, and difficulties in sustaining fiscal discipline.High real interest rates and their volatility as a result of unprecedented levels of borrowing by thegovernment, which mopped up long-term funds from the system, have had a depressing effect on

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the demand for debt financing, particularly longer-term financing. As a result of these factors,the supply response to the enacted economic reforms has remained modest.

1.5 At this juncture in the adjustment process, what is most needed is for largeexisting firms to restructure themselves to compete in the international market, and for SMEs toincrease their ability to perform specialized functions formerly performed by large firms, andincreasingly compete in production for the domestic market. This project aims to accelerate andperpetuate a process whereby some of the identified micro-level supply constraints, principallyinformation (business services), financial (credit), and institutional (implementation capacity) areloosened so as to accelerate this process of generating a supply response and broadeningparticipation.

2. THE PRIVATE SECTOR

A. Description of the Private Sector

2.1 Background. Following independence, Zimbabwe maintained controls onforeign exchange allocation, investment and prices, and added others on wages and labor. Thiscontinued the inward orientation of the economy, constrained flexibility and resulted in changebeing slow. The system of racial exclusion practiced by the previous government resulted in fewblack Zimbabweans owning formal sector enterprises or accumulating capital. The productivecapacity of the country, outside of the low productivity "communal lands," was in the hands ofthe State (16%), White and Asian citizens (28%), and foreign interests (56%). The Governmentremoved implicit racial restrictions, and set up development finance institutions such as theSmall Enterprise Development Corporation (SEDCO), and the Zimbabwe Development Bank(ZDB) in 1983-1984, but did not introduce a comprehensive program to change the structure ofownership. A significant emphasis on black entrepreneurial development only began at the endof the 1980s as liberalization began to remove some of the barriers to indigenous businessdevelopment. SEDCO got off to a slow start and increased its loan volume by 1989/90. From1986/87 to 1990/91, SEDCO approved 1,188 loans, while ZDB and commercial banks onlyrecently began to support new and small-scale enterprises to any significant extent. Finance wasnot the only restriction, however, and individual entrepreneurs who attempted to establishthemselves ran up against the dominance of established enterprises. This dominance wasentrenched by the continuation of economic policies which explicitly gave establishedenterprises privileged access to key resources, particularly foreign currency, and subjected newentrants to a complex set of restrictive regulations. As a result, the emergence and growth ofviable small-scale enterprises remained restricted.

2.2 While measures adopted since have removed many barriers, the benefits resultingfrom the ESAP are perceived to flow disproportionately to the most privileged segments of thepopulation. Yet the combination of incentive reform and deregulation have created theopportunity to both increase the rate and alter the pattern of growth. It is thus crucial both toaccelerate the rate of growth and broaden participation in this growth -- broad-based growth willlikely result in the greatest labor market absorption.

2.3 Manufacturing. Zimbabwe is one of the most industrialized countries in Africa,with the manufacturing sector producing about 29% of GDP and a wide array of commodities

ranging from food and clothing to fertilizers and chemicals, metal products of all kinds, electricalmachinery and equipment and motor vehicle assembly. Next to agriculture, it is one of the mostimportant sources of employment, providing livelihood to about 16% of the formal workforce in1992. Notwithstanding its sophistication and importance to the economy, the rate of growth ofmanufacturing output has averaged less than 3% per annum in the post-independence period, andgrowth in employment in manufacturing since independence has been less than that of thepopulation. The reasons for this modest performance are, to a large extent, a reflection of thepolicy environment, characterized by extensive price and investment controls and a highlyregulated foreign exchange allocation system, which the sector has had to contend for nearlythree decades. As a result of these distortions, the sector, over the years, had become excessivelyinward-looking and dependent upon the limited domestic market. The ESAP program hasstarted to improve the structure of incentives and regulations, but the supply response to dateremains modest.

2.4 Manufacturing export performance had generally been poor, with exports actuallydeclining between 1981 and 1986, before growing by 6.8% per annum between 1986 and 1990.This is modest, especially in light of the wider range of export incentives available during thelatter period. Over the period 1981-1990, average growth was only 2.5% per annum.Manufactured exports did increase from 29% of total merchandise exports (including gold) in1981 to 36% in 1990. Evidence from surveys conducted recently', however, shows that, as aresult of the ongoing reform program, there have been important changes in the manufacturingsector, and there is evidence that resource allocation is changing in such a way as to increaseproductivity in the manufacturing sector, in part through generation of exports. In the 1991-93period, exporting companies grew at a substantially faster rate and also exhibited higher grossinvestment levels. The fall in employment, which has been a common feature in severalindustries, is also markedly less in companies with a higher percentage of exports in totalturnover. Labor intensive sectors have benefited from the sharp reduction in real wages,reinforcing the expansion of exports.

2.5 Agriculture. Although the GDP share of agriculture is smaller in Zimbabwe thanin most other African countries, the economy is highly dependent upon agriculture, with thesector providing 70% of total employment and 40% of merchandise exports. Approximately60% of manufacturing value-added is either related to agro-industry or to the provision of inputsinto agriculture. Many services, including a sizable proportion of domestic trade, are closelyassociated with agriculture. Performance of the agriculture sector has been modest, withagricultural output growing by about 2.4% on average per annum during the first decade ofindependence. While agricultural output grew rapidly in the early-to-mid 1980s as a result ofexpanded plantings and yields underpinned by heavy public sector support in marketinginfrastructure and credit, it has been stagnant since then, with smallholder agricultureexperiencing declines in output and productivity. Although an important reason for thismediocre performance is the variability of rainfall, more fundamental causes have been decliningproducer prices in real terms, reduced availability of formal sector credit, declining effectivenessof research and extension services, and a contraction of public sector marketing services. Theintroduction, since structural adjustment, of far-reaching marketing and pricing policy reforms in

See, for example, Jan Willem Gunning, ed., The Manufacturing Sector in Zimbabwe: Dynamics and Constraints, April1994, Free University, Amsterdam and University of Zimbabwe, Harare.

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the agricultural sector are expected to have a strong impact on the systems for marketing severalmajor commodities. These policy changes represent a significant change from the past. Parallelchanges in import licensing and foreign exchange retention have increased the availability ofinputs required by farmers and agro-processors. Evidence of a supply response to the reformshas come in several forms, including the emergence of urban hammer millers and of small-scaleoil expressors, and a growing interest on the part of commercial farners to produce commoditiesfor export. Broader interest is also emerging in the production of value-added agriculturalproducts, including ethanol, animal feed, and canned, frozen, and dehydrated foods. At the sametime, there has been a continued expansion of the country's export-oriented horticultural industry,as evidenced by double-digit growth rates in trade, by a large expansion in citrus plantings in thepast three years, and by the growing numbers of large- and small-scale commercial growersentering into cut flower production.

2.6 Mining. Zimbabwe is a mineral-abundant country, with the formal mining sectoremploying about 50,000 people, contributing about 5% to GDP and accounting for about 23% oftotal export earnings. Most of the minerals are gold, asbestos, nickel, copper, coal and chromeore, and most are exported in their raw form or as semi-processed metals. Notwithstanding thedecline in 1992 and 1993, the value of mining production has been rising steadily in recent years,in local currency terms, largely as a result of currency depreciation. While mining output grewonly 1% per annum during the 1980s, increased profitability (in part due to exchange ratedepreciation), has helped to spur significant new investment and higher growth is now expected.Although mineral prices continue to remain extremely volatile in the world market, there isconsiderable optimism within the mining sector in Zimbabwe over its medium-term prospects,and the sector has continued to attract new investment.

2.7 Tourism. Zimbabwe's attraction as a tourist resort stems largely from the widevariety of scenery, flora and fauna of the country, one of the best climates in the world. Despitethese natural attractions, very limited tourism development occurred preceding independencebecause of an effective global embargo. Visitor arrivals, which peaked in 1972 at 400,000, fellto 270,000 in 1975 and further to 79,000 in 1979, of which 80% were from Southern Africa.There was slow growth in visitor arrivals until the late 1980s but in 1992, upwards of 700,000visitors arrived in Zimbabwe. Between 1980 and 1992, the total number of visitors grew at anannual average rate of about 10%, and the share of tourism receipts as a percentage of GDP hasalso increased from 0.8% in 1980 to about 2.6% in 1992. If the indirect and induced effects oftourism are taken into account, the share of the sector, in both employment creation and GDP, isprobably much greater. New employment creation in the sector has been growing at an annualrate of about 20%, far in excess of other sectors of the economy. Although the statistics ongrowth of tourism are very encouraging, the tourism sector continues to rely too heavily onregional markets with limited diversification of the tourism source markets. A strong componentof Zimbabwean tourism is also due to family visits reflecting the ethnic links between the variouspopulation groups in the country and other neighboring states.

B. The Policy Environment

2.8 Background. To date, important reform measures have been undertaken toimprove the environment for enterprise development. With and since the ESAP in 1991, theGovernment has been attempting to correct the anti-export bias and substantial changes have

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been made to the exchange and trade regime. These changes in policy have resulted inimproving the access of the private sector to scarce foreign exchange, increasing pricecompetitiveness through trade liberalization and reduced barriers to capital movements.Although much has been done, more remains to correct anti-export biases (see paras. 2.11, 2.12and 4.24 below). Considerable measures have also been undertaken to improve the incentiveframework for emerging enterprises producing for the domestic market. These have included thederegulation of domestic markets and distribution systems and modifications to local zoningordinances, to enable SMEs to develop and use appropriate factory space. Considerablemeasures have been taken, albeit more is to be done, to make infrastructure sufficient andreliable enough for emerging exporters. In particular, measures are needed to improve theprovision of telephone service, reduce the cost and improve the on-time arrivals for air freightand expand electricity coverage. Finally, the Government has largely removed formerrestrictions on new entrants in financial intermediation, and is considering draft legislation toimprove the regulatory framework (See paras 3.5 to 3.7 below). On the macro side, actionsneeded include strong fiscal management and supportive exchange rate management aimed atmaintaining a stable pattern of relative prices and export profitability.

2.9 The experience of other developing countries with relatively large inward-orientedmanufacturing sectors demonstrates that firms, such as those in Zimbabwe, can increaseproductivity and expand by penetrating export markets, provided the policy environmentfacilitates such adjustment. Firms can often do this by restructuring their product mix andproduction processes, thereby expanding output with a small amount of investment. This callsfor an array of initiatives to reduce the remaining anti-export bias, and enable Zimbabwean firmsto become internationally competitive. These include strengthening the duty drawback andInward Processing Rebate systems, as well as developing Export Processing Zones. Provisionsto ensure that exporters have access to material inputs at world prices are central, but to realizethe full potential for export-oriented growth, it is also critical that the anti-export bias inherent inrelatively high border taxes be greatly reduced, that any infrastructure constraints be removedand that exporters have access to competitively priced finance.

2.10 Taxes, Tariffs and Customs Procedures. Import liberalization since 1991 hasdramatically improved access to imported materials and capital goods, and real exchange ratedepreciation has greatly increased the competitiveness of Zimbabwean exports in internationalmarkets, but tariff collections remain high, and exporters are still far from free from the burdenof taxes on their material inputs. Zimbabwe has one of the highest tariff collection rates in theworld, despite having a nominal tariff structure (most imports have tariff collection rates of 15 -25%) that is not exceptionally high by developing country standards. This is because Zimbabwehas tariffs on basic inputs, while these attract zero duty in many other countries. This increasesthe cost of final goods, making them uncompetitive in external markets. This then leads toneeding significant tariff protection on downstream products. This taxation of inputs creates amajor problem for the effective implementation of duty/tax rebate systems to enable exporters tobe competitive. Even if rebates or duty exemptions can be given to direct exporters, indirectexporters (local firms who compete in supplying these inputs) would still face a costdisadvantage, because the existing duty drawback system is very inefficient in granting relief tosuch exports, and their inputs, in turn, are taxed.

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2.11 Few exporters have been able to gain timely duty relief from the effects of importtariffs under either of the current schemes - duty drawback, or duty suspension or exemptionunder inward processing rebate (IPR) provisions. Meanwhile, the domestic tax regime createsmodest cascading in the cost of locally-produced goods. This is particularly evident with respectto services, as providers of these services must charge tax on their sales yet also pay sales tax ontheir inputs. This creates a double tax effect in the cost structure as passed on to consumers.Exporters currently cannot reclaim any of the taxes which are embodied in the cost of servicesthey employ. Small-scale, indirect and new exporters have found it particularly difficult to gainrelief from indirect taxes. In fact, since repayment of duties is often delayed by some ninemonths and cannot be relied upon, exporters generally have to price their goods sufficiently high,based on the assumption that they will not receive a drawback, therefore the scheme is notaffecting the volume of exports. This deficiency needs to be rectified, and firms given full andtimely relief from the cost increasing effects of all taxes on inputs they can successfully switchfrom being focused on the domestic market to being export-oriented.

2.12 Concrete steps would be supported by the project to limit, mitigate or remove theanti-export biases against exporters, and, in particular, small export producers and indirectexporters (see paras. 4.24 to 4.25 and Annex C). These would include: (i) strengthening thecapacity of the Customs and Excise Department to administer the existing IPR and DutyDrawback programs; (ii) establishing and publishing standard input-output coefficients; (iii)computerizing the processing of tariff tabulations and calculations; and (iv) establishingregulations and implementing guidelines for a Licensed Common Bonded ManufacturingWarehouse Scheme.

2.13 Export Processing Zones (EPZs). Zimbabwe recently enacted legislationauthorizing the establishment of Export Processing Zones. To attract and retain a broad range ofproducers, the legislation provides firms with the basis for a package of incentives which areinternationally competitive, and which will minimize administrative and other impediments tofree trade. The legislation, however, is general and no implementing regulations to date havebeen drafted, nor has a staff been appointed for an EPZ Authority charged with enforcing thelegislation. Assurance of a best practice EPZ regime will depend on the execution of theseprovisions, as well as the transparency of the implementing regulations. The project wouldsupport meeting those objectives.

2.14 Infrastructure. Surveys have shown that constraints on infrastructure are seenby firms as a serious problem for their development. Irrespective of the size or the sector,telecommunications is identified as the most serious infrastructure problem, followed byelectricity and workers' transport. The difficulty with which firms can have access to efficienttelephone service has served as an entry barrier. Small firms rated freight transport as a biggerproblem than larger firms, and also rated other infrastructure problems highly. A less formalassessment also suggests that the cost of factory space, including either new site and constructioncosts (including financing costs) or rental costs have a large impact on the cost structure ofSMEs. Survey data is supported by financial analysis. For example, freight makes up more thanhalf the cost of supplying fresh horticulture products (including roses and chiles) to Europe andhence, competitiveness is heavily dependent on freight rates. Unfortunately, air freight costsfrom Harare are significantly higher than from directly-competing airports such as Nairobi,Arusha (Tanzania), and Johannesburg, because of problems with the State-owned air freight

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company, Affretair. Second, competitiveness in these products is adversely affected by the poorquality of service, including delays which destroy perishable exports. In terms of transport,Beira is by far the most geographically convenient port for land-locked Zimbabwe. However, inspite of substantial recent investment in port facilities, and increased reliability of rail and roadlinks through Mozambique, problems remain, resulting in uncertainty of delivery and delays inthe period to get to port. As a result, Zimbabwe continues to depend on the longer rail-sea linkvia Durban, and is not able to exploit to the full the geographical advantages of the Beira link.Finally, an evaluation by the Bank found that the cost offactory space is significantly above thatof neighboring countries, including Mauritius. While few legal barriers have been identified tothe efficient functioning of a market for small factory shells, access to financing of thedevelopers of such shells remains limited, which both accentuates concentration, and appears toresult in large margins between rental rates charged and mortgage payments made by owners thathave precious access to finance.

C. Enterprise Finance and Financing Constraints

2.15 While Zimbabwe has a relatively developed banking and finance sector, data fromthe RPED Study indicates that enterprises have limited access to external financing2 . Just as inmost countries, firms have relied predominantly on internal as opposed to formal institutionalfinance, including financing of start-ups. The same pattern is observed when financing poststart-up investments in land and buildings, and plant and machinery. Also, smaller enterprisescan be expected to incur higher transaction costs per unit of formal sector finance. However,internal financing has historically been particularly large in Zimbabwe, with the bulk ofcorporate investments having been undertaken using internally-generated funds, and thecorporate sector has been less dependent on the banking sector than common in other countries.Hence, while credit was seen as important for small-scale and black-owned businesses, littleemphasis was placed on it as an overall investment constraint. However, around 1990, a largeshift in the structure of corporate finance occurred in response to the increased capital formationand other uses of funds. Before 1990, only 23% of funds for investment were from sourcesoutside the firm. Since then, external sources have been dominant. Higher investment infinancial assets, as well as in inventory, and increased financing of trading partners, are behindthis widening need for external finance.

D. The Export Sector

2.16 Annual export growth in Zimbabwe has been only about 3%, and exports havebeen heavily dependent on agricultural products and minerals, leaving the country vulnerable tochanges in commodity prices. However, as a result of some reduction in the anti-export bias,there is evidence of increasing exporting activity in a number of non-traditional areas such ashorticulture, footwear, furniture, garments and textiles, chemicals, etc.; footwear and textileshave experienced the largest increase in exports in recent years. Increasing import levels to meetthe development needs of the country, while at the same time reducing the deficit to sustainablelevels, will require aggressive action aimed at further increasing exports and diversifying theexport base. Faster export growth, creating an additional exogenous source of aggregatedemand, is critical to sustain a higher overall growth rate. The growth of non-traditional and

2 For a description of the financial sector, see para. 3.1 below.

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value-added exports is also critical to diversifying Zimbabwe's economic structure and exports,thereby reducing vulnerability to external shocks. To generate this rapid increase in exports,Zimbabwean firms need to become competitive with foreign producers, and exporting needs tobecome as financially rewarding as selling on the local market. Only then can exporterspenetrate foreign market and attract investment. The recent depreciation of the Zimbabweandollar has done much to improve the relative profitability of export-oriented and efficient importsubstituting activities, and the liberalization of imports has improved access to material inputs.Moreover, trade liberalization, tax exemptions and the removal of investment licensing provideready access to capital goods at world prices. Yet, as indicated, while on the macro levelimportant measures have been adopted to support export expansion, exporters remain constrainedby remaining anti-export biases in the taxation of inputs, capital constrained for trade financing,and a limited understanding by the exporters of the requirements of overseas markets. Thesefactors would be addressed by this project.

2.17 Trade Financing. Foreign currency-denominated export loans in Zimbabwe arecurrently provided by merchant and, to a lesser degree, commercial banks for the shipment ofexports and imports, pre- and post-shipment, sourced from offshore credit lines, and generallybacked by "memorandum of deposit agreements" administered by the RBZ and regulated by theGovernment External Loans Co-ordination Committee. These have been granted based onGovernment's intention to ease the high interest rate burden of local currency loans on exporters.Banks are "advised" by the RBZ that they should source at least 70% of the pre- and post-shipment working capital requirements of any manufacturer engaged in export activity, based ona confirmed export order from offshore sources, at an annual interest rate that is not higher thanLIBOR plus 0.875%, and on-lent to the exporter with the bank's indicative margin of 1% to 2%for up to 180 to 270 days. Thus while two banks can source funds at below this rate, none canexceed it under the memorandum of deposit agreement.

2.18 Yet while multiple facilities exist, there exists considerable evidence that a largevolume of potentially creditworthy exporters still have limited credit access. Moreover,continued high real interest rates create a brake on expansion of trade financing. Apparently,foreign banks have been offering the offshore credit lines to Zimbabwe banks based on the aboveguideline of the RBZ, under the understanding that benefiting exporters are well-establishedcompanies with good credit standings. Those exporters who have poor credit standings withbanks due to their lack ofphysical collateral and track records, or those infant or SME exportersfor whom the banks are reluctant to commit resources to conduct thorough credit investigations,would face these offshore credit line supply constraints, even if the banks would be willing togrant export loans, based on confirmed export LICs and a revitalized Preshipment ExportFinance Guarantee coverage. In turn, the Reserve Bank's own export finance scheme(denominated in US$) has not been very effective in meeting the needs of SMEs or newexporters. This is believed to be due to weaknesses in administration and marketing, each ofwhich would be addressed under the proposed project. The Zimbabwe Development Bank's(ZDB's) export finance scheme is in a pilot stage, and appears to aim primarily at existing ZDBborrowers.

2.19 Although post-shipment risk can be minimized by the use of instruments such asirrevocable letters of credit, commercial banks face a more complex risk when extending pre-shipment financing, i.e., that the exporter might not perform and might fail to get the goods on

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the ship, as specified in the letter of credit. In many countries, banks not used to handling suchrisks are assisted, at least in the early years, by schemes of pre-shipment performance guaranteeswhich share this risk with the individual bank, so as to increase the bank's willingness to extendpre-shipment financing to all new and expanding exporters holding firm orders. In Zimbabwe,Credit Insurance of Zimbabwe (Credsure) provides select post-shipment cover for buyer andpolitical payment risks, or client insolvency, and does not issue exporter performance guarantees.

2.20 Successful exporters in other countries generally have had reliable access tocompetitively-priced credit. An almost automatic pre- and post-shipment credit system thatworks on the basis of confirmed orders and import letters of credit makes it much easier for localfirms to take advantage of foreign markets. While Zimbabwe already operates a very limitedexport credit facility through Credsure, it has supported only three companies (see Annex C).Moreover, the domestic currency cost of investment has been greatly increased by tight monetarypolicy designed to contain inflation. A long-run solution must involve low inflation and modestnominal as well as real interest rates. In the short-run, efforts such as those supported by thisproject, are needed to increase the amount of financing to emerging exporters and make suchlending decisions more attractive to financial institutions.

E. Small and Medium Enterprises

2.21 Policy Framework. Until the early 1990s, the policy enviromnent favoredexisting enterprises, inhibiting entry and the broadening of participation. While measuresadopted since have removed many barriers, the benefits resulting from the ESAP are perceived toflow disproportionately to the most privileged segments of the population. Yet the combinationof incentive reform and deregulation have created the opportunity both to increase the rate, andalter the pattern of growth. It is crucial both to accelerate the rate of growth and broadenparticipation in this growth -- broad-based growth will likely result in the greatest labor marketabsorption.

2.22 Concentration and Participation. The level of concentration and structure ofownership of industrial assets in Zimbabwe changed only slowly over the first decade afterindependence, but the pace of this change appears to have increased over the last few years. Animportant study by GEMINI3 found about 845,000 enterprises, a much larger number thananticipated. Although the bulk of employment is accounted for under activities of "knitting andcrocheting", and "grass, cane and bamboo" categories, there is also a significant number of othermore sophisticated businesses. However, it is not yet clear what proportion of these activities aremerely for subsistence, and what proportion could form the basis for a dynamic small-and-medium-scale enterprise sector.

2.23 The results of the RPED survey4 (Gunning (1994) indicated rising indigenousblack participation in formal manufacturing. Of the firms surveyed, 28% had African owners,40% were white Zimbabwean-owned, and 11% had Asian owners. The ownership of the

3 See Michael McPherson, Micro and Small Scale Enterprises in Zimbabwe: Results of a Country Wide Survey, GEMINITechnical Report 25, 1991.

4 See RPED, The Manufacturing Sector in Zimbabwe: First Report on the Round 1I RPED Survey Data., Free University ofAmsterdam and University of Zimbabwe, 1994.

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remaining 14% could not be ascertained and/or were firms owned by multinationals, the stateand cooperatives. Although the proportion of African ownership is low, there has been asignificant shift in terms of ownership structure since independence. While only 26% of white-owned firms were started after 1980, almost 72% of the African-owned firms were started afterindependence. Fifty-five percent of all firms started after 1989 were started by Africans.However, most of the firms owned by Africans are still small compared to the firms owned by

Table 1: Racial National Origin by Firm Size5

Employment

Less $More

Row (% than than RowOrigin) I0 11-100 101-250 251 Total %African 34 19 2 2 57 (33)Asian 3 13 6 0 22 (13)European 3 28 23 26 80 (46)Other 0 3 6 5 14 (8)Column Total 40(23) 63(36) 37(21) 33(19) 173 (100)

whites. Table 1 shows the racial origin of owners by firm size. Almost 60% of African-ownedfirms employ less than 10 workers, and only 7% employ more than 100 workers.

2.24 Until 1991, not only did the policy regime strongly favor existing enterprises, sotoo were significant barriers to finance identified for SMEs. Given the level of collateralrequirements and limited financial innovation, many SMEs with "bankable" projects found creditaccess difficult. This was in spite of a number of donor-supported programs, as well as SmallBusiness Units established in each commercial bank to support this market. These units have alending responsibility to small-sized firms, generally those below a maximum of 50 employees,and will intermediate loans referred to them by other branches.

2.25 The linkages between small- and medium-sized expansion of exports indicated inSection D above and increasing the participation of indigenous business are significant: (i)spillovers would likely occur to the extent that manufactured exporters source their inputrequirements from domestic suppliers, in particular from SMEs; (ii) domestic producers(including SMEs) could likely become indirect exporters as they provide finished goods toproducers that, in turn, export such products; (iii) small service enterprises would becomeimportant beneficiaries of the increase in business in support services for exporting companies;(iv) the nature of export growth in Zimbabwe would likely be relatively labor-intensive; and (v)in the longer-term, export expansion generally leads to technological learning and productivitygains by a broad array of enterprises.

2.26 SME Financing Constraints. There are four sources of loan financing forSMEs6 : (i) commercial banks have in the past provided limited financing to SMEs through theirSmall Business Units established for this purpose. These institutions have the branch networks,

5 Figures in parenthesis indicate the percentage of row tables. Source: RPED Survey, 1994.

6 While SMEs are defined in many ways, for our purposes we mean enterprises with approximately 10 to 100 employees.Microenterprises having less than 10 employees are not excluded from the project but are not a primary focus of theproject.

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staff, and financial resources to work towards the objective of making more substantial amountsof funds available to indigenous businesses; (ii) although many NGOs are more focused onmicroenterprises than SMEs, they tend to work well at the grassroots level and to lhave theflexibility to undertake the character-based assessments of the principals of small businesses; (iii)non-bank financial intermediaries potentially serve as additional mechanisms for intermediatingfunds to SMEs but have done little to date; and (iv) state-owned intermediaries, such as theAgricultural Finance Corporation (AFC), the Zimbabwe Development Bank (ZDB), and theSmall Enterprises Development Corporation (SEDCO), have provided financing.

2.27 SMEs face two important financial constraints: (i) lack of access to finance orcredit (particularly for the most dynamic indigenous enterprises); and (ii) a high cost of finance,notably due to high real interest rates (10-20% in real terms during 1995). Both can constrainenterprise performance. Surveys consistently identify high real interest rates as among the threemost binding constraints for all segments of the non-agricultural private sector. Gauging theextent to which lack of access to finance is a binding constraint is complicated by the fact thatsome firms that report lack of access to finance to be a binding constraint may not becreditworthy, and hence ought not to be advanced loan finance; and, given high real interestrates, many of those potentially creditworthy firms that might experience problems gainingaccess to finance, simply self-select by choosing not to borrow.

2.28 Various factors are believed to have contributed to the observed credit constraintfor investors, particularly SMEs. The dualist economic structure and limited interaction betweenthe banking community and the emerging SME sector have resulted in the perceived risks offinancing SMEs being considerably greater than the actual risks. This is supported by data in arecent survey of black-owned businesses in Zimbabwe7 . Information asymmetries are usuallyworse for small enterprises, and likely impair the functioning of the financial markets and causethe cost of borrowing to be pushed up. This cost manifests itself in higher interest ratesreflecting higher risks and transaction costs as well as, typically, a greater reliance by financialinstitutions on physical collateral. It is in this setting that the above survey indicates that vitalrole that State-owned financial institutions played in providing initial support to enterpriseswhich, because of the risk perceptions of private financial institutions indicated, would not haveotherwise had credit access. Indeed, of 47 enterprises sampled which had used loans, 36 hadreceived loans or guarantees from one or more parastatal or non-profit organizations, including18 from SEDCO. Implicitly, this also suggests a certain technical assistance and appraisalcapability to support emerging SMEs. In this way, deliberate measures to reduce this financingconstraint had a demonstrated impact.

F. Business Support Services - Information Linkages and Market Intelligence

2.29 The nature of business associations in Zimbabwe has to date reflected the dualismin the economic structure: Associations controlled by whites generally catered to large existingindustrial and agricultural concerns and have had little interaction with associations whichcatered to blacks, which generally catered to smaller businesses and more subsistence-basedagriculture. The outreach between these two types of associations has been limited, with blacks

7 See Levy and Bradburg, Zimbabwe's New Entrepreneur: An Emerging Success Story?. The World Bank, October, 1995.

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and whites grouped with their own associations. Moreover, many associations also havehistories which included an actively political, in addition to an economic mandate.

2.30 In Zimbabwe, not enough attention has been devoted to developing business skillswhich respond to buyer preferences, innovation, production efficiency, quality control andmarketing. As a result of long years of domestic orientation and protection from externalmarkets, many Zimbabwean firms lack the required skills, know-how, and market understandingwhich is essential for obtaining orders in new markets. The returns from improving theinformation base and, accordingly, upgrading supply capabilities by addressing deficiencies, arevery large. Supply performance is critical in exporting manufactured products to developedcountry markets and, for firms looking for export orders, what counts is the buyer's perception ofthe exporting firm's supply capabilities and its readiness to fulfill all aspects of the order. In thesame vein, strong evidence suggests that SMEs can be strengthened by measures to create greaterinformation linkages for individual enterprises, and the project would seek to develop thesemechanisms as well.

2.31 Presently, several agencies in Zimbabwe attempt to provide such information andassistance to exporters. ZimTrade, a trade promotion organization, has made a good start inconducting market and supply surveys, encouraging group participation in foreign trade fairs,providing training courses for new exporters, and developing newsletters, promotional brochuresand exporter directories. In addition, it has developed a trade and information center whichattempts to provide up-to-date information on international market trends and developments.Several specialized databases are available on-line to potential exporters and are fullycomputerized, allowing for speedy location of specific publications through a keyword searchsystem. Further, ZimTrade maintains a comprehensive library of up-to-date international tradedirectories, market reports, country reports, customs regulations, product specific journals andmarket studies. From a slow start, ZimTrade gets upwards of 300-400 visitors per month usingits database, in addition to numerous phone inquiries, and has recently opened an office inBulawayo. Besides ZimTrade, several other private sector organizations are emerging as sourcesof information and specialized assistance such as the Horticultural Promotion Council, theconfederation of Zimbabwe industries, and the Zimbabwe National Chamber of Commerce, inaddition to private service and financial firms. All of these perform a variety of exportpromotion functions relating to advice, training and information. The further development ofsuch trade promotion functions needs to be supported and information dissemination encouraged.

2.32 Generally, firms need individualized help, geared to their specific market nicheopportunities, and most of this help needs to be provided from the viewpoint of a distantpotential buyer. Such help is therefore not easy to deliver. One mechanism to deal with thisproblem successfully is the matching grant concept offered on a pilot basis in Zimbabwe byZimTrade, with support from the European Union (EU) through the Export Promotion SupportServices (EPSS) program. These grants cover up to half the cost of a firm's program to improveand adapt its supply, market development, and potentially related export development operations.Firms can use the grants to help pay for expert services and travel associated with marketexploration and initial marketing. Making the participating company pay 50% of the costsinvolved ensures that the firm has a financial stake in getting value for money.

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2.33 Analysis of SMEs in developing countries suggests that a powerful learningmechanism for emerging enterprises is learning from ongoing business activities. However,evidence suggests that this mechanism works only to the extent that firms are embedded in"information-rich" private networks. In Zimbabwe's dualistic setting, even potentially dynamicsmall entrepreneurs may not have access to these networks, and hence, could find themselvestrapped (without necessarily being conscious of the root of their problem) in a low-level "poor-but-efficient" setting. The challenge is to find ways of enhancing the access of indigenous andother firms to information-rich networks, without creating white elephant public institutions.While internationally the examples of success are, at best, limited, three approaches have beenincorporated into the Project to create information linkages needed (see paras. 4.5 to 4.8 below).

2.34 The current array of business support services available for SMEs is limited, andthose that are available are fragmented. Training is offered by a number of agencies or NGOsincluding SEDCO, AFC, EMPRETEC and others. Moreover, ZimTrade offers limitedintroductory exposure for SMEs. The Government has also channeled considerable sums offunds into the business services sector to assist retrenched civil servants.

