TA 4745-MLD: SME Development Project Report … 4745-MLD: SME Development Project Report iv TABLE OF...

TA 4745-MLD: SME Development Project Report

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TABLE OF CONTENTS

0 SUMMARY VII

1 THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES 1

1.1 ECONOMIC AND REGULATORY FRAMEWORK 1 1.1.1 Characterization of the Small Island Economy 1 1.1.2 International Competitiveness 4 1.1.3 Business Regulatory Environment 5

1.2 SECTOR AND REGIONAL ANALYSIS 8 1.2.1 Key Challenges and Opportunities 8 1.2.2 Government Strategy for Private Sector Development 13 1.2.3 External Assistance in the Atolls 16

2 PROPOSED SECTOR DEVELOPMENT PROJECT 18

2.1 PROJECT COVERAGE AND IMPLEMENTATION PROCESS 18 2.1.1 Objectives, Scope and Strategy 18 2.1.2 Targeted Sectors for MSME Development 20 2.1.3 Targeted Regions for MSME Development 23 2.1.4 Institutional Delivery Mechanism 24 2.1.5 Policy and Regulatory Framework 27

2.2 KEY FEATURE: BUSINESS DEVELOPMENT SERVICES 30 2.2.1 Existing Situation in the Maldives 30 2.2.2 Cluster-Based Development Strategy 30 2.2.3 Organizational Structure 32 2.2.4 Capacity Building 32 2.2.5 BDS Centers in Target Regions 34 2.2.6 Technical Assistance and Project Costing 35

2.3 KEY FEATURE: COST SHARING FACILITY 37 2.3.1 Objective and Coverage 37 2.3.2 Operational Features 40

2.4 KEY FEATURE: CREDIT GUARANTEE FACILITY 42 2.4.1 Financing Approach 42 2.4.2 Operational Features 44 2.4.3 Organization 46

2.5 FINANCING PLAN AND IMPLEMENTATION ARRANGEMENTS 47 2.5.1 Financing Plan 47 2.5.2 Project Performance Monitoring and Evaluation 50

3 TECHNICAL ASSISTANCE 51

4 PROGRAM BENEFITS, IMPACT AND RISKS 52

5 SOE RESTRUCTURING AND PRIVATIZATION 53

5.1 OBJECTIVES AND SCOPE 53

5.2 PUBLIC ENTERPRISE ANALYSIS 56

5.3 PROPOSED STRATEGY 59


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ANNEXES

CURRENCY EQUIVALENTS (as of June 2007) Currency Unit

MRf. 1.00 = US$ 0.0774 US$ 1.00 = MRf. 12.92

ABBREVIATIONS 6NDP Sixth National Development Plan

7NDP Seventh National Development Plan

ACDBP Atolls Credit and Development Banking Project

ADB Asian Development Bank

ADFs Revolving Credit Funds

ADSL Atoll Development Project for Sustainable Development

BCMW Building Construction and Mechanical Works

BDS Business Development Services

BML Bank of Maldives

CIP Commercially Important Passenger

EA Executing Agency

EDU Enterprise Development Unit

ESTP Employment Skills Training Project

gdp Gross Domestic Product

HIES Household Income and Expenditure Survey

IAS Island Aviation Services Limited

IATA International Air Transport Association

ICA Investment Climate Assessment

IDA International Development Association

IFAD International Fund for Agricultural Development

IFC Finance Corporation

IGAs Income Earning Opportunities

IMF International Monetary Fund

IPO Initial Public Offering

IWDCs Island Women’s Development Committees

LC Letter of Credit

MACI Maldives Association of Construction Industry

MCPI Ministry of Construction and Public Infrastructure

MEDT Minister of Economic Development and Trade

MEL Employment and Labor

MFLC Maldives Finance Leasing Company

MMA Maldives Monetary Authority

MHREL Ministry of Human Resources, Employment and Labor

MOAD Ministry of Atolls Development

MoCPI Ministry of Construction and Public Infrastructure


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MOFAMR Ministry of Fisheries Agriculture and Marine Resources

MOFT Ministry of Finance and Treasury

MPL Maldives Post Ltd

MRf Maldivian Rufiyaa

MTCC Maldives Transport and Contracting Company

MWASS Ministry of Women Affairs and Social Security

NDB National Development Bank

PE Public Enterprise

PEMEB Public Enterprise Monitoring and Evaluation Board

PPTA Project Preparation Technical Assistance

PSD Private Sector Development

PWC Public Works Corporation

RDMOS Regional Development and Management Offices

SADP Southern Atolls Development Project

SIE Small Island Economy

SME Small and Medium-Sized Enterprise

SME-DP Small and Medium-Sized Enterprise Development Project

SOE State Owned Enterprise

STO State Trading Organization Plc

SWOT Strengths, Weaknesses, Opportunities, and Threats

TA Technical Assistance

ToR Terms of Reference

UN United Nations

UNDAF United Nations Development Framework

UNFPA United Nations Population Fund

UNICEF United Nations Children's Fund

UNV United Nations Volunteers

WHO World Health Organisation


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0 S UMM AR Y

Borrower Republic of Maldives

Proposal The proposal consists of a loan of US$6.9 million for the development of ‘The Maldives Micro, Small and Medium Enterprises Development Project Loan’, preceded by US$1.7 million for activities related to capacity building.

Classification Targeting classification: General intervention

Sector: Industry, agriculture, services and trade

Subsector: Small and medium enterprises (SMEs)

Themes: Sustainable economic growth, private sector development

Environmental Assessment

Category C

Social Sector Assessment

Category C: Involuntary resettlement

Category C: Impact on indigenous people

Program Rationale

The Maldives is a Small Island Economy (SIE) consisting of 26 natural atolls with a total land of less than 300 square kilometers spread over 900 kilometers. It has one of the fastest growing economies in the world, driven by its two leading sectors of tourism and fishing that has created linkages to other subsectors like local handicrafts, tourism-related activities and boatbuilding. Yet the benefits of economic growth have not been equitably distributed to the population at large. Decentralization of economic activity has been undermined by the lack of infrastructure, a poorly developed inter-island transportation system, financial system constraints to credit for businesses, and legal and regulatory barriers. Greater opportunities for people living in Male’ has produced a fourfold population expansion in the past 20 years, and it has given rise to a population density in Male’ that is among the highest in the world, a situation made all the more severe by the recent tsunami.

