Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 14784

IMPLEMENTATION COMPLETION REPORT

ZIMBABWE

SMALL SCALE ENTERPRISE PROJECT(LOAN 2533-ZIM)

JUNE 29, 1995

Macro, Industry & Finance DivisionSouthern Africa DepartmentAfrica Region

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

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Currency EquivalentsEnd of Borrower Fiscal Year

1984 US$ 1.00 = Z$ 1.21985 US$ 1.00 = Z$ 1.61986 US$ 1.00 = Z$ 1.71987 US$ 1.00 = Z$ 1.71988 US$ 1.00 = Z$ 1.81989 US$ 1.00 = Z$ 2.11990 US$ 1.00 = Z$ 2.51991 US$ 1.00 = Z$ 3.21992 US$ 1.00 = Z$ 4.91993 US$ 1.00 = Z$ 6.51994 US$ 1.00 = Z$ 8.1

Fiscal Year of Borrower

July I to June 30

Abbreviations and Acronyms

ESAP Economic Structural Adjustment ProgramERR Economic Rate of ReturnGOZ Government of ZimbabweGNP Gross National ProductIDA International Development AssociationICR Implementation Completion ReportRBZ Reserve Bank of ZimbabweSAR Staff Appraisal ReportSEDCO Small Enterprise Development CorporationSME Small and Medium EnterpriseSSE Small Scale Enterprise

FOR OFFICIAL USE ONLY

Table of Contents

Preface ..................................................................................................................Evaluation Summary .......................................................... i

PART I: PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

A. Project Objectives .......................................................... 1IB. Achievement of Project Objectives ........................... , .I

Financial Objectives ................. .......................................... 2Disbursement Profile .................. 3........................................ 3Sub-loan Processing ........................................................... 3Impact on Subborrowers ...................... ..................................... 4Rate of Return .......................................................... 4

C. Implementation Record and Major Factors Affecting The Project .......... ....... 5

D. Project Sustainability .......................................................... 5SEDCO Operations ........................................................... 5Continuation of SME Lending ........................................................... 6

E. Bank Performance .......................................................... 6F. Borrower Performance ........................................................... 6G. Assessment Of Outcome ................ 7.......................................... 7H. Future Operations .......................................................... 8I. Key Lessons Learned .......................................................... 9

PART II: STATISTICAL ANNEXES

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in the ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operation Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: MissionsTable 14: SEDCO Financial Statement Summary

AppendicesA. Mission Aide-Memoire ...............................................................................B. Borrower's Contriblition to the ICR ............................................................

This docurnent has a restricted distribution and may be used by recipients only in the performance of theirofficial duues. Its contents may not otherwise be disclosed wiLhout World Bank authorization.

IMPLEMENTATION COMPLETION REPORT

ZIMBABWE: SMALL SCALE ENTERPRISE PROJECT

Loan Number 2533-ZIM

Preface

This is the Implementation Completion Report (ICR) for the Small Scale EnterpriseProject in Zimbabwe, for which loan 2533-ZIM in the amount of US$ 10 million equivalent wasapproved on August 8, 1985 and made effective on August 1, 1986. The loan was scheduled toclose on December 31, 1992 and actually closed on June 30, 1994. Final disbursement tookplace on November 3, 1994, at which time a balance of US$ 332,000 was canceled.

This ICR was prepared by Mark Dorfman and Dambisa Moyo in the Southern AfricaMacro, Industry and Finance Division of the Africa region and reviewed by Ataman Aksoy,Division Chief, and Judith Edstrom, Project Adviser. Granny Seape (Intern) prepared an earlierdraft based on a different format. The Borrower provided comments that are included as anappendix.

Preparation of this ICR was begun during the Bank's mission from March 13-24, 1995.It is based, inter ali on the Staff Appraisal Report; the Loan, Guarantee, and ProjectAgreements; Supervision Reports; correspondence between the Bank and the Borrower; andinternal Bank memoranda. Upon completion, the Borrower will have contributed to preparationof the ICR by: (i) reviewing major points included in the report; (ii) providing SEDCO andsubloan data; and (iii) preparing the Borrowers' Assessment section.

IMPLEMENTATION COMPLETION REPORTZIMBABWE: SMALL SCALE ENTERPRISE PROJECT

Loan Number 2533-ZIMEvaluation Summary

Introduction

1. At independence in 1980, Zimbabwe had strong infrastructure, a well developedfinancial sector and a relatively high per capita income (US$780). Although the Government had beenpursuing economic policies supporting an inward orientation, in 1983 it established the Small EnterpriseDevelopment Corporation (SEDCO) to provide financial assistance, training and management counselingto small and medium enterprises (SMEs). From the time SEDCO was founded until 1991, the policyenvironment continued to favor existing enterprises, inhibiting entry and the broadening of participation.While Zimbabwe's economy developed a diversified manufacturing base and achieved overall growth ofabout 3 percent per annum, growth rates only kept pace with population growth and achieved virtually noincrease in employment. With liberalization through the Economic Structural Adjustment Program(ESAP) in 1991 and subsequent policy reforms, the Government took more aggressive measures toreduce entry barriers to SMEs. The hope then and now is that SMEs would help broaden economicparticipation and thereby increase employment.

Project Objectives

2. Objectives. This was the first World Bank loan made to support SMEs in Zimbabwe,aimed at supporting SEDCO in carrying out its mission. The objectives stipulated in the Staff AppraisalReport (SAR) were: (i) institution building, through the strengthening of the SEDCO, (establishing andstrengthening small businesses could be effectively achieved if SEDCO was a strong intermediary); (ii)employment creation; and (iii) broad-based socio-economic development through establishing andstrengthening SMEs. The project objectives were clear.

3. Components and Covenants. The project had three components: (i) a US$ 8.5 millionline of credit destined for SMEs; (ii) a technical assistance component of US$ 0.6 million to providetraining for SEDCO employees; and, (iii) a construction study of US$ 0.9 million to assess opportunitiesfor small construction. Important loan covenants included: (a) SEDCO would appoint two experts--anOperations Adviser and a Technical Adviser; (b) the Government would pay into SEDCO an annualequity contribution of Z$5 million; and (c) SEDCO would have audited accounts prepared in accordancewith Bank requirements.

Implementation Experience and Results

4. Achievement of Project Objectives was mixed: Institution building was achieved asSEDCO staff received training through the technical assistance component of the project, which later ledto improvements in SEDCO's operations (better quality staff, more efficient project appraisals, and somereduction in the percentage of loan arrears at that time). However, training offered by SEDCO to itsborrowers had been mixed, based on SEDCO's own institutional capacity.

5. Employment creation data in May, 1995 suggests that 1,095 jobs have been created bysubloans supported by the project. A separate review in 1994 suggested that, according to subloanapplications for approved projects, over 5,000 jobs were to have been created under funded subloans. Ifone assumes that approximately 50% of loans were non-recoverable (see below) and of this amount, only1/5 of the non-recoverable loans could be recouped through collateral seizures and sales, then 40% of the$8.5 million credit line or $3.4 million would have been lost, not recovered and the Government wouldhave to repay to IBRD. Based on this methodology, the cost of the 1,095 jobs above would have beenabout US$3,100 per job, excluding interest on the IBRD loan. This could be considered a moderate costper job based on that projected in the SAR and generally relatively high cost-effectiveness.

