Document of The World Bank

FOR OFFICIAL USE ONLY

Report No: 56714-GT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$32 MILLION

TO THE

REPUBLIC OF GUATEMALA

FOR THE

ENHANCING MICRO, SMALL AND MEDIUM ENTERPRISE PRODUCTIVITY PROJECT

February 3, 2011

Poverty Reduction and Economic Management Central America Country Management Unit Latin America and the Caribbean Region

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.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS (Exchange Rate Effective December 2, 2010)

1 Quetzal = US$0.12523

US$1 = Q. 7.985

FISCAL YEAR January 1 – December 31

ABBREVIATIONS AND ACRONYMS

CEM Country Economic Memorandum CENAME National Metrology Center CentraRSE Guatemalan Corporate Social Responsibility Center CFAA/CPAR Country Fiduciary Assessment C-GAC Country-Governance and Anti-Corruption CGR Comptroller General DB Doing Business EIA Environmental Impact Assessment ESMF Environmental and Social Management Framework FM Financial Management GDP Gross Domestic Product GNI Gross National Income IADB Inter-American Development Bank IFC International Finance Corporation IFRs Interim Unaudited Financial Reports ISP Implementation Support Plan MARN Ministry of Environment and Natural Resources MINECO Ministry of Economy MSMEs Micro, Small, and Medium Enterprises MTSA Multilateral Treasury Account System M&E Monitoring and Evaluation OGA Guatemalan Accreditation Office ORAF Operational Risk Assessment Framework PIPPA Integrated Agriculture and Environmental Protection Program PIU Project Implementation Unit PDO Project Development Objective SIL Specific Investment Loan SME Small and Medium Enterprise SPS Sanitary and Phytosanitary UNDP United Nations Development Program USAID U.S. Agency for International Development USDA GATS U.S. Department of Agriculture Global Agricultural Trade System

Regional Vice President: Pamela Cox Country Director: Carlos Felipe Jaramillo

Acting Sector Director: Sector Manager:

Louise Cord Lily Chu

Task Team Leader: Mike Goldberg

Table of Contents I. Strategic Context ..................................................................................................................... 1

A. Country Context ........................................................................................................... 1 B. Sectoral and Institutional Context ................................................................................ 2 C. Higher Level Objectives to which the Project Contributes .......................................... 3

II. Project Development Objectives............................................................................................. 4

A. PDO .............................................................................................................................. 4 1. Project Beneficiaries ..................................................................................................... 4 2. PDO Level Results Indicators ...................................................................................... 4

III. Project Description.................................................................................................................. 5

A. Project Components ...................................................................................................... 5 B. Project Financing ........................................................................................................ 10

1. Lending Instrument: ................................................................................................... 10 2. Project Financing Table .............................................................................................. 10

C. Lessons Learned and Reflected in the Project Design ............................................... 11 IV. Implementation ..................................................................................................................... 12

A. Institutional and Implementation Arrangements ........................................................ 12

B. Results Monitoring and Evaluation (M&E) ............................................................... 13

C. Sustainability .............................................................................................................. 13

V. Key Risks .............................................................................................................................. 13

VI. Appraisal Summary .............................................................................................................. 14

A. Economic and Financial Analysis .............................................................................. 14

B. Technical .................................................................................................................... 14

C. Financial Management ............................................................................................... 14

D. Procurement ................................................................................................................ 15

E. Social .......................................................................................................................... 15

F. Environment ............................................................................................................... 16

Annex 1: Results Framework and Monitoring.............................................................................. 17

Annex 2: Detailed Project Description ......................................................................................... 20

Annex 3: Implementation Arrangements ..................................................................................... 30

Annex 4: Operational Risk Assessment Framework (ORAF) ...................................................... 48

Annex 5: Implementation Support Plan ........................................................................................ 52

Annex 6: Team Composition ........................................................................................................ 55

Annex 7: Related Projects Financed by the Bank and Other Agencies ........................................ 56

PAD DATA SHEET Guatemala

ENHANCING MICRO, SMALL, AND MEDIUM ENTERPRISE PRODUCTIVITY PROJECT

PROJECT APPRAISAL DOCUMENT

Latin America and the Caribbean Finance and Private Sector

Date: February 3, 2011 Country Director: Carlos Felipe Jaramillo Acting Sector Director: Louise Cord Sector Manager: Lily Chu Team Leader(s): Mike Goldberg Project ID: P112011 Lending Instrument: Specific Investment Loan

Sector(s): General Industry/Trade Sector (100%) Theme(s): SME support (P)

Regulation and Competition Policy (S) EA Category: B

Project Financing Data: Proposed terms: Commitment linked, Fixed Spread Loan (FSL) payable in 25 years, including a 10 year of grace period with all conversion options.

[X] Loan [ ] Credit [ ] Grant [ ] Guarantee [ ] Other:

Source Total Amount (US$M) Total Project Cost:

Borrower: Total Bank Financing:

IBRD IDA

New Recommitted

32.00 0.00 32.00 32.00

Borrower: Republic of Guatemala

Responsible Agency: Ministry of Economy (MINECO)

Contact Person: Vice Minister Maria Teresa Ayala Telephone No.: 502-2412-0281 Fax No.: 502-2412-0286 Email: mayala@mineco.gob.gt

Estimated Disbursements (Bank FY/US$M)

FY FY12 FY13 FY14 FY15 FY16 FY17

Annual 3.5 6.0 7.5 5.5 5.5 4.0

Cumulative 3.5 9.5 17.0 22.5 28.0 32.0

Project Implementation Period: FY 2012-2017 Expected effectiveness date: July 1, 2011 Expected closing date: December 31, 2017

Does the project depart from the CAS in content or other significant respects?

○ Yes x No

If yes, please explain:

Does the project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate by Bank management? Is approval for any policy exception sought from the Board?

○ Yes x No ○ Yes ○ No ○ Yes ○ No

If yes, please explain:

Does the project meet the Regional criteria for readiness for implementation?

x Yes o No

If no, please explain:

Project Development Objective: The project development objective (PDO) is to stimulate the growth of micro, small, and medium enterprises (MSMEs) in selected value chains.1

This will be achieved by supporting investments and technical assistance to enhance their productivity, improve the quality of their products and processes, and facilitate their integration into the national and international markets. Project beneficiaries will include micro, small, and medium enterprises along the selected value chains.

1 “Selected value chains” means the value chains to be identified as strategic by the PIU and to be selected by the Steering Committee, within the Borrower’s tourism and agribusiness sectors, or any other sector proposed by the Borrower and satisfactory to the Bank.

Component 1: Improving and Promoting Business Development Services

Component 1 supports strengthening MINECO’s capacity to lead and coordinate the development efforts of the public and private sectors in support of MSMEs, based on existing national policies, including strengthening Business Development Services (BDS), supporting pilots for the development and implementation of new products to increase access to BDS and financial services, and strengthening MINECO’s Vice Ministry for MSMEs. Component 1 will coordinate closely with Component 2, as value chain working group action plans identify deficiencies in financial and non-financial business services for MSMEs.

Component 2: Creating Productive Value Chains

Component 2 supports improving the competitiveness of MSMEs through the provision of: (i) technical assistance and training to beneficiaries to facilitate the design of sub-project proposals; and (ii) sub-grants to Beneficiaries operating in the selected value chains for the carrying out of subprojects. Sub-grants may provide partial or complete financing of sub-projects.

Component 3: Project Management and Monitoring

Component 3 supports the provision of technical assistance, equipment, training and operational costs to the PIU, including the hiring of technical staff to manage the fiduciary, technical, and safeguards aspects of the Project, monitor the physical progress of the project and the impact of Project activities. The component also provides technical assistance for the carrying out of the financial audit of the project.

Safeguard policies triggered: Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waterways (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60)

x Yes ○ No x Yes ○ No

○ Yes x No x Yes ○ No x Yes ○ No x Yes ○ No x Yes ○ No ○ Yes x No ○ Yes x No ○ Yes x No

Conditions and Legal Covenants:

Financing Agreement Reference

Description of Condition/Covenant Date Due

Article IV, 4.01 Issuance of the Operational Manual by the Borrower.

By Effectiveness

Schedule 2, Section 1.A.2.

The Borrower, through MINECO, shall establish a committee (the Steering Committee), led by the Vice Minister of Micro, Small and Medium Enterprises of the Ministry of Economy, and comprised of representatives of academic institutions, civil society and specialized technicians, with functions and responsibilities satisfactory to the Bank and detailed in the Operational Manual.

No later than three months after the Effective Date

Schedule 2, Section 4, B. 1.(b)

No withdrawal shall be made under Category 2 (b) of the disbursement table until the Borrower, through MINECO, has established the Steering Committee in a manner satisfactory to the Bank.

Disbursement Condition

Schedule 2, Section 1, A.3.

The Borrower, through MINECO, shall submit to the Bank for its approval, the proposed Selected Value Chains.

Before providing any Sub-grant to the Beneficiaries.

Schedule 2, Section 1, C. 2.(a)(ii)(A)

The Borrower, through MINECO, shall carry out its Sub-project with due diligence and efficiency and in accordance with sound technical, economic, financial, managerial, environmental and social standards and practices satisfactory to the Bank; including in accordance with the provisions of the Environment and Social Management Framework (ESMF), Indigenous Peoples Planning Framework (IPPF), Resettlement Framework (RF) and the Anti-Corruption Guidelines applicable to recipient of loan proceeds other than the Borrower.

By Effectiveness

1

I. Strategic Context A. Country Context

1. With a multiethnic population of 13 million and a per-capita GNI of US$2,610, Guatemala is the largest economy in Central America. In recent years, Guatemala has made significant progress in completing reforms, which have contributed to broad-based economic growth. The country’s fiscal deficit and public debt-to-GDP ratio are among the lowest in Latin America. Public institutions are stronger and poverty rates have declined. In the last decade, the economy has further diversified from its traditional agricultural base. Increased access to foreign markets through regional trade agreements has also assisted economic diversification. Much of this stability can be attributed to prudent macroeconomic policies that have kept inflation and public debt manageable, while avoiding fiscal imbalances. As a result, despite the effects of the global financial crisis, Guatemala’s real growth in 2010 was estimated to be 2.8 percent (Economist Intelligence Unit, January 2010 Country Report). 2. However, Guatemala’s poverty rates, inequality, and social indicators do not compare favorably with rates in similar countries in the region. According to the Human Development Index (2010), Guatemala’s ranking is 116 of 169 countries. The country has not moved from this position since 2005. In addition, Guatemala ranks among the bottom two Latin American countries in the overall Human Development Index, after Haiti (145).

3. Despite some improvements in overall poverty rates (56.2 percent in 2000, declining to 47.0 percent by 2008), poverty remains higher than in many countries in the region. Extreme poverty, at about 16 percent, is concentrated in rural and indigenous regions. The Gini coefficient only improved slightly between 2000 and 2006, decreasing from 55.0 percent to 53.7 percent (WDI 2009). Finally, partly as a result of the worldwide economic downturn, the economy’s real GDP growth rate fell from approximately 6.3 percent in 2007, to 3.3 percent in 2008, and to a paltry 0.6 percent in 2009.

4. The worldwide economic downturn has also profoundly affected the Guatemalan private sector (especially micro, small and medium enterprises) in a number of ways. For example, demand for Guatemalan products in Europe, the United States, and elsewhere has declined. In addition, micro, small, and medium enterprises (MSMEs) are encountering increased difficulty accessing credit. As such, they need to find new and creative ways to overcome short-term and long-term challenges and barriers to growth. However, some entrepreneurs point out that this reality is not very different from conditions that MSMEs have historically confronted.2

5. The Government of Guatemala is committed to addressing these difficult conditions for MSMEs through inclusive broad-based growth, increased investment and greater social spending (World Bank 2008). For example, to fight poverty and foster social justice and equal opportunity, one of the four core pillars of the Government’s “Plan of Hope” (Plan de la Esperanza, 2008-2032) is on enhancing productivity. The pillar aims to improve the conditions for development by fostering sustainable and equitable economic growth and job creation.

2 See presentation “Brief del Proyecto Implementación de la Estrategia de Desarrollo de la Innovación, Articulación e Internacionalización en la MIPYME,” Consejo MIPYME Guatemala, 2010.

2

B. Sectoral and Institutional Context Private Sector and Competitiveness Issues 6. The project will use the national definition of MSMEs, as found in the operational manual. Given that they provide employment to 75 percent of the population, and operate in labor-intensive industries, MSMEs are major providers of jobs. Improving their productivity and ability to access new markets, information, and technology can increase their participation in regional and global markets and generate strong positive economy-wide benefits.3

7. Worldwide, MSMEs face several challenges. They are less productive and less able to compete in external markets than larger firms. Given the costs of meeting standards and obtaining market information and technology, MSMEs are unlikely to become more productive individually. They typically do not reach economies of scale, and often lack the networks with larger firms, brokers, and other actors to efficiently reach new markets. Without adequate support systems, between 40 percent and 50 percent of SMEs in developed countries fail in the first three years.

4

8. The national system for measuring and certifying product quality is critical for trade, innovation, and competitiveness. Guatemala’s quality infrastructure—the public and private entities required to establish and implement standardization, inspection, testing, product and system certification, and accreditation—functions relatively well, but actual use is limited and improvements could be important for value chain development. This uneven application of quality standards and ensuing gaps in the overall quality of many products was raised as a key issue in the Country Economic Memorandum (CEM, Report No. 54242-GT)

The reasons for this poor performance include: (1) poor management skills and workplace practices, (2) lack of information on market opportunities, (3) difficulty accessing affordable, reliable financial services, (4) problems obtaining quality inputs at competitive prices, and (5) a lack of information and access to innovative technologies and certification services, making it difficult to meet international quality standards (Hallberg and Konoshi 2003).

5

9. The CEM focused on MSMEs and identified a number of obstacles to growth and the areas in greatest need of reform (Haven and Guasch, World Bank 2010). Reforms in education and training, innovation and quality, and logistics and security, among others, would also improve MSME’s performance. One of the proposed reforms was to increase MSME’s productivity and participation in the economy by fostering their development and integration into value chains. A value chain describes the stages of a process for any product or service. This includes physical transformation, inputs, and the demand response (Kaplinsky and Morris 2000).

for Guatemala and in interviews with private sector stakeholders in preparation of the project.

10. The development and integration of MSMEs into value chains will have cross-cutting and economy-wide impacts and encourage improvements in other reform areas. The goal of successful integration of MSMEs into value chains is to become competitive in producing goods and services for national and international markets. Two of the priority sectors identified in the CEM, and consistent with the Government’s commitment to growth, are tourism and 3 One of MINECO’s challenges has been to create a data-base of MSMEs from the rural and urban areas. 4 Viewed another way, this apparent instability might also be caused to some extent by a high degree of mobility and low barriers to entry and exit. Either way, the lack of a national business survey makes it impossible to provide an exact figure, but the team estimates that Guatemalan MSME failure rates are higher than the rates found in developed economies. 5 This document is expected to be published in early 2011.

3

agribusiness, which represent 11 percent and 34 percent, respectively, of 2008 foreign exchange earnings.