3. FINANCIAL MARKETS AND THEIR REGULATION

3.1 Structure of the Financial Sector. Zimbabwe generally has a highly-developedfinancial system compared to other countries in the region. Financial institutions that lend directlyto the public are comprised of five commercial banks (Barclays, Standard Chartered, Zimbank,Stanbic and the Commercial Bank of Zimbabwe), five finance houses (Stanbic Finance, Fincor,UDC, Standard Finance, and Scotfin), three building societies (Central African Building Society,Founders Building Society and Beverly Building Society), two development finance institutions(SEDCO and ZDB), and nine merchant banks. There is also a government-owned CreditGuarantee Company (CGC-Second Tier) and the Post Office Savings Bank. The Reserve Bank ofZimbabwe (RBZ) is the monetary and regulatory authority. The Government has a controllinginterest in Zimbank and its subsidiaries, Syfrets and Scotfin, in the Commercial Bank ofZimbabwe, in ZDB and in SEDCO. In addition, the system comprises a stock exchange, over 50insurance companies and a large number of pension funds.

3.2 Economic Regulation and Monetary Policy. Since 1992, economic regulationson financial instruments have been almost entirely removed. The severity of high real depositand lending rates indicated in Table 2 below, reflects Government's contractionary monetarypolicy both to reduce inflation and protect the balance of payments, in the face of continuing andaccumulated fiscal deficits. The real average lending rate of 11.8% indicated makes the debt-service requirements for sub-loan financing particularly difficult for commercial customers.Such rates are projected to be reduced in the medium-term, but such a reduction will depend onachieving an improved fiscal position and a market response to Government policies. Spreadsare also very high, given Zimbabwe's required reserve and liquidity requirements, averagingalmost 8% for commercial banks. Strong financial margins and returns on capital invested in thefinancial sector suggest that Zimbabwe could be attractive to new entrants. This is validated bythe recent entrance of one commercial bank (purchasing an existing bank) and the establishmentof four merchant banks in the last two years.

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Table 2: Interest Rates and Spreads (in percent)

NominalDeposit Rates 2/ Real Deposit Rates 3/ Lending Rates 5/ Real Lending Rates 6/ Sprads

Comm Accept. Comm Accept. Inflation Comm Accept. Comm Accept. Comm Accept.T-Bills I/ Banks Houses 4/ Banks Houses Banks Houses Banks House

Dec 19927/ 34.6 31.0 36.0 11.5 15.8 36.9 34.2 16.5 14.2 5.9 (1.8)March 1993 38.0 33.0 36.0 15.2 17.8 17.5 38.2 37.0 19.6 18.7 5.2 1.0June 1993 38.5 33.5 39.5 2.8 7.4 15.5 38.5 36.0 6.6 4.7 5.0 (3.5)Sept 993 28.2 24.3 27.3 10.5 13.2 29.9 36.6 35.1 21.5 20.2 12.4 7.9Dec 5993 27.0 24.0 26.3 (10.2) (8.6) 12.4 33.3 33.7 (3.5) (3.2) 9.3 7.5March 1994 26.9 25.5 26.6 8.4 9.4 38.1 33.5 33.1 15.3 15.0 8.0 6.5June 1994 28.6 29.0 30.5 3.7 4.9 15.8 34.3 35.5 7.9 8.9 5.3 5.0Sept 1994 31.5 29.0 29.4 19.9 20.2 24.4 34.8 36.8 25.2 27.1 5.8 7.4Dec 1994 29.6 27.3 28.5 (5.5) (4.6) 7.6 36.4 35.8 1.3 0.8 9.1 7.3March 1995 30.4 28.5 30.0 17.7 19.0 34.7 35.2 36.5 23.8 25.0 6.7 6.5June 1995 27.5 26.5 26.5 (4.2) (4.2) 9.2 36.2 36.5 3.2 3.4 9.7 10.0Sept 1995 23.9 23.0 22.0 (5.4) (6.2) 32.0 35.7 36.5 4.4 5.0 12.7 14.5Dec. 1995 30.0Simple Avg. 30.4 27.9 29.9 5.4 7.0 21.6 35.8 35.6 11.8 11.6 7.9 5.7

1/ 90-Day Treasury Bills.2/ 3-month deposit rates. Figures represent the midpoint of the endpoint ranges published.3/ [Average Deposit Rate-Annualized Inflation Rate for subsequent quarter]/[l+lnflation Rate].4/ Consumer Price Index change for the previous three months multiplied by four.5/ Average Lending Rates. Figures represent the midpoint of the endpoint ranges published.6/ [Average Lending Rate-Annualized Inflation Rate for subsequent quarterl/[ I +Inflation Rate].7/ Rate for Treasury Bills is January 1993.

Source: RBZ Monthly Bulletin.

3.3 Savings and Financial Depth. Broad Money (M2) was 26.7% of GDP in 1993and is projected to increase to between 28.2% and 29.5% from 1995 to 1997. Total commercialbank loans and advances were about US$ 1.1 billion at end-June, 1995, while loans, advances andacceptances of merchant banks was about US$400 million. The level of financial depth can beconsidered only moderate, given Zimbabwe's income level and distribution. The bulk of formalsavings in financial institutions (not including pension funds or insurance companies) is incommercial banks, which held 80% of such savings at end-July, 1995. Merchant banks held15% and discount houses just over five percent. Approximately 11% of savings was held inForeign Currency Accounts (FCAs). Savings is also skewed towards demand deposits (48% oftotal deposits) with savings deposits under thirty days comprising 40% and time deposits over 30days comprising 12% of deposits. The large volume of demand deposits is in part accentuated tothe degree that such deposits are used against overdraft accounts for corporate customers.

3.4 Ownership and Competition. Historically, financial institutions have largelyreflected the duality of ownership observed in the real sector: Most institutions catered toexisting companies and agricultural interests (for domestic market and financing exports),primarily owned by whites, while State-owned institutions attempted to finance indigenousemerging enterprises and farmers. Economic regulations contributed to conservative lendingpolicies in that: (i) repressed lending rates contributed to lending to known or affiliatedcustomers; and (ii) former entry barriers contributed to limited competition assuring a reasonableprofit with little risk-taking. In 1988, with the encouragement of the RBZ, commercial banks setup Small Business Units, (SBUs) whose aim was to cater to nascent indigenous enterprises.These Units functioned in a very limited way until about 1994, when the effects of domestic

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market liberalization increased some of the interest of commercial banks in pursuing the SMEmarket.

3.5 Prudential Regulation and Supervision. Zimbabwe's formal financial sector isregulated by the RBZ, which is responsible for monetary and foreign exchange policy. TheReserve Bank of Zimbabwe Act of 1964, and the Banking Act of 1968, give the RBZ broadpowers to regulate commercial banks, discount houses, and merchant banks and finance houses,as well as empowering the RBZ to carry out its central banking functions8. These functionsinclude responsibility over the money supply, issuing currency, providing clearing house facilities,administering Government loans and securities, and acting as custodian of the country's foreignexchange reserves and managing the country's gold output. RBZ's financial dealings with otherintermediaries is through discount houses that trade in bankers' acceptances, negotiablecertificates of deposit (NCDs), and government treasuries and municipal notes in the secondarymarket. In general, RBZ has influenced the banking system to control the money supply, but hashad very limited powers to supervise and control prudential regulations.

3.6 Under current law, RBZ has the authority to issue statutory prudential regulationsfor banking institutions, but has no authority to carry out on-site inspection, and limited authorityto require information for surveillance purposes9 . The main statutory requirements for thebanking system cover minimum capital and reserves and minimum reserve and liquiditybalances. Operational guidelines include gearing ratios, overall risk asset ratios, maximumexposure in any one customer or related group of customers, and monitoring of foreign exchangedealings by the banking system. At end-October, 1995, guidelines were also established forcapital adequacy and loan classification and provisioning, albeit the legal authority of suchguidelines is limited to moral suasion.

3.7 A draft revised Banking Act before Parliament would amend current legislationgoverning deposit-taking institutions and the financial services industry. As such, the regulatoryauthority of the RBZ Banking Supervision Department would increase significantly, includingthe legal authority for on-site supervision. Moreover, the coverage of its authority would bewidened to include finance houses and building societies. Further, capital requirements,including risk-related capital adequacy ratios and other prudential legislation for all financialinstitutions, would be statutorily required to be met. Finally, segmentation of the banking systemunder current law would be eliminated. The legislation would also lay the foundation for theemergence of new money-market instruments and financial services. The implications of suchlegislation would be that the RBZ Banking Supervision Department would have to bestrengthened considerably (see para 4.22).

3.8 Financial Market Development and Outreach to Emerging Enterprises.Zimbabwe's financial markets are in a transition. Although relatively complex, sophisticated and

8 Currently. the Post Office Savings Bank is regulated by the Post Office Savings Bank Act (Chapter 249) and falls underthe joint trusteeship of the Secretary of the Treasury, the Governor of the Reserve Bank and the Postmaster General. TheBuilding Societies are regulated by the Buildings Societies Act. Other institutions, including insurance companies, pensionfunds, etc., are subject to their individual legislation and governed by independent boards.

9 It is in light of these legal limitations that the Project includes the application of specific eligibility criteria for theparticipation of financial intermediaries under the Project.

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diverse by regional standards, the outreach to lending to emerging enterprises both for local andexport markets has been limited. Conservative lending policies have to date focused on themaintenance of collateral, often through fixed assets (land) or movable assets. Little lending hasto date been done purely on a cashflow basis, except for large and well-established exporters.Given that the level of perceived risks of emerging enterprises is believed to be greater than theiractual risk, it is expected that, once financial institutions develop greater experience with cash-flow lending and improve their appraisal capability and information networks, then more lendingwill go to the to-date disenfranchised groups. Although the experience of most financialinstitutions in project appraisal of SMEs is limited, this capacity is believed to be sufficient toeffectively draw upon, channel,-and benefit from financing and guarantee mechanisms set up tosupport emerging enterprises under the Project. The same is even more the case in terms ofexport financing, where the expertise is there, albeit the willingness to provide cashflow-basedexport financing has been limited. Most important, if the reforms indicated above are developed,namely, improvement in prudential regulations so as to permit an orderly entrance of morecompetition, and an improved macro program so as to reduce interest rates on a sustainablebasis, it is then e-xpected that, in the medium-term, the financial markets will have adjusted insuch a way as to finance emerging enterprises on their own accord.

4. THE PROJECT

A. Origin and Relation with Country Assistance Strategy

4.1 This project stems from discussions held in October and November 1994, inwhich the Government and IDA agreed to develop an integrated enterprise support programincluding credit, business services and institutional development. A process of AnnualConsultations was also established in January 1995, whereby Bank staff and Governmentofficials discuss the assistance program, in an effort to strengthen early collaboration, and avoidinvesting a lot of resources in preparing operations before Government commitment isestablished. These meetings, a Borrower feedback survey in mid-1995 and consultations withstakeholder groups (civil society, NGOs, academics, private sector, labor and government) inFebruary 1996, have also been an integral part of the preparation of a Country AssistanceStrategy.

4.2 The last Country Assistance Strategy for Zimbabwe was discussed with theBoard in January 1994. A key element of that strategy was to support the Government's effortsto promote private sector investment and exports as the engine for employment generation andgrowth. Instruments for providing support were to include additional adjustment lending, acountry economic memorandum, a trade expansion study and a small and microenterprisedevelopment (SMSE) project. The next adjustment operation has been deferred pendingfulfillment of remaining measures for release of the second tranche of the Second StructuralAdjustment Credit (FY93), the studies have been completed and the SMSE Project has evolvedinto this project, the Enterprise Development Project. A new Country Assistance Strategy hadbeen planned for consideration by the Board with this Project. However, intervening events,including the recent presidential elections, argued for deferring presentation of a new strategypending Government's elaboration of the next phase of its adjustment program (ESAP 2) andfurther discussions on the Bank's role in supporting the program. The ongoing strategy

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continues to include private sector and export development, particularly among indigenousenterprises, as key to the overall objective of broad based growth. Apart from the proposedproject, other relevant interventions would cover agriculture, focusing inter alia on rebuildingservices for the smallholder and small-scale irrigation. Other prongs of the strategy includecontinued support for macroeconomic reform and stability; human resource development,particularly health which is threatened by fiscal constraints and AIDS/HIV; infrastructuredevelopment, as the backbone for private sector development and development in the rural areas;environment and resource management, including particularly water resources; and capacitybuilding, particularly at the local government level.

B. Lessons Learned From Past Experience

4.3 The project aims to draw on the results of financial intermediary projects,including the recently completed Small Scale Enterprise Project in Zimbabwe, which have oftenhad limited results because: (i) subsidy mechanisms or sector targeting often did not have adesired sustainable real sector impact; and (ii) reliance on a limited scope of financialintermediaries did not result in the breadth or depth of financial intermediation needed,particularly for reaching emerging enterprises, because of lending conservatism and informationasymmetries. Specific lessons for the Zimbabwe project were: (i) micro-level support of SMEscannot lead to a sustainable result unless the macro, policy and institutional barriers to SMEdevelopment are also addressed. These constraints put a brake on SME development in the1980s; (ii) using a unique financial intermediary such as SEDCO can help to develop theexpertise of SME lending, but it does not result in the establishment of such an expertise in thebroader commercial marketplace on a sustainable basis; (iii) access to credit by financialintermediaries requires continuing compliance with explicit eligibility criteria; and (iv) lendingrates both to and from intermediaries should be comparable to market rates and positive in realterms to avoid financial and real market distortions. Further, the project aims to draw uponspecific lessons in the provision of business services, namely that: (i) to the degree possible,lending and technical assistance to borrowers should be separated functions; (ii) provision ofinformation and management services should be specialized and tailored to the firm orassociation's needs -- generalized training should be avoided; and (iii) foreign and domesticbusinesses themselves can serve as important catalysts for other firms embarking on export orother business expansion. Finally, the project aims to build upon the lessons of institutionaldevelopment as it relates to improving customs administration and financial institutionmanagement of credit operations. This project aims to achieve success where the earlier projecthad more limited results by: (i) providing financing and business services to enterprises, in thiscase after most of the identified policy barriers have been removed; (ii) intermediating fundsthrough multiple institutions certified as financially viable by external auditors; and (iii)supporting an integrated series of measures which encompass financing, guarantees, businessservices and institution-building.

C. Project Objectives

4.4 The objective of this project is to support a stronger supply response by privatesector enterprises to policy reforms undertaken, including: (i) increasing the growth of export-based output; and (ii) broadening participation in economic activity, in particular by indigenousfirms.

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D. Project Description'°

1. The Business Services Component

4.5 Given the duality described above in the existing structure of businessassociations and the identified collective benefits to improving information linkages, the Projectsupports a Business Services Component consisting of: (i) a Subsector Business AssociationsInitiative (SBAI) providing matching grants to business associations to support their efforts tostrengthen their array of services for firms, including creation of company alliances; (ii) support ofan enhancement of an existing ZimTrade Matching Grant Scheme for individual enterprisesentering or expanding into export markets; and (iii) support of the initial costs of creating linkagesbetween established and emerging enterprises through a Matchmaking Facility. A more detaileddescription is indicated below and in Annex A.

4.6 Support to Subsector Business Associations- SBAI (Project Cost US$3.1million, of which IDA would finance US$1.4 million). The SBAI would provide financing to"kickstart" the emergence of service-oriented Zimbabwean subsector business associations --groupings of firms engaged in similar activities, typically manufacturing or services. Theprogram would be managed by an SBAI Administrator supported under the project and wouldsupport subsector associations in the preparation of technical and marketing programs which aimto improve the competitiveness and productivity of firms through: (i) direct provision ofdevelopment support to associations through "handholding" in designing a business plan. Thissupport is aimed at those associations that do not yet have the capability to design focusedstrengthening programs themselves; (ii) provision of 50:50 matching grants providingdevelopment support for 12 months to cover the costs of a subsector association staff personspecialized in the concerns of the relevant subsector. This person could be full- or part-time, andcould be shared with one other subsector association; and (iii) the provision of programmatching funds, on a cost sharing basis (25% paid by participating firms, and 75% covered bythe project) for eligible programs mounted by the associations (see Annex A for guidelines forthese programs). Both the development support and program matching grants are intended ascatalysts -- demonstrations to firms in the relevant subsectors, and to the private sector morebroadly, of the benefits of strong, productivity-oriented subsector associations. In cases where,for reasons of Zimbabwe's history, there exists more than one association for a particularactivity, the component will endeavor to foster collaboration among these associations. Theexpectation is that, having once experienced the benefits to be derived from such associations,firms will then be willing to continue to participate in them, unsupported by SBAI grants.Consequently, the scheme is designed to be temporary, to operate only for a single, three-yearperiod.

4.7 Support to Improving International Competitiveness (Project Cost US$7.3million of which IDA would finance US$3.8 million). The ZimTrade Matching Grant Scheme(ZMGS) would provide support to enterprises seeking to expand their internationalcompetitiveness. Matching grants would be supported under the Project on a 50:50 cost-sharingbasis (with private firms) to stimulate the use of foreign and domestic support services and travel

10 A diagram attached as Annex D provides a useful picture of the project functions, responsibilities and funds flow.

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by firms so as to speed up a firm-level response. Support services quickly introduce into firmsthe skills, know-how, information and contacts that will be needed, in order either to defendagainst import competition, or to expand exports. Travel by key personnel helps to build realismabout how best the firm can find its niche in an international marketplace, establishing contactsboth with export outlets and with sources of imported inputs that could help buildcompetitiveness. Cost-sharing grants would be provided on the basis of a plan prepared by thefirm (see Annex A for complete guidelines). The ZMGS would also support the process ofrestructuring by working in a "hands-on" way with firms to prepare firm-level plans, aimed atenhancing competitiveness (involving support services and travel to be supported by the ZMGS).The scheme would seek to add to, strengthen, and build upon a foundation of the current ExportPromotion Support Service (EPSS) offered by ZimTrade. The scheme represents a reformulationof the existing scheme, as well as an upgrading and extension of the program. The schemewould be managed by the ZMGS Management Team who will have the global knowledge andprivate sector experience that can help fill the gaps in firms' knowledge, assisting in proactivelypromoting the scheme to owners and senior managers of private firms, concentrating on thoseassessed as having the highest potential for building international competitiveness. Approval ofZMGS matching grants will be made by the ZMGS Management Team, a Technical Adviser and,depending upon the size of the grant, in some cases by the Steering Team of the Project. It isexpected that about 80% of grant support will go towards technical and productivity adjustmentswithin the factory and about 20% will directly support efforts at marketing. The cost-sharing andproactive, hands-on initiatives are intended as catalysts -- demonstrations to participating firms,and, more broadly, to the private sector -- of the benefits of actively seeking out external sourcesof information and know-how.

4.8 Export Catalysts through Matchmaking (Project Cost US$3.1 million, of whichIDA would finance US$1.8 million). The Matchmaking Facility aims to build Zimbabweanfirms' export capability by facilitating export-oriented enterprise collaboration between small andmedium local and foreign partners through a private matchmaking scheme. Foreign partnerswould bring a package of external market access and production know-how with or withoutinvestment finance. The facility would provide matching grant support as one effective way todeal with local potential exporters' lack of: (i) access to the external market network and marketinformation for export products; (ii) access to exportable production know-how; and (iii) accessto external information on input sourcing to promote export-oriented foreign enterprisecollaboration in diversified forms. The collaborations supported through this facility provide apackage of (i) - (iii), offer an opportunity for local partners' immediate entry into the worldmarket, and offer an opportunity for the acquisition of skills in these areas. Under the facility, aprivate matchmaker would identify potential foreign collaborators, brokering information onbusiness opportunities in the recipient country, and use their information network in the lattercountry to link foreign collaborators with potential local partners. The fee provided to thematchmaker would be based on the culmination of a collaboration contract which isperformance-based. Matchmaking fee payments would be shared between: (i) the MatchmakingFund (MMF) established under the Project (50% of the initial installment); (ii) the foreignpartner (25% of the initial installment); and (iii) the local exporter (25% of the initialinstallment). Installments would be based on the contract value and implementation stages (seeAnnex A for Guidelines). Funding would also be provided to support the costs of establishing an

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initial contact between the matchmaker, foreign collaborator and local partner. The facilitywould be managed by a Matchmaking Management Contractor, with input and support from aTechnical Adviser.

2. The Finance Component

4.9 The Finance Component supports permanent working capital and investmentfinancing for SMEs, US$ export financing for direct or indirect exporters, and SME andPreshipment Export Finance guarantee funds established (and backstopped) under the project asindicated below. Funds under this component would be intermediated by Participating FinancialIntermediaries (PFIs), who would be certified as eligible for participation by the Project Steeringleam, upon the recommendation and on the basis of information presented by independentexternal auditors commissioned for this purpose (see Annex B for the criteria and evaluationprocedures). Funds would be intermediated through an Apex Unit in the RBZ (See para. 4.34below) and the Guarantee Funds would operate in a Credit Guarantee Agency (CGA), also in theRBZ.

4.10 SME Finance Facility - Fund (Project Cost US$31.1 million of which IDAwould finance US$25 million). Uncertainty and the term structure of interest rates has led tolimited and prohibitively-priced medium-term funds for financial institutions to fumd theinvestment and permanent working capital needs of their SME customers. The SME FinanceFund seeks to provide an intervention to relax the constraint for term funding by financialinstitutions for SMEs. The aim is that by providing financing to SMEs capable of sustainablegrowth, these enterprises can grow and generate employment on a sustainable basis. Eligibleborrowers would include companies with up to 50 employees and with up to US$200,000 inassets (exclusive of land), with sub-loans up to a limit of US$75,000 (see Annex B for moredetailed guidelines). The Project Steering Team (see para. 4.31) could, in consultation with IDA,modify this limit according to implementation experience. Funds would be offered to SMEs byparticipating financial intermediaries (PFIs) in Zim$ at a maturity of up to five years, and with upto 18 months' grace period. PFIs would be required to onlend to SMEs funds in the samecurrency and with the same maturity and grace period as received from the Apex. At least 20%of the subproject cost would need to be met by sub-borrowers. The interest rate charged by theApex to financial intermediaries would be the average cost of funds of commercial banks, asdetermined by a quarterly rolling average, computed by the RBZ and announced quarterly. Therate charged SMEs by PFIs would be freely determined by PFIs in accordance with the costs andrisks involved. Sub-project documentation submitted to the Apex would be limited to summaryinformation.

4.11 Central to the demand estimates for the SME Finance Fund is the assumption thatthe process being supported entails marginal financing which would otherwise not beundertaken. The "financing gap" is virtually impossible to determine for SMEs in this contextbecause of the dynamic nature of changes in demand, and in the supply response due to theprocess being supported. Under the assumption that the average SME credit would beUS$50,000 equivalent, the sub-component would finance approximately 500 new SMEborrowers over a four-year period. This would represent an increase of approximately 2.2% fromthe US$1.1 billion of loans and advances of commercial banks (end-July 1995). Although theexact size of commercial banks' SME portfolios is not known, if estimates are valid that SME

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exposure is only five percent of total portfolios, new SME sub-loans under the project wouldrepresent a significant increase. If the process is sufficiently dynamic, the hope is that there willbe a supply response in the sense that financial institutions will divert an increasing share of theirown-sourced funds to finance this market.

4.12 SME Credit Guarantee Facility - Fund (Cost US$5.6 million"l financed by theGovernment and private sector). The Project will support an SME Credit Guarantee in order toencourage financial institutions to lend to entrepreneurs with viable projects and good prospectsof success, but whose perceived risk is greater than their actual risk because the borrowers areunable to provide adequate collateral, or do not have a suitable credit history to prove that theyare creditworthy. Eligible SME sub-loans financed by the SME Finance Fund could beguaranteed for 50% of the outstanding principal amount plus accrued interest up to 90 days,provided a PFI's losses for guaranteed loans have not exceeded 15% of its guaranteed sub-loantotal. New loans made once this threshold has been reached (but losses less than 40%) could beguaranteed at a rate of 25%. No additional loans would be guaranteed if a PFI's loss rate onguaranteed loans exceeds 40%. Each PFI would pay the Apex a three percent premium on theguaranteed portion of its portfolio--a premium that could be passed along to PFI borrowers.

4.13 Both the SME Credit Guarantee and the Preshipment Export Finance Guarantee(below) would be administered by a Credit Guarantee Agency (CGA) located in the RBZ andactively interacting with the Apex. The CGA would be responsible for processing guaranteeapplications, verifying borrower compliance with eligibility conditions, verifying eligibility ofPFIs, processing receipt of premiums, scrutinizing requests for claims under the guarantee, andprocessing reimbursement under such claims. The CGA would issue a Guarantee Certificate tothe PFI for guaranteed sub-loans. The scheme's design is intended to be simple enough so thatparticipation does not add materially to a PFI's transaction costs. The aim of this mechanism isto be temporary until such time as financial institutions are better able to assess, price andmanage risk when no special incentive would be needed.

4.14 The SME Credit Guarantee Fund (and Pre-shipment Export Finance GuaranteeFund below) would be funded by: (i) premiums collected by the Apex from PFIs deposited intoan interest-bearing deposit account; (ii) interest from such account; (iii) any funds recovered inthe disposal of collateral on guaranteed-loans; and, as necessary; (iv) sub-loan recoveries fromthe SME and Export Finance funds transferred from the SME Finance Fund to the SME CreditGuarantee Fund"2 . Once a sub-loan is confirmed by the CGA as being entitled to reimbursementunder a claim, the Apex would debit the Guarantee Fund account and credit the PFI's projectaccount for the compensated balance. This would effectively exonerate the PFI from repaymentto the RBZ for 50% (or less) of the outstanding balance of the defaulting sub-loan.

4.15 Export Finance Facility - Fund (Project Cost US$43.8 million of which IDAwouldfinance US$35 million). This fund would support pre- and post-shipment export financing(generally imported inputs and local content which go into exported products) for emergingexporters unable to access such financing from commercial sources. Under existing financing

I I The actual cost will depend on the level of defaults of SME loans (note the financing mechanism below).

12 Projections for the SME Credit Guarantee Fund are indicated in Annex B.

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arrangements for commercial and merchant banks in Zimbabwe, overseas funding sources haveoften stipulated that foreign currency funds should be used by local institutions only for well-established exporters. This has had the effect of limiting the financing for emerging exporters,for whom the Export Finance Fund seeks to relax this foreign currency funding constraint.Eligible borrowers would include companies with up to 100 employees and with up toUS$500,000 in assets (exclusive of land). Sub-loans would be financed up to a size limit ofUS$150,000 (see Annex B for more detailed guidelines). The Project Steering Team (See para.4.31) could, in consultation with IDA, modify this limit according to implementation experience.Funds would be offered to exporters by PFIs in US$ at a maturity from the time of drawdown tothe time of the sight export L/C negotiation (or post-shipment export bill discount), but not morethan six months (pre-shipment) or 120 days (post-shipment). Borrowers would be required tohave a confirmed export letter of credit from a top-quality bank, export credit insurance, or, inthe case of indirect exporters, a domestic back-to-back L/C. Post-shipment financing would beprovided by rolling over the pre-shipment maturity into the post-shipment phase. PFIs would berequired to onlend funds in the same currency and with the same maturity as received from theApex. At least 20% of the subproject cost would need to be met by the sub-borrowers. Theinterest rate charged by the Apex to financial intermediaries would be the average cost of US$funding of commercial and merchant banks from overseas sources, as determined by a quarterlyrolling average, computed by the RBZ and announced quarterly. Currently, the ceilingestablished by the RBZ for offshore credit lines for export loans is LIBOR + 0.875%, whichwould be the initial rate charged on funds of the line, subject to change by the Steering Team inaccordance with changes in RBZ regulations and market conditions. The rate charged exportersby PFIs would be freely determined by PFIs in accordance with the costs and risks involved.The aim of subproject documentation would be to summarize the financed transaction to submitto the Apex.

4.16 Demand estimates for the Export Finance Fund are difficult to determine foremerging exporters because of the dynamic nature of changes in demand and in the supplyresponse due to the changing process being supported. The amount of the Export Finance Fund(US$35 million) is based on the following analysis: Total outstanding pre- and post-shipmentnon-tobacco export loans based on offshore credit lines of commercial and merchant banks at themiddle of June, 1995 were approximately US$250 million (US$167 million under memorandumof deposit agreements'3 with the RBZ and the remaining US$83 million for general exports andexport-related imports without the agreement). It is estimated that these export loans based onoffshore credit lines have been granted mainly to 300 to 400 well-established companies in thenon-tobacco primary and manufacturing sectors. This amount supplies approximately 1/3 to 1/2of the total non-tobacco (also excluding cotton and gold) export finance needs. The remainingexport finance needs (1/2 to 2/3 of the total - US$250-500 million) must be met by either Zim$loans with high rates or self-financed for the remaining exporters (estimated to be more than1,000). Such financing is very difficult for emerging exporters, even when they have confirmedexport letters of credit. Project funds can fill a portion of this "financing gap". Under theassumption that the average Export Finance credit would be US$100,000, the sub-componentwould finance approximately 350 new exporters over a four-year period. This would representan increase of approximately 2.3% in loans from the US$1.5 billion of loans, advances andacceptances of commercial and merchant banks (end-July 1995). Alternatively, this would

13 This is a program whereby the RBZ pools the risk of offshore credit lines with local banks then restricts the maximum rate.

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represent between 7% and 14% of the total amount of export finance estimated to be currentlyself-financed or financed by domestic currency loans. While this amount represents a smallincrease in these institutions' overall exposure, given the limited volume of exports from firms inZimbabwe with under 100 employees, it will represent a significant inroad into this nascentmarket.

4.17 An Export Finance Guarantee Facility - Fund (estimated Cost US$7.5 millionfinanced by the Government and private sector). The project would support a PreshipmentExport Finance Guarantee Facility whose purpose is to encourage financial institutions, throughrisk reduction, to lend to emerging exporters holding confirmed overseas export letters of creditor specified buyers' non-payment risk insurance for confirmed orders. Such export projectsfinanced likely show good prospects of success (as evidenced by the export L/C), but the PFI isreticent to extend funding because of limited collateral or credit history. The Export CreditGuarantee Fund would operate in a similar way for export finance as for SMEs as indicated inparas. 4.12 to 4.14 above. Eligible sub-loans financed by the Export Finance Fund could beguaranteed for 80% of the outstanding principal amount plus accrued interest up to 90 days,provided a PFI's losses for guaranteed loans have not exceeded 15% of its guaranteed sub-loantotal. New loans made once this threshold has been reached (but losses less than 40%) could beguaranteed with a coverage of 25%. No additional loans would be guaranteed if a PFI's loss rateon guaranteed loans exceeds 40%. The PFI would pay the Apex a 0.15% premium on theoutstanding monthly balance guaranteed. This premium could be passed along to PFI borrowers.The CGA would review select exporter data so as to mitigate the risk of fraudulent abuse andreview the eligibility of the PFI for such guarantee coverage. The CGA would issue a GuaranteeCertificate to the PFI for guaranteed sub-loans. The Export Credit Guarantee Fund would bearthe contingent risks owing to default from exporters' non-performance.

4.18 The Pre-shipment Export Finance Guarantee Fund would be financed frompremiums, interest earned, and transfers from the Export Finance Guarantee Fund in a waysimilar to that described for SMEs in para. 4.14 above. PFIs would effectively be exoneratedfrom repayment to the RBZ for 80% (or less) of the outstanding balance of defaulting sub-loansentitled to compensation by the guarantee.

3. Institutional Development Component

4.19 As indicated in Annex C, an Institutional Development Component (Project CostUS$2.2 million of which IDA would finance US$1.4 million) would provide support for thestrengthening of institutions key to improving enterprise development and exportcompetitiveness. This would include: (i) support for financial intermediaries in strengtheningtheir small business appraisal and monitoring systems and capacity; (ii) support of SEDCO insharpening its financial administration and strategic focus; (iii) support of the RBZ to improvefinancial institution regulation; (iv) select support of the RBZ in its Apex Unit and creditguarantee functions pertaining to this Project; (v) support of the Customs and Excise Departmentin its automation and administration of duty-drawback and inward processing rebate provisions;(vi) support to the Export Processing Zone (EPZ) Authority in the development of implementingguidelines for the EPZ provisions; and (vii) support for the Ministry of Industry and Commercein its administration of economic policy. This component would also support the operation ofthe Administrative Secretariat, with Government financing and co-financing.

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4.20 Matching Grant Program for Financial Institutions. A Financial InstitutionMatching Grant Program (Project Cost US$840,000 of which IDA would finance US$420. 000)would be established to assist financial institutions in developing the capacity and systemsnecessary for SME loan initiation, appraisal and monitoring. This scheme aims to mitigate someof the costs incurred by financial intermediaries in undertaking or enhancing this new line ofactivity. PFIs would have access to grant funds on a 50:50 basis to partially defray these additionalmarket entry costs in order to accelerate their movement in this area. The total expected IDAsupport of US$420,000 would represent 14 matching grants of an average of US$30,000 over athree-year period. Matching grants would be targeted at supporting the Small Business Units ofcommercial banks. In order to receive such a grant, the financial institution must submit adevelopment program which should indicate precisely the type of expert advice or trainingproposed. This could include the number of activities (workshops, on the job training, site visits,courses attended) to be concluded, number of staff trained per activity, level of staff trained, typeof training conducted, sources of trainers, estimated cost per training event, estimated cost perstaff training event, and expected results. Matching grants could also be applied towards thedevelopment of internal systems and controls of SME lending activity, such as the developmentof a separate cost account and loan portfolio monitoring system for the Small Business Unit orSME portfolio. It is likely that institutional development needs will be concentrated in thefollowing areas: (i) internal staff training; (ii) twinning/partnering with "best practice" financialintermediaries abroad; (iii) specialized consultancies; and (iv) management information systems forsmall business lending. The program would be managed by the Project Administrative Secretariat(see Annex E), with support of a Technical Adviser and in consultation with IDA. Matching grantapproval should be by the Steering Team, at the recommendation of the AdministrativeSecretariat. The submission to IDA of guidelines satisfactory to IDA for the matching grantprogram would be a condition of disbursement of funds for this subcomponent.