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6. Achievement of socio-economic development through establishing and strengtheningSMEs was also mixed. Of 470 enterprises projected, 246 were supported under the loan and data on thesubsequent economic circumstances of such enterprises is limited. Of the subloans which still remainedon SEDCO's books (end-February 1995), approximately 55% were either not servicing their loans orservicing but not paying on time, suggesting that borrowers have financial difficulties and thus thesubloans have resulted in limited socio-economic impact. As SEDCO estimates that 70% of subprojectswere successfully implemented and performing well, this suggests a positive result.

7. Achievement of Financial Objectives. The loan significantly increased the SEDCO'sfunds for onlending and thus was able to support SMEs formerly without funding as such. In terms ofyielding a sustainable result, SEDCO's portfolio losses have compromised its ability to fully use loanrepayments to project itself on a sustainable footing. Such losses, corroborated by figures indicatingSEDCO's net lending, indicate SEDCO's dependency upon new capital injections. Numerous measureswere taken to improve loan collections as well as to improve loan initiation. In some cases, loan arrearsrates did improve, albeit increased significantly in the early 1990s as the effects of adjustment made thebusiness environment more turbulent and thus increased the risks of financial difficulties or bankruptcyfor SMEs.

8. Bank Performance. The Bank did a satisfactory job in preparing and supervising thisproject. The difficulties in the project had more to do with the shortcomings in its design than in itsexecution. The project was developed in 1985 when the models for financial intermediary loans tended tosupport intermediation through State-owned institutions with credit targeted, in this case to SMEs.However, the Bank could have: (i) supported measures to support financing to SMEs throughcommercial institutions in addition to SEDCO; (ii) achieved greater clarity as to financial performancerequirements and monitoring indicators for SEDCO; (iii) sought to address the other policy andinstitutional barriers to SME development under the project; and (iv) remedied SEDCO's transportproblems limiting SEDCO's rural outreach.

9. Borrower Performance. SEDCO sought to and succeeded at developing a loanorigination, approval, monitoring and recovery capacity in-house. These functions appear to have beenconducted professionally with the sincerest of intent. Project appraisals included detailed submissionsand reviews of the financial position and projections of prospective borrowers, assessments ofmanagement, labor issues, competitive analysis and even site visits. After some struggle, SEDCO diddevelop and put into place a strong computer monitoring system for the arrears. The maintenance ofclean external audits throughout the project is a laudable accomplishment.

10. SEDCO's performance was hampered by limited Government commitment whichcontributed to implementation difficulties. Stronger support by Government could have been providedguidance on interest rate policy, assisted with committed capital, reinforced SEDCO's debt-recoveryauthority, provided strategic guidance for SEDCO and supported policy changes supporting SMEs.Moreover, little integrated vision was evident in the process of approving other Government and donorinitiatives for similar credit support. Long delays were also experienced in the approval process for legalmatters with parent ministries.

11. Thus in spite of the best intent, SEDCO experienced difficulties throughout the project,the greatest being high arrears in its loan portfolio, both for funds financed under the project as well ascredits financed out of its own capital. These problems in arrears reflected: (i) macroeconomic changes,including dramatic effects of drought and exchange rate movements which adversely affected SMEs, (ii)limitations in SEDCO staffing, particularly early in the project, and (iii) some weaknesses in accountingand credit management information systems. Other difficulties experienced also reflected limitedGovernmental support of the institution.

12. Project Outcome. The overall project outcome has been satisfactory. The project moreor less achieved its major objectives, although there were shortcomings in the project's design more than

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in its execution. Although economic rates of return have not been calculated for subprojects financed,net present value calculations were undertaken by SEDCO. If one looks at the cost-effectiveness of jobsresulting under the project and the number of enterprises supported, the project is moderatelysatisfactory. While the results in terms of sustainability of SEDCO are poor, sustainability at the firmlevel is likely satisfactory.

Summary of Findings, Future Operations and Key Lessons Learned

13. Continuation of SME Lending. Liberalization and adjustment measures undertakensince 1991 significantly altered the policy environment for SMEs, reducing barriers and increasingincentives. Banking institutions however, remain reluctant to fund SMEs due to the risks and highertransactions costs involved. SME lending thus needs to be facilitated by examining and supporting themechanisms by which commercial financing becomes available. SEDCO could continue to have animpact on the financing for SMEs but its own financial position has limited its impact. A recent policydecision to separate technical assistance to SMEs from financing as well as to consider private capital forSEDCO are both measures which might increase SEDCO's effectiveness.

14. Future Operations. Although the Bank has not worked with the Borrower to prepare aplan for the continued and future operation of SEDCO, SEDCO management has undertaken such ananalysis. The Bank's approach to reaching the objectives in this project has changed considerably fromthe time when this project was developed. For the same reason, there are not performance indicators tojudge the future success of this project. Preparation was begun during 1993-1994 on a subsequentsecond Small Scale Enterprise Project and agreement ultimately was not reached as to its design. In late1994, discussions began on a new IDA project, an Enterprise Development Credit that would provide abroader array of both financing and business services as well as aim to address difficulties faced byexporters in addition to SMEs.

15. Lessonsfor Future Projects. The main lessons for future projects are:

* Provision of credit to SMEs cannot lead to a sustainable result unless the macro, policy andinstitutional barriers to SME development are also addressed. While financing is often a constraint(as in this case), other barriers often limit enterprise development, such as entry barriers; distributionsystems giving exclusive privilege to existing companies; and limited information networks whichenterprises need in order to thrive. Project preparation should include identification of the principalconstraints to SME development and the project should address these constraints in a comprehensivefashion;

* Critical to the success of support measures for SMEs is vision for the SME sector, a strategy toachieve the objectives of that vision; and strong commitment by the Bank, Government and otherstakeholders to that strategy;

* Using a single financial intermediary such as SEDCO can help to develop expertise in SME lending,but does not result in the establishment of such expertise in the commercial marketplace on asustainable basis. Intermediation through a unique intermediary such as SEDCO should be avoided.If a state-owned institution such as SEDCO is chosen, the project should foresee a medium-termalternative, such as privatization of the institution or the supplementing and eventual replacement ofthe institution's functions by commercial means;

# Whether through one or more intermediaries, on-lending access by retail institutions should requirecontinuing compliance with explicit eligibility criteria including both financial performance (solvencyand efficiency) as well as a qualitative capacity to effectively lend to the SME sector;

# To the degree possible, lending and technical assistance to SMEs may need to be separate functions toensure that borrowers feel the correct set of incentives; and

* Lending rates both to and from intermediaries should be comparable to market rates and positive inreal terms to avoid financial and real market distortions.

PART I - PROJECT IMPLEMENTATION ASSESSMENT

A. Project Objectives

I. The objectives of the Small Scale Enterprise project as stipulated in the StaffAppraisal Report (SAR) were: (i) institution-building through the strengthening of SEDCO(establishing and strengthening small businesses could be effectively achieved if SEDCO was astrong intermediary); (ii) employment creation; and (iii) broad-based socio-economicdevelopment through establishing and strengthening small and medium scale enterprises. Loan2533-ZIM provided funding to SEDCO to assist it in financing SME participation inZimbabwe's economy. The project aimed to provide urgently needed financial assistance,training and management counseling to small-scale entrepreneurs and thus generate employment.

2. The context of pursuing the project's objectives were that the Government in1983 had established SEDCO to provide financial assistance, training and managementcounseling to small and medium commercial and industrial enterprises. The policy framework,however, since independence had supported an inward orientation which favored existingenterprises, inhibiting entry and the broadening of participation. Zimbabwe's economydeveloped a diversified manufacturing base and achieved overall growth of about 3 percent perannum from the import substitution policies. However, growth rates only kept pace withpopulation growth and achieved virtually no increase in employment. As time passed,Zimbabwe's economy experienced a downturn and per capita income stagnated. Withliberalization through the ESAP in 1991 and subsequent policy reforms, the Government ofZimbabwe took more aggressive measures to reduce entry barriers to SMEs. The hope then andnow is that through broadened economic participation, SMEs would increase employment andbroaden the local manufacturing base. Thus, the project sought to support SMEs throughfinancing while the policy environment remained discriminatory towards their development.

