METHODOLOGICAL GUIDE: Restructuring, upgrading and ...

METHODOLOGICAL GUIDE:

Printed in AustriaV.02-59595–March 2003–250

Restructuring, upgrading and industrial competitiveness

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

economy env i ronment employment

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATIONVienna International Centre, P.O. Box 300, A-1400 Vienna, AustriaTelephone: (+43-1) 26026-0, Fax: (+43-1) 26926-69E-mail: [email protected], Internet: http://www.unido.org


Restructuring, upgradingand

industrial competitiveness

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATIONVienna, 2003

ii

*Mr. Dhaoui is a doctor of management science (University of Paris IX Dauphine), former university lecturer and UNIDO staffmember since 1990. He is a certified auditor under ISO 9000 and ISO 14000.

This guide was written byMr. Mohamed Lamine Dhaoui,*

UNIDO Senior Industrial DevelopmentOfficer, Industrial Promotion andTechnology Branch, Investment

Promotion and InstitutionalCapacity-Building Division.

This publication may be quoted or reprinted in whole or in part but the United Nations IndustrialDevelopment Organization requests acknowledgement, together with a copy of the publication contain-ing the quotation or reprint.

The designations employed and the presentation of the material in this publication do not imply theexpression of any opinion whatsoever on the part of the Secretariat of the United Nations IndustrialDevelopment Organization concerning the legal status of any country, territory, city or area or of itsauthorities, or concerning the delimitation of its frontiers or boundaries.

Mention of firms or trade names in this document does not imply the endorsement of UNIDO.

This document is a translation of text that has not been formally edited.

iii

PREFACEIn the last few years the international economic environment has undergone profound, rapid and

complex changes that have affected the methods of organizing and managing industry, productionsystems, distribution networks and commercial practices at the national and international level.

For the majority of developing countries and countries with economies in transition, the liberalizationand opening up of the economy has been reflected first and foremost in their accession to the WorldTrade Organization (WTO) and the signing of a number of preferential arrangements and/or free-tradezone agreements.1 This new context, which is marked by growing integration of the global economy,offers the industries of developing countries and economies in transition a great opportunity to gain afoothold in the economies of developed countries, which represent the world’s largest market, but it alsomakes it imperative for them to restructure and upgrade their industries.

In response to the numerous requests from developing countries and countries with economies intransition, the United Nations Industrial Development Organization (UNIDO) has in the past few yearsintroduced a comprehensive and multidisciplinary global approach to industrial restructuring and upgrad-ing. This integrated approach forms part of a new “Trade Facilitation” initiative, a programme developedby UNIDO to keep up the pace of continued improvement in the productivity, competitiveness andintegration of industry and of increased employment and exports. This approach integrates the enterpriseinto its immediate environment. It has been developed, tested and tried out during the past few years andtakes account of the experience gained by UNIDO in the implementation of a number of projects andsuccessful experiments (Portugal, Republic of Korea, Tunisia, etc.).

This guide has been written following the publication in 1997 of an initial paper on the concept ofupgrading and a manual on company restructuring and also following the charting and implementationby UNIDO of several restructuring and upgrading projects and programmes. The first part of the guidedescribes UNIDO methodology in the field of strategic diagnosis, restructuring and industrial upgradingof enterprises and their environment. The second part presents a number of successful experiments andprogrammes drafted and implemented by UNIDO in close collaboration with the authorities of a numberof countries.

This publication is a methodological tool designed for the heads of industry in developing countriesand economies in transition and also for consultants offering specialist advice in restructuring and indus-trial upgrading.

Carlos Alfredo MagariñosDirector-General, UNIDO

1Examples of free-trade zones include: NAFTA—North American Free Trade Agreement (North America), MERCOSUR—CommonMarket of the Southern Cone (South America), European Union (western and central Europe), ASEAN—Association of South-EastAsian Nations (South-East Asia), Arab countries (North Africa and the Gulf countries), SADC—Southern African DevelopmentCommunity (southern Africa) and WAEMU—West African Economic and Monetary Union (West Africa).

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CONTENTS

Page

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii

Part OneRestructuring and upgrading approaches and methods

I. Globalization: the challenge of industrial governance in developing countries . . . . . . . . . . 3

A. Liberalization and globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3

B. The challenge of globalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

C. The new pattern of industrial competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

II. The UNIDO programme of assistance in restructuring and upgrading . . . . . . . . . . . . . . . . . 6

A. Context and justification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

B. Upgrading concept . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

C. Objectives of the integrated programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

D. The principal components of the integrated restructuring and upgrading programme . 8

E. UNIDO’s experience in restructuring and upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . 8

III. Overall strategic diagnosis and upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

A. Basic principles of diagnosis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

B. Designing an overall strategic diagnosis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

C. Analysis of external sources of competitiveness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12

D. Diagnosis of product markets and strategic positioning . . . . . . . . . . . . . . . . . . . . . . . . 14

E. Financial diagnosis . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

F. Diagnosis of technical capacities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21

G. Diagnosis of managerial skills and quality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22

H. Checklist for overall strategic diagnosis and the drafting of an upgrading planfor an agro-food enterprise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24

IV. Industrial enterprise upgrading strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

A. Globalization and possible upgrading strategies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27

B. Strategic consideration and upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

C. Formulation of the strategy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29

D. Industrial enterprises and possible upgrading strategies . . . . . . . . . . . . . . . . . . . . . . . . 29

V. Formulation of upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

A. Formulation of the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34

B. Formal conditions for the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

C. Contents of the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35

VI. Implementation and monitoring of the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

A. Prior conditions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39

B. Implementation of the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40

C. Monitoring of the upgrading plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41

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Page

Part TwoInternational experience of restructuring and upgrading

I. Programme for modernizing and upgrading industry in Portugal . . . . . . . . . . . . . . . . . . . . . 45

A. PEDIP I (1988-1993): modernization and upgrading programme . . . . . . . . . . . . . . . . . 46

B. Implementation structure: PEDIP Management Office . . . . . . . . . . . . . . . . . . . . . . . . . . 46

C. Description of programmes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46

D. PEDIP II (1994-1999): modernization and upgrading programme . . . . . . . . . . . . . . . . . 49

E. Results of PEDIP I and II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52

II. The Tunisian national upgrading programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

A. Perceived need for upgrading . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

B. Legislative and regulatory framework . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

C. Steering and management mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54

D. Components of the upgrading programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55

E. Operating and financial procedures of the programme . . . . . . . . . . . . . . . . . . . . . . . . 56

F. Upgrading programme status (end of December 2001) . . . . . . . . . . . . . . . . . . . . . . . . 59

G. Initial evaluation of upgrading programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60

III. Industrial upgrading programme in Algeria . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

A. Problem: context and justification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62

B. Objectives of upgrading programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 63

C. Upgrading mechanism . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 64

D. Upgrading procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66

IV. Industrial upgrading programme in Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

A. Dismantling of tariffs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72

B. Enterprise upgrading programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

C. Upgrading procedure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73

D. Strategic diagnosis and upgrading plan: example of a canned food enterprisein Morocco . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 77

V. Industrial upgrading programme in Egypt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

A. Recognized upgrading needs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79

B. Legal structure and mechanisms of upgrading programme . . . . . . . . . . . . . . . . . . . . . . 80

C. Industrial modernization programme . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80

D. Egyptian national industrial modernization programme . . . . . . . . . . . . . . . . . . . . . . . . 85

E. Financial resources of the Fund for improving competitiveness . . . . . . . . . . . . . . . . . . 86

F. Impact of execution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 86

Bibliography . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87

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1For example, the European Union free-trade zone agree-ment with south Mediterranean countries and the CommonMarket for Eastern and Southern Africa (COMESA).

Introduction

The adoption of the Uruguay Round agreementsand the setting up of the World TradeOrganization (WTO) at the international level andthe conclusion of various association and free-trade zone agreements1 at the regional andsubregional level are regarded as marking thestart of a new era in international economic andindustrial relations.

Many developing countries and economiesin transition view with concern the dawn of anew economic era characterized by the globali-zation of trade. While some countries react, pre-pare themselves and seek to take up the chal-lenge, others fail to react and, at the risk of furtherimpoverishment, surrender themselves to thedominant forces of history. In this new atmos-phere of continual change and at the request of anumber of countries, the United Nations Indus-trial Development Organization (UNIDO) hasdeveloped a technical assistance, restructuringand upgrading programme to prepare and adaptindustries and their environments to the new con-text of globalization, which is marked by toughcompetition.

The programme is part of the “Quality andProductivity” service module developed over thelast few years by UNIDO to strengthen nationalcapacities and maintain the dynamic process ofintegration of exports, employment and industrialgrowth in the context of globalization. It is alsopart of the new initiative launched by the Direc-tor-General relating to trade facilitation.

The programme, which can be adapted byselecting modules to suit the specific needs ofeach country and each industry, was developedon the basis of studies carried out by UNIDOduring the last few years and also of the analysisof and experiments in upgrading in developedcountries (Republic of Korea, Portugal) andemerging and developing countries (Tunisia). Thestudies carried out by UNIDO in developingcountries clearly highlight two sets of handi-caps: one set is connected with the immediateindustrial environment, and the other with themanagement systems and methods within enter-prises.

In spite of the many various reforms in-troduced as part of the structural adjustment

programmes carried out by the World Bankand International Monetary Fund, the industrialenvironment still contains a number of obstaclesto plans for upgrading and improving the com-petitiveness of enterprises. The upgrading of in-dustry therefore entails both a reform of thebusiness environment and ongoing improvementsin management systems to improve quality, pro-ductivity and competitiveness and boost employ-ment and exports. For this reason, the pro-posed assistance programmes take a two-stepapproach:

� The first step is designed to promote themodernization of the immediate environ-ment by developing national restructuringand upgrading programmes and to estab-lish a legal framework and manage-ment structure (in the form of upgradingoffices), strengthening of the capacitiesof support and consultancy structures,improvement of quality infrastructure(quality assurance, certification, accredi-tation, metrology), and creation of afund for upgrading and modernizing in-dustry;

� The second step is designed to promotethe development of competitive indus-tries by helping enterprises, on a pilotbasis, to position themselves most advan-tageously in an open economy and toformulate a strategy adapted to the newcompetition situation.

Figure I provides an overview of the pro-cess of upgrading enterprises and their environ-ment.

UNIDO has developed methods and toolsadapted to the specific needs of developing coun-tries to help them implement this programme.

The first part of this guide provides a frame-work for the restructuring and upgrading of indus-try and succinctly describes methods and practi-cal tools for considering the different aspects ofthe strategic process of upgrading and moderniz-ing industry. The second part, by way of example,describes experiences in a number of countries informulating, implementing and financing upgrad-ing and modernization programmes:

� The case of Portugal, where two pro-grammes have been developed (1988-

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2It may be recalled that in 1997 UNIDO published:— A manual on diagnostic and industrial restructuring

relating mainly to enterprises.— A paper on the concept of restructuring and upgrading.

1999) to prepare and upgrade industry toenable it to grasp the chance of gaining afirm foothold in the European economicarea and deal with the threats posed bythe opening of its market;

� Experiences in Algeria, Egypt, Moroccoand Tunisia which, with UNIDO’s assist-ance, have developed and implementedprogrammes for upgrading and modern-izing their industries.

The guide2 is designed principally for theheads of industry and enterprises in developingcountries, specialists and managers in govern-ment service and banks, and consultants wishingto obtain information on and enhance theirknowledge of approaches to upgrading and themethods involved.

Figure I. The upgrading process

� �Enterprise Environment

� �Overall strategic diagnosis Institutional and regulatory environment �

� �Formulation of the upgrading plan

and financing schemeInfrastructures and services ��

Approval of the upgrading plan Standards, certification, accreditation �� Implementation and monitoring Investment incentives and promotion

of the upgrading plan �� Modernization Organization Production Training and Quality Marketing and Alliance

of and manage- skills and market andequipment ment systems systems development certification research partnership

� � � � � � � �COMPETITIVENESS

� �Export The local market

Part One

Restructuring and upgrading approachesand methods

3

I. Globalization: the challenge of industrialgovernance in developing countries

The new context of liberalization of the economyand globalization is characterized by rapid, pro-found and complex changes. It presents develop-ing countries with opportunities and challenges.Within this new context, each country needs toprepare itself and implement a comprehensiverestructuring and upgrading programme to takeadvantage of the positive effects of liberalizationand to strengthen production, sales and export ca-pacities.

A. Liberalization and globalization

Many countries view with concern the dawn of anew economic era characterized by the globali-zation of trade. Some are hardly reacting and, atthe risk of further impoverishment, surrenderthemselves to the dominant forces of history. Oth-ers, however, seek to take up the challenge andare preparing for it.

Throughout the last decade, the internationaleconomic environment has been marked by pro-found, rapid and complex changes that have af-fected the modes of production, distribution andtrade and organization in all industries. The liber-alization and opening up of the economy havebeen reflected, for most developing countries andcountries with economies in transition, by their

accession to the World Trade Organization(WTO) and the signing of a number of regionaland/or intraregional preferential agreements (seetable 1).

This new context, which offers the industriesof developing countries a major opportunity toobtain a foothold in the economies of developedcountries in particular, which represent theworld’s largest market, nevertheless makes it im-perative for them to upgrade their economic, fi-nancial, regulatory and social environment, theirproduction systems and their industrial base so asto facilitate access to the international market andimprove the prospects for export of their products.In the large industrialized countries, as Crespy1

(1988) points out, there are now practically noconditions deriving from that environment thatcreate decisive advantages or handicaps for enter-prises, but the same is not true of the economicenvironment in most of the developing countries.In these countries, such structures, establishedunder an excessively protectionist regime andexposed in some cases to only a small degree ofcompetition, seem fragile, uncompetitive and illprepared to face the challenge of powerful rivals.

1Guy Crespy (1988), “Stratégies et compétitivité dansl’industrie mondiale”, L’observatoire des stratégies indus-trielles, Economica, Paris, p. 3.

Table 1. Some preferential arrangements between developedand developing countries

Number ofArrangement member countries Member countries or countries/territories in the process of joining

Agreement on free trade between the EU 15 + 12 EU + Algeria, Cyprus, Egypt, Israel, Jordan, Lebanon,European Union (EU) and the Libyan Arab Jamahiriya, Morocco, Palestine, Syrian Arabsouthern Mediterranean countriesa Republic, Tunisia, Turkey

Free-trade arrangements between EU EU 15 + 6 EU + Bulgaria, Czech Republic, Hungary, Poland,and Eastern Europe Romania, Slovakia

North American Free Trade Agreement 3 Canada, Mexico, United States of America

Arab Free Trade Agreement 19 Algeria, Comoros, Djibouti, Egypt, Iraq, Jordan, Kuwait,Lebanon, Libyan Arab Jamahiriya, Mauritania, Morocco,Palestine, Qatar, Somalia, Sudan, Syrian Arab Republic,Tunisia, United Arab Emirates, Yemen

Common Market for Eastern and 19 Angola, Burundi, Comoros, Congo, Djibouti, Egypt,Southern Africa (COMESA) Eritrea, Ethiopia, Kenya, Madagascar, Malawi, Mauritius,

Namibia, Rwanda, Seychelles, Sudan, Swaziland,Uganda, Zimbabwe

West African Economic and Monetary 8 Benin, Burkina Faso, Côte d’Ivoire, Guinea-Bissau, Mali,Union (WAEMU) Niger, Senegal, Togo

aOne of the main elements of these agreements is the gradual establishment of a free-trade area in accordance with WTO provisions.These agreements replace the former cooperation agreements between these countries and the European Union based on systems involvingpreferences, quotas, safeguard measures and reference prices.

4

The interventionist approach followed bymost developing countries, taking the form prima-rily of the establishment of trade barriers and fi-nancial and commercial aid for exports (subsidies,devaluation of the national currency, etc.), is nolonger in accordance with the Uruguay RoundFinal Act, which established a liberal and opentrade system designed to enable the enterprises ofmember countries to trade under equitable com-petitive conditions, free of distortion.

The types of protectionist policies and strate-gies adopted up to 1995 in most developingcountries will need to be replaced by very differ-ent policies and strategies, following a new ap-proach of integration with the developed coun-tries characterized by more competition, lessinterventionism and more competitiveness.

B. The challenge of globalization

The new circumstances of the regional and inter-national environment call for transformation andupgrading of support structures and industrialenterprises in developing countries. Studies con-ducted by UNIDO and other international organi-zations show that the structures, institutional in-frastructure and industrial base created under theinfluence of excessive protection appear fragileand insufficiently competitive to cope with thevery strong competition of industrial enterprisesoperating in the developed countries. Moreover,the liberalization of trade obliges developingcountries to raise the level of quality of their prod-ucts while complying with a growing number ofinternational standards and also with the UruguayRound agreements concerning technical barriersto trade, which are being increasingly applied onthe international market. The fragilities and distor-tions noted have to be eliminated in order tostrengthen production and export capacities andto upgrade industrial branches and enterprises tothe level of their international competitors.

The globalization of competition, the diver-sity of markets and the rapid process of innova-tion in products and technological processes havechanged the factors determining industrial com-petitiveness at the international level. In the newpattern of competition that is now apparent at theinternational level, the sources of competitiveadvantage are linked not only to the cost of factorinputs and to the availability of raw materials, butalso increasingly to the quality of the industrialsupport infrastructure, the effectiveness of sourcesof innovation, the degree of competitive pressureand the organizational and technical capacities ofenterprises in acquiring and assimilating newtechnologies and responding rapidly to demandrequirements and changes in demand.

In this new and permanently evolving envi-ronment, the various industries—irrespective,

moreover, of their contribution to economicgrowth—have never had so great a need for strate-gic diagnosis and industrial analysis focusing on:

� Analysis of the general economic envi-ronment in which the industry operates;

� Analysis of the historical development ofthe industry;

� Study of the key actors in the industry(domestic and international competitors,suppliers, clients, etc.);

� Evaluation of the key performance indi-cators for the industry;

� Identification of the key success factorsand decisive competitiveness elementsfor each industry;

� Detailed knowledge of products, tech-nologies and technical regulations andstandards;

� The conception of integrated upgradingand development programmes for indus-tries with prospects for survival andgrowth.

In addition, while the path to success in thisnew liberal economic context is generally a verynarrow one, diagnosis and reappraisal haveserved to guide choices concerning profitabilityand positioning and provide opportunities for theGovernment, ministry, industrial officials andheads of enterprises to make the changes neces-sary at all levels to upgrade their industries andindustrial enterprises and to improve their com-petitiveness in a lasting manner.

C. The new pattern of industrialcompetitiveness

As M. E. Porter2 points out, the new globalizationcontext will see the emergence of enterprises andcountries that have succeeded in preparing andadjusting themselves and in applying the follow-ing basic principles:

� Enterprises compete within industries, notwithin countries;

� A competitive advantage is constructedupon a difference, and not upon a simi-larity;

� An advantage is often geographicallyconcentrated;

� An advantage is developed over a longperiod.

Although the Uruguay Round agreementsand the preferential arrangements signed pro-

2M. E. Porter (1993), L’avantage concurrentiel des nations,Paris, Inter Éditions.

5

vide safeguard clauses to limit the negativeeffect of liberalization for developing countriesduring a transitional period, these countriesneed to reorient their industrial strategies inorder to take the new globalization contextfully into account. The reforms to be introducedand implemented must permit industries andenterprises in these countries to prepare them-selves, adapt and establish a foothold in theworld economy in order for them to benefitfrom the anticipated positive effects that interna-tional trade brings.

For developing countries and countries witheconomies in transition, the main challenge ofglobalization at the start of the twenty-first cen-tury is to determine how to take adequate advan-tage of the positive effects of liberalization andhow to strengthen competitive advantages in or-der to increase the production of products andservices in accordance with international stand-ards, facilitate access to the international market,increase exports and have a significant impact onthe sustained growth and competitiveness of in-dustry.

Figure II. The new pattern of industrial competitiveness

Former pattern New pattern

At governance level:

From interventionism To laissez-faireFrom the State as actor To the State as facilitating partnerFrom the State as operator To the State as helperFrom the State as owner To the private owner

At market level:

From protection To liberalizationFrom natural standards To international standardizationFrom subcontracting based on capacity To subcontracting based on skillsFrom the geographically centred market To the area market

At enterprise level:

From economies of scale To economies of flexibilityFrom production of tangibles To production of intangiblesFrom integration To fragmentation

⇓⇓⇓⇓⇓NEW FACTORS OF COMPETITIVENESS

Former pattern New pattern

From production skills To managerial skillsFrom labour costs To acquisition of technologies and compliance

with international standardsFrom transactional strategies To partnership strategies

6

II. The UNIDO programme of assistancein restructuring and upgrading

In response to numerous requests from memberStates, UNIDO has during the last few years de-veloped and implemented an integrated restruc-turing and upgrading programme for enterprisesand their environment. It is designed to maintainthe competitiveness, integration and growth of in-dustries and to facilitate access to the interna-tional market.

The programme can be adapted by selectingmodules to suit the specific needs of each coun-try, each industry and each enterprise.

A. Context and justification

In the framework of the liberalization, adjustmentand revival of the economy, the restructuring andupgrading of industry have for most developingcountries and economies in transition becomepriority programmes designed to promote anddevelop a competitive industrial sector endowedwith institutional and human capacities and skills.

To meet the numerous requests from suchcountries, UNIDO has in recent years developeda comprehensive and multidisciplinary overallapproach encompassing industrial enterprises andtheir environment.

The approach adopted takes into considera-tion the experience acquired by UNIDO in ex-ecuting several industrial restructuring projectsduring recent years and also the various success-ful adjustments and industrial restructuring ex-periments (Chile, Republic of Korea, Mexico,Portugal, Turkey).1 The lessons derived fromthese experiments are principally related to theimportance of protective and back-up measuresdecided upon in close coordination with the op-erators directly concerned and carried out beforeand during implementation of the adjustmentand industrial restructuring programme. The stra-tegic choice of liberalization, which was madedeliberately and implemented in these countries,was not that of “haphazard” but of progressiveand measured liberalization accompanied duringa transitional period by a programme of aid andsupport for the main industries. Periods of transi-tion are necessary in order to give enterprisesmore time to adapt to the total opening up of the

market. The same should apply to industrial en-terprises operating in developing countries thathave enjoyed a high level of protection and, ifthey are not to disappear, need to adapt, inte-grate and face international competition underthe best possible conditions. By way of illustra-tion, we can refer to the agreement on a free-trade area between the southern Mediterraneancountries (Algeria, Egypt, Jordan, Lebanon, Mo-rocco, Tunisia) and the European Union, whichprovides for the gradual and progressive disman-tling of customs dues on inputs and industrialproducts with a view to attaining de facto freetrade by the year 2010.

In order to ensure that the liberalization proc-ess does not produce undesirable effects now orin the future, or even de-industrialization, as wasthe case in some countries, particularly in Africa,which were not able to implement the necessaryprotective and back-up measures in time, it is avery urgent and essential requirement that in eachcountry (a) the State should discuss and decideupon appropriate back-up and assistance meas-ures jointly with the operators concerned andimplement such measures during a transitionalperiod, and (b) that every industrial enterprisegenerating real value-added should agree to makeessential adaptation efforts and to embark on anupgrading and ongoing improvement programmein order to achieve and maintain the minimumdegree of competitiveness required at the interna-tional level.

Back-up measures must be limited in timeand should not seek to guarantee enterprises anyparticular profit margin or market share, becausesubsidies generally retard adjustments and inno-vation rather than promote them.

On the basis of an evaluation of the studiescarried out by UNIDO and some other interna-tional organizations and after an analysis of themain lessons drawn from a number of adjustmentand industrial restructuring experiments, both suc-cessful and unsuccessful, we propose that anoverall integrated industrial restructuring pro-gramme be set up complementing the structuraladjustment programme. This measure must pre-cede or, failing that, run parallel to the establish-ment of the free-trade area or preferential ar-rangement. The programme developed can beadapted by selecting modules suited to the specialcharacteristics of the countries and the specificfeatures of the industries.

1World Bank (1991), Restructuring economies in distress,Washington, D.C.

7

B. Upgrading concept

Upgrading is a new concept developed byUNIDO during the last few years. It involvesputting into effect the concepts and results of themajor changes in the global environment. It is acontinuous process designed to prepare and adaptenterprises and their environment to the require-ments of free trade.

For industries and enterprises it involves twogoals:

� Competitiveness in terms of price, qualityand innovation;

� Ability to follow and assimilate the devel-opment of technologies and markets.

C. Objectives of the integratedprogramme

The aim of the integrated restructuring and up-grading programme is to support the process ofrestructuring, competitiveness, integration andgrowth of industries and employment and to fa-cilitate access to the international market in thecontext of economic and trade liberalization.

Figure III summarizes the objectives of theintegrated programme and the interaction be-tween the main components.

Modernizing the institutional and physicalindustrial environment. The domestic industrialenvironment is a support and even a necessityand it plays a stimulating role. A good physicaland institutional environment will enable indus-trial enterprises, particularly those that are ailing,to confront international competition on the do-mestic and international markets on equal termsand without any handicap. In developing coun-tries, it is imperative to place enterprises in anenvironment of a level that is at least comparablewith that of foreign competitors. “Success in inter-national competition comes from the happy blendof the domestic environment and sources of com-petitive advantage favourable to particular indus-tries.”2 The design and implementation of an inte-grated restructuring and upgrading programme forindustry and a fund to cover direct financial aid tosupport institutions for industry and enterprisesare part of the structure that needs to be set up tomodernize the industrial environment.

Strengthening the capacity of support institu-tions. Most developing countries have supportinstitutions that are not developed or not suffi-ciently developed to be able to assist industrialenterprises in their adaptation and upgrading ef-forts. It is necessary to review these institutions,redefine their roles and activities and strengthen

2M. E. Porter (1993), L’avantage concurrentiel des nations,ERPI, Quebec, p. 602.

��–��–��

��–�� –��

��– –��

–��

Figure III. Objectives of the integrated and restructuring programme

Modernizingthe industrialenvironment

Strengthening RESTRUCTURING Promoting thethe capacities of AND development of

support institutions UPGRADING PROGRAMME competitive industries

Improving thecompetitivenessand development

of industrialenterprises

8

their capacities with a view to providing efficienttechnical assistance and support to meet theneeds of enterprises in the new context of interna-tional competition. The programme is thereforedesigned to strengthen industrial support institu-tions such as national standardization, metrology,certification and accreditation agencies, and topromote the international recognition (throughmutual recognition agreements) of product, sys-tem, measurement and test certification. It is alsodesigned to establish or strengthen the capacitiesof technology centres at a sectoral (agro-food,textile, etc.) and/or horizontal (packaging, engi-neering, etc.) level so as to provide industrialenterprises with the required technical assistance.

Promoting the development of industries thatare competitive on national and internationalmarkets. Most developing countries export com-monplace mass-produced goods where low wagelevels constitute a decisive competitiveness fac-tor. That is the case with the agro-food, textile andleather, mechanical and electrical engineeringindustries. Nevertheless, this type of advantage isnot an enduring one and can be easily trumped.Each developing country must constantly consoli-date its “specific inalienable advantages that set itapart from other competitors”3 by acting on sev-eral different fronts: strengthening human re-sources, improving quality, reducing costs, con-tinuously improving productivity and encouragingpartnership. In the context of a very vulnerableand uncertain environment characterized by theglobalization of competition and rapid innovationin technology and products, strategic studies andanalyses need to be carried out in order to deter-mine the industries in which the country pos-sesses genuine and substantial advantages and toidentify the industries that will flourish in theimmediate future and/or in the long term, takinginto account the competitive advantages alreadyexisting and/or to be created and using relevantnational and international technical, commercialand financial data as the basis. In order to carryout such strategic studies it is useful to conductcomparisons between industries and countries onthe basis of performance and competitiveness in-dicators and benchmarking.