11. Tourism. Tourism is one of the most important non-remittance foreign exchange earners in Guatemala. It represents 11 percent of total foreign exchange earnings, compared to 9.5 percent from coffee. In 2009, tourism doubled from the 2000 level, with a record 1.7 million visitors arriving (Guatemalan Institute of Tourism). However, tourism productivity is relatively low, with spending per tourist stay at US$629 compared to US$880 in Costa Rica (IADB 2004). Although it has a number of important World Heritage and Natural Sites, Guatemala has not fully capitalized on its tourism potential—particularly given global trends and new opportunities in community tourism, cultural-heritage, and eco-tourism. According to the CEM, security and marketing are the top constraints for tourism. Fragmented activities and the lack of new products, training, and infrastructure are other key issues affecting the sector.

12. Agribusiness. The agricultural sector, including agro-industry, affects 60 percent (IADB 2004) of the population in Guatemala and exports US$3 billion. Due to torrential rains in most of the country, agricultural production grew only 1.2 percent in 2010, led by non-traditional exports. Global agribusiness trends—such as the growth of supermarkets (Wal-Mart Central America) and increased emphasis on quality, social standards, and organic products—generally favor more organized large producers. Specific challenges facing smaller firms in Guatemala include dependency on intermediaries, quality control, access to technology and extension services, no cold chains and efficient warehouses, and high transaction costs. This is reflected in prices and retention rates. The value of Guatemalan agricultural products is generally 20 percent lower than comparator countries, including from other Central American countries. Retention rates at the U.S. border for phytosanitary reasons reached 13 percent in 2007.

C. Higher Level Objectives to which the Project Contributes 13. The project is aligned with the Government’s overall strategy for growth. Growth of the productive sector is also at the core of MINECO’s National Policy for MSME Development, which includes, as one of its key pillars measures, helping local clusters and value chains develop on a decentralized level, and places a strong focus on clean technology, innovation and quality enhancements. To carry out these plans, MINECO has a separate vice ministry dedicated to MSME development.

14. The project will play an integral part in the productivity enhancement pillar of the World Bank Group’s Country Partnership Strategy (Report Nº 44772-GT, discussed by the Bank Board on September 23, 2008). This is also consistent with the Country Partnership Strategy Progress Report (Report Nº 55573-GT). The Project will complement two on-going Bank-financed projects, which aim at improving the available roads infrastructure in the country, and at supporting small scale productive initiatives on the firm-level in selected rural locations, with special attention to indigenous communities.6

15. The project will complement, without duplicating, efforts financed by government agencies, other multilateral organizations, and other donors (see Annexes 2 and 7

This Project also builds directly on the recommendations from the 2010 CEM, which highlighted the important role that value chains can play for integrating MSMEs into markets and addressing the detected bottlenecks.

6 These projects are the Second Rural and Main Roads project (P055085) and the Project to Support a Rural Economic Development Program (P094321).

4

complementarities). The project has a sectoral focus and will work with value chains to improve overall efficiency and benefits to large groups of SMEs, rather than individual firms and transactions. For instance, the tourism segment work will focus on training and technical assistance, certification, environmental protection and co-financing of investments with positive spillover effects. The work will also scale up pilots and address problems related to certification and innovation. Finally, the project will build in protection of assets, risk management, and clean production technologies, all at the level of the value-chain, particularly where there are spillovers and externalities to the wider sector.

16. Recent value chain studies in Guatemala show the potential for significant benefits from greater integration of MSMEs into production, processing, and marketing networks. Work on cultural and eco-tourism shows enormous potential for improved productivity and inclusion of MSMEs, as well as eco-friendly approaches to inputs and waste management. Constraints, risks, and opportunities need to be taken into account to ensure that sustainable benefits accrue to the MSMEs. For example, a value chain study of chocolate found significant opportunities for MSMEs, but only if new diseases (such as the moliniasis fungus) and other production risks are carefully controlled.

17. The 2010 CEM confirms that, to improve productivity, MSMEs need also to address weaknesses in quality, human capital, innovation, and infrastructure. For example, Guatemala remains deficient in such issues as (i) the promotion of a culture of innovation and quality. (ii) national quality systems, (iii) education, (iv) technology transfer and productive relationships between the private sector and the universities, (v) institutional development for science and technology policy, (vi) financing of new technologies, and (vii) research and development, The project will address these issues as they become necessary for increased MSMEs participation in value chains and through a small number of pilots (component 1).

II. Project Development Objectives A. PDO

18. The project development objective (PDO) is to stimulate the growth of micro, small and medium enterprises (MSMEs) in selected value chains.7

1. Project Beneficiaries

This will be achieved by supporting investments and technical assistance to enhance their productivity, improve the quality of their products and processes, and facilitate their integration into the national and international markets.

19. Project beneficiaries will include micro, small, and medium enterprises along the selected value chains.

2. PDO Level Results Indicators

20. The key outcome indicators will measure improvements for the participating MSMEs within the value chains as follows:

Growth and Value Added: Value per unit of outputs produced in the respective value chains.

7 “Selected Value Chains” means the value chains to be identified as strategic by the PIU and to be selected by the Steering Committee, within the Borrower’s tourism and agribusiness sectors, or any other sector proposed by the Borrower and satisfactory to the Bank. The national definition for micro, small and medium is a firm with less 61 workers. MINECO will update this definition for policy purposes and the new definition will be used for the project.

5

Integration: Increase in number of MSMEs participating in value chain working groups.

III. Project Description A. Project Components

The project can be summarized as follows:

Component 1: Improving and Promoting Business Development Services (US$9.7 million)

Component 2: Creating Productive Value Chains (US$19 million)

Component 3: Project Management and Monitoring (US$2.52 million)

Unallocated Funds (US$0.70 million) Component 1: Improving and Promoting Business Development Services (US$9.7 million) 21. Component 1 supports strengthening MINECO’s capacity to lead and coordinate the development efforts of the public and private sectors in support of MSMEs, based on existing national policies, including strengthening Business Development Services (BDS), supporting pilots for the development and implementation of new products to increase access to BDS and financial services, and strengthening MINECO’s Vice Ministry for MSMEs. Component 1 will coordinate closely with Component 2, as value chain working group action plans identify deficiencies in financial and non-financial business services for MSMEs.

22. This component will finance key activities under the National Policy for MSME Development (2005) which coordinates various government efforts. The National Policy includes improving access to financial services that are appropriate for MSMEs, improving business development services, and improved quality and access to technologies with business applications. This component will help inform national policies on MSMEs and value chains will benefit from improved business support services. The project will finance parts of the Policy not covered by existing government financing and support from donors. The component will finance MINECO’s participation in national, regional and international seminars related to MSMEs, so that the Ministry can improve its plans and implement innovative pilot programs. The component will not finance a survey of the MSME sector because the Inter American Development Bank (IADB) is financing such a survey in its Trade and Integration Support Program with MINECO.8

23. Component 1 consists of four subcomponents:

Subcomponent 1.1. Improving and Promoting Quality Services 24. Subcomponent 1.1 will improve quality services, through the strengthening of the supply and demand of quality services that are relevant to the needs of MSMEs, including, inter alia (i) the design and implementation of a communications strategy that targets MSMEs and promotes the importance of quality in processes and products; (ii) the carrying out of training activities and the employment of additional technical personnel for, inter alia, MINECO’s metrology lab and MINECO’s accreditation agency and purchase and maintenance of equipment; (iii) the strengthening of MINECO’s capacity to increase the coverage of the national quality system; and (iv) the development of a sustainability plan for the Borrower’s national quality system with 8 GU-L1037: Programa de Apoyo al Comercio y la Integración. The Program's general objective is to help equip Guatemala to act on trade opportunities by strengthening capacity for foreign trade management, export promotion and investment attraction, and business development.

6

the aim of improving its institutional capacity and promoting the generation of income from fee-based services and other sources to cover the costs of technical personnel.

Subcomponent 1.2 Strengthening Business Development Services 25. Subcomponent 1.2 will strengthen BDS, through (a) the expansion of the information available in MINECO’s current directory of BDS providers; (b) the carrying out of an evaluation of existing BDS providers and an assessment of the services provided by said BDS providers; (c) the provision of technical assistance to BDS providers to address identified weaknesses, including, inter alia, expansion of certification services, promotion of alternative dispute resolution mechanisms and the provision of training to trainers.

Subcomponent 1.3 Supporting Pilots for the Development and Implementation of New Products 26. Subcomponent 1.3 will support pilots for the development and implementation of new products through the carrying out of (i) pilot research activities and (ii) feasibility studies to identify the most useful solutions to overcoming barriers to growth and productivity faced by selected value chains and MSMEs.

27. Examples include a partial credit risk guarantee for banks lending to MSMEs and the development of new microfinance products (such as, inter alia, microleasing and microinsurance, development agencies, risk management units and credit bureaus as financial support entities). To measure their impact and decide if a particular pilot should be expanded, the pilots will include a monitoring plan and indicators. These pilots will be discussed with the Bank and included in the annual operational plan, with direct monitoring and reporting undertaken by MINECO.

Subcomponent 1.4 Strengthening MINECO’s Vice Ministry for MSMEs 28. Subcomponent 1.4 will strengthen the institutional capacity of MINECO’s Vice Ministry for MSMEs through the improvement of the quality of its processes and services, including inter alia, the certification of its processes by the International Organization for Standardization.

Component 2: Creating Productive Value Chains (US$19 million) 29. Component 2 supports improving the competitiveness of MSMEs through the provision of: (i) technical assistance and training to beneficiaries to facilitate the design of sub-project proposals; and (ii) sub-grants to Beneficiaries operating in the selected value chains for the carrying out of subprojects. Sub-grants may provide partial or complete financing of sub-projects.

30. This component will improve the competitiveness of MSMEs through the development and partial grant financing of prioritized action plans for selected value chains, beginning with the tourism and agribusiness sectors, both of which were identified in the Country Economic Memorandum. The component will initially select two value chains each from these sectors. The selection process will be transparent and competitive, based on technical criteria that reflect economic, social, and environmental feasibility as well as strong participation of MSMEs in the value chain. In cases when a value chain working group is not selected for project support, the value chain working group leaders will be informed of the specific reasons for the decision in writing. Such value chains can be reconsidered in future selection rounds.

31. A selection team made up of the Component 2 coordinator in the Project Implementation Unit (PIU) and the technical expert(s) will use a variety of sources of information to select

7

potential value chains in a transparent process. Sources of information should include available statistical information on demand for a product, interviews with key sector actors, specific statistics on MSME participation in the sector, and productivity information if available. This process will identify between 10 and 30 candidate value chains. Through in-country consultations and interviews, the PIU and the experts will create a short list of 10 or more value chains.

32. Next, the selection team will conduct field visits to assess institutional readiness (such as presence of organized groups, e.g. associations) and receptivity, and identify possible champions. Based on the PIU’s recommendations, the Steering Committee will select the initial value chains to participate in the project (up to four). The Steering Committee will also approve the action plans, upon no objection from the Bank, and make all final decisions regarding funding and project implementation. The PIU will use available subsector information, data provided in the diagnostic work, and benchmarking information from other countries, to facilitate the organization of the value chain working group, provide technical assistance as need arises, and develop prioritized action plans. An illustration of the value chains selection criteria—anchored around social, economic, and feasibility filters and based on a weighting system to be presented in the Project Operational Manual—as shown in Figure 1:

Figure 1: Example of Value Chain Selection Criteria

Source: Adapted from presentation by OTF Group 2007

33. These value-chains will form working groups to generate priority action plans, supported by specialized facilitation and technical assistance, as needed. To encourage maximum

Priority Value Chains

National Objectives

Sustainable Employment

Potential to Develop MSMEs

Environmental Sustainability

Value added potential Niche segments

Implementation Quick implementation

Market Criteria Regional and global demand

Strategy

Pre-conditions for change

Re-positioning strategy

Thecnical and financial

parameters

8

participation, the project has set a target of around 80 percent MSME participation in the production and processing stages involved in the value chain. It is expected that large anchor firms (such as wholesale input providers and transport companies) will also play an important role in developing value chain working plans, but facilitators and MINECO PIU staff will ensure that these large firms do not dominate the process.

34. To ensure momentum for the project, the working groups will identify “quick wins” by identifying obstacles and limitations and possible solutions to overcome them, before generating priority action plans, such as supporting farmers to meet phytosanitary pre-certification (thus increasing their net income). The working groups will submit these quick wins to the Steering Committee’s normal review and approval procedure, which includes reviews by MARN to ensure compliance with the environmental and other safeguards.

35. To develop the action plans, the project will employ a public-private partnership approach that encourages strong MSME participation. The approach will begin with working groups composed of key stakeholders in the value-chain, and include relevant associations, foundations, non-governmental organizations, cooperatives, mercantile societies, chambers of commerce, representatives firms, and other supporting institutions, such as research agencies and input providers.

36. The MINECO-led Steering Committee will be composed of the Vice Minister of MSMEs, representatives from relevant government agencies, and various civil society organizations (if private sector representatives are chosen, they cannot come from the specific value chains represented in the working groups). The Steering Committee will provide overall guidance, reviews, and final decisions (upon Bank no objection) concerning of recommendations made by technical staff in the PIU. For environmental and natural resource safeguard issues, the working group of the selected value chain must obtain the environmental approval of MARN using the standard instrument required by MARN. In agreement with its legal mandate, MARN will review relevant proposals before final approval by the Steering Committee.

37. The formal action plan will include a baseline and key performance indicators and will be subject to approval by the Steering Committee and World Bank no-objection. The PIU and the value chain working group will refine the intermediate outcome and output indicators provided in Annex 1 and track the performance in the project monitoring system. The PIU will monitor the impact of the interventions on cost, time, and value added (or another productivity measurement) within the respective value chain. Where necessary, the monitoring and evaluation expert within the PIU will commission limited survey work to complement existing information.

38. Trade facilitation issues, such as regulatory and administrative barriers, as identified by the working groups, will be addressed in coordination with existing programs in Guatemala at national, state and private sector levels including, for example, the Inter-American Development Bank, USAID, Agexport, and other national government and private programs.

39. Selected value chains will become eligible for graduation after about two years. Graduation means that successful value chains will not need further project support because they successfully completed the action priorities and have the internal organization to identify other resources. However, value-chains can also lose eligibility for further funding due to a lack of demonstrated progress. The project is aimed at building public-private sector ownership of the project through specialized facilitation and technical assistance. Sustainability and institutionalization mechanisms include building public and private capacity to facilitate working

9

groups using international best practices, and a seminar to transfer lessons learned after year two. A preliminary institutionalization plan for the working groups will be included before the formation of the working groups, and updated as part of the working group deliverables.

40. Figure 2 describes an example of the phases, results and project financing. Project financing will decline as private sector financing increases and the value chain approaches graduation. Annex 2 provides an example of the phases and activities.

41. The component will improve the sustainability of the productivity and income gains with ex-ante risk management tools and practices as an integral part of the selected value chains’ action plans. This component could finance insurance premia, as applicable (meaning reasonable recurrent expenditures, as determined by the Bank, to finance insurance premiums to cover the loss or damage of works and goods financed under Subprojects). For example, risk management activities for the agribusiness value chain would include the use of disease resistant seeds, natural disaster preparedness through targeted infrastructure investments, insurance instruments, and integrated pest management. Environmental expert consultants contracted for the selected value chains will similarly ensure pro-active environmental solutions in action plans in coordination with national entities such as the Clean Production Technology Center of the Guatemalan Chamber of Industry.