3. The project had three main components: (i) a US$ 8.5 million line of credit tofinance SMEs; (ii) a technical assistance component of US$ 0.6 million to provide training toSEDCO employees; and (iii) a construction study of US$ 0.9 million to assess opportunities forsmall construction companies. It was anticipated that the project would provide support to anestimated 470 SMEs and create approximately 4,000 jobs.

4. The project had three modifications during implementation: (i) a sub-loan wasapproved to assist with a transportation problem at SEDCO. This problem had a direct effect onSEDCO's program to increase the collection of outstanding arrears; (ii) the free limit forBorrower loan approval was increased from US$50,000 to US$100,000 in July, 1988; and (iii)because the minimum owner equity participation criteria for projects (15% owner's equity inrelation to the project amount) proved too stringent and therefore excluded otherwise attractivesub-projects, SEDCO management lowered the amount to 10% for co-operatives.

B. Achievement of Project Objectives

5. The operation's goal of providing financial support to SMEs by expanding accessto long-term credit was clear. The project objectives ("i"-"iii" in para. I above) were defined andtargeted towards achieving this goal. Achievement of these objectives however, was mixed.Institution building was achieved as SEDCO staff receive training through the technicalassistance component of the project, which later led to improvements in SEDCO's operations

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(better quality staff, more efficient project appraisals, and some reduction in the percentage ofloan arrears at that time). However, training offered from SEDCO to borrowers had been mixed,based on the institutional capacity of SEDCO affected by high staff turnover.

6. A small sample of SEDCO subborrowers interviewed in a 1994 survey' expressedconcerns that the loan application process slow, with in some cases clients waiting 12-18 monthsfor responses from SEDCO2 . In the same survey, cases were cited where by the time a loan wasapproved, the cost of the equipment the loan was intended to purchase had increasedsignificantly yet the credit amount could not be increased in the same way. A third and relatedcomplaint was that many of the subborrowers only received a fraction of the loan amountrequested. Consequently, SEDCO did provide financial assistance to many SMEs, but the loanswere less effective since the subborrowers had to find additional funding elsewhere to meet theirrequirements. Finally, many of the subborrowers received little or no technical assistance. Someborrowers felt that SEDCO had inadequate training in small business management.

7. Employment creation data in May, 1995 suggests that 1,095 jobs have beencreated by subloans supported by the project. A separate review in 1994 suggested that,according to subloan applications for approved projects, over 5,000 jobs were to have beencreated under funded subloans. If one assumes that approximately 50% of loans were non-recoverable (see below) and of this amount, only 1/5 of the non-recoverable loans could berecouped through collateral seizures and sales, then 40% of the $8.5 million credit line or $3.4million would have been lost, not recovered and the Government would have to repay to IBRD.Based on this methodology, the cost of the 1,095 jobs above would have been about US$3,100per job, excluding interest on the IBRD loan. This could be considered a moderate cost per jobbased on that projected in the SAR and generally relatively high cost-effectiveness.

8. Achievement of the third objective, socio-economic development throughestablishing and strengthening SMEs, was also mixed. Of 470 enterprises projected, 246 weresupported under the loan and data on the subsequent economic circumstances of such enterprisesis limited. Of the subloans which still remained on SEDCO's books (end-February 1995),approximately 55% were either not servicing their loans or servicing but not paying on time.This suggests that many such clients have financial difficulties and thus the loan has had alimited socio-economic impact. As SEDCO estimates that 70% of subprojects were successfullyimplemented and performing well, this suggests a positive result. The volume of firms that havegraduated from SEDCO and gone on to expand their operations also demonstrates a positiveresult.

9. Achievement of Financial Objectives: Given that SEDCO in 1986 was startingfrom a very small capital and portfolio base, the loan significantly increased the SEDCO's fundsfor onlending and thus was able to support SMEs formerly without funding as such. In terms ofyielding a sustainable result, SEDCO's portfolio losses have compromised its ability to fully useloan repayments to project itself on a sustainable footing. These losses began as early as whenthe first loans were initiated in 1986. As of end-February, 1995, approximately 55% ofSEDCO's portfolio was estimated to be affected by arrears of three months or more (Clients

1 The data is summarized in Levy and Bradburg, The World Bank, mimeo, forthcoming.

2 Such delays were validated by SEDCO's own records. Delays resulted from a combination of factors indicated, includingdelays in subproject approval by IBRD.

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either not paying or paying late. At end-1993, a study indicated that the estimated figure wasZ$77.7 million-US$11 million, principal and interest of a total of Z$128 million). This is a veryhigh level of arrears and is corroborated by figures indicating SEDCO's net lending. Thus, newlending has relied upon new capital injections because of limited reflows. Numerous measureswere taken to improve loan collections as well as to improve loan initiation. In some cases, loanarrears rates did improve, albeit increased significantly in the early 1990s as the effects ofliberalization and adjustment made the business environment more turbulent and thus increasedthe risks of financial difficulties or bankruptcy for SMEs.

10. SEDCO maintained lending rates Box 1: Portfolio and Borrower Characteristics

that were positive in real terms during much of theproject implementation period, although such Total SEDCO loans: 1,892 (end-December, 1993), valued atrates did become negative in real terms from 1990 ZS12S.12 million (USS18.6 million - including accrued interest).

until 1992 for urban loans and until 1993 for rural Sectoral Distribution (December 31, 1993)

loans. It should be noted however, that . Commerce sector: 57% (number), 31% (value)* Industry sector: 21 % (number), 26% (value)

commercial bank lending rates were not fully * Service sector: 18% (number), 37% (value)

liberalized until 1989 and thus negative real ratescan also be observed for commercial institutions. (including accumulated interest arrears)

Moreover, institutions other than SEDCO such as . Short-term loans (working capital and tern loans up

the Credit Guarantee Company of Zimbabwe to three years), 3% (value), 13% (number)

offered funds at subsidized rates creating interest oMed-term (3-5 years), 79% (value), 77%/ (number)

rate distortions for SMEs. Comparisons between ,the lending rates of SEDCO and market rates are Average SEDCO Loan Size

* Increased from Z$20,000 (US $ 8,523) to Z$50,000severely hampered by: (i) economic regulations (US $ 9,090) from 1986-1989;

mentioned; (ii) the absence or published data on * Increased from ZS50,000 to ZS 80,000 (US$ 15,686)

average lending rates; and (iii) market distortions from 1989 to 1991; and* Maximum loan size increased from Z$500,000 to

created by multiple sources in the economy of ZS1,000,000 in 1991.

subsidized funds. The legal agreement of theproject actually had some ambiguity with respect Borrower Ownership Structure and Location

* Sole proprietorships: 70% of borrowers (1986-91)to the interest rates required. In the Project dropping in 1992 to under 50% as limited companies

Agreement, it is said that SEDCO would not take increased.

any action that would have the effect of waiving a Companies heaviest in Harare and Bulawayo..Women principal borrowers: I 1%

the provisions of its Policy Statement. In such * Indigenous principal borrowers: 97%

Policy Statement, it specifies that SEDCO would _

only lend at a rate positive in real terms. On the other hand, the same Project Agreementestablished that SEDCO would review the interest rate structure yearly and inform the Bank ofproposed changes.