In an effort to ameliorate regional inequalities and reverse migration to the capital, the Government placed regional economic growth and diversification as a key objective of economic development in the Seventh National Development Plan (7NDP) for 2006-2010. As part of 7NDP, the Government is developing regional centers that are designed to have social and infrastructure facilities, and that will be complemented by focus islands on different atolls acting as atoll service hubs and growth centers. The focus islands identified under the 7NDP are to serve as growth centers, fostering employment and income generation opportunities by concentration of development efforts and provision of a higher level of infrastructure to achieve economies of scale. The Government expects that these efforts will reduce regional differentials and promote growth and employment opportunities outside of Male’.

Objective and Scope

The objective of the MSME Development Project Loan is to support the Government’s efforts to (i) develop the entrepreneurial climate and support services that will facilitate growth, (ii) provide the necessary conditions for converting existing entrepreneurial potential into innovative and successful business activities, (iii) attract entrepreneurial leadership from other regions of the country, and (iv) establish broader regional centers for SME activities that are driven by growth nodes or networked clusters for supporting activities. To achieve the aforementioned objective, the project loan focuses on the following:

� bolster human resource development by creating business development service centers that provide training programs in entrepreneurship, management, and technical skills for MSMEs and develop appropriate materials for such training, as well as help to identify commercial opportunities


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in specific sectors;

� improve access to finance by developing innovative financing schemes using alternative financial instruments such as equity financing, while encouraging the development of cooperatives and associations;

� promote a market-driven process through the public and private sector that in the short to medium-term will target specific types of activities in selected regions of the country; and

� enhance the catalytic role of public sector for facilitating commercial activities in the atolls and strengthening MSME activities by improving the policy and regulatory environment.

The project framework is attached in Annex A.

Loan Amount and Terms

A loan of US$ 6.9 million with the guarantee of the Republic of Maldives from ADB’s ordinary capital resources will be provided under ADB’s London interbank offered rate (LIBOR)-based lending facility. Prior to the loan, US$ 1.7 million in assistance will support activities related to capacity building.

Counterpart Funds

The policy framework for the program includes specific components that bear distinct costs of structural adjustments and improvements in the regulatory environment. The Government will provided assurances that necessary funding will be made available to cover these costs.

Executing Agency Ministry of Economic Development and Trade (MEDT)

Risks and Assumptions

Risks include lack of Government capacity to implement program, and inadequate inter-ministerial coordination of private sector development initiatives.

Technical Assistance

The ADB will provide US$1,000,000 in 2008 to build the capacity for MSME development in the atolls. Under the loan and in 2009-2011 the Government will finance US$1.2 million of capacity building activities related to MSME development in the atolls. Support will be given for specific activities designed to (i) establish and sustain programs in the BDS centers, (ii) provide capacity building to the Enterprise Development Unit of the Ministry of Economic Development and Trade (MEDT) and business member organizations (BMOs), and (iii) ensure sustainable access to MSME financing.


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1 T H E S E C TO R : P E R FO RM ANC E , P R O B L EM S , A N D O P P OR T UN I T I E S

1 . 1 E C O N O M I C A N D R E G U L A T O R Y F R A M E W O R K

1 . 1 . 1 C h a r a c t e r i z a t i o n o f t h e S m a l l I s l a n d E c o n o m y

1. SIE Features: The Maldives is a Small Island Economy (SIE) consisting of 26 natural atolls with a total land of less than 300 square kilometers spread over 900 kilometers around the equator.1 There are 1,190 islands in the archipelago, of which 198 are inhabited by a population of 309,000.2 Only 28 islands have a land area greater than a square kilometer.3 Only four islands have a population greater than 5,000 people, and 70 percent of the inhabited islands have a population of less than 1,000 people. In addition to the inhabited islands, 87 islands have been designated and developed as tourist resorts, with an additional 11 islands currently being set aside for development. With a total land area of 2 square kilometers , the capital island of Male’ is home to a third of the population. It is the seat of the Government of the Maldives (Government) and the centre of commerce and business. Concentration of the population in the capital is growing, especially after the December 2004 tsunami destroyed the means of livelihood in many islands. 2. Special Challenges: The Maldives has a number of economic disadvantages similar to other SIEs that undermine the country’s international competitiveness. In small economies like the Maldives the percentage deviation of costs from a medium-size economy are over 70 percent for sea freight, nearly 50 percent for electricity and telephone service, more than 30 percent for both unskilled labor and fuel.4 In sectors like tourism, these high costs translate into a 60 percent overall increase in the cost of tourism, which can be passed onto the high-end consumer of tourism activities but are not readily transferable onto products like handicrafts, agro-industrial products and manufactured goods that compete in fairly homogeneous international product markets. From a policy perspective it does not suggest the need for protection against the rest of the world, but rather proactive policies that seek to overcome, or at least partially compensate for the economic disadvantages associated with the high production and trading costs.

1 For administrative purposes, these atolls are grouped in 20 atolls. 2 Based on 2002 census. 3 Most islands are part of large atolls that surround large lagoons, and all are low lying with none having an altitude

higher than 1.8 meters above sea level. The surrounding barrier reefs act as natural protection for the islands from adverse weather conditions during the monsoon seasons. Although no official reference could be identified for the land-mass estimate, the 300 km

2 figure is quoted in reports such as the UNEP State of the Environment Report

and the FAO Agricultural (Horticultural) Crop Sector Report (FAO, 1994). More recent estimates based on satellite data estimate the area at 227.45 km

2 (Naseer and Hatcher, 2004).