Figure 2: Technical and Financial Assistance Overview of Sub-Projects (Action Plans)

Private Sector Financing

Project Financing

Priority action plan

Identification of:Champions

Working Groups(Formal Entity Formed)

Value-Chain Graduation

Secondary action plan

Jobs

Income

100%Project funded

Results

Action Plan

Results Results

Organization Action Plan Phase I * Action Plan Phase II *

Sub Grants

50-75%

Sub Grants

30-50%

42. Tourism. The project will work with MSMEs, other members in the selected value chains, and the relevant stakeholders, to improve the competitiveness of tourism services and assets. As part of this process, the component will develop activities that address physical, marketing, regulatory, and other constraints. The value chain working group will determine the final list of activities, which could include, inter alia, development of new tourism packages with high MSME participation, upgrades of heritage assets (such as small on-site infrastructure improvements), creation of safe zones for targeted routes, training of guides, strengthening of

10

tourism organizations, introduction of clean production technologies in small hotels, creation of a joint web site, and familiarization trips by international tour operators. The component will also directly address security concerns, drawing lessons, for example, from the Tourist Assistance Program, Taxi Seguro, and international experience.

43. Agribusiness. The project will work with MSMEs, other firms in the selected value chains, and relevant stakeholders to trigger productive private investments and job creation. Activities could include, inter alia, the development of new products, market intelligence research, cold chains or other small infrastructure improvements, and niche marketing schemes, as well as the relevant certifications and seals (such as organic or Fair Trade certifications).

Component 3 – Project Management and Monitoring (US$2.52 million) 44. Component 3 supports the provision of technical assistance, equipment, training and operational costs to the PIU, including the hiring of technical staff to manage the fiduciary, technical, and safeguards aspects of the Project, monitor the physical progress of the project and the impact of Project activities. The component also provides technical assistance for the carrying out of the financial audit of the project.

45. For the purposes of this project, fiduciary aspects of project management include financial management, procurement and audits. This component will provide financing for the provision of technical assistance for the carrying out of the financial audit of the Project.

46. The Director of the Finance and Administration unit will manage the fiduciary team while the Project Coordinator will report on technical and strategic issues to the Vice Minister of MSMEs. The consultants for this unit will be selected on a competitive basis (see below for an organization chart). A specific annual budget and set of activities will be established for technical assistance and capacity building activities for MINECO staff in technical, fiduciary, and safeguards issues, including indigenous peoples’ issues and social issues.

B. Project Financing 1. Lending Instrument:

Specific Investment Loan (SIL) of US$32 million.

2. Project Financing Table

Component and/or Activity Total (US$ millions)

IBRD Financing

% Financing

Component 1: Improving and Promoting Business Development Services

9.7 9.7 100

Component 2: Creating Productive Value Chains 19.0 19.0 100 Component 3: Project Management and Monitoring 2.52 2.52 100 Total Baseline Costs 31.22 31.22 100 Physical Contingencies 0.35 0.35 100 Price Contingencies 0.35 0.35 100 Interest during Implementation 0.00 0.00 Front-end Fee 0.08 0.08 100 Total Financing Required 32.0 32.0

11

C. Lessons Learned and Reflected in the Project Design 47. The proposed project design draws on past and current World Bank financed projects and other donor operations in private sector development. Lessons learned include the following (see Annex 2 for complete discussions):

48. Limit the number of initiatives to encourage a performance-based competition. A lesson from the recently closed Competitiveness Project9

49. Focus on integration of MSMEs into the value chain. One of the CEM’s highest priority recommendations for increasing MSME development is to integrate MSMEs into value chains.

is that it is not effective to take a very broad approach to competitiveness.

50. Choose value chains based on potential for MSME participation, market demand, competitiveness, value added and productivity gaps. To avoid capture of benefits by a narrow group of firms the candidate value chains should have a high potential for MSME participation.10

51. Ensure a large private sector response and ownership, and take enough time to implement value chain work completely. To trigger a strong private sector response, provide a “critical mass” of comprehensive interventions including short-term, decreasing co-financing, facilitation, and specific policy and regulatory responses to tax, duty and other administrative issues that affect value chain productivity.

52. Encourage new leaders or champions to emerge through participation. A participatory planning approach (which includes setting their own targets) creates opportunities for new civic entrepreneurs to emerge (public and private) during value chain identification and action plan development.

53. Based on these and other lessons learned, the project will be driven by five key principles. These are: (i) strategic orientation (choosing what not to do) (ii) transparency and inclusion of MSMEs, (iii) facilitation and technical assistance, (iv) results, and (v) cost effectiveness.

54. The project also represents an innovative approach to private sector development based on the following characteristics:

• The project uses a comprehensive value chain approach and transparent selection criteria • The project develops ex-ante risk management systems to protect productivity gains and

mitigate the impacts of future natural disasters or crop failures • The project focuses on MSME participation, benefits and needs. • The project aligns incentives for win-win solutions, benefiting participating firms, the

public sector, and surrounding communities.

9 Guatemala Competitiveness Project: Loan No. 7044-GT, P055084, closed on June 30, 2009. 10 The Rwanda National Innovation and Competitiveness Project (RNIC) and Rwanda Accelerated Competitiveness and Execution (RACE) were government-led initiatives where multiple donors supporting different components. The Jamaica Cluster Competitiveness Project (JCCP) was funded by USAID and DFID.

12

IV. Implementation A. Institutional and Implementation Arrangements

55. MINECO will be responsible for project implementation and lead the Steering Committee. A dedicated PIU within MINECO will manage the project and report to the MINECO-led Steering Committee. Figure 3 shows the organizational chart.

56. The PIU will include a Project Coordinator, an Administrative Assistant, a Safeguards Specialist, and the following:

• For Component 1: One component coordinator and a technical expert. • For Component 2: One component coordinator a technical expert. • For Component 3: Two procurement staff (one specialist and one analyst), two financial

management staff (one specialist and one analyst), and two staff responsible for monitoring and evaluation. The PIU structure could increase according to its needs. The structure can be defined in the Operational Manual.

57. The Results Framework in Annex 1 provides key performance indicators, and intermediate outcome indicators for both components. The M&E specialist in the PIU will be responsible for the development and updating of a monitoring and evaluation system within the PIU, and for coordination and supervising the project related monitoring and evaluation work conducted in the value chain working groups and involved government agencies. The expert will report regularly—at least twice a year—to the Steering Committee and the World Bank team on progress made towards meeting the agreed results. Furthermore, the M&E expert will support the publication of the core results to a broader audience as part of the communication campaign.

Figure 3: Project Implementation Unit Organizational Chart (MINECO)

MINECOSteering

Committee

Project Coordinator (PIU)

Component 1 Coordinator

Technical Expert

Component 2 Coordinator

Technical Expert

Component 3 Coordinator (PIU)

Procurement Specialist

Procurement Officer

Financial Management Coordinator

Financial Management

Officer

Monitoring & Evaluation Specialist

M&E Officer

Safeguards Specialist

Agribusiness Value ChainWorking Group

Tourism Value ChainWorking Group

Assistant

13

B. Results Monitoring and Evaluation (M&E) 58. To ensure that the monitoring and evaluation (M&E) data are regularly generated and tracked, each component includes direct support for M&E systems. Value chain working group action plans will provide specific targets based on baseline information, reflecting productivity enhancements, impact on jobs and income gains, as well as the implementation of quality standards, which they will have to track. The value chain experts hired for each value chain will regularly report on progress made towards those targets to the working groups, the M&E expert in the PIU and to the World Bank. The PIU could contract services for M&E from an external provider.

59. The status of key project outcomes will be monitored during each supervision mission of the World Bank project team. A special implementation review (similar to a mid-term review) will take place approximately two years after the date of project effectiveness, and will take an in-depth look into progress made and the monitoring and results framework. A final independent evaluation, including survey work and workshops with key stakeholders, will be conducted in the last semester of project execution to assess overall achievement of expected project results.

C. Sustainability 60. The Borrower has demonstrated commitment to the project. MINECO has made the project a key part of the work plan of the Vice Ministry of MSMEs. MINECO has supported private sector development through the World Bank-funded Competitiveness Project and the IADB-funded Trade and Integration Support Program. Clearly, this project’s emphasis on MSMEs, value chains and the business environment neatly fits into the Ministry’s long term plans. The Ministry of Finance has already indicated that fiscal space will be available for this project in 2011, even at a time of tight fiscal space. Consultations with leading private sector representative groups (including five chambers and one association) demonstrate that the project complements the work plans of these institutions. Finally, consultations with a broad range of private, public and civil society representatives reveal a strong commitment to initiatives that can create jobs and improve income for producers and others along the value chain.

V. Key Risks 61. The most important institutional risk is related to MINECO’s leadership of the project’s technical, fiduciary, and safeguards work. MINECO has worked with Bank-financed projects in the past, but not as the direct executing agency. Given the number of stakeholders and the project’s technical requirements, MINECO is expected to make a firm, multi-year commitment to project implementation, coordination, budgeting, and staffing.

62. Stakeholder issues present another risk. There is a history of private sector initiatives being captured by sectoral or geographically based elites. The project has been designed to ensure that significant participation of MSMEs is a key criterion for value chain selection. A key results indicator will be the number of MSMEs that participate in the value chains and gain benefits from the investments. The project will use a communications strategy and other methods to avoid creating unrealistic expectations on the part of private sector associations, chambers and other representative groups.

63. Country risk is also significant because elections are scheduled for late 2011. The political system is stable, with democratic outcomes since 1986. However, no political party has

14

ever held a majority in Congress, leading to deadlocks that delay or even cancel important legal reforms.

64. Finally, the project design depends on a close and ongoing partnership built around the transparent selection of value chains and the value chain working groups. While there are examples of public sector collaboration with the private sector in recent years (notably built around the Agenda Nacional de Competitividad 2005-2015), there is also a history of a breakdown in the dialogue. The full risk analysis at appraisal stage is presented in the ORAF in Annex 4.

VI. Appraisal Summary A. Economic and Financial Analysis

65. Given that the project will support action plans to be created during implementation as subproject proposals, it does not lend itself to detailed ex-ante cost-benefit analysis. Although the broader sectors have been selected, the value chain working groups will ultimately determine the scope of activities. A technical committee will use standard net present value review and sensitivity analysis to evaluate the costs and benefits of all activities funded by the project, to ensure that they are economically justified.11

B. Technical

66. The project’s technical design builds upon lessons learned and best practices of similar projects and studies from Guatemala and other countries and regions. The CEM identified tourism and agribusiness as strategic sectors with high potential for growth and high MSME participation. The design builds upon the CEM’s sector-specific findings and cross-cutting recommendations, particularly in improving quality. The project design will focus on actions with strong positive externalities, positive social impacts, high learning spillovers to the actors in the value-chain, and whenever possible, to the rest of the economy.

67. The design also reflects the approaches of current projects in Guatemala, to ensure that overlaps do not occur. Project design was also informed by the lessons learned from the Competitiveness Project, specifically that project activities should be focused on sectors with potential and to avoid an overly broad approach. Other projects, particularly the Competitive Value Chains Project in Cameroon, have provided important inputs incorporated into project design. The Cameroon project demonstrates a public-private planning approach that supports specific value chains.

C. Financial Management 68. The Ministry of Economy (MINECO) is the main counterpart of the Bank for this operation. Within MINECO, the Project Implementation Unit (PIU) currently implementing the IADB financed project No. 2094/OC-GU, and previously involved in the implementation of the IADB financed project No. 1318/OC-GU, (for which acceptable administrative and financial management arrangements complemented by existing institutional controls and procedures were developed), will be used to support this operation, and will be responsible for the project’s financial management. These responsibilities include project budgeting, accounting, flow of

11 To illustrate the cost-benefits of this project, a single action to pre-certify 10,000 acres with a phytosanitary handling facility under a local small farmers cooperative (Cuatro Pinos) would increase net income of members by US$1.5 million per year, or US$52.5 million in 25 years (excluding depreciation).

15

funds, preparation and submission of financial reporting, as well as supervision and financial oversight over all project activities, including implementation of action plans under component 2, which will require signing of financing agreements including the World Bank’s anti-corruption clauses. At present, MINECO has in place well organized information systems as well as monitoring and evaluation mechanisms. Financial reports prepared by the Unit are comprehensive and allow monitoring of project activities. The PIU received clean external audit opinions and existing arrangements would only need to be slightly adjusted to manage this operation.

69. When it comes to the financial management capacity of other entities involved in the project implementation, the PIU, with the support of additional staff, will be able to manage the entire operation, and, whenever necessary, provide required support.

D. Procurement 70. A full assessment of MINECO’s capacity to implement procurement under the Bank’s procurement guidelines identified the major risks, which can be summarized as: (i) the lack of experienced procurement staff, and (ii) the lack of a clear identification of procurement related roles and responsibilities, and (iii) the lack of clear and detailed procurement procedures, Sample Bidding Documents (SBD) for National Competitive Bidding (NCB) processes, simplified formats for Shopping processes or for the selection of Individual Consultants (IC), and other related instruments. Mitigating measures aim to ensure that an experienced procurement specialist is hired under terms of reference acceptable to the Bank (a procurement analyst will also be hired), and that the Operational Manual includes the roles, responsibilities, procedures, and related instruments in a section dedicated to procurement. Annex 3 includes the prior and post review and supervision conditions, detailed information about the assessment findings, proposed mitigation plan, procurement risk rating, and a summary of the proposed procurement plan for the first 18 months of project implementation.

71. For the purposes of procurement under the project, “non-consultant services” means services which will be bid and contracted on the basis of performance, such as: (i) the carrying out of surveys for impact of Project activities, baseline and monitoring activities; (ii) publishing costs; and (iii) and Insurance Premiums, as applicable (which term means reasonable recurrent expenditures, as determined by the Bank, to finance insurance premiums to cover the loss or damage of works and goods financed under Subprojects).

E. Social 72. The Project triggers the Bank’s Operational Policies 4.10 (Indigenous Peoples) and 4.12 (Involuntary Resettlement). Although involuntary resettlement is not anticipated, since most project activities will be determined during implementation, a Resettlement Framework has been developed, using a consultation process during October and November 2010, and was subsequently disclosed in-country on December 1, 2010 and through the World Bank’s Infoshop on November 30, 2010. This Resettlement Framework consists primarily of a checklist to ensure involuntary resettlement does not occur. Value chain working groups will be informed of these safeguard policies and requirements, so that action plans will already take these important concerns into account. The Project is also committed to an ongoing system of local consultation with indigenous stakeholders. An Indigenous Peoples Planning Framework has been developed, involving a consultation process with key actors from October through November of 2010. This framework was disclosed in-country on November 29, 2010 and through the World Bank’s

16

Infoshop on November 23, 2010. This Indigenous Peoples Planning Framework will ensure that indigenous peoples are not excluded from project activities and that ongoing consultation takes place. Also, a social and indigenous peoples expert will participate in the value chain working groups to encourage indigenous participation and identify involuntary resettlement issues as they arise for early treatment.

F. Environment 73. The Project has an overall assessment of Category B and triggers Operational Policies 4.01 (Environmental Assessment), 4.04 (Natural Habitats), 4.09 (Pest Management), and 4.11 (Physical Cultural Resources).