I. Disbursement Profile: Loan effectiveness was delayed by nine months becausethe Government and SEDCO did not meet two requirements to make the loan effective, namelyprovision of Z$5 million towards SEDCO's capital base and the appointment of an OperationsAdviser. Consequently, the technical assistance and credit components of the loan did notdisburse in a timely manner. The SAR anticipated that the loan would be 50% committed byend-1988. Only 6% of the loan actually disbursed by that date. The managed funds account forrisky projects was not utilized until well into the project, in part due to the credit ceilingestablished. The slow disbursement is attributed to: (i) the delay in loan effectiveness; (ii) loanprocessing delays because SEDCO was understaffed; and (iii) delays in setting up the specialaccount with the Reserve Bank of Zimbabwe. Lending did eventually pick-up and by June 1990,

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60% of the loan had been committed. In July, 1990, SEDCO's capital base was raised to Z$25million which meant it was able to increase loan disbursements and take on much neededadditional staff. The component of the loan initially set aside for the construction study wasredirected to the credit portion of the project. The closing date of the loan was extended fromDecember 31, 1992 to June 30, 1994. An undisbursed balance of $332,000 remained at the endof the project.

12. A review of the sub-loan profile indicates that a number of loans early in theprogram had been made to rural borrowers. With limited staff capacity for appraisal of theseloans, a number of these loans resulted in poor performance. Subsequently, the drought in 1992not only affected the rural loans but had a depressing effect on the economy and thus theportfolio at large. Finally, measures adopted under the 1991 ESAP changed the businessenvironment in such a way that some borrowers were adversely impacted.

13. Sub-loan Processing: SEDCO faced many problems in the processing of loans.This was primarily because of a critical shortage of staff to process the applications, which inturn created a backlog. The actual process of loan appraisal had too many steps and proved to belengthy. In some cases, loan processing, which included review and approval from Bank staff,took as long as twenty months. Some subborrowers surveyed complained that by the time theloan was approved, the price of the item the funds were intended for had increased sodramatically, they could no longer afford to purchase the item. Fortunately, by late in theproject, there was a noticeable improvement through the hiring of staff and strengthening ofprocedures.

14. Impact on Sub-borrowers: Because of a dearth of data which trackssubborrowers who are no longer on SEDCO's books, it is difficult to assess the medium-termimpact on sub-borrowers. A 1994 survey I did track 18 SEDCO borrowers who in general hadvery positive results. This data as well as anecdotal evidence suggests that SEDCO has had animportant impact on individual businesses as well as on the degree to which indigenousbusinesses have developed in Zimbabwe.

15. The most important impact on subborrowers has been the effects of measuresbeyond the scope of this project, namely the significant economic policy changes in the late1980's and under the 1991 ESAP. The latter, in particular, significantly changed the incentivestructure under which SMEs operate in Zimbabwe. Monopolistic distribution channels whichhad made it virtually impossible for SMEs to compete were largely officially removed.Moreover, zoning and other entry barriers were also reduced. Perhaps the most importantincentive or deterrent to SME development has been the nexus of fiscal and monetary policies.The liberalization of the exchange rate mechanism has enabled SMEs to have more ready accessto foreign exchange. However, three years (1992-1995) of fiscal crowding out and tightmonetary policy has resulted in very high real interest rates which in themselves has dramaticallyconstrained the growth potential of SMEs far and beyond the impact SEDCO could have had.

16. Rate of Return: The SAR stated that a rate of return calculation was notapplicable for this project. Individual subprojects however, were required to have cash flow

3 The data is summarized in Levy and Bradburg, The World Bank, mimeo, forthcoming.

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projections indicating that the financial rate of return was higher than the interest rate applied tothe subloans. This calculation was undertaken by SEDCO for each subproject.

C. Implementation Record and Major Factors Affecting The Project

17. As indicated above, a number of issues arose which delayed or hampered effectiveproject implementation. Many of these issues relate to the apparently limited Governmentalcommitment to the project: (i) Loan effectiveness was delayed because of the GOZ not providingfunds towards SEDCO's capital base and delays in appointing an Operations Adviser; (ii) Slowdisbursements were also hampered by transport problems and understaffing at SEDCO. In July,1990, SEDCO's capital base was raised by the Government to Z$25 million which meant it wasable to increase loan disbursements and take on additional staff. In light of improvedperformance (and changes to the loan agreement), the project rating was raised from a "3" ratingto a "2" rating overall in July 1990. A useful debt recovery unit was also instituted at the sametime. By late in the project, there was a noticeable improvement through the hiring of staff andsome strengthening of procedures, albeit arrears continued to be a problem. While reportedarrears decreased in the 1990 period, they subsequently increased.

18. SEDCO did undergo a learning process in SME lending. Early in the process,some loans were approved which had significant repayment risk and were thus more vulnerableto economic circumstances. A strong move was also made for rural lending, before the expertisein making such loans had fully matured. As lending volume increased in 1990, so too had thelevel of project appraisal ability. Measures to establish a Debt Recovery Unit generally had goodresults, trying to improve collection procedures. Problems did arise sometime however, as somebranch managers were less effective in implementing the debt recovery procedures than others.

19. One issue which significantly affected SEDCO's ability to process subloans wasthe significant demand generated by the ability of SEDCO borrowers to get access to foreignexchange via SEDCO sub-loans. While subloans were denominated in Zim$, a borrower with anapproved sub-loan could use such a subloan as a basis for a foreign exchange allocation. Thisaccelerated demand for subloans. In addition however, delays in actually getting the foreignexchange very often disrupted the businesses of sub-borrowers.

20. It should be noted that while the combined objectives of providing credit andtechnical assistance to borrowers may have been complementary, they also may have createddifficult signals for SEDCO borrowers. The credit function is often more risk-averse than thedevelopment function. One measure which could address this potential difficulty is theGovernment's announcement in 1995 of its intent to separate the technical assistance and lendingfunctions of SEDCO into two separate institutions.

D. Project Sustainability

21. SEDCO Operations: Ideally, there are two possible sustainable scenarios forSEDCO. The first is that SEDCO would continue and grow as a viable financial institutionsupporting the SME sector. As SEDCO's commercial viability increases, it would mobilizeadditional capital through private investors. As a commercial entity, under partial or full privateownership, and lending to SMEs, such an institution could be under a sustainable footing. Thelatter scenario is under consideration by the Government. A second ideal alternative is that as

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the loan demand for SEDCO is increasingly absorbed by competing financial institutions,SEDCO works itself out of a job, i.e., SEDCO is removed as a State-owned financial institutionin the marketplace. The first option would require further strengthening of staff, procedures anddebt collection efforts.

22. Continuation of SME Lending: Some of the barriers that inhibit SME lendingremain largely as much today as they did when this project was begun. Liberalization andadjustment measures undertaken since 1991 have significantly altered the policy environment forSMEs and both reduced the barriers and increased the incentives for them to thrive. Bankinginstitutions however, remain reluctant to fund SMEs due to the risks and higher transactionscosts involved. SME lending thus needs to be facilitated by examining and supporting themechanisms by which commercial financing would become available. SEDCO can conceivablycontinue to have an impact on the financing for SMEs but its own financial position has limitedits impact. While in 1993 the GOZ committed itself to inject Z$ 100 million per year for fiveyears into SEDCO, it has not fully made good on this commitment. A recent Governmentdecision reportedly to consider private capital for SEDCO is a measure in the right direction.