4 Based on a survey of SIE relative to other countries using the World Bank’s World Economic Indicators and Global Business Cost Survey, as well as the United Nations trade database (Comtrade), and reported in Winters (2003).


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3. Economic Growth: Despite its intrinsic competitive disadvantages, the Maldives has one of the fastest growing economies in Southeast Asia. Two sectors, tourism and fishing, have been the driving forces behind the expansion of Gross Domestic Product (GDP) and employment generation, and have created linkages to other subsectors like local handicrafts, tourism-related activities and boatbuilding. In 2006 the sharp rise in real GDP reflected a resumption of growth following the devastation that occurred throughout the country as a result of the tsunami on 28 December 2004 (Table 1). The recovery has been largely driven by tourism sector and brings the country back to its steady-state growth path of around 6 percent a year. GDP per capita has expanded from US$ 2,094 in 2002 to an estimated US$ 2,757 in 2006, the highest in the South Asia region. The economy is largely driven by service industries, which account for about 79 percent of GDP. The main service industries, other than tourism, are real estate, wholesale and retail trade, transport and communications, government administration and financial services (Table 2).

Source: Ministry of Planning and National Development; Maldives Monetary Authority (MMA); and International Monetary Fund (IMF), World Economic Outlook database.

Table 2: Maldives Sectoral Contributions to GDP (percent), 2000 - 2005

2000 2001 2002 2003 2004 2005

Primary Sector 9.4 9.5 10.4 9.7 9.7 9.1

Agriculture 2.8 2.8 2.7 2.6 2.6 2.5 Fisheries 6.0 6.1 7.1 6.6 6.6 6.1 Coral and sand mining 0.6 0.6 0.6 0.6 0.6 0.6

Secondary Sector 14.4 15.1 15.6 15.6 15.6 16.1

Manufacturing 8.0 8.1 8.8 8.5 8.5 7.9 of which, fish preparation 2.1 2.3 3.0 3.0 2.7 2.5

Electricity and water supply 3.2 3.4 3.5 3.6 3.6 3.8 Construction 3.2 3.5 3.3 3.5 3.5 4.4

Tertiary Sector 80.1 79.3 77.9 78.6 78.6 78.8 Wholesale & Retail Trade 4.5 4.4 4.2 4.1 4.1 3.9 Tourism 33.0 31.9 30.9 32.7 32.7 32.3 Transport & communications 14.5 14.2 14.3 14.2 14.2 15.2 Financial services 3.4 3.4 3.4 3.3 3.3 3.2 Real estate 7.8 7.7 7.6 7.2 7.2 6.9 Business services 2.9 2.9 2.9 2.8 2.8 2.7 Government administration 11.8 12.7 12.6 12.4 12.4 12.8 Education, health and social services 2.2 2.1 2.0 1.9 1.9 1.8 Financial services, indirect measure (3.9) (3.9) (3.9) (4.0) (4.0) (4.0)

GDP total 100.0 100.0 100.0 100.0 100.0 100.0

Source: Ministry of Planning and National Development – Statistical Yearbook of Maldives 2006.

4. Regional Growth Inequalities: Notwithstanding the country’s high economic growth rates in the past ten years, the benefits of that growth have not been equitably distributed to the population at large. Average household income in the atolls is 55 percent of that in Male’,

Table 1: Maldives General Economic Indicators, 2000 - 2006 2002 2003 2004 2005 2006

GDP at 1995 constant price (USD mn) 546.3 593.0 649.4 613.5 693.3 Real GDP Growth (%) 6.5 8.5 9.5 -5.5 13.0

Population (thousands) 306 315 325 335 345 GDP per capita (USD) 2,094 2,197 2,482 2,350 2,757

Consumer price inflation (avg %) 0.9 -2.8 6.3 3.3 7.0 Current account balance (USD mn) -35.7 -32.0 -129 -287 -358

Exchange rate (avg Rf/USD) 12.8 12.8 12.8 12.9 13.0


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according to the 2002-03 HIES by the Ministry of Planning (2004). Decentralization of economic activity has been undermined by the lack of infrastructure, a poorly developed inter-island transportation system, financial system constraints to credit for businesses, and legal and regulatory barriers. Greater opportunities for people living in Male’ has produced a fourfold population expansion in the past 20 years, and it has given rise to a population density in Male’ that is among the highest in the world, a situation made all the more severe by the recent tsunami.5 Lack of infrastructure in the atolls, underdeveloped inter-island transportation, a lack of financial services, and legal and regulatory barriers have all contributed to the wide disparity in average per capita income of Male’, resorts and industrial islands, on the one hand, and other islands in the outer atolls, on the other. 5. Regional Development Strategy: In an effort to ameliorate regional inequalities and reverse migration to the capital, the Government placed regional economic growth and diversification as a key objective of economic development in both the Sixth National Development Plan (6NDP) for 2001-2005 and the present Seventh National Development Plan (7NDP) for 2006-2010. As part of the 7NDP, the Government is developing regional centers that are designed to have airports, ports and other social and infrastructure facilities, and that will be complemented by focus islands on different atolls acting as atoll service hubs and growth centers. The focus islands identified under the 7NDP are to serve as growth centers, fostering employment and income generation opportunities by concentration of development efforts and provision of a higher level of infrastructure to achieve economies of scale. Islands that are of importance to the population consolidation program are likely to have the following characteristics: (a) sufficient land area to support greater numbers of population; (b) proximity to atoll capital; (c) substantial existing infrastructure; and (d) potential for growth because of land area, agricultural, fishery or other commercial activity. The Government expects that these efforts will reduce regional differentials and promote growth and employment opportunities outside of Male’. It also plans to address poverty among the most vulnerable groups, who may not be able to benefit from the growth strategy, by developing special targeted income support programs.

5 In 2006, 35% of the population was located in Male’ compared with 27% in 2000, according to the Ministry of

Planning’s 2006 census (Ministry of Planning, 2006).