Improving the competitiveness and develop-ment of industrial enterprises based on a processof upgrading, modernizing of production toolsand industrial subsystems, strengthening manage-rial capacities, developing quality and adoptinginternational standards (ISO 9000 and ISO14000). This ongoing improvement process mustbe undertaken in coordination with the share-holders and must be supported technically andfinancially by the banking system and authorities.The programme should be voluntary for enter-prises.

D. The principal componentsof the integrated restructuring

and upgrading programme

The integrated programme, based on a flexiblemodular system and on close coordination be-tween the main actors (the State, support andassistance institutions and private operators) com-prises three main components organized accord-ing to the respective beneficiaries: the Ministry ofIndustry, support agencies, and industries andenterprises. These programme components entailshort- and medium-term activities. They are sum-marized in table 2 below.

E. UNIDO’s experiencein restructuring and upgrading

The restructuring and upgrading approach wasconceived and initiated by UNIDO in 1995 inresponse to various requests made, in particular,by a number of southern Mediterranean, EasternEuropean and Asian countries. This assistance isone of the main services offered by the Qualityand Productivity Service Module, which providesa set of flexible services to help create and de-velop national capacities as a basis for stimulatingand improving productivity, competitiveness andgrowth.

Technical assistance to those countries con-sists of a series of activities aimed at improvingthe competitiveness and increasing the exportcapacities of the industrial base. It is providedwithin the framework of the integrated pro-grammes developed in the last few years byUNIDO in several countries.

By way of illustration, we can cite the tech-nical assistance provided to Tunisia at the time ofthe launch and execution of its national upgrad-ing programme. UNIDO gave direct assistance tothe Upgrading Bureau and took part in the pilotprogramme by carrying out the upgrading diagno-sis and formulating an upgrading plan for around40 enterprises in the agro-industrial sector. A sec-ond project, known as MITAQ, aimed at improv-ing competitiveness through the quality-basedapproach was also implemented with more than40 enterprises benefiting from it.

UNIDO also assisted the Ministry of Industryand Restructuring in Algeria in the formulation ofa national restructuring and upgrading pro-gramme and in restructuring and upgrading some30 enterprises. It is also assisting Egypt, Mada-gascar, Morocco, Palestine, Rwanda and eightWAEMU countries in formulating and implement-ing restructuring and upgrading programmes fortheir industries.

As part of its technical assistance pro-grammes, in the last few years UNIDO has alsohelped several countries in Eastern Europe (e.g.,

3Ch. Leclerq and X. Leclerq (1993), Gestion stratégique dela concurrence en temps de crise, Maxima, Paris, p. 34.

9

Table 2. Integrated restructuring and upgrading programme

First Assistance in the design, implementation and follow-up of a national industrial restructuring Short Mediumcomponent and upgrading programme (beneficiary: Ministry of Industry) term term

Result I Formulating and assisting in the implementation of a restructuring and upgradingprogramme

Activity 1 Formulation and assistance in the implementation of an upgrading programme xActivity 2 Designation of the steering committee and agency to be responsible for implementing

the programme; identification of the other interface agencies and organizations x xActivity 3 Establishment of an information and awareness-raising programme x xActivity 4 Training of a body of specialists to be responsible for implementing the restructuring and

upgrading programme x x

Result II Design and formalization of procedure and regulatory frameworkActivity 1 Formalization of the procedures for implementing the upgrading programme xActivity 2 Updating of the legislation or regulations directly concerned with enterprise recovery x

Result III Study for setting up a restructuring/upgrading fundActivity 1 Analysis of the current situation regarding the financing of investment tangibles

and intangibles xActivity 2 Study of the possibilities and feasibility of setting up a restructuring/upgrading fund xActivity 3 Assistance in setting up the fund and drafting the mode of operation x

Result IV Study for setting up an upgrading performance measurement functionActivity 1 Identification of needs by means of a survey of actors involved xActivity 2 Definition of a mechanism for inputting, processing and retrieving information;

identification of the technical, financial and regulatory conditions for its operation xActivity 3 Approval of the project by the steering committee and implementation x

Second Short Mediumcomponent Strengthening the capacities of enterprise support systems (beneficiary: support institutions) term term

Result I Strengthening the capacities of consultancy firms and banksActivity 1 Organization of a training session on strategic diagnosis and the upgrading plan x

Result II Strengthening the capacities of standardization, certification and accreditation agenciesActivity 1 Evaluation of the current quality infrastructure with regard to material and human resources xActivity 2 Formulation of a programme for upgrading and strengthening the capacities

of standardization, certification, metrology and accreditation bodies xActivity 3 Assistance to standardization, certification, metrology and accreditation bodies in obtaining

international recognition x

Result III Strengthening the capacities of technical centresActivity 1 Evaluation of the needs for and availability of technical assistance xActivity 2 Organization of training sessions for technical centre staff x xActivity 3 Assistance in setting up technical and commercial databases x

Result IV Strengthening the foreign trade support mechanismActivity 1 Evaluation of the current status of the support mechanism for stimulating exports

and access to the international market xActivity 2 Formulation of a trade facilitation programme xActivity 3 Assistance in implementation of the programme x x

Third Support programme for the restructuring and upgrading of pilot enterprises chosen from among Short Mediumcomponent the priority sectors (beneficiary: enterprises) term term

Result I Upgrading diagnostic report for each pilot enterprise selectedActivity 1 Diagnosis of products, markets and strategic positioning xActivity 2 Financial diagnosis xActivity 3 Diagnosis of managerial skills xActivity 4 Diagnosis of technical capacities and quality diagnosis xActivity 5 Drafting of a diagnostic report x

Result II Choice of upgrading strategy for each enterpriseActivity 1 Study of possible strategies xActivity 2 Choice of an upgrading strategy for each enterprise selected x

Result III Upgrading planActivity 1 Formulation of an upgrading plan x

Result IV Direct assistance in upgradingActivity 1 Training activities x xActivity 2 Assistance in the implementation and monitoring of intangible investments including

ISO certification, introduction of hazard analysis and critical control points (HACCP),identification of partners x

10

Belarus, Bosnia and Herzegovina, Poland, Roma-nia, Slovakia) and Latin America (Colombia, Ec-uador, Peru) to design and set up programmes forrestructuring and modernizing industry.

Management software (BEST Business Envi-ronment Strategy Tool and FIT Financial Improve-ment Tool) has been used by UNIDO, in particu-lar to manage and monitor restructuring

programmes and to facilitate decision-making andstrategic enterprise management. A manual ondiagnosis and industrial restructuring has alsobeen developed by UNIDO.

Figure IV shows examples of technical assist-ance provided by UNIDO in several developingcountries and countries with economies in transi-tion.

Diagnostic study

Policy and Management,strategy quality,

formulation certification

Pilot Integratedrestructuring restructuring

and upgrading and upgradingproject programme

Capacity-building:standardization, accreditation

PolandRomania

Algeria TunisiaMorocco Kazakhstan

WAEMU countries Egypt

Sri LankaRwanda

Colombia

Madagascar

Figure IV. Geographical and thematic cover

11

III. Overall strategic diagnosis and upgradingIn this new context of liberalization, reflected formost developing countries and economies in tran-sition mainly by their accession to the WorldTrade Organization (WTO) and the signing offree-trade zone association agreements, industrialenterprises of all sizes have a greater need thanever to formulate and implement restructuringand upgrading diagnosis strategies and pro-grammes.

Although there are a number of works deal-ing with diagnosis, few of them look at overallstrategic diagnosis. This method, developed in thelast few years by UNIDO, offers an all-embracingapproach to strategic diagnosis. The methods andtechniques, adapted to the context and the par-ticular situation of enterprises in developing coun-tries, are selected and inserted into a coherentoverall plan based on quality considerations anddesigned to ensure continuous improvement inperformance. They provide scope for intuition,innovation and flexibility.

A. Basic principles of diagnosis

The idea of diagnosis, as extended to manage-ment, has been written about extensively sincethe 1970s and the start of the international eco-nomic crisis. In medicine, the definition, aim,forms, methods, field of application and author ofa diagnosis are generally clear, but the same can-not be said for management.

What does enterprise diagnosis actuallymean? To what areas can it be applied? What isoverall strategic diagnosis in connection withupgrading an enterprise? What procedures areinvolved?

Diagnosis, analysis and audit:dependence and complementarity

The word “diagnosis” comes from Greek andmeans “recognition”. It is essentially a medicalterm, defined in the Concise Oxford Dictionary as“the identification of the nature of an illness orother problem by examination of the symptoms”,and also as the assessment of a situation or stateof affairs. Its aim is to identify the weaknesses andstrengths of the enterprise in order to rectify theformer and exploit the latter. It is also defined asa critical examination of the existing status with aview to describing the situation of the enterprisein terms of its different internal and external as-pects.

Aims of diagnosis

Diagnosis is an analytical tool and decision-making aid that can be used by an enterpriseirrespective of whether its situation is good or bad.In general, the aim of diagnosis is to assess andmake an overall judgement with a view to high-lighting the potential and the weaknesses of anenterprise and to identify its competitive leverage.

Types of diagnosis:overall, functional, strategic

The type of diagnosis depends on the nature ofthe objectives, their urgency, and the means andresources available. Authors writing about enter-prise diagnosis are not unanimous about its form.

A number of forms have been described, thethree most common of which are:

(a) Overall (in-depth) diagnosis. This is thebasic model for analysing an enterprise as awhole by reference to its functions and organiza-tion. It results in suggestions for improvement;

(b) Express diagnosis. This diagnosis is de-signed to identify the reasons for difficulties and,above all, to devise rapid rescue measures and tostructure the activities to be undertaken in orderof urgency and importance;

(c) Functional diagnosis. This is a fragmen-tary diagnosis of a particular function.

B. Designing an overallstrategic diagnosis

Aims and objectives

Each diagnostic method, be it descriptive, matrixor strategic, has a particular aim and inherentadvantages and drawbacks. The choice dependson the objectives, and the means and informationavailable. Descriptive methods are based on ananalytical study of the different variables withinthe enterprise. They are fairly static and take ac-count of the components of the enterprise consid-ered individually. Matrix methods are based onanalysis and evaluation of the strategic position-ing of the enterprise’s activities in a predeter-mined competitive framework. These methodscannot, however, be used for restructuring andupgrading diagnosis in developing countries be-cause they fail to take account of technical, hu-man and organizational variables.

12

We suggest that the overall strategic methodbe used to diagnose the upgrading potential ofenterprises in developing countries. This choice isjustified by the fact that enterprises will operate infuture in a competitive, turbulent and complexenvironment, which will call for the fulfilment ofcertain managerial requirements.

The scope of strategic diagnosis makes itpossible to study the link between the industryand its environment with a view to identifying theappropriate strategic choices.

Moreover, this method makes it possible toidentify the changes that a small or medium-sizedindustry needs to introduce in order to confrontthe new situations (competition, market, technol-ogy, etc.) that it will be exposed to in the neweconomic context.

Method

Overall strategic diagnosis consists of identifyingthe real problems and of devising realistic solu-tions to them. It is (a) a systematic analysis of theenvironment in which the enterprise operates, itsmarket and competitive position, and (b) an in-depth and overall analysis of the different internalfunctions including an objective evaluation of thecapabilities and performance of the enterprise.

The forms of investigation are diverse but theconclusions are specific to each case, and for thisreason strategic diagnosis calls for a methodologythat is rigorous but sufficiently flexible to adapt tothe differences in terms of size and activities.Stress is placed on the key tasks and functions,which need to be identified from the outset so asto maintain a focus on the essential.

Overall strategic diagnosis is the first step inthe strategic upgrading process (SUP). It is fol-lowed by three phases: the selection of strategies;the formulation of an upgrading plan; and, finally,the implementation and monitoring of this plan.

Any error of judgement, poor choice of criteria,reference or business model is likely to mobilizeresources to solve subordinate problems insteadof the priority concerns. Figure V summarizes thestrategic upgrading process.

Overall strategic diagnosis for the purpose ofupgrading an enterprise calls for a precise all-embracing approach on the basis of five catego-ries of diagnosis, which form the diagnostic struc-ture.

These diagnoses must be interconnected andtake account of the strategies and objectives ofthe enterprise. They must be linked in a logicaland coherent fashion. The quality of strategic di-agnosis thus depends on a harmonious symbiosisof these five components.

C. Analysis of external sourcesof competitiveness

The economic environment in which an enter-prise operates can have a positive or negativeimpact on its performance. Factors that have adirect influence on the performance of an enter-prise, such as monetary, fiscal or labour legisla-tion, the availability of a physical and institutionalinfrastructure, the quality of the standardization,certification and metrology institutions, technol-ogy transfer and the accumulation of know-how,development of partnerships and cooperationamong enterprises, and the subcontracting mar-ket, have not been adequately dealt with in workson diagnosis and recovery because they are notan obstacle to upgrading and growth of enter-prises in developed countries.

Studies conducted by UNIDO have shownthat, in spite of the measures that have been un-dertaken, the environment in developing coun-tries is still characterized by a number of struc-tural constraints and organizational shortcomings.

Figure V. Strategic upgrading process

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Overallstrategicdiagnosis

Implementationand Selection of

monitoring upgradingof upgrading SUP strategies

plan

Formulation ofupgrading

plan

13

It is therefore necessary to include a diagnosis ofthe environment in the strategic diagnosis. Theaim of this diagnosis is to analyse the differentand principal components of the environment,identifying the constraints and opportunities thatthey represent, and to study their direct or indirectimpact on the upgrading and development of theindustrial enterprise. This diagnosis is summarizedin figure VII.

Economic and social environment diagnosis

Analysis of this environment, which has beenevolving continuously since the opening up of theeconomy and the adoption of structural adjust-ment programmes, provides a significant pointerto the origins of constraints and opportunities forupgrading enterprises. It could include:

� Trends in the basic economic data of acountry, such as:

Average per capita income, gross na-tional product, consumption, invest-ments, economic growth rate, ex-change rate;Exports and/or imports by the country,sector and industry and of productsmanufactured by the enterprise underconsideration;Economic policy: development aims,economic orientation, programmes and

strategies of the country, sector andindustry;

� The principal economic measuresadopted by the State to promote and fi-nance industry and the associated serv-ices, support for restructuring and up-grading of enterprises;

� The impact on the performance of indus-try of various economic and politicalvariables, such as devaluation of the cur-rency, increase in the cost of particularfactor inputs, average cost of capital, la-bour and severance.

Diagnosis of the industrial environment

The industrial environment of an enterprise ismade up of all the actors (individuals, enterprisesand organizations) and factors (economic andtechnical) that exert an influence on its own re-sults and also on those of its direct competitors.The diagnosis of this environment consists there-fore of an analysis of the various institutional andsupport agencies (standardization, certification,accreditation, metrology, financing, management,maintenance and consultancy services, etc.) so asto identify the constraints and opportunities forupgrading and developing the enterprise in anopen and competitive market.

Figure VI. Overall strategic diagnosis procedure

Overall strategic diagnosis

Analysis of Financial Diagnosis ofexternal sources diagnosis managerial skills

of competitiveness and quality

OBJECTIVES ACTIVITIES OBJECTIVES ACTIVITIES OBJECTIVES ACTIVITIES

Analysis of productmarkets and Diagnosis of

strategic positioning technical capacities

OBJECTIVES ACTIVITIES OBJECTIVES ACTIVITIES

14

Diagnosis of the technological environment

This diagnosis analyses the technical support sys-tems that enable the enterprise to use and accesstechnical and technological information, to selectand acquire technologies, equipment and manu-facturing procedures, to adapt and control tech-nology transfer and, finally, to capitalize and de-velop technological know-how.

D. Diagnosis of product marketsand strategic positioning

Diagnosis of the product markets and strategicpositioning of an enterprise is designed to meas-ure the commercial performance of the enterpriseand of each of its areas of strategic activity and toassess the commercial policy and strategies im-








Figure VII. Structure and architecture of the economic and industrial environment

Analysis of external sources of competitiveness

Competitive Competitive Competitivesocio-economic industrial technological

environment environment environment

Political environment Industrial support agencies Technical support centresStandardization for industry

Industrial environment climate MetrologyManagement Promotion and transfer

Legal environment Industrial consultancy of technology

Export policy Industrial investment Research and developmentincentives

Tariff system UpgradingQuality and certification

Investment policyCost of production factors

LabourEnergyCommunicationsTaxes and levies

15

plemented to achieve the commercial objectivesset by the enterprise. It is not a detailed marketstudy but a means of identifying the key factorsand principal recommendations that condition thesuccess of the enterprise’s activities within its in-dustry. Figure VIII summarizes this diagnostic pro-cedure.

Analysis of commercial performanceof the enterprise

This analysis consists of breaking down the activi-ties of the enterprise into strategic fields of activ-ity, and then evaluating the performance of eachfield and of the competitive position of the enter-prise within its industry and in relation to its prin-cipal competitors.

Several indicators can be calculated in orderto analyse the commercial performance of theenterprise’s product markets, such as sales devel-opment, an analysis of sales by product marketpairs, and direct costing analysis on the basis, forexample, of trade margin and product marketcontribution margin.

(a) Breakdown of the enterprise’s activities.When an enterprise manufactures several differ-ent products and sells them on one or severalmarkets, it is useful to break down the businessinto strategic fields of activity, in other words tak-ing account of the essential differences betweenthe products and the markets. A strategic diagno-sis will therefore include an in-depth analysis ofeach field so as to develop a specific strategy;

(b) Analysis of commercial performance ina strategic field of activity. The analysis of com-mercial performance in a strategic field of activitystarts with the plotting of a product market matrixwith the different products entered horizontallyand the possible markets vertically. Then the de-mand, rate of growth of this demand and its elas-ticity in relation to prices are analysed, the char-acteristics and frequency of sales are defined andthe conditions for successfully satisfying the mar-ket demand are determined. The supply thenneeds to be analysed so as to identify the princi-pal competitors and suppliers, barriers to en-trance, types of technology available and thedegree of integration of competitors and to obtaina general overview of the main opportunities andconstraints and the main conditions for success-fully supplying the market. Finally, changes in theposition of the products on the market or marketsin relation to the competition need to be analysedso as to determine which products are competi-tive and which present problems. This analysis isnot always easy to carry out for certain industriesin developing countries because of the lack ofcommercial and technical information on com-petitors;

(c) Evaluation of the competitive position ofthe enterprise. This evaluation analyses the per-formance of the enterprise and of the differentstrategic field(s) of activity, and the complementa-rity, synergies and, if applicable, imbalances be-tween the fields. Several key success factors canbe used to evaluate this competitive position.According to Porter,1 the strategic positioning ofan enterprise depends in principle on a combina-tion of the following dimensions:

Degree of specializationImportance of brand imageChoice of distribution channelsQuality levelTechnology levelChoice of vertical integrationChoice of cost strategiesService levelPrice policyRelations with other companiesRelations with States

Analysis of commercial policy and marketing mix

The next stage is to examine the commercial policyand marketing mix of the enterprise. This examina-tion will, for instance, consider the developmentover the three previous years of product, price,distribution, promotion and publicity, communica-tions, and customer relations policies. The analysesare both quantitative (product margins, growthrates, relation between enterprise’s unit sellingprice and sales terms and those of competitors,etc.) and qualitative (life cycle analysis, customercoverage by distribution networks, sales force re-muneration policy, types of sales personnel, etc.).

Market study

To supplement the analysis of the strategic posi-tioning of the enterprise within its market, thediagnosis may also include a market study con-ducted in the field among the principal customersand competitors of the enterprise so as to confirmor disprove the data and findings gathered.

On the basis of the information received indiscussions with the enterprise management, theresults of the diagnosis and the survey, if one ismade, the analyst should be able, first of all, toidentify and classify the principal external and in-ternal strategic difficulties connected with theproduct markets and to deduce the main opportu-nities and constraints, and then to evaluate themarket for the enterprise’s principal products at thenational and international level based on a retro-spective analysis of the market and the projecteddevelopment of macroeconomic indicators influ-encing the consumption of these products.

1M. E. Porter (1982), Choix stratégique et concurrence,Economica.

16

E. Financial diagnosis

The enterprise’s accounting and financial data arean essential and useful source of information forevaluating and assessing the economic and finan-cial situation of the enterprise. Any strategic diag-nosis should therefore include an in-depth finan-cial analysis, which, based on analysis of thedevelopment of the financial statements, the cashflow statement, cost prices and production costsand the various items in the income statement,measures the profitability of the enterprise andanalyses its financial equilibrium.

This analysis has the advantage of providinga rapid overview of the enterprise’s situation andbehaviour. The financial analysis can be con-ducted as shown in figure IX. Various problemsmay be encountered in the financial analysis,particularly in small and medium-sized enter-prises, regarding the reliability, availability, regu-larity and homogeneity of the accounting dataand the conversion of the latter into economicdata.

The first stage in the financial analysis con-sists of addressing these problems by adjustingthese accounting and financial data so as to arrive

Figure VIII. Structure and architecture of product and markets








Analysis of product markets and strategic positioning

Analysis of Analysis ofcommercial marketing mix Market studyperformance

Segmentation of activities Product policy Brand imageinto strategic fieldsof activity Price policy Product quality

Analysis of performances Distribution policy After-sales serviceby strategic field of activity

Promotion policy PriceEvaluation of strategicpositioning Sales management

17

at a better understanding of the real financialposition of the enterprise. Adjustment of the bal-ance sheet might include the following mainitems:

(a) Preliminary expenses

These are as yet unabsorbed costs incurredthrough establishment, development and capitalreconstruction. They are entered in the balancesheet under this item as non-values spread overseveral financial years and offset under “profitand loss”.

(b) Fixed assets

(i) Land and buildings: These items arebooked at their historical value. Theyare normally valued on the basis ofmarket indicators;

(ii) Investments: An analysis of the vari-ous investments should be carriedout to determine their total net depre-ciation or appreciation.

(c) Inventories

Analysis of this item makes it possible to identifyslow-selling inventories that have not moved for








Figure IX. Structure and architecture of the financial diagnosis

Financial diagnosis

Conversion of Analysis of income statementaccounting data Sales development

Costs development

Analysis of Analysis of production costs and cost

financial statements prices by strategic field of activity

Financial structure

Working capital Product costsCash flow analysis Analysis of break-even point

Decisions to manufacture or outsource

18

several financial years and cannot be sold, as wellas the actual amount of the reserve calculated onthe basis of the depreciation of specific invento-ries.

(d) Customers

Receivables that are difficult to collect should beanalysed. Provisions should be made for non-re-coverable debts.

(e) Receivables and debts in foreign curren-cies

According to the nominalism principle, receiva-bles and debts in foreign currencies should bebooked at their historical value at the rate on thedate of invoicing. The differences arising fromexchange rate fluctuations between this value andthe amount receivable or payable should be de-termined and provisions made accordingly.

Balance sheet analysis

This analysis is carried out on the basis of thethree most recent balance sheets of the enterprise,

the last of which is adjusted. The financial equi-librium is assessed on the basis of a study of thedevelopment over time of the cash flow state-ment, the working capital statement, and workingcapital and cash requirements.

The cash flow statement is one of the mostuseful economic and financial analysis instru-ments. According to Colasse (1993), it can beused for dynamic analysis of the financial func-tioning of an enterprise. In particular, it permits adescription of the financing of capital expendi-tures and the fluctuations in the working capital,as well as the cash resources and the use towhich they are put. There is no fixed model forthe cash flow statement.

The financial analysis involves the establish-ment of a multi-year financial forecast (see ta-ble 3), a model invented by Geoffroy de Murard.It shows the real behaviour of the enterprise ac-cording to different aspects of its operation, in-cluding product and cost transaction flows; move-ments of assets and liabilities; cash flow (receiptsand outlays); and the differences resulting fromvariations in inventories, receivables and debts.

Table 3. Multi-year financial forecast models

Year Year % value(n-1) (n) added

Production sold+ production in stock+ production tied up1 = PRODUCTION IN FINANCIAL YEAR

Consumption of material+ outsourcing and external services2 = EXTERNAL COSTS

3 = VALUE ADDED (balance 1-2)

Taxes and leviesPersonnel costs4 = GROSS OPERATING SURPLUS (GOS)

Investment in operating inventoriesNet disinvestment in receivables and debts from current operations5 = VARIATION IN WORKING CAPITAL REQUIREMENTS (WCR)

6 = OPERATING CASH SURPLUS (balance 4-5)

Investments in operating ASSETSVariation in WCR linked to investments7 = AVAILABLE AFTER INTERNAL FINANCING OF GROWTH

Exceptional or non-operating surplus or deficitVariation in WCR linked to exceptional operations8 = EXCEPTIONAL CASH FLOW

3.5.3 Current investment income3.5.4 Financial expenses (excluding amortization)3.5.5 Variation in WCR linked to financial operations9 = CASH RESOURCES CONSUMED BY CURRENT FINANCIAL OPERATIONS

3.5.6 Tax on profits3.5.7 Dividends10 = VARIATION IN WCR LINKED TO PROFIT DISTRIBUTION OPERATIONS

Increase in nominal capitalVariation in long-term debtsVariation in long-term financial assets11 = CASH RESOURCES LINKED TO CAPITAL OPERATIONS

12 = VARIATION IN CASH RESOURCES (balance 7-8-9-10)

19

Although static, traditional analysis on thebasis of ratios generally allows an accurate assess-ment. The analyst will be looking to assess thefinancial structure, cash balances and operatingactivities. A comparison of the enterprise’s ratioswith those of the sector or of the main competi-tors permits a better assessment of the profitabilityof the enterprise, an evaluation of its financialequilibrium and its position within the sector inwhich it operates. In the absence of a centralbalance sheet office in most developing countries,the analyst must determine key company per-formance indicators within the sector and from

supervisory bodies. Table 4 shows a selection ofsignificant ratios frequently used in analyses offinancial position.

Analysis of income statement

Income statements are generally presented in twospecific accounts. For the purposes of examination,it is useful to consolidate them in a single document(see table 5), which we call the Management ResultsAnalysis Table (MRAT). The table makes it possibleto isolate highly significant results and intermediatebalances for all profitability calculations.

Table 4. Balance sheet analysis ratios

Ratio Definition

Financial structure ratios

Structural financing Long-term capital : net fixed assets

Coverage for invested capital Long-term capital : invested capital

Indebtedness ratio Medium- and long-term debts : equity capital

Intrinsic share value Equity capital ± profits : number of shares

Cash ratios

Solvency Current assets : short-term debts

General liquidity Realizable assets + available assets : short-term debts

Immediate liquidity Available assets : short-term debts

Inventory, receivable and operating debt ratios

Stock rotation time in days Approved inventories x 360 : purchases excluding tax

Customer credit delay in days Current working inventories + receivables : sales without tax

Supplier credit delay in days Trade debts : purchases including tax

Table 5. Management results analysis table (MRAT)

Year Year Year(n-2) (n-1) (n)

Designation 1 2 1 2 1 2

1. Sales excluding VAT2. Variation in finished product inventories3. Production by-products4. Production value (1+2+3)5. Purchase of incorporated material and supplies6. Variation in material inventories7. External work, supplies and services8. Financial costs9. Production costs (5+6+7+8)

10. Value added (4-9)11. Miscellaneous operating products12. Operating subsidy13. Personnel costs14. Taxes and levies15. Gross operating profit (10+11+12-13-14)16. Interest and dividends received17. Financing costs18. Amortization transfer19. Operating reserve20. Operating profit (15+16-17-18-19)21. Non-operating products and profits22. Non-operating costs and losses23. Non-operating profit (21-22)24. Taxes on profits25. Net profit

Net cash flow (±25 + 18)

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Table 6. Profitability analysis ratios

Ratio Definition

Sales growth CAHT* (n) – CAHT (n-1) : CAHT (n-1) (%)

Value added growth Value added : production value

Financial profitability Net profit : own resources

Financial cost portion in production value Financial costs : production value

Ageing of capital assets Accumulated amortization : gross capital assets

Personnel costs Personnel costs : production value

Personnel productivity Value added : number of staff

*Sales without tax

The profitability assessment itself is carriedout on the basis of an analysis in time and space,if possible, of the growth in sales and valueadded, financial profitability and productivity.The ratios customarily used in this type of analysisare shown in table 6.