E. Bank Performance

23. The Bank overall did a satisfactory job in preparing and supervising this project.The difficulties in the project had more to do with the shortcomings in its design than in itsexecution. The project was developed in 1985 when the models for financial intermediary loansboth in the Bank and throughout much of the world tended to support intermediation throughState-owned institutions with credit targeted, in this case to SMEs. Moreover, when projectpreparation began in 1983, there were very few indigenous-owned businesses, virtually nofinancing of such businesses, virtually no expertise in doing so, and thus the needs fordeveloping such a capability were overwhelming. However, having said this, the Bank couldhave: (i) embarked on measures to support financing to SMEs through commercial institutions inaddition to SEDCO; (ii) achieved greater clarity as to financial performance requirements andmonitoring indicators for SEDCO at appraisal; (iii) achieved greater clarity as to mutualobjectives for the SME sector, been more clear as to the racial character/broadening participationissues involved; and (iv) sought to address the other policy and institutional barriers to SMEdevelopment under the project. Bank supervision was generally strong, with a remarkable levelof review of individual subprojects. Each project over the quite low free-limit of US$50,000(later increased to $100,000) was reviewed carefully by Bank staff.

F. Borrower Performance

24. The level of commitment by Government to the process envisioned under the loanwas very limited, which contributed to implementation difficulties. Stronger support byGovernment to SEDCO could have been provided, for example in providing guidance on interestrate policy, being forthcoming in committed capital, reinforcing SEDCO's debt-recoveryauthority, providing strategic guidance for SEDCO, supporting changes to policies supportingSMEs. Moreover, the Government also channeled donor and its own funds through competinginstitutions at subsidized rates which in some cases undercut SEDCO's role. Further, little visionwas evident in the process of approving donor initiatives for similar credit support. Long delayswere also experienced in the approval process for legal matters with parent ministries.

-7-

25. As indicated, a step in the right direction in terms of Government support hasbeen the Government's consideration of proposals to allow SEDCO to source equity capital fromoutside Government. Moreover, the Government has strengthened SEDCO's debt-recoveryauthority by passing a law to amend the SEDCO Act so as to give SEDCO the powers to realizesecurities against its loans.

26. Although the objectives of the project were laudable, it appears that neither theGovernment nor the Bank envisioned a strategy for the entire SME sector when the project wasdeveloped in 1984. Project objectives were developed by the Bank in association with theGovernment yet it seems that actual Government commitment to the project objectives waslimited. There was also limited overall strategic planning of the SME sector. The lack of acoherent strategy was further manifest in the way in which multiple donor initiatives for creditsupport to SMEs were not dealt with in an integrated fashion and at times were evendiscouraged.

27. In this context, SEDCO sought to develop a genuine loan origination, approval,monitoring and recovery capacity in-house. SEDCO's loan appraisal, origination andsupervision appear to have been conducted professionally with the sincerest of intent. Projectappraisals included detailed submissions and reviews of the financial position and projections ofprospective borrowers, assessments of management, labor issues, competitive analysis and evensite visits. After some struggle, SEDCO did develop and put into place a strong computermonitoring system for the arrears. The maintenance of clean external audits throughout theproject is a laudable accomplishment.

28. SEDCO did experience difficulties during the project. The most importantdifficulty was arrears in its loan portfolio, both for funds financed under the project as well ascredits financed out of its own capital. The problems in arrears reflected: (i) macroeconomicdifficulties which adversely affected SMEs, (ii) limitations in SEDCO staffing, particularly earlyin the project, and (iii) some weaknesses in accounting and credit management informationsystems. In the latter case however, accruals were of sufficient quality to sustain clean audits andwere kept relatively accurate.

29. Other difficulties which SEDCO experienced throughout the project were: (i) theeffectiveness date had to be changed four times because the SEDCO did not have the Z$5 millionGovernment capitalization requirement; (ii) until July 1986, the Operation Advisor position inSEDCO remained vacant; (iii) SEDCO suffered a severe lack of local currency to finance SMEprojects and, as a result, disbursement of subloans was often slow and in most cases in partialamounts; (iv) disbursements initially proceeded at a very slow pace due to problems with settingup the special account with the Reserve Bank of Zimbabwe; (v) there was a critical shortage ofqualified staff at SEDCO; and (vi) a lengthy process of loan approvals ensued. SEDCOmanagement responded to these problems by hiring more staff and setting up a debt recoveryunit. Credit management also initially suffered from problems in the delivery of audit reportsaccording to the required standard format. The latter problems were ultimately addressed.

G. Assessment Of Outcome

30. The overaUl project outcome has been satisfactory. The project more or lessachieved its major objectives, although there were shortcomings in the project's design more

-8-

than in its execution. Although economic rates ofreturn have not been calculated for subprojectsfinanced calculated, SEDCO calculated positive net present values for each approved subproject.If one looks at the cost-effectiveness of jobs resulting under the project and the number ofenterprises supported, the project is moderately satisfactory. While the results in terms ofsustainability of SEDCO are poor, sustainability at the firm level is likely satisfactory.

H. Future Operations

31. Although the Bank has not worked with the borrower to prepare a plan for thecontinued and future operation of SEDCO, SEDCO management has undertaken such ananalysis, including an assessment of opportunities, threats, strengths and weaknesses. Whilesuch an assessment is valuable, it has not been complemented by a pronouncement of specificGovernment policy as to its vision for the SME sector and the potential role of SEDCO in it.The Bank's approach to reaching the objectives in this project has changed considerably from thetimne when this project was developed. Moreover, performance indicators to judge the futuresuccess of this project had not yet been developed.

32. Preparation of a subsequent second Small Scale Enterprise Project was begunduring 1993 but no agreement was ultimately reached as to its design. In late 1994, discussionsbegan on a new IDA project, an Enterprise Development Credit that would provide a broaderarray of both financing and business services as well as aim to address difficulties faced byexporters in addition to SMEs. SEDCO's participation as one of the intermediaries in theEnterprise Development Project would be contingent on sustainable financial perfornance. Byapplying such criteria to all participating financial intermediaries, the project seeks to mitigatethe possibility that financing wouldn't continue on a sustainable basis. Liberalization measuresundertaken since 1991 have significantly altered the policy environment for SMEs reducing thebarriers and increasing the incentives for them to thrive. On the other hand, the effects ofadjustment, and high interest rates in particular have hindered the financing of SMEs as withother enterprises in the economic. It is in the liberalized environment that SMEs become evenmore important to Zimbabwe's growth strategy.

33. Ideally, a future impact evaluation by OED should be timed so as to evaluate howthe lessons of the SSE project have been incorporated into the design of the EnterpriseDevelopment Project. It is in the context of this second project that we hope to see a moresustainable result.

I. Key Lessons Learned

34. The main lessons learned are:

* Provision of credit to SMEs cannot lead to a sustainable result unless the macro, policy andinstitutional barriers to SME development are also addressed. While financing is often aconstraint (as in this case), other barriers often limit enterprise development, such as entrybarriers; distribution systems giving exclusive privilege to existing companies; and limitedinformation networks which enterprises need in order to thrive. Project preparation shouldinclude identification of the principal constraints to SME development and the project shouldaddress these constraints in a comprehensive fashion;

-9-

* Critical to the success of support measures for SMEs is vision for the SME sector, a strategyto achieve the objectives of that vision; and strong commitment by the Bank, Government andother stakeholders in that strategy;

# Using a single financial intermediary such as SEDCO can help to develop expertise in SMElending, but does not result in the establishment of such expertise in the commercialmarketplace on a sustainable basis. Intermediation through a unique intermediary such asSEDCO should be avoided. If a state-owned institution such as SEDCO is chosen, the projectshould foresee a medium-term alternative, such as privatization of the institution or thesupplementing and eventual replacement of the institution's functions by commercial means;

* Whether through one or more intermediaries, on-lending access by retail institutions shouldrequire continuing compliance with explicit eligibility criteria including both financialperformance (solvency and efficiency) as well as a qualitative capacity to effectively lend tothe SME sector;

# To the degree possible, lending and technical assistance to SMEs may need to be separatefunctions to ensure that borrowers feel the correct set of incentives; and

* Lending rates both to and from intermediaries should be comparable to market rates andpositive in real terms to avoid financial and real market distortions.