74. Because most project activities will be determined during implementation, the project will ensure that negative and irreversible impacts do not occur in safeguard areas. An Environmental and Social Management Framework (ESMF) covers all environmental safeguard areas. The ESMF was disclosed in-country on November 29, 2010 and through the World Bank’s Infoshop on November 23, 2010. Pro-active environmental solutions, such as clean production technologies, will be incorporated throughout the entire value chain process. Before the Steering Committee approval phase, independent environmental expert consultants will facilitate the value chain selection process in the environmental assessment of activities, consideration of environmental risks, and promotion of pro-active operational environmental solutions in the design of action plans. In agricultural operations, the Project will encourage the control of pest populations through the integrated pest management framework within the ESMF (included in the Operational Manual), such as biological control, cultural practices, and the development and use of crop varieties that are pest resistant or pest tolerant. The Project may finance the purchase of pesticides when their use is justified under an integrated pest management approach. Any environmental assessments conducted for project activities will include identification of physical cultural resources likely to be affected by the project, and assess the potential impacts on these resources. When the project is likely to have adverse impacts on physical cultural resources, the project will identify appropriate measures to avoid or mitigate these impacts as part of the environmental assessment process.

75. Prior to execution, MARN will review and assess the environmental impacts of any activity in the action plan that could potentially have an environmental impact. Accredited consultants at MARN will be contracted to undertake environmental impact assessments prior to execution of that activity. The value chains action plans must fulfill the environmental requirements properly authorized by MARN according to the applicable procedures and legal framework. This requirement (and the negative list in the Operational Manual) applies to all activities in the action plan, regardless of whether the project is providing financing or not.

17

Annex 1: Results Framework and Monitoring

COUNTRY: GUATEMALA ENHANCING PRODUCTIVITY OF MICRO, SMALL, AND MEDIUM ENTERPRISES PROJECT

Monitoring 1. The PIU will refine the results framework after the Steering Committee has selected the value chains and approved the action plans. The PIU will also determine the baseline and target values based on information from the subsector, the diagnostic work, and benchmarks from other countries. The results framework will include World Bank indicators, if the Bank has developed interim core indicators for private sector development.

Project Development Objective (PDO): The project development objective (PDO) is to stimulate the growth of MSMEs in selected value chains. This will be achieved by supporting investments and technical assistance to enhance their productivity, improve the quality of their products and processes, and facilitate their integration into the national and international markets.12

PDO Level Results

Indicators* Cor

e Unit of Measure Baseline

Cumulative Target Values** Frequency Data Source/

Methodology

Responsibility for Data

Collection

Description (indicator definition etc.)

YR 1

YR 2 YR3 YR

4 YR5 YR6

Indicator One: Value increase per unit in respective value chains

US$ TBD Baseline x 10%

Baseline x 20%

Annual INE, relevant government agencies (e.g. INGUAT) and international trade statistics (e.g. FAOSTAT)

PIU

For tourism: increase in amount spent per visitor. For agribusiness: value increase per product unit (e.g. US$ per kg of raw material)

Indicator Two: Number of MSMEs participating in value chain working groups

Minutes of Working Groups

TBD TBD TBD TBD TBD TBD TBD Annual Survey of firms

PIU

Increase in number of MSMEs participating in value chain working groups

12 The project will also track MSME participation in the value chains. This indicator would be tracked for Bank PSD monitoring purposes, but would not accurately reflect the PDO. Based on selected value chains, specific targets and indicators will be established in the approved value chain action plans (sub-projects).

18

INTERMEDIATE RESULTS

Intermediate Result (Component One):

Unit of Measure Baseline YR 1

YR 2 YR3 YR

4 YR5 YR6 Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (indicator

definition etc.) Number of calibration services provided to MSMEs

Number of calibrations

TBD TBD TBD TBD TBD TBD Annual CENAME PIU

Number of calibrations

Number of accreditations provided to MSMEs

Number of accreditations

TBD TBD TBD TBD TBD TBD Annual OGA PIU

Number of accreditations

Number of hits on online platform providing information on international standards and listing certified companies

Web site number of hits

TBD TBD TBD TBD TBD TBD Monthly National Quality System website PIU

Web site

Number of hits on online directory of business development service providers

Web site number of hits

TBD TBD TBD TBD TBD TBD

Monthly Online BDS directory website PIU

Online Directory

Intermediate Result (Component Two):

Unit of Measure Baseline YR

1 YR 2 YR3 YR

4 YR5 YR6 Frequency Data Source/ Methodology

Responsibility for Data

Collection

Description (indicator

definition etc.) Number of workers trained in the tourism value chain by programs supported by the project;

Increase in income of MSMEs in the value chain

By end of Year 1

Baseline x 15%

Baseline x 30%

Annual Value chain working groups

PIU

Baseline on income for firms will be measured at the end of year 1 once trust is established.

Number of hits in the project supported e-tourism platforms;

Web site number of hits

By end of Year 1

Value chain working groups

PIU

Number of tourists using project supported Number of

reservations and By end of Year 1

Annual Value chain working group; PIU

19

tourism packages visitors INGUAT

Number of companies in value chain compliant with relevant SPS standards.

By end of Year 1

National Quality System, PIPPA, value chain working groups

PIU

Narrowing of price gap between US import price of respective produce compared to other Latin American countries

Survey By end of Year 1

USDA GATS

Number of producers participating in project supported training and outreach programs

Increase in income of MSMEs in the value chain

By end of Year 1

Baseline x 15%

Baseline x 30%

Annual Value Chain working groups,

PIU Baseline on income for firms will be measured at the end of year 1 once trust is established.

20

Annex 2: Detailed Project Description

The Project includes three components as described below:

Component 1: Improving and Promoting Business Development Services. 1. Component 1 is responsible for strengthening MINECO’s capacity to lead and coordinate the development efforts of the public and private sectors in support of MSMEs based on existing national policies, including improving existing business development services (BDS) and quality services and conducting pilots to develop new products to increase access to BDS and financial services. Component 1 will coordinate closely with Component 2, as value chain working group action plans identify deficiencies in financial and non-financial business services for MSMEs.

2. This component will finance key activities that coordinate various government efforts. The policies and activities may include improving access to financial services that are appropriate for MSMEs, improving business development services, and improved quality and access to technologies with business applications.

3. The project will finance parts of MSME policy not covered by existing government financing and support from donors. The component will finance MINECO’s participation in national, regional and international seminars related to MSMEs, so that the Ministry can improve its plans and implement innovative pilot programs. The component will not finance a survey of the MSME sector because the Inter American Development Bank is financing such a survey in its Trade and Integration Support Program with MINECO.13

Subcomponent 1.1: Improving and Promoting Quality Services.

The component consists of four subcomponents.

4. This subcomponent will strengthen the quality infrastructure and ensure a supply of quality services that are relevant to the needs of MSMEs.14

5. These activities, along with the value chain activities in component 2, will likely increase demand for quality services. However, several studies

On the demand side, this subcomponent will include consultant services, publications, and conference services to support the design and implementation of a communication strategy that targets MSMEs and aims to promote a culture that understands the importance of quality in processes and products. The strategy will provide, inter alia, trainings to associations, conferences, publications, and coordination activities with other relevant agencies—such as certifying entities and other government agencies that promote standards.

15

13 GU-L1037: Programa de Apoyo al Comercio y la Integración. The Program's general objective is to help equip Guatemala to act on trade opportunities by strengthening capacity for foreign trade management, export promotion and investment attraction, and business development.

have identified deficiencies in the supply

14 A recent study led by the PTB found that demand for metrological services was not met by the current quality system in Guatemala. The report found that a basic basket of services in weighing instruments, dimensions, electricity, mass, temperature, and volume was not available in Guatemala. [Quality Infrastructure for Competitiveness: Plan of Action to Strengthen Basic Capabilities of Metrological Services in Central America and the Dominican Republic. September 2010] 15 World Bank. SME Development in Guatemala: Let 10,000 Firms Bloom. Country Economic Memorandum. 2010 PTB. Quality Infrastructure for Competitiveness: Plan of Action to Strengthen Basic Capabilities of Metrological Services in Central America and the Dominican Republic. September 2010.

21

of quality services in Guatemala. The subcomponent will build on existing national plans and studies to strengthen MINECO’s ability to lead a national quality system covering accreditation, certification, metrology, and standards work.

6. The subcomponent will provide support for training activities and, on a declining basis, additional technical personnel for, inter alia, the metrology lab and the accreditation agency. The project will also finance the capacity building and equipment purchase and maintenance needed to increase the coverage of the quality system services. Lastly, this subcomponent will finance the development of a sustainability plan of the national quality system with the aim of improving its institutional capacity and the generation of income from fee-based services and other sources to cover the costs of technical personnel. Figure 4 illustrates how the national quality infrastructure can be applied at different spots along the value chain and demonstrates how daunting it could be for an MSME to navigate the system.

Figure 4: How a National Quality Infrastructure Affects a Value Chain

Source: PTB. The Answer to the Global Quality Challenge: A National Quality Infrastructure. June 2007.

Subcomponent 1.2: Strengthening Business Development Services. 7. The subcomponent will provide consultant services, goods and non-consulting services to improve the supply of business development services. It will carry out an inventory of existing business development services (BDS) and expand the information available in MINECO’s current directory of BDS providers. BDS providers offer assistance to MSMEs in areas that range from initial business planning to training to accessing new markets. The providers could assist in variety of topics including, inter alia, technology transfer, legal and financial assistance, market intelligence, certification, and management training. European Union. Diagnóstico del Sistema Nacional de la Calidad de Guatemala. July 2010.

22

8. The subcomponent will finance the evaluation of existing BDS providers and assess the level of services provided. Based on these evaluations and the productivity barriers identified by the selected value chain working groups, this subcomponent will finance consultancies, goods, and conference services to provide technical assistance to BDS providers to address identified weaknesses. The subcomponent will support the provision of business development services (BDS) in remote and rural areas, where many potential beneficiaries are located. Technical assistance will include, inter alia, training of trainers, expansion of certification services, and promotion of alternative dispute resolution mechanisms.

Subcomponent 1.3 Supporting Pilots for the Development and Implementation of New Products 9. Subcomponent 1.3 will support pilots for the development and implementation of new products through the carrying out of (i) pilot research activities to identify barriers to growth and productivity of the selected value chains and MSMEs, (ii) feasibility studies to identify the most useful solutions, and (iii) implementation of the solutions. Examples include a partial credit risk guarantee for banks lending to MSMEs and the development of new microfinance products (such as inter alia, microleasing and microinsurance, development agencies, risk management units and credit bureau as financial support entities.) To measure their impact and decide if a particular pilot should be expanded, the pilots will include a monitoring plan and indicators. These pilots will be discussed with the Bank and included in the annual operational plan, with direct monitoring and reporting undertaken by MINECO.

Subcomponent 1.4 Strengthening MINECO’s Vice Ministry for MSMEs 10. Subcomponent 1.4 will strengthen the institutional capacity of MINECO’s Vice Ministry for MSMEs through the improvement of the quality of its processes and services, including inter alia, the certification of its processes from the International Organization for Standardization.

Component 2: Creating Productive Value Chains

11. Component 2 is responsible for improving the competitiveness of MSMEs through the provision of: (i) technical assistance and training to beneficiaries to facilitate the design of sub-project proposals; and (ii) sub-grants (partial or complete funding of sub-projects) to Beneficiaries operating in the selected value chains for the carrying out of subprojects.

12. This component will improve the competitiveness of MSMEs through the development and partial grant financing of prioritized action plans for selected value chains, beginning with the tourism and agribusiness sectors, both of which were identified in the Country Economic Memorandum. The component will initially select two value chains each from these sectors. The selection process will be transparent and competitive, based on technical criteria that reflect economic, social, and environmental feasibility as well as strong participation of MSMEs in the value chain. If a value chain working group is not selected for project support, the group leaders will be informed of the specific reasons for the decision in writing. Such value chains can be reconsidered in future selection rounds.

13. The Component 2 coordinator in the Project Implementation Unit (PIU) and the technical expert(s) will use a variety of sources of information to select potential value chains in a transparent process. Sources of information should include available statistical information on demand for a product, interviews with key sector actors, specific statistics on MSME participation in the sector, and productivity information, if available. This process will identify

23

between 10 and 30 candidate value chains. Through in-country consultations and interviews, the PIU and the experts will create a short list of 10 or more value chains.

14. Next, the selection team will conduct field visits to assess institutional readiness (such as presence of organized groups, e.g. associations) and receptivity, and identify possible champions. Based on the PIU’s recommendations, the Steering Committee will select the initial value chains to participate in the project (up to four). The Steering Committee will also approve the action plans, upon no objection from the Bank, and make all final decisions regarding funding and project implementation. The PIU will use available subsector information, data provided in the diagnostic work, and benchmarking information from other countries, to facilitate the organization of the value chain working group, provide technical assistance as need arises, and develop prioritized action plans.

15. To ensure successful early implementation of component 2 activities, the working groups will identify “quick wins” before generating priority action plans, such as supporting farmers to meet phytosanitary pre-certification (thus increasing their net income) The working groups will submit these quick wins to the Steering Committee’s normal review and approval procedure, which includes reviews by MARN to ensure compliance with the environmental and other safeguards.

16. MINECO will approve the action plans, and make all final decisions regarding funding and project implementation. Figure 5 illustrates the four stages of this “funnel” approach.

Figure 5: Value Chain Selection

17. The PIU will use available subsector information, data provided in the diagnostic work, and benchmarking information from other countries, to facilitate the organization of the value chain working group, provide technical assistance as need arises, and develop prioritized action plans.

24

18. A critical element of value chain selection is to assess ownership and commitment by business participants, including identification of champions and demonstrated commitment by all firms in the value chain. During the selection process, the selection team will conduct field visits to assess institutional readiness and receptivity, and identify possible champions.

19. Using available subsector information, data provided in the diagnostic work, and benchmarking information from other countries, the PIU will facilitate the organization of the value chain working group and the development of its prioritized action plan. This plan will include a baseline and key performance indicators (such as risk management and assets management proposals) and will be subject to approval by the Steering Committee and World Bank no-objection. The PIU and the value chain working group will refine the intermediate outcome and output indicators and track the performance in the project monitoring system. The PIU will monitor the impact of the interventions on cost, time, and value added (or another productivity measurement) within the respective value chain. Where necessary, the monitoring and evaluation expert within the PIU will commission limited survey work to complement existing information.

Value Chain Support Activities 20. Tourism. The component will work with MSMEs and the relevant stakeholders in selected tourism value chains, to improve the competitiveness of tourism services and assets. With a focus on Guatemala’s world-class tourism assets and competitive advantages, the component will address constraints and opportunities in the development of high value tourism packages (for example, a unique combination of upgraded Mayan heritage sites and eco-tourism). As part of this process, the component will develop activities that address physical, marketing, regulatory, and other constraints. The value chain working group will determine the final list of activities, which could include, inter alia, development of new tourism packages with high MSME participation, upgrades of heritage assets (such as small on-site infrastructure improvements), creation of safe zones for targeted routes, training of guides, strengthening of tourism organizations (such as INGUAT), introduction of clean production technologies in small hotels, creation of a joint web site, and familiarization trips by international tour operators. The component will also directly address security concerns, drawing lessons, for example, from the Tourist Assistance Program, Taxi Seguro, and international experience.

21. Agribusiness. The component will work with MSMEs, other firms in the selected value chains, and relevant stakeholders to trigger productive private investments and job creation. Activities could include, inter alia, the development of new products, market intelligence research, cold chains or other small infrastructure improvements, and niche marketing schemes, as well as the relevant certifications and seals (such as organic or Fair Trade certifications).