Analysis of production costs and cost prices

Where an analytical accounting system is avail-able, the overall analysis of an enterprise’s activi-ties on the basis of the MRAT can be supple-

Table 7. Analytic Analysis by Product Table (AAPT)

Year Year Year Year YearDesignation Unit (n-4) (n-3) (n-2) (n-1) (n)

1. Production capacity tonnes2. Actual production tonnes

3. Value of production sold Costs Costs Costs Costs Costs(%) (%) (%) (%) (%)

4. Raw materials consumed at cost price (RM)RM1RM2RM3

5. Consumable materials at cost price (CM)CM1CM2CM3

6. Rent7. External work and services8. Other production costs9. Personnel costs

10. Technical assistance

11. Manufacturing cost (4+5+6+7+8+9+10)

12. Packaging13. Distribution costs

14. Cost of distribution (12+13)

15. Production cost before amortization and financing costs (11+14)

16. Amortization in financial year17. Financing costs

18. Production cost before general costs (15+16+17)

19. General costs

20. Total production cost (18+19)

21. Pre-tax profit (3-20)

mented by an in-depth analytical study of thedevelopment of products and operating costs byproduct and strategic field of activity. This analy-sis has numerous aims, the most important ofwhich are to provide a more accurate estimationof the production costs and cost prices by productand by cost centre (factory, workshop, manage-ment) and more detailed knowledge of the contri-bution of each product to the enterprise’s profit.

The Analytic Analysis by Product Table(AAPT) (see table 7 below) can be used as a basisfor this cost analysis.

21

On completion of these analyses, the analystwill be in a position to determine:

� The amount of permanent capital (capitalinput and/or medium- and long-term debts)to restore a healthy financial situation in theenterprise and finance tangible and intan-gible investments required for upgradingand development of the enterprise;

� The working capital requirements andsource of their financing;

� The profitability threshold of the enterprise.

F. Diagnosis of technicalcapacities

In an economic environment characterized byintense competition and increasingly rapid tech-nological changes, the diagnosis of technical ca-pacities (see figure X) is used to analyse the enter-prise’s production system and tools, to evaluatetechnical performance and to determine the prin-cipal technical actions that need to be carried outto upgrade the enterprise and develop its com-petitiveness.

Figure X. Structure and architecture of diagnosis of technical capacities








Diagnosis of technical capacities

Analysis of Evaluation of Analysis of technicalproduction technical support functions andoperations performance environmental aspects

Analysis of inputs Productivity Technical support functions

Analysis of production Costs Engineeringsystem (technology and Quality of finished products Maintenanceprocess)

Control and inspectionAnalysis of production

Environmental aspects

Waste management

Clean production

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Diagnosis of production system

The diagnosis examines the three aspects of theproduction system, namely input, process andproduction, and focuses on the following aspects:

(a) Analysis over time and space of inputsand their characteristics (material and supplies,labour and energy, production material and equip-ment, etc.). The analyst will be looking for theoptimum use of materials and technical personnel,and will pay particular attention to loss of materialsand excessive consumption (energy, electricity,water). The analysis of inputs consists of observingtheir status and functioning, examining the waymaterials are consumed (compared with standardsand predicted use), the capacity utilization rate,frequency of breakdowns and costs of mainte-nance and servicing, and paying due attention tomaterials, supplies and energy. Thus, the charac-teristics of the purchased materials and their com-pliance with the technical specifications, patternsof consumption by unit manufactured, losses andwaste are all analysed. Finally, the analysis looks atthe human resources and can be supplemented byinterviews with personnel to assess the workingenvironment, skills and technical capacities, in-cluding professional qualifications, staff trainingand occupational safety;

(b) Analysis of the production system (tech-nology and process) and comparison with systemsused in the sector and by the main competitors.The analyst must first assess the technology cho-sen by the enterprise in terms of the availablefactor inputs (raw materials, labour, etc.), and theflexibility of the means of production, i.e. theircapacity to produce a wide range of products andto adapt to fluctuations in volume, and the capac-ity of the staff to assimilate the technology and toinnovate. An analysis of the process makes itpossible to assess the capacity of the enterprise toprovide finished products meeting the needs ofcustomers in terms of quality, delivery time andcost. It also assesses production managementmethods, particularly research and methods, plan-ning and scheduling, maintenance management,and quality control and assurance;

(c) Finally, this diagnosis evaluates theproducts manufactured by the enterprise by ana-lysing their technical and managerial characteris-tics (nature, quality, price, delivery times, distribu-tion, after-sales service) in relation to those of thecompetition and those demanded by customers.This analysis also verifies compliance of the en-terprise’s products with the relevant internationalstandards.

Evaluation of technical performance

This evaluation looks at productivity, output andcosts.

Productivity and output are measured byanalysing the development of production indica-tors (in volume) by workshop and plant, con-sumption by workshop and product unit, produc-tion capacity utilization and production times. Acomparison of the productivity of the main ma-chines with that indicated by the designer andthat achieved by the main competitors can bemade. This productivity and output analysis canprovide information about bottlenecks that mightbe due to inefficient utilization of machines ortechnical personnel.

Measurement of performance in terms ofcosts is based on an analysis of the pattern of rawmaterial, energy, maintenance, subcontracting,general and personnel costs and of the cost oftying up of stocks.

On completion of this diagnosis, the techni-cal consultant will be in a position to identify,structure and classify fundamental problems andbottlenecks hindering proper technical function-ing of the enterprise and, in particular, to recom-mend a detailed plan of action to improve pro-duction performance.

G. Diagnosis of managerial skillsand quality

Most investigations to determine the exact sourceof difficulties in enterprises reveal that manage-ment and organization problems are among themain causes of failure. As part of an overall stra-tegic diagnosis it is therefore important to diag-nose these managerial skills (see figure XI). Thediagnosis is designed to evaluate managerial skillsand performance, study the enterprise’s organiza-tional structure and socio-cultural aspects, andidentify actions to be taken to improve theseskills.

Evaluation of managerial skills

It is vital at the outset to have the head of theenterprise explain and define the corporate visionand objectives, their hierarchical structure, themain policy thrusts of management and its strate-gic orientations and any constraints and pressureslimiting its power. Then, the managerial skills ofthe management should be assessed and evalu-ated, i.e. the management methods and ap-proaches conceived by the head of the enterpriseand senior management staff to accomplish theobject and meet the targets set. To this end, it isessential to evaluate managerial, technical andentrepreneurial skills and aptitudes, as well as themanagement style of the head of the enterprise.

To do this, the method used by senior man-agement to perform the following five essentialmanagement functions needs to be assessed:

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� Analysis: Identify tools, areas and fre-quency of analysis and test the quality ofthese analysis tools;

� Planning: Evaluate the planning process inthe enterprise, i.e. the procedures for draft-ing, following up and reviewing plans;

� Control: Evaluate the control process inthe enterprise by identifying the actors,areas and tools used, and the perform-ance criteria and the penalties and incen-

tives system and by verifying the controlsin practice;

� Coordination: Identify and analyse inpractice the procedures for coordinationbetween the different functions within theenterprise;

� Motivation: Evaluate the motivation proc-ess, which consists of maintaining anddeveloping internal cohesion and estab-lishing a favourable social climate.

Figure XI. Structure and architecture of diagnosis of managerial skills








Diagnosis of managerial skills and quality

Evaluation Evaluation Qualityof managerial of the organizational auditskills structure

Vision, mission and strategy Organizational chart Quality system(ISO 9000, ISO 14000)

Management information Human resourcessystem (MIS) management Quality assurance

Corporate culture Pay and motivation Product standards

Metrology

Control and inspection

Inputs, process, production

24

Evaluation of organizational structure

This structure defines and formalizes the func-tions, competences and relations between the dif-ferent units that make up the enterprise. It isevaluated in terms of the efficiency of its organi-zation and the compliance by personnel with theorganizational rules, the degree of flexibility ofthe procedures and attributes, the degree of stabil-ity and adaptation to changes in the environmentand to developments in the enterprise’s activities,and finally the quality of communications, reli-ability of information networks and the degree ofsynergy between the different units.

This evaluation also permits measurement ofsocial performance and an assessment of the so-cial climate and the main features of the corpo-rate culture. Several aspects and qualitative andquantitative criteria can be used to evaluate thesocio-cultural aspects of the enterprise.

The following documents can be examined:current labour legislation, i.e. the labour code, thecollective agreement for the sector in which theenterprise operates, the personnel statutes and/orinternal regulations, the salary scale, a modelemployment contract and details about the staff(surname, first name, age, training, experience,seniority, assignment).

The “diagnostician” can also analyse themain social elements within the enterprise, e.g.development of human resources by occupationalcategory and by type, social costs, training, ab-senteeism and rotation rate, and ratio of seniorand permanent staff.

Quality audit

This audit can be carried out by a qualified ISO9000 auditor and should reveal whether the en-terprise is applying and respecting quality man-agement principles as defined in ISO 9000 ver-sion 2000 “Quality management systems”. Thequality system is then evaluated on the basis of ananalysis of trends in quality indicators such asproduct returns, customer complaints, number orvalue of rejected articles (production defects) andthe cost of non-quality (waste, rejects, returns).The different defects must be analysed to deter-mine where they originated, e.g. raw materials,machines, labour. This analysis of causes enablesthe analyst to determine priority actions that needto be undertaken and the means of control to beset up to improve quality management systemsthat are required to comply with the provisions ofISO 9000 version 2000.

On the basis of the analyses and inquiries,the analyst can first of all clearly identify the keyproblems regarding managerial skills, structureand social performance, investigate their causesand deduce the direct and indirect effects on theeconomic performance of the enterprise, and then

point out possible solutions and finally determinethe actions and measures required to better utilizethe enterprise’s human resources.

Conclusion

In a complex competitive environment, overallstrategic diagnosis appears to be the most appro-priate method for upgrading and developing anenterprise. It is based on methods described inexisting documentation. It is modular and flexibleand involves five categories of interlinked diag-noses, covering the environment, product mar-kets, finance, technological competence andmanagerial skills.

Summarizing the overall strategic diagnosis isthe most difficult task because of the amount ofinformation, observations and recommendationsthat need to be taken into account. The consult-ants involved in the diagnosis must then correlatetheir conclusions with the strategies and aims ofthe enterprise, set them in context and produce ageneral summary encompassing the enterprise asa whole and its environment. Their capacity tosummarize depends first on their ability to iden-tify, analyse and reformulate the most importantmanagement problems and threats to the environ-ment, and then to classify them by importanceand urgency, to identify the specific competen-cies within the enterprise and the opportunitiesoffered by the environment and then to deducethe competitive advantage that the enterprise canexploit, develop and defend in the long term. Italso depends on their ability to identify and pro-mote possible and realistic solutions and actions,drawing a distinction between ones necessary forimmediate survival, short-term ones designed toincrease profitability, and medium-term ones toconsolidate profitability and safeguard the enter-prise’s future.

Finally, the credibility of overall strategic di-agnosis depends above all on the ability, i.e. ex-perience and know-how, of the consultants tocarry out a synthesis in keeping with the scale ofthe enterprise and its environment and to makeproposals to stimulate change in the new context.

H. Checklist for overall strategicdiagnosis and the drafting

of an upgrading planfor an agro-food enterprise


The diagnosis should cover the following aspects:

Analysis of the legal and regulatory environ-ment in which the enterprise operates. This analy-sis focuses on the policies, incentives, availableexport promotion tools, financing of tangible and

25

intangible capital outlays, training, employment,quality promotion, certification, standardization,competition, research and development, and part-nerships.

Strategic positioning of the company in rela-tion to competitors in a five- to ten-year timeframe:

� Identification of the current dimensions ofthe national, regional and interregionalmarkets in terms of supply and demandof the agro-food products being studiedand a specific analysis of the marketgrowth rate, key product characteristics(diversity, price, quality, delivery time),substitution products, development ofproduction capacity, product life cycle,barriers to entrance by new manufactur-ers;

� Analysis of the dynamics of these markets(in particular the demand) in recent yearsand prediction of medium-term growth;

� Evaluation of strengths and weaknesses ofmain competitors on the national andinternational scale;

� Verification of changes in consumertastes;

� Estimation of the competitive position ofthe enterprise in a five- to ten-year timeframe with the progressive opening of thenational market;

� Formulation of recommendations onprice, quantities and product quality (dis-tribution methods, etc.) and estimation ofprospects and risks as regards future de-mand development (are there any signifi-cant market niches justifying an up-grade?).

Technological and sanitary diagnosis

Technological diagnosis comprises:

� Manufactured products;

� Raw material supply conditions;

� Production equipment and installations(specific and general): evaluation of ageand in particular technical suitability ofinstallations in relation to standards to beachieved; determination of the produc-tion capacity and current and target ex-ploitation;

� Technological solutions used in the pro-duction process and proposed modifica-tions to head off future competition envis-aged in the “strategic positioning”section;

� Mastery of technical processes with rec-ommendations on technical measures

designed to rectify any weaknesses iden-tified;

� Production organization: modalities, serv-icing schedules, incoming materials re-ception, warehousing, packaging, dis-patch and relations with otherdepartments, with particular attention tothe quality management system;

� Production factors and conditions: termsand costs, including drops in production;

� Product transport and distribution.

Sanitary diagnosis comprises:

� Manufacturing installations:Overall design of the productionpremisesProduction premises (floors, walls, ceil-ings, doors, ventilation, lighting, clean-ing and disinfecting: hands, installa-tions, tools and materials)Cold rooms (floors, walls, ceilings,doors, lighting, refrigerating power,thermometers, thermostats, etc.)Pest control (insects, birds, rodents,cats, dogs, etc.)Tools and equipment (tables, recepta-cles/containers, conveyor belts, cutters,etc.)Reject and waste disposalWater supply (quantity and quality)Waste water and effluentsStaff installations (cloakrooms, toilets,washrooms, etc.)Product transport systemsStorage of raw materials, finished prod-ucts, packaging and miscellaneous in-gredients

� General hygiene conditions:Premises and materials (condition andmaintenance)Staff (clothing, medical examinationsand check-ups, etc.)Manufacture (product handling)Interim storage of fresh, processed andfrozen products, etc.

� Internal control conditions:HACCP auditLaboratory analysesRecords and traceability

Financial diagnosis

� Analysis of asset and liability situation forthe three previous years; preparation ofdetailed breakdowns to identify structuralindicators and close analysis of capitali-zation and indebtedness terms (short- andlong-term, rates and periods), in relationto the situation and size of the enterprise;

26

� Evaluation of financial stability in relationto the possible need to increase workingcapital and/or to changes in operatingactivities;

� Analysis of general accounting system;evaluation of its efficiency and informa-tion technology (IT) needs;

� Analysis of economic management in theprevious three years on the basis of trad-ing accounts (profits from sales and sup-ply by quantity and unit value, identifica-tion of cost factors in as much detail aspossible);

� Evaluation of profitability conditions (re-turn on investment and capital); compari-son with average values for the sector orsubsector;

� Analysis of industrial accounting system;evaluation of its efficiency and IT needs.

These analyses are carried out in cooperationwith the head of the enterprise and the seniormanagement.

Organization/management diagnosis

� Organization and administration, with adescription of the ownership structureand the way in which ownership rightsand prerogatives are exercised; composi-tion of the board of directors, if applica-ble, and its functioning; division of tasksand functions, description of the profes-sional experience of the key personneland their working habits, evaluation oftheir performance; description and evalu-ation of recruitment criteria and proce-dures;

� Human resources, with the complete staffstructure broken down by functions;evaluation of the staff training status atthe different levels; description andevaluation of in-house training proce-dures;

� ISO 9000 quality audit.

In particular, the study should include thefollowing features:

� Organizational chart, staff, qualifications,absenteeism, turnover, matrix of compe-tencies;

� Corporate policy to foster career progres-sion as an additional motivation;

� Management staff (international compari-son of management ratios);

� Workshop organization (configuration);

� Production process analysis and evalua-tion; software, management charts, etc.;

� Management ratio tables: activity, output,time and cost analysis;

� Benchmarking and national and interna-tional comparisons: highlight principalcompetitiveness ratios and compare themwith standard and international ratios.

Drafting of upgrading plan

The upgrading plan can be drafted only if theconclusions of the strategic diagnosis are positive.

The upgrading plan defines the short-termtarget (one year) and medium-term target (three tofive years) and the strategy to be implemented toachieve them.

The plan of action comprises:

� Actions relating to tangible investment,intangible investment (technical assist-ance, personnel training, including man-agement personnel, etc.) and financialrestructuring;

� Actions in detail: aim, description, cost,financing, duration;

� Planning of actions defined for the threesubsequent years, year by year, distin-guishing between short- and medium-term actions;

� Measurable impact of each action (inclu-sion of a means of quantification to meas-ure the situation before, during and at theend of the action);

� Programme of action summarized in asingle table recapitulating the cost andfinancing for each action and the pro-gramme as a whole.

The upgrading plan as a whole should bedrafted in the form of a dossier suitable for pres-entation to a bank including, in particular, a prof-itability study for planned investments, and shouldbe drawn up in cooperation with one of the banksfinancing the enterprise.

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IV. Industrial enterprise upgrading strategiesIn order to prepare itself, adapt and gain a foot-hold in this new economy characterized by glo-balization, the industrial enterprise must formu-late and implement an upgrading programme.One of the basic features of this programme is thechoice and construction of a strategy adapted tothe new competitive conditions in this new free-trade economy. What are the most significantstrategies proposed in this new competitive envi-ronment? How is an upgrading strategy to be for-mulated and how is access to the internationalmarket to be facilitated? What possible strategiescan be used to upgrade industrial enterprises?

A. Globalization and possibleupgrading strategies

In this new context with its numerous uncertain-ties, complexity and globalization, it is essentialto ask how globalization and the establishment ofa free-trade area will disrupt existing strategiesand which upgrading strategies an industrial en-terprise needs to adopt.

The identification and selection of upgradingstrategies are part of the second stage of the stra-tegic upgrading process (SUP) of industrial enter-prises (figure XII).

It is evident that one of the keys to the suc-cess or failure of an enterprise is the nature of thestrategy it selects to confront its competitors. In acompetitive market, like that of the EuropeanUnion, industrial enterprises, if they are to suc-ceed, must adopt competitive strategies that givethem a long-term competitive advantage over all

the competitors in their sector.M. E. Porter, an American industrial econo-

mist, distinguishes two types of basic winningstrategy that give an enterprise a comparativeadvantage: a strategy of cost leadership and astrategy of differentiation.

To succeed and maintain its position underconditions of unrelenting competition, an enter-prise must continually define the type of advan-tages it is looking for and the field within whichthese competitive advantages can be achieved.

The acquiring of competitive advantage iscontingent on the way in which the enterprisemanages, conducts and organizes all of its activi-ties. Each of its activities creates value for custom-ers and the enterprise.

We can distinguish between primary activi-ties, such as production, marketing, finance andhuman resources, and support activities, such aslogistics, supply and after-sales service. To obtaina competitive advantage over its rivals, an enter-prise must either offer value to its customers thatis comparable or superior to that of the competi-tion (cost leadership strategy) or devise uniqueactivities that justify higher sales prices (differen-tiation strategy).

There is no universal strategy applicable toevery industry or enterprise. Each industry andenterprise is an individual case. However, inmany industries different winning strategies coex-ist. It is up to the enterprise to make strategicchoices concerning the type of advantage or com-petitive field. The table below shows examples ofstrategic choices made by certain industries.

Figure XII. Strategic upgrading process

��

��

��

��



monitoring upgradingof upgrading SUPstrategiesplan


plan

28

Country Industries Segment Strategic choices

Italy Shoe Top DifferentiationTaiwan (Chinese province) Shoe Bottom Cost strategyGermany Automobile Top DifferentiationRepublic of Korea Shipbuilding Middle Cost strategyJapan Automobile Middle Cost strategy

Shipbuilding Top DifferentiationFrance Agro-food Top DifferentiationTunisia Agro-food Middle Cost strategy

The summary of the overall strategic diagno-sis will provide suggestions regarding the strategyto be adopted and the plan of action to be imple-mented.

To judge by the results of an analysis carriedout by UNIDO on a selection of industrial enter-prises and a study of strategies adopted by Euro-pean enterprises in anticipation of the single Eu-ropean market, several strategic actions andadjustments must be introduced to give enter-prises competitive advantages. It is impossible to

provide an exhaustive list of these actions. Themain ones proposed by us for consideration byheads of enterprises are non-material actions witha high potential impact on costs and the differen-tiation of products and services.

These actions relate to improving methods,management practices and competencies (know-how, quality, technology, creativity) in both pri-mary and support activities. Their impact on themain functions in the enterprise is shown intable 8 below.

Table 8. Impact of price and differentiation strategies on functions in the enterprise

Functions Strategies Impact

Production Product cost advantage Standardization of production, automation,subcontracting

Marketing Positioning in price-sensitive marketsFinance Importance of management controlHuman resources Emphasis on productivity

Production Service cost differentiation Coordination of production, research and technical/commercial service with purchasing, marketingand sales

Marketing Investment in communicationsFinance Advantageous financing termsHuman resources Investment in technical/commercial and after-sales

services

Production Product differentiation Investment in flexible productionMarketing Focus on the value added produced by product

differentiationFinance Anticipate fluctuations in revenueHuman resources Ongoing training to ensure that staff are qualified

Production Service differentiation Ensure maximum flexibility of production processMarketing Develop image of competence and be open to

client commentsFinance Invest in financial innovationHuman resources Invest in personnel

Production Innovation differentiation Importance of research and development inprocesses and products

Marketing Develop image of competence and be open toclient comments

Finance Invest in financial innovationHuman resources Emphasize creativity

Production Marketing differentiation Standardized basic production with possibility offlexibility in finishing

Marketing Positioning as unique productFinance Invest in communicationsHuman resources Train for creativity, especially commercial

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B. Strategic considerationand upgrading

On the basis of the elements collected and therecommendations made in the strategic diagnosis,which is the first stage in the upgrading process,a particular choice generally crystallizes as to theactions to be taken to restore the viability andcompetitiveness of the enterprise. For several rea-sons, this choice calls for strategic considerationof the enterprise’s future prospects.

First of all, the new decade is a complex anduncertain one. It is unusual for the analysis of theenvironment in which the enterprise operates toresult in a single possible scenario regarding theevolution of the market, behaviour of competitors,development of new technologies or the attitudeof the authorities. Moreover, studies and inquirieshave shown that most enterprises in developingcountries use technologies that are sometimesunsophisticated. They often work as subcontrac-tors for clients and/or manufacturers of low-end tomedium-range products and operate on competi-tive markets where the threat of new entrants isgreat. Finally, the enterprise’s resources are bydefinition limited and thus have to be used to themaximum efficiency.

In this context, where the intensification andinternationalization of competition are continu-ously modifying the factors on which the successof an enterprise is based, not to mention its spe-cialization, it is vital for the enterprise to carry outmethodical and continuous strategic reflection inorder to identify in time the likely evolution of themarkets and success factors, the strengths andweaknesses of the enterprise in the face of itscompetitors and the possible orientations andstrategies to be implemented. It is thus essential toallow for several possible scenarios so as tooptimize the chances of upgrading and develop-ing the competitiveness of the enterprise.

With no claims to exhaustiveness, we presentin the following sections some of the most impor-tant strategies of the last decade that have beenproposed to help enterprises to recover. Thesestrategies could be used equally to upgrade enter-prises. The main strategies are growth, refocusingon the basic specialization, differentiation andpartnership.

C. Formulation of the strategy

Definition of a strategy, which is the second stagein the upgrading process, involves determiningthe objectives to be attained, the means to beused and the organizational model. For an enter-prise operating in a competitive market, the basicaim is obviously to improve performance (interms of productivity and growth) and competi-

tiveness and to consolidate the results achieved inorder to safeguard the future.

Based on the results of the diagnosis, a feasi-bility study has to be carried out for each possibleand realistic strategic choice, with account takenof the above-mentioned aim, the current situationof the enterprise and its possible development, theresources capable of being mobilized, the willing-ness of partners to act, the legal, financial, com-mercial, technical and human constraints, and thelikely evolution of the environment in which theenterprise operates. It is difficult to make an ex-haustive list of possible upgrading strategies, sinceeach enterprise is a unique case and there is nosingle strategy that can be used in all cases toimprove the performance of an industrial enter-prise. Moreover, it is possible to conceive anupgrading strategy by specific field of activity andas a function of the phase in the life cycle of eachactivity.

The choice of upgrading strategy can then bemade on the basis of a study of each of the pos-sible strategies in consultation with the actors in-volved: shareholders, senior management, bank-ers, suppliers, customers and staff. The study ofeach strategy will have made it possible to definethe objectives to be pursued, to clarify the waysand means for implementation and to determine“who does what, how and when”. In that way,the role and commitment of each actor is clearlydefined. The best strategy is the one that enablesthe objective to be achieved in a way that isacceptable to all actors concerned while usingthe fewest resources possible.

Figure XIII sums up the stages to be followedin the selection of a strategy or strategies. It hasthe advantage of including consideration of likelyconstraints and opportunities when the enterpriseupgrading strategy is being formulated.

D. Industrial enterprises andpossible upgrading strategies

For industrial enterprises, particularly those withglobalized export activities (such as the textileand agro-food industries, which are regarded asmature and highly competitive industries), thepossible strategic upgrading options proposed byus are compatible and can be combined. Thereare basically three options: re-centring, partner-ship and flexibility. Our contribution takes intoaccount the main characteristics of industrial en-terprises in developing countries. They are fre-quently small, with limited financial resources,underused production capacities and inadequatemanagement methods for basic marketing, qualityand design, and insufficient sources of commer-cial and technical information. The three strate-gies are described hereafter.

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*****

*****

*****

*****

Figure XIII. Formulation of enterprise upgrading strategy

** ***** ***

** ***** ***


Environmental Strengths andconstraints Strategic options weaknesses

and opportunities of the enterprise

Social and political Choice of strategic Values and aspirationsaspects options of management

Strategic alternativesaccording

to the scenarios

Choice ofupgrading strategy

Re-centring strategy

Re-centring of activities and resizing around the“basic specialization” are vital if the enterprise isto successfully penetrate free-trade areas. It canspecialize in products and markets in which it hasor could have specific expertise that sets it apart.This would enable it to create a personalizedimage vis-à-vis customers and competitors. TheBSN group (France), for example, abandoned cer-tain areas and focused on the mineral water sec-tor, increasing its geographical coverage in thesector and becoming the market leader in France,Italy and Spain.

The hasty and sometimes misplaced diversi-fication carried out by some enterprises during theyears of growth and/or market protectionism haveto be reconsidered with the opening and globali-zation of the same market. Misguided choicesmade by some enterprises in the initial planningof investments and/or their extension (taking placeeven in periods of stagnation) and implemented inmany cases without feasibility studies result inoversized and over-ambitious projects, as can beseen by the fact that the capacity utilization ratein developing countries is of the order of 50 percent only.

The re-centring strategy, developed in Francein the 1980s and after, consists of focusing on themost remunerative activities where the enterprisehas real competitive advantages. A fruit tree can-not bear fruit to the full unless the dead wood andsurplus branches are pruned; the same is true ofan enterprise.

This strategy involves withdrawal from activi-ties that are judged to be peripheral, strengthen-ing the main focus and diversifying into related orcomplementary activities. It is justified in the caseof many threatened enterprises operating in de-clining markets with high production costs andfinancial problems. This type of strategy has beendeveloped particularly by public and large privateenterprises operating in developing countries (Al-geria, Ethiopia, Egypt, Sudan, Syrian Arab Repub-lic, etc.) and in countries with economies in tran-sition (Albania, Hungary, Poland, RussianFederation, etc.). The financial constraints call forthe selective allocation of funds.