35. Each of these lessons has been drawn upon in the preparation of the subsequentEnterprise Development Project, under preparation.

Page I of 7Part II -- STATISTICAL ANNEXES

Table 1: Summary of AssessmentsTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan/Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in the ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operation Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: MissionsTable 14: SEDCO Financial Statement Summary

STATISTICAL TABLES

Table 1: Summary of Assessments

A. Achievement of Objectives Substantial Partial Negligible NotApplicable

Macro Policies El El E] 0

Sector Policies El E El 0

Financial Objectives El 0 El El

Institutional Development Ii0 El [

Physical Objectives [ 0

Poverty Reduction El 0 E] E

Gender issues E El El 0

Other Social Objectives a 0 El El

Environmental Objectives El El El 0

Page 2 of 7

Public Sector Management a 0 IT [

Private Sector Development 0 I U T

Other (specify) IT 0 ! I

B. Project Sustainability Likely Unlikely Uncertain

[ S 0C. Bank Performance Highly Satisfactory Deficient

Satisfactory

Identification Il IT]

Preparation Assistance I! IT!

Appraisal [1 0 I

Supervision I 0 [

Hi[ly

D. Borrower Performance Satisfactor Satisfactory Deficien

Preparation I! IT!

Implementation I0 []

Covenant compliance El 5

Operation (If applicable) T I I

Highly HighlyE. A5.sessment of Outcome Satisfactory Satisfactory Unsatisfactory Unsatisfactor

5 0 5 0

Page 3 of 7

Table 2: Related Bank Loans/Credits

Loan/Credit Title Purpose Year of Approval StatusPreceding Operations .1. Manufacturing To assist the government in increasing utilization of the March 1981 Closed

Rehabilitation Project country's manufacturing capacity.2. National Agricultural To support the national agricultural extension and research July 1983 Closed

Extension and Research programs by providing necessary facilities and equipment.Project

3. Small Farmn Credit Project To improve incomes and living standards of farmers in the September 1982 Closedcommunal areas by intensifying agricultural productionthrough financing farmn inputs and investments.

Following Operations1. Agriculture Credit and To enable smallholders to increase production of food cash May 1989 Open

Export Promotion Project and export crops suited to peasant farming and commercialfarrners to diversify into export and import substitution.

2. Urban sector and Regional To appraise individual projects in Urban areas and support June 1989 OpenDevelopment Project the provision of primary urban infrastructure.

3. Structural Adjustment To support the first phase of the Government of Zimbabwe's January 1992 ClosedLoan I 5-year structural adjustment program.

4. Emergency Drought To provide the Government with financial resources in June 1992 ClosedRecovery and Mitigation support of its drought relief and recovery program.Project I I _

5. Structural Adjustment To support the second phase of the Government of June 1993 OpenLoan II Zimbabwe's 5-year structural adjustment program.

Table 3: Project Timetable

Steps in Project Cycle Date Planned DateActualIdentification (Executive Project Summary) March 1, 1983 March 2, 1983Preparation March 1983 - July 1984Appraisal August, 1983 July 8-25, 1984; November

5-17, 1984Negotiations February, 1984 March 25-28, 1985Board Presentation April, 1984 May 3, 1985Signing August 1985 August 8, 1985Effectiveness September 1985 August 1, 1986Project Completion June 30, 1992 November 3, 1994Loan Closing December 31, 1992 June 30, 1994

Table 4: Loan/Credit Disbursements: Cumulative Estimated and Actual(US$ millions)

FY86 FY81 FY88 FY89 FY90 FY29 FY94 EY95|Appraisal 1.2 1.8 2.2 2.1 1.3 0.8 0.5 0.1EstimateActual 0.44 0.14 0.73 0.90 2.22 2.88 1.14 1.05Actual as % 0 24.4 6.4 34.8 69.2 277.5 576 1,140of estimateDate of Final 11/3/94Disbursement

Page 4 of 7Table 5: Key Indicators for Project ImplementationMonitoring indicators were not specified in the project SAR and therefore not verified duringsupervision.

Table 6: Key Indicators for Project OperationKey Operating Indicators Indicated in the SAR Aimatd Actual1. Employment Creation 4,000 new jobs 1,095 jobs created2. Enterprise Development - Number of Enterprises to 470 SMEs 246 SMEs

be supported.

Table 7: Studies Included in the ProjectStudy Purpose as Defined at Appraisal | S Impact of StudvStudy of the To determine the potential of Discontinued NoneConstruction Sector small construction firms.

Table 8A: Project Costs

Appraisal Estimate (US$ Million! ActuaVLatest Estimate (US$ Million)Local Foreign Total Local costs Foreign TotalCosts Costs Costs

Item1. Credit 6.8 7.6 14.4 N/A N/A 14.4

Component

2. Technical 0.6 1.1 1.7 N/A N/A 1.7AssistanceComponent

Total 7.4 T 8.7 16.1 N/A N/A 16.1

Table 8B: Project Financing

Appraisal Estimate (US$ Million! Actual/Latest Estimate (US$ Million)

Source Local Foreign Total Local costs Foreign Totalcosts Costs Costs

IBRD/IDA 1.3 8.7 10.0 N/A N/A 10.0Cofinancng - - -i-

InstitutionsOther External - -

SourcesDomestic Contribution 6.1 - 6.1 N/A N/A

Total 7.4 8.7 16.1 N/A N/A

Table 9: Economic Costs and Benefits

This project did not have an ERR calculation undertaken nor is such required.

Page 5 of 7Table 10: Status of Legal Covenants

Agreement Section Covenant Present Original Revisd Description CommentsType Status fulfillment fulfill -

date mentdate

Project 5 Full August, July, SEDCO would appoint two experts The project effectiveness datecompliance 1985 1986 (Operations and Technical Advisors) had to be postponed by a year

before loan effectiveness. because it took long to fillthe Operations Adviserposition.

Loan 2.02 2 Full Throughout The Government would establish a Some difficulties arose incompliance Special Account with the Reserve setting up the special account.

Bank of Zimbabwe for expeditingdisbursements sub-loans and thetechnical assistance component forSEDCO. The Special Account wouldbe audited for each fiscal year, and acopy of the audit fumished to theBank within six months of the end ofthe fiscal year (L.A.Sec.4.01(b)).

Loan 2.03 10 Full Throughout The closing date shall be December The closing date wascompliance 31, 1992 or such later as the Bank amended to June 30, 1994.

shall establish. The Bank shallpromptly notify the Borrower of suchlater date.

Loan 3.01 5 Partial Throughout Borrower declares its commitment tocompliance the objectives of the Project as set

forth in Schedule 2.

(b) Borrower shall cause SEDCO to SEDCO not provided withperform in accordance with the full fiscal resources requiredprovisions of the Project Agreement to carry out the mandateall the obligations set forth, shall take agreed-upon.or cause to be taken all action,including the provision of funds,facilities, services and other resources,necessary or appropriate to enableSEDCO to perform such obligations,and shall not take or permit to be takenany action which would prevent orinterfere with such performance.