22. Guatemala receives low value for agricultural products from US buyers compared to comparator countries. For example, it receives only US$0.80 for a kilo of fresh peas, compared to US$1.16 world average, and US$1.79 from Mexico (see Figure 6).

25

Figure 6: Prices of Fresh Peas Paid by US Importers, Weighted Average per Kg., 2004-2008 (US$)

23. Risk Management. To help MSMEs move away from ex-post and toward ex-ante approaches to managing risks, the project will integrate risk management techniques into the selected value chains. Risk prevention, transfer, and coping mechanisms help MSMEs lower variability in income and production variability, and should contribute to sustainable solutions. The component could finance insurance premia, as applicable (which term means reasonable recurrent expenditures, as determined by the Bank, to finance insurance premiums to cover the loss or damage of works and goods financed under Subprojects).Possible actions include scaling up existing pilots using disease resistance seeds in the cocoa sector, natural disaster preparedness through targeted infrastructure and insurance instruments, innovative instruments such as index insurance for crops and animals, and price hedging mechanisms for inputs in the agribusiness value chain. The project will advocate clean production technologies and techniques as part of the ex-ante risk approach, including the promotion of environmentally sound inputs, improved warehousing, better work processes, waste management, environmentally sound packaging, and worker training in best practices. These practices will also contribute to market niche acceptability and can provide a premium in prices to firms in the value chain.

Implementation 24. Initial Mobilization. The project will build stakeholder ownership through a mobilization process, resulting in a shared action plan. Value chains will be supported through specialized facility to ensure appropriate participation of MSMEs, coordinate delivery of quality technical assistance, serve as a neutral broker between firms and the Government, and increase private sector co-investments in the value chain (see Figure 2 for the three phases of implementation, and the percentages of project financing). Key timeline activities could include:

• Establish a shared vision among value chain stakeholders in an initial workshop, • Form value chain working groups, • Identify “quick wins,” • Formulate action plans, • Implement action plans,

26

• Graduate or phase out project support of value chains, and • Select new value chains.

25. Implementation Review. To ensure that any necessary background studies or reports are available on time, preparations for the Bank’s formal implementation review supervision mission should start at least three months before the scheduled mission. Based on the results of the implementation review, MINECO will make key decisions on (i) alternative financing mechanisms, and (ii) alternative institutional arrangements.

26. Planning for a new round of value chain selection. Each value chain will produce a graduation plan, after reviewing the progress towards project objectives and sustainability considerations. MINECO will decide whether or not to continue to support the initial value chains. A timeline for a new round of value chain selection will be established. Other sectors, such as Information Communications Technology, may be considered. Decisions regarding ongoing support by the project include:

• Progress and momentum towards results indicators, • Sustained commitment by the value chain, including presence of one or more

champions and co-investment (financial and in-kind), and • Inclusiveness, which means participation of MSMEs, and a low risk of “capture” by

larger firms or by a dominant player in the value chain.

27. Alternative institutional arrangements. The project will consider alternative institutional arrangements such as institutionalizing a public-private partnership (competitiveness council) or forming a value chain specific apex organization funded by membership fees as part of the implementation review.

Action Plan Example 28. By way of example, a working group’s action plan for a cultural heritage and ecotourism value chain might include the following prioritized activities:

• Upgrading Mayan Heritage sites (for example, Tikal, Quirigua and Zaculeu) as part of cultural heritage tourism product offering, such as (i) the rehabilitation of historical or service buildings, creation of museums, and the development of areas for artisanal activities, and (ii) finalization and adoption of a site management plan and the provision of technical assistance for site management. Cost: US$1.5 million.

• Promotional campaign to brand Guatemala, including marketing activities abroad (events, fairs, press), channel partnerships with airlines and hotels, database of potential customer segments, and a unified website, including government agencies (MINECO, INGUAT), private associations (CAMTUR) and a large number of SME hotels, restaurants, eco-lodges, and associated service providers (such as “safe taxis”). Cost: US$350,000.

• The development of three tourism routes linking key assets, starting with a pilot route linking Chichicastenango, Atitlán, and Antigua as the Mountain Cultural Heritage Tour; expanding to a route for Livingston, Rio Dulce, nearby eco-tourism sites, and Quirigua; and finally a tourist route for cultural heritage and eco-tourism in Tikal, El Mirador and Flores. Cost: US$50,000.

27

• Development of standards and systems to promote the “safe taxi” system and the financing of fifteen new taxis (to be distributed in Tikal, Atitlán, and Flores) as the first stage of the “safe taxi” system. Cost: US$100,000.

29. This action plan example represents a total investment of US$2.0 million. Based on a review of the proposed action plan, MINECO technical staff finds in this hypothetical case that 75 percent of the costs are investments that would benefit a large number of MSMEs in the value chain and in related areas. Therefore, the project would provide up to US$1.5 million and the value chain working group would have to provide US$0.5 million, whether through direct contributions or by leveraging the amount from other sources.

Box 1: Value Chain Selection vs. Picking Winners In recent years, there has been a growing acceptance of targeting industries by governments and academia. This trend has been met with the usual criticism of “picking winners,” commonly associated with failed industrial policies in Africa and Latin America. However, as cases in East Asia, Chile, and Rwanda have shown, the debate has been shifting to how governments can select and support industries, not whether they should do it. Some key considerations include:

• Governments have an important role in addressing coordination and market failures, which are particularly common in developing countries.

• Unlike traditional industrial policies, value chain initiatives use a market-driven, bottom-up approach where the public sector plays a strong facilitation role by the public sector. By providing a platform for public-private dialogue and industry specific policy reforms, the Government serves as an enabler of the private sector, instead of the master planner.

• Through a transparent selection of value chains and specialized facilitation during implementation, particular emphasis is given to promoting inclusion of MSMEs into value chains while avoiding capture by larger firms. Selecting value chains that are MSME centered and with actual or potential competitive advantage does not eliminate the problem of industry capture, but helps to minimize selecting industries with strong oligopolistic pressures.

• Much of the failure in industry selection can be explained by lack of competitive advantage, including protecting non-competitive industries. It is critical to understand what a country is good at and where it has distinct and sustainable advantages. This process of “self-discovery” does not happen automatically (Hausmann and Rodrik, 2003). Moreover, it is important to align industry selection with factor endowments (Lin, 2010). Competitive advantage points to the need to examine not only demand trends and competition trends, but also differentiated product segments, rather than crowded, zero-sum industries (Porter, 1990).

References: New Structural Economics (Lin, 2010), Self-Discovery (Hausmann and Rodrik, 2003), The Competitive Advantage of Nations (Porter, 1990), Picking Winners, Saving Losers (The Economist, Aug 5, 2010).

Component 3 – Project Management and Monitoring 30. This component will finance the cost of the Project Implementation Unit (PIU) in MINECO, which will manage all technical, fiduciary and safeguards aspects of the work. For the purposes of this project, fiduciary refers to the arrangements to control and ensure the use of funds for the intended purposes of the project and proper compliance with Bank policies and procedures with due attention to economy and efficiency, including sound procurement, financial management and external audit activities.. The Director of the Finance and Administration unit

28

will manage the fiduciary team while the project coordinator will report on technical and strategic issues to the Vice Minister of Development of MSMEs. The consultants for this unit will be selected on a competitive basis and will include the following:

• For Component 1: One component coordinator and a technical expert. • For Component 2: One component coordinator and a technical expert. • For Component 3: One project coordinator, one administrative support staff, two

procurement staff (one expert and one analyst), two financial management staff (one expert and one analyst) and two staff responsible for monitoring and evaluation.

31. A specific annual budget and set of activities will be established for technical assistance and capacity building activities for MINECO staff in technical, fiduciary, and safeguards issues, including indigenous peoples’ issues and social issues.

Key Principles and Lessons Learned for Component 2 32. Component 2 will be driven by five key principles: (i) strategic orientation, (ii) transparency and MSME inclusiveness, (iii) technical and financial assistance, (iv) well-defined and achievable results, and (v) cost effectiveness.

33. Strategic orientation. The component seeks to draw a critical mass of complementary interventions to trigger a strong private sector response, which is consistent from lessons learned in East Asia and elsewhere. The focused selection of value chains from the tourism and agribusiness sectors is consistent with lessons learned from other projects—to avoid a “Christmas tree” approach and attempt to solve all barriers to growth and business climate issues. Component 2 will also promote the use of clean production technologies and the adoption of risk management techniques at the firm and subsectoral levels.

34. Transparency and MSME inclusiveness. The process of value chain selection and investment prioritization will be based upon transparent technical criteria, not political influence or other factors. See Figure 1 for an example of value chain selection criteria.

35. Existing demand alone can be a dangerous illusion during the value chain selection process. One common mistake in developing countries is choosing high employment sectors that cannot be sustained. The Guatemalan textile and garment sector is an example of an industry selected and supported without adequately factoring in competitors, global market trends, and international and national investor preferences. Therefore, the selected value chains will need to pass the test of competitive advantage. This is beyond the simple “market test” for products and services, and includes an understanding of sustainable advantages such as clear differentiation from the point of view of attractive customer segments.

36. Technical and Financial Assistance. Specialists in facilitation and value chain methodologies will assist the working groups in developing the prioritized action plans. This assistance will take place in three phases. The project will co-finance some of the action plan items and project costs, as illustrated in Figure 2, above.

37. Well-defined and Achievable Results. Technical and financial assistance should result in measureable improvements in income and jobs through an expansion into new markets or improved value chain operational efficiency and greater competitiveness in existing markets. The component is designed with end indicators in mind, such as increases in overall visitor spending (tourism), increased value added (for agribusiness), and number of MSMEs certified (for all

29

supported value chains). To accomplish these results, the component’s investments and activities might include:

1. Value chain investments, such as: • certification costs incurred by MSMES, • cold chains for agricultural products, • upgraded cultural heritage sites, • improved market intelligence capacity (surveys, trade fairs, promotion activities), and • training for improved overall value chains, • insurance premia to cover goods and works financed by the project.

2. Policy, administrative, and institutional activities, such as: • address policy, administrative, and institutional aspects of certification, • review competition law policy and enforcement, • institutionalize public-private dialogue mechanisms (competitiveness councils), • provide trade facilitation services, and • address the high cost of doing business.

38. Cost effectiveness. This principle applies to administrative and coordination matters, as well as the leveraging of project funds to generate much larger benefits and private sector co-investment. For instance, most consultants will be selected for relatively short periods with specific technical outputs: they should not become shadow MINECO staff members. Technical consultants will be required to present diagnostics and action-oriented recommendations to MINECO staff, thereby building capacity in the Ministry. The exception will be in fiduciary responsibilities (procurement, financial management, and disbursement), where skilled certified service providers will train MINECO staff. MINECO will commit an adequate budget to maintain its trained staff during the life of the project.

39. For value chains, cost-effectiveness will also be an important consideration. However, since the project will only co-finance the action plan activities, there will be a built-in incentive for cost-effective approaches. In addition, the use of clean production technologies and certifications, whenever possible, will increase the long term benefits to society and the sustainability of the value chain improvements.

Financing Public and Private Investment 40. Component 2 will finance sub-projects that include, value chain assets, such as goods, equipment, works, or technical assistance activities with strategic impact for the entire value-chain but that are too big or costly for individual firms (or a small group of firms). Examples include integrated cold chains benefitting at least 10 entities, warehouses, and rehabilitation of cultural sites, and the necessary technical assistance required for such investments. Ownership and maintenance terms for these assets, if applicable, should be proposed by the working groups and approved by the Steering Committee. Any investments that do not meet the definition of common value chain assets can be financed by individual firms, small groups of firms, or other sources of financing. The project’s operational manual provides specific guidelines and steps for the review of sub-projects and the determination of the amount of project co-financing.

30

Annex 3: Implementation Arrangements

A. Project institutional and implementation arrangements

1. Project administration mechanisms

1. The Ministry of Economy (MINECO) will be the responsible institution for project implementation, including fiduciary, administrative, technical, and coordination responsibilities. MINECO will maintain at all times during project implementation, a PIU with a structure, functions and responsibilities acceptable to the Bank and reflected in the Project Operational Manual. The PIU will be led, at all times during Project implementation, by a Project coordinator and assisted by adequate professional, technical and administrative staff (including procurement and financial management specialists), all operating under terms of reference satisfactory to the Bank.

2. In the approved value chain action plan, the number of beneficiaries will be specified (including the number of microenterprises and SMEs). The operational manual and a technical review by the PIU will specify the percentage of co-financing available through the sub grants system depending on the MSME requirements. For the second phase of the action plan, the project’s share of costs for priority actions will decline and the working group will be expected to cover a greater share of costs.

3. Component 1. The PIU will be directly responsible for executing component 1. For subcomponent 1, the component coordinator will work closely with the Vice Minister of Investment and Competence and the management and staff of the National Quality System to determine activities. The staff at the National Quality System will likely be responsible for direct supervision of consultants hired to work under this subcomponent. The component coordinator will also be responsible for supervising activities for subcomponent 2. Given the diversity of potential pilots in subcomponent 3, the research pilots may require environmental reviews. Environmental experts will be consulted during the pilot design phase to ensure that appropriate mitigation measures are taken.

4. Component 2. For component 2, environmental and social reviews will be based on the phased value chain process. A social review will be based on information provided from field work and desk reviews to determine if there are barriers to participation by indigenous people, businesses and communities.

5. Component 3. This component will be run in agreement with standard Bank requirements for efficient project implementation, and will rely on systems, processes, and procedures presented in the project operational manual approved by the Bank

6. Selection of Value Chains. Figure 7 illustrates the value chain selection and action plan review process. The PIU will lead the selection process, while the Steering Committee will provide the final approval of selected value chains. The PIU could require a consultancy by an environmental expert consultant in this process to ensure that ex ante environmental risks are duly considered in value chain selection. As the project will advocate clean production technologies and other pro-active environmental solutions, however, exclusion of value chains on environmental grounds is likely to be infrequent.

7. The PIU-led selection process will use technical criteria such as SME concentration, employment potential, economic impact, environmental sustainability, market feasibility, and

31

presence of champions. Relevant stakeholders in the value-chain and safeguards experts will be consulted. After selection and approval by the Steering Committee, a workshop will formally launch the project and the value-chain working groups. The beneficiaries should sign the legal documents that the PIU determines according to the Operational Manual, the Loan Agreement and other regulations of the legal framework.

Figure 7: Value Chain Selection and Action Plan Review under Component 2

8. Development of Action Plans (Sub-Projects). The working groups’ proposed action plans will include pre-feasibility studies and will be reviewed by the MINECO-led Steering Committee, which will be composed of the Vice Minister of MSME Development, representatives from relevant government agencies, and various private sector organizations, include technical and academic entities (although not from the specific value chains represented in the working groups).

9. Working groups developing action plans will be accompanied by and benefit from consultants with expertise in issues affecting the respective value chains. These consultants will provide targeted technical assistance to identify activities with potential adverse impacts and incorporate pro-active mitigation measures. In addition, the working groups may get the advice of private entities, for example, CentraRSE (Guatemalan corporate social responsibility institution) and the Clean Production Technology Center of the Guatemalan Chamber of Industry – will promote pro-active environmental solutions in the action plan design phase.

10. To sensitize working group members about the environmental issues, at the initiation of the action plan process, the PIU can develop capacity building workshops and provide the experts in national environmental regulations backed up by MARN. A team of safeguard and policy experts will also contribute to the development of the prioritized action plans. The team will include representatives from MINECO (the safeguards specialist and the Component 2 technical specialist of the PIU) and a social and indigenous peoples expert.