This strategic choice necessarily requireswide geographical coverage, increased by thefree-trade area agreement, but also a reduction inthe range of products to enable the enterprise tospecialize where it has greatest mastery in termsof quality, technology and market. It also involves

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a reduction in product diversity within a particu-lar range to permit specialization in top productsover which the enterprise has optimum cost, qual-ity and price control.

This specialization can give the enterprise apotential economic advantage through the combi-nation of experience and the effects of economiesof scale. It requires tough measures, includingwithdrawal and strengthening the competitivenessof basic activities. Withdrawal means giving upcertain assets (equipment, buildings, activities,etc.) connected with marginal or unfavourableactivities, the abandoning of some units unneces-sary for the functioning of the enterprise, or thepossible closure of unprofitable subsidiarybranches, workshops or production units. It in-volves vertical and/or horizontal fragmentation,outsourcing of some subsidiary activities and theabandoning of some “dead-weight” products, andcan also entail the mobilization of resources tofinance the development of certain activities orpriority upgrading actions.

Strengthening the competitiveness of basicactivities is an ongoing operation. It calls forgreater concentration of the enterprise’s resourceson a limited number of “star” products generatingsignificant cash flow in a rapidly growing market,with a view to increasing the performance andthe competitiveness of activities in which theenterprise specializes. It results in reduced costsand improved productivity (effects of the experi-ence curve, technological expertise and stockreduction), rationalized production, improvedproduct quality, better understanding of customerneeds and increased sales with fewer products.

Partnership strategy

Partnerships, alliances and mergers are types ofcooperation developed by European and Asianenterprises to deal with the challenges of the sin-gle market. These forms of cooperation involvecombinations of qualifications and resources andmake it possible to:

� Share some of the high fixed costs in-curred through development;

� Provide financing on favourable terms;

� Create synergistic effects and/or comple-mentarity through the combination ofmarketing, research and technology in-formation.

Efforts must be made by the authorities indeveloping countries to encourage and stimulatepartnership between local and foreign enterprises,in part by removing legal and regulatory barriersand differences in company law and tax regula-tions. Enterprises must take the initiative to con-tact partners and to discuss and enter into partner-ship agreements.

Given the fact that the internationalization ofthe economy has resulted in an increase in thescope for relations between enterprises, large,small and medium-sized enterprises in both de-veloped and developing countries must seek toexploit opportunities made possible through glo-balization and free-trade areas.

In a context of stiffer competition, the partner-ship and alliance strategy is one of the main pos-sible strategic responses for enterprise develop-ment. Agreements with external partners andalliances among competitors are rather specialforms of behaviour that depart from conventionalcompetition analysis, but they have an evidentstrategic dimension in today’s world that needs tobe analysed. Partnership between enterprises indeveloping countries and enterprises in developedcountries appears to us to be an ideal strategy forupgrading and development of industrial enter-prises. In a tight and highly competitive nationalmarket, industrial enterprises would have a lot togain from associating themselves with national orforeign enterprises with a view to pooling knowl-edge and expertise so as to create technological,commercial and financial synergies.

The canned tomato and chilli industry in Tu-nisia illustrates the utility of this strategy. Forty-sixenterprises produce a double concentrate of toma-toes and harissa required for a local market instagnation. Only a small amount is exported,around 10 per cent of production. The seeking andentering into partnerships with Spanish, French,Italian or Turkish enterprises could solve the out-put, diversification and export problems that sev-eral enterprises in this industry are experiencing.These partnerships would make it possible to intro-duce (a) new growing techniques (in Tunisia, out-put is 27 tonnes/hectare (t/ha) compared with 38 t/ha in Turkey and 54 t/ha in France; (b) better diver-sification for making all the products in the range(peeled tomatoes, tomato juice, ketchup, tomatosauce, spicy tomatoes, hot sauces, etc.); and (c)new forms of attractive aseptic packaging in com-pliance with modern marketing quality standards(glass jars, tubes, etc., instead of the welded metalcans that have been used for the last 30 years).These proposals would have the advantage of up-grading this industry and stimulating exports toEurope, the Middle East and Africa. The same strat-egy could also be applied to the clothing industryin Africa. Partnership with local or foreign enter-prises could help to resolve several management,marketing and distribution problems as well asproblems of scale, quality and others.

The success of this strategy depends princi-pally on the choice of partner. The profile of thepotential partner must be carefully studied be-cause the partnership should be one of equalitywhere the enterprise has the role not of a subcon-tractor so much as a fully-fledged partner. A part-nership is also and above all an exchange of in-

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formation and experience aimed at enhancing theinteraction between the partners and providingthe customer with better value for money.

This strategy helps to overcome some of thehandicaps and problems experienced by most in-dustrial enterprises in developing countries. Thepartnership agreement is usually concluded for alimited period. It does not threaten the independ-ence of the enterprise, which retains its identity andculture. Moreover, it is flexible, discrete and revers-ible. In many cases it represents far less of a com-mitment than a take-over or merger. Because of itsflexibility and reversibility, a contractual relation-ship is thus preferable to capital consolidation.

Through the cooperation that it entails, therelationship between the partners is an importantway of improving the quality of products andpackaging and of upgrading the products. A part-nership agreement can also increase productioncapacity, enhance the product range, offer rapidaccess to new technologies and/or new markets,give access to relevant technical and/or commer-cial information and generate synergies.

Furthermore, it is not expensive to set up andresults in greater competitiveness because of thereduction in the costs incurred by the enterprisefor purchasing and sales, marketing, publicity orstorage. The partnership agreement can also befinanced by one of the credit lines agreed withdeveloped countries.

Efforts have been undertaken in Egypt, Mo-rocco, Tunisia and other countries to identifyenterprises and put them in contact with foreignpartners through investment promotion agenciesand the organization of business hubs or forums.

Enterprises wishing to implement this strategymay, however, encounter difficulties in findingpartners offering a balanced input and may alsocome up against legal and regulatory barriers anddifferences in company law and tax regulations.

In developing cooperation on the nationaland international level, there still remains the taskin most developing countries of removing legaland tax obstacles so as to encourage and stimu-late the grouping of enterprises through the intro-duction of new legal forms, such as the economicinterest group, through the revision of companylaw, in particular the law on partnerships.

Flexibility strategy

Flexibility of human and material resources isanother recent strategic choice adapted by mostenterprises in industrialized countries. It can playa major role in the upgrading of training and skillsdevelopment of personnel and renewing andmodernizing equipment. To meet an increasinglyvaried and personalized demand and to establishthe capacity to respond promptly, an enterprisemust possess and mobilize flexible human andmaterial resources.

In a competitive market characterized by therapid and progressive evolution from a homoge-neous demand to a varied and personalized de-mand and by technological development (ma-chines with programmable digital command,computer-assisted design (CAD) in industry,modular design) making it possible to manufac-ture heterogeneous products more quickly and insmall batches without significant additional costs,striving for flexibility can become a strategy andmeans of upgrading an enterprise in the newcontext of globalization and free-trade zones.Flexibility is the ability to react continuously andpromptly to variations in the environment as theyoccur, without recourse to significant surplus pro-duction capacities or to supplementary labour.The strategy uses the new flexible technologies toreduce the diversity of intermediate products fromthe bottom up, to manufacture heterogeneousproducts without needing to readjust the produc-tion process each time, to increase the functionsperformed by a given product and, finally, to re-duce the reaction time (i.e. the time from designto production of a high-quality product at the timerequired by the customer without faults) to achange in the environment.

If it is not possible to mobilize large invest-ments and to have rapid access to completelyflexible workshops, a number of progressivemeasures and actions can be taken, for example:

� Reduce the heterogeneity of productsmanufactured through standardization,modular components, interchangeabilityand outsourcing;

� Enhance the flexibility of personnel toincrease multi-functionality and mobilitythrough training, motivation and profit-sharing. In a clothing enterprise, thegrouping of tasks in a single workstationand “multi-workstation” training of staffcan be intensified in order to be able torespond to multiple demands in a shorttime;

� Reorganize and redesign production inbatches to reduce intermediate storage,checks and waste;

� Give more responsibility to managementand non-management personnel throughquality circles, multidisciplinary brain-storming, etc.

� Strengthen the information, communica-tions and coordination mechanisms be-tween functions and between personnelso as to move towards a more integratedenterprise structure.

Table 9 shows the impact of these strategieson the resources and product mix and the inher-ent limits to their implementation.

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Conclusion

In the new context of globalization, the choice ofstrategy depends not only on the strengths andweaknesses of the enterprise but also and aboveall on the opportunities and constraints of its en-vironment.

Based on the results of the diagnosis of enter-prises and their environment in developing coun-tries, we have been able to identify three strategies,namely re-centring, partnership and flexibility, that

Table 9. Impact of upgrading strategies on resources and product mix

Strategies Impact on resources Impact on product mix Constraints/limits

Re-centring Transfer of assets Specialization in top products Difficulty in finding takers forMobilization of financial resources Pruning of non-competitive assets to be transferred

Reduction in certain costs products Psychological and human(storage, non-quality) Vertical and/or horizontal constraints on implementing

Some staff redundancies fragmentation draconian measures

Restructuring of operating Large geographical coveragemargins on top products Improved product quality

Partnership Minimal financial requirements Encourages vertical and Legal barriersand alliance Reduction in certain costs horizontal integration

(storage, non-quality, sales Possibility of increasing productionand purchasing, publicity) capacity through opening

Rapid know-how transfer of new marketsImproved access to technical and

commercial information

Flexibility Financial requirements for Reduction in reaction time to Relatively long implementationrenewal or addition of changes in environment time in periods of financialsome equipment, training, etc. Reduction in diversity of tension

Increase in production capacity intermediate productsMulti-functionality and greater Improved product quality

mobility of personnelReduction in certain costsProfit-sharing and motivation

of personnel (quality circles)

can be used for upgrading by most industrial enter-prises. We have suggested strategic actions thatmight serve as guidelines for the managers of theseenterprises rather than a strategic logic based onchoice of products, markets or technologies.

Finally, it should be pointed out that everyenterprise is a unique case whose strategic logicmust be conceived and constructed with accounttaken of its real and potential competitive advan-tages and the existing and likely opportunities andconstraints of its environment.

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V. Formulation of upgrading planThe upgrading plan, also known as a “businessplan”, is the logical follow-on from the diagnosisand choice of strategies. The summary of theoverall strategic diagnosis highlights the conflictsbetween the enterprise’s objectives, its potentialand its performance and makes it possible to pro-pose practical and realistic solutions for upgrad-ing and improving the competitiveness of theenterprise.

The summary of strategic choices can beused as a basis for developing an overall plancombining the objectives determined by the en-terprise and the ways and means necessary toachieve them. The chosen strategy defines in par-ticular the type of commitment required by theenterprise for the upgrading. This strategy is basedon the determination of a number of economic,financial and legal choices with account taken ofthe technical, social and legal constraints and therecommendations of the actors involved. Thechoices are developed and formalized in the in-dustrial enterprise upgrading plan.

The upgrading plan is the basic element forall negotiations. It clearly formalizes the contribu-tions requested and the conditions to be fulfilledfor the plan to succeed. Finally, it consists of aretrospective analysis of the enterprise’s situationand a projection of its activities for at least threeyears ahead.

What are the formal and substantive condi-tions for an upgrading plan? What are the condi-tions for success? How is it to be implementedand followed up?

A. Formulation of theupgrading plan

The formulation of the upgrading plan is the thirdstage in the strategic upgrading process (SUP) (seefigure XIV).

The upgrading plan, like the recovery plan,formalizes the commitment of the partners inter-ested in rescuing the enterprise, because the suc-cess of the recovery plan depends on the achieve-ment of consensus among the different partners,which is probably one of the most difficult aspectsto manage.

In order for the negotiations with partners tosucceed, the following procedure should beadopted by the manager responsible for the nego-tiation and for drafting the upgrading plan:

� It is essential to be thoroughly familiarwith the strengths and weaknesses of theenterprise, the results of the diagnosis, thestrategy to be adopted and the financialand economic choices selected for theupgrading plan;

� The manager must know the basic posi-tion of each partner and evaluate theeconomic and financial consequences ofeach position;

� The negotiation meetings must be wellprepared (date, venue, agenda, objec-tives, scenarios, constraints, etc.);

� To increase efficiency, negotiationsshould be conducted separately with

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monitoring upgradingof upgrading SUP strategies

plan


plan

Figure XIV. Strategic upgrading process

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each partner. Agreements or minutesshould be signed;

� Particular attention should be paid toimportant partners, especially associates,banks and staff representatives. Theyshould be kept informed of the progressin the discussions and negotiations andmay also be involved in making some ofthe important decisions that significantlyinfluence the upgrading plan.

The formal and substantive conditions for theupgrading are presented below.

B. Formal conditions for theupgrading plan

Extreme rigour is required when drafting the up-grading plan and its forecasts and it should coverall aspects of the enterprise with account taken ofits internal and external environment. The accept-ance of the plan by the actors involved dependsnot only on the reliability of the information, andthe credibility of the solutions and the proposedmeasures, but also on the form and quality of theplan itself. The actors will judge the plan mainlyby its form and content. Given its importance, thedossier should therefore be complete, precise andunambiguous. In Tunisia, for example, the Up-grading Bureau suggests that enterprises interestedin the programme should include an application,project file, copy of the diagnosis and upgradingplan in the upgrading dossier.

Bearing in mind the information needs of thepartners and the possibility of access to availableinternal and external information, the upgradingdossier should contain the following information:

� A presentation of the enterprise;

� An overview of its current situation;

� The upgrading actions;

� The upgrading conditions and assump-tions;

� The financial projections with and with-out upgrading.

As soon as the upgrading plan has beenadopted by the partners and the financial plan hasbeen finalized, the enterprise can present its dos-sier to the Upgrading Bureau for examination,evaluation and approval.

C. Contents of the upgrading plan

Presentation of the enterprise

This section should include:

� Date of establishment of the enterprise;

� Object of the enterprise;

� Capital structure, list of members of themanagement board or the associates,name of the statutory auditor and auditor;

� Registered office and locations of plantsand sales outlets;

� Development of capital since the estab-lishment of the enterprise;

� Names of enterprise’s banks;

� Products made by the enterprise;

� Principal markets of the enterprise;

� Tax benefits granted to the enterprise(where applicable);

� Total staff by category (senior manage-ment, engineers, middle management,workers), by status (permanent, casual)and by seniority;

� Organizational chart;

� Manufacturing processes and theoreticaland actual production capacities;

� List of principal capital expenditures.

Summary of strategic diagnosis

This summary should include:

� The activities in the previous three years(production, sales, staff, manufacturingcosts, production costs and profits);

� Strengths and assets in commercial, fi-nancial, technical, organizational andsocial terms;

� Current difficulties and weaknesses incommercial, financial, technical organi-zation and social terms;

� Financial position (summary of financialdiagnosis): audited balance sheet, perma-nent fund deficit, accumulated losses,amount of equity capital in net assets,indebtedness in relation to equity capital,permanent fund requirements, salariesand financial costs in relation to sales,etc.);

� Proposed upgrading solutions.

Upgrading strategies and actions

This section should include:

� Presentation of chosen upgrading strate-gies;

� Urgent measures and actions in the up-grading plan, highlighting the chosen ac-tions, contributions requested and ex-pected results in financial andcommercial terms and with regard to pro-duction, employment and staff reorgani-zation;

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� Timetable: immediate, short-term andmedium-term actions;

� Investment programme with presentationof a data sheet for each investment with:

Description of the project;Implementation period;Investment amount;Technical impact (gains in terms ofproductivity, maintenance, energy sav-ings);Method of financing chosen;

� Financing programme.

This programme should show the financialimplications of the plan: equity capital, subsidiesand loans. For each source of financing, theamount, type of repayment, timetable for utiliza-tion of the loan, duration and period of grace,interest rate, commissions and insurance premi-ums, if applicable, collateral demanded and itscost be shown.

Particular importance should be attached tothis programme. A delay in or refusal to financeall or part of the programme could jeopardize thesuccess of the upgrading plan. It is therefore ad-visable to include in this programme only thosesources of financing for which agreements in prin-ciple have been signed.

Upgrading conditions and estimates

(a) Conditions for success of the plan. Allthe conditions that need to be fulfilled for theupgrading plan to succeed should be enumerated:the requested contributions, the commitmentsundertaken, the tax and social benefits obtained,and the agreements concluded and commitmentsundertaken by shareholders, financial institutions,trade unions and public agencies and authorities.A detailed timetable with amounts and timingshould be drawn up;

(b) Risks incurred. A list should be made ofall the major potential risks that could signifi-cantly delay or prevent achievement of the objec-tives or practical implementation of the results ofthe plan, for example an appreciable delay in themobilization of contributions or implementationof commitments undertaken;

(c) Estimates and databases. The estimatesrelating to the sales and production programmesand the development of costs and products shouldbe determined with account taken of:

� The targets fixed for the coming years;

� The trends in the company’s figures overprevious years;

� The impact on the production and costplans of the technical actions providedfor in the upgrading plan;

� Commercial and technical studies carriedout.

Particular care should be taken when deter-mining these estimates in that they are used prin-cipally for making financial projections. Estimatesthat are too optimistic or too pessimistic couldhave a considerable impact on the forecast resultsand could thus mislead partners.

These estimates relate to the following ele-ments:

� Sales programme: estimate of the volumeand value of annual sales for the next fewyears by product and market;

� Production programme: estimate of an-nual production for the next few years byvolume, product and plant; also for sub-products;

� Raw material and consumables purchas-ing programme: forecast of the annualpurchasing programme for the next fewyears by volume, value, material andcurrency. The typical consumption ratesby product unit of the materials usedshould be determined and are useful forcalculating sensitivity or other factorswhere required;

� Production and operating costs: determi-nation of additional costs required forproduction, in particular:

Outsourced work, supplies and serv-ices;Miscellaneous management costs;Financial costs;Amortization;Levies and taxes.

Financial projections

After the upgrading and modernization con-ditions and estimates have been defined and de-termined, financial projections have to be made.They should include:

� Trading accounts, balance sheet fore-casts, and staffing and resources tables;

� Multi-year cash flow chart;

� Cash flow forecast;

� Economic profitability indicators and cer-tain financial ratios.

The upgrading plan should thus contain theprincipal financial forecasts described above.Taken together, these forecasts represent the planin figures, presenting the results and providing asummary of the plan. They also serve as a basisfor all negotiations and follow-up.

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SUMMARY OF A STRATEGIC DIAGNOSIS REPORT AND UPGRADING PLAN

Summary

1. OVERALL STRATEGIC DIAGNOSIS

1.1 General aspects1.1.1 Brief history and summary presentation1.1.2 Enterprise’s activities

1.2 Positioning of enterprise1.2.1 Production capacity and usage rate1.2.2 Production and sales1.2.3 Strategic positioning on the national level1.2.4 Analysis of the market on the national level1.2.5 Environment of the enterprise and institutional framework of the sector1.2.6 Technological differential and international positioning

1.3 Technical diagnosis1.3.1 General status of installations1.3.2 Implantation and site1.3.3 Production equipment1.3.4 Production organization1.3.5 Production monitoring and product quality control

1.4 Environmental diagnosis1.4.1 General assessment1.4.2 Management of environmental problems1.4.3 Liquid waste1.4.4 Gas waste1.4.5 Solid waste

1.5 Technical/commercial diagnosis1.5.1 Supplies1.5.2 Reception and storage of materials1.5.3 Sales1.5.4 Finished products and dispatch1.5.5 Distribution networks1.5.6 Promotion and communications1.5.7 Price

1.6 Management system diagnosis1.6.1 Administration of the enterprise1.6.2 Enterprise planning system1.6.3 Organizational chart1.6.4 Management style1.6.5 Human resources management1.6.6 Utilization of external expertise1.6.7 Information and management systems1.6.8 Quality system and management

1.7 Financial diagnosis1.7.1 Assessment of the financial situation1.7.2 Balance sheet analysis1.7.3 Operational analysis

1.8 General recommendations1.8.1 Enterprise strategy1.8.2 Financial management of the enterprise1.8.3 Marketing and sales1.8.4 Production1.8.5 Organizational chart and work organization1.8.6 Human resources management1.8.7 Consultancy, engineering and technical assistance

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2. UPGRADING PLAN

2.1 Upgrading objectives2.1.1 General objectives2.1.2 Expected results

2.2 Major upgrading items2.2.1 Corporate concept2.2.2 Markets2.2.3 Products and services2.2.4 Resources

2.3 Upgrading strategy

2.4 Recommended actions2.4.1 Immaterial actions2.4.2 Tangible investments

2.5 Budget forecast

2.6 Financing

2.7 Expected impact of the implementation of the upgrading plan

2.8 Implementation planning

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VI. Implementation and monitoringof the upgrading plan

The implementation of the upgrading plan thathas been adopted and accepted by the principalpartners of the enterprise is generally a long-termprocess requiring the commitment of all involvedparties. For an upgrading plan to succeed, theenterprise should attain all the objectives set inthe plan. The implementation of the plan involvesobtaining and putting into practice on schedulethe requested contributions, commitments andagreements made with partners. This normallyentails the immediate implementation of short-term survival strategies to increase profitability, aswell as medium-term strategies to consolidateprofitability and ensure the long-term competi-tiveness of the enterprise.

The implementation and monitoring of theupgrading plan is the fourth phase in the strategicupgrading plan (SUP) (see figure XV).

A. Prior conditions

With no claim to exhaustiveness, some of themany conditions for the success of the upgradingplan are described below.

(a) Judicious choice of the person responsi-ble for implementing the upgrading plan. Person-ality, competence, availability, willingness andinterest are the most essential criteria. The imple-mentation of an upgrading plan calls for the headof the enterprise to have a sense of organization,an ability to delegate and an aptitude in choosing

the people around him or her. The person respon-sible for implementation plays a fundamental rolein putting together the upgrading team, drawingup an organizational chart, delegating the neces-sary powers and defining responsibilities of thedifferent positions, and in actual implementationof the upgrading plan, particularly the decision-making processes, negotiation, mobilization ofmaterial and human resources, coordination andperformance measurement. This person may bethe head of the enterprise in a small or medium-sized enterprise or a senior manager (engineer ormanager of a large enterprise).

(b) Drafting of a detailed programme andtimetable for implementation of the upgradingplan with indication of the objectives to beachieved, the expected results in figures and theplanned activities by sphere of activity, divisionand department in each sphere with a list of theactivities and the timetable for their accomplish-ment (planned date of commencement and dura-tion).

(c) Rapid implementation of the plan. Assoon as the plan has been approved, it should beimplemented without delay. Any delay in imple-mentation, particularly in the mobilization ofmeans or the setting up of measures, could jeop-ardize the achievement of objectives and ex-pected results.

(d) Establishment of a good social climatebased on motivation and profit-sharing by person-

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Implementationand

Selection ofmonitoring SUP upgrading

of upgrading strategies

plan


plan

Figure XV. Strategic upgrading process

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nel. This involves informing personnel on the situ-ation of the enterprise and the objectives of theupgrading programme. The works committee, orstaff representatives where there is no committee,should be involved and informed of all decisionsrelating to personnel. According to an inquirydesigned by Cégos and carried out by Brilman(1986), the establishment of a social policy is oneof the common features of all successful recoveryprogrammes. This policy, says Brilman, should bebased on:

� “The courage to implement a policy oftruthfulness;

� The courage to establish intensive anddirect communication with personnel soas to avoid rumours;

� The courage to confront the trade unions;

� Renewed motivation of personnel.”

(e) Establishment of a simple follow-up andmonitoring system for staff, resources, means, andthe achievement of the expected results and ob-jectives.

Once the various management systems andmonitoring tools and the different measures de-scribed above have been set up, the person re-sponsible for upgrading will need to carry out thedifferent financial, organizational, technical andstrategic activities and actions provided for in theupgrading plan. The implementation planningshould be respected and, where necessary, re-vised as the programme is being carried out.

B. Implementation of theupgrading plan

From successful experiments in other countries itwould appear that the difficulty is not in the for-mulation of the upgrading plan but, above all, inits practical implementation by the enterprise. Atthis stage, the plan has been accepted by all orthe most important partners. The managementsystems and tools and mechanisms for monitoringthe upgrading plan have been devised and put inplace. The implementation phase covers the pe-riod from the decision to implement the plan untilthe enterprise has achieved the objectives set.

The implementing activities vary from oneenterprise to another. Each enterprise is an indi-vidual case with its own particular logic. Belowwe present some of the difficulties and problemsencountered by most industrial enterprises thathave implemented upgrading plans in Tunisia.

(a) Improving management systems. Withaccount taken of the weaknesses identified in thestrategic diagnosis, the following actions could beenvisaged. First, the reorganization of the enter-prise’s structure with a view to reducing costs and

improving productivity; second, reorganizationand stimulation of sales and marketing activities;then, introduction of a quality management sys-tem and computerized systems for better manage-ment of personnel, accounting, cash flow, invoic-ing, etc.; and finally, at the technical level, theimprovement and progressive introduction of flex-ible production systems and means so as to per-mit an efficient adaptation and rapid reactions bythe enterprise to the uncertainties and risks of theenvironment and the market, the introduction of aquality management system, etc.

(b) Personnel training. To carry out the ac-tivities cited above, it is often necessary to con-duct training and skills development programmesfor the head of the enterprise and the personnel soas to ensure greater staff flexibility and mobility.This aspect deserves particular attention in viewof its impact on productivity and on the enter-prise’s performance.

(c) Financial restructuring. While waitingfor the first financial resources to be mobilizedand in the case of enterprises in a precarious fi-nancial state, immediate measures can be takento improve cash flow by speeding up incomingpayments (more rapid delivery and invoicing,award of rebates for cash payment and large dis-counts for products in stock), slowing down out-going payments (negotiate longer payment termswith suppliers, reduce purchases, negotiate bankterms and loans) and suspending current invest-ments.

Financial restructuring is contingent on theprompt provision and mobilization of internal andexternal financial resources to enable the upgrad-ing plan to be executed. The various internal re-sources to be mobilized are contained in the fi-nancial plan, with indication of the due dates andamounts required. Among those that can be mo-bilized, there are resources from the transfer ofpart of the operating assets (particularly whenresizing the enterprise, i.e. transfer of independentsectors of activity) or non-operating assets (trans-fer of land, buildings, shareholdings, etc.); re-sources derived from a reduction in the workingcapital requirements with ensuing cash surplus(e.g. by reducing stocks or customer credit, usingsupplier’s credit, etc.), and resources made avail-able through self-financing and derived, for exam-ple, from reduced costs, productivity gains or in-creased sales.

The various external resources to be mobi-lized are listed in the financial plan with indica-tion of the due dates and amounts involved. Theyinclude:

� Equity capital to be provided by share-holders in connection with an increase inthe enterprise’s contributed capital. Thesefunds are the most advantageous since

41

they cost nothing to the enterprise, beingpaid back on profits;

� Subsidies and premiums granted by theState as part of the upgrading pro-gramme;

� Medium- and long-term bank loans to fi-nance investments and to reconstitute theworking capital;

� Possible consolidation of short-term loansand certain medium- and long-termdebts.

C. Monitoring of the upgrading plan

As has been pointed out, no enterprise is immuneto failure because even a healthy enterprise canhave symptoms of decline which need to be diag-nosed early on. In a permanently changing eco-nomic environment, constant vigilance is calledfor. Vigilance is a state of mind. For this reason,every enterprise, if it is to survive, needs to put inplace a “watchdog function”, monitoring mecha-nisms or a rigorous and regular system for moni-toring the functioning of the enterprise and itsposition within its environment.