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1 . 1 . 2 I n t e r n a t i o n a l C o m p e t i t i v e n e s s

6. Effective Exchange Rate: The international competitiveness of the Maldives is reflected in the real effective exchange rate (RER), which takes into account both general price movements in the country relative to that of each of its trading partners, and the cross exchange rate between the Maldives and each of its trading partners.6 The Maldives has effectively pegged the rufiyaa against the U.S. dollar since 1994. Between 1995 and 2001 that policy caused a 35 percent appreciation of the rufiyaa's real effective exchange rate, which undermined the country’s international competitiveness, discouraged tourism and fish exports and prevented economic diversification. Large inflows of foreign direct investment and tourism created ‘Dutch disease’ symptoms as the overvaluation of the rufiyaa made non-tourism exports such as fisheries and agricultural products less competitive. The large proportion of spending on imported goods and local spending on domestic non-traded goods such as construction also created pressure for capital and labor to move away from the traditional export sector, with a concurrent weakening of the country’s competitiveness and further loss of export incentives for the fisheries and agricultural sectors. Since the depreciation of the dollar since 2002, the ruffia has become increasingly undervalued relative to the Euro. 7. Competitive Potential: Among the major factors inhibiting enterprises from competing effectively in the local, domestic, resort and foreign markets are the lack of equal treatment to them given by resorts and their inability to supply high quality products and services. Costing of services products is not considered to be a major constraint to competing in the various markets

by enterprises. Indeed, according to the World Bank’s recent Investment Climate Assessment (ICA), only 30 percent of material inputs and supplies originate from domestic sources. 7 A fairly similar pattern exists in manufac-turing and transport logistics, where more than one-half of the enterprises in manufacturing and trans-

6 The real exchange rate is a measure of the relative price of non-tradables to tradables and, as such, it measures

the cost of producing a good domestically. A relative price rise, for example, reflects an increase in the domestic cost of producing tradable goods, since it makes production of tradables less profitable and induces resources to move to the non-tradables sector. While the concept is straightforward, its empirical measurement is difficult for a country like the Maldives where price series for tradable and non-tradable products are not readily available. Two alternative measures of the real exchange rate can be constructed within the context of the country’s data limita-tions. The first uses partner-country and domestic price measured in terms of CPI data to construct a real exchan-ge rate index that represents the ratio between non-tradable and tradable prices. Specifically, the real exchange rate is defined in this case as e

rt = P

nt/P

ft, where e

n is the nominal exchange rate, P

f is the foreign currency price

of goods purchased abroad, and P is the domestic price level. The second uses purchasing power parity (PPP) definition to correct the nominal exchange rate by the relative price of domestic to foreign prices, as measured by CPI data. Using this approach, the real exchange rate is defined as e

rt = (1/e

n)t P

nt/P

ft , where e

n is the nominal

exchange rate, Pf is the foreign currency price of goods purchased abroad, and P is the domestic price level.

7 World Bank, "The Maldives: Sustaining Growth and Improving the Investment Climate". Finance and Private Sector Development Unit, South Asia Region, June 2006.

Table 3: Maldives Real Cross-Rates Indices (1995=100)

Real Cross-Rates

World Europe Asia America Mid.East Oceania

1995 100.0 100.0 100.0 100.0 100.0 100.0

1996 104.9 105.7 105.2 104.7 101.4 100.4

1997 119.8 124.8 119.0 112.8 111.9 112.3

1998 129.5 125.7 135.6 116.6 112.7 136.2

1999 134.9 137.0 137.5 121.2 117.4 138.4

2000 134.8 145.8 131.9 112.7 116.3 143.6

2001 134.9 145.6 133.1 111.3 110.4 148.7

2002 126.8 133.3 127.8 109.7 102.5 134.8

2003 111.7 109.1 117.7 97.8 95.7 108.2

2004 109.1 103.1 116.2 95.4 100.3 98.0

2005 105.5 103.1 110.1 90.2 98.3 91.7

2006 101.9 100.7 104.8 86.6 98.5 90.4

Source: Calculations based on average annual exchange rates and wholesale price indices.


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port logistics purchase their material inputs and supplies directly from foreign sources.

1 . 1 . 3 B u s i n e s s R e g u l a t o r y E n v i r o n m e n t

8. Effect on Business: The Maldives ranks fairly high in several areas of the regulatory environment affecting the ease of doing business, but its comparative position has recently declined because of increased burdens in a number of areas that especially impact on MSMEs. Downgrading has occurred in (a) ease of employing workers, (b) starting a business, (c) protection of investors, (d) contract enforcement, (e) trading across borders, and (f) ease of closing a business (Table 3). In the remaining four areas of the business regulatory environment there has been no change in the country’s comparative ranking from a year earlier, that is, there has been no comparative improvement in the business regulatory environment (World Bank, 2007). 9. Starting and Closing Businesses: The Maldives is the only country in South Asia that has a legal requirement on the minimum start-up capital. Under the company law, entrepreneur are

required to deposit a sum equal to 7 percent of the country’s income per capita before starting operation. In contrast, the Maldives is ahead of other South Asian countries on the time and number of procedures needed for business start-up, although it ranks behind Sri Lanka and Bhutan on the cost of those start-ups. The country is also ahead of others in South Asia in terms of the ease of dealing with licenses because of the simplicity of the process, but there is room for improvement on the time and cost need to obtain building and occupancy permits. In general, reforms to facilitate business start-up are easy to implement, as

evidenced by the fact the in 2006 over 40 countries eased business entry requirements. 10. Operating a Business: The 2006 ICA of the Maldives points to a number of areas in the operation businesses that require attention (World Bank, 2006). Although most of the surveyed enterprises were in Male’ Atoll, the ICA points to a number of constraints to doing business in the Maldives that are also likely to apply to businesses operating in other atolls. The top five obstacles identified by the businesses surveyed were (i) lack of access to finance; (ii) high cost of finance; (iii) lack of access to land; (iv) lack of skilled labor; and (v) corruption. There is, however, a high degree of diversity across sectors with respect to the relative significance and severity of other constraints affecting enterprise performance. Access to and cost of finance

Table 4: Maldives Global Ranking of Ease of Doing Business, 2006 versus 2005

2006 2005 Change Overall 53 49 -4

Paying Taxes 1 1 0

Employing Workers 5 1 -4

Dealing with Licenses 9 9 0

Starting a Business 31 33 2

Protecting Investors 60 58 -2

Enforcing Contracts 83 81 -2

Trading Across Borders 91 84 -7

Closing a Business 114 109 -5

Getting Credit 143 143 0

Registering Property 172 172 0 Source: World Bank, Doing Business 2007. Washington, DC.