11. Review and Approval of Activities for Environmental Impacts. In line with its legal mandate, MARN will review each proposed project in the action plan rather than the plan as a whole. Projects will be submitted to MARN in a standard format prior to their execution, and will be classified into four environmental categories, in line with Guatemala’s national regulations. The categories are:

A – high environmental impact B1 – moderate to high impact B2 – moderate to low impact

32

C – low impact

12. Consultants will advise working groups on MARN’s likely environmental classification of each sub-project and additional Bank safeguard requirements. They will also provide advance caution on potential category A activities. For non-category A activities, MARN will determine, prior to execution, whether an environmental management plan (EMP) should include an environmental impact assessment (EIA). To help complete EIAs, the project will provide value chain working groups with technical assistance by independent consultants, as needed. The project will not provide sub grant funding for category A activities. Any proposed value chain working group action plans with category A impacts will be sent back to the value chain working group for restructuring, to lower potential negative environmental impacts. This mechanism will be fully developed in the project operational manual.

2. Financial Management, Disbursements and Procurement

a. Financial Management b. Disbursements c. Procurement

13. Within MINECO, the PIU currently implementing the IADB project BID-2094/OC-GU and 1318/OC-GU, will be responsible for the financial management functions of the project. A full assessment of the capacity of this PIU to implement procurement under Bank’s Procurement Guidelines was carried out by Bank. The assessment identified the major risks as: (1) the lack of experienced procurement staff within the PIU, and (2) the lack of a clear identification of procurement related roles and responsibilities, along with the lack of clear and detailed procurement procedures, SDB for NCB processes, simplified formats for Shopping processes or for the selection of IC, and other related instruments. The following table summarizes the findings for each procurement risk factor assessed.

14. Given the financial management risks identified, and the design of the project, FM requirements will include preparation and submission of annual financial audits and semi-annual intermediate financial reports as well as delivery of FM training and supervision. In addition, as part of the FM arrangements of the proposed project, the entity will prepare a Project Operational Manual and identify or contract dedicated FM staff to strengthen the implementing entity. Compliance with these requirements will be reviewed prior to the project’s effectiveness. FM supervision will commence with a mission at the time of effectiveness (to ensure successful implementation of FM arrangements), review of annual audit reports (to provide assurance regarding the proper use of funds), review of semi-annual financial reports (to monitor the implementation of the project), and at least one annual FM supervision missions (to review the continuing acceptability of FM arrangements).

15. This annex documents the updating of the Financial Management (FM) Assessment of the proposed Financial Management arrangements for the project to be implemented by the Government of Guatemala, through the Ministry of Economy (MINECO). Financial management responsibilities will be performed by the project implementation unit (PIU) for an ongoing IADB project. The PIU is currently in charge of financial management aspects of IADB project BID-2094/OC-GU and has also implemented the BID1318/OC-GU. The assessment was conducted by a Bank financial management specialist in accordance with OP/BP 10.02 and FM guidelines. It also takes into account the experience of Bank financed operations within MINECO, which will have the primary responsibility for the project’s FM functions.

33

16. The entity’s FM arrangements are considered acceptable if the FM system provides reasonable assurance that: i) all transactions and balances relating to the project will be properly and completely recorded; ii) accurate, reliable and timely financial reports will be produced; iii) external auditing arrangements are acceptable to the Bank; and iv) the project assets will be adequately safeguarded.

17. The assessment concludes that FM arrangements proposed for this project, which combines country system budgetary controls, the accounting system SICOIN, and complementary FM arrangements, comply with Bank requirements; and the resulting financial audit reports and Bank supervision are acceptable.

18. During project preparation, a decision was made to use the Single Treasury Account for Multilateral Execution already in place in Guatemala, based on the experiences and lessons learned from other multi-sectoral projects in Guatemala. The basic underlying principle is that the project execution takes place under budgetary rules in place in Guatemala, and the control framework for the use of public resources including budgetary execution and recording that are subject to the ex post scrutiny of the Guatemala’s supreme audit institution (Contraloría General de Cuentas - CGR). Specific arrangements have been designed for producing the project financial reports, external financial audit for the program and consolidation of the interim unaudited financial reports.

19. For component 1, the project will finance goods, consultant services, publications, non-consultant services, training, research pilots and feasibility studies. The project will also finance value chain action plans with detailed eligible expenditures in component 2, and the cost of the PIU and audits in component 3. MINECO will manage funds. It is not expected to have more than one designated account.

20. To this purpose the proposed FM arrangements will streamline FM arrangements within the project to facilitate execution, avoid unnecessary incremental operational arrangements, and rely as much as possible on Public Financial Management (PFM) country systems.

21. The operations will follow government rules and regulations pertaining to budgetary execution and payroll system controls as well. The few incremental arrangements to be performed by the PIU will include disbursement, accounting, financial reporting, and financial audits, and should be outlined in the final version of the operational manual, which will contain references to other applicable regulations and norms.

22. The scope of project supervision will include follow-up of the FM implementation arrangements and FM performance, to help to ensure continuity of adequate FM arrangements, identify additional mitigation measures if necessary, and monitor fiduciary risk.

23. Fiduciary Risks have been identified and mitigated as reflected in the ORAF matrix in Annex 4.

34

Description and Assessment of Project FM arrangements Country Issues

24. The 2007 Update of the Country Fiduciary Assessment (CFAA/CPAR) indicates that the fiduciary environment in Guatemala is adequate, as evidenced by the improvements in the public expenditure management systems made over the previous decade and the actions being taken by the Government to continue to increase transparency.

25. While challenges remain, the current administration is moving ahead to strengthen its public fiduciary control framework further and has shown strong commitment to tackling fiduciary issues in many key areas identified by the Country Fiduciary Assessment. The recent Bank Operation the “Second Fiscal and Institutional Development Policy Loan” has included certain key actions and selective milestones have been identified to help track the public financial management reform progress.

26. The present administration has identified governance as one of its top priorities and has announced the implementation of comprehensive actions to tackle the governance issue in the country. Guatemala is a C-GAC (Country-Governance and Anti-Corruption) pilot country. The passage of the new Access to Public Information Law (Ley de Acceso a la Información Pública) in September 2008 was a significant step forward as was the creation of the Vice-Ministry of fiscal transparency and evaluation within the Ministry of Finance.

27. Budget arrangements. The project budget will be formulated, executed, and monitored through the Government’s budget execution system SIAF and its accounting module SICOIN, which provides details on the budgetary allocation commitment and execution. This system has a classification that provides details on the execution of each component that would be used through budget lines under the annual budget envelope, thereby identifying and recording eligible expenditures.

28. MINECO supervision and financial oversight control over the value chain action plans for component 2 will ensure that the subproject agreements include Bank anti-corruption clauses and provision for proper recording and justification of use of funds. These agreements will also be subject to audit by independent auditors with Terms of Reference and scope acceptable to the Bank. In this way, it will be easier to provide a consolidated audit opinion on the project. The agreements will be reviewed and cleared by the project team financial management specialist to ensure proper inclusion of fiduciary arrangements.

29. Accounting Policies and Procedures. The main financial management (FM) regulatory framework for the project will consist of: (i) the Organic Budget Law (LOP) and its Regulations, which norm the public sector FM systems, i.e. budget, accounting, treasury, and public credit; (ii) the annual Law of the General State Budget; and (iii) the executing project agency's manuals based upon the cited laws. Project-specific FM arrangements that are not contemplated in the documents cited above will be documented in a concise FM section of the project's operational manual. Among others, specific reference will be made to: (i) the role of MINECO on supervision and oversight on actions plans in component 2 and; (ii) scope of the external financial audit and the responsibility of actions plans to submit required financial information to MINECO. MINECO will use as Chart of Accounts for the project reflecting sources of funding, disbursement categories and project components the current budget classification that will be

35

presented summarily in project financial reports and will be part of the project’s operational manual.

30. MINECO will also prepare Interim Unaudited Financial Reports (IFRs), based on budgetary execution records, to be submitted to the Bank semiannually for project reporting. These IFRs will include the following: (i) sources and uses of funds (by disbursement category), for each quarter and in cumulative form, and uses by component accompanied by a statement of movements in the designated account presented in a customized form to document eligible outputs; (ii) physical progress, including a comparison between actual and estimated number of outputs for the period.

31. The transactions using advance methods of financing that are under the Multilateral Treasury Account System (MTSA) that is used for Bank financed execution will be recorded into the Government's system for processing payments as it is established in the MTSA manual issued by MINFIN.

32. Treasury System. It is important to take note of the use of country systems (SIAF) applied in Guatemala where there is established a system under the Treasury of a dedicated multilateral financed projects single treasury account (the MTSA). In 2008, the system was assessed and approved by Financial Management and Disbursement departments. Performance of the system has been satisfactory since its inception and no specific issues have arisen. The MTSA account and, therefore, the designated accounts (called “Cuentas Secundarias” – secondary accounts) are held in dollars in the Central Bank of Guatemala (BANGUAT). Under the MTSA system the executing agencies process the payments within the Government budget execution system, SICOIN-WEB, as expenditures and commitments arise. The payments are recorded in budgetary systems, and paid by Treasury in the MINFIN through the commercial banking system to suppliers, contractors or consultants.

33. Financing and fiduciary control of Action Plans. As the different action plans are agreed upon and the planned expenditures defined with the counterparts, the financing agreements will include fiduciary arrangements for the management of project funds and the recording and financial reporting of the action plans, including the provision of the reporting on counterpart funds if they are technically required. The funds should be maintained in segregated accounts and the institutions responsible for managing the funds will be responsible for maintaining the records and supporting documentation for at least three years after the closing. The institutions will also grant access to project auditors and bank supervision to those documents. The agreement also will include provision of the Bank anti corruption clauses. The action plans will be a specific part of the scope of the external auditors.

34. The justification of expenditures from the action plans will be done based on a standard format that it will be part of the agreement and it will also be used for justify those expenditures to the Bank as a customized statement of expenses.

35. Flow of Funds – Disbursement Arrangements. As established on the assessment of the execution of other programs in Guatemala and taking into consideration the establishment and functioning of the MTSA, the project will have in place a designated account to execute its component expenditures under MINECO management in US dollars and maintained in the Banco Central de Guatemala (BANGUAT) under the MTSA system in the name of the project. Funds deposited into the designated account as advances, will follow the Bank’s disbursement

36

policies and procedures, as described in the Disbursement Letter and Disbursement Guidelines. The designated account ceiling is estimated at US$3,000,000.

36. WB Disbursement Methods. The following disbursement methods may be used to withdraw funds from the loan account: (a) reimbursement, (b) advance, and (c) direct payment.

Disbursement Table by Expenditure Category

Category Amount of the Loan

Allocated (expressed in USD)

Percentage of Expenditures to be financed

(inclusive of Taxes) (1) Goods, works, consultants’ services, Non Consultant Services, Training and/or Operating Costs under Component 1 of the Project

9,700,000 100%

(2) (a) Goods, consultants’ services, Non Consultant Services and/or Training under Component 2 (a) of the Project; (b) Subprojects under Component 2 (b) of the Project

3,000,000

16,000,000

100%

100% of amounts disbursed under the corresponding Sub-grants

(3) Goods, works, consultants’ services, Non-Consultant services, Training and/or Operating Costs under Component 3 of the Project

2,520,000 100%

(4) Unallocated 700,000

(5) Front-end Fee 80,000 Amount payable pursuant to Section 2.03 of this Agreement in accordance with Section 2.07 (b) of the General

Conditions TOTAL AMOUNT 32,000,000

37. Internal and External audit. The project annual financial statements will be audited under terms of reference prepared in line with Bank guidelines to be performed by independent auditors and following auditing standards acceptable to the Bank. The terms of reference will provide specifications for the opinion on the use of funds under the value chain action plans on Component 2. MINECO will be responsible for the hiring process that will be completed no later than four months after effectiveness and should be submitted as soon as available to the Bank. In any case, the audit report should be shared with the Bank no later than six months after the end of each audited year/period. The project will be subject to the Government’s internal control framework and internal audit function that eventually could perform audit work through institutional Internal Audit Units covering project execution, in which case its reports will be made available to the Bank.

Schedule of Audit and Financial Reports

Due Date 1) Audited Project Specific Financial Statements and Complementary Financial Information

June 30

2) Audit Special Opinions Designated Account (Special Account) June 30 Action Plans use of funds June 30

3) Unaudited Interim Unaudited Financial Reports Semi Annually

37

38. Supervision Plan. FM supervision will focus on implementation capacity, providing training to FM staff at MINECO prior to effectiveness and will pursue the project supervision strategy on the project with the project team. Supervision will include review of interim reports and audit reports, visits to value chain implementation activities and review of sample action plans support documentation. FM supervision scope will be adjusted by the assigned financial management specialist according to the project’s fiduciary performance and updated risk.

38

Summary of Procurement Risk Assessment Factors Agency: Ministry of Economy – MINECO

Risk Factor 1: Accountability for Procurement Decisions in the Implementing Agency or Agencies

Findings: The Operational Manual used for Execution Unit within MINECO does not include clear responsibilities and authority delegations for the procurement function. The Manual that the aforementioned Unit uses serves a particular IADB operation.

Risk Factor 2: Internal Manuals and Clarity of the Procurement Process

Findings: The only Manual reviewed by the Bank's Mission was one of an IADB operation, which only refers to the TORs for a PS, procurement thresholds and procurement plan. An exhaustive procurement chapter should be included in the Project's OM, and should be agreed with the Bank before Negotiation of the LA.

Risk Factor 3: Record Keeping & Document Management Systems

Findings: A record keeping system should be in place.

Risk Factor 4: Staffing

Findings: The MINECO's Execution Unit is in the process to hire one Procurement Specialist and one Analyst (IADB's no objection is pending); the CVs of the selected candidates were reviewed finding they lack of experience in donor funded projects. No procurement related code of ethics is in place.

Risk Factor 5: Procurement Planning

Findings: A comprehensive procurement plan was recently approved for the IADB operation, and will be uploaded to SEPA. A procurement plan for this operation shall be duly prepared.

Risk Factor 6: Bidding documents,(pre-)qualification, shortlisting, and evaluation criteria

Findings: Only IADB's SBD for ICB and RfP are known to the Execution Agency. SDB for NCB, and simplified formats for Shopping and Selection of IC are needed.

Risk Factor 7: Advertisement, Pre-bid/proposal Conference and Bid/Proposal Submission

Findings: GUATECOMPRAS portal is used to publish every single step in a bidding/selection process; documents are available on-line.

Risk Factor 8: Evaluation and Award of contract

Findings: Lack of technical expertise in evaluation committees is a constant.

Risk Factor 9: Review of Procurement Decisions and Resolution of Complaints

Findings: The system foresees that the one who took a decision is the one who resolves a complaint, therefore, fairness is not assured, although, this is part of the national procurement law and regulations.

Risk Factor 10: Contract Management and Administration

Findings: Payments are generally overdue; there is not a control protocol in place to verify to of quantity, quality and timeliness of goods/products received.

Risk Factor 11: Procurement Oversight Findings: External Financial Audits are carried out in a yearly basis, but procurement processes are not fully reviewed.