4.21 Support of SEDCO in Strengthening its Financial Administration and StrategicFocus (Project Cost US$1 70,000 financed by IDA). The Project would provide support forSEDCO to strengthen its financial administration and strategic focus: Select specializedconsultants would be supported under the Project, including a Financial Institution ManagementConsultant, a Financial Specialist, and a Legal Specialist. Funding for computer upgradingwould also be provided. Key to-the effective use of funds under this subcomponent will be thepreparation by SEDCO management of a revised strategic plan, indicating the intended directionfor the institution and the means of achieving institutional strengthening. Submission of such aplan, acceptable to IDA, would be a condition of support under this subcomponent.

4.22 Support of the RBZ to Improve Financial Institution Regulation andSupervision (Project Cost US$200,000financed by IDA). The project would provide support tothe institutional strengthening of the RBZ in its expanded role of regulation and supervision offinancial institutions, by financing external consultants in providing hands-on guidance andtraining in on-site inspection procedures and practices, off-site analysis, and in the developmentof implementing regulations and circulars to complement the revised Banking Act.

4.23 Support of the RBZ in the Project Apex Unit and Credit Guarantee Functions(Project Cost US$70,000 financed by IDA). The project would support the RBZ in developingan Apex Unit and Credit Guarantee Agency (CGA) including the provision of consultant

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guidance in developing operations manuals for each unit, installing operating procedures for eachtask, and training RBZ staff to carry out the Apex and CGA guarantee functions.

4.24 Strengthening Export Competitiveness - Support to Customs and Excise(Project Cost US$300, 000 financed by IDA). The project would support measures by theCustoms and Excise Department to strengthen export competitiveness. Funds would be providedto increase the efficiency of customs collection and, in particular, strengthen measures whichreduce anti-export biases against exporters, especially small export producers and indirectexporters. The project would provide expert advice and computers to the Customs and ExciseDepartment in developing a modernized system of Input-Output Coefficient administration, inthe implementation of a Licensed Common Bonded Manufacturing Warehouse Scheme, and inmeasures to improve the Inward Processing Rebate (IPR) and Duty Drawback provisions.

4.25 Support to the Export Processing Zone (EPZ) Authority (Project CostUS$90, 000 financed by IDA). The project would support the recently-constituted EPZ Authorityand related Government agencies supporting the efficient regulation of export processing zones.Support would be provided for the development of EPZ Customs Regime implementationregulations and a study tour by Customs, Ministry of Finance and EPZ Authority staff to reviewbest practice EPZs in developing the implementation framework.

4.26 Support to the Ministry of Industry and Commerce (Project Cost US$S100, 000financed by IDA). The project would support the Ministry of Industry and Commerce inimproving its management of economic policy, and, in particular, in the coordination of bilateraland multilateral initiatives. The aim of this support would be to provide training and computersupport to MOIC staff in fulfilling its new mandate. This support will prove vital, given theincreasingly active role the Ministry has taken on in the last two years in economic planning, andin its role vis-ai-vis multilateral institutions. The project would provide funding for a series offocused training sessions for MOIC staff on financial management, procurement and strategicplanning.

4.27 Support to Project Implementation Support (Project Cost US$460,000 financedby the Government and cofinancing). The project would support the constitution and operationof the Administrative Secretariat as well as the provision of a Technical Adviser who wouldprovide guidance in the management of the Institutional Development subcomponents, as well asprovide similar guidance in the operation of the ZMGS and MM Initiative (see Annexes B andE).

E. Project Cost and Financing Plan

4.28 The proposed IDA credit of US$70 million equivalent would finance about 66%of the total project cost. The cost estimates are based on the figures provided in Section D aboveand in Annexes A-C. A contingency of US$1.3 million has been established in order toaccommodate unexpected total project costs for the Business Services and InstitutionalDevelopment components. This amount represents 7.9% of the cost for these components andincludes contingencies for both IDA and non-IDA funded portions.

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4.29 As indicated in Table 3 below, private firms are expected to contribute US$18.1million to SME and Export Finance sub-loans and as guarantee premiums. The Governmentwould backstop the sub-loan guarantees (US$10 million equivalent, depending upon the lossrecord) and identify staff to manage the Administrative Secretariat. Operating costs would alsobe supported by ZimTrade (US$0.3 million), which for these purposes has been included asGovernment financing. Cofinancing from USAID and NORAD (estimated at US$1.8 millionequivalent) would contribute to the management of the SBAI Initiative as well as finance aTechnical Adviser. Private enterprises will participate in the financing of the project for a totalamount of US$23.7 million, including approximately 25-50% of matching grants and 20% ofsub-loans. Credit proceeds would be provided: (i) by the Government to PFIs as sub-loans viathe RBZ; (ii) as matching grants for the Business Services component and the Support toFinancial Institutions subcomponent; and (iii) as direct grants for the management of theBusiness Services component and for other Institutional Development subcomponents.

Table 3: Estimated Project Costs and Financing Plan(US$ million)

Project Cost Local Foreign Total % TotalFinance Component 39.4 48.8 88.1 83.2SME Finance Fund 25.0 6.3 31.3 29.5SME Credit Guarantee 5.6 5.6 5.3Export Finance Fund 8.8 35.0 43.8 41.3Export Credit Guarantee 7.5 7.5 7.1

Business Services Component 8.6 5.7 14.3 13.5Institutional Development Component 0.4 1.9 2.2 2.1Contingency 0.4 0.9 1.3 1.2

TOTAL 48.8 57.2 106.0 100.0

Financing PlanPrivate Enterprises 10.6 13.1 23.7 22.3Government of Zimbabwe 5.2 5.3 10.5 9.9Co-Financing 1.8 1.8 1.7IDA 33.0 37.0 70.0 66.0

TOTAL 48.8 57.2 106.0 100.0

F. Project Implementation

4.30 Project Implementation Plan. The framework for project implementation will bea Project Implementation Plan which will be developed by the Government in association withIDA. Such a plan will detail the precise objectives and operating parameters of each projectcomponent, indicate the institutional and managerial arrangements, and indicate precisemonitoring indicators to evaluate outcomes. The plan should be developed under the leadershipof the Steering Team, with the execution by the Administrative Secretariat. Furnishing IDA sucha plan, satisfactory to IDA would be a condition of Credit Effectiveness.

4.31 Institutional Arrangements. The project would operate under the guidance of aSteering Team (see Annex D) which would be comprised of the Permanent Secretary of theMinistry of Industry and Commerce (chairman); the Permanent Secretary of the Ministry ofFinance; the Head of Planning, National Economic Planning Commission; the Governor of theReserve Bank; the chief executives of the Zimbabwe Investment Center, ZimTrade, CZI, the

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ZNCC and the Bankers Association; and a representative nominated by the indigenous businesscommunity. The Steering Team would meet every two months, or more frequently ascircumstances dictate. Members of the Steering Team could designate officials to act on theirbehalf, particularly given the likely possibility of the appointment of designated subcommitteesfor select issues. A committee of the Steering Team would be designated to review eligibilitycertification proposals for the participation of financial intermediaries. The functions of theSteering Team would be as follows:

* to monitor the overall direction of the Project and recommend modifications in design orexecution to IDA, as needed, in accordance with the parameters established under the Project;

* to appoint staff and consultants under the project, as designated in the project documents;* to approve SBAI matching grants in excess of US$30,000;* to review business plans and support programs of any SBAI association, after such an

association has made expenditures in aggregate of US$35,000;* to confirm eligibility of an SBAI association for any subsequent US$35,000 tranche support;* to approve ZMGS matching grants above US$50,000 equivalent and all proposals for

matching grants referred to it by the ZMGS Management Team;* to review progress in the implementation of the individual project components, based upon

statistical information provided by the Administrative Secretariat or executing units for eachof the three components; and

* to approve financial institutions for full or partial eligibility to participate under the project inconsultation with IDA, and in accordance with the eligibility criteria established andevaluations conducted by external auditors. In the case of institutions found partiallyeligible, agreeing on an action plan for the financial intermediary to remedy the deficienciesnoted.

4.32 An Administrative Secretariat, described in Annex E, would be responsible underthe project for carrying out the management functions of the Institutional Developmentcomponent, as well as would serve as an administrative arm of the Steering Team.

4.33 The Business Services component would be administered as follows: The SBAIInitiative would be managed by an SBAI Administrator and supplemented by support from aTechnical Adviser. This Administrator would have some autonomous decision-makingauthority, subject to the limitations indicated in para. 4.31 above. The Administrator would berequired to be appointed prior to Credit Effectiveness. The ZimTrade Matching Grant Schemewould be implemented by a ZMGS Management Team (two full-time ZimTrade staff), with thesupport and oversight of the Steering Team. The Matchmaking Facility would be implementedby a Matchmaking Management Contractor. The respective managers of each of these threeschemes would be required to furnish IDA with satisfactory operational guidelines for the SBAI,ZMGS and the Matchmaking Facility, respectively, as a condition of Credit Effectiveness.

4.34 The Finance component would be managed through an Apex Unit and a CreditGuarantee Agency (CGA) in the RBZ, in accordance with a Subsidiary Financing Agreement tobe entered into between the Government and the RBZ. The signing of such an agreement wouldbe a condition of Credit Effectiveness. The Apex would be responsible for: (i) intermediation ofSME and Export Finance funds acting as an agent on behalf of the Government, including thefacilitation of subproject commitments, subproject disbursements, and collection of repayments

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from PFIs; (ii) collecting and reviewing summary loan documents provided by PFIs; (iii)overseeing the coordination of functions between the finance funds and guarantee facilities forSMEs and exporters respectively; (iv) facilitating the transmission of eligibility evaluations frominterested financial intermediaries' auditors and the Steering Team; and (v) providing quarterlysummary statistical progress reports to the Steering Team and IDA. The functions the RBZ wouldperform in administering the export and SME credit guarantee facilities would be to verify that theexporter (via the PFI) has the required documentation, issue a guarantee certificate when approved,and facilitate PFI account reconciliation in the event of default. All finance and guarantee functionscarried out by the Apex and CGA would be done on the account of the Government of Zimbabweand not the RBZ. The Apex would receive an annual fee of 0.5% on the average balance of sub-loans it intermediates in order to cover the administrative costs associated with the aboveresponsibilities. The establishment by the RBZ of the Apex Unit, satisfactory to IDA and thefurnishing to IDA of satisfactory operating procedures would be a condition of CreditEffectiveness. Compliance with the procedures and terms and conditions set out in the ProjectAgreement would be a condition of disbursement of sub-loan funds.

4.35 Eligibility criteria for access of financial intermediaries to the Apex facility (seeAnnex B). The aim of such eligibility criteria is to assure that: (i) retail institutions with accessto the facility are solvent and well-managed so as to assure their own sustainability; and (ii) suchinstitutions have the outreach to serve the SME and exporter target groups. The eligibilitycriteria will use a stepladder approach, whereby select institutions will have limited eligibilityand then, depending upon their financial position and ability to lend, could increase theirexposure thereafter. The certification of at least one financial intermediary to participate in theProject and the entering into a Participating Agreement with that financial intermediary would bea condition of Credit Effectiveness.

4.36 The Institutional Development (ID) component would be administered by theAdministrative Secretariat as indicted in para. 4.32 above.

4.37 Procurement. Procurement of goods and works under the project would becarried out in accordance with the Guidelines, Procurement under IBRD Loans and IDA Creditsof January 1995, as summarized in Annex G. Procurement under sub-loans estimated to costUS$60.0 million in aggregate would be in accordance with established local commercialpractices consistent with Section 3.12 of the Guidelines. PFIs will have to satisfy themselvesthat goods and services are for investments approved by them and are reasonably priced, byensuring that sub-borrowers obtain the best prices by purchasing at the most advantageoussource. PFIs would be required to maintain records and documentation of procurement underindividual sub-loans for review by IDA during supervision.

4.38 As indicated in Annex A, under the Business Services and InstitutionalDevelopment components, all goods and services would be procured in accordance withprocedures acceptable to IDA. Procurement of goods (computers and equipment) under thesecomponents would be made according to local shopping procedures, based on three quotations,for any single contract totaling US$30,000 or less, according to Bank Procurement Guidelines ofJanuary, 1995. Goods contracts costing more than US$30,000, but less than US$100,000, wouldbe procured in accordance with National Competitive Bidding procedures (NCB). Goods

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contracts in excess of US$ 100,000 would be procured in accordance with InternationalCompetitive Bidding Procedures. The aggregate limit of the procurement of goods under the

Table 4: Procurement(US$ Million)

NCB Other NIF Project CostFinance Component

SME and Export Credit Finance 60.0 18.1 78.1Facilities (60.0) (60.0)

Guarantee Facilities 10.0 10.0

Business Services/lnstitutional Development ComponentsPersonal Computers and Office 0.1 0. l 0.2Equipment (0. 1) (0.1) (0.2)

Consultants' Services 8.8 6.9 15.7(8.8) (6.3)

Training 1.0 1.0 2.0(1.0) (1.0)

Total 0.1 69.9 36.0 106.0(0. 1) (69.9) (70.0)

NIF - Not IDA-financed. Amounts in parenthesis are the amounts IDA financed.

combined Local Shopping and National Competitive Bidding procedures would be US$200,000.Selection and contracting of consultants would be in accordance with the Guidelines, Use ofConsultants by World Bank and by World Bank as Executing Agency, August 1981. Standardprocurement/consultancy recruitment timetables and documents should also be used. Prior IDAreview would be required for consulting and other services for: (a) all contracts awarded on thebasis of competitive selection and amendments to contracts with individuals with a final value ofUS$50,000 or more and US$100,000 or more with firms; (b) all contracts awarded on the basisof sole source; and (c) terms of reference for all contracts.

4.39 Disbursement. Disbursement categories and projected disbursements areindicated in Tables 5 and 6 below. IDA will finance 100% of the IDA-allocated portion (US$70million equivalent) as indicated in Annex H. Disbursement and withdrawal procedures aredetailed in the World Bank Disbursement Handbook (1992 edition). All disbursements aresubject to the conditions of the Development Credit Agreement and the procedures defined in theDisbursement Letter. All applications to withdraw proceeds from the Credit account will befully documented, except for: (i) expenditures of contracts with an estimated value ofUS$100,000 or less for goods, consulting firms and training; (ii) US$50,000 or less forindividual consultants; and (iii) all of the expenditures under the finance component which maybe claimed on the basis of certified statements of expenditure (SOE). Documentation supportingexpenditures claimed against SOE's would be retained by the Administrative Secretariat and theApex Unit, and will be available for review as requested by IDA supervision missions andproject auditors. To facilitate disbursements of eligible expenditures for goods and services, theGovernment would open two Special Accounts (SA) in a commercial bank to cover local andforeign currencies of IDA's share of eligible expenditures for the Finance, Business Services andInstitutional Development components. The authorized allocation of Special Account A for theFinance component would be US$4.0 million, covering an estimated four months of eligible

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expenditures financed by IDA. The authorized allocation of Special Account B for the BusinessServices and Institutional Development components would be US$500,000. Upon crediteffectiveness, 50% of the authorized allocations, amounting to US$2.0 million and US$250,000respectively, would be deposited to the Special Accounts. The remaining balance will be madeavailable once total commitments under Special Account A have reached or exceeded SDR 8.0million and under-Special Account B, SDR 1.0 million. Replenishment applications should besubmitted regularly, preferably monthly, after monthly bank statements are received andreconciled by the implementing agencies, along with appropriate supporting documents for localand foreign expenditures as required. To the extent possible, all of IDA's share of eligibleexpenditures should be paid through the Special Accounts.

Table 5: Disbursements(US$ Millions)

Category Amount % of Total % of Expenditures Financed(1) Finance Component 60.0 85.7 100% of amounts disbursed

Business Services/Institutional Development Components(2) Matching Grants 100% of amounts disbursed

PFIs 0.4 0.6Other Items 4.1 5.9

(3) Goods 0.1 0.1 100% of foreign expenditures, I 00% oflocal expenditures (ex-factory cost) and90% of local expenditures for otheritems procured locally

(4) Training and Consultant Services 100% of amounts disbursedEPZ Authority 0.1 0.1SEDCO 0.1 0.1Other Items 3.4 4.9

(5) Unallocated 1.8 2.6

Total 70.0 100.0

Table 6: Estimated IDA Disbursements14

(US$ million)IDA Fiscal Year 1997 1998 1999 2000 2001 2002 2003Annual 4.2 5.6 11.2 14.0 14.0 11.2 9.8

Cumulative 4.2 9.8 21.0 35.0 49.0 60.2 70.0

4.40 Audit and Reporting Requirements. All project accounts, the Special AccountsStatement of Expenditures and financial accounts of PFIs would be audited at the end of eachfiscal year by independent auditors acceptable to IDA. Copies of such audit reports would beforwarded to IDA within six months of the end of each reporting period. MOIC, the SBAIAdministrator, the MM Management Contractor, the ZMGS Management Team, the Apex andthe CGA would all be responsible for maintaining adequate records and a project informationsystem that would provide quarterly information on disbursements satisfactory to IDA. TheApex would maintain full records on the Finance component and be responsible for coordinatingthe audits of PFIs under its jurisdiction. MOIC would also be responsible for coordinating thepreparation of bi-annual progress reports prepared by each of the implementing agencies,

14 Based on Standard Disbursement Profiles for Zimbabwe.

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indicating the progress in meeting the objectives of each component, according to the monitoringindicators in the Project Implementation Plan.

4.41 Project Supervision. This project will require significant IDA supervisionresources in order to support its multiple elements. Biannual supervision missions will workclosely with the Steering Team, Administrative Secretariat, the SBAI Administrator, the MMManagement Contractor, the ZMGS Management Team, the Apex and the CGA to jointlysupervise the project. Project supervision will be particularly extensive during the start-up phasewhere fourteen staff weeks have been programmed for supervision during the last two months ofFY96 and 39 staff weeks in FY97. This amount is reduced in FY98 to 31 staff weeks and thenincreases again to 38 staff weeks during FY99 when a mid-term review would be conducted.Supervision will draw upon the support of an Local Specialist who will from the ResidentMission on a part-time basis for a three-year period. Annex I provides a supervision plan.

4.42 Reporting Requirements. Quarterly progress reports under the project would besent to the Steering Team and to IDA from the Administrative Secretariat (InstitutionalDevelopment Component), RBZ (Credit Component), and the SBAI Administrator, ZMGSManagement Team and the MM Management Contractor (Business Services Component). Inaddition, the Steering Team will be expected, with the assistance of the AdministrativeSecretariat, to communicate periodically with IDA.

4.43 Mid-Term Review. A Mid-Term review is expected to be completed by June 30,1999. This review will be carried out jointly with counterpart representatives indicated in para.4.42 above. Recipients (private firms) would also be surveyed in the review to assess the successof the project from a user's perspective. The purpose of the review would be to assess: (i)whether the project is being implemented satisfactorily; (ii) how its design and functions can beimproved; (iii) whether and how it is achieving its objectives as discerned through monitorableindicators; and (iv) what factors beyond the scope of the project have affected it in achieving itsobjectives. Prior to the review, the Administrative Secretariat will be expected to prepare adetailed report, covering areas to be greed upon with IDA, including an evaluation of progress inproject implementation. Reference documents will include Annex I, operating guidelines,procedure manuals, audits and other Credit and Project documents.

4.44 Project Completion. This project is expected to be completed by June 30, 2002and its closing date is December 31, 2002. An Implementation Completion Report (ICR), thecontent and format of which would be agreed-upon with IDA, would be prepared within sixmonths after the closing date. IDA would prepare this ICR in close collaboration with theSteering Team, the Administrative Secretariat, and the managers of each of the project units.

G. Environment

4.45 Environmental Aspects. This project is not expected to present any specificenvironmental risks, and thus it has been given an environmental rating of "B". AnEnvironmental Impact Assessment Policy was developed and began to be implemented by theMinistry of Environment and Tourism in 1994, although the means of implementation has beenweak. A National Environmental Action Plan (NEAP) is currently under development. Sub-projects financed under the project would be required to fully meet existing health, safety and

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environmental guidelines in effect at a national or a local level, and sub-borrowers would bearthe responsibility for failure to comply with such guidelines. Parallel to this, during projectimplementation, the Government will examine how to develop an environmental reviewprocedure for sub-projects, consistent with the environmental review procedures applied to non-IDA financed sub-projects. Neither an indigenous people's plan nor resettlement plan has beendeveloped.

H. Project Benefits and Risks

4.46 Project Benefits. This project would support a process to increase growth andemployment through increases in output led by exports, and broaden the scope of enterprisedevelopment through expansion of small- and medium-sized indigenous businesses. In the wakeof significant policy reforms, the project aims to catalyze a process of accelerated growth by aseries of micro level interventions. Both aim to contribute to poverty alleviation in the medium-term. This estimate is based on a methodology whereby the project is expected to accelerate anincrease in output by three years.

4.47 Many of the project benefits are difficult to measure in advance because theproject supports an acceleration of a process rather than a concrete outcome. Nevertheless, thebest estimate is that the project would generate a Net Present Value (NPV) of US$52 million at adiscount rate of 12% (see Annex J for details). First, the finance component is expected toaccelerate an increase in output by SMEs and emerging exporters by reducing the fundingconstraint and the level of risk through the guarantee mechanism. This is expected to increaseoutput based on the level of working capital financing each year, reduced by the level ofresources expected to be diverted from other economic activities to achieve this result. Second,matching grants for emerging exporters is expected, based on other empirical evaluations, toyield an increase in output of these firms of at least ten times the amount of the combinedmatching grant and the contribution of the enterprise, reduced by the level of resources expectedto be diverted from other economic activities to achieve this result. Third, albeit more indirectly,matching grants for business associations is expected to increase output in accordance both withthe increase in membership of these associations, but, more importantly, in accordance with theincreased level of provision of service provided by these associations. Finally, measurement ofthe economic benefits of institutional development support is the most difficult, because supportonly yields provision of services to firms indirectly. Nonetheless, for the purpose of consistency,it was assumed that this support would increase output, staggered 2 years after disbursements,equal to the level of support.

4.48 Project Risks. The project's principal risks are: (i) the Government may fail tocontain the fiscal deficit, such that the impact of greater credit access and informationmechanisms is overshadowed and handicapped by macroeconomic instability and interest rateswhich stifle emerging enterprises; (ii) certain components or subcomponents may prove more orless difficult to administer, and thus turn out more or less successful in reaching their objectives;(iii) the Government may not fully support the institution-building measures supported by thecredit because of insufficient commitment as shown in staffing or other resources, especiallycounterpart funds; (iv) alternative below market funding could be provided by the Governmentor other sources and undermine the Finance component; and (v) measures may prove slow to betaken to further eliminate remaining anti-export biases inherent in the tariff and tax structure, so

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that exporters remain non-competitive in spite of measures supported under this project. Theseactions could lead to weak results and threaten the sustainability of impact.

4.49 The most import measures mitigating against these risks are that the project hasbeen designed in a modular form such that component parts have been designed with someparameters for evolution during implementation, and the redesign or the elimination of onesubcomponent need not affect the functioning of others. It is expected that some components orsubcomponents may not work out entirely as envisioned, but that such limitations need notmaterially deter from the overall success of the project. Other features mitigating and adjustingfor these risks are: (i) the ongoing dialogue on the macroeconomic program among the Bank,IMF and Government; (ii) the Finance Component will prove self-regulating to the extent thatcommitments would slow if real interest rates remain high; (iii) in order to reduce the possibilityof alternative funding provided by other sources undercutting the Finance Component,considerable discussions with multiple stakeholders has attempted to explain the poor results ofsuch subsidized interventions; (iv) a large number of stakeholders have been consulted and areworking as part of the project to support the measures which would make it a success; and (v)Government has committed itself to the objectives of emerging enterprise development asevidenced by its Industrial Policy Statement.

5. AGREEMENTS REACHED AND RECOMMENDATION

5.1 Actions Agreed. The following were the agreements and assurances receivedduring Negotiations: (i) a Subsidiary Financing Agreement satisfactory to IDA will be enteredinto by the Government of Zimbabwe and the RBZ (para. 4.34); (ii) the project will be carriedout in accordance with a Project Implementation Plan, including action plans for all components(para. 4.30); (iii) standard procurement/consultancy recruitment timetables and documents willbe utilized during project implementation (para. 4.38); (iv) financial audits will be utilized duringproject implementation (para. 4.40); and (v) a Mid-Term review will be undertaken within 30months of Credit Effectiveness, but no later than June 30, 1999, with Government and privatesector participation and analytical inputs, and actions agreed during the review would beimplemented expeditiously, in consultation with IDA (para. 4.43).

5.2 The following actions are the main conditions of Credit Effectiveness: (i) theestablishment of an Administrative Secretariat satisfactory to IDA (para. 4.32); (ii) theappointment of an Administrator satisfactory to IDA for the Subsector Business AssociationsInitiative (SBAI) under the Project (paras. 4.6, 4.33); (iii) the establishment of a ManagementTeam satisfactory to IDA for the administration of the ZimTrade Matching Grant Scheme(ZMGS) under the Project (paras. 4.7, 4.33); (iv) the establishment by the RBZ of an Apex Unitsatisfactory to IDA and the furnishing to IDA of satisfactory operating procedures for the ApexUnit (paras. 4.34, 4.9-4.18); (v) the furnishing to IDA of a project implementation plansatisfactory to IDA (para. 4.30); (vi) the furnishing to IDA of satisfactory operational guidelinesfor SBAI, ZMGS and the Matchmaking Facility (para. 4.33); (vii) the certification of at least onefinancial intermediary to participate in the Project and entering into a Participating Agreementwith that financial intermediary (para. 4.35); (viii) the signing of the Subsidiary FinancingAgreement (para. 4.34); and (ix) the furnishing to IDA of satisfactory guidelines for theevaluation of financial intermediaries to be approved to participate in the Project (para. 4.35).

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5.3 The following are conditions of Disbursement: (i) Sub-loans - compliance withthe procedures and terms and conditions set out in the Project Agreement (para. 4.34); (ii)Matching Grants for financial intermediaries - furnishing to IDA of guidelines satisfactory toIDA for the administration of the Matching Grants (para. 4.20); (iii) the EPZ Authority -establishment of an EPZ Authority satisfactory to IDA (para. 4.25); and (iv) SEDCO - thefurnishing to IDA of a plan satisfactory to IDA for the strengthening of SEDCO's financialadministration and strategic focus (para. 4.21).

5.4 Recommendation. With the above agreements, the project will be suitable for acredit of SDR 47.5 million (US$70 million equivalent) to the Government of Zimbabwe, onstandard IDA terms with 40 years maturity, 10 years grace.

- 35 - Annex ABusiness Services Component


Business Services Component

I. Intouction

1. The objective of this Project is to support a stronger supply response by private sectorenterprises to policy reforms undertaken, including: (i) increasing the growth of export-based output; and(ii) broadening participation in economic activity, in particular by indigenous firms. The BusinessServices Component aims to "kickstart" these changes in Zimbabwe's private sector -- an increasedoutward-orientation, enhanced international linkages, and a heightened awareness of the mutual benefitsof strengthened domestic networks which encompass large and small, established and emergingenterprises. To achieve this, it is necessary in implementing this Component that:

* the focal points for project implementation enjoy the confidence and support of the full rangeof participants in Zimbabwe's private sector; and that

* the organizational arrangements for implementation be temporary -- signaling that the goal isnot to create a permanent new public bureaucracy to "support" the private sector, but ratherto induce sustained changes in private actions and organizations.

2. The Business Services Component comprises three elements -- the Subsector BusinessAssociations Initiative (SBAI), the ZimTrade Matching Grant Scheme (ZMGS), and the Foreign-Domestic Matchmaking (MM) Initiative. As discussed below, each of these subcomponents would havea manager or managers and would operate under the broad oversight of the EDP Steering Team. IDAsupport for the Business Services Component would amount to US$7.4 million of a total cost of US$14.3million as indicated in Table Al below.

II. Subsector Business Associations Initiative (SBAI)

3. Background. International experience suggests that strong, service-oriented subsectorassociations can play an important role in fostering productivity and competitiveness. As organizationsaccountable to their members, they have a powerful incentive to ensure that the services they offer areindeed those desired by their members. As collective organizations, they can provide services whichfirms -- especially smaller firms -- might not be in a position to procure individually.I Further, they canprovide a valuable forum for networking among firms. The kinds of activities which a well-functioningassociation active in a vibrant subsector might undertake could include:

+ preparation and provision of programs to improve the productivity and competitiveness ofmembers;

+ provision of information on trends in the subsector domestically and globally, and otherdomestic issues of particular relevance to subsector members; and

+ a forum to facilitate networking and information-sharing among members.

Conceptually, there are two complementary rationales here. First, subsector associations as collective associations are wellpositioned to provide "intra-industry public goods (services)". Second, they can provide services for which the fixed costs/scale economiespreclude provision by all but the largest firms.

- 36 - AnnexABusiness Services Component

Table Al: Business Services Component Budget - Projected Cost and Budget(US$ Thousands)

Co- PrivateIDA Fin Govt. Firms Total

1. Subsector Business Associations Initiative 1.400 1,215 500 3115SBAI Administrator 1,215 1,215Specialist Management Contracting Services 150 150

SBAI Matching Grants 1,250 500 1,750Initial Support of Business Plan Preparation 150 150Matching Grant for Technical and Marketing Programs 900 300 1,200Matching Grants for Subsector Association Staff Person 200 200 400

2. Zimtrade Matching Grant 3.765 200 1/ 288 3,000 7.253Local Staffing 270 2/ 270Rent 18 2/ 18Technical Adviser 200 1/ 200Initial Outreach Expenses 15 15Training for ZimTrade staffers 150 150Specialist Management Contracting Services 600 600Matching Grants 3,000 3,000 6,000

3. Matchmaker Initiative 1.750 100 1/ 1,200 305MM Management Contractor 250 250Technical Adviser 100 11 100

Matchmaker Grants 1,500 1,200 2,700Initial Travel 300 300Collaboration Incentive 1,200 1,200 2,400

4. Contingency - Demand-Responsive Matching Grants 500 400 900

GRAND TOTAL 7.415 1.515 288 5.1 14.318

1/ The allocation of funds for this individual is based on the projected work program. Such an individual will also haveresponsibilities under the Administrative Secretariat as indicated in Annex E.

2/ The amount of funding indicated would be the contribution by ZimTrade to the staffing and operating expenses of thefacility. They do not represent an additional fiscal responsibility by the Government.

4. Objective. The objective of the SBAI program is to help "kickstart" the emergence ofZimbabwean associations capable of providing services to their members and acting as a forum fornetworking among firms. These associations comprise groupings of firms engaged in similar activities,

typically manufacturing or services. In those cases, where for reasons of Zimbabwe's history, there

exists more than one association for a particular activity, the component will endeavor to fostercollaboration among these associations.

5. Description. The SBAI Initiative has three parts:

* The Initiative would provide development support to strengthen the capability of subsector

associations by providing financial support for the preparation of an initial business plan bythe association;

+ The Initiative would provide additional development support via a 50:50 matching grant

program, providing support for 12 months to cover the costs of a subsector association staff

person specialized in the concerns of the relevant subsector. This person could be full- orpart-time, and could be shared with one other subsector association; and

* The Initiative would support subsector associations in the preparation of technical and

marketing programs (program matching grants) which aimed to improve the


competitiveness and productivity of firms. The component would support the developmentof such programs through the provision of matching funds, on a 25:75 cost-sharing basis (25percent paid by participating firms, and 75 percent covered by the project) for eligibleprograms. The intent is that, once the programs are designed, their delivery is contracted outto private, domestic or foreign providers. On an as-needed basis, specialist assistance will bemade available to support associations in their preparation of an initial round of programs.

6. Both the direct development support and program matching grants are intended ascatalysts -- demonstrations to firms in the relevant subsectors, and to the private sector more broadly, ofthe benefits of strong, productivity-oriented subsector associations. The expectation is that, having onceexperienced the benefits to be derived from such associations, firms will then be willing to continueusing them, unsupported by SBAI grants. Consequently, the scheme is designed to be temporary, tooperate only for a single, three-year period.