The most serious error committed by mostmanagers, who almost always try to conceal theirdifficult situation, is to wait too long before react-ing and in this way compromise their chances ofupgrading or recovery. In our opinion, there areseveral reasons for delayed reaction by heads ofindustrial enterprises:

� Absence of a model for preventing diffi-culties and methods for monitoring theenvironment that are specifically gearedto industrial enterprises;

� Absence of an early warning system orlist of indicators of difficult situations indeveloping countries;

� Ignorance and/or scant interest by mostheads of enterprises in the financial, fiscalor social assistance available to enter-prises for recovery or upgrading;

� Delays in drawing up financial state-ments;

� Absence of forward management plan-ning and operating reports in most indus-trial enterprises;

� Confusion between a structural crisis andeconomic slowdown;

� Cash facilities granted by certain banks.

As pointed out in Le score de l’entreprise byM. Holder, J. Loeb and G. Portier, if difficultiesare realized at an early stage by the heads ofenterprises, less effort is required for recovery andupgrading during continued operation. In this

context and in order to provide rigorous preven-tive monitoring, on the basis of the French law of1 March 1984 on the prevention of difficulties inenterprises, and chapter 11 of the BankruptcyCode (1987) of the United States of America relat-ing to business reorganization, we propose inex-pensive operational monitoring instruments thatcan be used immediately and are particularly use-ful for industrial enterprises operating in turbulentor threatening environments:

� Diagnosis on a regular basis and/or eachtime shareholders, banks or the auditorrequests it; this diagnosis gives an insightinto the development of the enterpriseand enables it to react while the difficul-ties are reversible;

� Establishment on a regular and timelybasis (at the end of each half year) ofaccounting and financial documents (bal-ance sheet, income statement, cash fore-cast, budget) and their submission toshareholders, banks and the companyauditor;

� Drawing up of a streamlined operatingreport for interested observers, particularlyin small and medium-sized companies.This report includes indicators linked toresults and makes it possible to measureand evaluate actual performance in com-parison with forecasts. This system callsfor an explicit definition of the objectivesto be attained by the enterprise and itsoperational units, the inclusion of the staffconcerned in the determination of theseobjectives, and finally the drawing up,based on the upgrading plan, of annualand half-yearly financial forecasts,monthly investment and financing budgetsand monthly operating and cash budgets.

The forecasts and results of these budgetsshould be in conformity with those of the upgrad-ing plan. As the plan is implemented, the achieve-ments should be compared regularly with theforecasts contained in the plan. The discrepanciesshould be analysed and corrective actions under-taken in implementing the upgrading plan.

Conclusion

For industrial enterprises operating in developingcountries to take successful advantage of the newmarket system, which is much less protected thanhitherto and much more exposed to internationalcompetition, they must be upgraded and theirsystems, management modes and attitudes re-moulded. This upgrading must be designed tostrengthen the competitive position of the enter-prise and improve its access to international trade.

Successful recovery and upgrading experi-ments have shown that the strategic procedure,increased collaboration, mobilization and firmcommitment by all actors concerned are theprerequisites for the success of the upgradingoperation. With account taken of the financial,technical and social constraints of industrialenterprises in developing countries, we haveidentified and conceived a number of proposalsrelating to:

� Overall strategic diagnosis metho-dology;

� Choice of upgrading strategy;

Table 10. Non-material upgrading actions:UNIDO assistance provided to a dairy in Rwanda

Action/recommendation Actual/expected impact

Setting up of milk collection centres Restructuring of the network at a national level in RwandaOrganization of transport of milk to the dairy Increase in purchasing power in farming communitiesTraining of milk producers in villages Creation of jobs by increasing the quantity and quality of milk

Pending an increase in the local production of raw milk, Increase in the utilization of existing installation frommanufacture of dairy products using reconstituted milk 20 per cent to 50 per cent in 2002 and 100 per cent in 2003

Reduction in import of finished productsUse of reconstituted milk to permit regular flow of fermented milk

Production of new products such as ultra-high Development of new markettemperature (UHT), fermented extended shelf Increased sales volumelife (ESL) milk and ESL yoghurts with an Reduced import of finished productsextended range of flavours Increased possibility for exporting finished products

Ensuring that the raw milk does not contain antibiotics Improved quality of fermented milk and savings on importedthrough the widespread training of farmers ferments

Refrigeration of raw milk at 4°C from receipt to reception Increased productivity and quality through improved workat plant, storage and then heat treatment organization

Pasteurization of fermented milk at 95°C before Reduced risk of deterioration of product during transportprocessing and distribution and increase in life of fresh product

Homogenization of milk, recovery of cream with Reduced losses, sale of new products and increased40 per cent fat and transformation into pasteurized profitabilityprocessed cream and butter

Provisions for automatic regulation of temperature Efficient cleaning of plant, improved quality, reduced lossesand concentration of cleaning solutions Estimated 5 m³ water saving per day

Provision of a vat to recover water in cleaning-in-place Clean process and CIP water available(CIP) system and introduction of automatic sorting Reduction in production stoppages as a result of water

Provision of 20 m³ daily storage vat with epoxy resin shortagesor stainless steel inner lining

Provision of plastic crates to store and distribute products Reduced risk of product loss during handling and transport

Introduction and monitoring of operating modes and Consistent and reliable quality of dairy productsquality plans in accordance with Good ManufacturingPractices (GMP) and HACCP

Assistance in the setting up of a marketing system Loyal clientele, increased sales, increased market share,committed staff

Creation of private integrated agricultural initiative (IAI)

Introduction of the proposed maintenance, hygiene Starting up of butter packing machineand safety plan Regular supply to yoghurt and fermented milk packing

machines to control production times

Reduction in volume of water used and processing Better environmental protectionof waste water

Reduction in packaging waste

Establishment of several sales kiosks for dairy products Increased saleson franchise basis Additional jobs created

� Priority upgrading actions such as intan-gible investments in response to the diffi-culties and problems encountered by themajority of small and medium-sizedenterprises. These actions relate to im-proving the management system, train-ing, financial restructuring, quality im-provement, etc.;

� Simple implementation and monitoring ofthe upgrading plan adapted to small andmedium-sized enterprises, in particularthe setting up of a streamlined operatingchart and regular diagnosis.

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Part Two

International experience of restructuringand upgrading

45

I. Programme for modernizing and upgradingindustry in Portugal1

the accent being placed on traditionaltechniques at the expense of workingcapital.

In this situation, it had become vital for theGovernment authorities to include in their indus-trial policy an integrated programme aimed atremedying the above-mentioned weaknesses. Thefollowing objectives were determined at the time:

� Improvement in the functioning of themarkets and creation of conditions con-ducive to effective internationalization ofindustrial enterprises in Portugal;

� Reduction in dependence on imports,notably by diversifying energy sources(by reducing reliance on oil) and stimu-lating the capital and intermediate goodssectors;

� Strengthening competitiveness by diversi-fying investments, which would nolonger be aimed solely at direct produc-tion but also at techniques and technolo-gies;

� Adaptation of techniques to demand toimprove technological potential andproducts that could be manufactured.

Once these objectives had been set, the Por-tuguese Government negotiated a programmewith the European Commission in 1988 toachieve them and to close the economic gap thatseparated Portugal from the highly developedcountries of the European Community.

In June 1988, the Council of Ministers of theEuropean Community approved a budget packageof 1 billion ecus in subsidies and 1 billion ecus inloans from the European Investment Bank (EIB) tolaunch a special Portuguese industry developmentprogramme called PEDIP, to which Portugal alsoallocated 500 million ecus from its nationalbudget.

Since that time, Portuguese industry has ben-efited from funding from the European Union.PEDIP I (from 1988 to 1993), PEDIP II (from 1994to 1999) and POE (from 2000 to 2006) have be-come major elements (but not the only ones) inthe upgrading of Portuguese industry.

This document briefly describes the first twoprogrammes.

Portugal joined the European Community in1986. At that time the situation of Portuguese in-dustry was as follows:

� Insufficient specialization based for themost part on a few low-capacity wealth-creating activities;

� Unbalanced structure, strongly depend-ent on other countries for raw materials,capital goods and energy resources;

� Enterprise development strategies focusedon direct production, little interest in in-vestment in innovative fields, training,information, modern management andorganization techniques;

� Unbalanced industrial structure, com-posed mainly of small enterprises withfew associations and little regular coop-eration;

� Relations to international enterprises lim-ited to export networks, without long-term commitment, and insufficient repre-sentation in international organizationsplaying a major role in decisions on thefuture of industry and commerce;

� Few research resources, concentrated inuniversities and cut off from industrialreality;

� Technological infrastructure not gearedto training, information, technical assist-ance and research;

� Poorly qualified human resources at ex-ecutive, management and labour levels;low quality and productivity levels, insome cases as little as one quarter of thatof other members of the Community,thereby compromising long-term com-petitiveness;

� Small economic margin and mediocreperformance of factor inputs;

� Inability to develop the industrial situa-tion because of the imbalance in invest-ment in terms of the number of transac-tions and the amounts concerned in eachof them, and low degree of integration,

1Alberto José Santana, Director of PEDIP I and PEDIP IIModernization and Upgrading Programmes from 1988 to1996, September 2001.

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A. PEDIP I (1988-1993):modernization and upgrading

programme

This programme, originally planned to run from1988 to 1992, was extended until 1993. It had abudget of 1.5 billion ecus in subsidies and 1 bil-lion ecus in loans and was based on four priorityfocuses agreed by the European Community andthe Portuguese Government:

� Focus 1: speeding up the modernizationof the support infrastructure for the indus-trial sector;

� Focus 2: strengthening the basis for voca-tional and continuous technical training;

� Focus 3: directing financing towards pro-ductive investments in enterprises, par-ticularly small and medium-sized enter-prises;

� Focus 4: improving productivity of smalland medium-sized enterprises and qualityin industry.

The various elements associated with thesefour focuses were co-financed by the EuropeanCommunity through a number of funds: a creditline specially opened for PEDIP, the EuropeanRegional Development Fund (ERDF) and the Eu-ropean Social Fund (ESF).

The programme was structured around thespecific features of these three funds and had thefollowing characteristics:

� Temporary, for five years;

� Integrated, in that they were to cover abroad range of measures to stimulate theupgrading of the industrial sector;

� Horizontal, in that they were applied tothe entire territory of Portugal;

� Adjustable at any time of their implemen-tation.

They covered seven operational programmes(see table 11), six of which related to the focuses

mentioned above, the seventh being devoted tosupport activities (spreading of information, im-plementation and monitoring of the programmeas a whole).

As part of its industrial policy, Portugal thendefined two complementary strategic programmes:

� Integrated programme for informationtechnology and electronics (PITIE);

� Capital goods industry development pro-gramme (PRODIB).

In order to achieve the above-mentioned ob-jectives, the PEDIP programme provided directsupport to industrial enterprises implementingprojects aimed at:

� Innovation, modernization and upgradingof the production structure;

� Acquisition and development of newtechnologies;

� Creation of new industrial units in sectorswith growth potential;

� Strengthening of human resource man-agement and technical capacities in in-dustry;

� Promotion of quality, industrial designand marketing by means of dynamiccommercial strategies;

� Improvement in the productivity of pro-duction factors.

B. Implementation structure:PEDIP Management Office

The implementation structure was establishedwith account taken of the programme’s temporaryand variegated nature and of the operationalstructure of the Ministry of Industry.

In view of the temporary nature of the pro-gramme and the need for flexibility, it was de-cided not to create too heavy a structure.

Given the fact that PEDIP was integrated,since it covered several strategic and horizontalprogrammes, and that it needed to be managedby an organization capable of coordinating allmeasures implemented by the above-mentionedsectors, a PEDIP management office was speciallyset up and provided with the flexibility requiredfor achievement of the objectives set.

C. Description of programmes

Programme 1:Basic and technological infrastructures

Subprogramme 1.1: Basic infrastructures

The following strategic measures were tar-geted:

Table 11. Operational programmes

StrategicPriority sectoralfocuses Operational programmes programmes

Focus 1 Basic and technologyinfrastructures

Focus 2 Vocational training

Focus 3 Promotion of productioninvestment

Financial engineering

Focus 4 Improving productivity

Industrial quality and design

Spreading of information,implementation and monitoring

PIT

IE

PR

OD

IB

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� Strengthening of the road network servingindustrial centres;

� Promoting the development of a railwayinfrastructure and the equipment neces-sary to serve the main freight routes forindustry;

� Support in the development of a port in-frastructure and corresponding installa-tions in industrial zones;

� Promoting the construction of a supportinfrastructure for activities and businessassociations (exhibition halls, multi-pur-pose buildings for training and generalassistance for commercial activities, etc.);

� Support in the improvement of other es-sential infrastructure for industrial activ-ity, particularly in disadvantaged regions;

� Promoting the development of energyinfrastructures, in particular networks forthe transport and distribution of electric-ity and combustible gases.

Subprogramme 2:Technological infrastructure

The following priorities were defined:

� Assistance to small metrology laborato-ries in improving the quality of theirproducts;

� Development of technology centres pro-viding support to enterprises in the indus-trial sector;

� Encouragement to institutes specializingin new technologies to establish con-structive relations between research andproduction, especially in strategic inno-vation sectors;

� Creation of centres of excellence tostrengthen the interaction between re-search and industry in interdisciplinaryhigh-technology fields in strategic sec-tors;

� Establishment of transfer centres to pro-mote general utilization of technology inmultisectoral enterprises, particularly instrategic innovation sectors;

� Creation of demonstration units to in-crease technical knowledge in specificfields so as to enable the potential of newproducts and new technologies to betaken advantage of without delay;

� Fostering the creation of business incuba-tors devoted in particular to technologicalinnovation;

� Encouragement of the setting up of tech-nological parks and nodes.

Programme 2: Vocational training

Various measures were introduced on thebasis of what were considered to be the priorityobjectives. They were chosen to supplement thesupport measures and other programmes, includ-ing the Regional Development Plan (RDP), and tomeet the training needs of the industrial sector.The following priorities were determined:

� Medium- and long-term training of mid-dle and higher management in specificmanagement and technology fields;

� General training to implement the meas-ures financed by PEDIP;

� Setting up of training establishments insectors considered important for indus-trial development, where the traditionalsystem was proving to be deficient;

� Training of researchers to make good theshortcomings discovered in staff profilesand to help with the upgrading and mod-ernization of enterprises;

� Improvement in the quality of trainingthrough the setting up of establishments totrain trainers and teachers and to subsidizethe writing and publication of educationalmaterial for projects financed by PEDIP.

Programme 3:Promotion of production investment

The structural imbalance in the national pro-duction system made the Portuguese economyextremely vulnerable. It was therefore necessary,in a relatively short time, to adapt and upgradethe industrial sector to enable it to take advantageof an open economy. Programme 3 was designedspecially to directly encourage enterprises tomodify their structures, to modernize them and tohelp them reorganize so as to ensure their long-term competitiveness and independence.

It thus aimed essentially at stimulating invest-ment in industrial enterprises in the process ofmodernizing (upgrading) their structures and in-terested in developing technology, innovating,improving the quality of their products, recyclingenergy and protecting the environment.

Programme 4: Financial engineering

To speed up industrial development, the con-ditions for financing enterprises needed to be im-proved.

Programme 4 was established with this inmind with a view to creating the necessary finan-cial conditions for general modernization of in-dustrial enterprises, to adapting credit mecha-nisms to the upgrading plans and providing along-term and balanced financing framework forenterprises.

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The programme was designed in the form ofmeasures to supplement and strengthen incentiveplans established primarily for small and medium-sized enterprises in cooperation and collaborationwith credit institutions. The majority of the re-sources available under this programme were de-voted to the creation of two risk capital enter-prises (50 per cent of whose capital was financedby PEDIP).

Programme 5: Increasing productivity

Programme 5 aimed at improving the pro-ductivity of enterprises through demonstrationsand information campaigns with a view to in-creasing the efficiency of factor inputs, or throughassistance in organizing operations that had thesame objective but did not fit into any otherPEDIP operational programme because of theirextreme specialization.

The planned activities covered two areas:

� Support for new techniques and tech-nologies; demonstrations, the spread ofinformation and promotion within enter-prises to boost productivity;

� Assistance in implementing projects relat-ing to factor inputs that were not suffi-ciently developed in other PEDIP pro-grammes, particularly with regard toorganization and management of produc-tion, supply and distribution, energy, andquality and industrial design.

Programme 6: Quality and industrial design

Given the strategy of turning Portuguese in-dustry into an open market in preparation for thesingle European market, the competitiveness as-pect was increasingly subordinated to factors con-nected with management capability; at the sametime, there were also problems of quality and in-dustrial design.

A series of measures was therefore requiredwithin this programme to define quality criteriaand to integrate them into a coherent and com-prehensive structure so that the basic objectives ofPEDIP regarding quality and industrial designcould be achieved.

The structure defined for this purpose tookaccount of the general concern about quality,which was one of the main priorities of PEDIP,and the expected impact of the other pro-grammes, and also of the specific objectives ofthis programme, namely:

� Strengthen the structures of the NationalQuality Management System (NQMS) toguarantee and improve quality and createthe basis for satisfying Community criteria;

� Promote respect for standards or techni-cal specifications and the introduction of

quality management policies in enter-prises;

� Promote consumer rights and good cus-tomer/supplier relations;

� Make industrial design an essential ele-ment of the production process;

� Support mechanisms that fostered the con-clusion of bilateral agreements to ensurethat national standards were accepted inother countries of the Community.

Programme 7: Distribution of information,implementation and monitoring

The scope of PEDIP, its objectives and therelated human and material resources made itnecessary to devote particular attention to its im-plementation and to ensure that it was carefullymonitored so as to guarantee the proper use ofCommunity funds.

Moreover, since PEDIP’s main objective wasthe modernization and upgrading of Portugueseindustry, it had also to consider the enterprisesthemselves, particularly small and medium-sizedenterprises, which were geographically dispersedand had difficulty in accessing information. Thesuccess of the programme was therefore cruciallyreliant on an information mechanism that wouldfoster the development of projects in line withPEDIP’s main objectives and capable of beingintegrated in the PEDIP programme.

PEDIP did not directly finance industrial de-velopment; its aim was rather to provide the in-dustrial sector not only with clear and precise in-formation on the available assistance but also tocoordinate the means and conditions necessaryfor this assistance to bear fruit.

Integrated programme for informationtechnology and electronics (PITIE)

The primary objective of PITIE was to fosterthe development of Portuguese industry in theinformation and electronics sector by establishinga strategy to promote its modernization and ex-pansion.

It was designed not only to create and de-velop enterprises that were making efforts to mod-ernize the Portuguese economic structure but alsoto contribute to the restructuring of the industrialsector.

Capital goods industry developmentprogramme (PRODIB)

In view of the strategic importance of capitalgoods industries in strengthening the manufactur-ing structure in Portugal and making good thedeficit in the commercial structure, a sectoral pro-gramme was launched for the horizontal and in-tegrated development of those industries within

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the framework of the assistance provided byPEDIP, which was adapted as a result.

The programme was designed to increase theweight of capital goods industries in the domesticindustrial product during the PEDIP programmeand, at the same time, to improve quality throughthe use of more sophisticated equipment adaptedto the growing needs of the user sectors.

The instruments used were generally thesame as those for the PEDIP operational pro-grammes (1, 2, 3, 5 and 6) to which the capitalgoods industry had preferential access. They in-cluded maximum or joint incentives, guaranteeincentives up to a defined ceiling and the possi-bility of presenting a single application for differ-ent types of proposed assistance.

D. PEDIP II (1994-1999):modernization and upgrading

programme

PEDIP II, designed and managed by the team thathad formulated and implemented PEDIP I, fol-lowed the same direction as the previous pro-gramme while indisputably taking advantage ofthe experience that had been gained on the way.

The situation in 1994 had, however, changedconsiderably in comparison with 1988: (a) thebusiness environment had undergone profoundchanges as a result of the industrial policy imple-mented during PEDIP I; (b) the government au-thorities had already acquired some experience inthe implementation of this type of programme;and (c) the rules governing structural funds hadevolved. The design and structure of PEDIP II hadtherefore to be adapted to this new environment.The differences between PEDIP I and PEDIP II canbe summed up as follows:

� The aid was redirected towards inte-grated projects;

� A strategic analysis was demanded forprojects having a great impact on thestructural environment;

� Diagnostic assistance was systematicallyprovided through the use of the enter-prise’s own resources or external consul-tancy;

� Apart from the advantages of the projectitself, the selection criteria took accountof its effects on the enterprise after imple-mentation;

� Loans were set up for industrial invest-ments;

� Financial engineering mechanisms to re-duce financing costs for small andmedium-sized enterprises were strength-ened;

� Anticipatory measures were taken to rem-edy natural weaknesses of the market;

� Greater external participation in manage-ment was planned, particularly with re-gard to the financial system;

� The social partners were involved moreofficially and to a greater extent in theprogramme monitoring;

� A suitable evaluation system was created.

PEDIP II programme

PEDIP II benefited from the experience of PEDIP I.In the design of PEDIP II, industrial policy

was coordinated with a large number of associ-ated policies. This avoided the dissipation of effortand wastage of funds in the areas where pro-grammes connected with other policies (transport,communications, education, land planning, re-search and development, etc.) were better able tooffer incentive measures. Other programmes werecreated for this purpose as part of the RegionalDevelopment Programme (RDP).

The main aims of PEDIP II were to foster asustained improvement in the competitiveness ofPortuguese industrial enterprises, to strengthentheir capacity to adapt to the rapid evolution oftechnologies and markets, to encourage moderni-zation, upgrading and diversification and to pro-mote the internationalization of industrial struc-tures.

Relative importance of PEDIP programmes

The allocation of the total budget package to the differentprogrammes is presented in the table opposite. Programme 3 formodernization and upgrading of the manufacturing system had thelargest allocation.

It should not be concluded, however, that programmes 5 and 7 wereminor ones. They were designed to support less costly projects requiringintangible investments that nevertheless helped considerably to improvethe competitiveness of enterprises.

PercentageOperational ofprogramme budget

Programme 1 34Programme 2 10Programme 3 41Programme 4 7Programme 5 4Programme 6 3Programme 7 1

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Areas of activity and beneficiaries

To achieve these objectives, the programme oper-ated on three different levels:

� Structure and organization of enterprises;

� Business environment;

� Behaviour of enterprises.

Regarding the structure of enterprises, themost tangible support consisted in the co-financ-ing of various development project elements. Butthe programme provided equally important indi-rect aid by improving infrastructures and financ-ing as requested by the enterprises.

In budgetary terms, industrial enterpriseswere the principal beneficiaries of the programme(accounting for around 57 per cent of the budget)and were able to exploit the planned benefitsthrough a specific incentive system—SINDEPEDIP—which combined all forms of aidnecessary for modernization and upgrading.

enterprises, such as management, quality, indus-trial design, innovation, cooperation and training,acting as a catalyst for the incentives provided forin the different systems. Assistance was also of-fered to make known successful examples of in-novative management techniques, forms andprocesses so as to encourage similar investmentsin other enterprises by means of the most appro-priate incentive system.

— Enterprise incentive system

The incentive system relating to strategies forindustrial enterprises—SINDEPEDIP—in-cluded a group of measures that could beapplied in all enterprises fulfilling certainpredefined conditions.The system included the following detailedgroups of measures:

� Aid in the evaluation of the enter-prise: aimed at encouraging enter-prises wishing to carry out, with theassistance of external bodies, diag-noses, studies and audits to helpthem to take strategic measures todevelop their activities;

� Aid in implementing integratedcommercial strategies: applicable toall projects involving a fixed capitalinvestment of more than 100 millionescudos (500,000 euros);

� Aid to small enterprises: aimed athelping small enterprises to modern-ize by allowing them to carry outthe small investment projects theyrequired to develop. For larger pro-jects, these enterprises could takeadvantage of the assistance de-scribed in the previous point;

� Aid in productivity and demonstra-tion of industrial expertise: aimed athelping enterprises to improve theirproductivity through a range of meas-ures, principally by encouragingthem to carry out demonstrations andpublishing the results so that otherenterprises operating in the same sec-tor could follow their example;

� Support in inter-enterprise coopera-tion: aimed at promoting coopera-tion between small and medium-sized enterprises to enable them toachieve economies of scale and at-tain the desired level of competitive-ness which otherwise would havebeen out of their reach;

� Aid in research and development:aimed at encouraging enterprises toinvest in innovation by devising newproducts and procedures;

Note:

PEDIP II was divided into five operationalsubprogrammes, the sixth being devoted tomanagement, monitoring and evaluation of theprogramme as a whole. Each of thesesubprogrammes contained several measures for aparticular type of activity.Nevertheless, in order to simplify access bybeneficiaries to the programme, all measuresaimed at the same type of beneficiary (technologyand quality infrastructures, enterprises,professional associations, technology institutionsand financial system) were grouped together inincentive systems.

The question of the business environmentwas dealt with in close coordination with otheroperational programmes in the Community sup-port framework so as to concentrate resources onareas of particular interest to the Ministry of In-dustry and Energy.

Activities to create a favourable business en-vironment targeted different types of beneficiary:technical, technological and training support in-frastructures, professional associations and organi-zations belonging to the financial system.

Support was provided through the followingincentive systems: SINFRAPEDIP (strengtheningof technology and quality infrastructures),SINETPEDIP (strengthening of technical institu-tions), SINFEPEDIP (financial engineering aid toenterprises) and SINAIPEDIP (professional asso-ciations).

To influence the behaviour of enterprises,PEDIP II relied on a series of voluntary measures.Altogether, these measures affected factors thatwere not directly productive but contributed toimproving and enhancing the competitiveness of

51

� Aid in industrial quality: aimed atencouraging the certification ofquality assurance systems and prod-ucts and the calibration of instru-ments. Through this specific aid, theprogramme sought to promote thecertification and installation of inte-gral quality management systems inenterprises;

� Support in the utilization of the in-dustrial property regime: aimed atencouraging enterprises and indi-viduals to register patents;

� Assistance in the use of the capitalmarket: aimed at enabling small andmedium-sized enterprises to gain ac-cess to the unlisted securities market.

Types of incentives provided forby SINDEPEDIP

PEDIP II provided both direct financialsupport and indirect mechanisms to en-courage the financial system to offer fa-vourable products and conditions morein line with the needs of small and me-dium-sized enterprises.

The direct assistance provided throughthe various types of aid described abovewas available in the form of:

Subsidies: for investments that werenot directly productive;Interest-free loans: for investments thatwere directly productive.

The amount of aid depended on theoverall analysis of the nature of theproject and the type of incentive (loan orsubsidy). It could thus vary from 30 to70 per cent in the case of subsidies andfrom 40 to 80 per cent in the case ofloans.

— Incentives to foster an environment morefavourable to enterprises

In this area, one of the principal objectives ofthe PEDIP II programme was to strengthenthe infrastructures created or strengthenedduring the previous programme. The ideawas to provide these infrastructures with theconditions necessary for their operation, ei-ther by granting aid to strengthen their hu-man, administrative or managerial capacities,or by increasing their market share amongindustrial enterprises.The programme helped to strengthen the fol-lowing structures: technology and quality in-frastructures, associations, particularly busi-ness associations, industrial support servicesand technology institutes.

As mentioned earlier, the support to thesestructures was organized through thespecific incentive systems (SINFRAPEDIP,SINAIPEDIP, SINETPEDIP and SINFEPEDIP).While recognizing the importance of theabove-mentioned structures, the PEDIP IIprogramme devoted particular attention tostrengthening technological infrastructures,since these support structures, which were ofcardinal importance with regard to innova-tion, were judged to be indispensable to thegrowth of long-term competitiveness of smalland medium-sized enterprises.The PEDIP II programme endeavoured tostrengthen this type of infrastructure, whichwas not well developed at the time, in sev-eral ways:

� Assumption of a large proportion ofcertain types of operational ex-penses required for the creation andupgrading of technical and manage-rial competencies;

� On the demand side, granting ofconsiderable aid to enterprises usingthe services provided by these sup-port structures (maximum aid of 80per cent being granted to enterpriseshaving recourse to them);

� Assumption of a large proportion ofthe expenses connected with high-risk projects concerning innovativeproducts or processes of interest toseveral enterprises;

� Encouragement of innovative pro-jects contributing to the develop-ment of enterprises, proposed byconsortiums of enterprises and sup-port structures.