39

Summary of Procurement Rating

Risk Factor Title Risk Rating

1 Accountability for Procurement decisions in the Implementing Agency High

2 Internal Manuals and clarity of the Procurement process High 3 Record Keeping & Document Management Systems Substantial 4 Staffing High 5 Procurement Planning Moderate

6 Bidding documents, (pre) qualification, shortlisting and evaluation criteria Substantial

7 Advertisement, Pre-bid/proposal Conference and Bid/Proposal Submission Low

8 Evaluation and Award of contract Substantial

9 Review of Procurement Decisions and Resolution of Complaints Substantial

10 Contract management and Administration Substantial 11 Procurement Oversight Substantial

39. The overall risk rating for procurement was assessed as SUBSTANTIAL, and as MODERATE as a residual rating after the mitigations actions are properly addressed.

40. Mitigating measures basically aim to (i) assure that an experienced procurement specialist is hired under TORs acceptable to the Bank (a procurement analyst shall also be hired), and (ii) that the Operational Manual includes a dedicated Procurement Section. This Section will describe all the roles and responsibilities for the procurement function, including detailed procedures for each procurement or selection method, and have as Annexes SDB for NCB processes, simplified formats for Shopping of Goods and the selection of Individual Consultant, and other related instruments. A detailed action plan that includes an exhaustive list of mitigation measures that address every risk factor assessed was agreed to with MINECO, such list can be found in P-RAMS database.

41. Procurement for the proposed project will be carried out in accordance with the World Bank’s “Guidelines: Procurement under IBRD Loans and IDA Credits” dated May 2004, revised October 2006 and May 2010; and “Guidelines: Selection and Employment of Consultants by World Bank Borrowers” dated May 2004, revised October 2006 and May 2010, and the provisions stipulated in the Legal Agreement. For each contract to be financed by the Loan, the different procurement methods or consultant selection methods, estimated costs, prior review requirements, and time frame are agreed between the Borrower and the Bank project team in the procurement plan. The procurement plan will be updated at least annually or as required to reflect the actual project implementation needs and improvements in institutional capacity. The procurement plan is being finalized. The contract packages will be provided to the Bank after the final approval procurement plan for the first 18 months of project implementation.

42. Short lists of consultants for services estimated to cost less than US$200,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 of the Consultant Guidelines.

43. In addition to the prior review supervision to be carried out from Bank offices, the capacity assessment of the Implementing Agency has recommended annual supervision missions to visit the field to carry out post-review of procurement actions. One out of every 10 contracts

40

should be post-reviewed when applicable. Thresholds for the use the different procurement methods and recommended thresholds for Bank prior review are given in the following Table.

Thresholds for Procurement Methods and for Recommended Bank Review Estimated Value Contract Threshold Procurement Method Bank Prior Review

>=US$150,000 Goods and Non-consulting Services:

<US$150,000 and >= US$25,000 <US$25,000

ICB NCB Shopping Direct Contracting

All First Two First Two All

Consulting Firms:

>=US$200,000 <US$200,000

QCBS, QBS, FBS, LCS, CQS QCBS, QBS, FBS, LCS, CQS SS

All First for each selection method All

>=US$50,000 Individual Consultants:

<US$50,000

IC IC SS

All First Two, others agreed in the PP All

ICB = International Competitive Bidding. NCB = National Competitive Bidding. SS = Sole Source. QCBS = Quality- and Cost-Based Selection QBS = Quality-Based Selection FBS = Selection under Fixed Budget LCS = Least-Cost Selection CQS = Selection Based on the Consultant’s Qualifications IC = Individual Consultant.

41

Summary Procurement Plan WORKS Executing

Unit ID

Number Name/Description of process Procurement

Method Estimated Amount

(US$)

Subject to prior

review by IBRD

Estimated dates

Start

process Sign

contract Complete

GOODS Executing

Unit ID

Number Name/Description of process Procurement

Method Estimated Amount

(US$)

Subject to prior

review by IBRD

Estimated dates

Start

process Sign

contract Complete

Purchase of computers, office furniture

NCB 60,000 YES MONTH 3 MONTH 6 MONTH 10

Paper, office supplies LCS 1,000 MONTH 3 MONTH 5 MONTH 7 Transportation, fuel, vehicle rental LCS 5,000 MONTH 3 MONTH 5 MONTH 7

Telephone equipment LCS 4,500 MONTH 3 MONTH 5 MONTH 7 Other administrative goods LCS 20,000 Printing for component activities LCS 10,000 TOTAL 100,500

42

NON-CONSULTANT SERVICES Executing

Unit ID

Number Name/Description of process Procurement

Method Estimated Amount

(US$)

Subject to prior

review by IBRD

Estimated dates

Start process

Sign contract

Complete

Contracts for international training courses for new personnel

LCS 40,000 Yes MONTH 2 MONTH 3 MONTH 18

Airline tickets LCS 12,000 Yes MONTH 2 MONTH 3 MONTH 3 Airline tickets, conference speakers LCS 4,000 Yes MONTH 8 MONTH 9 MONTH 10 Per diem LCS 3,300 Yes MONTH 8 MONTH 9 MONTH 10 Contracting three international

conference speakers LCS 3,000 Yes MONTH 8 MONTH 9 MONTH 10

Event logistics LCS 5,000 Yes MONTH 9 MONTH 10 MONTH 10 10 airline tickets LCS 10,000 Yes MONTH 5 MONTH 6 MONTH 6 Per diem for ten speakers LCS 20,000 Yes 3 airline tickets, year 1 LCS 3,000 Yes Per diem, 3 experts, year 1 LCS 40,000 Yes Market intelligence data base, year 1

(product 1) LCS 20,000 Yes MONTH 1 MONTH 2 MONTH 12

Market intelligence data base, year 1 (product 2)

LCS 20,000 Yes MONTH 1 MONTH 2 MONTH 12

Market intelligence data base, year 1 (product 3)

LCS 20,000 Yes MONTH 1 MONTH 2 MONTH 12

Market intelligence data base, year 1 (product 4)

LCS 20,000 Yes MONTH 1 MONTH 2 MONTH 12

Subscription specialized international markets magazine

LCS 15,000 Yes MONTH 1 MONTH 2 MONTH 12

Subscription specialized international markets magazine

LCS 100,000 Yes MONTH 1 MONTH 2 MONTH 12

Subscription specialized international markets magazine

LCS 15,000 Yes MONTH 1 MONTH 2 MONTH 12

License payment, quality norms certification

LCS 100,000 Yes MONTH 30

43

Logistics payments, workshops, seminar for MINECO certifications

LCS 50,000 Yes

TOTAL 500,300 CONSULTING FIRMS Executing

Unit ID

Number Name/Description of process Procurement

Method Estimated Amount

(US$)

Subject to prior

review by IBRD

Estimated dates

Start

process Sign

contract Complete

Contract consulting firm for quality communications strategy

QCBS 300,000

Yes MONTH 2 MONTH 5 MONTH 14

Calibration of laboratory instruments (year 1)

QCBS 7,000

Yes MONTH 2 MONTH 4 MONTH 8

National on-line BDS service providers inventory

QCBS 150,000

Yes MONTH 1 MONTH 4 MONTH 7

Design and printing of 1000 pamphlets on BDS for MSMEs

QCBS 2,500

Yes MONTH 8 MONTH 10 MONTH 11

Payment of courses QCBS 100,000

Yes MONTH 4 NA

Develop training course project staff, year 1

QCBS 30,000

Yes MONTH 4 MONTH 7 MONTH 11

Carry out Training course for project staff, year 1

QCBS 30,000

Yes MONTH 11

MONTH 14 MONTH 18

Course, year 1 QCBS 6,000

Yes MONTH 2 MONTH 3 MONTH 6

Course, year 1 QCBS 6,000

Yes MONTH 7 MONTH 8 MONTH 12

Year 1 Pilot QCBS 1,000,000

Yes MONTH 4 NA NA

Year 2 Pilot QCBS 1,694,000

Yes MONTH 16

NA NA

44

Contracting methodology for selection of 4 value chains using criteria

QCBS 43,000

Yes MONTH 2 MONTH 4 MONTH 10

Contracting firm for on-line monitoring and evaluation system and plan for value chains

QCBS 45,000

Yes MONTH 2 MONTH 5 MONTH 7

Analysis, diagnostic and market studies for value chain #1

QCBS 37,000

Yes MONTH 12

MON TH 13 MONTH 17

Consulting firm for priority activity #1 for value chain #1

QCBS 70,000

Yes MONTH 17

MONTH 18 MONTH 20

Analysis, diagnostics, and market studies for value chain #2

QCBS 37,000

Yes MONTH 12

MONTH 13 MONTH 17

Consulting firm for priority activity #1 for value chain #2

QCBS 70,000

Yes MONTH 17

MONTH 18 MONTH 20

Analysis, diagnostics, and market studies for value chain #3

QCBS 37,000

Yes MONTH 12

MONTH 13 MONTH 17

Consulting firm for priority activity #1 for value chain #3

QCBS 70,000

Yes MONTH 17

MONTH 18 MONTH 20

Analysis, diagnostics, and market studies for value chain #4

QCBS 37,000

Yes MONTH 12

MONTH 13 MONTH 17

Consulting firm for priority activity #1 for value chain #4

QCBS 70,000

Yes MONTH 12

MONTH 18 MONTH 20

Year 1 Pilot QCBS 1,000,000

Yes MONTH 3 MONTH 5 MONTH 28

Year 2 Pilot QCBS 1,694,000

Yes MONTH 16

MONTH 18 MONTH 36

Implementation of Action Plan for Value Chain #1

QCBS 500,000

Yes MONTH 13

MONTH 15 MONTH 24

Implementation of Action Plan for Value Chain #2

QCBS 500,000 Yes MONTH 13

MONTH 15 MONTH 24

Implementation of Action Plan for Value Chain #3

QCBS 500,000 Yes MONTH 13

MONTH 15 MONTH 24

Implementation of Action Plan for Value Chain #4

QCBS 500,000 Yes MONTH 13

MONTH 15 MONTH 24

45

Consulting firm for diagnostic and selection of MINECO quality certifications

QCBS 150,000

Yes MONTH 5 MONTH 6 MONTH 10

Consulting firm to support process of MINECO quality certifications

QCBS 200,000

Yes MONTH 11

MONTH 12 MONTH 18

Consulting firm to certify MINECO processes/offices

QCBS 300,000

Yes MONTH 24

MONTH 24 MONTH 30

Firms for monitoring, evaluation, impact studies, selected value chains

QCBS 50,000

Yes MONTH 30

TOTAL 9,235,500

INDIVIDUAL CONSULTANTS Executing

Unit ID

Number Name/Description of process Procurement

Method Estimated Amount

(US$)

Subject to prior

review by IBRD

Estimated dates

Start

process Sign

contract Complete

Regional quality promotion events, first phase, selected regions

IC 32,000 Yes MONTH 5 MONTH 6 MONTH 8

Regional quality promotion events, first phase, selected regions

IC 32,000

Yes MONTH 1 MONTH 14 MONTH 16

Metrology consultant IC 21,600

Yes MONTH 1 MONTH 2 MONTH 18

Metrology consultant IC 21,600

Yes MONTH 1 MONTH 2 MONTH 18

Metrology consultant IC 21,600

Yes MONTH 1 MONTH 2 MONTH 18

Accreditation consultant IC 21,600

Yes MONTH 1 MONTH 2 MONTH 18

Consultant, sustainability plan development

IC 25,000

Yes MONTH 1 MONTH 2 MONTH 5

46

Development of training of trainers course

IC 35,000

Yes MONTH 8 MONTH 9 MONTH 14

Monitoring and evaluation of certification trainees

IC 5,000

Yes MONTH 8 MONTH 9 MONTH 15

Design training of trainers course IC 35,000

Yes MONTH 11

MONTH 12 MONTH 18

Monitoring and evaluation of certified trainees

IC 5,000

Yes MONTH 10

MONTH 11 MONTH 19

Needs Assessment, human resource development, Vice Ministry MIPYMEs

IC 20,000

Yes MONTH 1 MONTH 2 MONTH 4

Project Coordinator IC 68,000

Yes MONTH 1 MONTH 2 MONTH 18

Assistant IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

Coordinator Component 1 IC 59,500

Yes MONTH 1 MONTH 2 MONTH 18

Technical expert, Component 1 IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

Coordinator Component 2 IC 59,500

Yes MONTH 1 MONTH 2 MONTH 18

Technical expert, Component 2 IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

Coordinator Component 3 IC 59,500

Yes MONTH 1 MONTH 2 MONTH 18

Procurement specialist IC 42,500

Yes MONTH 1 MONTH 2 MONTH 18

Procurement technical consultant IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

Financial Management specialist IC 42,500

Yes MONTH 1 MONTH 2 MONTH 18

Financial Management assistant IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

47

Monitoring and evaluation specialist IC 42,500

Yes MONTH 1 MONTH 2 MONTH 18

M&E technical consultant IC 34,000

Yes MONTH 1 MONTH 2 MONTH 18

TOTAL 853,400

48

Annex 4: Operational Risk Assessment Framework (ORAF)

Negotiations and Board Package Version16

Project Development Objective(s)

The project development objective (PDO) is to stimulate the growth of micro, small, and medium enterprises (MSMEs) in selected value chains.

PDO Level Results Indicators:

1. Growth and Value Added: Value per unit of outputs produced in the respective value chains. 2. Integration: Increase in number of MSMEs participating in value chain working groups.

Risk Category Risk Rating Risk Description Proposed Mitigation Measures

Project Stakeholder Risks High Some stakeholders may change level of commitment as elections approach in Sept. 2011. The possibility of turnover in senior government positions leading up to the elections could cause delays in project approval, effectiveness and implementation Recent issue on gold mine illustrates risks that private sector investments can produce without careful planning, and NGO and community responses. Value chains that are not selected may voice complaints

Discussions held with Congressmen and Ministers to emphasize the importance of the project and expected impact of BDS and value chain work. The CEM focused on SMEs and value chains and was presented and well received by wide range of private and public sector stakeholders. Environmental and Social Management Framework, including resettlement framework and indigenous peoples plan framework, have been thoroughly vetted and meet Bank requirements and national laws. A communications strategy is under development to manage expectations and provide value chain selection transparency. Specific written technical feedback will be provided to candidate value chains to provide the justifications when a value chain is not selected. Professional facilitators will be hired to help in value

16 This is the version that should be used for Negotiations and submission for Board Approval.

49

Risk Category Risk Rating Risk Description Proposed Mitigation Measures Project requires strong champions at value chain level who can work beyond self-interest level and sell “win-win” solutions.

chain working group formation and development of “win-win” solutions. “Quick wins” will be chosen for selected value chains to build support and demonstrate the power of working together on specific bottlenecks.

Implementing Agency Risks Medium - I MINECO does not have direct experience implementing World Bank projects. However, the existing MINECO unit has already begun to identify procurement and financial management specialists, has worked closely with Bank staff in these areas, and is finalizing terms of reference for the project unit’s fiduciary specialists. There is no history of fraud or corruption issues in projects implemented or managed by MINECO. Technical staff of MINECO does not have experience with value chain development. However, MINECO has a very active BDS support unit.

Project funds will be used to cover the costs of procurement consultants (2) and financial management consultants (2). The project operational manual already has a thorough description of specific treatment of procurement and financial management processes and requirements. Periodic training will be provided by Bank experts. For technical staff, annual training plans will be developed and financed by project. Technical consultants working on value chain action plans and on feasibility studies for the pilots under Component 1 will present results of their work as training for technical staff.