7. The SBAI Grant Support is estimated at US$1.25 million equivalent, which is derivedfrom estimates of the number of participants and average size for each type of support: This support isallocated as follows:

v Development Support. It is especially difficult to predict the demand for developmentsupport -- both the number of associations that might be interested, and the balance betweenfull-time and part-time demand per association. An amount of US$10,000 would beallocated per association for the preparation of a business plan, with 15 subsectorassociations estimated to participate in this subcomponent, making for a total estimated costof US$150,000. Development support for a subsector association staffperson is estimated torequire over a three-year period, the equivalent of six full-time specialists for 12 months, atan approximate cost of US$200,000.

* Program Matching Grants. For program matching grant support, a grant ceiling ofUS$100,000 over the period would be set per subsector/association. A reasonable target isthat over a three-year period, 75:25 matching grant support for programs will be provided to30 existing subsector associations, at an average cost of US$30,000 each. Total IDA supportwould thus amount to US$900,000.

8. Oversight and Management. The SBAI will be implemented by an SBAIAdministrator, supported as needed by specialist management contracting services, and by a TechnicalAdviser to the Project. The SBAI Administrator will have full responsibility for managing the SBAIinitiative. This Administrator will be funded by USAID, and will operate as a member of the USAIDZimbabwe Enterprise Project team. As needed, the Administrator will be supported by a TechnicalAdviser for the Project. To support SBAI management, IDA will make available US$150,000 to contractspecialist management contracting services, to work with subsector associations in the preparation ofrelevant technical and marketing programs. These funds could be disbursed as agreed by the SBAIAdministrator and a Technical Adviser. All uses of these funds should be reported to the Steering Team.

9. Oversight of the SBAI. Oversight of the SBAI will be exercised by the Steering Teamof the Project. In addition, as part of the normal operation of the SBAI, its staff will be responsible forongoing liaison with the full range of business associations in Zimbabwe -- including CZI, ZNCC, IBDCand ZABO. One possibility to which the Steering Team and the SBAI Administrator might give seriousconsideration (but not explicitly required in the project) is having an explicit review of the SBAIprogram every three months with an informal liaison committee (comprising representatives ofZimbabwe's business association community) established for that purpose.


10. Approval Procedures. Matching grants for program support of under US$30,000would be able to be approved jointly by the SBAI Administrator and a Technical Adviser. Grants ofprogram support in excess of that amount will require the approval of the Steering Team or its designatedrepresentatives. Once any association has received a cumulative total of support amounting toUS$35,000 (including support for the preparation of a business plan and development support for staff),the program of support and the association's business plan must be reviewed by the Steering Team or itsdesignated representative prior to any further provision of support. A second review will be requiredonce the cumulative total amount of support reaches US$70,000.

11. Eligibility of Associations and Programs. One crucial criterion for eligibility for thesefunds is that participating subsector associations be well-placed to mount focused programs of technicaland marketing support for their members (see below). This criterion suggests that a broad range ofbusiness groupings -- though not the full universe -- would be eligible. Subsector associations organizedaround members engaged in activities such as manufacturing, agro-processing, tourism/hostelry wouldbe well-positioned to mount such focused programs -- and hence would straightforwardly qualify toaccess start-up support. Local chambers of commerce, whose members are drawn from a wide variety ofactivities, would not be eligible.

12. Requirements of participating associations are:

* that the putative association have a critical mass of members -- 10;* that the governing authority of the association be democratically elected by the membership;* that members pay dues at an agreed rate (how this rate will change once the initial start-up

support for overhead costs has been drawn down should be specified from the start); and* that the association formally commit itself to work cooperatively on the provision of

business services and information with any other associations that might operate (or emerge)in a similar sphere of business activity.

13. The last criterion is critical to the nurturance of a positive, business environment inwhich information flows freely. Consequently, it would be a precondition for any business organizationto gain access to project resources (including matching grants for programs) -- including nationalassociations, and local, multi-sectoral chambers of business.

14. Eligibility for Program Matching Grant Funds. For an association to be eligible formatching grant funds for programs which it might mount, it will need to meet all the eligibility criteriadelineated above. It will also need to develop a strategic business plan which outlines how it plans toevolve in the subsequent few years. As described above, the SBAI initiative will provide up toUS$10,000 to support the costs of developing this plan. Plans prepared independently should bediscussed with the SBAI Administrator prior to the receipt of program support. The SBAI Administratorwill require the approval of the Steering Team not to provide any support should the plan be judgedunsatisfactory, and fail to be modified. In addition, associations that seek program matching grant fundswill need to agree to the following:

* to permit non-members to participate in programs funded with matching grants;* to actively market these programs to non-members; and* (if there are any other subsector associations with members drawn from similar subsector

activities) to offer to provide the programs in co-operation with the parallel association or, ifthat association is unwilling to co-operate, to allow the association's members to participate.

Additionally, all applications for program support will need to be accompanied by a statement of how theprogram supported by the SBAI will benefit smaller-scale firms.


15. The above does not preclude associations from having programs for members only; thesecould not, however, be supported with matching grant funds. Note also that the detailed eligibilitycriteria outlined above focus on the organization of subsector associations, and their relations with others-- not the detailed content of the programs to be offered. In the initial stage of the component, it isexpected that subsector associations will develop programs jointly with the management team. But oncethe association develops the capability to design programs in-house, so long as the program is focused onspecialized, subsector initiatives to enhance productivity (see below), no effort should be made tosecond-guess the association's programs with independent technical evaluations.

16. Types of Eligible Programs. The general principle is that eligible programs are thosethat aid the efforts of firms to improve productivity and competitiveness. Eligible programs should notbe general purpose in character (i.e. they should not focus on general management and financing issuesthat are generic to firms across multiple activities). Rather, they should be tailored to the specificrequirements of firms in particular activities.

17. As noted above, applications for SBAI program funds will need to include a statementwhich details how the program will benefit smaller-scale firms. Programs which benefit only large firmswill not be eligible for SBAI support. In principle, all firms in the relevant activity could participate insupported programs. In practice, large firms are likely to be less dependent on collective mechanismsthan their smaller counterparts to gain access to productivity-enhancing resources. (The matching grantcomponent for individual firms, possibly operating through ZimTrade and described elsewhere, isintended to help kickstart such efforts.) Further, the Project is targeted for a tier of firms larger thaninformal, microenterprises. It follows that programs would usefully be designed to reach the "middle-tier" of small-to-medium terms.

18. One objective of subsector associations is as a mechanism to elicit demand from small-to-medium firms as to what kinds of services they find useful. So, subject to the general principlesdelineated above, it would be contrary to that objective for this component to prescribe what programsare eligible.

19. In the initial phase of development, subsector associations may not yet be in a position toelicit demand. So nascent associations might usefully work with the management team on thedevelopment of an initial menu of offerings. (The requirement that participating firms cover 25 percentof costs would provide a useful "reality check" as to what is demanded, even at the initial stage.)Broadly speaking, "specialized, tailored programs" aim to enhance a Technical and marketingcapabilities of firms:

* Technical programs aim to enhance the productivity with which firms pursue theirspecialized business activities. Such programs likely include initiatives to: (i) improveorganization of the workplace; (ii) upgrade the quality of equipment; (iii) strengthen designcapability; plus (iv) other initiatives to enhance product quality. These might also includetargeted, short-duration initiatives to enhance the skills of specific categories of workers.

* Marketing programs aim to enhance the ability of firms to pursue initiatives to penetrate newdomestic or export markets. The SBAI will support programs to promote the disseminationof subsector-specific, but not firm-specific, information. Firm-specific information will bedisseminated through the ZimTrade Matching Grant Scheme. Among the range ofdomestically-oriented programs are those that seek to promote subcontracting between largeand small firms. It is anticipated that such programs could be funded through the linkageprograms developed by USAID and NORAD. Programs focusing on export markets could


initially fruitfully be developed in collaboration with ZimTrade -- although it is importantthat from the first subsector associations have the autonomy to draw on export marketingservices from sources other than ZimTrade.

20. Based on experience elsewhere, programs in areas such as the above would often bemounted in the form of short "courses" (ranging from a two-hour presentation to a two day program).An alternative model might be for the subsector association to invite a consultant for a visit of, say, twoweeks duration, during which time the consultant might provide individually-tailored advice to a numberof interested firns.

21. The SBAI Administrator. The SBAI Administrator will be located in the offices of theUSAID Zimbabwe Enterprise Development (ZED) Project, and will be fully financed by USAID (as itscofinancing contribution to this project). The tasks of the Administrator will include the following:

* promoting the SBAI -- and the advantages of networks of co-operation among firms -- tosubsector associations and business groupings more broadly;

* supporting subsector associations in the preparation of business plans which outline thestrategic direction of the association (this activity may be conducted jointly with privateconsultants recruited with funds made available through the SBAI for that purpose);

* working together with subsector associations, and other external advisers as necessary, todevelop technical and marketing programs for the subsector to be supported by SBAImatching grants, including identification of private providers for the programs;

* ensuring that programs supported by the SBAI are responsive to the needs of smaller andnewer firms, as well as established, large companies;

* approving, jointly with a Technical Adviser, all matching grants of program support tosubsector associations for amounts below US$30,000, and reporting on these approvals tothe EDP Steering Team;

i preparing (jointly with a Technical Adviser) recommendations to the Steering Team onwhether to support applications for individual SBAI program grants in excess of US$30,000;

* when subsector associations reach the cumulative US$35,000 and US$70,000 benchmarks ofSBAI support, preparing (jointly with the subsector association) a review of progress for theSteering Team, including a recommendation on whether support for that association shouldcontinue; and

* approving, jointly with a Technical Adviser, matching grant support for the appointment of afull- or part-time staffperson by an individual subsector association.

III. ZimTrade Matching Grant Scheme

A. Objectives and Functions

22. Background. The Economic and Structural Adjustment Program (ESAP) has radicallyaltered the "rules of the game" for Zimbabwe's private sector. Prior to ESAP, Zimbabwe's private sectoroperated on the presumption of stable domestic markets, and with very limited innovation. In aliberalized environment, the private sector will need to become more dynamic and more outward-oriented -- looking for opportunities in international markets, scanning globally for technological andother innovations which it can apply at home, and incorporating high quality imported inputs into itsproduction process.

23. Objectives. The ZimTrade Matching Grant Scheme (ZMGS) is intended to support theprocess of restructuring in two ways:

-41 - Annex ABusiness Services Component

* ZMGS will stimulate the use of foreign and domestic support services and travel by privatefirms through the provision of 50:50 cost-sharing grants. Experience elsewhere indicatesthat these activities can contribute strongly to speeding firm-level response. Supportservices quickly introduce into firms the skills, know-how, information and contacts that willbe needed, in order either to defend against import competition, or to expand exports. Travelby key personnel helps to build realism about how best the firm can find its niche in aninternational marketplace. It establishes contacts both with export outlets and with sourcesof imported inputs that could help build competitiveness.

* Zimbabwean firms however, appear to seriously undervalue what can be gained during firm-level adjustment from the use of support services and travel. Because they undervalue thebenefits they expect from services and travel abroad, these firms perceive both as"expensive," and therefore of low interest. As a way of encouraging firms to explore whatmight be the benefits of these external sources of information and know-how, the ZMGS willprovide, on the basis of a plan prepared by the firm, 50-50 cost-sharing grants towards thecosts of buying in outside support services and travel. Based on international experience, itis expected that about 80 percent of grant support will go towards technical and productivityadjustments within the factory, and about 20 percent will support efforts at marketingdirectly.

* ZMGS will support the process of restructuring in a "hands-on" way with firms to preparefirm-level plans aimed at enhancing competitiveness -- involving support services and travel,and to be supported by the ZMGS. To be sure, Zimbabwean firms are far better placed thanoutsiders to know what are the opportunities and constraints in the domestic markets inwhich they operate; and they know better than outsiders how to respond to the specificchallenges of efficient production posed by the Zimbabwean setting. However, long years ofisolation and limited competition are likely to have left substantial knowledge gaps as toglobal trends in their specific markets, in technological innovation, and in innovations inwork organization and planning. These gaps make it difficult for firms to alone prepareplans for effectively drawing on external sources of information and know-how.

24. The Matching Grant scheme would seek to add to, strengthen, and build upon afoundation of the current Export Promotion for Support Services (EPSS), currently offered by ZimTrade.The Scheme represents a reformulation of the existing scheme, as well as an upgrading and extension ofthe program.

25. The ZMGS Management Team will have a full-time Zimbabwean staff, plus access tospecialist private management contracting resources, with the global knowledge and private sectorexperience that can help fill the knowledge gaps in the private sector. It will proactively promote thescheme to owners and senior managers of private firms, concentrating on those assessed as having thehighest potential for building international competitiveness. The objective of this promotional effort willbe to encourage firms to make use of the scheme, to obtain agreement on a formal plan which could besupported by the scheme, and on the initial set of actions by the firm for implementing that plan.

26. Both the matching grant cost-sharing and the proactive, hands-on initiatives are intendedas catalysts -- demonstrations to participating firms, and to the private sector more broadly, of thebenefits of actively seeking out external sources of information and know-how. The expectation is that,having once experienced the benefits to be derived from such activities, firms will then be willing tocontinue using them, unsupported by ZMGS grants. Consequently, the scheme is deliberately designedto be temporary, to operate only for a single, three-year period.

- 42 - A nnex ABusiness Services Component

B. Organization of ZMGS

27. Demand Size of the Matching Grant Fund. Demand for matching grant schemesalong the above lines is difficult to predict accurately in advance, especially since comprehensivestatistics as to the number and size of Zimbabwean firms are not publicly available. As a starting point,ZimTrade has a register of about 1,000 potential exporting firms.' Increasing this number by 50 percentto account for excluded firms and new entrants yields a total of 1,500 firms. International experiencesuggests that if the ZMGS can persuade 10-15 percent of these firms to participate in the scheme, itcould be counted a success. Thus a reasonable goal would be to have 200 participants over the scheme'sthree-year lifespan.

28. Since the benefits to Zimbabwe would be substantial if large firms also made seriousefforts at restructuring, it is not intended to limit participation in the scheme only to small and mediumenterprises. The costs of implementing a restructuring plan by a large firm can be substantial. Toprovide an attractive incentive for large firms to participate, while ensuring that grant funds are notdisproportionately directed towards very few firms, a cap of US$100,000 of grant support will be set perfirm. In the event that a substantial number of large grants are approved early in the program, thisceiling -- and other parameters of the component -- can be reviewed by the Steering Team in associationwith IDA.

29. In practice few, if any, matching grants are likely to reach this US$100,000 ceiling(which would support a US$200,000 program -- with US$100,000 covered by the participating firm).ZimTrade data identifies only 109 firms with 500 or more employees, and only 72 with turnover aboveUS$12.3 million (Zim$100 million). Moreover, as a guideline, a large proportion of applications for theexisting EPSS (on which more below) were for substantially less than the US$10,000 ceiling. Based onthese data and international experience, a reasonable expectation is that the average grant across theestimated 200 participants will be for US$15,000 -- implying a total matching grant fund of US$3million.

30. Structure and Budget of the ZMGS Management Team. Corresponding to the work-load implied by the above data, the ZMGS would have two full-time Zimbabwean staff, both formallyemployees of ZimTrade, including one senior person designated as Team Leader. The two designatedZimTrade staffers (plus other ZimTrade personnel) would be provided with specialized training to enablethem to work effectively as technical and organizational (as well as marketing) consultants to the privatesector -- to the point of being able to work effectively in the design of programs which qualify for ZMGSsupport. Ordinarily, no firm should receive more than 2-3 days of free support to prepare its program.The ZimTrade staffers could be supported by an external management contract firm who would providespecialists to make multiple short-term visits in support of the ZMGS outreach efforts. The managementcontract team should have an extensive track record of working intensively on enhancing thecompetitiveness and productivity of firms, and should have intimate knowledge of the range of businesssupport services available in the international marketplace.

31. IDA resources will support the ZMGS Management Team in the following ways:US$600,000 has been allocated under the Project for the specialist management contracting firm. At thesoonest opportunity, the EDP Steering Team (working together with ZimTrade) should initiate thebidding process to recruit these services for an initial period. US$150,000 has been allocated to support

2 The ZimTrade number is substantially in excess of the 518 manufacturing firms which were registered members of CZI in 1993.Even so, the CZI firms together still accounted for as much as 86 percent of the official 1993 figure for manufacturing employment reported bythe Central Statistical Office.

-43- Ann-ABusiness Services Component

a training initiative to develop the relevant staff skills within ZimTrade. Recurrent costs of the initiative(salaries of the two ZimTrade staffers, plus office overheads) will be met by ZimTrade. The Project hasallocated a further US$15,000 to cover "extraordinary" expenses associated with the initial year of theprogram's launch (e.g. outreach expenses for program launch; office equipment). Thus, total IDAsupport for the ZMGS, including the Matching Grant Fund, is estimated to be US$3,765,000.

32. Oversight of ZMGS. Although ZMGS will operate as part of ZimTrade, formallyresponsibility for oversight will vest with the Steering Team of the EDP or its designated representative.As described earlier, the approach to determining which programs qualify for support will be one of"quality management" through providing inputs up-front, rather than "quality control" through technicalevaluation of plans. Two options for "quality management" will be available to firms. In the firstoption, firms will have the right to submit programs prepared independently; however, to ensure that theproposed initiatives are presented in good faith, and are broadly consistent with the market positioning ofthe firm, no plan will be supported without a visit to the firm by a ZMGS staffperson. In the secondoption, program will he prepared by the firm with the active support of the ZMGS management team(supplemented :- specialist management contracting services). In keeping with the spirit of "qualitymanagement" r atiler than "quality control, the role of the Steering Team should be largely an arms-lengthone, with a primary focus on the overall parameters of the program. Hence, only proposals whichinvolve grants in excess of US$50,000 would be brought to the Steering Team for approval.

33. Approvals of proposals under US$50,000 would be the internal responsibility of theZMGS management team, and hence ZimTrade. All such proposals would require the joint approval ofthe ZMGS team leader plus a Technical Adviser, with proposals in excess of US$30,000 requiring, inaddition, the approval of ZimTrade's chief executive or his or her designated representative.

34. All approvals by the ZMGS Management Team would be considered by the nextmeeting of the Steering Team ex-post, in order for the committee to give guidance on future approvalspolicy, where needed. The Steering Team could only revoke an approval already granted by the ZMGSmanagement team in the event that fraudulent information was determined to have been provided withinan application.

35. Relation To Other ZimTrade Activities. It is unusual that matching grant schemes arelocated within organizations which also directly provide services to firms similar to those supported bythe scheme. For this reason, it is important to be explicit about the relationship between ZimTrade'sactivities, and the support to be provided by the ZMGS.

36. A serious potential conflict of interest could emerge if the ZMGS were to pay ZimTradefor services which it provided to firms; in such a situation, there could be a strong incentive forZimTrade staff on the ZMGS to steer firms towards ZimTrade's services. As a way of avoiding this risk,it will be stipulated (with the concurrence of ZimTrade's senior management) that no recipient canobtain a grant for the usage of any services provided by ZimTrade3.

37. More generally, an important part of ZimTrade's role is a catalytic one -- ZimTrade'sability to do its job would be enhanced by a "thickening" of the marketplace for private consultingservices, and by an enhancement in the capabilities of specialized subsector business associations. In theview of the management of ZimTrade, the ZMGS will thus be an important addition to the range of toolsat their disposal.

3 Note that the precedent for this stipulation already is present in a similar stipulation in the present EU funded matching grantscheme.

- 44 - 4nnexABusiness Services Component

38. There are, however, two ZimTrade programs whose relation to the ZMGS needs explicitmention. First, as noted, there already exists a European Union (EU)-funded matching grant program --the Export Promotion Support Scheme. The principles under which the scheme operates -- a low ceilingof grant support, a passive approach to the receipt of proposals, no formal requirement of factory visits toapplicants, and a technical evaluation of each proposal by a large committee -- are radically at variancewith those presented here, and the EU and ZimTrade have already taken the initiative in exploring howthey might be adapted. It would be desirable to integrate the two programs, as it is difficult to see howboth schemes could operate simultaneously.

39. Second, ZimTrade offers a New Exporters Development Program, which provides freetraining and "hand-holding" to new, potential exporters to the point that they enter export markets. Inprinciple, such a scheme conflicts with the "develop a plan and then contract for services" approach ofthe ZMGS. In practice, the Program is a signal of ZimTrade's commitment that its services are inclusive-- geared to emerging, predominantly indigenous, enterprises as well as established firms. Thiscommitment is important for the ZMGS as well, and it is to be hoped that, as they graduate, enterprisesin the New Exporters Program will increasingly require services on a scale and sophistication that canmost effectively be contracted from private providers with the support of the ZMGS.

C. Qualifying Criteria for Grant Support

40. Qualifying Firms. The ZMGS would be open to all private firms in all manufacturing,agro-processing and exportable service sectors. The grant scheme would operate essentially on a "first-come, first-served" basis. A matching grant would be given provided: (i) the applicant demonstrates acredible plan for building international competitiveness; (ii) the applicant is willing to make the 50percent contribution to costs; (iii) the scheme contains adequate defenses against abuse; and (iv) theactivity is shown to contribute to the firm's plan. Grant support for expenditures would be on areimbursement basis. That is to say that recipient firms would be expected initially to fund the costs ofsupported activities, later claiming back 50 percent reimbursement.

41. As summarized earlier, members of the ZMGS management team would seek toestablish a close working relationship with each grant-recipient firm and, as requested, to work withthem in the preparation of their plan to be funded 50:50 by the ZMGS. Proposals prepared jointly withthe team would be "automatically" supported, following the procedures outlined earlier. While firmswould retain the right to prepare their own programs, no program would be supported without a priorvisit to the firm by a member of the management team. Firms which felt that the management team wasbeing unreasonable in its "suggestions" would have the right to appeal to the Steering Team.

42. In addition to the above, the scheme would guard against misuse by its insistence on a 50percent contribution by the firm itself. Also, the scheme would insist on specifying deliverable outputs,allowing for checking that the money is indeed being used for the purpose agreed. Finally, closeworking relationships with each grant-recipient firm would allow the management team to follow up onany unusual aspects causing concern.

43. Qualifying Firm-Level Programs. To qualify for ZMGS grant support, firm-levelprograms must be aimed at enhancing international competitiveness. The program should be driven by awritten statement, committing the firm to its execution. This statement should demonstrate that the firmhas given serious consideration to the planning issues involved, such as:

* identification of the sequence of steps required within the plan, in order to achieve theimprovement in international competitiveness desired;

* resources required for each step within the plan, both internal and externally-sourced;


+ best estimates of the likely benefits to the firm to be achieved by the plan, plus a comparisonof these with the likely costs and risks to the firm; and

* an approximate timed action plan.

44. A qualifying program will seek to take a firm from its present state of internationalcompetitiveness to some future planned-for state where this has been substantially enhanced. In theZimbabwean context, this is virtually certain to involve the firm having to look beyond the smalldomestic market. The program may include several steps, and several separate usages of supportservices and travel. The program should, however, only seek to deal with competitiveness issues clearlydefinable in the firm's present state. Typically, a program to build international competitiveness mighttake a firm through three stages:

* investigation of the target market, be it domestic or foreign, usually starting with deskresearch or limited phone research, followed then by more intensive field interviewing,either carried out by the firm's staff or by an outside service supplier;

* supply package adaptation, on the basis of information collected from the market, in order tobring what is being supplied presently into line with customer preferences, and to meetglobal competition. This could be, for instance, through changes in product design,rationalizing production to reduce costs, or through improved quality assurance, and

* active selling, with the adaptation completed, of the improved supply package.

Programs can -- and often should -- be broken down into distinctive sub-plans. As noted, the lifetimegrant support for the program to an individual firm is US$100,000. However, to encourage firms todevelop a medium-term strategy for upgrading competitiveness from the start -- and to signal that thepurpose of the subcomponent is to demonstrate the value of external support, not provide an ongoingsubsidy -- limits will be placed on the number of distinctive programs which a firm can submit. Inparticular, grant funds will be provided to a firm for a maximum of three programs. Moreover, once aqualifying program supported by a grant in excess of US$50,000 had been completed, the firm concernedwould thereafter receive no further grant support from the ZMGS.

45. Qualifying Activities. Any use of external support services, or travel, demonstrablycontributing to any step within a qualifying firm-level plan, would be supported. The followingexamples of what would normally qualify and what would not are provided for further guidance:

* In-factory consultancy and short-term contract management services, say up to six months induration per introduced expert, would normally qualify, but new permanent staffappointments would not;

* Consultancy or short-term contract management assistance directed specifically at improvinglabor productivity or yields on raw materials would normally qualify;

* Assistance in improving in-house capabilities in design-related techniques such as pattern-making, prototyping, grading, sizing, counter-sampling, etc., would normally qualify.Buying in a set of designs for one season only, with no longer-term enhancements aimed for,would normally not qualify;

* The expenses of exposure tours for factory personnel, to view alternative techniques andtechnologies in factories elsewhere would normally qualify; and

* Market exploration tours by marketing personnel to explore new export marketopportunities.

46. For each qualifying activity for which grant support was being sought, the firmconcerned would be expected to define at least one "measurable output", the sight of which would allowthe administrators of the scheme to verify that the activity had indeed taken place as described.


Depending on the circumstance, a defined deliverable might consist, for instance, of a detailedengineering drawing, or a prototype, incorporating quality improvements; a set of standard timesdeveloped for a production process, against which productivity could be assessed; or an externally-commissioned market report. Administrators would assist client firms in defining suitable outputs thatwill allow them to verify activities, but which are in any case beneficial to the firm, rather than producedmerely for the benefit of the scheme.

47. Qualifying Expenditures. Expenditures on service fees, plus expenditures on travel andincidental expenses charged at cost, incurred wholly and exclusively on a qualifying activity, would beeligible for 50 percent grant support. Salaries for staff employed by the supported firm would not beeligible, nor would recurrent costs such as royalty fees. No expenditures on hardware could besupported, even where equipment or instrumentation purchases formed an important part of a firm-levelplan. Expenditures on services provided by the firm undertaking the ZMGS management contract orassociated firms (including, as discussed, ZimTrade), would not qualify for support.

48. The choice of service supplier would be made by the recipient firn, and would not berestricted to suppliers on any central register, or in any other way. However, the administrators of thescheme would seek to satisfy themselves as to the supplier's competence for the task intended, and thatthere was a genuine arms-length commercial relationship between supplier and user. The administratorsof the scheme would also seek to satisfy themselves that fee rates being charged for services werebroadly in line with market realities, particularly in cases where service suppliers were not previouslyknown to the administrators. In general, firms procuring services will be encouraged to obtain bids fromat least three technically qualified contenders. Such bids could be required at the discretion of theadministrators -- and will automatically be required for services costing in excess of US$10,000.

D. Terms of Reference for ZMGS Management

49. Full-time Staff from ZimTrade. The responsibilities of the ZMGS Team Leader and asecond staff person (both seconded from ZimTrade) will comprise the following:

* promoting the ZMGS to small, medium and large firms (particular emphasis should beplaced on promoting the scheme to two groups of firms -- high potential indigenous firms;and established, larger firms assessed as having the highest potential for internationalcompetitiveness);

* visiting the facilities of all applicants for matching grant support;

+ working jointly with firms who so desire on the preparation of a qualifying plan for matchinggrant support (with the assistance of the specialist management contracting team, asnecessary);

* (for the ZMGS Team Leader) approving jointly with a Technical Adviser all applications formatching grant support of under US$30,000, approving jointly with a Technical Adviser andthe ZimTrade chief executive all applications for US$30-50,000, and (together with aTechnical Adviser) making recommendations to the Steering Team or its designatedrepresentative for all applications in excess of US$50,000;

* establishing arrangements for making matching grant payments to service providers,(together with the EDP Administrative Secretariat) ensuring that these payments are made,and are in conformance with the criteria established for participation in the ZMGS;


* ensuring that the deliverables specified by firms in their applications are indeed completed asintended; and

* evaluating annually the subsequent performance of firms supported by the ZMGS.

50. Specialist Management Contracting Services. The firm responsible for providingthese specialist services will be appointed by the Steering Team for an initial period on the basis of acompetitive bid. The winning contractor could be an international firm, a Zimbabwean firm, or a jointinternational-Zimbabwean bid. Key qualifications would include:

* a demonstrated track record of the contracting firm (and its designated staff) in working withfirms to prepare programs for enhancing competitiveness and productivity;

* a diverse roster of consultants capable of providing high-level specialist advice to firmsacross a varied array of subsectors; and

* intimate knowledge of the range of business support services available in the internationalmarketplace, and the ability to help Zimbabwean firms tap into that network.

It would also be desirable if the winning bidder included on its team be an individual with priorexperience in managing an export-oriented matching grant scheme.

III. Facilitating Export-Oriented Foreign-Domestic Enterprise Collaboration ThroughMatchmaking

A. Objective

51. The objective of the sub-component is to build Zimbabwean firms' export capability byfacilitating export-oriented enterprise collaboration between small and medium local and foreign partnersthrough a private matchmaking scheme. The foreign partners will bring a package of external marketaccess and production know-how with or without investment finance.

B. Rationale

52. Package of Factors Including Market Access. In light of the early stage ofZimbabwe's manufactured export development, one effective way to deal with local potential exporters'lack of: (i) access to the external market network and market information for export products; (ii) accessto exportable production know-how; and (iii) access to the external market network and information oninput sourcing is to promote export-oriented foreign enterprise collaboration in diversified forms. Thesecollaborations provide a package of (i)-(iii) and offer the best opportunities for local partners throughimmediate entry into the world market as well as acquisition of skills in these areas.

53. Resolving Imperfect Information Issues. An earlier World Bank study4 of both thedemand and supply sides of export-oriented inter-firm collaboration confirmed that foreign collaborators'lack of interest in collaboration with local firms in sub-Saharan Africa (SSA) stems primarily fromsevere imperfect information on export-oriented collaboration opportunities and negative images.

See Yung Whee Rhee and Therese Belot, Export Catalysts in Low-income Countries: A Review of Eleven Success Stories, WorldBank Discussion Papers #72, The World Bank. 1990.


54. This program would ease imperfect information issues that exist in potential supplycountries by giving incentives to private intermediaries to use their existing information networks tobring together foreign export-oriented and local manufacturers in formal collaborations such asinternational subcontracting agreements (SC), technical and/or marketing agreements (T/MA), jointventures (JV) and foreign direct investment (FDI), and licensing agreements (LA).

55. Matchmaker Activities. The activities of a private matchmaker would includeidentification of potential foreign collaborators, brokering information on business opportunities in therecipient country, and use of their information network in the latter country to link foreign collaboratorswith potential local partners to the extent that the matchmakers have developed such a local network.

C. Structure of Private Matchmaker Fee and Incentives

1. Performance-based Matchmaking Fee Payments

56. The basic principles used in designing the matchmaking mechanism are:

(i) the matchmaking fe>e w,ill be collatoration contract performance-based; and(ii) matchmaking fee paymnents will bc shared between:

(a) the Matchmaking Fund (MMF) established under the sub-project;(b) foreign partner; and(c) a local partner.

57. The criteria for determining the level and timing of (a) would be:

(i) transparency of contract performance indicators;(ii) safeguard of contract implementation;(iii) relative simplicity of administering the scheme;(iv) sufficient incentives for the matchmaker; and(v) willingness of the local and foreign partners to pay for matchmaker services.

2. Implementation of Matchmaking Fee Payments

58. Matchmaker Payment Preference. In an earlier empirical investigation of foreign/domestic collaboration mechanisms, potential matchmakers expressed a preference for a success fee inproportion to the collaboration contract value at the time of contract agreement, as opposed to a fee inproportion to actual export eamings.

59. Collaborator's Payment Preference. In contrast to the matchmakers' statedpreferences, local and foreign collaborators would be willing to pay a matchmaker fee in proportion toactual export earnings once these have been realized, since actual export earnings ultimately determinethe extent to which the local and the foreign partners are better off because of the matchmaker'sintermediation.

60. Two-stage Payment. In order to accommodate the conflicting preferences indicatedabove, a two-stage payment would be used:


Installment l: A specified percentage of the projected collaboration contract value contingent uponproject implementation, paid from the MMF (50%) and by the foreign and local partner(25% each); and

Installment II: A specified percentage (in accordance with that specified in Chart Al) of actual exporteamnings paid annually for a specified time period by the local and foreign collaborator

Chart Al indicates the levels and timing of the matchmaking fee for different eligible forms offoreign/domestic collaboration. Note that, to safeguard against problems of moral hazard, there will be noInstallment I for intemational subcontracting arrangements supported by the MMF. For this form ofcollaboration, MMF payments would be made only at the Installment 11 stage.