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nevertheless emerged as the major obstacle to businesses in all major sectors, including the construction, handicraft, and agriculture sectors. 11. Legal Enforcement: According to the ICA survey findings, there is considerable variation in the degree of confidence in the rule of law among businesspersons. Only about 40 percent of entrepreneurs in manufacturing and tourism had confidence in the judicial system’s ability to enforce contractual rights in business disputes; in the transport and logistics sectors, the level of confidence was only 27 percent. Major problems remain in enforcing contracts and closing a business, and there are severe exit barriers. Enforcement of a contract takes 665 days, compared with an average of 385 days in other South Asian countries. The bulk of these delays are in the 485 days that it takes to execute judgments, following the average of 165 day average that it takes to give a judgment (World Bank, 2007). Since insolvency is nonexistent and there is no bankruptcy law, it can take as long as seven years to close a business, compared with four years in other countries of the region. The ICA study also shows that investor confidence in the judicial system is about one-half of that that in Sri Lanka and India.


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12. Access to Land: Land access is one of the biggest obstacles to business growth in the Maldives. The majority of business operations are being carried out in rented or leased land and buildings, with the average contract length for land varying from seven years in transport and logistics to between 10 and 14 years in manufacturing and tourism. According to the ICA, more than one-third of the firms in tourism and logistics and about one-fourth in manufacturing have made an attempt to acquire rights to new land or buildings. However, over 60 percent of manufacturing respondents, around 45 percent of respondents in the tourism industry and transport-logistics have been unsuccessful in acquiring land. Moreover, a comprehensive and transparent regulatory framework for housing and urban management is lacking in the Maldives, and planning and building standards and regulations have been developed in an ad-hoc manner. Following the implementation of the 2002 Land Act, the Government is taking steps to create a market for land sales and is conducting a cadastral survey. Uncertainty nevertheless remains in a number of areas, including the ability of enterprises to transfer land. Table 5: Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis of MSME Development in Atolls

Factors Internal External

Positive S - Strengths O – Opportunities

Geographical location near tourist resorts Improvement of logistics through inter and intra-island transportations system

Artisan tradition and culture Communication system enhancements through mobile phones and internet

Regional development planning Possibilities to use existing facilities for BDS activities and services

Low cost skilled workers Political commitment to private sector development

Schools system for creating knowledge-base society

Development of entrepreneurial infrastructure for MSME services

Cultural, recreational and tourism capacities Existence of experienced entrepreneurs

Opportunities for agricultural commercialization, tourism related activities, handicrafts and small processing capacities

Location of growth modules in targeted regional developmental centers

Negative W - Weaknesses T - Threats

Tradition of large enterprises Lack of entrepreneurial mindset

Narrow economic structure Few people oriented to modern working environment

Lack of entrepreneurial and managerial knowledge and skills Dependence on government for action

Lack of support for entrepreneurs Delays in privatization and restructuring of SOEs

Lack of finance for MSMEs Impact of government involvement on business decisions in enterprises

Fragmentation of the agricultural land; little experience with cooperatives Corruption and lack of good governance

Lack of financial resources

Lack of coordination of development activities, especially transportation and communication


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13. Access to Financing: The lack of clarity on property rights is a major constraint to accessing finance, as lenders are unwilling to take land as collateral if they are unable to sell it freely upon the borrower’s default. Partly for this reason, access to credit is ranked as the number one impediment to doing business in the Maldives, according to both perceptions of entrepreneurs as reported in the ICA and actual financing conditions relative to those of other countries, as reported in the World Bank’s business survey (World Bank, 2007). The ICA reports that only one-third of businesses use bank loans for their activities. Instead, firms rely on internal funds for working capital. Domestic commercial banks contribute 11 percent to existing working capital and international commercial banks only 3 percent. Indeed, only 25 percent of respondents to the ICA questionnaire reporting making any efforts to apply for loans. Nearly 60 percent of the credit that has been extended is for the tourism sector, followed by commerce (import-export operations) and the fisheries sector. Together these three sectors absorb over 85 percent of existing loans. Differences in financial sector development and the regulatory environment often determine the magnitude of SME lending in countries. In Asia countries like the Maldives that have limited SME financing also lack banking intermediation, have weak legislations and poor public finance management, whereas those that have well-development financial sectors tend to have high SME financing.8

1 . 2 S E C T O R A N D R E G I O N A L A N A L Y S I S

1 . 2 . 1 K e y C h a l l e n g e s a n d O p p o r t u n i t i e s

14. Business Environment in the Atolls: Our survey of business conditions and perceptions by MSMEs in three key regions of the Maldives reveal significant differences from those identified by the World Bank’s ICA for businesses operating in the capital of Male’. Table 5 summarizes the major opportunities and challenges to entrepreneurs and businesses in the Northern, Southern and South-Central Development Regions of the country. These findings are based on SWOT analysis of the enterprises in each of the regions by team members and differ from the more detailed MSME survey conducted in those atolls. 15. Internal Constraints: Table 6 shows the ranking of key internal constrains on enterprises in the Northern and Southern Development Regions. Lack of technically skilled labor, labor costs, and accounting skills are the principal concerns of business in both regions. Availability of capital is only a major problem for enterprises in the South-Central Region. In contrast, technology and management staffing is a major problem in the Northern and Southern Regions, but they rank below alls in the South-Central Region.