• Capacity Risk

The main FM risks are as follows: PIU may not have sufficient fiduciary staffing to handle significantly increased workload. MINECO has prior experience with the World Bank processes. However, the PIU experience is mostly focused on the IADB policies. As such, the PIU familiarity with the World Bank fiduciary policies may not be adequate. Implementation of Action Plans would require participation of multiple entities, thus adding to the complexity of the operation, and potentially raising the risk of incompliance with the project procedures.

Financial Management: Additional fiduciary staff will be hired/assigned to the PIU. PIU staff will receive focused training on the implementation of the World Bank fiduciary procedures. Clear and specific provision focused on the implementation of Action Plans will be included to the project operational manual. External audit scope will require comprehensive examination of those sub projects (actions plans).Sub-projects staff will receive a specialized fiduciary training prior to receiving financing.

Project Risks High • Design High There is a risk of elite capture in the value chains. Legal options are being investigated by MINECO and

50

Risk Category Risk Rating Risk Description Proposed Mitigation Measures Contracting with value chain working groups will require a legal transformation of some of the unassociated, unregistered firms. While larger firms (including anchor firms, transport companies and input providers) are necessary for improving efficiency and productivity throughout the value chain, they cannot be permitted to dominate the organization and action plans (sub-projects) development of the value chain working groups.

will be shared as part of initial orientation to the selected value chain working groups. The proposed value chain must have a large share of micro, small and medium enterprises active in the sector (such as is the case in tourism and agribusiness). Proposed sub-projects must be able to demonstrate the scale of likely employment generation. The Steering Committee led by MINECO will include representatives of civil society that have some commercial background.

• Social and Environmental

Medium - I Some action plan activities may have to be adjusted or eliminated due to possible environmental risks or impacts. There is a risk that some marginalized groups will not be well-informed, included in value chain proposals.

MARN and an independent social scientist will participate in the value chain working groups. The project will have an environmental and social management framework to guide technical, social and environmental review of proposed action plans. The Environmental Social Management Framework will be drafted before appraisal. Project opportunities will be disseminated in local languages and in graphic form, and through both formal and informal local leaders. The tourism and agribusiness sectors already have high rates of participation by indigenous people, women and other marginalized groups.

• Program and Donor

Medium – L The Inter-American Development Bank and USAID are members of the Advisory Board and have a history of information-sharing with Bank teams and PIUs.

Donor coordination has already begun and MINECO is responsible for implementing all private sector development work with donors.

• Delivery Quality

Medium - I Value chains may not sustain their efforts after project support.

Value chains will have a clear plan that they can present to a financial institution or another source of financing. Value chain working groups will take over a larger share of costs over a two-year period of project support.

51

Overall Risk Rating at Preparation

Overall Risk Rating During Implementation

Comments

High High

Election-related issues, recent turnover in some key Ministerial positions, and other factors create a concern about instability and a timely review and approval by some government actors. The MINECO PIU will also go through a learning curve of operating with Bank technical and fiduciary systems and requirements, which could result in delays.

52

Annex 5: Implementation Support Plan 1. The Project Implementation Support Plan (ISP) describes how MINECO, the Bank, public entities and other development partners will support the implementation of the risk mitigation measures (identified in the ORAF) and provide the technical advice necessary to facilitate achieving the PDO (linked to results/outcomes identified in the result framework). The ISP below also identifies the minimum requirements to meet the Bank’s fiduciary obligations.

2. Key risks identified in the ORAF include counterpart capacity, country risk (which cannot be mitigated at the project level) and safeguard issues. The comments below address the ways that these risks will be incorporated into the final project design and the administrative and fiduciary systems.

Programmatic flexibility in implementation 3. The value chain support system is demand driven, highly participatory, and based on demonstrated market opportunities. The value chain working group, supported by a facilitator, will identify priority investments, capacity building, infrastructure and other needs that can be co-financed. This should ensure a very high level of ownership by MSMEs and other actors, as well as a greater chance of sustainability since market-based incentives for strong performance will be in place.

4. Value chain working groups will be informed from the start of the performance-based contractual relationship that they are expected to graduate to market financing, self-financing, or other forms of support after approximately two years of project support (provided on a declining basis).

5. MINECO does not have the monitoring and evaluation capacity necessary to monitor the performance-based contracts for the value chain working groups based on their prioritized action plans. This will be developed with support by the project, and increases the impact of the project’s activities on the business environment, an area under the purview of MINECO. The PIU could contract out services for M&E, including impact evaluations.

Administrative and Fiduciary Flexibility 6. Disbursement categories will be aligned with components, allowing flexibility in the use of funds to reach specific targets. The annual operating plans and annual procurement plans will allow the Bank and MINECO to plan the use of funds based on actual opportunities and needs. The initial disbursement size and reimbursement amounts will be determined after the project’s disbursement official has reviewed the project scope and likely disbursement profile.

7. For procurement, appropriate streamlining and thresholds for prior and post review will be established after the relevant Bank experts have reviewed and assessed the capacity of the Finance and Administrative Unit of MINECO.

8. For financial management, appropriate streamlining and auditing procedures will be established after the relevant Bank experts have reviewed and assessed the capacity of the Finance and Administrative Unit in MINECO.

53

I. Support to Implementation Time Focus Skills Needed Resource Estimate Partner Role

Months 1 -12 Establishing fiduciary systems in MINECO; Communications strategy (promote project services, requirements) Environmental-Social Management framework in place Establishment of Steering Committee Launch selection process and start work of first three value chain working groups Sign inter-institutional agreements

Procurement and FM expertise Communications specialist Social, indigenous peoples specialist; environmental impact mitigation expert Organization of regular high level meetings Technical expertise in selected sectors; facilitators Legal expertise (internal to MINECO)

Included in project annual operating plan ($60,000) $30,000 (in annual operating plan) $30,000 No cost to project $30,000 No cost to project

MINECO to hire staff, provide space and equipment for consultants MINECO to identify, host MINECO staff to monitor Indigenous Peoples Framework, overall ESMF MINECO leadership Participate in review of plans, initial work with value chain working groups Responsible for legal issues – identification and resolution

13-48 months Support value chain action plans in declining basis Carry out impact studies as prioritized value chain action plans are put into effect Identify additional value chain working groups based on desk reviews, interviews. Review key project characteristics in implementation review Implement Doing Business reform

Procurement and FM expertise Social, indigenous peoples specialist; environmental impact mitigation expert MINECO leadership Technical expertise in selected sectors; facilitators

TBD TBD based on implementation review results

54

Time Focus Skills Needed Resource Estimate Partner Role memo changes Capacity building and investment plans (when needed) for quality, certification, laboratories, other service providers Establish statistical system on SMEs to support government development of SME policies

Legal expertise (internal to MINECO) Quality and certification expertise (cost and specific needs TBD) Statistics consultants (cost and specific needs TBD)

Final project implementation

Impact evaluation, sustainability planning

II. Skills Mix Required Skills Needed Number of Staff Weeks Number of Trips Comments

Safeguards (social, indigenous peoples, and environment; other safeguards per project documents) PSD Technical skills (value chain selection and sub-projects/action plans, BDS, feasibility studies )

Institutional capacity strengthening (procurement, disbursement, M&E, financial management, operational and procurement plan reviews)

PIU will have a dedicated full-time staff member; Bank supervision will require 3 SWs per FY 14 SWs per FY (Mix of junior and senior technical staff) 5 SWs per FY (Mix of junior and senior technical staff)

Two trips per fiscal year Three supervision team trips per FY Three supervision team trips per FY

III. Partners Name Institution/Country Role

Private sector (value chains) to be selected competitively

Guatemala Development and implementation of sub-projects, co-financing

55

Annex 6: Team Composition

World Bank staff and consultants who worked on the project:

Name Title Unit Mike Goldberg Task Team Leader LCSPF Kwang Wook Kim Co-Task Team Leader LCSPF Sunita Varada Private Sector Development Analyst LCSPF Antonio Blasco Sr. Financial Management Specialist LCSFM Fernando Paredes Operations Officer LCCGT Patricia Melo Operations Analyst LCSPF Monica Lehnhoff Procurement Analyst LCSPT Alvaro Larrea Procurement Specialist LCSPT Eric Palladini STC LCSPF Ilka Funke STC LCSPF Daniel Ortiz del Salto STC LCSPF Christian Schuster ETC LCCGT Roberto Munster STC LCSPF Vincent Palmade Lead Economist (Peer Reviewer) AFTPF Paulo Correa Lead Economist (Peer Reviewer) ECSF1 Carlos Arce Sr. Economist (QER Reviewer) ARD Hannah Messerli Sr. Private Sector Development Specialist (QER Reviewer) AFTFE Ricardo Bisso Advisor, Private Sector Development (QER Reviewer) UNDP Jean-Louis Racine Private Sector Development Specialist (QER Reviewer) ECSF2 Stefania Abakerli Sr. Social Development Specialist (Peer Reviewer) LCSSO Fabiola Altimari Sr. Counsel LEGLA Patricia Hoyes Sr. Finance Officer CTRFC Oliver Rogers STC LCSPF

56

Annex 7: Related Projects Financed by the Bank and Other Agencies Guatemala Project

1. The Bank’s recently completed Competitiveness Project (PO55084) financed policy reforms to improve Guatemala’s competitiveness and efforts to support a broad set of sectoral and regional initiatives as part of a national competitiveness agenda. Although the Implementation Completion Report rated the project Moderately Satisfactory and highlighted the solid progress made in the areas of clearly defined clusters and the emergence of private-public partnerships, it concluded that a narrower, targeted approach would be beneficial for future projects.

2. The complementary reforms supported by the donor community target individual firms or initiatives or lack the holistic approach of working on supply and demand side issues within a value chain approach. The IADB has approved two projects to support a number of competitiveness issues and reforms, but only one has been signed into effectiveness and the other is pending restructuring. Bilateral donors support a number of small initiatives to support the quality infrastructure in the country (the German firm PTB through a regional project), cluster work (USAID) and individual initiatives on the firm level (IADB Trade Integration Project). The most recent World Bank/IADB project (Rural Economic Development Project) to foster rural productive development is undergoing restructuring.

3. The table below summarizes the projects and activities of the Bank Group and the Inter-American Development Bank, the two main actors in private sector development in Guatemala.

Project Name Description Period Project Costs

Within World Bank Group Rural Economic Development Program

The project aims for strong indigenous involvement to improve the competitiveness of rural productive supply chains and strengthen the institutional capacity of public entities to adopt a territorial management model. The project (i) improves income and invests in productive supply chains (market access, technical assistance, seed capital, financial services, productive infrastructure investments and access to telecommunications), (ii) introduces in the institutions a new model of public management focused on territorial management, and (iii) finances project management, monitoring and evaluation.

FY 2006 -13

US$60 million ($30 million Bank,US$30 million IADB)

Second Rural and Main Roads Project

The project contributes to rural poverty reduction and social cohesion by improving and maintaining access in rural areas to markets, schools, health centers and other social and economic infrastructure through broadened community participation. By emphasizing beneficiary involvement, the project assures that local development decisions reflect the needs and priorities of rural communities. The Government has requested this change to help alleviate the fiscal burden on municipalities, which

FY 2003-11

US$63.72 million

57

are experiencing financial circumstances due to reduced fiscal transfers and locally generated income. This has led to fewer resources to finance capital works. Reducing the amount through a change in the financing percentage would free up about US$1.2 million which could be reallocated by the municipalities to support their recurrent, operating costs and to reduce debt.

Japanese Social Development Fund (JSDF)

The Bank is currently implementing a Japanese Social Development Fund grant that addresses capacity building for indigenous peoples and local NGOs in the Western Altiplano. Research for the grant has indicated that agricultural producers have little access to finance and to markets, forcing them to depend on intermediaries. Grant implementation has demonstrated that partnering with local NGOs leads to more effective results, since they know the reality on the ground.

March 31, 2011

US$0.9 million

Inter-American Development Bank Trade and Integration Support program

The project aims to help the country attract more foreign direct investment, enhance the overall business environment and find new markets for its products, particularly for goods produced by small and medium-sized companies. The project strengthens (i) management capacity for trade agreement administration and negotiation (US$3.5 million), (ii) technical capacity for export promotion (US$5 million), (iii) technical capacity for investment attraction (US$2.4 million). Further, it (iv) implements an internationalization plan for SMEs (IADB US$6.3 million; private sector contribution US$4.5 million) and (v) finances technology modernization (US$2 million).

Initially foreseen 2008- Became effective in 2010

US$20 million

Program to support strategic investments and productive transformation

The program objective is to improve citizen security and reduce indices of criminality and violence through preventive activities aimed at young people. Components include: (i) institutional strengthening, (ii) prevention of juvenile violence and delinquency, and (iii) social communication.

FY 06- … Approved

US$29 million

58

References

Guasch, José Luis, Jean-Louis Racine, Isabel Sánchez, and Makhtar Diop. 2007 “Quality Systems and Standards for a Competitive Edge,” Directions in Development, World Bank. Hausmann, Ricardo and Dani Rodrik. 2003. "Economic Development as Self-Discovery," Journal of Development Economics, Volume 72, Issue 2, December. Hallberg, Kris and Yasuo Konishi. 2003. “Bringing SMEs into Global Markets,” in Gary S. Fields and Guy Pfeffermann (eds). Pathways out of Poverty: Private Firms and Economic Mobility in Developing Countries. Washington DC: International Finance Corporation, The World Bank. Haven, Thomas and José Luis Guasch. 2010. SME Development in Guatemala: Let 10,000 Firms Bloom. Report No 54242-GT. Two Volumes. Washington, DC: World Bank.

Kaplinsky, Raphael and Mark Morris. 2000. “A Handbook for Value Chain Research.” Prepared for the Institute of Development Studies: Sussex

Lin, Justin Yifu and Ceseltin Monga. 2010. “The Growth Report and New Structural Economics” DEC Policy Research Working Paper 5336, World Bank.

Ministry of Economy (MINECO). 2005. Política nacional para el desarrollo de las micro, pequeñas y medianas empresas: Creando más y mejoras oportunidades. Guatemala City.

Narciso, Juan José. 2010. Unpublished Ministry of Economy (MINECO) Study.

Palmade, Vincent. 2010. Cameroon Competitive Value chains Project, Project Appraisal Document, Finance and Private Sector Development, AFCC1, World Bank, May 27.

Porter, Michael E. 1990. The Competitive Advantage of Nations. New York: The Free Press, Sewadeh, Mirvat and Vicente Ferrer. 2003. “Donor Support for SPS Capacity Building: Taking Stock and Drawing Lessons,” unpublished report, World Bank. Todd, Jessica, Paul Winter, and Diego Arias. 2004. “CAFTA and Rural Economies of Central America: A Conceptual Framework for Policy and Program Recommendations,” Inter-American Development Bank, December, 2004 The Economist. 2010. Picking Winners, Saving Losers. August 5. World Bank. 2009. Implementation Completion and Results Report (ICR). “Guatemala Competitiveness Project,” Report No. 1334 World Bank. 2008. Country Partnership Strategy. Report No. 44772-GT. August World Bank. 2005. Implementation Completion and Results Report (ICR), “Agricultural Census and Information System Project,” Report No. 34519. World Bank. 2009. “Cluster for Competitiveness: A Practical Guide & Policy Implications for Developing Cluster Initiatives,” PREM Trade Department. February World Bank. World Development Indicators at Web site, http://data.worldbank.org/country/guatemala.