(c)The Borrower shall relend theproceeds of the Loan allocated for PartA and B.2 of the Project to SEDCOunder a subsidiary loan agreement tobe entered into between the Borrowerand SEDCO, under terms andconditions approved by the Bankwhich shall include, Inter alia, interestat the prevailing rate established bythe Borrower for its loans to parastatalorganizations.

Loan 3.04 5 Partial With- Borrower shall, in the carrying out of The construction study wascompliance drawn Part C.2 of the Project, take into never carried out.

account the results andrecommendations of studies carriedout by the Borrower on the localconstruction industry.

Loan 4.01 2 Full Throughout The Government would have recordscompliance and accounts for small contractors

component (Part C) audited each yearand submit audit reports to Bankwithin six months of the end of fiscalyear. Govt. shall ensure that SOEs areincluded in annual audit (L.A. Sec.4.01(a) and (c)).

Page 6 of 7Table 10 Continued:

Agreeme Sectio Covena Present Original Revisd Description Commentsnt n nt Type Status fulfillme fulfill-

nt date mentDate

Loan 4.02 4 Partial Throughout The Govemment would pay intocomplianc SEDCO an annual equity contributione of ZS5 m and provide funds for the

managed fund for high risk operationsin areas with limited infrastructure (a)

Loan_4_02_4_Full _IThroughout _and (c).Loan 4.02 4 Full Throughout The Govemment would provide

complianc SEDCO with funds, facilities and othere resources appropriate to enable

SEDCO to continue the provision ofmanagement counseling and trainingto SSEs in Zimbabwe (b).

Project 2.09 12 Full Throughout SEDCO would not take or concur tocomplianc any action that would have the effect ofe amending, abrogating or waving the

provisions of the Policy Statement andAction Plan without prior consultationwith the Bank.

Project 2.03 5 Full Throughout Subloans documents submitted to thecomplianc Bank would include followinge information: description of enterprise

and project costs, project appraisal,terms and conditions of subloanamortization schedule. Free limitsubloan requests should include:summary description of enterprise andproject; project costs, terms and

=_____ _ _ _ =__I conditions, and amortization schedules.Project 2.10 2 Full Throughout SEDCO would review the interest rate

complianc structure and interest rates for lendinge operation yearly. SEDCO shall inform

the Bank of any proposed changes andafford the Bank a reasonable

__________ _I_ _ opportunity to comment thereon (a).Project 4.01 1 Full Throughout SEDCO would have its audited In the first couple of years

complianc accounts prepared as indicated in the SEDCO did not complye illustrative Form of Audited Reports with the required format.

for DFC and submit them to the Bankwithin six of the end of each fiscal year

____________ _________ __________ (b). ________________________bProject 1 2 Full Throughout Subloan appraisal criteria would be SEDCO interest rates forSchedule complianc . 51 or fewer permanent subloans were altered.

e employees; fixed assets ofZS500,000 of less

* Maximum subloan Z$500,000;! FRRs on subloan over Z$50,000-Subloan terms and conditions:. Interest rates of 18% on urban,

16% rural loans;. Minimum equity contributions of

10% projects costs for subloansup to Z$20,000: 15% for largersubloans; and

. Maturities and grace of up to 3years and 4 months for workingcapital; up to 7 years and 2 yearsfor long term loans.

Page 7 of 7

Table 11: Compliance with Operation Manual StatementsThis project did not have any lack of compliance with applicable Bank Operations Manualstatement.

Statement Number and Title| Describe and Comment on Lack of Compliance1. None

Table 12: Bank Resources: Staff Inputs

Stage of Project Cycle Planned Revise ActualWs US$ W eks ru S$ Weks

Through appraisal 1/ 2/ 1/ 21 54.8 2/Appraisal through Board Approval 1/ 2/ 1/ 2/ 60.9 3/ 2/Board Approval through Effectiveness I/ 2/ 1/ 2/ 3/ 2/Supervision 2/ ___ 2/ 113.9 2/Completion I I I

I/Records of staff week planning projections have not been catalogued or kept for the years applicable.

2/ Records have not been kept in US$ equivalent for staff resources until FY94.

3/ Data is available only for staff resources used from Appraisal through Effectiveness.

Table 13: Bank Resources: Missions

Stage of Project Month Number Days Specialized Performance Rating Type ofCvCe /hat of in the staff skills Implementation Development Problem

Persons Eil Reprsented Status Q_iThrough July 1984 I/ I/ I/ N/A N/A N/AAppraisalAppraisal June 1985 I/ I/ I/ N/A N/A N/Athrough BoardapprovalBoard Approval July 1986 1/ 1/ 1/ N/A N/A Effectivenessthrough date wasEffectiveness post-poned

by a yearbecause twoconditionswere notsatisfied.

Supervision 4/3/87 N/A N/A N/A 2 19/28/87 N/A 12.6 N/A 2 26/20/88 N/A 13.3 N/A 2 28/24/89 2 N/A Financial 3 28/10/90 2 N/A Financial 2 23/12/91 2 N/A Financial 2 29/12/91 2 N/A Financial 2 27/2/92 1 N/A Financial 2 21/4/93 1 5.6 Financial 2 23/18/93 2 12.6 Financial 2 26/30/93 I 12.6 Financial 2 26/30/94 1 14 Financial 2 2

Completion 3/24/95 1 11 Financial6/12/95 I 15 Financial

ZIMBABWE

SMALL SCALE ENTERPRISE PROJECT (LOAN NO. 2533-ZIM)

IMPLEMENTATION COMPLETION REPORT

AIDE-MEMOIRF

While a formal project completion mission was not conducted for this project, multiplemissions discussed project completion, both in the context of the preparation of the second small-scale enterprise project as well as in March 1995 in the context of the preparation of theEnterprise Development Project. In June, 1995, a subsequent mission formally reviewed thedraft ICR with SEDCO representatives and incorporated select changes to the document basedon these frank and open discussions.

ZIMBABWE

SMALL SCALE ENTERPRISE PROJECT (LOAN NO. 2533-ZIM)

IMPLEMENTATION COMPLETION REPORT

BORROWER'S ASSESSMENT

l

RMPLEMENTATMN- COMPLETION REPORT

LOAN 2533 - ZIMBORROWERS ASSESSMENT

Within its limited scope of assessment on the oonception of the project SEDCO's view is that projecthad nobli objectives broadly defind irL schedule 2 of the Loan Agreement as

* (1) 'To erha.nce the entrepreneurial and fediial capabilitres of co operatives and entrepren6urs--c,ilgedhin saa-sd1e-entcrptises^in Zonbobw.v -- .

(ii) To assist SEDCO in. becoming an effeciive organisation to provide financial and technicalassistance to small-scale enterprises, and

(iii) To improve the efficiency of contractors in the construction industrv in Zimbabwe.

These objectives were formulated against a background of an economic environment characterised bvshortage of local funds on the money market, shortage of foreign currency and spare parts coupled withvery tight foregn currency control by the goverrnment and therefore the project could not have come ata more apportine ime.

The focus of the project as set on schedule I to the Loan Agreement was on Investment projects. This isrefleoed by the allocation of USS8 100 000 out of a total of USSIO million loan amount. The allocationwas boosted to USS9 357 256-46 million by a fujrther USSI 257 256-46 which had been allocated toparts B and C of the project as g-ven in schedule I of loan agreement. Part of the funds which werere-allocated to investment projects 2 years down the line were from the small contractors project which

d fa'iled to take off the growwd.