The financing mechanisms to which smalland medium-sized enterprises had accesswas a further important method of stimulat-ing the economy.In 1994, in spite of the development of finan-cial products, small and medium-sized enter-prises in Portugal were still disadvantagedcompared with their competitors in more de-veloped countries. The PEDIP II programmethus made an important contribution in thisarea thanks to the SINFRAPEDIP incentive sys-tem. The following measures were proposed:

� Continued promotion of venturecapital;

� Increased financing by encouraginginvestments (some with fixed, otherswith variable returns);

� Aid in setting up a system of mutualguarantees in Portugal;

� Aid for fixed-capital managementfunds.

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— Forward-looking measures

Given the imperfections of the market and theneed to speed up the pace of change in orderto safeguard the competitiveness of Portu-guese industry, it was felt that this programmeshould offer more forward-looking measuresthan PEDIP I so as to encourage activitiesdeemed essential for the development of en-terprises in precisely those areas where mar-ket forces were insufficient to enable theseactivities to emerge spontaneously and rap-idly. These measures could not, however, besimply defined at the whim of the governmentauthorities; they needed to be the product ofsound cooperation between the authoritiesand the business community through the inter-mediary of the associations that represented it.The following areas were envisaged:

� Quality and industrial design;� Inter-enterprise cooperation and up-

grading of enterprises;� Internationalization of industrial

strategies;� Innovation and technology transfer;� Increased environmental awareness;� Productivity objectives and demon-

stration projects;� Promotion of technological infra-

structures in industry;� Tasks connected with energy output.

Vocational training

PEDIP II was designed in such a waythat there was no provision for trainingindependent of the investment projects.For this reason, due account had to begiven to human resources in the diagno-sis carried out to justify the investments.To satisfy this requirement withoutharming the programme design, an inde-pendent subprogramme was createdconsisting of four operational measures:

The first two measures were de-signed simply to integrate trainingexpenses in the investment projectsfor both the organizations offeringsupport services to industry and theindustrial enterprises.The third measure was designed tomake up the shortcomings in train-ing and, in cooperation with thevarious business organizations, tomodify or stimulate the demand byenterprises for training.The fourth measure was aimed at fi-nancing a technical support structurefor voluntary actions such as studiesand awareness-raising campaigns.

Programme management

The structure of PEDIP I was retained, i.e. a man-agement office with a small staff supported byvarious general departments and services of theMinistry of Industry to implement the various in-centive systems and anticipatory measures.

Based on the experience of PEDIP I, PEDIP IIalso had a management, monitoring and evalua-tion subprogramme.

Although this subprogramme was subsidiaryin budgetary terms, it was nevertheless vital to thesuccessful implementation of PEDIP II. It plannedthe financing of activities essential to the pro-gramme, namely communicating, monitoring andstrengthening the forward-looking measures andevaluating their impact.

The communication of information about theprogramme to all potential users was fundamentalto the achievement of the programme’s aims.

The monitoring activities made it possible toensure that public funds were properly used.

The evaluation proved very useful in theelaboration of future industrial development pro-grammes.

Programme budget

The public financing for PEDIP II (EuropeanUnion and national budget) amounted to2.3 billion ecus.

Around 57 per cent of this budget was allo-cated to the SINDEPEDIP system (assistance inupgrading enterprises).

E. Results of PEDIP I and II

Results of PEDIP I

The deadline for presentation of projects forPEDIP I was set at 31 December 1993.

Table 12 shows the projects received andapproved for implementation within the pro-gramme framework.

An independent organization evaluated theprogramme and published a report, which clearlyshowed that PEDIP I had made a considerablecontribution to the modernization and develop-ment of Portuguese industry.

Results of PEDIP II

The deadline for presentation of projects forPEDIP II was set at 31 December 1999 and theprogramme ended officially at the end of 2001.An independent advisory board has been en-trusted with the ex post evaluation.

Table 13 gives a summary of the projectsreceived and approved and the aid granted.

53

Table 12. PEDIP I summary

(In millions of escudos)

Projects received Projects approved

Programmes Number Investment Number Investment Aid

Basic and technological infrastructure 637 238,339 359 130,906 90,424

Vocational training 1,005 71,885 2,082 30,436 21,328

Promotion of production investment 6,074 848,354 2,632 445,622 96,105

Increasing productivity 2,229 92,415 1,009 37,124 15,674

Quality and industrial design 995 24,351 461 12,354 9,069

Total 10,940 1,275,344 6,543 656,442 232,600

Financial engineeringa 7,590

aParticipation in venture capital enterprises and investments.

Table 13. PEDIP II summary

(In millions of escudos)

Projects received Projects approved

Incentive system Number Investment Number Investment Aid

SINFRAPEDIP Aid in strengthening technologyand quality infrastructures 242 36,711 220 35,162 14,876

SINAIPEDIP Aid to industrial support services 281 34,019 227 30,962 15,467

SINDEPEDIP Aid to industrial enterprisesin formulating strategies 7,060 1,957,059 5,597 14,443,345 337,296

SINFEPEDIP Aid to industrial enterprisesusing financial engineering mechanisms 20 48,933 18 44,933 22,905

SINETPEDIP Aid in strengthening technology institutes 13 16,431 13 16,431 11,319

Subtotal 7,616 2,093,153 6,075 14,570,833 401,863

Anticipatory measures 246 93,329 241 91,994 57,814

Total 7,862 2,186,482 6,316 14,662,827 459,677

Note: 1 euro = 200,428 escudos.

54

II. The Tunisian national upgrading programmeFor Tunisia, 1995 was marked by the launching ofthe post-adjustment stage and the signing of thefree-trade area agreement with the EuropeanUnion. To meet the demands of this new situa-tion, the Tunisian Government designed and im-plemented a national programme for upgradingthe economy and the industrial base (PMN).

The strategic choice of creating this free-trade area, a deliberate decision by the Tunisianauthorities, was not to opt for a haphazard open-ing up to Europe, as had been the case in somecountries of Eastern Europe, but to bring about agradual liberalization (progressive dismantling ofimport duties) in close consultation with businessoperators, so as to be able to introduce in goodtime the necessary adjustments and adaptations inthe production facilities and their environment.

The PMN is the first large-scale industrialenterprise upgrading programme in Africa. Whatare the objectives of this programme? What are itscontents? What are the conditions for eligibility?What advantages does it offer for enterprises?What results has it achieved? This chapter willattempt to answer these questions.

A. Perceived need for upgrading

Over the last three decades, Tunisia’s industry hasenjoyed considerable protection (restrictions onand administration of imports and agreements,controlled prices, etc.). However, although it hascontributed significantly to economic develop-ment, it still suffers from numerous structuralweaknesses and organizational deficiencies (inad-equate institutional infrastructure, industrial basedominated by small and medium-sized enter-prises, scant inter-industry links, low levels of in-tegration and institutional support, heavy techni-cal dependence, old or obsolete equipment, etc.).These weaknesses constitute a major obstacle tothe emergence and development of internation-ally competitive industries.

As a result of the new provisions of the free-trade agreement with the European Union basedon the dismantling of tariffs on locally manufac-tured products, the situation of some enterprises,which were no longer able to benefit from theprotective measures, has deteriorated, while otherenterprises might well suffer the same fate unlessback-up and upgrading measures are taken imme-diately. Transitional support and back-up meas-ures as well as technical and financial assistancein upgrading are needed to prepare and adapt

industrial enterprises and their environment toconfront the new situation.

In this connection, it should be pointed outthat most developed countries and the newly in-dustrialized countries have, at some time in theirevolution, formulated and implemented strategiesand programmes to restructure, adjust and de-velop their industries aimed at meeting the de-mands of liberalization and the opening up oftheir frontiers. We may cite, by way of example,the case of Portugal, which since 1987 has intro-duced specific industrial development pro-grammes (PEDIP I launched in 1988 and PEDIP IIlaunched in 1994), financed by the state budgetand European funds to prepare and adapt Portu-guese industries to face European competition.

B. Legislative and regulatoryframework

It should be emphasized that the concept of up-grading is a recent one, which started to be used inTunisia just before the signing of the free-trade areaagreement with Europe. This concept has not beenclearly defined in any legislative text. Only thesteerage and management mechanisms and theresources to fund the activities under this pro-gramme have been regulated by legislation. Thefact that this programme is concerned with theupgrading of enterprises and their environment isapparent from documents and information notesdistributed by the Ministry of Industry and fromofficial speeches. Enterprises in difficulty, whichare covered by Law No. 95-34 of 17 April 1995,are, however, not eligible for this programme untilthey have achieved a healthier financial situation.

C. Steering and managementmechanism

(a) The State Secretariat under the Ministerof Industry responsible for monitoringthe programme

(b) Steering committee

Decree No. 95/2495 of 18 December 1995laying down rules for the organization, operationand intervention of the Fund for the Developmentof Industrial Competitiveness, set up under article37 of the Finance Act (Law No. 94-127 of 26 De-cember 1994), provided for the establishment of asteering committee (COPIL) for the upgrading pro-gramme.

55

The role of this Committee is to examineapplications from industrial enterprises wishing tobenefit from the upgrading programme and toaward restructuring grants. The Committee ischaired by the Minister of Industry or his repre-sentative and is made up of representatives fromthe Ministries of Industry, Finance, InternationalCooperation and Foreign Investment, EconomicDevelopment, Employment, and VocationalTraining and Commerce, as well as representa-tives of the employers’ organization (UTICA),trade union (UGTT) and financial institutions.

The Committee meets periodically whenconvened by its chairman. The agenda is drawnup in advance and communicated to the Commit-tee members at least one week before the datefixed for the meeting. The Committee may del-egate some of its powers to a select committee, inparticular for the examination of applications forlimited investments (1.4 million US dollars). TheUpgrading Bureau serves as the Committee’s sec-retariat.

(c) Upgrading Bureau

Article 15 of Decree No. 95-927 of 22 May1995 on the organization of the Ministry of Indus-try provided for the establishment of this secre-tariat. Its functions are summarized in the chart infigure XVI prepared by the Upgrading Bureau.

D. Components of the upgradingprogramme

The upgrading programme concerns the upgrad-ing of enterprises and their environment in thebroad sense. Initial estimates put the budgetedcost of the programme at around 2.5 billion Tuni-sian dinars (1 dinar = 1.4 US dollars). It accord-ingly has two components:

(a) Environment upgrading

The reforms already undertaken by the Tuni-sian authorities as part of the structural adjustment

Figure XVI. Functions of the Upgrading Bureau

To carry out the necessary studies forimproving industrial upgrading programmesin cooperation with the specialized servicesand bodies

To negotiate bilateral, multilateral andregional funding programmes relating to theareas of upgrading and improving industrialcompetitiveness in coordination with theministries concerned

To undertake, in coordination with the ministries concerned, theprogramming of internal and external funding sources allocated to thedifferent restructuring and upgrading programmes

UPGRADING BUREAU

To define and implement the Government’spolicy in the areas of upgrading of industryand improving the competitiveness ofindustrial output

To provide coordination in these areas

To carry out, with the assistance of therelevant services of the department andindustrial support agencies, the preparation,execution and follow-up of upgradingprogrammes in the industrial sector

56

programme are necessary but insufficient. To cre-ate a more favourable economic, financial, regu-latory and social environment that is more attrac-tive to local and foreign industrialists, theprogramme provides for the following measuresin particular:

� Redefining and reshaping the role of theadministration and of the regulatory,monitoring, promotion, quality, analysisand support institutions;

� Strengthening support agencies, espe-cially technology centres, the CentralLaboratory, the Institute for Standardiza-tion and Quality, and the Industrial De-velopment Agency (API);

� Strengthening vocational training facili-ties and establishments;

� Renovating existing industrial zones anddeveloping free zones;

� Stimulating the economic, trade andtechnological information market.

About 40 per cent of the overall budget hasbeen set aside for upgrading and strengtheningthe enterprise environment.

(b) Enterprise upgrading

This programme concerns the upgrading ofall industrial enterprises (which are not in eco-nomic difficulties) in order to facilitate and ensuretheir successful integration into the Europeaneconomy. According to various studies and sur-veys conducted in Tunisia on the situation of in-dustrial enterprises and the statements made bythe Tunisian authorities, some 2,000 industrialenterprises are involved in the programme.

The enterprise upgrading programme givespriority to measures conducive to:

� Improving competitiveness through skillsdevelopment and quality management;

� The acquisition of new technologies;

� Strengthening enterprises’ financial struc-ture.

About 60 per cent of the overall budget hasbeen earmarked for enterprise upgrading.

E. Operating and financialprocedures of the programme

(a) Operating procedures

Figure XVII, prepared by the Upgrading Bu-reau, shows the operating procedures for enter-prise upgrading.

An analysis of these procedures shows that:

� Five main actors are involved in the up-grading process: the enterprise, the bank,

the Upgrading Bureau, the Steering Com-mittee and the specialist research struc-tures (consultancy firms, technology cen-tres and API);

� The bank is involved in the upgradingprocess from the diagnosis stage until theupgrading of the enterprise is completed(approval of financing plan). In our viewthe bank’s involvement is a preconditionfor the success of that process. To carryout the diagnostic analysis and formulat-ing the upgrading plan, the enterprise hasto enlist the services of the technologycentre, a consultancy firm and/or indi-vidual consultants. It is thus at liberty tochoose its consulting partners. The qual-ity and credibility of the diagnosis and ofthe upgrading plan depend on the expe-rience, competence and expertise of theconsultants chosen. The diagnostic analy-sis report and upgrading plan are evalu-ated by the Upgrading Bureau. The reportand the plan may be rejected or undergofurther development;

� The grants to finance the activity plan areawarded only after signature by the headof the enterprise and the Minister of In-dustry of an agreement committing theenterprise to implement its upgradingplan;

� The grant is released in stages as theupgrading programme is executed; moni-toring is carried out by technical centres.

(b) Financing of the programme

The Fund for the Development of IndustrialCompetitiveness (FODEC) has been set up to helpfinance the programme.

Articles 33 to 46 of the Finance Act (LawNo. 94-127 of 26 December 1994) establishedthe Fund for the Development of Industrial Com-petitiveness (FODEC), which is based on 1 percent of the sales of local enterprises and the valueof finished product imports (excluding equipmentand machinery).

The purpose of the Fund is to:

� Contribute to the financing of qualityimprovement measures;

� Contribute to the financing of restructur-ing operations;

� Finance sectoral studies;

� Grant subsidies to industrial technologycentres;

� Undertake any other activities aimed atdeveloping industrial competitiveness.

In 1999 and 2000, the Fund was enlarged toinclude the following measures:

57

� Contribute to the financing of priorityITP1 technology investments: laboratoryand analysis equipment, introduction ofthe HACCP quality assurance system,CAD/CAP/CAPM2 and associated techni-cal assistance;

� Contribute to the organization of man-agement recruitment by small andmedium-sized enterprises for strategic,research, innovation, quality and methodfunctions.

The legislator was thus concerned essentiallywith improving competitiveness, in the broadsense of the term, and restructuring industrialenterprises and technology centres responsi-

1Investment and Technology Promotion Branch.2Computer-aided design/computer-aided programming/

computer-aided production management.

Figure XVII. Operating procedures for enterprise upgrading

FINANCIAL � ENTERPRISESINSTITUTION � Technology centre

Consultancy firmsConsultants

▼ ▼

Application fileApproval of the � with diagnosis

activity financing scheme and upgrading plan

▼

UPGRADING BUREAU

▼

Examination andevaluation of applications

Agenda

Approval of activities Convocation

Decision to award grants

Drafting of Ministry ▼

of Industry/enterpriseagreement

Release of funds/follow-up COPIL

Further developmentof the upgrading plan ▼ ▼ ▼

Decision by the Ministerafter consultation

Application not taken up with COPILand possible referral

to the Office for Assistanceto Enterprises in Difficulty

�

�

�

58

ble for providing assistance and technicalsupport to them. The upgrading of servicesrelated to enterprises was thus included inthe upgrading programme.

The grants that may be awarded by FODECare as follows:

For the upgrading programme:

� 70 per cent of the cost of diagnostic andupgrading studies (maximum 21,000 USdollars);

� 20 per cent of the self-financed share ofthe restructuring investment (no ceiling);

� 10 per cent of the remaining portion ofthe restructuring investment financed byother resources (no ceiling).

Foreign enterprises in Tunisia are also eligi-ble for the upgrading programme.

For ITP priority technology investments:

� Award of grants amounting to 50 per centof the cost of equipment (maximum100,000 dinars) and 70 per cent of thecost of intangible investments (maximum70,000 dinars).

To encourage the recruitment of managersfor small and medium-sized enterprises:

� Award of a maximum grant of 7,000 di-nars per year for two years for each re-cruitment (minimum three recruitments).

(c) Procedures for processing applications

Enterprises wishing to benefit from the up-grading programme are required to submit to theUpgrading Bureau an upgrading application filecontaining a request, the duly completed projectdata sheet, the overall strategic diagnosis reportand the upgrading plan.

The Upgrading Bureau checks the applica-tion and conducts an evaluation, drawing on ex-ternal financial and technical expertise wherenecessary. Following acceptance of the upgradingplan, the Upgrading Bureau places the applica-tion on the agenda and submits it to the SteeringCommittee for its examination and opinion.

The Steering Committee may:

� Approve the plan, or

� Request further development of the up-grading plan with a view to its re-exami-nation, or

� Reject the application and refer the enter-prise to the Office for Assistance to Enter-prises in Difficulty.

In all cases, 70 per cent of the cost of thediagnostic analysis will be financed following ac-ceptance of the diagnosis report by the Steering

Committee. The Upgrading Bureau will notify theenterprise of the response to its application.

(d) Procedures for releasing funds

The procedures determined by COPIL are asfollows:

Cost of the diagnostic analysis and prepara-tion of the upgrading plan. The grant for 70per cent of the amount approved by theSteering Committee is released in a singleinstalment following approval of the diagnos-tic analysis report and the upgrading plan.

Activities under the upgrading plan. The fol-lowing grants may be awarded:

� 20 per cent of the self-financedshare of the upgrading investment;

� 10 per cent of the remaining portionof the restructuring investment fi-nanced by other resources.

The grants awarded are released in four in-stalments at most:

� The first instalment (30 per cent ofthe grants) is released after 30 percent of the investments have beenmade;

� The remaining part of the grants isreleased:

Either in a single instalment, orIn three instalments for the re-mainder of the activities as theyprogress.

To be eligible for grants, enterprises mustfulfil the following two conditions, as demon-strated by the audited financial statements:

� Positive working capital;� equity

total assets> 30 %

For ITPs, grants are released as the activitiesare carried out.

Note:

� ITP grants are awarded without submissionof a diagnosis on the basis of a special form(information about the enterprise and itsactivities);

� The programme measures have evolved:intangible grants have increased from 50 to70 per cent and the ceiling for diagnosisupgrading programme grants has beenraised from 14,000 to 21,000 dollars, etc.;

� Programme investments have represented 30per cent of all industrial investments.

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F. Upgrading programme status (end of December 2001)3

Upgrading of enterprises

Number of applications being processed 894Number of participants 2,005

Applications examined by COPIL

Number of applications approved 1,103Number of applications rejected 8Total approved upgrading investments 2,078,920,000 dinars

of which intangible investments 266,200,000 dinarsand investments for diagnosis 18,200,000 dinars

Grants awarded:Diagnosis Intangible Tangible Total

11,500,000 92,600,000 186,500,000 290,500,000

Approvals

1996 1997 1998 1999 2000 2001

Number of enterprises 61 128 167 240 265 242

Investments (in dinars) 189,083,614 262,160,046 387,786,239 300,240,418 449,929,328 489,719,917

Grants (in dinars) 23,104,215 37,218,581 51,414,910 47,106,779 67,227,962 64,442,042

Upgrading of services

Number of applications approved 36Total approved upgrading investments 17,200,000 dinarsGrants awarded 5,680,000 dinarsNumber of applications being processed 83Number of participants 119

ITP applications

Number of applications approved 400Investments 23,200,000 dinarsGrants 11,000,000 dinars

3Source: Upgrading Bureau, Ministry of Industry, Tunisia.

Upgrading applications by sector

Building Mechanicalmaterial, and Textile

Leather ceramic electrical andAmounts in millions Agro-food and shoe Chemical Miscellaneous and glass engineering clothingof dinars industries industries industries industries industries industries industries Total

Approved applications 166 91 63 173 76 134 400 1,103

Investments 522 80 158 257 454 270 338 2,079

Investment shareby sector 25% 4% 8% 12% 22% 13% 16% 100%

Intangible investments(including diagnosis) 53 19 20 34 34 52 63 274.4

Intangible ratio 10% 24% 12% 13% 7% 19% 19% 13%

Grants awarded 69 12 19 40 49 39 62 290.5

Applications beingexamined 145 83 46 155 82 137 246 894

Applications refused 3 1 4

Total participation 314 174 110 328 158 275 646 2,005

Target 140 202 63 156 127 211 1,101 2,000

Rate of participation 224% 86% 175% 210% 124% 130% 59% 100%

60

Implementation rate by sector:

Buildingmaterial, Mechanical

Leather ceramic and electrical Textile andAgro-food and shoe Chemical Miscellaneous and glass engineering clothingindustries industries industries industries industries industries industries Total

Sales (1997-2000)a 44% - 68% 61% 63% 54% 60% 65%Sales (1997-2000)b 27% - 58% 32% 69% 37% 33% 35%Sales (1997-2000)c 112% - 49% 69% 83% 83% 47% 63%

aMean variation.bOverall variation.cInsufficient sample for this sectoral analysis.

Type of investment Implementation rate %

Production 72Computers 75Laboratory 57Civil engineering 65Other equipment 54

Total equipment 71

Quality assurance system 16Training 10Production-linked technical assistance 3Other technical assistance 72Research 5Software 10Other intangible investments 30

Total 11

G. Initial evaluation of upgradingprogramme4

Impact of upgrading programme onenterprises—general situation

Five years after the programme was launched, theUpgrading Bureau carried out a study to evaluatethe upgrading programme with a view to high-lighting the deficiencies and selecting the priori-ties to be retained in the tenth economic andsocial development plan. The overall evaluationcomprised three areas:

� A large-scale quantitative survey of 590enterprises whose upgrading applicationswere approved between 1996 and 1999;

� An in-depth qualitative survey of a repre-sentative sample of 80 enterprises ben-efiting from FODEC;

� An evaluation of the other institutionsinvolved in the upgrading programmeincluding financial institutes, the relevantdepartments of the Ministry of Industry,

the professional associations, support in-stitutions, consultancy firms, etc.

The evaluation was carried out by neutral bod-ies such as universities and international experts.

Initial findings of quantitative survey:successes and performances

The programme has always been monitored onan annual basis. The last quantitative survey waslaunched in October 2000 and involved 590 en-terprises whose upgrading applications had beenapproved between 1996 (start of the programme)and 1999. The results of the survey, based on 300replies (out of 350 received) are presented below.

The overall implementation rate5 was 68%[59%]6 (72% [62%] equipment and 37% [29%]intangible) and the mean implementation ratewas 68% [64%] (75% [70%] for equipment and46% [31%] for intangible investments). Only 5%[10%] of the enterprises had an implementationrate of less than 10 per cent, while 11% [6%] hadcompleted or exceeded the planned investments.

4Source: Upgrading Bureau, Ministry of Industry, Tunisia.

5The implementation rate is the ratio of the amounts in-vested to the approved investments. The mean implementa-tion rate is calculated for each enterprise.

6The figures in square brackets refer to the third survey in 1999.

The implementation rate by type of invest-ment varied: civil engineering and computerequipment investments generally had priority, fol-lowed by production and other equipment.

Development of activities before and afterprogramme

Upgrading programme stimulates activity andinvigorates employment

The mean variation in sales between 1997and 2000 was 65 per cent (or 18 per centper year) and the overall increase in sales duringthat period was 35 per cent (annual average of11 per cent).

Export sales increased 65 per cent overallduring the three years (18 per cent per year) and11 per cent of the enterprises that exported in2000 had not done so in 1997.

Of the enterprises surveyed, 43 per cent hadachieved a mean export sales growth rate of 300per cent between 1997 and 2000.

61

Buildingmaterial, Mechanical

Leather ceramic and electrical TextileAgro-food and shoe Chemical Miscellaneous and glass engineering and clothingindustries industries industries industries industries industries industries Total

Employment (1997-2000) 19% 14% 30% 10% 16% 4% 19% 16%

Managers (1997-2000) 90% 158% 100% 48% 30% 30% 65% 62%

The upgrading programme improved thelevel of managerial staff in enterprises, particu-

Before upgrading After upgradingPosition programme (%) programme (%)

Managing director 15 14Marketing/commercial 11 13Human resources management 6 5Production 55 50Supply 4 5Research/development 1 2Method 3 4Quality 5 7

Total 100 100

Overall management rate 6 4

larly in marketing, research and development,and quality and method management positions.

Employment and management

The mean increase in employment between1997 and 2000 was 31 per cent (or 9 per cent peryear). The overall increase for that period was

16 per cent (or 5 per cent per year) with a con-siderable improvement in the number of manage-rial jobs, which increased by 62 per cent (or 17per cent per year).

62

III. Industrial upgrading programme in Algeria1

Economic reforms aimed at establishing a marketeconomy have been introduced at a rapid paceover the last ten years and have made it possiblefor the country to gradually decentralize and relaxthe structures and mechanisms that were set upafter independence.

The structural adjustment programme sup-ported by an Extended Structural AdjustmentFund Facility (1996-1998) signed with the Interna-tional Monetary Fund (IMF), the rescheduling ofthe foreign debt and enterprise reforms have pro-duced encouraging macroeconomic results in Al-geria since 1995 which are nevertheless inad-equate on their own given the negative socialrepercussions and threats that international com-petition poses for the economy.

For the liberalization of the economy to pro-ceed at a steady pace and efficiently, an industrialupgrading programme is therefore required toenable enterprises and their environment to adjusteffectively.

The opening up of foreign trade has alreadystarted to have an impact on industrial enter-prises. The private and public industrial sectorscannot compete with foreign products on the do-mestic market, nor can they make inroads intoforeign markets.

This difficulty is exacerbated by the extensiveprotectionism, which was one of the characteris-tics of Algeria’s economy until the start of thisdecade. Added to this are high production costs,inadequate or even non-existent internationalcompetitiveness and a predominant if not exclu-sive focus on the domestic market. Developing ina climate of centralized management, protection-ism and weak market pressure, industrial enter-prises have not had to be concerned with thedictates of performance and efficiency (in terms oftechnology, human resources, management, com-mercial aspects and costs). This has naturallyweakened the competitiveness of Algerian prod-ucts on international markets.

A. Problem:context and justification

Context

The transition from protectionism to a liberalized,open and competitive market cannot take placewithout assistance to enterprises and its supportstructures. Competitiveness depends, in fact, as

much on the performance of the enterprise as itsenvironment. By exerting an influence on theconstraints inherent and external to the enterprise,it is possible to help it adapt to the new marketconditions, to improve competitiveness, to en-hance export capability and integrate activities,and to develop a capacity for consolidation andgrowth.

Algeria’s membership of the European Un-ion’s free-trade area (FTA/EU) and the WorldTrade Organization (WTO) confirms the country’sdesire to become part of the world economy.These steps represent a considerable challenge,and it is vital to conduct programmes to preparethe economy for it.

It should be noted that the European Unionnegotiates agreements with Mediterranean coun-tries on a bilateral basis with account taken of thecharacteristics of each country.

The countries that have signed agreementshave undertaken industrial upgrading pro-grammes. Although intraregional commerce rep-resents less than 5 per cent of total trade betweenthe countries of the Mediterranean, these agree-ments should logically create the conditions for itsdevelopment. Cyprus, Malta and Turkey, for ex-ample, are in the process of establishing a cus-toms union.