Chart Al: Levels and Timing of Performance-Based Matchmaking Fee forEligible Forms of Foreign Domestic Collaboration

JV or 100% FDI Technical/Marketing InternationalAgreement (T/MA) or Subcontract (SC)

Licensing Agreement (LA)

Installment I 1% of collaboration 20% of estimated annual N.A.contract value up to collaboration contract value upUS$50.000 to US$50,000

Installment 11 1% annually of actual 1% of actual annual export 1% of actual annual exportexport earnings for earnings for specified number earnings for a specifiedspecified number of years of years number of years, with a

maximum of US$50,000provided by the MMF.

Contract Implementation Deposit of local and Start of training in local Arrival at local factory ofVerification Criteria foreigners equity shares in factory and/or start of raw materials/intermediate

local bank marketing activities under inputs for local processingT/MA; and transfer of under the SC agreementtechnology/training under LA

Definition of Export Actual annual export Actual annual export earnings Actual annual exportEarnings earnings (gross foreign (gross foreign exchange earnings (gross foreign

exchange earnings) earnings) resulting from exchange earnings)resulting from collaboration resulting fromcollaboration collaboration

Definition of Actual investment Estimated royalty payments Estimated value of SCCollaboration Contract value/actual project cost (usually defined as percentage orders/salesValue of export earnings during

contract period)

Responsibility for Installment I: MMF 50%, Installment 1: MMF 50%.Payment local and foreign partner local and foreign partner each

each 25% 25%

Installment I: Local and Installment I: Local and Installment 11: Local andforeign partners in equal foreign partners in equal foreign partners in equalamounts amounts amounts

- 50- Annex ABusiness Services Component

61. The MM Management Contractor will monitor project implementation and calculate thelevel and timing of Installment payment I accordingly, on the basis of explicit criteria. In turn, the 20%share of Installment I and all of Installment 11 will be made by the parties to the collaboration contractaccording to a private, three-way contractual agreement (i.e., between the Matchmaker, the foreign andthe local collaborator). While no 'model contracts' will be imposed for Installment 11, the scheme'sadministration should insist that the private parties to the agreement incorporate into their formalagreement the contract performance indicators in Chart Al. While the MMF will not guaranteeInstallment 11, as a measure to build the Matchmaker's confidence that Installment 11 will be made, thescheme's administration should maintain an information base (built around reports provided by theZimbabwean firm and its foreign collaborator) on the subsequent course of private collaborationagreements "catalyzed" by the MMF.

62. Safeguard Against Moral Hazard. In order to safeguard against moral hazard (i.e., theMatchmaker's moral hazard in the case of a 'free ride' or the foreign/domestic collaborator's moralhazard in the case of failure of contract implementation), Installment I will not be made unless thescheme's Manager can verify that: (i) the collaboration has been mainly based on the Matchmaker'sefforts; (ii) the contract has been implemented. Moral hazard on the part the foreign/ domesticcollaborators can also be prevented through their 50% contribution to Installment 1.

63. Transparency of Fee Structure. Transparency of the matchmaking fee structure willbe critical in inducing potential matchmakers to participate in the scheme. The first step to ensuretransparency would be to clearly define the critical parameters determining the fee (export earnings,collaboration contract value, implementation verification) (see Chart Al).

64. Limit on MMF Matching Grant. In order to accommodate a maximum number ofcollaborations given limited resources, the maximum amount of matching grant from the MMF would beset at US$50,000 for any one collaboration contract.

65. Advance on Performance-based Matchmaker Fee. The MMF is designed as aperformance-based initiative, so in general no advances on performance-based fees will be provided.Under exceptional circumstances, though, it may be helpful for the MMF to advance from Installment Ithe costs of selected (i.e., pre-screened) potential matchmakers on an initial all-expenses-paidinformation mission to Zimbabwe. Thereafter the costs of the Matchmaker's travel expenses associatedwith their subsequent inward foreign collaborator missions could be shared between the MMF and theMatchmaker. The levels and timing of advances depend on proposals the Matchmaker will submit,detailing the expected collaboration contracts they will bring, as well as estimated collaboration contractvalue and projected export eamings. Should the Matchmakers' intermediation be successful and acollaboration agreement be made, then the advance would be subtracted from the fund's payment ofInstallment I to the Matchmaker. Should a collaboration contract not materialize, however, matchmakerswill not be expected to reimburse the fund. Over the lifetime of the MMF, no more than US$50,000should be disbursed as advances to support the travel costs of either matchmakers or their potentialforeign collaborators (see below).

66. The ability of a Matchmaker to induce potential foreign collaborators to makeexploratory visits to Zimbabwe before committing to any formal collaboration agreements may alsodepend on assistance from the MMF. Potential foreign collaborators may be willing to participate ininward missions only if their expenses associated with project and local collaborator search costs can beshared. The MMF could offer matching grants regarding travel and local expenses not automatically, butshould the need arise.

-51- AnnexABusiness Services Component

D. Eligibility of Collaboration Forms, Sectors, and Supply Sources

67. Chart A2 below provides a summary of the framework for eligibility, sectors and supplysources:

Chart A2: Eligibility of Collaboration Forms, Sectors. and Supply Sources

Variable GuidelineEligible Foreign-domestic * Joint VenturesCollaboration Forms * 100% Foreign Direct Investment (special case of foreign-domestic collaboration)

* Technical and/or Marketing Agreements and Licensing Agreements* International Subcontracting Agreements

Eligible Manufacturing Without any intention of 'targeting', the following sectors are initially selected forSubsectors for Foreign- eligibility in the matchmaking scheme because: (i) foreign export-oriented collaboration isdomestic Collaboration currently not taking place spontaneously in these sectors; (ii) there are currently no or

negligible exports in these subsectors; and (iii) foreign/domestic collaboration agreementsare pervasive in these subsectors for successful export activities:* garmentsa textilesa footwear- leather* luggage* fumituree processed food* toys* sports goods* engineering goods* electronics* tourism

Eligible Foreign Scheme's initial focus is on attracting foreign collaborators from outside the regionCollaboration Supply because the objective is to enable local manufacturers to acquire skills not yet available inSources the sub-region and other SSA countries.

MMF Administration Administration of the MMF would imply the following major tasks:Tasks

* Advertising the Scheme. Advertisements providing general information about thescheme would be placed periodically in relevant publications (e.g., newspapers,business association publications) in Zimbabwe and foreign collaboration supplycountries. Brochures describing the scheme in more detail and explaining the 'rules'of participation would then be provided to those potential matchmakers signalinginterest in the scheme.

* Pre-screening. Matchmakers will be required to submit proposals before starting anyintermediation in order to qualify for any payments from the MMF. This may reducethe risk of the MMF paying for collaboration activities that were already occurringwithout the incentives offered under the matchmaking scheme.

* Substitution for Private Local Matchmakers. In the case that foreign matchmakers donot have the same developed information network that they would have to identifypotential foreign collaborators, it would be critical that the MM ManagementContractor identify local partners in a pro-active manner.

* Coordination of Inward Missions of Potential Foreign Collaborators. Should foreignmatchmakers not have sufficient information on Zimbabwe's investment andcollaboration environment, the MM Management Contractor would be responsible fordesigning a program to introduce foreign matchmakers to collaboration opportunities


and business environment in Zimbabwe. While the actual execution of inwardmissions would be the primary responsibility of the private matchmaker, the MMManagement Contractor could, as needed, closely collaborate with the matchmaker toarrange meetings and promotional activities (i.e. with ZimTrade and ZIC).

* Monitoring of Collaboration Project Implementation. In order to determine level andtiming of Installment 1, the MMF administration would have to verify actual projectimplementation (see Chart AI).

* Monitoring of the Scheme's Effectiveness. Implemented projects should be formallymonitored for the period of the scheme in order to determine its effectiveness. Thistask would also imply writing periodic reports to be submitted to the oversightcommittee on experience with the scheme and formulation of recommendationsshould policy changes be necessary.

Institutional Location' The scheme would be run by a MM Management Contractor who would be housed in aAffiliation location set up for the exclusive use of the Project.

Cooperation between ZIC The scheme's Manager would be able to liaise with ZimTrade staff and use theand ZimTrade institutional resources ZimTrade can provide. The Manager would coordinate activities

with ZIC through designated counterparts such as the Assistant Director of Marketing andthe staff responsible for ZIC's existing database on local joint venture partners.

Oversight The oversight for the scheme would be carried out by the MM Management Contractorsupported by a management contract, assisted by a Technical Adviser, and reporting to theSteering Team. Since agreement that a MM can participate/enroll in the program inprinciple commits the MMF to pay up to US$50,000 should the matchmaker perform asoutlined above, all applications to enroll as a matchmaker in the program will need theapproval of the Steering Team or its designated representative.

68. MMF Period and Estimated Total Costs. The program would be supported for a threeyear period, after which it is expected that foreign/domestic collaboration activities in Zimbabwe willoccur spontaneously. The cost of operating the scheme would be US$1.7 million, of which US$1.5million is for the MMF and US$0.2 million is for the full-time MM Management Contractor. Anestimated total of 40 collaboration cases could be supported.

- 53 - Annex BFinance Component


Finance Component

I. Introduction. The objectives of the Finance Component are to increase-the supply ofterm funds available to Small and Medium enterprises (SMEs) as well as the supply of pre- and post-shipment financing for emerging exporters. Guarantee facilities aim to reduce some of the risk ofsubborrowers in these markets. The hope is that by alleviating the financial constraint to theseenterprises, many can grow on a sustainable basis and thus broaden participation and generateemployment.

I. SME Finance Facility (SME Finance Fund)

2. Introduction and Objective. Financial services and, in particular, capital in the form ofloans, are severely limited to SMEs in Zimbabwe. More specifically, uncertainty and the term structureof interest rates has led to limited and prohibitively priced medium-term financing options for financialinstitutions to fund the investment and permanent working capital needs of their customers. Otherfactors beyond this project's scope that have contributed to constraints on institutional finance include adecline in financial institution lending to the private sector reflecting limited aggregate demand for creditdue to high interest rates and higher risk free returns on GOZ Treasury Bills and other money marketinstruments. A lack of institutional capability in the formal financial sector to adequately assess SMEprojects has also limited credit and is being addressed elsewhere in this project.

3. The objective of the SME Finance Fund is to increase the supply of term funding atmarket rates available to and bank and non-bank financial institutions in order to finance the demands ofemerging SMEs. The aim is to help to accelerate the activities already initiated by several banks andnon-banks and, potentially, NGOs to deliver financial services to SMEs on a commercially-viable basis.This component would provide US$25 million equivalent in sub-loans which would mobilizeapproximately US$31.3 million including sub-borrower contributions.

4. Eligible Borrowers. Definitions of SMEs in Zimbabwe are difficult to discern since thelabor and capital intensity of enterprises varies so widely. The classification of SMEs made by SmallBusiness Units of Zimbabwean commercial banks varies from less than 20 employees to less than 150.Some credit lines also differentiate SMEs by net asset size or turnover, each of which has its limitations.Eligible borrowers under this project would include companies with up to 50 employees and with up toUS$200,000 in net assets. Sub-loans would be made in Zim$ up to a size limit of US$75,000 equivalent.While this limit would be specified at project initiation, the Steering Team, could in consultation withIDA, modify the credit ceiling at a later date. Under the assumption that the average SME credit wouldbe US$50,000, the sub-component amount of US$25 million would finance approximately 500 new SMEborrowers over a four-year period.

5. Operational Guidelines. Below is a summary of the SME Finance Facility'soperational guidelines:


Chart B1: SME Finance Fund - Operational GuidelinesOperating Characteristic Definition

Fee Received by Apex for 0.5% per annum of the average outstanding balance of sub-loans. This applies to both SMEFund Administration Finance and Export Finance Funds.

Interest Rate Charged by Average cost of funds of commercial banks, as determined by a quarterly rolling average,Apex to PFls computed by the RBZ and announced and repriced quarterly. All outstanding balances

would be reprised. Repricing from PFIs to subborrowers should reflect the same timing andrepricing mechanism.

Interest Rate Charged by PFIs would be fully free to charge a rate commensurate with the costs and risks of sub-loans.PFIs to subborrowers

Currency ofSub-loans Commitments, disbursements and repayments in Zim$. Withdrawal applications from theSpecial Account would be made in the US$ equivalent of the Zim$ amount.

Maturity of Sub-loans Funds could be used for permanent working capital, i.e. a net medium-term increase in the coreworking capital need, as well as for investments. The PFI would be required to onlend at thesame maturity as funds lent from the Apex. The maximum maturity would be limited to fiveyears. The minimum maturity suggested would be one year.

Grace Period A grace period of up to 18 months could be provided to the subproject upon the approval bythe Apex. The grace period (principal only) would be matched by the sub-loan between thePFI and the SME.

Maximum Sub-loan Size US$75,000 equivalent, subject to periodic change as necessawy by the Steering Team inconsultation with IDA.

Maximum Borrower Firm Maximum 50 employees and US$200,000 in net assets (Total Assets of the firm, excludingSize land, adjusted by depreciation), subject to periodic change as necessary by the Steering Team,

in consultation with IDA.

Amount of Sub-loan Re- 100% of the sub-loan amount.financed by Apex

Minimum Contribution by As determined by the financial intermediary, but, at a minimum, at least 20% of the subprojectSub-Borrower cost.

Application Requirements Application to Apex would be a summary formn providing data on the name, size and sector ofthe firm and nature of the sub-project, level of financing and the names of principals. Detailedfinancial project data would not be included. Applications from the PFI to the SME would beat the discretion of the PFI.

Eligible Sectors All sectors. Mortgage lending and real estate purchases would not be eligible.

Eligible &penditures Refinancing existing sub-loans would not be eligible. Borrowers with non-performing loans inany PFI could not be granted initial or additional loans under the project.

Autonomous Free Limits Because of the limits in sub-loan size, all projects could be approved by the Apex. Reviewsby IDA would be on an ex-post basis.

Audit Requirements * Fund Project Account audited annually;* PFIs must submit audits annually to the Apex and IDA* Statement of Expenditures of PFIs subject to random export audits; and* Random ex-post reviews conducted to individual sub-loans indicating compliance with

procurement and disbursement requirements.-

Procurement Procurement according to IDA guidelines is the responsibility of the PFI.

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Disbursement In accordance with the submission of subproject documentation (kept by the PFI) and aStatement of Expenditure submitted by the PFI to the Apex.

Sub-Project Each sub-project would be required to submit a project summary containing, at a minimum,Documentation the following information: (i) Name and address of borrower; (ii) sector of firm; (iii)

number of employees; (iv) audited financial statements or affidavit that total assets do notexceed the ceiling; (v) description of financing and subproject; and (vi) a maturity and termof financing.

11. SME Credit Guarantee Facility (SME Credit Guarantee Fund)

6. Rationale and Objectives. The purpose of the SME Credit Guarantee Fund is toencourage financial institutions to lend to entrepreneurs with viable projects and good prospects ofsuccess but whose perceived risk is greater than their actual risk because the borrowers are unable toprovide adequate collateral or do not have a suitable credit history to prove that they are creditworthy.This responds to an identified need for a support mechanism to overcome this obstacle. Thus, theGuarantee Fund is intended to assist in increasing formal-sector financing to SMEs. The design isintended to encourage financial institution lending by mitigating some of the credit risk on guaranteedloans. The scheme's design is intended to be simple enough so that participation does not add materiallyto a financial institution's transaction costs, create uncertainty through the reimbursement mechanism,nor create too large a burden to the SME through the commission charged.

7. Operational Guidelines. Below is a summary of the SME Credit Guarantee Facility'soperational guidelines:

Chart B2: SME Credit Guarantee Facility - Operational GuidelinesVariable GuidelineEligibility * In principle, all sub-loans financed under the SME Finance Facility would be eligible for

coverage by the SME Credit Guarantee, except as stipulated in the restrictions below. Neithersub-loans nor guarantees would be provided to refinance any portion of a PFI's existing exposureto a borrower.

* Guarantee approval would be the responsibility of PFIs, subject to subsequent approval of theCGA.

Documentation PFIs must provide a statement of prior and existing exposure to a borrower and must attest that theRequirements guarantee would apply only to incremental (increased) loans to an existing client or initial loans to

new clients. The PFI would provide the Credit Guarantee Agency (CGA) with a summary of thetransaction on a form (not exceeding 2 pages), which would give details on the borrower, thetransaction (amount, terms, conditions and maturity) and the amount of guarantee requested. Thisform should also detail the PFI's past and existing relationship with the client. The CGA would checkfor client and loan eligibility.

Risk Coverage - The Guarantee fund would cover 50% of the credit risk for the outstanding principal of covered SMESafeguard sub-loans. Once an individual PFI's losses of loans guaranteed under the program have exceededProvisions 15%, new loans would be guaranteed at a rate of 25%. No additional loans would be guaranteed if a

PFI's loss rate on guaranteed loans exceeds 40%. PFIs that lose their eligibility can regain fullcoverage only by collecting enough of the defaulted loan balances to reduce their default ratio below15% or 40%, respectively. The use of write-offs or refinancing to achieve the 15% target would beprohibited and reviewed by the CGA.

Credit The Guarantee would be administered by the CGA, in association with the Apex. The responsibilitiesGuarantee of the CGA would be:Administration * Receive and review documentation on loans guaranteed by it;

* Verifying the eligibility of the PFI and sub-project. Initial documentation should include ahistory the PFI's credit relationship with the borrower and a certification that the loan to be


guaranteed is not a refinancing of existing or past credit';* Receive and review quarterly reports from PFIs;* Inquire about efforts to collect or bring current, past due loans.* Review requests for exercise of the guarantee, verify the eligibility of the request and assure that

prudent banking practices have been followed in disbursing, administering and attempting tocollect the loan.

* Facilitate reimbursement for approved guarantee claims, optimally within 30 days of receipt of arequest for guarantee execution.

* Encourage PFIs to make every recovery effort possible for sub-loan repayment.

Guarantee PFI's would be required to report quarterly to the CGA on the status of all loans made under theExecution Project. Special note would be given to loans 30 days or more past due and efforts to collect them in

the normal course of business would be detailed. Once a loan is 90 days past due, interest accrualsshould cease. Once litigation has been initiated, a request to execute the guarantee should be made tothe CGA. The agreement with the PFI's should stipulate that the PFI can receive a 60% share of anyrecoveries made by its efforts in litigation or through other means after guarantee execution, includingseizure and disposal of any collateral, excluding cash. Any cash collateral should be applied to theoutstanding balance before any amount is paid under the guarantee. A request to the CGA forpayment under the guarantee should be paid within 30 days of its receipt. Certified copies of alldocumentation related to the loan should be forwarded from the PFI to the CGA. Post executioncollection efforts would be distributed between the CGA and the PFI including the share to whicheach is entitled of any sums collected.

Premia Rate and Each PFI would pay the CGA a three percent fee on the guaranteed portion of its portfolio, subject toCalculation review by the Steering Team in consultation with IDA. This fee would be paid once, up front, on the

level of funds to be guaranteed. The fee could be passed along to the borrower.

Audit The CGA would require annual audit reports verifying that guaranteed loans were not used toRequirements refinance existing client debt. Annual audits would be conducted on the project account, including

the account of the SME Credit Guarantee Fund. In this context, it is expected that: (i) the CGAwould keep separate accounts for each sub-borrower; and (ii) auditors would conduct select andrandom reviews of subprojects to validate compliance with the terms and conditions of subprojects.

8. Guarantee Fund Cash Flow Projections. Table BI below provides sensitivity analysisas to the impact of various levels of default on the levels of losses to the SME Credit Guarantee Fund aswell as estimates the level of sub-loan reflows which would need to be channeled into such a fund basedon different loan loss scenarios. It is important to note that the 3.0% premium can only cover a loan losslevel of 7.0% (with 50% coverage). More likely, a 10% loan loss level (10% of new loans made go intodefault, not 10% of the annual portfolio guaranteed) would result in US$0.6 million being diverted fromsub-loan recoveries into the Guarantee Fund. If it proves that the loss experience is greater thanexpected resulting in an unforeseen drawdown of the funds, the Steering Team would be charged withmodifying the coverage and/or the premium, in consultation with IDA On the other hand, to the degreethat funds accumulate from premium revenues, these funds can be reallocated to the SME Finance Fundas necessary. Because this intervention is aimed at providing a temporary inducement for financialinstitutions to lend until such time as they have the understanding and capability to do so on their own,the intent of the guarantee fund is to be time-bound.

Table B1: Cash Flow Projections for the SME Credit Guarantee Fund(US$ Millions)

Scenario 1: 2.0% DefaultAssumptions:Annual Rate of Default 2.0%Total SME Onlending Covered by Guarantee 25.0Premium Paid into Fund 3.0%

Given the overlap of information requirements between the CGA and the Apex, the sub-project summary form for financing would alsobe submitted to the CGA.


Average Loan Maturity (Years) 4.0Rate of Coverage 50%

Financial Projections Year 1 Year 2 Year Year 4 Year 5 Year Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.4 0.7 0.8 1.0 1.2Capital Injection from ReflowsPremiums Received 0.08 0.32 0.39 0.24 0.19 0.19 0.19Amount Paid Out on Claims -0.03 -0.11 -0.13 -0.08 -0.06 -0.06Interest on Positive Net Premiums (4.0%) 0.00 0.01 0.03 0.03 0.04 0.04 0.05

Fund Balance (End of Period) 0.08 0.4 0.7 0.8 1.0 1.2 1.3

Apex Sub-loan Balance (Beg of Period) 2.5 12.5 22.6 25.3 25.5 25.8New Disbursements from IDA ($) 2.5 10.0 10.0 2.5Interest Received on Onlent Funds (1% in USS) 0.0 0.0 0.1 0.2 0.2 0.3 0.3Transfers of Reflows to Credit Guarantee Fund

Sub-loan Balance (End of Period) 2.5 12.5 22.6 25.3 25.5 25.8 26.0

New Loans 2.5 10.6 13.1 8.2 6.3 6.4 6.4

Scenario 2: 7.0% Default (Breakeven for SME Credit Guarantee Fund)Financial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.3 0.4 0.1 0.1 0.0Capital Injection from ReflowsPremiums Received 0.08 0.32 0.39 0.24 0.19 0.19 0.19Amount Paid Out on Claims -0.09 -0.37 -0.46 -0.29 -0.22 -0.22Interest on Positive Net Premiums (4.0%) 0.00 0.01 0.01 0.01 0.00 0.00

Fund Balance (End of Period) 0.08 0.3 0.4 0.1 0.1 0.0

Apex Sub-loan Balance (Beg of Period) 2.5 12.5 22.6 25.3 25.5 25.8New Disbursements from IDA ($) 2.5 10.0 10.0 2.5Interest Received on Onlent Funds (1% in US$) 0.0 0.0 0.1 0.2 0.2 0.3 0.3Transfers of Reflows to Credit Guarantee Fund


New Loans 2.5 10.6 13.1 8.2 6.3 6.4 6.4

Scenario 3: 10.0% DefaultFinancial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.3 0.2 0.0 0.0Capital Injection from Reflows 0.3 0.2 0.1Premiums Received 0.1 0.3 0.4 0.2 0.2 0.2 0.2Amount Paid Out on Claims -0.1 -0.5 -0.7 -0.4 -0.3 -0.3Interest on Positive Net Premiums (4.0%) 0.0 0.0 0.0 0.0 0.0

Fund Balance (End of Period) 0.1 0.3 0.2 0.0 0.0 -0.1

Apex Sub-loan Balance (Beg of Period) 2.5 12.5 22.6 25.0 25.0 25.2New Disbursements from IDA ($) 2.5 10.0 10.0 2.5Interest Received on Onlent Funds (1% in USS) 0.0 0.0 0.1 0.2 0.2 0.2 0.3Transfers of Reflows to Credit Guarantee Fund -0.3 -0.2 -0.1 0.6


New Loans 2.5 10.6 13.1 8.2 6.2 6.3 6.3

Scenario 4: 15.0% DefaultFinancial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.2 0.0 0.0 0.0 0.0Capital Injection from Reflows 0.2 0.7 0.5 0.2 0.3Premiums Received 0.1 0.3 0.4 0.2 0.2 0.2 0.2Amount Paid Out on Claims -0.2 -0.8 -1.0 -0.6 -0.5 -0.5Interest on Positive Net Premiums (4.0%) 0.0 0.0 0.0 0.0 0.0


Apex Sub-loan Balance (Beg of Period) 2.5 12.5 22.4 24.4 24.1 24.2New Disbursements from IDA (S) 2.5 10.0 10.0 2.5Interest Received on Onlent Funds (1% in USS) 0.0 0.0 0.1 0.2 0.2 0.2 0.2Transfers of Reflows to Credit Guarantee Fund -0.2 -0.7 -0.5 -0.2 -0.3 1.9



New Loans 2.5 10.6 13.1 8.1 6.1 6.0 6.0

Scenario 5:25.0% Default 1/Financial Projections Year 1 Year 2 Year Year 4 Year 5 Year 6 Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.1 0.1 0.0 0.0 0.0Capital Injection from Reflows 0.9 0.5 0.3 0.2 0.2Premiums Received 0.1 0.3 0.4 0.2 0.2 0.2 0.2Amount Paid Out on Claims 1/ -0.3 -1.3 -0.8 -0.5 -0.4 -0.4Interest on Positive Net Premiums (4.0%) 0.0 0.0 0.0


Apex Sub-loan Balance (Beg of Period) 2.5 12.5 21.7 23.9 23.8 23.8New Disbursements from IDA ($) 2.5 10.0 10.0 2.5Interest Received on Onlent Funds (1% in US$) 0.0 0.0 0.1 0.2 0.2 0.2 0.2Transfers of Reflows to Credit Guarantee Fund -0.9 -0.5 -0.3 -0.2 -0.2 2.1


New Loans 2.5 10.6 13.1 7.9 6.0 5.9 6.01/ Assumes that 15% Default Rate on Existing Loans Not Reached until End-Year 2.

Scenario 6: 50.0% Default 2/Financial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalSME Guarantee Fund Balance (Undrawn-Beg. of Period) 0.1 0.0 0.0 0.3 0.5 0.7Capital Injection from Reflows 0.2 1.0Premiums Received 0.1 0.3 0.4 0.2 0.2 0.2 0.2Amount Paid Out on Claims 1/ -0.6 -1.3Interest on Positive Net Premiums (4.0%) 0.0 0.0 0.0 0.0 0.0 0.0


Apex Sub-loan Balance (Beg of Period) 2.5 12.3 21.4 24.1 24.3 24.5New Disbursements from IDA ($) 2.5 10.0 10.0 2.5Interest Rec. on Onlent Funds (1% in US$) 0.0 0.0 0.1 0.2 0.2 0.2 0.2Transfers of Reflows to Credit Guarantee Fund -0.2 -1.0 1.2


New Loans 2.5 10.6 13.1 7.8 6.0 6.1 6.12/ Assumes that 15% Default Rate on Existing Loans Not Reached until End-Year 1 and

50% default on Existing Loans Not Reached until End-Year 2.

lII. Export Finance Facility (Export Finance Fund)

9. Introduction and Objective. The objective of the Export Finance Fund is to respond toa foreign currency supply constraint by financing the pre- and post-shipment working capital needs ofemerging direct and (manufacturing) indirect exporters. The Project would finance exports of emergingenterprises through a foreign currency pre- and post-shipment export finance revolving fund (ExportFinance Fund). The pre- and post-shipment export financing would be implemented as an integratedproduct with the Pre-shipment Export Finance Guarantee indicated in Section IV below.

10. The rationale behind providing this export financing is to mitigate a funding supplyconstraint identified. This constraint emanates from a practice whereby foreign banks have generallysupplied off-shore credit lines to local financial institutions with the understanding that the loans areexclusively for well-established companies as well as within the Zimbabwe country risk limit). As such,only well-established exporters have had access to funds supplied to financial institutions from theseforeign sources. By sourcing funds to these institutions at their average cost of funds, the aim is to avoidreplacing existing US$ financing. In the same vein, the disbursement mechanism should be efficient andstreamlined in order to be competitive with existing mechanisms based on these off-shore credit lines.

11. Access to post-shipment finance by direct exporters generally is handled mainly throughpost-shipment finance mechanisms such as bankers' acceptance (BA) discounting or completed export

-59- AnnexBFinance Component

bill (backed by the export credit insurance or guarantee) discounting at local banks and rediscountingbased on off-shore credit lines except for those exporters who cannot access such post-shipment finance.Yet emerging exporters with access difficulties for pre-shipment financing often have similar difficultiesfor post-shipment finance, even when the post-shipment period is backed by a confirmed letter of credit.As such, this project would provide for selective support of these enterprises. In order to ultimatelyinclude all indirect exporters currently excluded from the foreign currency export loans, it is hoped thatin the medium-term a back-to-back domestic L/C system would be introduced.

12. Operational Guidelines. Below is a summary of the Export Finance Facility'soperational guidelines:

Chart B3: Export Finance Facility - Operational GuidelinesOperating DefinitionCharacteristic

Fee Received by 0.5% per annum of the average outstanding balance of sub-loans.Apexfor FundAdministration

Interest Rate Average cost of US$ funding of commercial and merchant banks from offshore sources as determinedCharged by by a quarterly rolling average, computed by the Reserve Bank of Zimbabwe (RBZ), announced andApex to PFIs repriced quarterly on all balances. Repricing from PFIs to subborrowers should reflect the same

repricing mechanism. Currently, the ceiling established by the Reserve Bank for off-shore credit linesfor export loans is LIBOR + 0.875%, which would be the initial rate charged on funds. This ratewould be subject to change by the Steering Team in accordance with changes in market conditions.

Interest Rate - PFIs would be fully free to charge a rate commensurate with the costs and risks of sub-loans.PFIs tosubborrowers

Currency of Sub- Commitments, disbursements and repayments would be denominated in US$. Cash payments by theloans sub-borrower could be made in the Zim$ equivalent to the US$ balance payable.

Maturity of Sub- * The maturity of the sub-loan and the exporter's Promissory Note would be from the time ofloans drawdown of the sub-loan to the time of the sight export L/C negotiation (or post-shipment

export bill maturity);* Maximum preshipment export finance maturity: 6 months;* Maximum postshipment export finance: 120 days.* The PFI would be required to onlend at the same maturity as funds lent from the Apex.

Maximum Sub- US$150,000 equivalent, subject to periodic change as necessary by the Steering Team in consultationloan Size with IDA.

Maximum Maximum 100 employees and US$500,000 in net assets subject to periodic change as necessary by theBorrower Firm Steering Team, in consultation with IDA.Size

Amount of Sub- 100% of the sub-loan amount.loan Re-financedby Apex

Minimum * Exporter must contribute at least 20% of the total financing from his or her own resources. ThisContribution by is in order to minimize potential moral hazard and secure financial commitment;Sub-Borrower * The size of any pre-shipment export loan should be no less than 70% nor more than 90% of the

amount of the export L/C, back-to-back domestic L/C value, or amount one export transactioncovered by the Export Finance Guarantee certificate;

* The size of any post-shipment export loan should not be less than 70% nor more than 90% of the

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post-shipment export bill.

Application (i) Confirmed export L/C, other export order backed by export credit insurance or domestic L/CRequirements created back-to-back based on the above export order to the benefit of the (manufacturing)(Exporter) indirect exporter;

(ii) Integrated application form for the export loan and the export finance guarantee (if the latter isdesired - See Guarantee Section IV below);

(iii) Post-shipment export finance application form (if post-shipment financing desired);(iv) Export finance guarantee certificate issued by the CGA (if applicable); and(v) Promissory Note in favor of the PFI drawn in US$ for the amount of loan required.Exporters would be eligible for a loan for the subsequent export transaction before the preceding loanhas been fully liquidated, provided the next sub-loan meets the above eligibility and documentaryrequirements.

Potentially * Emerging direct and indirect (manufacturing) exporters unable to access existing foreignEligible currency export loans of commercial and merchant banks with net assets up to US$500,000 andSubproject employing up to 100 people, subject to modification by the Steering Team in consultation withBorrowers IDA.

* Exporters (subject to the size limit above) unable to access post-shipment export bill discountingat local banks and rediscounting at foreign banks after completing shipments supported by theExport Finance Fund-based sub-loans. Post-shipment financing would take the form of exportbill rediscounting by rolling over the pre-shipment export loan after completion of the export anypayment of the pre-shipment sub-loan.

Documentary * Summary loan application, including information on the exporter, size of export and purpose ofRequirements financing.(From financial * A financial intermediary's Promissory Note written in US$ for the amount of the sub-loan (theintermediary to maturity of Fl's Promissory Note would be identical to that of exporter's Promissory Note statedApex) above);

* Copies of the export L/C (or other export order) and the Export Finance Guarantee certificate;and

* As necessary, additional documentary requirements for accessing post-shipment export billrediscounting banker's acceptance or completed export bill and CDI.

Autonomous Because of the limits in loan size, all projects could be approved by the Apex, independent of specificFree Limits authorization by IDA.