In the absence of specific goals SEDCO implemented the project within the framework of the poli)cobjectives in its mandate and in accordance with provisions of the Loan Agreemnent, the ProjectAgree_mt and the Subsidiary Agreement.

Ibe agreemn;w was finally signed on 8th August, 1985 and the programme was supposed to beimplemented by 6th November, 1985 and run for 7 years until 31sT December, 1992. Though timing ofthe programme was perfect, there were delays in implementation mainly due to protracted nezotiationson the modalities of disbursement and procurenent to the extent that it was not until 1988 thatmeaningfiul disbursements started with obvious consequences of a delayed response to a problem.

2

In the final analysis the mode of operation for the project was adequately designed to ensure effectiveand emficient implementation of the project. Evaluation and disbursement procedures were clearly setthough other modalities relating to procurement of goods were left to be finalised by SEDCO (minutedin minutes of the Washington Negotiations - March 25-28, 1985). At the initial phase of project

implementation in 1986 SEDCO was well geared to handle the processing of World Bankl Loans as itwas zoing to apply the same investment project appraisal and selection criteria and procedures as it hadbeen using on its projects.

Consequently fewer problerns were.experienced on the appraisal and approval of the subprojectsgspL;6IIy rhose below free. lini;. .Cnsid.e ab1e delays.were e,cpen,nced on sub-projects aboye free, limitwhere turnaround time was up tol2 months. Some delays occurred mainly because of communicationhiccups. Also reliance on specific project managers at The World Bank presented a problem in that inthe absence of such individuals no action could be taken on the submissions thereby delaying decisions

(refe to table attached).

Foreign disbursement and procurement were unfamiliar tasks to SEDCO and therefore at an initial stagethe Corporation went through a learning phase, as a result a number of problems were aecntered inputtng together adequate documentation to enable payment to be effected. Further to that the tightforeign exchange controls that existed required that bureaucratic procedures had to be foUowed tosecure import licences which were a pre-requisite for disbursement. The World Bank on the other handused to take a long time to issue re-imbursernent guarantees to back-up the Letters of Credi

A samiple of sub-projects and details relating to their implementation is shown as an appendix to confirmthe Above assertion.

Apparent from the table are delays that occurred in getting sub-projects above free limit approved by theWorld Bank and issuance of reimbursement guarantees. The effect of the delays was that by the timethe sub-projects were comrnissioned the investment cost would have sky-rocketed to more than doublethe onginul cost. Ths was brought about by either general price increases or flactuatios in theaechange rate. The impact of the foreign exchange rate volatility was two fold:

i) IWdation of the local currency equivalent of the foreign component denominated in hard currencies

through direct conversion.

u) 1The corollary of the above was that costs incidental to the importation e g. duty charged on theimported commodity became more thereby fianher compounded the problem.

3

Most projects were hit hard by this problem and rendered not viable during the period June to December1992 when the exchange rate was very volatile and the Zimbabwean dollar depreciated to its lowest ebb.As a consequence of the above the following problems beset the sub-projects from the onset:-

1) sub-projects were implemented well behind schedule and therefore failed to cope with changed

economic environment.

2) sub-projects were under capitalised and therefore ran into cashflow problems. This problem wasexacerbated by the fact that this occurred at a time when SEDCO could not rescue clients as it hadfinnci a_or rais and* governnrnr financial help was minimal.

3) some sub-projects ended up highly geared and eventually failed to meet their debt obligations.

4) In caes where it was ascertained that the sub-projects were no longer worthwhile implementingclients declined loan offers and SEDCO ended up stuck with decommitted funds thereby delayingfiurther drawdown on the line of credit and in some cases clients irsisting on implementation on

condition that they were granted concessions.

5) The design of the procurement system did not provide tight controls in the sourcing of goods.This loophole was exploited by some clients who ended up importing unauthorised goods to thedetriment of both the sub-project and SEDCO.

6) Preshipment inspection did not include a technical report on suitability of equipment imported

wrhich resulted in the procurenent of sub-standard or incompatible equipment. Clients were as aresult exploited by suppliers.

After realisation of such a problem some measures like the pre-shipment inspection were put in place totry and arrest the situation but this did not prove effective as the problem was still experienced.

The above notwithstanding , a considcable number of the sub-projects financed under loan2S33 have registered noticeable successes so far. Their paformance is measured using SEDCOstandard investment project w=ss indicators nameuy:-

(i) Profitability level and repayment record.(ii) Asse accumulation.

(iii) Employment creation(iv) Sustainability and potential for growth.

4

Inevitably in the absence of well defined project outcomes in the Loan/Project Agreement the overallsuccess indicators of loan 2533 derive from its objectives and the above indicators and are therefore

broadly listed as follows:-

1) Development of small enterprise sector especially the productive sectors.

2) Creation of wealth.

.~~ ~ ~ ~ ~ .- . -. . *-

3) Raisin* the standard of living of most peoplk through provision of essential services.

4) Creation of employment

On the basis of the above definitions the project recorded the foUowing successes;-

1) Out of the USS9 357 256-46 million allocated to investment projects a total of USS9 023 135-66was disbursed. Of the 246 sub-projects financed about 70%/ were successfuly implemented andwe performing reatively well.

2. The portfolio size is ZS49 657 987-08 and only about 14% of this is in arrears.

3) The investment created a total of 1 095 jobs at an average cost of ZS34 929-41 per job.

4) All in all a sgni5cant contribution was made to the development of small scale enterprises.

These outcomes are annrbutable to:

() Projet thrust and design and its operational guidelines.

(a) Expetise of SEDCO in appraising and providing extenon services to investment projects.

(i) Flemdbility of the agreement and cooperation of the lender in being responsive to the changingeconomic environment.

(iv) Govemment support

(v) World Bank's assistance in setting up debt recovery unit.

5

(vi) World Bank's technical support which enabled efficient delivery of services.

Overally the project made a significant impact on both the industrial and service sectors especially on thetransport sector at a time when the country was facing a transport crisis. This positive impact wasspilled over to the Agricultural industry and the economy at large.

Drawii from the experience on the line of credit as discussed in the report are ihe followingi1ssonstrecommnendations for fiuture facilities: .*.

1) Non-bureaucratic but effective procedures should be employed i.e. decisions on loan applicationsand payments should be done expeditiously. The lender should consider the idea of doing away

with the free lirnit and give the borrower the ultimate authoriy in, deciding on which sub-projects

are elligible for finding.

This would ensure that prompt decisions are made and a more responsive attitude prevails to meetthe borrower's continuously changing needs.

2) Adjustments to the agreement that allow efficient implementation of the project should always bc

done promptly to minimise dysfinctions in the system.

3) The procurement process should be tightened and procedures clearly defined to ensure thatprocurement is made to the best advantage of both the borrower and the lender.

4) Consideration should be given to financing a project in its entirety where the cient can meet hisequity requirements to avoid undercpitalisation.

5) Outcomes should be clearly defined to provide guidance on implementation of project.

In conclusion it is SEDCCs view that the ben_ts that accrued as a resul of this project are more thanthe weaknesses cited but nevertheess it is hoped that the latter wil incite a more objective review of theprogramme wih a view to making future progammes more responsive to the borrwers needs.

- ~~~~~~~A"f NDIX

OOIt up DATE APP 'SA OISI ( L' l.C. 9AY 1U AW MOVuII N PinJirCT RA LOAN NO.: t SIOC0 PILAY Sy 1/18RN CR1AY -IfOurStr DFLIY OW5ED DELAY U/1A4K DISIIRMtI

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