Upgrading programme

How can an enterprise face up to internationalcompetition if it does not upgrade its products,information, management and production sys-tems, and its business environment? Suppressionand tariff protection cannot protect national pro-duction; at most they can postpone the inevitable.

� The European Union has already signedagreements with Tunisia (March 1998),Morocco (March 2000) and Jordan. An interimagreement has been signed with the PalestineLiberation Organization (PLO) for the benefit ofthe Palestinian Authority (July 1997);

� The agreement with Israel entered into forceon 1 June 2000;

� Negotiations with Egypt have been concluded,but the agreement has not yet been signed.Negotiations are under way with Algeria,Lebanon and the Syrian Arab Republic;

� Association agreements had been signed priorto the Barcelona Declaration with Cyprus,Malta and Turkey.

1Source: Ministry of Industry and Restructuring, Algeria,December 2001.

63

With the globalization of trade and interde-pendence of national industrial policies and theoverall development of industries in the world,the main concern is therefore to promote thecompetitiveness of enterprises and the industrialsystem.

In view of this situation, the industrial re-structuring programme needs to be supplementedby an upgrading programme for enterprises andtheir environment and the reorganization of thebanking and financial sector.

By focusing in their upgrading plans on in-tangible investments, enterprises can positionthemselves in a competitive economy and im-prove their economic and financial performanceat the international level.

Seen in this way, the upgrading of enterprisesis not only a management objective relating toproducts, markets, finances and employment, butalso a plan that involves all the associated institu-tional support. Intersectoral collaboration be-tween the actors is a real prerequisite that calls fora new approach to the support offered to enter-prises.

B. Objectives of upgradingprogramme

The programme objectives must be seen in termsof the levels of intervention:

Macro-level: Government and Ministry ofIndustry and Restructuring(MIR)

Meso-level: Local, sectoral, technical,technological or professionalintermediaries

Micro-level: Enterprises wishing to benefitfrom the upgrading pro-gramme

Macro-level objectives

The general policy of the Ministry of Industry andRestructuring with regard to industrial restructur-ing can be summarized as follows:

� Formulation of industrial policies servingas a basis for support and incentive pro-grammes. These policies will be formu-lated by consensus with other sectoraldepartments with account taken of thepotential offered by national and interna-tional capacities;

� Activation of tools enabling enterprisesand governmental institutions to under-take actions at the meso- and micro-level;

� Implementation of an upgrading pro-gramme for enterprises and their environ-ment;

� Implementation of an awareness-raisingand communication programme so as toinform economic operators of the indus-trial policy actions being undertaken andto provide clear indication of the actorsand means available to enterprises.

Figure XVIII. Upgrading programme objectives

MACRO

Modernizing theindustrial environment

▲▲▲▲▲

▼▼▼▼▼

MESOMESO Promoting the

Strengthening support � � RESTRUCTURING AND � � developmentstructure capacities UPGRADING PROGRAMME of competitive

industries

▲▲▲▲▲

▼▼▼▼▼

MICRO

Improvingthe competitiveness

and developmentof industrial enterprises

��–––��

��–––��

��–––��

��–––��

64

Meso-level objectives

A concerted programme requires a partnershipstructure. The programme objective is to identifyenterprise support institutions, to verify and con-firm that these institutions have the wherewithalto provide this support, to assist them in restruc-turing and to promote them. The institutions con-cerned include:

� Employer and professional associations inthe industrial sector;

� Quasi-public institutions;

� Technological and commercial resourceinstitutes and centres;

� Specialist training bodies;

� Banks and financial institutions;

� Industrial zone management organiza-tions.

Upgrading the business environment bystrengthening the support structures is a funda-mental aim designed to improve the industrialcompetitiveness of enterprises. Elements thatcould contribute to this aim include:

� Training, project evaluation methods;

� Methods of evaluating and monitoringthe upgrading plan;

� Assistance in upgrading (decentralization,tasks, organization) for integration of theenterprise in the industrial restructuringprocess;

� Identification, diagnosis and upgrading ofexisting situation;

� Proposals and feasibility studies for thenew structures;

� Assistance in setting up the new struc-tures.

Micro-level objectives

The upgrading programme is an incentive mecha-nism for improving the competitiveness of enter-prises. It is thus distinct from investment promo-tion policies or policies designed to assistenterprises in difficulty. For the enterprise, it is acontinuous process of improvement (upgrading)aimed at progress, planning for the future andidentifying weaknesses.

Above all, it is a programme that the enter-prise subscribes to voluntarily. It is not imposedby the Government, the State or its institutions.The State, however, must be ready to respond toapplications by enterprises that meet the eligibilityrequirements.

The implementation of upgrading activities isthe responsibility of the enterprise alone. The ac-tivities to be carried out are:

� Examination of the diagnosis and upgrad-ing plan;

� Intangible investments, such as:Studies, including research and de-velopment;Technical assistance (industrial prop-erty);Software;Training;Setting up of quality systems (quality,certification, etc.);Standardization;Setting up of information and man-agement systems (improvement in in-ternal systems to enable managers toreact more quickly to changes in theeconomic situation, but also as ameans of gaining entrance into capi-tal markets via the stock exchange,and industrial and commercial infor-mation);All other intangible investments thatimprove industrial competitiveness;

� Tangible investments, such as:Production equipment;Handling and storage equipment;Laboratory and measuring equip-ment, etc.;Computer hardware;Production utilities (refrigeration,heat, air, water, electricity);Civil engineering installations con-nected with production;All other tangible investments thatimprove industrial competitiveness.

C. Upgrading mechanism

Definition of programme

In accordance with the government programme,the Ministry of Industry and Restructuring is con-ducting a programme financed through a budgetallocation. A pilot programme was launched in1996 with the assistance of the United NationsDevelopment Programme (UNDP) and the UnitedNations Industrial Development Organization(UNIDO) and a number of donor countries, enti-tled “Integrated support and assistance pro-gramme for industrial restructuring and recoveryof industrial enterprises in Algeria” (“Programmeintégré d’appui et d’assistance à la restructurationindustrielle et au redressement des entreprisesindustrielles en Algérie”).

The Finance Act of 2000 called for the settingup of an earmarked account entitled “Fund forpromotion of industrial competitiveness” to pro-vide direct financial aid to industrial enterprises or

65

industry-related services for upgrading activitiesto promote industrial competitiveness. It was cre-ated by decree and is under the charge of a na-tional committee chaired by the Minister of Indus-try and Restructuring, who acts as certifyingofficer for the Fund.

A monitoring and evaluation mechanism forthe Fund was set up through a joint decree of theMinister of Finance and the Minister of Industry.Its work is carried out by the National Committeefor Industrial Competitiveness. The programmeparticipants are:

� Department for Industrial Restructuring(responsible for managing the upgradingprogramme);

� National Committee for Industrial Com-petitiveness;

� Banks;

� Support services, including specialisttechnology centres, consultancy firmsand consultants.

Department for Industrial Restructuring

The Department for Industrial Restructuring(DGRI) of the Ministry of Industry and Restructur-ing is responsible for creating and coordinatingthe Fund’s legal and financial instruments, anddefining the technical, financial and regulatoryconditions for the functioning of the upgradingprogramme.

It also provides the technical secretariat forthe National Committee for Industrial Competi-tiveness, examines applications submitted, dealswith them and submits them to the Committee.

It is responsible for identifying other associ-ated structures and organizations, formulating theprogramme following extended consultation, set-ting up the communication and awareness-raisingprogramme, promoting training programmes forspecialists involved in the upgrading programme,designing and formalizing procedures and theregulatory framework, proposing updates of legis-lative or regulatory texts directly related to therecovery of enterprises, drafting a planning chartfor upgrading, and identifying the informationneeds of enterprises and user departments.

It also submits to the National Committee forIndustrial Competitiveness all suggestions for ac-tivities to promote industrial competitiveness.

National Committee for IndustrialCompetitiveness

Set up by Executive Decree No. 2000-192 of 16July 2000, which defined the terms for utilizationof the earmarked fund No. 302-102, “Fund forpromotion of industrial competitiveness”, theCommittee’s tasks are as follows:

� Drafting of procedures for presentation ofapplications by enterprises and bodies forassistance from the Fund;

� Determining the conditions of eligibilityfor assistance from the Fund;

� Determining the nature and amounts ofassistance to be granted;

� Establishing the instrument linking thebeneficiary enterprise to the Ministry ofIndustry and Restructuring;

� Monitoring and evaluating the perform-ance of enterprises that have receivedassistance from the Fund.

The Committee is chaired by the Minister ofIndustry and Restructuring as certifying officer forthe Fund and is composed of:

� The representative of the Minister respon-sible for finance;

� The representative of the Minister respon-sible for industry and restructuring;

� The representative of the Minister respon-sible for participation in and coordinationof reforms;

� The representative of the Minister respon-sible for small and medium-sized enter-prises and industry;

� The representative of the Minister respon-sible for trade;

� The representative of the Minister respon-sible for foreign affairs;

� The representative of the Minister respon-sible for higher education and scientificresearch;

� The representative of the Algerian Cham-ber of Industry and Commerce.

Other actors, such as representatives of em-ployer associations and banks, are also consulted.

Fund for promotion of industrialcompetitiveness

The Finance Act of 2000 offers basic financialsupport for upgrading activities through the estab-lishment of the Fund for promotion of industrialcompetitiveness. Enterprises are provided with thefollowing types of financial assistance from thisFund:

(a) Financial aid to enterprises

This assistance is designed to cover some ofthe expenses incurred by enterprises for:

� Overall strategic diagnosis and upgradingplan;

� Intangible investments;

� Tangible investments connected with thepromotion of industrial competitiveness.

66

(b) Financial aid to support structures

This assistance is designed to cover expensesconnected with:

� Operations aimed at improving the envi-ronment of manufacturing enterprises orindustry-related services, such as qualityimprovement, standardization and me-trology, industrial property, training, re-search and development, industrial andcommercial information, decentraliza-tion, industrial policies and strategies andthe promotion of professional associa-tions in the industrial sector;

� All activities relating to the programmesfor rehabilitation of industrial zones andwork areas;

� Studies relating to the rehabilitation ofindustrial zones and work areas;

� Implementation of training programmesfor managers of industrial zones andwork areas;

� All activities to develop industrial com-petitiveness.

Organization chart

The flow chart is shown in figure XIX.

Other special funds connectedwith enterprise

Apart from incentives such as credit policy, a taxpolicy conducive to investment and a variety ofdirect technical measures, subsidies, loans andguarantees, the State also intervenes through aregional planning policy to improve populationdistribution through rational siting of economicfacilities, for example by means of industrial zoneand development zone policies. The specific de-velopment of these zones and the award of grantsfor industrial development and adaptation enablesthe State to steer its industrial policy.

Funds of direct relevance to the upgradingprogramme include:

� Regional planning fund;

� Special fund for development of thesouthern regions;

� National environment fund;

� Fund for regulation and development ofagriculture offering support to public andprivate enterprises involved in agricul-tural production, processing, marketingand export of agricultural and agro-foodproducts;

� National fund for energy management,which grants non-remunerated loans to

finance investments designed to enhancethe efficiency of energy utilization;

� Fund for promoting continuous voca-tional training;

� Fund for promoting apprentice training;

� National fund for safeguarding employ-ment, which gives access to loans to fi-nance “investments to enhance existingproduction capacities and/or to createnew activities”;

� Fund for promotion of exports;

� National fund for scientific research andtechnological development.

The DGRI is responsible for identifying, to-gether with the fund managers, the means to en-able eligible candidates for upgrading to benefitfrom the funds. If applicable, the National Com-mittee for Industrial Competitiveness will notifyenterprises of the possibilities offered.

Diagnosis and formulation of upgrading plan

The diagnostic process and the content of thediagnosis are based on the method devised withthe assistance of UNDP and UNIDO during thepilot project carried out by the Ministry of Indus-try and Restructuring:

� Overall strategic diagnosis of all functionsof the enterprise;

� Strategic positioning of the enterprise inrelation to domestic and external compe-tition assuming the dismantling of protec-tionist tariffs (0 per cent import dutiesand/or export market);

� Test of the financial viability of the enter-prise and its financial capacity to mobilizethe necessary resources for upgrading.

D. Upgrading procedures

The procedures (see figure XX) for benefiting fromincentive grants for implementation of the upgrad-ing programme involve two distinct major steps:

(a) Completion by consultancy firm or ex-ternal consultants chosen by the enterprise of an“overall strategic diagnosis and upgrading plan”.This study accompanies the application for finan-cial assistance from the Fund for promotion ofindustrial competitiveness and gives an entitle-ment to grants, provided that the eligibility rulesand procedures defined by the National Commit-tee for Industrial Competitiveness are observed;

(b) After agreement and approval by theNational Committee for Industrial Competitive-ness, the performance of non-material and/or

67

Figure XIX. Upgrading mechanism

○ ○

○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○ ○

○ ○ ○ ○ ○ ○ ○

DGRI/MIRTechnical Secretariat �—� ABEF bank association

�*� Definition of terms of reference

for the overall strategic diagnosisUNIDO/UNDP �—� including international strategic

positioning and for the upgrading plan,and the communication of the criteria

�*�

Identification of consultancy�firms and consultants �

� � Enterprise

�*�————————� Consultancy firm� Consultants � �

Overall strategic diagnosisand upgrading plan ———————� Bank

�————————— Letter of intent* from bank,* financing****�

DGRI/MIRNational Committee

for IndustrialCompetitiveness

**�

No �————— Approval

Other special funds * connected with enterprise�Yes �

***�

Signature of agreement Enterprise: request forbetween MIR Implementation payment of grant

and enterprise, ——� ——� in instalmentspayment Upgrading plan

of diagnosis grant

Monitoring

Inspection

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material activities defined in the upgrading plangives an entitlement to financial assistance in oneof two ways:

� In three instalments, the third coming atthe end of the implementation of the ac-tion plan, which should occur no laterthan two years after its notification andapproval;

� In a single instalment for implementationwithin two years.

Exceptionally, the Committee may grant anextension of one year for completing the actionsundertaken.

The eligibility rules and detailed proceduresapproved by the National Committee for Indus-trial Competitiveness are available from the tech-nical secretariat.

Eligibility

The following types of enterprise are eligible indi-vidually for financial aid from the Fund for pro-motion of industrial competitiveness:

� Enterprises under Algerian law, legallyconstituted in Algeria and in operation formore than three years (presentation ofbalance sheets for the previous threeyears), entered in the register of compa-nies and possessing a tax number;

��–––––

––––

–––––––––��

��–––––––––

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Figure XX. Overall strategic diagnosis and upgrading plan

1Overall

strategicdiagnosis

2 4Choice of OVERALL STRATEGIC Upgrading

upgrading strategies DIAGNOSIS and monitoringUPGRADING PLAN

3Upgrading plan

� Enterprises in the manufacturing orindustry-related service sectors;

� Enterprises with performance potential onthe basis of their financial results and themarkets in which they operate;

� Bankable enteprises: in its financial state-ments for n-1 the enterprise must have:

Net positive assets equal to or exceed-ing capital stock;Positive working capital balance;Gross operating results relative to eq-uity capital equal to or exceeding theofficial market rate set by the Bank ofAlgeria;

� Enterprises employing at least 30 perma-nent staff;

� Enterprises submitting an application withthe overall strategic diagnosis and up-grading plan supported by a financingagreement from their bank.

Advance information

An enterprise wishing to launch an upgradingprogramme and to benefit from financial aid fromthe Fund for promotion of industrial competitive-ness should first select a consultancy firm, ensur-ing that it has the capacity and resources neces-sary to carry out the overall strategic diagnosis

69

and to elaborate the upgrading plan while re-specting the eligibility rules laid down in thedocuments distributed by the Ministry of Industryand Restructuring.

It should then notify the technical secretariatby mail of its choice, indicating the name of theconsultancy firm and/or consultants with whom ithas contracted to work and its decision to carry outan upgrading programme. This information willenable the relevant department of the Ministry ofIndustry and Restructuring to familiarize itself withthe enterprises involved in the programme.

The technical secretariat will confirm receiptof the information without this confirmation im-plying that the enterprise is indeed eligible for theprogramme.


Role of the enterprise

The decision to upgrade is made voluntarily bythe enterprise. The choice of consultancy firm andconsultants is therefore left to the enterprise aswell.

Role of the consultancy firm and consultants

The consultancy firm and/or consultants offers aprofessional service that involves them jointlywith the enterprise in the upgrading decision andactivities. This being the case, it is evident that thechoice cannot be made by any entity outside theenterprise itself.

For this reason, the eligibility rules and pro-cedures and approval of the applications by en-terprises are circulated widely. It is for the consul-tancy firms and consultants to ensure that they arefamiliar with these rules.

The consultancy firm and consultants mustensure that they do not contract to work withenterprises that do not comply with the eligibilityrules.

Role of the bank

The application must be accompanied by an as-sessment from the bank regarding the enterprise’scapacity to mobilize the financing (loans andequity) necessary to implement the upgradingplan.

The Ministry of Industry and Restructuringwill therefore formulate a programme to increasethe awareness of banks and provide them with thenecessary instruments.

Submission of the application

The application for direct financial aid from theFund for promotion of industrial competitivenessaccompanied by the overall strategic diagnosis

and upgrading plan, signed jointly by the enter-prise and the consultancy firm, is submitted bythe enterprise to the technical secretariat of theNational Committee for Industrial Competitive-ness. The method of presentation and the specificprocedures, approved by the Committee, are cir-culated widely by the technical secretariat.

The technical secretariat ensures that:

� The eligibility criteria are met;

� The financing plan has the formal writtenagreement of a lead bank which has veri-fied that the other contributors (owner’sequity, acquisition of shares, etc.) areduly committed.

If particular criteria are not met, the enter-prise will be informed immediately of the condi-tions that it must fulfil in order to qualify for assist-ance from the Fund.

The approval criteria concern only the qual-ity of the diagnosis presented by the enterprise,and possibly the quality of the experts consultedand the analysis strategy. The main conditions tobe verified are:

� Financial viability: positive net assets,positive working capital, etc.;

� Strategic positioning and competitivenesson the national and international marketwith tariffs dismantled (0% import duties);

� Reliability of the accounting information(certification);

� Joint presentation of the diagnosis by theenterprise and consultancy firm;

� General compliance of the method foroverall strategic diagnosis and elabora-tion of the upgrading plan;

� Positive contribution of the upgradingplan to the competitiveness and in-creased productivity of the enterprise;

� Compliance with the rules for submittingthe grant application;

� Agreement from a bank to support theupgrading plan.

Submission to the Committee

After analysing the application, the technical sec-retariat submits it to the Committee, together withits recommendations. The Committee considersthe application internally, in accordance with itsown rules of procedure and then gives its opinion.

To ensure the confidentiality of the informa-tion submitted by the enterprise, the technicalsecretariat submits to the Committee only a sum-mary in a form already indicated to the enterpriseand consultancy firm. Its recommendations are

70

confidential and are divulged only to the enter-prise concerned. The members of the Committeeare committed to maintaining professional se-crecy.

Agreement with the Ministry of Industry andRestructuring

The technical secretariat notifies the enterprise ofthe Committee’s decision and, if the application isapproved, sends it an agreement that will besigned with the Ministry of Industry and Restruc-turing. This agreement defines the rights and ob-ligations of the parties in respect of the financialaid from the Fund.

Implementation and incentives

Provision of direct aid to industrial enterprises

Implementation of the upgrading plan is the ex-clusive responsibility of the enterprise through itsown internal procedures. The financial aid pro-vided by the incentive grants is meant to improveindustrial competitiveness and not just to give fi-nancial support. These grants must be used forsetting up specific business strategies aimed atproviding long-term competitiveness in the inter-national economy.

Overall strategic diagnosisand upgrading plan

The financial grant for the overall strategic diag-nosis and upgrading plan covers 70 per cent ofthe costs up to a limit of 3 million dinars. Thegrant is paid independently of the subsequentsteps defined in detail in the upgrading plan. Theoverall strategic diagnosis is nevertheless in-tended as the basis for implementation of theupgrading plan. The enterprise must thereforestart implementing the plan in the year followingthe award of the grant.

Upgrading plan

The upgrading can be implemented in stages:

� The first stage should involve at least 30per cent of the tangible investment and/or 30 per cent of the intangible invest-ment;

� The second stage should involve at least60 per cent of the tangible investmentand/or 60 per cent of the intangible in-vestment;

� The enterprise may select to organize thefinancing in three, two or even one instal-ment.

Figure XXI. Overall strategic diagnosis and upgrading plan:example of an Algerian industrial enterprise


Strengths

� Willingness of managers touse modern technology andmanagement techniques andopenness to partnerships

� Strategic vision ofmanagement

� Staff motivation� Operational information and

management systems� Great potential on local and

international market

Weaknesses

� Low general and technicallevel of human resources

� Manufacturing process notsufficiently mastered

� Limited financial resources� Poorly developed sales

through large distributionnetworks

� Productivity lower than thatof European competitors (1to 3)

� Low product quality

Upgrading plan

Intangible actions

� Training of technicalpersonnel for greaterproduction flexibility

� Introduction of qualitymanagement systems forISO 9000 certification

� Training of managementpersonnel to respond betterto export demand

� Sustained marketing activityon local market

� Development of distributionnetwork with partners

� Development of outsourcingnetwork for specific products

Tangible actions

� Automation of productionfacilities

� Purchase of laboratoryequipment for analysis andquality tests

Expected results

� Productivity increased by50 per cent

� Reject waste reduced from5 to 2 per cent ofproduction

� Increased export sales toreach 50 per cent of totalsales

� ISO 9000 certification

-�� -��

71

The grants are:

� 50 per cent of the costs of intangible in-vestments;

� 15 per cent of the tangible investmentsfinanced from equity;

� 10 per cent of the tangible investmentsfinanced by loans.

Monitoring and modalities for grantingfinancial aid

Following the application by the enterprise in aform approved by the Committee, the technicalsecretariat designates an external body to verifythe substantive content of the application. Thisverification involves documentary elements (in-voices and proofs of payment provided by the

bank) and the physical existence of the invest-ments.

Once this monitoring operation has beencompleted and formalized in a report completedin the form agreed by the Committee, the grant ispaid out.

Implementation period

The investments eligible for financial aid mustbe made within two years of the date of signingof the agreement. At the request of the enterprise,an extension of one year may be granted inexceptional circumstances. The financial aidfrom the Fund for promotion of industrialcompetitiveness does not exclude the possibilityof other arrangements for assistance to enter-prises.

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IV. Industrial upgrading programmein Morocco1

Table 14. Dismantling of tariffs

Non-locally Locally manufacturedCapital goods Raw materials Spare parts manufactured products products

Year of dismantling (%) (%) (%) (%) (%)

0 100 25 25 251 25 25 25 Period of grace2 25 25 253 25 25 25 104 105 106 107 108 109 1010 1011 1012 10

Morocco has been involved since the early1980s in an extensive programme of liberaliza-tion and structural adjustment of its economy.The programme, which is designed to help thecountry integrate progressively in the worldeconomy, was reinforced through accession tothe GATT agreements (1987) and membershipof the World Trade Organization (WTO) in1994 and, more recently, through signature ofan association agreement with the EuropeanUnion (EU) and a free-trade agreement with thecountries of the European Free Trade Associa-tion (EFTA).2

Morocco is therefore at a new stage in theprocess of liberalization of its economy, whichwill put it at the heart of a free-trade zone withthese two regional groups after a transition periodof 12 years at most from the date on which theagreements came into force.

In view of the dismantling of tariffs providedfor in these agreements and in order to enableenterprises to improve their competitiveness, asupporting programme has been initiated in col-laboration with private operators. The pro-gramme is designed to upgrade enterprises, pri-marily by improving their competitivenessfactors.

A. Dismantling of tariffs

By virtue of the association agreement betweenMorocco and the European Union and a free-trade agreement between Morocco and EFTA,import duties and equivalent taxes on industrialproducts imported from these countries will beprogressively dismantled as shown in table 14.

It is also planned to eliminate referenceprices for products from the European Union andEFTA three years at the latest after these agree-ments come into force.

For products from Morocco, the EuropeanUnion has maintained tariff protection for theagricultural elements, while eliminating importduties for the industrial element. The agriculturaltariff can be in the form of a fixed amount or anad valorem tariff.

For agro-industrial products from the Euro-pean Union, Morocco also singles out the agricul-tural element for import duty while taking ac-count of the dismantling of tariff protection for theindustrial element.

Moreover, the removal of import duty oncapital goods from the date of entry into force ofthe agreement and its progressive elimination forraw materials, spare parts and non-locally manu-factured products three years later will result in areduction in production costs for enterprises,which will improve their competitiveness.

The principle of progressive dismantling willgive enterprises time to adapt and complete theirupgrading process and hence their integration inthe world economy.

1Source: Ministry of Commerce and Industry, Kingdom ofMorocco, February 1999.

2EFTA members are Iceland, Liechtenstein, Norway andSwitzerland.

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B. Enterprise upgrading programme

Objective

In anticipation of the dismantling of tariffs result-ing in a free-trade zone, support measures havebeen determined jointly by the Government andprivate operators. These measures are designedto upgrade enterprises and improve their competi-tiveness.

Upgrading activities

The support measures are of three types:

� General measures (GM);

� Sectoral measures (SM);

� Enterprise measures (EM).

The above-mentioned programme comprisesseven direct activities:

� Improving reception facilities (GM);

� Promoting exports (GM);

� Improving vocational training (GM);

� Strengthening professional associations(SM);

� Developing technological infrastructure(SM-EM);

� Diagnosis—Euro-Maroc Entreprise (EM);

� Financing of upgrading (EM).

Guiding the upgrading programme: NationalUpgrading Committee (NUC)

Objective

� Define, coordinate and monitor upgrad-ing activities;

� Ensure compatibility with national socio-economic development policy;

� Ensure complementarity of programmesimplemented by government authoritiesand the various parties involved (donors,international organizations, economicoperators and social partners, etc.).

Constitution of NUC

� Department of Commerce and Industry(chairman);

� Ministry of Economic Affairs and Fi-nance;

� Federation of Chambers of Commerce,Industry and Services (FCCIS);

� General Confederation of Moroccan En-terprises (CGEM);

� Professional Association of MoroccanBanks (GPBM);

� European Commission (EC);

� European Investment Bank (EIB) [ob-server].

Working groups

Seven working groups relating to the above-mentioned activities chaired by representa-tives of the private sector have been created.These multidisciplinary groups are responsi-ble for making practical and specific sugges-tions for carrying out the activities.

Improving of reception facilitiesVocational trainingPromotion of exportsStrengthening of professional associa-tionsTechnology infrastructureEuro-Maroc EntrepriseFinancing mechanism

C. Upgrading procedure

Preliminary phase: diagnosis and business plan

An essential step in the upgrading programme isthe completion of:

� A preliminary diagnosis and detailed di-agnosis to determine the impact of thedismantling of tariffs on the competitive-ness of the enterprise and its strengthsand weaknesses;

� A development or business plan relatingto the various activities to be undertakenby the enterprise to improve its competi-tiveness, covering technical, financial,commercial, human resources, adminis-trative, organizational and other aspects.This plan should be accompanied by afinancing plan and timetable for imple-mentation.

To assist it in completing the diagnosis andbusiness plan, the enterprise may call on the serv-ices of Euro-Maroc Entreprise (EME), in whichcase the cost of diagnosis and upgrading activitieswill be partially covered by EME (see table 15).

The duration varies depending on the enter-prise’s speciality and the diversity of its problems.

Recourse to EME is not obligatory. The diag-nosis and business plan may also be completedby the enterprise itself or by any other body of itschoice, in which case the costs must be coveredby the enterprise on its own. The business planmust clearly indicate the following needs:

� Tangible investments connected in par-ticular with the modernization of indus-trial equipment, the acquisition of newtechnologies and possible extensions;

74

� Intangible investments in particular forthe following:

Development of human resources andtraining;Improving administrative management;Marketing and export development;Introduction of new management con-cepts;Establishment of a quality assurancesystem;Identification of technical, commercialand financial partners;Environmental protection.