8 RAM Consultancy Services Sdn Bhd, “SME Access to Financing: Addressing the Supply Side of SME Financing”.

ASEAN Secretariat, REPSF Project No. 04/003, July 2005.

Table 6: Ranking of Internal Constraints

Region Northern South-Central Southern Total

Technically skilled labor 4.6 4.4 3.2 4.1

Labor costs 3.7 3.9 3.5 3.7

Accounting skills 4.4 2.1 4.4 3.6

Market information 4.2 2.2 4.2 3.5

Management staffing 4.4 2.0 4.2 3.5

Technology 4.0 1.9 4.4 3.4

Capital 2.7 4.4 2.0 3.0 Source: MSME survey in Northern, Southern and South-Central Regions.


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16. External Constraints: High utility prices are ranked high by enterprises in the atolls (Table 7). They also perceive access and cost of financing to be a threat to their operations. Land as well as transport issues in both air and sea transportation are also major constraints reported by enterprises. The fact that telephone and internet costs are experienced as costly is significant to potential efforts to provide business development services through extension activities in the atolls. Among the factors having a negligible impact on the enterprises are labor relations, foreign competition, customs and trade regulations, business licensing and operating permits. Perceptions about cost and access to finance are largely due to the dependence on family and own financial resources. Because of the difficulty of obtaining credit, few enterprises actually consider using external financial sources. SMEs operating principally in Male’ also reported

access and cost of finance, as well as access to land as among the top five constraints to doing business.9 Corruption, which is ranked among the top five constraints in Male’, is considered to as a somewhat lesser constraint to doing business in the Northern, South-Central and Southern Development Regions. 17. Private Sector Per-ception of Government: Enterprises have a mixed perception about their relationship with the central and local governments. About one-fourth perceive central government as helpful, while over one-half

have an unfavorable perception of the government’s activities. The remaining enterprises surveyed either had a neutral perception or lacked experience with the government or were therefore reluctant to express an option. There are generally concerns about the lack of a clear demarcation between public and private sector activities. The Government has initiated reform efforts in the legal and regulatory framework to facilitate investment and promote the private sector. In 2005 the Government introduced several reforms covering compliance monitoring with enforcement of court decisions by the Attorney General, the introduction of an examination for practicing lawyers, establishment of a Bar Association and draft a Code of Ethics for judges, and the preparation of a three-year civil-justice action plan.

9 World Bank, “The Maldives: Sustaining Growth and Improving the Investment Climate’. Washington, DC: World

Bank, South Asia Region, Finance and Private Sector Development Unit, April 2006.

Table 7: Ranking of External Constraints Region

Northern

South-Central Southern Total

High utility prices 4.7 4.7 4.8 4.7 Access to finance 4.7 4.6 4.4 4.6 Cost of finance 4.6 4.5 4.4 4.5 Water and/or electricity access 4.5 4.5 4.4 4.5 Land 4.2 4.3 4.5 4.3 Shipping and sea transportation services 4.6 4.4 3.9 4.3 Air transportation services 4.5 4.2 3.7 4.1 Competition with domestic competitors 4.3 3.9 3.2 3.8 Access to land 3.4 3.4 3.4 3.4 Telephone and/or internet access 3 3.2 3.5 3.2 Too high taxes & duties 3.4 3.3 3 3.2 Other fees and unofficial payments 2.8 3.0 3.4 3.1 Business licensing & operating permits 2.9 3.0 3.2 3.0 Customs and trade regulations 2.9 2.9 2.8 2.9 Labor regulations 2.9 2.7 2.2 2.6 Competition with foreign competitors 2.8 2.4 1.7 2.3 Source: MSME survey in Northern, Southern and South-Central Regions.


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18. Legal and Regulatory

Constraints: The current legal framework is not sufficiently comprehensive to provide an appropriate PSD enabling envi-ronment. One of the major problems of administrating just-ice is the court system, espe-cially in islands where constraints include lack of trained personnel and substantial bureaucratic delays. People from the atolls and outer islands have to travel to Male’ for the appeal process or what are often complex commercial issues. The courts lack trained judicial persons throughout all magistrate courts. Nor does the court system have an effective summons procedure or a comprehensive judgment enforcement process. The Government needs to formulate legislations on taxation, bankruptcy, banking and taxation. It also needs to introduce accounting and auditing standards for the private sector. Minimum wage levels need to be introduced as well. Finally, it is essential that impact assessments be carried out a part of the formulation of major pieces of legislations to measure their impact on PSD and MSMEs in particular. Based on a review of relevant commercial and investment laws and regulations, including accounting standards, land tenure and property rights, the focus of support to MSME activity in the atolls should be based on realistic and sustainable approaches for strengthening the MSME policy, legal, regulatory, and accounting framework, and one that contains a detailed strategy and time-bound action plan for MSME development. 19. Transportation: At present the transport of cargo between Male’ and the outer islands relies on the traditional cargo and passenger vessels operating on a fairly unscheduled basis, while the transport of passengers relies on these same vessels and, where possible, on the use of air transport services. There is a fairly significant network of transport operations within islands in the same atoll and between islands of adjacent atolls. While Male’ remains the centre of the transport system, there are growing numbers of hubs. Two regional ports are opening in Kulhudhufushi and S. Hithadhoo, while State Trading Organization Plc (STO) imports cargo directly into S. Gan, and Fari Maldives Pvt. Ltd imports cargo directly into Theefaridhoo.10 The domestic aviation network is largely dependent on seaplanes for the tourist market and wheeled aircraft for the local population. Plans exist to increase the number of domestic airports from four to eleven. Limited ferry routes exist, but regular services tend to be unscheduled and subject to weather conditions. From time to time, foreign companies have established regular ferry services, but these have been short-lived.

