PROJECT INFORMATION DOCUMENT (PID)

CONCEPT STAGE

Report No.: AB1448

Project Name / Tanzania - Private Sector / MSME Competitiveness Project
Region / AFRICA
Sector / Micro- and SME finance (100%)
Project ID / P085009
Borrower(s) / GOVERNMENT OF TANZANIA
Implementing Agency
Environment Category / [ ] A [ ] B [X] C [ ] FI [ ]
Date PID Prepared / March 10, 2005
Estimated Date of Appraisal Authorization / November 1, 2005
Estimated Date of Board Approval / December 22, 2005
  1. Key development issues and rationale for Bank involvement

Tanzania achieved significant growth during the last five years, reaching an average growth rate of 5.2 percent, which is comparable to countries of South Asia (5.4 percent) and South East Asia (5.6 percent).[1] This performance is partly based on an increase in exports, which increased by an average of 19 percent, increases in investment in the construction industry averaging 9.6 percent and a modest resurgence in the manufacturing sector output, which grew at an annual average of 6 percent. Sound macro economic management, as well as financial, public enterprise and trade policy reforms by the Government have been the underlying factors for private and public confidence.

Despite important progress in the past decade, Tanzania is amongst the world’s poorest countries with an estimated per capita income of US$ 330 (Atlas method) in 2004. In order to fulfill Tanzania’s vision of becoming a middle income country in 2025 and to follow a similar growth path to that of Botswana or Malaysia, significant growth in exports in goods and services need to be achieved. Following a simulation carried out under the recent country economic memorandum, the share of industry and services in GDP need to increase to 30 and 37 percent respectively. International experience suggests that these projections are consistent with the pattern of structural transformation observed in other economies.

The Tanzanian private sector as the engine of this growth and transformation is however still in transition from a public sector dominated and controlled economy. Not unlike other countries in the region, the private sector consists of a large informal sector (enterprises with less than 1-5 people). Additionally, 32 percent of all formal registered enterprises are micro enterprises, 50 percent of them are small and medium enterprises, and only 12 percent are large enterprises. To transform the economy and play a role in providing jobs for the estimated 700,000 new entrants into the labor force every year, existing enterprises need stronger growth, and new entrants and entrepreneurs need to be encouraged. At present, existing opportunities in current product value chains in the local or export markets have not been exploited due to the high cost of doing business and a lack of competencies and information. Enterprises and investors face a costly legal, regulatory and administrative environment; inadequate access to financial and non-financial services, and poor infrastructure. Enterprise growth is also limited due to entrepreneurship behaviour and managerial capacities.

The Government’s strategy, embodied in the National Vision 2025, and the National Strategy for Growth and Reduction of Poverty (NSGRP) which call for the transformation of the economy to a dynamic semi-industrial economy through private sector led growth, aims to address such key constraints. Building on the overall strategy, the Government’s SME policy outlines priorities and strategies for improving the performance and competitiveness of existing enterprises and creating new ones. All aspects of the policy are aimed at removing constraints in the legal and regulatory framework, improving access to physical infrastructure and workplaces, strengthening the entrepreneurship culture, business development and access to markets, and improving access to finance.

The Tanzania National Business Council and the Investors Round Table chaired by the President of Tanzania, raised three key areas constraining private sector growth. These are the legal and regulatory framework, infrastructure (power, water and roads), access to finance and weak labor skills. An Investment Climate Assessment for Tanzania and the report on Doing Business in 2005, and other analytical work carried out by the World Bank, are consistent with the issues raised in the private sector dialogue.

The proposed project, which is part of the IFC/IDA MSME initiative, will contribute to the implementation of the Government’s growth and MSME strategies. It will support the goals set forth in the Government’s National Growth and Poverty Reduction Strategy, and complement activities being supported by the Government, the private sector, donors, and other stakeholders. The project will support the policy statements and strategies outlined in the SME development policy, however it will focus on areas where a) the Bank has developed a comparative advantage or experience, b) where leveraging of private sector participation in implementation is possible, c) emergence of a broad based entrepreneurship culture is supported and d) public sector institutions will be transformed to enhance private sector and SME growth. As mentioned in the SME policy, government has put in place a number of industrial support organizations, including the Small Industries Development Organization, which are ill equipped and therefore unable to discharge their mandated responsibilities. The proposed project will therefore focus on designing effective and sustainable solutions which are private sector based and not dependent on continued recurrent funding by Government.

The Government requested the Bank’s participation following a continuous policy dialogue on issues relating to growth and private sector development. The proposed intervention builds and deepens that policy dialogue and contributes to the implementation of the Government strategies and policies in this field. The project builds on joint Bank and other development partner’s analytical work in the areas of growth, the investment climate, the financial sector and trade. The proposed project rationale, design and implementation are based on the findings of this work. In addition, the Bank has also developed the knowledge and experience in the country by working on related projects with the Bank of Tanzania, the Tanzania Revenue Authority and the President’s Office Planning and Privatization. The proposed project builds on those experiences and successes. Lastly, the Bank is uniquely positioned to address the wide set of issues and obstacles that constrain private sector development and which cut across various themes and agencies. The proposed approach is based on the experience and learning of other regions, and the activities supported under this project have been developed drawing on international best practices.

The project is consistent with the Government’s National Strategy for Growth and Reduction of Poverty (NSGRP). The NSGRP aims, among other things, to create the conditions for private sector-led growth. The Joint Assistance Strategy (JAS) with other development partners, which is under preparation and will be completed this year, will focus on achieving outcomes targeted in the NSGRP. The proposed project, which falls under the IFC/IDA initiative, forms an integral part of the Bank’s program for the JAS period 2004 to 2007.