Realization of investments detailedin the business plan

Financing of tangible investments

The financial input required to modernize pro-duction equipment cannot always be coveredsolely by the enterprise’s own resources. Themechanism set up to finance upgrading takes ac-count of the need to:

� Facilitate access to bank financing;

� Consolidate under-capitalized equitycapital;

� Reduce financing costs.

This mechanism involves three instruments:

� Upgrading Guarantee Fund (FOGAM);

� Venture capital;

� Upgrading loans.

Upgrading Guarantee Fund

(a) Eligibility conditions

Balance sheet total before invest-ment of less than 20 million

Table 15. Diagnosis and business plan

EME contributionStage Objectives Duration (%)

Preliminary diagnosis Impact of dismantling 4 days per enterprise 100

Summary of main strengths,weaknesses, risks and opportunities

Definition of terms of referenceof subsequent interventionfor detailed diagnosis

Detailed diagnosis Analysis of main dysfunctions Several weeks 80and business plan Evaluation of most important

functions for upgrading of enterprise

Identification of main sourcesof productivity

Drafting of upgrading action plan,financing programme and timetablefor implementation

Accompanying activities Implementation of main activities Several weeks 70defined in business plan

31 US dollar = 11.37 dirhams (January 2002).

dirhams3 and an upgrading pro-gramme costing a maximum of 10million dirhams;Potential viability of enterprise andsubmission of diagnosis and busi-ness plan.

(b) Financing conditions. Projects meetingthe following conditions will benefitfrom a FOGAM guarantee:

Equity capital and quasi-equity capi-tal: minimum 30 per cent;Bank loans: maximum 70 per cent.

(c) Guarantee conditions

Guarantee ratio: 60 per cent of theloan as principal, plus six months’interest;Guarantee commission: 0.25 percent of outstanding principalamount plus VAT;Payment of guarantee commission:in a single transfer immediately ongranting of the guarantee. It may beincluded in the cost of the invest-ment.

(d) Procedure for granting guarantee

Submission of application to CCG:by enterprise’s bank;Contents of application:

Summarized report by bank onthe basis of the diagnosis andbusiness plan;Agreement in principle by bankwith terms for granting loan;All documents likely to facilitateevaluation of the application;

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Time required for Guarantee Com-mittee to consider application andmake its decision: 10 workingdays at most from the date of re-ceipt of the application.

Venture capital

To contribute to the resources at the disposal ofthe enterprise wishing to upgrade and to supple-ment its inadequate self-financing capability, acredit line of 45 million ecus from the EuropeanInvestment Bank (EIB) has been mobilized underthe MEDA programme and reconveyed for man-agement to other contributing banks (Banquepopulaire, BMCE, Banque commerciale du Maroc[BCM], Banque nationale pour le développementéconomique [BNDE], WAFABANK andALMOUSSAHAMA venture capital company).

(a) Venture capital financing. Venture capital isprovided exclusively in the form of equityparticipation for 2 to 18 years, during or atthe latest at the end of which the participa-tion is retroceded to the enterprise at the netasset value.

(b) Eligibility conditions. All enterprises submitting a competitive restructuring pro-gramme are eligible for this line of financingirrespective of the sector in which theyoperate or their size. However, companiesmanufacturing arms or tobacco, involved inreal estate dealing or greenhouse cultiva-tion, or conducting polluting activities areineligible.

(c) Amount of financing. The venture capitalmay finance up to 40 per cent of the equityfunding requirements indicated in the devel-opment plan and/or decided jointly with thebank. The amount is:

Either co-financed equally by EIB andthe participating bank;Or financed 75 per cent by EIB and25 per cent by the bank, if the latteralready has commitments to the enter-prise concerned.

(d) Submission of applications and procedures.The application for venture capital financingis submitted by the enterprise to its bank onthe basis of a diagnosis and business plan.The bank agrees the provision of suitablefinancing with the enterprise after consulta-tion with EIB.

Upgrading loans

The Moroccan banking system has undertaken tosupport enterprises in the process of competitiverestructuring by providing them with specific fi-nancing for upgrading activities.

(a) Eligibility conditions

Balance sheet total before invest-ment of less than 20 million dirhamsand an upgrading programme cost-ing a maximum of 10 milliondirhams;Potential viability of enterprise andsubmission of diagnosis and busi-ness plan.

(b) Amount of financing. The loan may financeup to 70 per cent of the project.

(c) Duration of loan. Five to twelve years withgrace period of one to three years.

(d) Interest rate. Lowest basic bank rate.

(e) Release of loan. Concurrent with and propor-tionate to equity capital and quasi-equitycapital committed.

Intangible investments

Ongoing training

Groupement interprofessionnel d’aide auconseil (GIAC)

GIACs are interprofessional associations governedby the dahir (decree) of 1958 and established ona voluntary basis by professional business organi-zations and federations. Their general aim is topromote ongoing training of their members, par-ticularly in small and medium-sized enterprisesand industries (SME/SMI).

They offer the following services:

� Raising the awareness of enterprises tothe importance of vocational training as acompetitiveness factor;

� Identifying sources of financing for con-sultancy services to establish the skillsrequirements of member enterprises, inparticular by drawing up financing dossi-ers complying with the eligibility andselection criteria of bodies financing on-going vocational training;

� Provision of technical aid to enterprisesin drafting financing applications.

The activities likely to benefit from assistanceby GIACs are of three types:

� Determination of training developmentstrategy of enterprise or group of enter-prises;

� Determination of operational means re-quired for its implementation;

� Identification of concomitant skills re-quirements.

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(a) Eligibility criteria

Enterprises seeking GIAC financing mustmeet the following criteria:

Legal structure: private enterpriseregistered with a professional cham-ber or organization;Location: industrial, commercial orservice units (factories, distributioncentres, etc.) in Morocco;Taxes: enterprises subject to voca-tional training tax (TPF);Enterprises belonging to a GIAC.

(b) Content of application for financing

The applications for GIAC financingmust contain the following informationand documents:

Information sheet on the enterprisein accordance with a model pro-vided by the ministry responsible forvocational training (available fromGIACs);Copy of the TPF payment slip to theSocial Security Department (CNSS)for the previous calendar year, orsimilar confirmation provided by theenterprise’s bank or the CNSS;A document containing:

Enterprise development project(export markets, technology in-vestment, standardization, etc.);Objectives and expected results ofdesired project engineering;Proposed contribution (means andduration) by service provider;Estimated cost of contribution.

(c) Procedures

� Evaluation of financing dossiersProposed dossier submitted by en-terprise to assistance body;Verification of eligibility by assist-ance body;Examination of dossier and admis-sibility by consultative committee;Signature of contract by enterpriseand GIAC.

� Consultancy serviceContribution by service provider;Final report by service provider;Payment for service.

� Reimbursement of consultancyservice

Preparation of reimbursementdossier by enterprise in accord-ance with contract terms;Verification of dossier by assist-ance body;

Reimbursement agreement;Reimbursement: GIACs reimburse70 per cent of consultancy coststo enterprise.

Special vocational training contracts (CSF)

CSFs help enterprises to implement ongoing train-ing programmes by financing the indicated per-centage of the activities detailed below:

� Training plan: maximum 70 to 80 percent of cost of drawing up a training plan;

� Planned training: maximum 70 per centof the training costs;

� Non-planned training: maximum 40 percent.

Eligibility criteria

Enterprises that are up to date with their TFPpayments are eligible for CSF financing.

Identification of partners

Among the services envisaged by Euro-MarocEntreprise is the development of a diversified in-formation tool consisting of a documentation cen-tre and database linked to the principal Europeanservers to provide the commercial, technical andfinancial information required by SME/SMI.

Euro-Maroc Entreprise also offers to seekpartners on a personalized basis in response tospecific demands expressed by enterprises.

Market repositioning

As part of the services offered in particular by theAssociation marocaine des exportateurs (ASMEX),the Centre marocain de promotion desexportations (CMPE), chambers of commerce andprofessional associations, Euro-Maroc Entreprisewill also provide assistance in:

� Establishing commercial relations;

� Identifying business opportunities;

� Providing access to European markets;

� Participating in fairs and exhibitions inEurope;

� Formulating and implementing exportstrategies;

� Training in marketing and internationalcommercial techniques, etc.;

� Support for actions and initiatives bysectoral associations to assist memberenterprises in their exports.

77

Quality procedure

In anticipation of the entry into force of the asso-ciation agreements between Morocco and theEuropean Union and as part of the work of theDepartment of Commerce and Industry to assist inthe upgrading of Moroccan enterprises, an exten-sive quality-promotion programme has beenplanned. This programme, aimed essentially atenterprises, is designed to help between 250 and300 industrial enterprises applying on their owninitiative to install a quality assurance system.

A promotion campaign for the heads of en-terprises will be conducted consisting of sectoralseminars and training of local consultants, whowill help the enterprises in their contacts with in-ternational experts. Thereafter, candidate enter-prises will receive assistance in two phases:

� The first phase will involve a diagnosisand drafting of a quality developmentplan and assistance to enterprises in im-plementing the plan;

� The second phase concerns enterprisesthat require ISO 9000 certification andwill consist of aid in finalizing the qualityassurance system and carrying out pre-liminary audits.

Eligibility conditions

All enterprises are eligible for this pro-gramme. They will have to contribute 30 percent of the costs of the local consultant in thecase of SMIs and 50 per cent in the case ofindustrial enterprises with more than 200employees.

D. Strategic diagnosis andupgrading plan: example of a

canned food enterprise in Morocco

The enterprise is a small family-owned limitedliability company (SARL) with share capital of13.5 million dirhams. Together with a Spanishenterprise, it is the world leader in the productionof canned capers. It also cans table olives (a dif-ferent variety from oil olives), peppers, truffles andtomatoes.

Products in 2000: The enterprise produced4,845,000 kg of canned table olives and600,000 kg of canned capers, of which 95per cent was destined for export (Germany,Belgium, Canada, United States of America,Italy). In 2000, the enterprise had sales of65 million dirhams.

Resources

� 35 permanent staff (and 100 seasonalworkers);

� Modern management (computerizedproduction management being in-stalled, 800,000 dirham investment);

� Semi-automated installations requir-ing seasonal workers; adequate pro-duction equipment with largeprocessing capacity of 19,000 tonnes(276 vats with 10-tonne capacity and99 vats with 24-tonne capacity).

Main handicaps and constraints

� Insufficient raw materials in Morocco(table olives and capers) due to thedrought and the ageing of certain ex-isting varieties of table olives;

� Strong competition from Europeanenterprises and Italian and Spanishmarkets, whose enterprises benefitfrom European aid programmes andsubsidies;

� Lack of knowledge and inadequateapplication of international hygieneand food quality standards;

� Lack of middle-management re-sources (senior technicians and su-pervisors);

� Inefficient energy use (water, steam,process), non-optimized productioncosts and no additional monitoring ofraw materials or process components(caustic soda, salts, additives, etc.);

� Serious environmental pollution: re-ject waste and non-treatment of pol-lutants in waste (waste water, causticsoda, salts);

� Financial difficulties exacerbated byirregular harvests and repeated inci-dence of poor quality and/or non-conformity of products to importers’specifications and various standards;

� Very high rate of indebtedness andlack of equity capital;

� Manual or semi-automated industry.

Proposed upgrading programmes

� Intangible investmentsThe main purpose of these urgent in-vestments is to provide the enterprisewith a quality management systemand means of increasing its competi-tiveness and reducing the consider-able losses due to non-compliance,poor quality and non-optimization ofprocesses (losses, energy saving):

Improvement in food hygiene(awareness-raising and training ofworkers);

78

Establishment and formalization ofworking methods (methods andprocedures office, traceability,maintenance);Quality assurance and certificationprogramme (ISO, HACCP, Quality,Standardization and Metrology[QSM]) in conformity with the vari-ous specifications of importercountries.

� Tangible investmentsThese investments (indispensableminimum) will help to reduce bottle-necks and production costs. Theyconsist of:

Essential work on all sites (to en-sure compliance with minimumfood hygiene rules imposed bycountries importing the enterprise’sproducts): installation of new pack-aging lines;Establishment of minimum internalanalysis and control laboratories(first level);Improvement and automation ofsome process tasks to ensurecontrolled continuity of productquality;Improvement in conditions of stor-age and dispatch of finishedproducts.

79

V. Industrial upgrading programme in Egypt1

� Food processing industrySoap, oils, animal feedDairy productsProcessed and canned food

� Chemical industryFertilizers and insecticidesPaper and printing

� Electrical engineering industryCapital goodsComponents

� Mineral industryMineral resources

Egypt needs considerable support to enhancethe role of its industry in the restructuring of theeconomy. Greater attention also needs to be paidto sectors with high value added, particularly thetextile and food processing industries, to acceler-ate economic growth by means of a dynamic ex-port policy focusing on international markets,particularly those of the European Union andMediterranean countries.

As part of the Euro-Mediterranean associa-tion agreement, Egypt has signed an agreementwith the European Union involving a subsidy of 1million Egyptian pounds to support the industrialmodernization programme.

This agreement was approved by PresidentialDecree No. 66 of 1999. Another Presidential De-cree (No. 477), signed in 2000, defines the or-ganization of the Centre for Industrial Moderniza-tion, which is responsible for implementing theindustrial modernization programme.

UNIDO has formulated a complementaryprogramme entitled “Egyptian National Pro-gramme for Industrial Modernization” designedto help the public authorities to prepare the in-dustrial sector to face the new forms of compe-tition of the twenty-first century. Its aim is tosupport the process of modernization andstrengthening competitiveness and the integrationand growth of industries within the framework ofthe Uruguay Round (GATT) and the Euro-Medi-terranean association agreement. Most of the aidunder this programme is offered directly to enter-prises in the private sector and to institutionsproviding services in line with the upgradingneeds of enterprises. The principal aims of theprogramme are:

� Strengthening the capacities of the Minis-try of Industry to apply and coordinatethe Government’s upgrading policy;

As part of its economic policy of liberalization,Egypt signed the Uruguay Round Final Act and theagreement establishing the World Trade Organiza-tion (WTO) in 1994 as well as association and free-trade zone agreements with the European Union,Arab countries and the Common Market for East-ern and Southern Africa (COMESA). The newagreement with the European Union will offer in-dustrial enterprises operating in Egypt, particularlysmall and medium-sized enterprises (SMEs), op-portunities to develop and gain access to a moreadvanced economic zone that reaches more than350 million people. But it also represents a threatfor sectors that are not competitive or have notsucceeded in adapting to the new context of inter-national competition. This context will involvecertain costs and economic difficulties in the shortterm. Egypt must open up to global competitionand commit itself to the logic of the market, wherethe role of the public sector is likely to diminish inimportance. In order to meet the challenges ofliberalization and to facilitate integration of Egyp-tian industries and SMEs in the world economy,Egyptian enterprises and the Egyptian businessworld will require technical assistance to confrontthe immediate, medium- and long-term problemsof adjustment. At the same time, the enjoyment ofthe positive effects of liberalization will depend onstructural adjustment policies, the export structureand measures to promote SMEs and, above all, tostrengthen the competitiveness of the industrialsector and of SMEs.

A. Recognized upgrading needs

Aware of the importance and urgency of upgrad-ing, the Ministry of Industry and Technology hasidentified the following sectors as priority areasfor upgrading:

� Textile industrySpinning and weavingDyeing and finishingPrintingSynthetic fibresReady-to-wear garments

� Leather industryTanningShoesLeather articles

1Extract from a study carried out by UNIDO and approvedby the Ministry of Industry and Technology of Egypt on “Egyp-tian Competitiveness Upgrading Programme”, 2001. Studyconducted by M. L. Dhaoui, S. Tlatli and H. El Laithy.

80

� Strengthening the upgrading capacities ofinstitutions;

� Supporting modernization and upgradingpilot enterprises selected from the prioritysectors.

Given the importance of the modernizationand upgrading programme, UNIDO plans tostimulate the process by:

� Creating and setting up the organiza-tional structure and management mecha-nisms;

� Elaborating a legislative and regulatoryframework;

� Assisting in the establishment of financialresources.

B. Legal structure and mechanismsof upgrading programme

The two programmes (formulated by the EuropeanUnion and UNIDO) are combined in an inte-grated industrial modernization programme. Theintegrated programme structure is shown later.

The integrated programme has three focuses:modernization of enterprises, upgrading of the in-dustrial sector and industrial policy and sectoralsupport.

(a) Modernization of enterprises involvesthe following:

� Strengthening competitiveness byimproving technology, design, plan-ning, maintenance and quality con-trol;

� Training;� Management and marketing sup-

port;� Foreign direct investment (FDI), col-

lective and targeted promotion(match-making);

� Export development;� Promotion of financial services (fi-

nancing of long-term loans, loanguarantee system, venture capitalfunds);

� Modernization of machines andtools.

(b) Upgrading of the industrial sector in-volves the following:

� Creation of a network linking infor-mation centres for enterprises andtechnology centres;

� Establishment of “EGYnet”, a net-work providing information to enter-prises at the national level, consul-tancy services and internationallinks;

� Strengthening of the capacities ofprofessional associations;

� Creation of groups of industrial en-terprises;

� Promotion of the national qualitysystem (national approval system,establishment of certification bodies,promotion of national standards).

(c) Industrial policy and sectoral support in-volves the following:

� Strengthening and modernization ofthe Ministry of Industry and Tech-nology;

� Modernization of industrial policies;� Sectoral studies;� Strengthening of the legal and regu-

latory framework;� Improving the finance and banking

system.

C. Industrial modernizationprogramme

The industrial modernization programme (IMP) isa forward-looking Egyptian initiative, stronglysupported by the European Union, which is de-signed to strengthen and consolidate the role ofthe Egyptian industrial and manufacturing sectorin the world economy.

Given that this sector will probably be thedriving force behind export-based economicgrowth and increased employment, the IMP isdesigned to improve the competitiveness of Egyp-tian industries on the national and internationallevels by focusing on small and medium-sized en-terprises and providing technical assistance at thenational and sectoral levels.

It will give priority to industrial subsectorsthat offer competitive advantages and prospectsfor growth. The Egyptian Government has insti-gated support measures to simplify the rules andregulations and to eliminate other obstacles in ageneral effort to improve the economic environ-ment.

The IMP is part of the political context of theBarcelona Process, a Euro-Mediterranean initia-tive designed to establish a zone of prosperitythroughout the Mediterranean region. The Barce-lona Process is based on three fundamental prin-ciples: political dialogue, balanced economic andfinancial relations, and cooperation in numeroussocial and cultural domains. Its main economicand financial objectives are to progressively es-tablish a free-trade zone for commodities and toliberalize commerce in services, to set up appro-priate economic cooperation and to support theseinitiatives through increased financial aid from theEuropean Union to its Mediterranean partners,

81

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82

Figure XXIII. Structure of Industrial Modernization Bureau

MINISTRY OF INDUSTRYAND TECHNOLOGY

Industrial ModernizationBureau (BMI)

Director General

Relations with the Financial controllerpublic/media

Database

Director for enterprise Director for technology Director for industrial policyupgrading infrastructure and sectoral support

Modernization specialist

Marketing managementspecialist

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including Egypt. Since the cornerstone of this eco-nomic partnership is the progressive establish-ment of a Euro-Mediterranean free-trade zone, thetwo parties see collaboration as the only way ofachieving the common objective of long-termeconomic growth in Egypt. The benefits will benot only economic, since shared prosperity willinevitably lead to an improvement in other areasof life such as collective security and well-being.

The IMP has been designed to provide tech-nical assistance to small and medium-sized enter-prises in the following areas:

� Manufacturing techniques;

� Quality;

� International competitiveness;

� Export growth;

� Information about the market;

� Production planning;

� Use of capacities;

� Product design;

� Personnel skills;

� Joint ventures;

� Granting of technology licences;

� Investment possibilities;

� Industrial development and other relatedactivities.

83

Figure XXV. Powers of the Modernization Board

Defining the direction of government upgradingpolicy

Implementing government policy for upgradingand improving the competitiveness of industrialproduction

Monitoring and evaluating the upgradingprogramme

Determining the rate and amount of awards forupgrading operations

Examining applications from enterprises

Awarding grants to enterprises for upgrading

Defining financing policy for upgrading andimproving competitiveness in coordination withthe ministries concerned

Recommending activities and measures to theGovernment for upgrading enterprises andimproving their environment

ModernizationBoard

Figure XXIV. Powers of the Industrial Modernization Bureau

Defining and implementinggovernment policiesregarding the upgrading ofindustry and improving thecompetitiveness of industrialproduction

Coordinating these areas

ModernizationBureau

Programming internal andexternal financing allocatedto the various restructuringand upgrading programmes,in coordination with theministries concerned

Formulating, executing andmonitoring industrial sectorupgrading programmes inagreement with thedepartmental units andindustrial supportorganizations concerned

Conducting the studiesrequired to improve theindustrial upgradingprogrammes in cooperationwith specialist services andorganizations

Negotiating financingprogrammes at bilateral,multilateral and regionallevels to upgrade andimprove industrialcompetitiveness andcoordination with theministries concerned

84

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85

In keeping with the bilateral aspect of theBarcelona Process, association agreements havebeen concluded between the European Unionand its Mediterranean partners, including the Pal-estinian Authority, Israel, Jordan, Morocco andTunisia. Egypt has also concluded an agreementof this type, committing it to the long-term objec-tive of creating a Euro-Mediterranean free-tradezone within the next 10 to 15 years.

The Egyptian Government today fully sup-ports the principle of liberalization of trade andexport promotion. These objectives, among oth-ers, were defined in “Egypt in the 21st century”,a document setting out government policy inwhich Egypt’s commitment to trade liberalizationwas clearly formulated.

(a) For Egypt to achieve the target nationalannual growth rate of 7.6 per cent by theyear 2017, the manufacturing sector willhave to grow by 12 per cent per year,achieving results that are 30 to 50 per centbetter than at present.

(b) Investment in this sector will have to bemore than 30 per cent of the manufacturinggross domestic product compared with 22per cent at present. In other words, Egypt willrequire a productive investment of 4 billionUS dollars per year until 2017 if it is toachieve its target growth.

(c) Job creation in the economy as a wholewill have to improve considerably, if only toaccommodate the 600,000 persons who en-ter the job market each year. Most of themwill probably find employment in the indus-trial sector.

To achieve these objectives, the EgyptianGovernment has elaborated an upgrading policyfocusing on the private sector as the driving forcebehind growth, with particular attention beingpaid to small and medium-sized enterprises. TheGovernment is also determined to establish aneconomic climate conducive to the developmentof export-oriented industries.

The European Union is helping the EgyptianGovernment to achieve these objectives by grant-ing a subsidy of 1 billion Egyptian pounds (250million euros) to support the industrial moderniza-tion programme. This sum is supplemented by106 million euros provided by the Egyptian Gov-ernment and 74 million euros to be provided bythe beneficiaries. This initiative, with a total valueof 430 million euros, is one of the largest localand foreign financing assistance programmes everimplemented in the private industrial sector of apartner country on the southern side of the Medi-terranean. For the European Union, it is also thelargest industrial aid programme that it has everfinanced in a developing country.

D. Egyptian national industrialmodernization programme

The Egyptian national industrial modernizationprogramme, formulated by the Ministry of Indus-try and Technology with the assistance ofUNIDO, has three main elements: upgrading ofenterprises, technology infrastructure and indus-trial policy and sectoral support.

(a) Upgrading of enterprises

� Formulation, promotion and execu-tion of upgrading measures in in-dustrial enterprises in Egypt so as toimprove their competitivenessthrough vocational training andquality management;

� Upgrading of diagnostic pro-grammes and work plans of enter-prises benefiting from the nationalprogramme of the Industrial Mod-ernization Board;

� Monitoring of upgrading pro-gramme.

(b) Technology infrastructure

� Formulation, promotion and execu-tion of measures to upgrade thetechnology infrastructure in Egypt;

� Preparation, development andevaluation of studies, diagnoses andprogrammes relating to technologycentres;

� Preparation, development andevaluation of studies and diagnosesrelating to technology managementand transfer;

� Development of the technology in-vestment capacity of public and pri-vate enterprises.

(c) Industrial policy and sectoral support

� Definition and reformulation of therole of the administration and regu-latory, control, quality analysis andsupport bodies;

� Strengthening support bodies, par-ticularly with regard to standardiza-tion (central laboratory) and qualitycertification;

� Stimulation of the economic, com-mercial and technological informa-tion market.

Industrial Modernization Bureau

The Ministry of Industry and Technology decidedin April 2001 to endow the Industrial Moderniza-

86

tion Bureau (IMB) with an independent organiza-tional structure that would be economical on re-sources and flexible. The management and or-ganization of the IMB is modelled on privatesector criteria.

The IMB is chaired by the Minister of Indus-try and Technology and has its own administra-tive and financial structure.

It is administered by the ModernizationBoard, which is chaired by the Minister of Indus-try and Technology. The management board ismade up of prominent representatives of industry,the private sector and the bank system. The totalnumber of representatives sitting on the board iskept at a reasonable level.

The General Director of the IMB is appointedby the Ministry of Industry and Technology. Theorganizational structure, powers of the manage-ment board and of the Upgrading Bureau and theupgrading process chart are shown in figuresXXIII, XXIV, XXV and XXVI.

E. Financial resources of the Fundfor improving competitiveness

The upgrading programme in general covers en-terprises and their environment. The initial five-year programme budget for upgrading and mod-ernization of 4,000 enterprises is around 5 billionEgyptian pounds.

On average, the investment required to up-grade/modernize an enterprise is around 4.17million pounds, and the Fund for improving com-petitiveness will provide 0.9 million pounds as anincentive to each enterprise.

An investment of around 1.4 billion poundsis required to modernize the technology infra-structure in the industrial sector.

The Fund’s resources will be used to finance:

� The staffing and financing expenses of theFund; around 15 management staff willbe required, together with 10 or so em-ployees, to assist the programme and pro-vide support;

� The contribution of the Fund to the up-grading of enterprises and to services forenterprises.

The financial aid to enterprises will be in theform of grants to be paid as the upgrading processprogresses.

The grants provided by the Fund could beshared out as follows:

� 70 per cent of the cost of diagnosis andformulation of an upgrading plan, to amaximum of 100,000 pounds;

� 70 per cent of the cost of improving qual-ity and technology management, to amaximum of 300,000 pounds;

� 20 per cent of the share of the restructur-ing investment financed by the enterpriseitself;

� The first instalment of 30 per cent of thegrant will be released on approval of theplan;

� The remaining instalments will be re-leased as follows:

In one instalment for equipment afteracquisition;In two instalments for the remainingactivities as they progress.

F. Impact of execution

The expected impact of the programme is esti-mated as follows:

� Growth in the value of production: 8.07per cent during the first year of applica-tion, totalling 34.5 per cent by the end ofthe five-year period compared with thevalue of production before implementa-tion of the programme;

� Growth in gross domestic product (GDP)totalling 34 per cent by the end of thefive-year period.

� For 1 pound provided by the Fund anoutput of:

11 pounds in the value of production4 pounds in the GDP

� For 1 pound provided by the Fund, basedon subsidized interest rates (7 per centinstead of 15 per cent), an output of:

8.7 pounds in the value of production3.04 pounds in the GDP.

87

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Printed in AustriaV.02-59595–March 2003–250

Restructuring, upgrading and industrial competitiveness

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATION

economy env i ronment employment

UNITED NATIONS INDUSTRIAL DEVELOPMENT ORGANIZATIONVienna International Centre, P.O. Box 300, A-1400 Vienna, AustriaTelephone: (+43-1) 26026-0, Fax: (+43-1) 26926-69E-mail: [email protected], Internet: http://www.unido.org

METHODOLOGICAL GUIDE: Restructuring, upgrading and ...

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