Audit * Fund Project Account audited annually;Requirements * PFIs must submit audits annually;

* Statement of Expenditures of PFIs subject to random export audits; and* Random ex-post audits conducted to individual sub-loans indicating compliance with

procurement and disbursement requirements.

Procurement Procurement according to IDA guidelines is the exclusive responsibility of the PFI.

Disbursement In accordance with the submission of subproject documentation (kept by the PFI) and a Statement ofExpenditure submitted by the PFI to the Apex.2

Re-payment At the maturity of the exporter's Promissory Note and the financial intermediary's Promissory Note,Mechanism or the post-shipment export bill, the Project Account of the Export Finance Fund should receive the

Fl's debt repayments through an automatic repayment mechanism from the export proceeds oraccount of the exporter or through the Export Finance Guarantee payment mechanism.

2 PFI export finance disbursement mechanisms that tie the loan disbursement to the payments to the overseas suppliers (through back-to back import L/C negotiations) and the domestic suppliers (through the back-to-back domestic L/C negotiations) would be encouraged. ThePFI's risk-taking of the exporter's moral hazard could then be reduced to the remaining part of the loan (i.e. the value added part for which thecash will be given to the exporter).

-61- AnnexBFinance Component

13. Size and Impact of the Export Finance Fund. The size of the Export Finance Fundwould be US$35 million. Assuming that the Fund finances on average 80% of the export orders and theaverage turnover is four months, total export generated would be US$131 million. Assuming that theaverage financing is US$100,000 and one loan is provided per exporter, this means that 350 exporterswould be supported.

IV. Export Finance Guarantee Fund

14. Introduction. The objective of the Export Finance Guarantee is to cover a portion ofemerging exporters' non-performance risk so in order to overcome a supply rigidity whereby theperceived risk of these exporters is greater than the actual risk. This difference between actual andperceived risks may come about because of: (i) the borrower has inadequate physical collateral (and thebank is unaccustomed to making uncollateralized export finance transactions); (ii) the borrower has alimited track record; and (iii) banks' reluctance to commit resources to conduct thorough creditinvestigations of infant or small and medium size (SME) direct or indirect exporters for fear of losing theup-front costs involved.

15. Since 1991, Credsure (the Credit Insurance Zimbabwe Limited) has offered a ExportFinance Guarantee scheme that protects banks granting preshipment export finance against exporters'manufacturing nonperformance risks, along with export credit insurance and guarantee schemes thatprotect exporters and banks against foreign buyers' nonpayment risks. Despite the expected highdemand for the Export Finance Guarantee, Credsure had, at mid-1995, issued only three outstandingExport Finance Guarantees. These Guarantee payments are 100% reinsured by the Government just aspolitical risk export credit insurance payments through the Reinsurance Committee based on the ExportCredit Reinsurance Act. The contingent liabilities associated with the political risk export creditinsurance policies alone at Credsure appear to be above international norms. There are three majorreasons for the negligible use to date of the existing Export Finance Guarantee: (i) the lack of a Fund thatcan back up the contingent liabilities associated with any significantly expanded use of the ExportFinance Guarantee in a way separated from the Export Credit Reinsurance Fund. The latter primarilycovers contingent liabilities associated with the political risk coverage of the export credit insurance; (ii)the commercial and merchant banks' reluctance to take 30% of SME or infant exporters' manufacturingnonperformance risks or to put their resources for the credit investigations of these exporters; and (iii)insufficient marketing of the guarantee scheme.

16. Financing of the Export Finance Guarantee. The financing mechanism for the ExportFinance Guarantee would function as follows: (i) Premiums collected by the Apex would be depositedinto an interest-bearing account; (ii) payouts would be made from the same account; (iii) Recoveriesfrom the SME and Export Finance funds would, as necessary be transferred from the Project accountsestablished for sub-loans to the project account established to backstop potential losses under theguarantee. The mechanics of reimbursement would work as follows: (i) defaulting sub-loans would beentitled to 80% reimbursement; (ii) once a sub-loan is confirmed by the CGA to be entitled tocompensation, the Apex would debit the Guarantee Fund account and credit the PFI's project account forthe compensated balance. This would effectively exonerate the PFI from repayment to the ReserveBank for 80% of the outstanding balance of the sub-loan respective, plus accrued interest.

17. Operational Guidelines. Below is a summary of the Preshipment Export FinanceGuarantee Fund's operational guidelines:

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Chart B4: Pre-shipment Export Finance Guarantee Fund - Operational GuidelinesVariable GuidelinesEligibility * In principle, all preshipment export sub-loans financed under the Export Finance Facility

would be eligible for coverage by the Preshipment Export Finance Guarantee, except asstipulated in the restrictions below. Neither sub-loans nor guarantees would be provided torefinance any portion of a PFI's existing exposure to a borrower.

* Guarantee approval would be the responsibility of PFls, subject to subsequent approval ofthe CGA.

Documentary * Confirmed export L/C, other export order backed by export credit insurance, orrequirements (manufacturing) domestic L/C created on a back-to-back basis based on the above export

order;* Integrated application form for the sub-loan and the Preshipment Export Finance Guarantee'.* Integrated application forn submitted by PFI to CGA should be simple and the required

information should focus on the export transaction itself, rather than detailed financialstatements of the exporter.

Maximum For a single turn-over of an export sub-loan, US$150,000.Guarantee Size

Guarantee Risk The CGA would cover 80% of the value of the export loan (and up to 90 days associated interest)Coverage default risks stemming from exporters' nonperformance

Premium Rate A premium rate of 0. 15% would be charged on the monthly balance of the sub-loans outstandingcovered by the Guarantee. This is an annual equivalent of 1.8%.

Guarantee As per the export finance sub-loan.Maturity

Reporting * The financial intermediary's reporting requirements to the CGA would be: (i) the nature ofRequirement the sub-loan; (ii) the guaranteed loan effective date; (iii) export completion date; (iv) loan

liquidation date; and (v) default date.* PFI's would be required to report quarterly to the CGA on the status of all loans made under

the Project. Special note would be given to loans 30 days or more past due, and efforts tocollect them in the normal course of business would be detailed.

Safeguard The Preshipment Export Credit Guarantee fund would cover 80% of the non-performance risk ofProvisions the outstanding principal of covered sub-loans amount plus accrued interest up to 90 days. Once

an individual PFI's losses of loans guaranteed under the program have exceeded 15%, new loanswould be guaranteed at a rate of 25%. No additional loans would be guaranteed if a PFI's lossrate on guaranteed loans exceeds 40%. PFIs that lose their eligibility can regain full coverageonly by collecting enough of the defaulted loan balances to reduce their default ratio below 15%or 40%, respectively. The use of write-offs or refinancing to achieve the targets would beprohibited and reviewed by the CGA. Once a loan is 90 days past due, interest accruals shouldcease, and the guarantee would be eligible to be called provided litigation against the borrowerhas been instituted. PFIs would be able to receive 30% of any recoveries made by its efforts aftera loan has gone 90 days past due, but prior to execution of the guarantee, including seizure anddisposal of any collateral, excluding cash. Any cash collateral should be applied to theoutstanding balance before any amount is paid under the guarantee.

Financial Flows The financing mechanism for the Export Finance Guarantee would function as follows: (i)of the Guarantee Premiums collected by the PFI and the Apex would be deposited into an interest-bearing account;Fund-- (ii) payouts would be made from the same account; (iii) sub-loan recoveries from the Export

3 As emerging exporters develop a track record, then. in a later stage, a revolving guarantee could be offered based on the records ofpast export performance.


Finance Fund would, as necessary, be transferred from the Sub-loan Project Accounts to the4Guarantee Fund Project Account established to backstop potential losses under the guarantee

Guarantee * The financial intermediary should report arrears to the Guarantee Agency within 30 days ofExecution - default. Guarantee payment claims would be eligible after 3 months have passed since theProcedures for loan default occurred;Processing * The mechanics of reimbursement would work as follows: (i) defaulting sub-loans would beClaims entitled to reimbursement of 80% of the accumulated balance (principal and interest accrued

up to 90 days); (ii) once a sub-loan is confirmed by the Guarantee Agency to be entitled tocompensation, the Apex would debit the Guarantee Fund account and credit the PFI's projectaccount for the compensated balance. This would effectively exonerate the PFI fromrepayment to the Reserve Bank for 80% of the outstanding balance of the sub-loanrespective, plus accrued interest.

Audit The CGA would require annual audit reports verifying that guaranteed loans were not used toRequirements refinance existing client debt. Annual audits would be conducted on the project account,

including the account of the SME Credit Guarantee Fund. In this context, it is expected that: (i)the CGA would keep separate accounts for each sub-borrower; and (ii) auditors would conductselect and random reviews of subprojects to validate compliance with the terms and conditions ofsubprojects.

Responsibilities The CGA would be responsible to:of the CGA * Review the information received for accuracy and check the consistency of documentation

provided. This would include a review of the export order, the L/C and/or the buyer's non-payment risk coverage certificate to ensure coverage and to detect any possible falsification;

* Verify the eligibility of the PFI and sub-project. Initial documentation should include ahistory the PFI's credit relationship with the borrower and a certification that the loan to beguaranteed is not a refinancing of existing or past credit5;

* Receive and review quarterly reports from PFIs;* Inquire about efforts to collect or bring current, past due loans.* Review requests for exercise of the guarantee, verify the eligibility of the request and assure

that prudent banking practices have been followed in disbursing, administering andattempting to collect the loan.

* Facilitate reimbursement for approved guarantee claims, optimally within 30 days of receiptof a request for guarantee execution.

* Encourage PFIs to make every recovery effort possible for sub-loan repayment.* In the medium-term, provide a basic service to check to ensure that exporters using the

Guarantee are acting in good faith by checking past criminal or default records as well as thevalidity of export orders and protection against foreign buyers' nonpayment risks.

MWarketing The CGA should carry out a campaign to the banking and export communities through publicCampaign media, seminars, and publications,

Review of the Timely reviews and tabulation of exporter loan default data as well as the export success data ofState of Emerging emerging exporters should be used to provide input to the Steering Team for timely adjustmentsExporters of the Guarantee's operational parameters.

Speedy Issue of A seven working day target would be established for completing the Export Finance GuaranteeExport Finance application process at the level of the financial intermediary and the Guarantee Agency, includingGuarantee issuing the Finance Guarantee certificate. Financial intermediaries should be encouraged toCertificate follow the Export Finance Guarantee application review guidelines to be issued by the CGA.

See projections below.Given the overlap of information requirements between the CGA and the Apex, the sub-project summary form for financing would

also be submitted to the CGA.


18. Export Finance Guarantee Fund - Financial Projections. Table B2 below indicatesprojections of the Export Finance Guarantee Fund.

Table B2: Cash Flow Projection for Export Credit Guarantee Fund(US$ Millions)

Scenario 1: 2.0% DefaultAssumptions:Annual Rate of Default 2.0%Total Export Credit Covered by Guarantee 35.0Premium Paid into Fund 1.8%Average Loan Maturity (Years) 0.5Rate of Coverage 80%

Financial Projections Year 1 Year 2 Year 3 Year 4 Year5 Year 6 Year 7 TotalPreshipment Export Credit Guarantee Fund Balance (Undrawn- 0.1 0.2 0.5 0.7 0.9 1.1Beg. of Period)Capital Injection from ReflowsPremiums Received 0.06 0.23 0.42 0.60 0.68 0.72 0.75Amount Paid Out on Claims -0.06 -0.20 -0.37 -0.53 -0.61 -0.64Interest on Positive Net Premiums (4.0%) 0.00 0.01 0.02 0.03 0.04 0.04 0.05




Average Loan Balance 3.6 12.5 23.4 33.1 38.0 39.8 41.7

Scenario 2: 2.9% Default (Breakeven for Export Finance Guarantee Fund)Financial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalExport Credit Guarantee Fund Balance (Beg. of Period) 0.1 0.2 0.4 0.4 0.4 0.2Capital Injection from ReflowsPremiums Received 0.06 0.23 0.42 0.60 0.68 0.72 0.75Amount Paid Out on Claims -0.08 -0.29 -0.54 -0.77 -0.88 -0.92Interest on Positive Net Premiums (4.0%) 0.00 0.01 0.01 0.02 0.01 0.01 0.00





Scenario 3: 5% DefaultFinancial Projections Year 1 Year 2 Year 3 Year 4 Year5 Year 6 Year 7 TotalExport Credit Guarantee Fund Balance (Beg. of Period) 0.1 0.2 0.1 0.0 0.0 0.0Capital Injection from Reflows 0.3 0.6 0.8 0.8Premiums Received 0.06 0.23 0.42 0.59 0.67 0.69 0.71Amount Paid Out on Claims -0.14 -0.50 -0.94 -1.32 -1.49 -1.54Interest on Positive Net Premiums (4.0%) 0.00 0.01 0.00 0.00 0.00


Apex Sub-loan Balance (Beg of Period) 7.2 17.9 29.0 36.9 37.9 39.0New Disbursements from IDA ($) 7.0 10.5 10.5 7.0Interest Received on Onlent Funds (5% in US$) 0.2 0.2 0.6 1.2 1.6 1.9 1.9Transfers of Reflows to Credit Guarantee Fund -0.3 -0.6 -0.8 -0.8 2.5




Scenario 4: 15% DefaultFinancial Projections year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalExport Credit Guarantee Fund Balance (Beg. of Period) 0.1 0.0 0.0 0.0Capital Injection from Reflows 0.1 1.1 2.2 3.1 3.4 3.2Premiums Received 0.06 0.22 0.41 0.55 0.59 0.56 0.53Amount Paid Out on Claims -0.43 -1.50 -2.73 -3.69 -3.95 -3.75Interest on Positive Net Premiums (4.0%) 0.00 0.00 0.00 0.00

Fund Balance (End of Period) 0.07 0.0 0.0 0.0 0.0

Apex Sub-loan Balance (Beg of Period) 7.2 17.8 27.8 33.7 32.2 30.4New Disbursements from IDA ($) 7.0 10.5 10.5 7.0Interest Received on Onlent Funds (5% in US$) 0.2 0.2 0.6 1.1 1.5 1.6 1.6Transfers of Reflows to Credit Guarantee Fund -0.1 -1.1 -2.2 -3.1 -3.4 -3.2 13.1



Scenario 5:25% Default VFinancial Projections Year 1 Year 2 year 3 Year 4 Year Year 6 Year 7 TotalExport Credit Guarantee Fund Balance (Beg. of Period) 0.1 0.0 0.1 0.0 0.0 0.0Capital Injection from Reflows 0.4 2.2 0.7 1.3 1.5 1.5Premiums Received 0.06 0.22 0.39 0.54 0.61 0.61 0.62Amount Paid Out on Claims -0.7 -2.5 -1.4 -1.9 -2.1 -2.1Interest on Positive Net Premiums (4.0%) 0.00 0.00 0.00 0.00 0.00


Apex Sub-loan Balance (Beg of Period) 7.2 17.5 26.4 33.8 34.0 34.2New Disbursements from IDA ($) 7.0 10.5 10.5 7.0Interest Received on Onlent Funds (5% in USS) 0.2 0.2 0.6 1.1 1.5 1.7 1.7Transfers of Reflows to Credit Guarantee Fund -0.4 -2.2 -0.7 -1.3 -1.5 -1.5 7.6



/ Assumes that 15% Default Rate on Existing Loans Not Reached until End-Year 2.

Scenario 6: 50% Default 2/Financial Projections Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 TotalExport Credit Guarantee Fund Balance (Beg. of Period) 0.1 0.0 0.1 0.6 1.3 2.1Capital Injection from Reflows 1.2 1.1Premiums Received 0.06 0.21 0.39 0.55 0.64 0.67 0.70Amount Paid Out on Claims -1.4 -1.5Interest on Positive Net Premiums (4.0%) 0.00 0.00 0.00 0.02 0.05 0.08 0.11


Apex Sub-loan Balance (Beg of Period) 7.2 16.7 26.7 34.7 36.3 38.0New Disbursements from IDA ($) 7.0 10.5 10.5 7.0Interest Received on Onlent Funds (5% in US$) 0.2 0.2 0.6 1.1 1.5 1.8 1.9Transfers of Reflows to Credit Guarantee Fund -1.2 -1.1 2.3


Average Loan Balance 3.6 11.9 21.7 30.7 35.5 37.2 39.02/ Assumes that 15% Default Rate on Existing Loans Not Reached until End-Year 1 and

50% default on Existing Loans Not Reached until End-Year 2.

V. Performance Guidelines and Certification Procedures for Participation of FinancialIntermediaries

A. Introduction - Eligible Institutions

19. The purpose of the certification procedures detailed below is to ensure as far as possiblethat resources under the Project are intermediated through only those participating financial intermnediaries

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(PFIs) which can be reasonably determined to be solvent and well-managed in accordance with soundfinancial practices and which operate in a way in which they will allocate funds productively to the SME oremerging exporter markets respectively. With the assistance of external auditors, the Steering Team inconsultation with IDA would be responsible for qualifying institutions based on an evaluation of thesolvency, financial position and intermediation capacity of each prospective PFI.

20. Participation in the Finance facilities would, in principle, be open to all financialinstitutions licensed under the Banking Act6 as well as select State-owned institutions (SEDCO andZimbabwe Development Bank) and non-Governmental organizations on a case-by-case basis. Theevaluation of financial institutions (FIs) to participate under the project would be determined on the basis ofinformation and criteria set out in Sections B and C below. In cases where lending is proposed to asubsidiary of a licensed bank holding company, the evaluation would be applied to both the parent and thesubsidiary on a consolidated basis.

21. FIs would be certified for initial participation under the project and re-certified annuallyfor continued participation. Certification procedures would be as follows: (i) FIs would request theirexternal auditors to undertake an evaluation according to the criteria in Section C below; (ii) ApplicantFls would submit the information indicated in Section B to the auditors; (iii) the Auditors would providewritten evaluations to the Steering Team and to IDA as to the FI's compliance with the criteria; and (iv)the RBZ would have the right at any time to revoke the certification of FIs found to not to fully satisfythe eligibility criteria or found by the RBZ to be in violation of the Banking Act or other laws orprudential regulations.

B. Information Required

22. The following written information FI's would be required to submit to Auditors, theSteering Tean and IDA:

(a) Annual audited financial statements according to generally accepted accounting principles.For new institutions, the above requirement could be waived and in its stead, replaced withdetailed financial projections outlining data according to the same reporting standards,satisfactory to the Steering Team;

(b) Unqualified audit opinion over the statements in "a" above. If this opinion is qualified,required would be a satisfactory explanation and action plan from the management of thefinancial intermediary for remedying the situation;

(c) A special eligibility assessment conducted by external auditors according to the criteria inSection C. This should include publication of information as to the amount of loans pastdue (including overdrafts, so classified) affected by arrears, current and accumulatedprovisions, and the criteria for each as well as the criteria for interest accrual and rollovers;and

(d) Any other information the Steering Team, RBZ or IDA may consider necessary forpurposes of conducting its assessment.

Or amended legislation as passed.

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C. Eligibility Evaluation Criteria

23. External Auditors contracted would examine an financial institution's financial positionaccording to the following guidelines:

(a) Management. A review should evaluate the financial management of the institution,including its credit controls, planning mechanisms, staffing and information systems.Audits should verify or comment on the following:

(i) The Fl's Board of Directors sets overall financial policy and performs appropriateoversight of the Institution's operations;

(ii) The Fl has sound budget, planning and financial control procedures;

(iii) The Fl has sound lending policies and procedures;

(iv) The FI has sound internal controls and audit procedures;

(v) The Fl has managers with adequate skills and experience to carry out theirrespective tasks; and

(vi) The Fl's management information system provides sufficient information to thestaff responsible for managing the Fl's risks and financial performance.

(b) Capital Adequacy - The review should assess whether (where applicable) the financialintermediary's risk-weighted capital adequacy is in compliance with guidelines laid downby RBZ. If not applicable, the level of capital in relation to risk-adjusted assets should beindicated, along with a qualitative evaluation of the sufficiency of such capital. As of June1996, it is expected that commercial banks will be required to operate with minimumcapital adequacy ratios of 4% for Tier I capital and 6% for total net capital. By June 1997,all commercial banks will be required to have a minimum capital adequacy of 4% for Tier Icapital and 8% for total net capital. Requirements for merchant banks and discounts wouldbe in accordance with guidelines to be issued;

(c) Loan and Other Asset Quality. Assessment should be made of the risk profile of loans,other assets and the sufficiency of capital to cover such risks. A detailed portfolio reviewshould be conducted in accordance with the guidelines indicated in Charts B5 and B6 onthe next pages. The certification should indicate whether the level of loan loss provisionsis sufficient and, if not, the qualified level of deficiency and a recalculation of capital basedon such a deficiency;

(d) Collection Ratio. Auditors should consider whether the collection ratio is sufficient toavoid erosion of the inflation-adjusted net worth of the FI7;

(e) Earnings Performance. Auditors should evaluate whether net income, adjusted forinflation (as determined by the Consumer Price Index (CPI)), provides a positive return onequity with realistic provisions for losses. Negative real returns could be justified if theyare shown to reflect transitory conditions;

i.e., cash collections of principal and interest over total collectibles during the last 12 months' total collectibles comprise total arrears atthe beginning plus ainounts falling due during the period.

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(f) Liquidity Position. Auditors should evaluate whether the Fl has a sound liquidity positionand liquidity management systems. While the most important indicator of an institution'sliquidity position is its liquidity management capability, these other indicators should alsobe assessed: (i) frequency and level of liquidity support from the RBZ; (ii) frequency ofborrowings from the inter-bank market; (iii) the relationship between new commitmentsfor loans and investments and the resources available to finance such commitments; and(iv) liquidity maintained to meet maturing obligations (operating expenses and debt-servicing liabilities);

(g) Foreign Exchange Position. Auditors should assess whether the Fl has a proper foreignexchange risk monitoring and control system in place as stated in RBZ guidelines; and

(h) Intermediation Capacity. Auditors should review the capacity of the prospective PFI toeffectively initiate, appraise, process, monitor and supervise sub-loans to SMEs andexporters.

E. Certification Procedures

24. External Auditors would evaluate the Fl according to the performance guidelines above inorder to render an assessment of the Fl's soundness, solvency, risk concentration and capacity tointermediate credit to SMEs and exporters. The Steering Team would decide based upon the analysis andrecommendation of the External Auditors whether to certify, not certify or partially certify (or recertify) afinancial institution to participate in the Project.

25. Based on the assessment of variables indicated in Section C, institutions would becertified or recertified into one of three categories: (1) fully eligible; (2) partially eligible; and (3) noteligible. Institutions fully eligible would be entitled to intermediate funds under either the SME Fund orExport Finance Fund up to the maximum exposure levels established for all institutions by the SteeringTeam, in consultation with IDA. Institutions could be determined as partially eligible in cases wheredeficiencies in performance criteria are noted but where the institution has submitted a detailed time-bound action plan for remedying those deficiencies. The judgment of the viability of such an actionplan would be undertaken jointly by the Steering Team and IDA. Institutions could again become fullyeligible to participate at any time, providing they have been reassessed by External Auditors accordingto the same criteria and, provided that such assessment indicates that their condition has improvedsufficiently to fully meet the criteria.

26. Institutions found judged partially eligible would be eligible to borrow under theProject lesser of: (i) 10% of the net capital and reserves of the institution (verified and, as necessaryrestated by the External Auditors); or (ii) five percent of the total of the SME Finance Fund or ExportFinance Fund, respectively. These levels could be modified by the Steering Team, in consultation withIDA. As above, once certification indicates full compliance with eligibility criteria, such institutionswould again be entitled to the full amount of their allocation under the Project.


CHART B5 -- ZIMBABWE: Eligibility Criteria -Guidelines for Assessment of Commercial Financial Institution Credit Risks

Capital The level of capital and reserves should be sufficient to cover the risks associated with assets on a risk-adjustedAdequacy basis. The Basle standard of 8% should be applied, in accordance with RBZ guidelines and weights.

Loan An evaluation should review whether loans refinanced, rescheduled or renewed result from weaknesses in theRescheduling Borrower's Financial Position and/or inability to repay. In such a case, evidence should show that the borrower can

demonstrate the capacity to service the loan under the new conditions of the contract. Credits classified as doubtfulor loss should not have been renegotiated unless such loans have either an improvement in the loan collateral or anup-front cash payment. Loans rescheduled involving capitalization of interest (whereby uncollected interest isadded to unpaid principal at the payment date or maturity of a loan or advance) should have an increase in the valueof the collateral to cover the capitalized interest. A new loan resulting from the interest capitalization indicate thatthe borrower has increased his or her capacity to service the loan under the new conditions of the contract. Creditsclassified as substandard, doubtful or loss should not be eligible for interest capitalization.

Loan Institutions should routinely conduct a review of 70% of their portfolio on an annual basis, according to theReview classification and provisioning criteria below. Non-performing loans, loans classified as substandard, doubtful orStandards loss and classified overdraft accounts should be reviewed monthly.

Provisioning Useful provisioning guidelines are: Pass and special mention loans -no minimum required provision; SubstandardGuidelines loans --an initial 10% provision with increases arriving at a 20% provision; Doubtful loans --a 50% provision; and

Loss loans a 100% provision. Provisions should be calculated after deducting the estimated value of collateral andadding the legal and administrative costs for seizure and disposition of collateral as well as estimated assetdepreciation during the holding period for collateral.

Overdraft * Overdraft accounts should be reviewed by the PFI at least annually. Overdraft accounts should be classifiedAccounts as "Substandard" and subject to the provision schedule indicated above provided that: Interest charges for the

preceding 12 months have not been covered by deposits during the same period.* The overdraft has exceeded the authorized limit both frequently and without special authorization.- The overdraft has evidenced fluctuations and deposit patterns which do not conform with the normal cycle of

the borrower's business.• Once classified as "Substandard", the overdraft should be converted to a "Substandard" loan. be reflected as

such on the balance sheet and be subject to revised conditions.

Investment Fixed income investments should be reflected based on an estimate of their market value. Such a market valueClassification should reflect, inter alia the difference between the interest rate on the instrument and the rate prevailing for

securities with similar maturities, and the risk of the security (or the underlying value of the assets securing it).Central Govemment bonds and instruments with a Govemment guarantee should be valued to at least reflect thecoupon rate on the instrument. Equity investments should be reflected based on an estimate of their market valuegiven risk and profitability expectations and peer group and market indices.

Interest A useful guideline is that loans should be classified as "nonperforming" if no payment is made or the paymentAccrual made (both principal and interest is any amount less than the contractual payment for the payment period. Interest

on non-performing commercial loans should not accrue for more than 90 days and at the end of 90 days suchaccrued interest should be reversed. Interest on non-performing mortgage- loans should accrue for more than 180days and at the end of that period such accrued interest should be reversed. Interest on overdrafts shouldautomatically accrue by increasing the amount outstanding. Once the overdraft is classified as substandard, interestshould cease to accrue previously accrued interest should be reversed. Accrued, uncollected interest should bereflected as a separate account on the balance sheet.

Loan The aggregate sum of loans to "borrower groups related to a financial institution" should be examined. A rule ofConcentration thumb is that together they should represent no more than the total capital of the institution.Requirements Loans to Directors and Shareholders should be subject to more restrictive size limitations as for other borrowers

(including limits on loans to Borrowers or Borrower Groups Related to the Financial Institution).Risks of unsecured loans in relation to the capital base should be noted.Sectoral risk concentration should be evaluated in relation to the capital base of PFI.

Treatment of The size and valuation of Fixed Assets and Assets Seized from Defaulting Debtors should be reviewed and anFixed Assets assessment be made as to whether the valuation is appropriate (and the effects on capital) and whether too large of

an investment in fixed assets represents inordinate risk to the institution.


CHART B6 - ZIMBABWE: Eligibility Criteria for Participation of Financial IntermediariesRecommended Loan Classification Criteria for Commercial Loans

Loan Payment Documentation Financial Position of the Borrower CollateralClassifi- Status Qual!rcaion

Pass Up to 30 Has full credit The financial position of the borrower and The value ordays in documentation/information project are in no way impaired. liquidity of thearrears loan collateral

are in no wayimpaired

Special 30-89 days in May lack certain documentation in Evidence may suggest that factors could inMention arrears the credit folder yet such absence the future affect the loan but such conditions

does not impair the capacity to assess are noted as transitory and should not affectthe financial position of the borrower the recovery of the loan under originalor value of collateral. conditions.

Sub- 90-179 days May lack certain documentation in Evidence suggests that there is a well- Evidence maystandard in arrears the credit folder yet such absence defined credit weakness or weakness in the suggest that

does not impair the capacity to assess sector of the debtor firm such that the cash the value orthe financial position of the borrower, flow of the borrower is insufficient to liquidity of theproject or the value of collateral. promptly service the debt. Such weaknesses collateral have

suggest that there is a 20% chance of non- been impairedrecovery of the outstanding loan balance orvirtual certainty of recovery of 80% of theoutstanding balance.

Doubtful 180-364 days May lack documentation which Evidence may suggest that there is a 50% "in arrears or impairs the capacity to assess the chance of non-recovery of the loan due topayments financial position of the borrower or weaknesses in the borrower or financialjudicially project or the value of collateral position of the project financed or certaintysuspended of non-recovery of 50% of the outstanding

loan amount. Such a loss however, is not acertainty--possibly mechanisms exist suchas sale of the borrower company or legalaction

Loss Over 365 No documentation exists or grave Evidence may suggest that the debtor isdays in defects exist in the documentation insolvent--the borrower's financial positionarrears and the project financed is insufficient to

service the outstanding debt. In this case,there is virtual certainty (100%) of non-recovery of the loan.

- 71 - AnnexCInstitutional Development Component


Institutional Development Component

1. Introduction and Administrative Arrangements. The objective of the InstitutionalDevelopment Component is to support the development of public and private institutions which form anintegral part of the framework for enterprise development supported by other measures under the Project.Improving the capacity of these institutions will prove vital to further facilitating policy reforms beingundertaken (improving the application of duty relief mechanisms for exporters, Export Processing Zone(EPZ) schemes, and improving banking supervision) and in supporting private institutions in achieving asupply response to measures undertaken. The component would be administered by the project'sAdministrative Secretariat as indicated in Annex E.

I. Matching Grants for Strengthening the Capacity of Financial Intermediaries

2. Rationale. To date, each commercial bank in Zimbabwe has a Small Business Unitwhose objective is to lend to small emerging enterprises. Moreover, select non-bank financialinstitutions have embarked on lending to this segment. In most cases, an effort has been made to developthe capacity to lend to emerging enterprises on a profitable and sustainable basis. Yet the managers ofthese financial institutions have admitted that there are significant limitations in the staff capability andoperating systems to originate, appraise, supervise and monitor SME loans in their institutions.Moreover, banks and non-banks have indicated a need and willingness to view alternative methods forloan origination, appraisal, monitoring and supervision. The matching grant scheme is developed inrecognition of the additional costs incurred by financial intermediaries (Fls) in undertaking or enhancing anew line of activity in terms of developing skilled staffing for SME operations and in terms of developingthe necessary systems for monitoring and supervision of SME clients. The aim is that financial institutionscan partially defray additional market entry costs to accelerate their movement in this area.