10 ADB, “Domestic Maritime Transport Project”. Draft Final Report. TA 4395-MLD, August 2005.

Table 8: Constraints on Competitiveness of Enterprises

Region

Northern South-Central Southern Total

Differentiated treatment by resorts 5 3.5 5 4.5 Quality of products 4.7 4.5 5 4.4 Differentiated treatment by authorities 4.3 3.5 3.9 4.1

Production scale 3.8 3.4 3.1 3.4

Price of product 3.5 2.5 1.8 2.6 Source: MSME survey in Northern, Southern and South-Central Regions.


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20. Skills Deficiencies: According to the 7NDP, the Maldives has one of the lowest labor force participation rates in South Asia (47.7 percent). Youth unemployment is also substantial and has been increasing in recent years, with the result that 40 percent of young women and over 20 percent of young men are currently unemployed. One of the problems is the lack of appropriate skills needed for existing employment opportunities in the Maldives. Educational and vocational institutions have not inculcated enterprise as a career option or provided appropriate business orientation and support skills. According to the ICA survey, most schools only offer commerce subjects and the average pass rate is 25 percent, while the pass rate for English is only 6 percent. In contrast, the pass rate for chemistry, physics, commerce, fisheries, and science ranges from 25 to 45 percent. Difficulty in access to gainful employment has increased the incidence of drug use and delinquency. Despite some improvements, lack of local skilled labor continues to be a major problem in Maldives. Moreover, unskilled worker from a foreign country collects an average monthly pay of MRf 2,000, while a local person needs to be paid at least MRf 2,500 per month. This situation has creates reliance on migrant labor from neighboring countries. In 2004 there were 38,413 expatriates employed in the Maldives, compared with 33,765 in 2003 because of the growth and expansion of business activities. 21. Getting credit: Historically, most of the credit in the Maldives has been channelled to larger corporations, and the upper end of the medium size market. Particularly small enterprises as well as low and middle-income households still lack access to adequate financial services, in particular long-term finance either for capital investment or permanent working capital needs. The lack of suitable collateral, viable qualitative information, financial statements and accounts usually places the MSMEs in the high-risk category and they are therefore considered non-bankable. In general, the Maldives ranks 143rd worldwide on the comparative ease of getting credit, which is well below most other South Asian countries. The poor ranking is largely due to the complete absence of a public or private credit registry to facilitate the exchange of credit information amongst lenders. The legal rights of borrowers and lenders are also deficient in most respects because the law requires a specific description of the assets in the security agreement. As a result, it is impractical to use a changing pool of assets (such as in an inventory or accounts receivable) as security for a loan. The secured lender has no priority right to the collateral either in or outside bankruptcy, reducing the chances of loan recovery. If a borrower defaults, creditors are required to go through a lengthy court enforcement process. The lack of a bankruptcy law further reduces the chances of loan recovery in the event a borrower becomes insolvent. All this makes security agreements for MSMEs highly risky, costly and difficult to enforce. The situation could improve if the authorities carry through on plans to set up a credit information bureau with the assistance of the World Bank’s International Finance Corporation (IFC). The Bank of Maldives is also planning to introduce mobile phone banking, which will improve outreach in the atolls. 22. Financial Sector: The financial sector of the Maldives is narrow. There is one locally owned commercial bank, Bank of Maldives (BML), branches of three South Asian state-owned commercial banks, and a branch of HSBC international bank. The BML is jointly owned by the Government (51 percent), island communities (25 percent), and other government agencies (24 percent). The BML has 18 branches that include five mobile branches (dhonis). All these banks follow normal international banking practices and offer letter of credit (LC) facilities and other financing. Banking is regulated by Maldives Monetary Authority (MMA), which acts as the central bank. Banks seldom extend loans with maturities of more than three to five years and the spreads remain high. Lending rates vary from 8 to 13 percent for domestic currency and 7.75 to 13 percent for foreign currency; similar rates apply to the Government. This situation, gives rise to serious impediments to sustained growth of the private sector in the Maldives because of the


12

lack of available information and mechanisms to collect information that makes lenders unable to identify enough profitable projects in a risky environment. The provision of financial services is consequently restricted to low-risk clients or based on excessive collateral requirements instead of a credit analysis relying on financial statements and business plans. Experience from other countries shows that a more flexible and dynamic credit information system will improve the accuracy and cost-effectiveness of credit risk decisions made by financial institutions that, in turn, results in improved access to financial services, in particular for small businesses and individual borrowers. 23. Non-Banking Financial Sector: The non-bank financial sector consists of a government provident fund, a finance leasing company, a housing bank, two insurance companies registered in the country, and some agents for overseas insurance companies. The Maldives Finance Leasing Company (MFLC) provides medium and long-term capital equipment financing. The company was established with assistance from International Finance Corporation (IFC), with technical assistance provided by the National Development Bank (NDB) of Sri Lanka. To date, it has provided lease financing for capital equipment mainly to the tourism sector (nearly 80 percent of the total) for such items as speedboats, live-aboard safari and fishing vessels, dhonis, computers, and excavators. There are limited capital market operations securities trading. Three SOEs are quoted on the stock exchange (BML, State Trading Organization (STO), and the Maldivian Transport and Construction Company). The Government plans to list more enterprises on the stock exchange. 24. Lack of Capacities of Domestic BDS Providers. An effective method to build captioned capacities within the MSMEs is to incorporate external business development services. However, the MSME sector in the Maldives is characterized by an almost complete lack of use of these external services, mainly because of the limited market for BDS that is almost wholey concentrated in Male‘. Government spending on BDS is limited, which in turn effectively constrains the size and development scope of commercial BDS markets. Opening these markets to commercial operators would effectively optimize the allocation of government funds by increasing employment opportunities for the skilled work force in innovative markets, ensuring a more market-oriented BDS with immediate benefits to clients and reduced cost per trainee by allowing for competition. 25. Weak business linkages. Though The Maldives’s tourism sector is booming, impact on the development of rural enterprises and in particular rural manufacturing industries is low due to weak or missing links in value chains e.g. agriculture, agro-industries and tourism. Although the Government has adopted a clusters approach in its 7NDP, it is neither effectively and systematically supporting the development of those clusters nor strengthening of value chains through well-targeted BDS support programs in close cooperation with private sector stakeholders and private BDS providers, which could otherwise build the capacity to sustain and disseminate such programs. 26. Limited Instruments and Capacities to Coordinated MSME Development Policies, Programs and Projects. One of the greatest risks to MSME in the Maldives is the possibility of a continued lack of Government capacity to implement the MSME development program due to inadequate inter-ministerial coordination of private sector development initiatives. At present, the development of a common MSME development and implementation strategy suffers from a profound fragmentation of strategy formulation and decision making, weak communication and weak coordination among government ministries and agencies. These weaknesses have prevented the formulation and implementation of a common MSME development strategy, as