The Bank’s private sector engagement in Tanzania to date has focused on getting the basics right, reforming the public enterprise sector, reforming the financial sector and improving the regulatory environment. While these reforms are ongoing, the proposed project seeks to enhance and improve the public-private interface. The World Bank’s participation in the joint donor operation (BEST) will help ensure that the private sector reform agenda is comprehensive and consistent and linked to reforms in other sectors. The Bank’s participation in this particular area will also enhance the Government’s commitment to the predictability of the reforms on the business environment. It will also cover funding for investments for the rehabilitation and retooling of buildings, not currently financed under the BEST program, although the Bank intends to request other agencies to rethink their financing restrictions. The Bank will also introduce a series of innovative approaches to enhance enterprise creation, innovation, growth, and competitiveness based on best practice experience in and outside of the region.

  1. Proposed objective(s)

The project objective is to encourage the development of a healthy and competitive domestic private sector, as measured by the number of new businesses, the growth of existing businesses and formalization of businesses. This will be achieved by reducing the cost of doing business and increasing the capacity of the local private sector to participate in domestic and international markets. Private sector capacity will be developed in order to better utilize opportunities in value chains of key competitive clusters or areas of growth. Major activities will focus on improving the business environment, enhancing skills and entrepreneurship development, and increasing access to financial services.

  1. Preliminary description

The project will focus on: (i) investment climate issues focused on institutions interfacing with the private sector, (ii) private sector capacity, including access to business services and business linkages and (iii) access to finance, in particular for MSMEs. In these areas, the proposed project would develop new approaches and leverage or expand ongoing activities funded by bilateral and multilateral donors. The activities will be closely coordinated with the bank’s policy based instruments and provide the support for policy implementation.

Component 1 (Investment climate): The objective of this subcomponent is to reduce the cost of doing business by improving the efficiency of institutions that interface with the private sector. The component should reduce the time and cost to business entry, facilitate business access to markets, enable the mobilization of assets and investments and contribute to the formalization of informal businesses. This component will be implemented by participating in the BEST sector wide program. This component shall provide support in simplifying and modernizing commercial laws, improving the capacity of various registries including land registration, court registry systems and business registry, particularly in areas that involve MSMEs, and provide capacity building necessary to enable a modernization of the commercial legal system.

Component 2 ( Improving private sector capacity, in particular MSMEs): The objective of this sub component is to increase the private sector responsiveness to viable opportunities in regional and international markets. The component will focus on enabling businesses to upgrade, innovate, and improve productivity and sales. Based upon supply and value chain analyses, this component will aim to improve linkages between large or exporting firms with smaller enterprises, thereby increasing local supply and value addition. The component is expected to contribute to employment generation, (nearly 700,000[2] new job seekers enter the labor force each year), business creation and increased productivity at the firm level.

The project would support the private sector, in particular MSMEs, to develop their capacity to supply products according to export market requirements by providing matching grants for; (a) skills development and on the job training, (b) innovation and research, (c) business development services, and (d) certification. Based on the matching grant principles the component will also; (i) establish a business linkage program to improve technology and skills development; (ii) a business plan competition for the commercialization of research and entrepreneurship training. The component will also seek to strengthen the ongoing dialogue between the public and private sector. In implementing these approaches the project will work closely with private sector initiatives which hold a proven track record of increasing enterprise growth in Tanzania.

Component 3 (Increase access to finance): The objective of this component will be to improve access to financial services for MSMEs. The key expected outputs will contribute to an increase in private sector contribution to GDP (from 8% of GDP in 2004), the number of loans to SME, the total number of clients served by the financial system and an increase in savings. The subcomponent will respond to needs identified in the FSAP, and discussions with GoT officials and the private sector. It will focus on assisting the providers of financial services to MSMEs and other entities that serve the financial services providers. This assistance will be based on models currently being used by the IDA/IFC MSME Initiative in Kenya, Mali, and Uganda. Efforts under this subcomponent will be coordinated with GoTs efforts in developing the SME Credit Guarantee Scheme and the efforts of the Financial Sector Deepening Trust. This subcomponent will consist of five main activities. First, it will support the expansion of commercial bank lending to MSMEs through TA and matching grants aimed at providing training and knowledge transfer to improve SME-lending skills of banks. Second, it will encourage the commercialization of microfinance institutions through TA and possible IFC investments. Third, the project will stimulate an increase in lease financing for SMEs (in partnership with the IFC PEP Africa Leasing Effort). Fourth, it will stimulate private sector participation in housing finance through the provision of TA. Lastly, this project will improve the availability and accessibility of credit information through the provision of TA to Credit Bureaus and the BOT.

  1. Safeguard policies that might apply

They are no environmental impacts and should any arise they will be appropriately addressed. The project is rated as category C and there are no foreseen social and environmental impacts.

  1. Tentative financing

Source: / ($m.)
BORROWER/RECIPIENT / 10
INTERNATIONAL DEVELOPMENT ASSOCIATION / 95
Total / 105
  1. Contact point

Contact: Michael D. Wong

Title: Sr Private Sector Development Spec.

Tel: (202) 473-8581

Fax:

Email:

WB163360

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[1] CEM Background Paper Robert Utz. 2005.

[2] Tanzania Diagnostic Trade Integration Study – draft 2003 –pg30