3. Program. As indicated in Table Cl below, a 50:50 Matching Grant Program (ProjectCost US$840,000 of which IDA would finance US$420,000) would be established to assist financialinstitutions in developing the capacity and systems necessary for SME loan initiation, appraisal andmonitoring. This scheme aims to mitigate some of the costs incurred by financial intermediaries inundertaking or enhancing this new line of activity. PFIs would have access to grant funds on a 50:50 basisto partially defray these additional market entry costs in order to accelerate their movement in this area.The total expected IDA support of US$420,000 would represent 14 matching grants of an average ofUS$30,000 over a three-year period. Matching grants would be targeted at supporting the SmallBusiness Units of commercial banks. In order to receive such a grant, the financial institution mustsubmit a development program which should indicate precisely the type of expert advice or trainingproposed. This could include the number of activities (workshops, on the job training, site visits, coursesattended) to be concluded, number of staff trained per activity, level of staff trained, type of trainingconducted, sources of trainers, estimated cost per training event, estimated cost per staff training event,and expected results. Matching grants could also be applied towards the development of internal systemsand controls of SME lending activity, such as the development of a separate cost account and loanportfolio monitoring system for the Small Business Unit or SME portfolio. It is likely that institutionaldevelopment needs will be concentrated in the following areas: (i) internal staff training; (ii) twinning/partnering with "best practice" financial intermediaries abroad; (iii) specialized consultancies


Table Cl: Institutional Development Component: Projected Budget(US$)

Prsn Daily Per Budgetary Projection - Allocation Financing

D= ES Diem Year I Year 2 Year 3 Year 4 TIt MA Qther1. Matching Grants to Fin Institutions to Intermed. SME Loans 160,000 300,000 300,000 80,000 840,00 420,000

11. Strengthening SEDCO 99,890 44,510 25,000 25,000 170.000 170,0001. Cons. - Str. Management 30 500 140 24,400 24,400 24,4002. Legal Consultant 40 350 14,000 14,000 14,0003. Debt-Recovery Specialist 53 400 140 19,510 19,510 39,020 39,0204. Computers 16,980 16,980 16,980

5. Extemal Financial Assessments 25,000 25,000 25,000 25,000 100,000 100,000

Ill. Strengthening RBZ Banking Supervision 107,100 48,050 44,850 200.000 200,0001. Cons. -Financial Reporting 30 400 140 21,400 21,400 21,4002. Cons. -Drafting Impl. Regs 60 500 140 24,400 24,400 48,800 48,8003. Cons. - Training On- & off 90 475 140 23,450 23,650 23,650 70,750 70,750

-site Inspection & Analysis4. Cons. - Dev. of Procedures 50 500 140 21,200 21,200 42,400 42,400

Manuals (incl. inspection)5. Computers 16,650 16,650 16,650

IV. Support to RBZ Est. of Apex and CGA 62,500 17,500 80.000 80,000I. Cons. -Crdt Guarantee Systems 40 475 140 17,500 17,500 35,000 35,000

2. Cons. - SME Finance 22 400 140 17,080 17,080 17,0803. Cons. -Export Finance 22 425 140 17,630 17,630 17,6304. MIS Consultant 15 300 4,500 4,500 4,5005. Computers 5,790 5,790 5,790

V. Support to Customs and Excise 149,040 75,480 75,480 300.000 300,0001. Team Leader/lnw. Proc. Zone 135 600 140 41,300 38,500 38,500 118,300 118,3002. Input Output Coefficient Experts (3) 126 550 140 36,980 36,980 36,980 110,940 110,9403. Cons. -Common Bonded Warehouse 32 475 140 24,880 - 24,880 24,8804. Systems Consultant 15 300 4,500 4,500 4,5005. Computers 17,240 17,240 17,240

6. Systems Consultant 15 300 4,500 4,500 4,5007. Study Tour 19,640 19,640 19,640

VI. Support to the Adm. of Export Processing Zone Regulations 62,660 27,340 90.000 90,0001. Study Tour 29,460 29,460 29,460

2. Ext. Cons. - Dev. of Reg. Guidelines 72 475 140 27,340 27,340 54,680 54,6803. Computers 5,860 5,860 5,860

VII. Support of the Ministry of Industry and Commerce 38,880 30,560 30,560 100.000 100,0001. Consultant - Trainer 142 400 140 30,560 30,560 30,560 91,680 91,6802. Computers 8,320 8,320 8,320

Vil. Support to the Project Administrative Secretariat 115,000 115,000 115,000 35,000 380.000 380,0001. Technical Adviser 80,000 80,000 80,000 240,000 240,0002. Unit Head 16,000 16,000 16,000 16,000 64,000 64,0003. Unit Assistant 11,000 11,000 11,000 11,000 44,000 44,0004. Equipment, Space, Facilities 8,000 8,000 8,000 8,000 32,000 32,000

TOTAL 715.070 508.440 440.89 .100.000 1740.000 2.160.000 800.00

- 73 - 4nnexCInstitutional Development Component

consultancies; and (iv) management information systems for small business lending. The program wouldbe managed by the Project Administrative Secretariat (See Annex E), with support of a Project TechnicalAdviser and in consultation with IDA. Matching grant approval should be by the Steering Team, at therecommendation of the Administrative Secretariat.

4. In order to receive such a grant, the recipient financial institution would be required tosubmit a training program which would include, inter alia, activities (workshops, on the job training, sitevisits, courses attended) to be concluded, number of staff trained per activity, level of staff trained, typeof training conducted, sources of trainers, estimated training events, and expected results. Further, theuse of specialized consultants for training or systems development would need to be justified through thesubmission to the Administrative Secretariat. Finally, matching grants applied towards the developmentof internal systems and controls of SME lending activity, such as the development of a separate costaccount and loan portfolio monitoring system for the SBU unit or SME portfolio would need to bejustified by the submission of a similar plan.

II. Support of SEDCO in Sharpening its Financial Administration and Strategic Focus

5. Background. SEDCO's overall results in supporting emerging enterprises has beenpositive in the years since its founding in 1983. The institution has developed demonstrated institutionalcapacity in lending to SMEs and has reached an important segment of existing companies. Although itsborrower performance was adversely affected by the 1992 drought and its aftermath, SEDCO'sperformance when viewed from the perspective of sustainable enterprises supported, appears positive. Inthe past, SEDCO has experienced understaffing and staff turnover problems resulting from salaries notsufficiently competitive. In spite of the status of SEDCO as a parastatal and the presence of civilservants on the Board, SEDCO management operates independently and autonomously. Managementsupport had also been provided for a number of years through a CIDA-funded program. Through severaladvisors, this support has built up SEDCO's capacity in operations, client assistance and financialmonitoring. Access to financial resources has been constrained for SEDCO since its establishment,given that SEDCO has been and still is dependent on Govemment's budgetary allocations to cover itsoperating expenses. Slow Government disbursements have also created cash-flow constraints.Moreover, since the 1992 drought, losses in its loan portfolio have significantly reduced its net lending.

6. SEDCO defines its clientele as those enterprises with fewer than 50 employees and lessthan US$60,000 in assets. Seventy percent of its loans are in rural areas. SEDCO recently initiated aone-year pilot scheme in micro-finance using a group-lending methodology. These loans have a 12month term and monthly repayments and its cost of capital is under 10%. Enterprises must come up with15% of the overall project. SEDCO has also placed considerable emphasis on client training in order tosupport the growth of SMEs, providing training and technical assistance for its clients, and non-clientson a fee basis. For most clients, the first training/ technical assistance provided is in the form ofassistance to prepare loan submission, including, in effect, the business plan (e.g., projections, evaluationof markets). This process frequently requires a significant investment in time by SEDCO staff. Thiscost has been frequently cited by commercial banks as a serious constraint in their lending to SSEs.Clients are encouraged, and frequently required, to participate in one or more of the courses that SEDCOoffers in the core areas of business. With the assistance and financial support of CIDA, SEDCO hasdeveloped an Entrepreneur Development Program to assist a pre-screened group to develop businessproposals.

7. SEDCO has developed a fairly detailed screening process with loan origination,approval, monitoring and recovery capacity located in-house. The project review process includes: (i) areview of the current and projected financial position of the prospective borrowers; (ii) a marketcompetition analysis; (iii) a review of labor and management issues; and (iv) site visits. After some


time, SEDCO succeeded in implementing a solid computer monitoring system to manage the flow ofinformation and track clients in arrears. Currently, the institution has six branch offices all located inurban areas.

8. SEDCO has a capital base of about US$450,000 and an outstanding loan portfolio ofabout US$4.5 million. As of March 1995, SEDCO had a capital base of about US$750,000, 1,900 loansoutstanding, and a portfolio valued at about US$17.9 million. Its average loan size used to be underUS$10,000 but in recent years, SEDCO has increased that amount in an effort to provide support tolarger SMEs, many of which who have a credit history with SEDCO. A maximum size has been set atUS$120,000. Most of SEDCO's loans to date have been medium term loans, as 77% of all loans and79% of the value of all loans have been granted on a three to five year basis.

9. Strategic Plan. Prior to undertaking a program of strengthening SEDCO's financialadministration and strategic focus it is important to have a clear idea of the strategic objectives ofSEDCO's Board and management. It is therefore important to answer the following questions prior toproceeding to make commitments under this component as well as before potentially certifying SEDCOto intermediate funds under the Finance Component of the Project. Such a strategic plan should, at aminimum, indicate: (i) which segments of the market SEDCO is targeting in terms of size, sector andprocess, including ascertaining its objectives in microenterprise lending; (ii) more clearly define itsinterest rate policy, with clearer criteria for market adjustments; (iii) explain its funding and treasurystrategy, including realistic expectations of Government financing and the objectives and expectations ininviting in non-governmental shareholders; (iv) develop reasonable multi-year solvency targets whichthe institution could then work towards bearing in mind its strategic objectives; and (v) articulate targetsfor operating efficiency (operating costs as a percentage of loans outstanding), bearing in mind SEDCO'sobjectives to assistance services to its clients. Receipt of such a strategic plan, acceptable to IDA wouldbe a condition of disbursing funds under this subcomponent.

10. Program. Support under the Project would be provided to improve SEDCO's strategicfocus and its financial management. The project would provide US$170,000 of support for SEDCO asfollows: Assistance by a firm specialized in financial institution management strategy would becontracted by SEDCO to provide guidance in: (i) refining its strategic target borrower segments in termsof the competitive advantage the institution has to offer; and (ii) setting up a financial strategy so as tomaximize its funding and diversify its funding base; and (iii) review with SEDCO management issues ofstrategic and financial planning including, the implications of interest rate policy for capitalaccumulation and thus, levels of net lending and the strategic positioning of SEDCO in the SME, SSEand microenterprise markets. Further, a trained Financial Specialist would be contracted to provideassistance including: (i) training offinancial division staff in projections and financial planning, treasurymanagement and cost of funds assessment, calculation of financial risks; and portfolio appraisal; and (ii)training of business analysts in loan appraisal and project risk assessment. Assistance by a legalspecialist would be provided including: (i) training of Legal Desk Officers in legal procedures, includingloan liquidation's; (ii) training of Business Analysts in the legal aspects of registry/titling and recovery offixed and movable collateral; and (iii) training of Debt Recovery Unit Officers in the legal aspects andprocedures of collateral seizure and appropriation, including assessing client's worthiness of legalaction. The project would also provide for the acquisition of six desk-top computers, two printers andselect software to add to and replace SEDCO's aging computer systems.

III. Support to Strengthening RBZ Financial Institution Regulation and Supervision

11. Rationale. Under current law, the RBZ has the authority to issue statutory prudentialregulations for banking institutions, but has no authority to carry out on-site inspections, and limitedauthority to require information for surveillance purposes. The main statutory requirements for the

-75 - 4nnexzCInstitutional Development Component

banking system cover minimum capital and reserves and minimum liquidity balances. Operationalguidelines include gearing ratios, overall risk asset ratios, maximum exposure in any one customer orrelated groups of customers, and monitoring of foreign exchange dealings.

12. Financial liberalization, the increasing size and complexity of the financial system andpending modifications to banking legislation have resulted in significant increases in the responsibilitiesplaced on RBZ for financial institution supervision. The draft revised Banking Act would amend currentlegislation such that the regulatory authority and enforcement powers of the Banking SupervisionDepartment (BSD) in the RBZ would further increase significantly. The new Act would enable the RBZto perform on-site examinations and would widen its coverage to include finance houses and buildingsocieties. Further, current prudential banking guidelines would be transformed into regulations and newregulations would be drafted and implemented.

13. Program. In light of this pressing need for strengthened regulation and institutionalcapacity to implement such regulations, the project would provide US$200,000 of support for theinstitutional strengthening of the RBZ in its expanded role of regulation and supervision of financialinstitutions. Project funds would support the institutional strengthening of the RBZ in its regulation andsupervision of financial institutions by financing extemal consultants in providing hands-on guidanceand training in on-site inspection procedures and practices. Consultants would work closely with RBZstaff in conducting on-site inspections. Moreover, support would be provided in off-site analysis,including the application of eligibility criteria established. Finally, assistance would be provided in thedevelopment of implementing regulations and circulars to complement the revised Banking Act.Specific consultant support would be provided for: (i) drafting and implementation of prudential bankingregulations, including loan classification, provisioning and capital requirements under the revised BankingAct; (ii) assistance with the development of manuals for on-site and off-site bank examinations; (iii)practical assistance with on-the job on-site and off-site examinations (for instance from a foreign bankregulator); (iv) strengthening financial institutions' reporting to BSD and BSD's data analysis capacity;and (v) six laptop computers, four portable printers and select software for the BSD, in particular for usein on-site inspection and analysis.

IV. Support of the RBZ in Developing an Apex Unit and Credit Guarantee Agency

14. Rationale. The responsibilities taken on by the RBZ to manage the project's Apex andCredit Guarantee Agency (CGA) involve significant institutional development requirements and start-upneeds. Development of an efficient Apex will require considerable institution-building so as to assurethat the Finance Component functions efficiently. Further, efficient management of a CGA will provecritical to the success of the project.

15. Program. The project would provide US$70,000 of support to the RBZ in developingan Apex Unit and CGA. This would include:

* Development of Regulations and Procedures Manuals for the SME and Export Finance Facilities.Two consultant specialists would provide assistance in the development of the SME Finance Facilityand the Export Finance facilities, respectively. These manual will outline each step in themanagement of these finance facilities and will include each form of documentation required such asparticipation agreements, sub-loan data sheets, disbursement forms and guarantee documentation;

* Development of a Credit Guarantee Procedures Manual. Given that SME Credit guarantees andPreshipment Export Finance guarantees are considerably different from oneanother, specializedadvice would be provided to the CGA under the project in putting together the procedures for thesefacilities. Initial guidance would be provided by the individuals supporting the establishment of the


Apex which would then be complemented with one or more individuals with specific experience inSME and Export Finance guarantees. Much of the work of this individual(s) would be to refine theoperational procedures for guarantee execution.

Systems Development - Subproject Information Management and Disbursement System. Aconsultant would be hired under the project to assist Apex management in setting up an automatedoperating system for the management of the finance facilities, based on the finance facilitiesregulations manuals. In addition, the consultant will provide hands-on guidance to the Apex staff.Time permitting, the same consultant will be called upon to provide the same kind of operatingsystem design for the CGA, including initial staff training. Funds would also be provided for thepurchase of desktop computers and printers for the Apex and CGA.

V. Support of the Customs and Excise Department in its Automation and Administration of Duty-Drawback and Inward Processing Rebate Provisions

A. Background and Objectives

16. Background and Rationale. The Govemment has to date taken far-reaching measuresto improve the incentive framework for emerging exporters, including liberalization of access to foreignexchange and a reduction of duties on inputs. Yet anti-export biases remain, in part because of thedifficulty in administration of existing mechanisms for providing input duty relief for exporters.Assuring speedy access to imported inputs at world market prices is critical for emerging SME and infantdirect and indirect exporter to compete in the world market on an equal footing with foreign competitors.Offering efficient duty-free import schemes is the best export incentives that the Govemment can offer toemerging exporters without violating GATT rules on export subsidies as well as incurring budgetaryburdens.

17. Automation. The current Central and Regional Customs and Excise Department hashad very limited automation of duty assessments nor automation of the process of data centralization.Although a process is going on, further installation of desk-top computers in Regional Customs offices aswell as use by Customs Officers of transportable laptops could significantly increase the efficiency ofduty assessment and collection. Moreover, it could increase the efficiency of determining duty drawbackand inward processing rebate eligibility. The aim is to achieve more liberalized Inward ProcessingRebate permits authorization' as well as more speedy access to Duty Drawbacks (currently 7 to 8 monthsdelays in receiving drawbacks). Greater transparency in these schemes will prove critical for ensuringthe equal access for the schemes for SME, infant, or indirect exporters.

18. Standard Input-Output Coefficients. Published standard input-output coefficients area means by which direct and indirect producers are given a clear idea beforehand of the amount of dutythey can expect to pay on inputs that go into their products as well as a clear idea of the amount of rebateor other exemption they are entitled to. The use and publication of such coefficients would notfundamentally alter the process of duty assessment today but would merely increase the transparency andefficiency of such calculations. Publication of standard input-output coefficients and computerization ofIPR and Duty Drawback handling at the Regional Customs would make it possible for exporters to dealexclusively with the Regional Customs for IPR and Duty Drawback, eliminating their trips to and theduplicated administrative work of the main Customs office. In tum, cross-county experiences suggestthat the costs of pre-tabulating the standard input-output coefficients are much less than the Customs

I At this writing, only 41 exporters are allowed to use IPR.

-77 - AnnexInstitutional Development Component

manpower and exporters' administrative costs incurred in handling the input-output coefficients on an adhoc, non-systematic, and non-transparent way.

19. Common Bonded Manufacturing Warehouse Scheme. In order to provide access toduty exemption benefits (IPR-type benefits) for SMEs, infant, or indirect exporters, a Common BondedManufacturing Warehouse Scheme would be offered. Duty exemption would relieve SME or infantexporters from the high interest and working capital burdens associated with Duty Drawback. Thelicensed Common Bonded Manufacturing Warehouse operators would be allowed to hold the stocks ofthe duty-free imported items (under Custom bonds) for distribution to SME, infant, or indirect exportersbased on the published standard input-output coefficients and direct and indirect export orders atreasonable service charges that would include import and Custom agent fees. The license would begranted to private or public agencies. Upon the submission of the required export completiondocuments, the associated Custom Bonds would be released.

B. Program Support

20. The program is aimed to achieve four objectives: (i) develop an efficient and transparentsystem of Input-Output Coefficient Administration; (ii) improve the efficiency of Inward ProcessingRebate and Duty Drawback relief provisions; (iii) establish and implement a mechanism for duty reliefby indirect producers by a Common-bonded Manufacturers' Warehouse scheme; and (iv) furtherautomate the process of duty calculation and processing. This support will be closely coordinated withthe support of the EPZ Authority indicated in Section VI below. The Project will provide US$300,000 infunding to support achieving these objectives.

21. Standard Input-Output Coefficients. The project would support a Team Leader andthree foreign input-output coefficient experts for the estimation of the standard input-output coefficientsof the major manufactured export items. These coefficients (known as "formulae" or "ratings") would bepre-tabulated for key manufacturing export items (at the disaggregated H.C. level) by qualified sub-sector engineering staff. This exercise would be carried out in an office separated from the Regional andMain Custom units implementing the IPR and Duty Drawback on a daily basis and publish the standardinput-output coefficients for the daily use by exporters and Customs officials. An administrativemechanism could be established in the medium-term by which an input-output coefficient office couldissue new or revised standard input-output coefficients for new export items or items that need revisionsshortly after receiving exporters' requests. These individuals would have specializations in thetextile/garment, leather/footwear, and engineering/other sectors. They would be supported forapproximately 40 working days each. Additional tasks of these experts would be to estimate a fixeddrawback schedule for those outputs with complex and a large number of inputs such as electronicsgoods, and train the staff of the input-output coefficient office so that they can carry out the tasks ofupdating the standard input-output coefficients. In addition, the project would finance five desktopPentium computers and two printers to carry out the tasks of estimating, publishing, and updating thestandard input-output coefficients and fixed drawback schedule.

22. Systems Support. Assistance of one computer system expert would be needed forapproximately 30 working days (two three-week sessions) for the development of a computer program tobe used in the Regional Customs for the speedy administration of IPR, Duty Drawback and CommonBonded Manufacturing Warehouse schemes based on standard input-output coefficients and other importand export documents. Two desktop computers in each regional Customs office would also be supportedunder the project and five desktop Pentium computers and two printers to carry out the tasks ofestimating, publishing, and updating the standard input-output coefficients and duty drawback schedules.

- 78 - AnnexGC

Institutional Development Component

23. Study Tour. The project would support the participation of two individuals from theCustoms and Excise Department in the EPZ study tour referred to in the paragraphs below. The purposeof this exercise is to acquaint these officials with the "best practices" in other notable countries whereanti-export biases in the Customs regime have been reduced and thus exports flourished but where theintegrity of customs duty collections has remained.

VII. Support to the Export Processing Zone Authority (EPZ)

24. Rationale. An efficient Export Processing Zone can be key to expanded export growthan employment generation. Critical to this is the preparation of EPZ Customs Regime implementationguidelines. Unlike EPZ Acts in a number of developing countries that stipulate a special custom regime,the EPZ Act -- 1994 does not have a special provision on the custom regime. The Customs and Excise(General Amendment) Regulations, 1995 (No. 7) includes provisions on the custom regime for EPZs.However, these provisions are general. Assurance of the best practice EPZ custom regime will thereforelikely depend on the actual implementation of these provisions by Customs officials. In order to besuccessful in inducing foreign and domestic investors into the EPZs, it is necessary to let the potentialinvestors know the clearly spelled out customs regulations to be applied to the EPZs.

25. Program. As a first step to prepare EPZ implementation regulations, the project wouldsupport a study tour to review best practice EPZs such as the Dominican Republic EPZ. A team of stafffrom both the Customs and Excise Department and the EPZ Authority would travel to a select number ofdestinations for this purpose. Subsequently, in order to assist the preparation of the EPZ custom regimeimplementation regulations, the assistance of an external consultant who is an expert in EPZ customsregimes would provide support in drafting such regulations for a period of approximately 70 workingdays. Support would also be provided for two desktop computers for the EPZ Authority.

VIII. Support of the Ministry of Industry and Commerce

26. Rationale. In the last two years, the Ministry of Industry and Commerce has taken onan increasing active role in economic planning and in its role vis-a-vis multilateral institutions. Itsstaffing complement has indeed been weakened during the same period. The aim of this support wouldbe to provide training and computer support to MOIC staff in fulfilling its new mandate. The focus ofthis support would be to strengthen MOIC's private sector unit (in coordination with an existingNORAD-funded program) and improve its capacity for the coordination and management of multilateraland bilateral-supported programs.

27. Program. The project would provide US$100,000 funding for a series of focusedtraining sessions for MOIC staff on financial management, procurement, strategic planning, andcoordination of multilateral and bilateral organizations. Two desktop computers would also be financed,as well as one printer.

IX. Operation and Support of the Project Administrative Secretariat

28. The Operation of the Project Administrative Secretariat is indicated as Annex E. Thefinancing of the Secretariat would be as follows: The MOIC would second two staff to operate this unitas well as would provide external facilities for it to operate. Cofinancing would, in addition, providefinancing for an additional Technical Adviser who could assist the work of the Secretariat as well as unitmanagers of the ZMGS and Matchmaker Facility. It is estimated that the cost of the Technical Adviserwould cost US$540,000 over three years, and half of this individual's time (and budget) would bededicated to providing oversight of Institutional Development components and half to support of theBusiness Services Component.

AnnexD

Outline of Project FunctionsZIMBABWE: Enterprise Development Project

Outline of Project Functions

$ from Special Account SME Finance (Zim$)

APEX(Reserve Bank) Pre- and Post- shipment Export

SME and Export Finance Funds Finance (US$)

ParticipatingGuidance/ Financial

Arbitration of SME Credit Guarantee IntermediariesSelect Issues

............... .. Credit Guarantee Agency/FundPreshipment Export Finance Guarantee Emerging

$ Enterprises

Team Guidance/Arbitration Decisionmaking Select IssuesFreign Partner andFia-earrt ........... .... ----------- -- ........ *. . ,Foreign PartnerandFcian-

Matchmaker/Export lDomestic SuppoCounterpan ~ ~ an

DirectAdministrative . $ ZMGS Reformulated Matching Grant Program rGui-

and .. ... ........ ... ................. . .danceTechnical .Tearn_mSpecialist .| SA usco

..... . 5 Administrator b ~Businessl. . ......... , ~~~~~~~~Associations

. ~~~~~RBZ Banking. b~~~~P Supervision Dept.

. g ~~~~Customs & ExciseI

$ Matching 0 ~~~Financial l

s , - ---tED UL:--

- 80 - AnnexAdministrative Secretariat


Operations of the Administrative Secretariat

1. Functions - General. The objectives of the Administrative Secretariat are to serve as anadministrative arm of the Steering Team and to coordinate and manage the functions of the InstitutionalDevelopment component.

2. Administrative Arm of the Steering Team and Overall Project ManagementFunctions. As an administrative arm of the Steering Team, the Secretariat's functions would be to: (i)prepare agenda and minutes of meetings of the Steering Team and the Technical Committee of theSteering Team, as directed by Steering Team members. This could include transmitting Steering Teamapprovals and decisions, and, carrying out other actions as directed; (ii) transmitting quarterly progressreports to the Steering Team and IDA, based on data provided by the respective component orsubcomponent managers and, in the case of the Institutional Development component, also preparingsuch reports; (iii) coordinating the contractual process by which the Steering Team hires subcomponentmanagers under the project, in accordance with the procurement guidelines specified, includingsubmitting requests for "no objection" and accompanying documentation as needed to IDA; (iv)overseeing the transmission of applications, audit reports, certifications and/or rejections to the SteeringTeam from financial institutions seeking to participate under the project's Finance Facility. In the caseof financial institutions judged partially eligible, the Secretariat would be responsible for ensuring thatthe Steering Team has received progress reports on compliance with targets established forrecertification; (v) coordinating annual project auditing requirements; and (vi) assisting IDA supervisionmissions in coordination of the evaluation of each component.

3. Administration of the Institutional Development Component. Functions in theadministration of the Institutional Development Component would include: (i) administering thematching grant program for financial institutions (including reviews of applications and carrying outoutreach); (ii) overseeing that measures supported in the Customs and Excise Department and EPZAuthority are carried out in accordance with parameters established in the SAR and ProjectImplementation Plan; (iii) reviewing progress in the development program for SEDCO in relationship tofinancing provided; (iv) preparing a quarterly budgetary reconciliation and progress reports for theSteering Team and IDA on the level of commitments, disbursements and progress in reaching objectivesunder each of the Institutional Development subcomponents; and (v) coordinating the contractual processfor services and goods contracted under the Institutional Development component, including submittingrequests for "no objection" and accompanying documentation as needed to IDA.

4. Composition and Appointment. The Secretariat would be comprised by a Unit Headand two assistants. The Unit Head and one assistant would be identified by the Ministry of Industry andCommerce, subject to the no-objection of IDA. The Ministry would also supply the Secretariat withoffice space, equipment and support to carry out its mandate. Both staff of the Unit would report to theSteering Team.

5. It is expected that the third individual, a Technical Adviser would provide part-timeassistance to the Secretariat (serving as one of the assistants) in addition to advisory roles under theBusiness Services component. Such a Technical Adviser would be financed under the project.

Annex FZIMBABWE: Enterprise Development Project

Implementation Schedule

1996 1997 1998 1999ID Task Name Duratio Start Qtr2 Qtr3 Qtr4 Qtr 1 Qtr2 Qtr3 Qtr4 Qtr 1 | Qtr 2 Qtr3 | Qtr4 Qtr 1 Qtr 2 Qtr3 |Qtr41 I Financing Component -A. SME Financing 187w 6/3/96

2 Appoint Apex Staff 21d 6/3/96

3 Develop Apex Operating Guidelines 49d 7/1/96

4 Formalize Financial Intermediary Eligibility Cntena 49d 7/1/96

5 Develop SME Credit Line Guidelines 49d 7/1/96

6 Issue SME Credit Line Guidelines Od 9/5/96 *9/57 CertIfy Eligibility of Financial Intemiediafies 860d 9/16/96 _ _

8 Receive and Process Subloan Applications 849d 10/1/96 ___

9..

10 B. Export Financing 183w 7/1/96

11 Develop Export Finance Guidelines 49d 7/1/96

12 Issue Export Finance Guidelines Od 9/5/96 *9/513 Receive and Proess Subloan Applications 849d 10/1/96 -_ _ __|

15 C. SME Credit Guarantee Facility 187w 6/3/96

16 Appoint Credit Guarantee Agency Staff 21d 6/3/96

17 Develop and Issue CGA Operating Procedures 59d 6/17/96

18 Issue CGA Operating Procedures Od 9/5/96 * 9

19 Develop SME Guarantee Guidelines 49d 7/1/96

20 Issue SME Guarantee Guidelines Od 9/5/96 *9/5

21 Receive and Process Guarantee Applications 860d 9/16/96 ._.

22 Receive and Process Applications for Payrent on Guarantees 828d 10/30/96 __:

23 1

Task Summary Rolled Up Progress

Proje:ct./9 Progress Rolled Up Task

Milestone *Rolled Up Milestone

Page 1



1996 1997 1998 1 1999ID Task Name Duratio Start Qtr 2 tQtr4 Qtrl Qtr2 Qtr3 Qtr424 D. Export Finance Guarantee 187w 6/3/96

25 Appoint Credit Guarantee Agency Staff 21d 6/3/96

26 Develop CGA Operating Procedures 59d 6/17/96

27 issue CGA Operabng Procedures Od 9/5/96 *9/528 Deveop SME Guarantee Guidelines 49d 7/1/96

29 Issue SME Guarantee Guidelines Od 9/5/96 * 9/5

30 Undertake Marketng Seminars on Export Finance 3w 10/1/96

31 Receive and Process Guarantee Applicabons 860d 9/16/96

32 Receive and Process Applications for Payment on Guarantees 828d 10/30/96 .

33

34 lI. Business Services Component 165.2w 6/5/96 _

35 Issue RFP, Receive Proposals, Appoint Dom Staff 5.8w 6/5/96

36 Issue RFP, Receive Proposals, Appoint Foreign Consultants 5.8w 6/5/96

37 Develop SBAI Operating Procedures 16d 7/15/96

38 Issue SBAI Operabng Procedures Od 8/5/96 * 8/5

39 Develop ZMGS Operating Procedures 16d 7/15/96

40 Issue ZMGS Operating Procedures Od 8/5/96 * 8/

41 Develop Matchmaker Operabing Procedures 16d 7/15/96

42 Issue Matchmaker Operating Procedures Od 8/5/96 * 85

43 Carry Out Component 156.6w 8/5/96

45 III. Institutional Development Component 156w 6/3/96

46 A. Modemizabon of inpul-Outpul Coefficient Administration 112.4w 9/5/96 _

Task Summary Rolled Up ProgressProject:Date: 4/1/96 Progress Rolled Up Task

Milestone Roled Up Milestone <Page 2



1996 1997 1998 1999

ID Task Name Duratio Start Qtr2 Qtr3 Qtr4 Qtr 1 Qtr2 Qtr3 Otr4 Qtr1| Qtr2 Qtr3 Qtr4 Qtr1 Qtr2 Qtr3 Qtr4

47 Conbt Tean Leader 29d 9/5/96

48 Leader Develops aid Manages Progran 521 d 11/1/96

49 Contract Input-Output Coefficient Expert 1 4.8w 1/6/97

50 Development of Input-Output Coefficients 26w 2/7/97

51 Issuance of Input-Output Coefficient Book Od 8/7/97 81

52 Conbtrcl Input-Output Coefficient Expert 2 4w 5/30/97

53 Deveowent of Input-Output Coefficients 26w 7/1/97

54 Issuance of Revisions to Input-Output Coefficient Book Od 8/7/97 * 8/

55 Contract Input-Output Coefficient Expert 3 4w 1/6/98

56 Development of Input-Output Coefficients 26w 2/10/98

57 Issuance of Input-Output Coefiient Book Od 6/30/97 * 6/30

58 Issuance of Input-Output Coefficient Book Revisions Od 6/30/98 * 6/30

59 Devebpment of Revised Customrs Procedures 26w 12/2/96

60 Issuance of Revised Customr Procedures Od 5/30/97 * 5/30

61

62 B. Inr creasing the Efficiency of Inwad Processing Zonse Duty Drawbc 16w 7/1/96

63 Establishment of Common Bonded Waehouse Guidelines 16w 711/96

64 Design of Study Tour 6w 7/1/96

65 Study Tour 2w 8/12/96

66

67 C. Custors Procedures for Export Processing Zones 51.2w 8/15/96

68 Appointment of EPZ Authority Board Od 8/15/96

69 Consitution of EPZ Aulhority/Staffing 12w 8/15/96

Task Summary _~ Rolled Up Progress

Prjete:/19 Progress Rolled Up Task _

Milestone *Rolled Up Milestone

Page 3



1996 1997 1998 1999ID Task Name Duratio Start Qtr2 Qtr 3 Qtr4 Otr Qtr1 | Qtr2 |Qtr3 |Qtr4 Qtr 1 Qtr2 Qtr3 Qtr470 Contract EPZ Authority Consultant 4.8w 1/6/97

71 Devetoment of EPZ Implemening Regulations 26w 27/797

72 Design of Study Tour 6w 1/6/97

73 Study Tour 2w 2/17/97

74

75 D. Matching Grants for Strengthening the Capacity of Financial Instituti 164w 6/17/96 _ I r

76 Design of Matching Grant Operating Guidelines 4w 6/17/96

77 Issuance ot Guidelines Od 8/12/96

78 Operabon of Program 156w 8/12/96 _

79=.

80 E. Strengthening SEDCO 16w 6/3/96

81 Issuance of Revised Strategy Plan by SEDCO Mgmt Od 6/3/961 ~~~~~~~~~~~~~~~~~~~~~~~~~00

82 Conracting of Legal Consultant 21 d 6/3196

83 Consultant Support 59d 7/2/96

84 Contracting Debt-Recovery Consultant 21 d 6/3/96


86 Contractng for tIe Purchase of Computers 21 d 6/3/96

87 Computer Installation 59d 7/2/96

88..

89 F. Eligibility Assessments of Financial Insbtutions 154.2w 711196 _

90 Issuance of Eligibility Coteria for Financial unstilutions Od 7/1/96 * 7

91 Issuance of Audit Guidelines for Contracting Od 7/2/96

92 Administration of Eligibility Cert. Procedures 154w 7/2/96 _

Task Summary _ Rolled Up ProgressProject:Date: 4/1/96 Progress Rolled Up Task

Milestone Rolled Up Milestone KPage 4



1996 1997 1998 1999

ID Task Name Duratio Start Qtr 2 | Qtr 3 | Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 4 Qtr 1 Qtr 2 Qtr 3 Qtr 493

94 G. Reserve Bank - Banking Supervision 16w 6/3/96

95 Issuance of Revised Strategy Plan by SEDCO Mgmt Od 6/3/96 * 6/3

96 Contractng of Legal Consultant 21 d 6/3/96


98 Contractng Debt-Recovery Consultant 21 d 6/3/96 f99 Consultant Support 59d 7/2/96

100 Contractng for the Purchase of Computers 21 d 6/3/96

101 Computer Installabon 59d 7/2/96

102

103 H. Reserve Bank -APEX 108.6w 5/30/96

104 Contractng of Consultant 4w 5/30/96 ..

105 Consultant Support 104w 7/2/96

106

107 I. Reserve Bank -Guarantee Facility 108.6w 5/30/96

108 Contracbng of Consultant 4w 5/30/96 -


110

111 J. Support of the Ministry of Industry and Commerce 108.6w 5/30/96

112 Contractng of Consultant 4w 5/30/96


Task Summary l Rolled Up ProgressProject:______ ___

Date: 4/1/96 Progress Rolled Up TaskMilestone Rolled Up Milestone K

Page 5

-86-Procurement


Summary of Procurement Arrangements(US$ million)

NCB Q1hr�r NIE TotalProject Component Pr�CMt

Finance ComponentSME and Export Credit Finance Facilities 60.0w 18.1 78.1

(60.0) (60.0)

Guarantee Facilities 10.0 10.0

Business Services/Institutional Development Componeji1�

Personal Computers and Office Equipment 0.1- � 0.2(0.1) (0.1) (0.2)

Consultants' Services 8.8 6.9 15.7(8.8) (6.3)

Training 1.0 1.0 2.0(1.0) (1.0)

Total 0.1 69.9 36.0 106.0(0.1) (69.9) (70.0)

NIF - Not IDA-financed. Amounts in parenthesis are the amounts IDA financed.

Note: Bank Standard Bidding Documents will be used for ICR and sample Letters of Invitation (LOI) for selection of consultants.

aL All ICB procurement documents and arrangements will be subject to prior review by IDA. Although the latterrequirement could be applied in the event of the modification of the size of subprojects, these requirements would not bebinding in the project's current form.

bL Procurement would be required according to local shopping procedures for any single contract totaling US$30,000 or less.For each contract costing more than US$30,000, but less than US$100,000, procurement would be made by NationalCompetitive Bidding procedures (NCB). Contracts in excess of US$100,000 would be made in accordance withInternational Competitive Bidding (ICB) procedures. All NCR and ICR procurement documents and arrangements wouldbe subject to prior review by IDA.

- 87 - Annex HDisbursement


Summary of Disbursement Arrangements(US$ million)

(Percent in Parentheses)

Category Amount % of Expenditures Financed

(1) Finance Component 60.0 100% of amounts disbursed(85.7)

Business Services/Institutional Development100% of amounts disbursed

(2) Matching GrantsPFIs 0.4

(0.6)

Other Items 4.1(5.9)

(3) Goods 0.1 100% of foreign expenditures,(0. 1) 100% of local expenditures (ex-

factory cost) and 90% of localexpenditures for other itemsprocured locally

(4) Training and Consultant Services 100% of amounts disbursedEPZ Authority 0.1

(0.1)

SEDCO 0.1(0. 1)

Other Items 3.4(4.9)

(5) Unallocated 1.8(2.6)

Total 70.0(100.0)

Estimated IDA Disbursements(US$ Millions Equivalent)

IDA Fiscal Year 1997 i998 1999 2000 2001 2002 2003Annual 4.2 5.6 11.2 14.0 14.0 11.2 9.8Cumulative 4.2 9.8 21.0 35.0 49.0 60.2 70.0

- 88 - Annex IProject Supervision Plan


Project Supervision Plan

1. IDA Supervision. The input indicated in Table 11 below indicates an estimate of thetotal IDA staff and consultant resources required for the supervision of this Project. This includes: TaskManager supervision, specialist support, particularly in the export finance, SME Finance and businessservices areas, and support by a local specialist in the Resident Mission working one-third time for aperiod of three years.

Table 11: Estimated Staff Weeks for Project SupervisionFY96 FY97 FY98 FY99 FY00 FY01 FY02 FY03 ICR. Total

Task Manager- in Field 3 4 4 4 4 4 4 2 29SME Finance Specialist 2 2 2 6Export Finance Specialist 2 2 2 6Business Services Specialist 2 3 1 2 8Institutional Development Specialist 2 2 4Subtotal - Field 9 13 5 12 4 4 4 0 2 53

Task Manager- Headquarters 7 11 11 11 11 11 11 3 8 84Resident Mission - Local Project Specialist 2 15 15 15 8 8 63TOTAL 18 39 31 38 23 23 15 3 10 200

2. Borrower's Contribution to Supervision. Project counterparts will have supervisionresponsibilities as follows:

Table 12: Responsible Counterparts for Project Supervision

Responsible Issue Area ContentAuthorityProject Overall Project * Submit quarterly progress reports to IDA based on theAdministrative Implementation compilations of other counterparts indicating progress inSecretariat implementation;

* Project review meetings with the participation of the variousproject agencies to be held during the semi-annual supervisionmissions;

* Interact and accompany IDA supervision missions; and* Compile and submit annual audit reports on Project Accounts,

special accounts, statements of expenditures within six monthsafter the end of the Government fiscal year.

Direction and Progress . Submit quarterly progress reports to Administrative Secretariatof Institutional (IDA) indicating the progress in disbursement as well as progressDevelopment in reaching the objectives as indicated by monitoring indicators;

and* Monitor disbursements and request categorical reallocations to

Steering Team as necessary.


Project Overall Project Design * Review with supervision missions the progress in achieving projectSteering Team and Implementation objectives, including recommendations for project modification as

may be necessary; and* Review progress against monitoring indicators in Project

Implementation Plan.

Apex Progress in SME and . Submit bi-annual progress reports to the AdministrativeExport Finance Secretariat and to IDA indicating progress in creditFacilities and disbursements, repayments, SME and export development;participation of financial . Monitor project activities and the meeting of objectives asintermediaries indicated in monitoring indicators; and

* Compile and submit annual audit reports on PFIs' financialstatements, as well as special audits performed with respect toeligibility criteria as necessary.

Credit Progress in SME and * Submit bi-annual progress reports to the Administrative SecretariatGuarantee Export Finance and to IDA indicating Guarantee coverage, guarantee certificatesAgency Guarantee Schemes issues, data on credits guaranteed, and financial stocks and flows of

Credit Guarantee Funds; anda Monitor project activities and the meeting of objectives as

indicated in monitoring indicators.

ZimTrade, Progress in the Zimtrade . Submit bi-annual progress reports to IDA indicating levels ofZMGS Matching Grant Scheme matching grants, budgetary expenditures, progress in reachingManagement subcomponent objectives as measured by monitoring indicators;Team and

- Work in partnership with supervision mission in evaluatingsubcomponent progress.

Matchmaking Progress in Establishing * Submit bi-annual progress reports to the Administrative SecretariatManagement Matches/Export and to IDA indicating levels of matching grants, budgetaryContractor Catalysts that Result in expenditures, progress in reaching subcomponent objectives as

Sustainable Export measured by monitoring indicators; andRelationships a Work in partnership with supervision mission in evaluating

subcomponent progress.

3. Supervision Issues. The following are the principal issues which will require review onan ongoing basis:

(a) Implementation experience in terms of efficiency and client responsiveness by the SteeringTeam and Administrative Secretariat;

(b) Size, quality and implementation experience of SME Finance Fund, Export Finance Fund;SME Credit Guarantee Facility and Export Finance Guarantee Facility;

(c) Progress and implementation experience in the SBAI Initiative;

(d) Progress and implementation experience in supporting emerging exporters through theZimTrade Matching Grant Scheme;

(e) Progress and implementation experience in supporting emerging enterprises through theMatchmaking Facility;


(f) Progress and implementation experience in reaching the policy and institutionaldevelopment objectives supported by the Institutional Development Component;

(g) Review of complementary initiatives by Government, the private sector or other donors,including USAID's Credit Guarantee Facility;

(h) Review with Government and private sector officials the status of their commitment tothe objectives and components in the Project;

(i) Review of procurement procedures being applied;

(j) Review of disbursements, including examination of back-up documentation for SOEsand other accounts; and

(k) Review of audited accounts.

4. Content and Timing of Supervision Missions: The following are the content andtiming of supervision missions:

Table 13: Content and Timing of Supervision Missions

Date Activity Resources StaffWeeks

May, 1996 Pre-effectiveness and Project Launch mission; Task Manager, SME Finance 9Review of conditions of Effectiveness; review of Specialist, Trade Finance Specialist,project implementation arrangements; review of Business Services Specialistprocurement documents and procedures.

August, Items 3(a) through 3(k) above. Task Manager, SME Finance 71996 Specialist, Business Services

Specialist, Local Specialist

December, Items 3(a) through 3(k) above Task Manager, Trade Finance 61996 Specialist, Local Specialist

June 1997 Items 3(a) through 3(k) above Task Manager, Local Specialist 4

December Items 3(a) through 3(k) above Task Manager, Business Services 51997 Specialist, Local Specialist


December Mid-Term review (See para. 5) Task Manager, SME Finance 121998 Specialist, Trade Finance Specialist,

Business Services Specialist,Institutional DevelopmentSpecialist, Local Specialist


December Items 3(a) through 3(1) above Task Manager 21999

June 2000 Items 3(a) through 3(k) above Task Manager 2

- 91 - Annex/Project Supervision Plan

December2000 Items 3(a) through 3(k) above Task Manager 2

June 2001 Items 3(a) through 3(k) above; Task Manager 2

December . Items 3(a) through 3(k) above; Task Manager2001 . Review of information requirements and

procedures for Implementation Completion

June 2002 Project completion mission. Preparation of Task Manager 2Implementation Completion Report

5. Items for Mid-Term Review. The following are the principal items for Mid-TermReview:

* Progress with implementing components of the project in relation to established monitoringindicators;

* The adequacy of institutional arrangements including the operation and efficiency of the SteeringTeam and Administrative Secretariat and implementation of the various components of theproject;

* Progress in the implementation of the SME Finance and Guarantee Facilities;* Progress in the implementation of the Export Finance and Guarantee Facilities;* Random review of progress in individual SMEs and Exporters;* An assessment of the refinancing rates and the evolution of PFIs interest rate spreads;* Progress in the development of emerging enterprises -- SME's and Exporters -- income and

employment generation and sustainability of such enterprises;* Progress in the implementation of the Business Services Component, including the SBAI

Initiative, ZMGS, and Matchmaking Facility;* Review of procurement status for all project components; and* Progress in conducting institutional development programs.

- 92 - AnnexJEconomic Analysis - Project Performance Indicators


Economic Analysis - Project Performance Indicators

1. Many of this project's benefits are difficult to measure because the project supports theacceleration of a process that leads to an outcome rather than a concrete outcome directly. Nevertheless,the best estimate is that the project would generate a Net Present Value (NPV) of US$52 million at adiscount rate of 12 percent and an Economic Rate of Return (ERR) of 24.7%. This estimate is based on amethodology whereby the project is assumed to accelerate an increase in output by three years. Suchan increase in output is therefore expected be realized without the project, albeit three years later.Table J I below summarizes the quantitative results of the analysis undertaken, including ERR and NPV

calculations done on a subcomponent and on an aggregated basis. Chart JI indicates graphically theeffects in net increases in direct economic output by support provided under the project. A summary ofthe principal assumptions is indicated below .

Table Jl: Economic Analysis Summary(US$ Millions)

Present EconomicValue of Net Net RateIncreases in Present of

Output Value Return1. SME Finance 38.2 1.4 13%2. Export Finance 80.3 29.0 26%3. SBAI Matching Grants 7.8 4.7 42%4. ZMGS Matching Grants 19.8 12.5 51%5. Matchmaking Facility 7.2 4.2 46%6. Institutional Development 2.6 0.4 16%7. Contingencies 0.0 12%Total 156.0 52.1 24.7%

2. Methodology. The methodology of the assessment was as follows:

* For the Business Services component, matching grants for emerging exporters (ZMGS MatchingGrants) is expected to accelerate an increase in output for these firms of 10 times the amount of thematching grant. Although empirical data in other, primarily East-Asian countries, indicatedincreases in output of at least 15 times, this analysis used more conservative assumptions (of 10times). This expected increase in output was then reduced by two thirds. This reduction in netbenefits is based on an assumption of the level of resources expected to be diverted from othereconomic activities to achieve this result. The process of providing matching grants for BusinessAssociations leads to a more indirect result. However, for purposes of consistency, a similarmethodology was applied, with an expectation of an accelerated increase in output in accordancewith the increase in membership and level of provision of services provided by associations. For theMatchmaking Facility, given its similarity to ZMGS matching grants for purposes of economicanalysis, a similar accelerated increase in output was assumed -- ten times the level of support,reduced by 2/3 as above.

The full tables indicating the precise results by component and subcomponent are available in the Project Files. The analysis of benefitsmethodology is adapted from Levy. Berry and Nugent, "Successful SMEs and Their Support Systems," forthcoming, mimeo, 1996.

-93- AnnexJEconomic Analysis - Project Performance Indicators

Table J2: Cash Flow and Output Determinants of Economic Results(US$ '000)

IDA Proiect Net Increase in Economic Output Owing to Proiect b/Cost Cost Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7

1. SME Finance 25,000 -36,875 1,042 5,990 13,906 17,812 13,854 5,937 9902. Expor Finance 35,000 -51,270 2,187 12,578 29,203 37,406 29,094 12,469 2,0783. SBAI 1,400 -3,115 187 960 2,387 3,507 3,200 1,773 4674. ZMGS Matching Grant 3,765 -7,253 833 3,750 7,917 9,167 6,250 2,0835. Matchmaking Facility 1,750 -3,050 450 1,575 2,925 3,150 2,025 6756. Institutional Development 1,360 -2,240 420 980 1,540 1,120 5607. Contingencies a/ 1,725 -2,197 475 475 475 475 475 475 475

Total 70,000 -106,000 5,174 25,328 57,233 72,497 56,438 24,533 4,569

a/ A cash-flow amount was interpolated for contingencies in order to arrive as a 12% ERR (zero NPV) so as not to skew the results for theproject total.

b/ Reduced by 2/3.

* The Finance component is expected to accelerate an increase in output by SMEs and emergingexporters by reducing the funding constraint and by reducing the level of risk through the guaranteemechanism. Increases in output for SMEs were assumed to be equal to the amount of financing,with a lag of 6 months after disbursement to realize the output results. This assumes that investmentand permnanent working capital financing yield a rapid increase in output. Inputs are assumed toturnover twice per year and a five percent default rate per year is assumed. Increases in output ofemerging exporters were assumed to be the amount of export financing, based on an expectation ofturnover three times per year, with a similar five percent default rate per year. The estimatedincreases in output for SMEs and emerging exporters was, as above, reduced by 2/3.

* Measurement of the economic benefits of Institutional Development support is the most difficult,because support only yields provision of services to firms indirectly. Nonetheless, for the purpose ofconsistency, it was assumed that this support would accelerate an increase in output, staggered twoyears after disbursements, equal to 1.5 times the level of support. In the case of matching grants forPFIs (part of the Institutional Development Component), output by PFIs was assumed to increase byfive times the amount of the matching grant, also 2 years after disbursement.

3. Results. The above analysis yielded a series of accelerated increases in output levels persub-component. The same scenarios were then repeated, albeit, staggered three years behind the firstanalysis. This is based upon the assumption that the principal result is the acceleration of a process bythree years. As indicated in Table J2 and Chart JI below, the final economic results are represented bythe present value calculations of the difference between the first scenario of increases in output resulting

from the project and the same scenario, three years behind it. The results suggest that the overall projectcan be strongly justified in NPV and ERR terms. The Business Services subcomponents had muchstronger projected rates of return (42%-51%) that the Finance subcomponents (13%-26%). Thedownside risks are borne out through sensitivity analysis below:

4. Sensitivity Analysis. As indicated in Table J3, Sensitivity Analysis was performedyielding the following results: First, given the possibility of more gradual disbursement andimplementation owing to macroeconomic circumstances and slow progress in developing theimplementing institutions, an analysis was made of a slower disbursement process. By elongating thedisbursement period from approximately 4 years for all components to approximately 6 years (financecomponent) and business services and institutional development from 3 years to 5 years, the effect forthe project was to reduce the NPV from US$52.1 million to US$40.7 million and the ERR from 24.7% to

- 94 - AnnexEconomic Analysis - Project Performance Indicators

21.1%. This suggests that a slower implementation period will not have a material effect on theeconomic impact of the project.

Chart JI: Summary of Project Economic Effects250,000,000

a.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~oaX /~~~~~~~~~~~ ~~~~~~ ¢ ~~~~~~~Without, 200,000,000 Project

E° 150,000,000 / /Total WithzzJ: 4& /Project

LU 'D 100.000,000 Z

50,000,000 X - m . ..- Net EffectS 50,000,000 S __g/ ,_

z

0 -2 3 4 5 6 7 8 9 1C af -Net Effect

Years Adjustment

5. The second evaluation was to modify the reduction in the level of output attributed todiversion from other sources. In this case, by increasing the reduction from 66.7% (the base case) to75%, the NPV remained still significantly positive ($13.1 million) and reducing the level of reduction to50% increased the NPV quite significantly to US$130.1 million. Thus, although the outcomes aresensitive to the effects of modifying this variable, all of the outcomes present positive NPVs within theparameters (50%-75% reduction) established in the theoretical foundation for this approach.

6. An evaluation was conducted of the Finance component, testing how changes in theassumed rate of turnover of the firms financed would effect the economic results (using the evaluation ofthe three year lag as per above). The base case assumes that, in the case of SMEs, turnover would betwice per year (in accordance with company discussions), with output increasing at the level offinancing. In the case of emerging exporters, turnover is assumed to be three times per year, with outputincreasing at the level of financing. In the case of SMEs, by reducing the assumed level of turnover fromtwo times per year to one time, the subcomponent resulted in a negative NPV. The break-even point was1.93 times turnover per year. This suggests that the downside risk in these terms is relatively significant.In undertaking the same analysis for exporters, the results are similar (given that the calculation issimilar). The base case assumes that, in the case of emerging exporters, turnover would be three timesper year (in accordance with company discussions), with output increasing at the level of financing. Inthis case, the break-even point was a similar 1.92 cycles per year but even reducing the cycles to 2 peryear still yielded a positive NPV. This suggests that to the degree to which output is affected by theability of firms supported to increase production is the same for exporters as for SMEs, the downside riskis less for exporters because the marginal increase in output is greater given the shorter production cycle.

7. The evaluation of the Business Services Component was first examined changing theexpected increase in output of firms under the SBAI subcomponent as a function of support of businessassociations. First, firms participating in associations supported by the program and firms joining theseassociations under the base case were assumed to increase output by US$10,000. When this amount wasreduced to US$5,000, the NPV was reduced from US$4.7 million (42% ERR) to US$0.8 million (18%ERR), with the break-even point (in terms of NPV) at US$4,000 per firm. This means that ifparticipating firms do not increase their output by US$4,000 over the period, the project will have been

- 95 - Annex JEconomic Analysis - Project Performance Indicators

unsuccessful in the sense of yielding a 12% ERR. For the ZimTrade Matching Grant, the analysisevaluated the impact of changing the expected increase in output for each firm from the base case of 10(I$ of matching grant accelerates a US$10 increase in output). The results here were that the multiplegoes as low as 3.66 before the NPV would become negative. On the upside, an assumption of a multipleof 15 (consistent with East Asian experience) yields an NPV of $22.4 million (ERR of 72%). Sensitivityanalysis for the Matchmaking Facility yielded a somewhat similar result. If output by affected firmswere to increase by five times the level of grants (as opposed to the base case of ten times), the NPVbecomes US$0.6 million (18% ERR). The break-even point is for output to increase 4.2 times the levelof grants. However, the upside potential indicates that if output increases 15 times the level of grants,then the NPV rises to $7.8 million (ERR 68%). This suggests that the Matchmaking Facility could reachless than half its output expectations and still be considered successful.

8. The evaluation of the Institutional Development component first examined changing therelationship between the level of support and the expected level of output. The base case assumed thatfor each US$1 of support, output increased by a multiple of 1.5 times the support, albeit two years afterdisbursement. Changing the ratio of increases in output to support from 1.5 to 1.0 resulted in a negativeNPV of US$ 100,000 (ERR I I%). The break-even point to reach the 12% ERR threshold is for output toincrease 1.1 times the level of support, two years after disbursement. Separately, an evaluation was doneof the PFI Matching Grant Facility. The base case assumed that output of PFIs would increase at a ratefive times the level of the matching grant, yielding an NPV of US$0.4 million (ERR 16%). The break-even point for this subcomponent was found at the point where the increase in output is equal to 3.5times the matching grant support. Thus even by very conservative assumptions, this subcomponentseems to have a relatively low threshold to be considered successful in these terms.

9. Performance indicators are provided in the Project Implementation Plan. A summary ofthese indicators is indicated in Table J4. Many of the performance indicators are inputs for the economicassessment methodology.


Table J3: Sensitivity Analysis Summary

Scenario Sensitivity Analysis Cases Variable NPV ERRPerformed Amount (S Millions) cm

Overall ProjectDelayed Project Elongated Disbursement Base Case Reg. Disbrsmnt. $52.1 24.7Implementation Schedule Alternate Slow Disbrsmnt. 40.7 21.1

Change in Percent reduction in Base Case 66.7% Reduction 52.1 24.7Diversion increase in output Alternate 50% Reduction 13.1 15.5Assumption attributed to diversion Alternate 75% Reduction 130.1 39.7

from other sources.

Finance ComponentSME Finance Assumed Turnover/year Base Case 2 times/year 1.4 13Fund High Case 3 times/year 20.5 26

Low Case I time/year -17.8 5Break-even Case 1.93 times/year 0.0 12

Export Finance Assumed Turnover/year Base Case 3 times/year 29.0 26Fund High Case 4 times/year 55.8 37

Low Case 2 times/year 2.3 13Break-even Case 1.915 times/year 0.0 12

Business Services ComponentSBAI Matching Increase in output per Base Case $10,000/firm 4.7 42Grants firm in associations per High Case $20,000/firm 12.5 73

year. Low Case $ 5,000/firm 0.8 18Break-even Case $ 4,000/firm 0 12

ZMGS Matching Export output increase Base Case 10 12.5 51Grants as a multiple of the High Case 15 22.4 72

amount of Matching Low Case 5 2.6 22Grants. Break-even Case 3.66 0.0 12

MM Facility Export output increase Base Case 10 4.2 46Matching Grants as a multiple of Amount High Case 15 7.8 68

of Matching Grants. Low Case 5 0.6 18Break-even Case 4.2 0.0 12

Institutional Development ComponentPFI Matching Export output increase Base Case 5 0.4 16Grants as a multiple of Amount High Case 10 1.7 26

of Matching Grants. Break-even Case 3.5 0.0 12

Institutional Increase in output as a Base Case 1.5 0.4 16Development multiple of Project High Case 2.0 0.8 19(Non-PFI Support. Low Case 1.0 -0.1 11Matching Grants) Break-even Case 1.1 0.0 12


Chart J2: Sensitivity Analysis: Elongated Disbursement Scenario

300,000,000-*- + Total With

Project250,000,000- ;-Projed

S 200,000,000 -U- /- Totala.

S ~~~~~~~~~~~~~~~~~~~~~~~~Withouto - Project' 150,000,000 ------------ t------

100,000,000 - - - Net Effect

50,000,000 S X - -- -.--- -----x. -~~~

O j _ .... -X- / X^ . -' fflF --- -X- Net Effect0 _NAfter

1 2 3 4 5 6 7 8 9 11 Adjustment

Year

Main Assumptions

A. All ComponentsI. Increases in output are assumed to be accelerated by a period of three years. Such increases in

output are therefore e-xpected to have been realized without the project, albeit three years later.2. Net Present Value and Economic Rate of Return calculations done based on the difference in

increases in output between two scenarios, with and without the project respectively.3. The results of the differences in marginal output under the two scenarios is reduced by 67%. This

is based on the assumption that two-thirds of the increase in output is assumed to be attributed toeffects drawing away resources from other activities.

4. ERR and Net Present Value calculation done for a ten-year period, assuming the full project costsare expended up-front2.

B. Business Services Component1. SBAI. Assumes 17 subsector associations supported through development support and 36 through

matching grant support (US$10,000 in development support and US$30,000 in matching grants).Assumes average association supported has 14 members, all of which increase by 2 members eachyear. Assumes average firm in each association supported increases output by US$10,000 per yearattributable to membership in the association and support provided to the association. Increase inoutput has a lag of six months after disbursement of SBAI matching grant.

2. ZimTrade Matching Grant Scheme. Assumes 60 firms supported through ZimTrade matchinggrants (US$50,000 in matching grants for each firm). Assumes that the increase in exports is equalto 10 times the level of the ZimTrade matching grant, with a lag of 6 months after matching grantprovided.

3. Matchmaking Facility. Assumes 40 matchmaker transactions supported over three years andUS$30,000 provided to each matchmaker. Assumes 90% of matchmaker transactions supported

2If one were to calculate the project's costs over the entire disbursement periods, the Net Present Value and ERR calculations wouldincrease.

- 98 - Annex)Economic Analysis - Project Performance Indicators

result in export transactions and such transactions result in an average level of export transaction is10 times the level of matchmaker support, with a lag of 6 months after matching grant provided.

C. Finance Component1. Disbursements are assumed over a four year period: 20% year 1, 30% year 2, 30% year 3, and 20%

year 4. This is more rapid than the disbursement period given in Schedule A.2. Output is assumed to increase at a rate equal to new disbursements, with a lag of 6 months. This

means that in the case of SME financing, investment and permnanent working capital costs areassumed to result in an increase in output, with turnover twice per year. In the case of Exportfinancing, turnover is assumed to be three times per year. Increase in output was conservativelyassumed to be working capital costs. No additional output results were assumed from labor inputsor profit.

3. Five percent of total output each year is assumed to be lost due to firms falling into arrears orbankruptcy.

D. Institutional Development ComponentI. Assumes that each type of institutional development support (with the exception of matching

grants for financial institutions) results in 1.5 times increase in output, accruing two years afterdisbursement.

2. Assumes that matching grants for financial institutions results in an increase in output equal to thelevel of the matching grant plus the institution's contribution times five, accruing two years afterdisbursement.

3. Scenario calculated without project assumes same increases in output, albeit five years afterdisbursement (three years after realizing such an effect under the project).

Nature of Benefits* Acceleration of increase in output by emerging enterprises.* Incremental employment generation by emerging enterprises.* Improved financial sector efficiency in financing emerging enterprises.* Increase in output and efficiency by established enterprises as specialization and provision of

services by emerging enterprises help established ones.

Main BeneficiariesApproximately 500 Zimbabwean firms are estimated to benefit from SME financing and 350 firmsfrom Export financing. Approximately 53 associations and 900 firms are estimated to benefit from theSubsector Business Associations Initiative, 60 firms from the ZimTrade Matching Grant program, and40 from the Matchmaking Facility. The individual beneficiaries would thus be the principals andemployees of the firms affected. More generally, the financial markets will benefit as they improvetheir efficiency as well the markets for business services.

Non-quantified Benefits* Improved awareness of economic opportunities which does not directly result in increases in

output and employment by the firms supported.* Secondary and tertiary effects of increases in output.* Development of know-how put to use beyond the enterprises supported.

-99- AnnexJEconomic Analysis - Project Performance Indicators

Table J4: Summary Performance Indicators 3

Component Performance Indicator TimingBusiness * Appointment of SBAI Administrator, Establishment of SBAI Operating Mid-1996Services Guidelines, Operational Brochure, Application Form

* Establishment of ZMGS Management Team, ZMGS Guidelines, OperationalBrochure, Application Form

* Appointment of MM Management Contractor, Issuance of MM Guidelines,Operational Brochure, Application Form

* Timely Project Start Mid-1996* Matching Grants for Emerging Exporters In accordance w/* Matching Grants for Business Associations projection in PIP* Matches Established Under Matchmaking Facility

Financing * Timely Establishment of Apex Unit Mid-1996+ Timely Project Start Mid- 1996* Timely Establishment of Credit Guarantee Agency End- 1996* Sub-loans Committed for Emerging Exporters In accordance w/

projection in PIP* Sub-loans Committed for SMEs* Increase in Output of Emerging Exporters* Increase in Employment by SMEs and Emerging Exporters

Institutional * Strengthening the Capacity of Financial Intermediaries to Intermediate SME In accordance w/Development Loans - Net Increases in SBU loans. projection in PIP

* Strengthening SEDCO in sharpening its Financial Administration andStrategic Focus.- Reductions in administrative costs per loan; reductions inarrears; increase in number of SMEs graduating to commercial financing.

* Strengthening Reserve Bank Financial Institution Supervision - Issuance ofCapital Adequacy, Loan Classification Guidelines, revised format of financialreporting, system for monitoring compliance with prudential regulations,issuance of manual for off-site and on-site examinations, training program forBSD staff, Inspection of commercial banks (number of institutions).

* Development of RBZ Apex Unit and Credit Guarantee functions - Issuance ofOperational Guidelines for Export and SME Finance Facilities; Issuance ofintegrated application form and instructions (include for guarantees); issuanceof preshipment export finance guarantee guideline book; Conduct trainingseminars for Apex Unit staff, CGA staff, Fl's staff, and direct and indirectexporters; Issue operating procedures for Apex and CGA; Completion ofmarketing campaign; Issuance of RBZ Guidelines on back-to-back domesticL/C system and post-shipment export bill discounting;

* Support of the Customs and Excise Department in its Automation andIncreasing Efficiency - Improvement of the administration of InwardProcessing Zone and Duty Drawback Systems; establishment andmodernization of Input-Output Coefficients; establishment of CommonBonded Manufacturing Warehouse Scheme.

* Strengthening the Ministry of Industry and Commerce - focused trainingsessions for staff. Ability of Staff to carry out increasingly complex functions.

3A more detailed listing of the Performance Indictors is indicated in the Project Implementation Plan.

-100- AnnexKDocuments Available in the Project File


Documents Available in the Project File

I. Enterprise Finance in Zimbabwe, Regional Program on Enterprise Development, AfricaTechnical Department, The World Bank, April, 1995.

2. Impediments Confronting Infonrnal Sector Enterprises in Zimbabwe, Imani Development Ltd,Harare, Draft, Mimeo, 1990.

3. The Manufacturing Sector in Zimbabwe, Regional Program on Enterprise Development, AfricaTechnical Department, The World Bank, Country Study Series, First Report on the Round 11RPED Survey Data; October, 1994.

4. Micro and Small Scale Enterprises in Zimbabwe: Results of a Country-wide Survey, GeminiTechnical Report 25, Gemini-Development Alternatives Inc., 1991.

5. SME Finance Facility: Draft Subsidiary Financing Agreement; Mimeo, October, 1995.

6. Tourism PHRD Initiative, Draft Final Report, CHL Consulting Group, February, 1996.

7. Zimbabwe, Consolidating the Trade Liberalization; UNDP/World Bank Trade ExpansionProgram, 1994.

8. Zimbabwe Garment and Textile PHRD Initiative, Final Report, Kurt Salmon Associates,February, 1996.

9. Zimbabwe: Achieving Shared Growth, Country Economic Memorandum (Two Volumes), TheWorld Bank, 1995.

10. Zimbabwe's New Entrepreneurs: An Emerging Success Story? The World Bank, Mimeo,October 1995.

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MAJOR RIVERS To Jerera

NATIONAL CAPITAL

4. INTERNATIONAL AIRPORT

± OTHER AIRPORTS '. .. Gwanda

® PROVINCE CAPITALS Mwenezi

PROVINCE BOUNDARIES

INTERNATIONAL BOUNDARIES / The boundaries, colors,/denominations and any

--;P ~~~~~~~~~~~~~~~~~~~~other inforomation shoruno n th,s map do riot

imply, on the part of

> The Worid Bank Group,~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~TeWrd akGop

KILOMETERS 0 50 100 150 any judgment on the legal0 Beitbridge To Mepu. o status of any territory,

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(0~ ~ ~ ~~IE a 50 as I To oracerptance of such - Pret~~~Ori- boundries.

IMAGING

Report No: 15062 ZIM

Type: SAR