13

well as programs and projects that complement and build on one another. At present, the inter-ministerial MSME Policy Committee is chaired by the Ministry of Economic Development and Trade and consists of representatives from the ministries of finance and treasury, economic development and trade, atolls development, planning and national development, agriculture and fisheries, transport and communications, youth and sports, and higher education and employment. The Committee needs to be strengthened to ensure involvement of senior officials from the ministries and it should meet on a recurrent basis to monitor and maintain quality control of the technical assistance, as well as ensure full participation by key ministries and coordination of existing strategies, programs and projects.

1 . 2 . 2 G o v e r n m e n t S t r a t e g y f o r P r i v a t e S e c t o r D e v e l o p m e n t

27. Government Strategy: There are a number of principles underlying the strategy of the Seventh National Development Plan (7NDP) that point to the leading role of MSMEs in private sector development, especially those in the atolls and outer islands, as well as the supportive role of the public sector in creating an enabling environment for the private sector. The Government’s strategy as it relates to the private sector in the regions outside the capital of Male’ aims to improve economic growth by increasing the number and coverage of MSMEs activities and reducing or restructuring state owned enterprises (SOEs). 28. Sectoral Strategies by Line Ministries: At the sectoral level several development strategies aim to enhance the capabilities of the private sector, specifically microenterprises in the atolls. In the past, many of these took the form of financial arrangements targeting microenterprises, but these have mostly been eliminated.11 These schemes include loans to boat purchase and repairs and to fish processing by the Ministry of Fisheries Agriculture and Marine resources (MOFAMR), micro-credit to disadvantaged women by the Ministry of Women Affairs and Social Security (MWASS), the Atolls Credit and Development Banking Project (ACDBP) and the Southern Atolls Development Project (SADP) by the Development-Banking Cell (DBC) of the Bank of Maldives, and the Atoll Development Project and Atoll Development Funds of the Government, UNDP and International Fund for Agricultural Development (IFAD). The Atolls Credit and Development Banking project is part of a long-term program for the BML to operate as a development finance institution and support its financial service operations in outer atolls. 12 The project has been costed at $6 million with IFAD contributing $3 million, the Government of Maldives $2.5 million and UNDP $0.5 million. The project covers 15 out of 19 outer atolls in the Northern and South-Central regions, specifically Haa Alifu, Haa Dhaalu, Shaviyani, Noonu, Raa, Baa and Lhaviyani, in the Northern atolls; and Vaavu, Meemu, Faafu, Dhaalu, Thaa, Laamu, Gaafu Alifu and Gaafu Dhaalu in the South-Central atolls. It targets 3,250 atoll households directly from credit access and to benefit 6,000 indirectly through improved earning opportunities. The target population comprises households with a per capita income below MRf 2,000 per annum, equivalent to MRf1,000 per month for a family of six persons. The objective is to develop a credit delivery system for the outer atolls, thereby reducing income disparities between the outer atolls and Male’ by increasing the employment opportunities and income levels.

11 H. Abdullah and Z. Ismail, “An Overview of Micro credit and SME financing activities in the Maldives”. Country

Paper for SAARC Finance Seminar on Micro Credit Operations, Dhaka, Bangladesh, 21 Dec 2002.

12 EFAD, “Atolls Credit and Development Banking Project Republic of Maldives: Atolls Credit and Development Banking Project: Completion Evaluation Executive Summary. (Undated).


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29. Institutional and Infrastructural Goals: Line ministries have increasingly shifted their goals to the enhancement of private sector development through institutional and infrastructural enhancements as a means of facilitating growth and development of MSMEs in the atolls. The Ministry of Human Resources Employment and Labor has established two important programs for matching vocational training and higher education with employment opportunities and needs in the country. The first is the program to expand and improve the quality of vocational and technical education, and the second is the program to expand post-secondary education opportunities. The former includes increased youth skills training opportunities focusing on employable skills for youth, and the latter includes increased numbers of private training providers offering career oriented vocational and technical training. The Ministry of Transport and Civil Aviation has recently focused its efforts on identifying strategies for the development of domestic maritime transport, largely because of the recognition that private sector development has been hindered by the undeveloped status of the country’s transport network. In an effort to ensure adequate access among all inhabited islands, the Ministry is working to implement greater access to all inhabited islands, as well as to establish a sustainable harbor maintenance program. At the same time, the Ministry of Fisheries Agriculture and Marine Resources is making efforts to enhance the role of the private sector and facilitate investment in some areas and activities that will benefit small scale industries in the atolls. Current programs are supporting the establishment and development of a mariculture industry, and implementing fisheries community development programs that provide extension, and other services and support to communities. It is also formulating schemes to improve access to knowledge, technology and finance. In agriculture the Ministry is promoting commercial agriculture and poultry farming with the introduction of new crop varieties and animal breeds require comprehensive planning for the sustainable utilization of the nation’s limited land and water resources. A study on agricultural commercialization was conducted to promote MSME development based on a cluster approach to development of the sector in the atolls. 30. Employment Targets: The 2006 Census revealed that 8.3 percent of the adult population is unable to find suitable employment or lacks employment opportunities, thereby being officially unemployed.13 Of the total adult population, 22 percent are economically inactive in the sense of not actively seeking work. The Government has not elaborated any specific targets in its 7NDP to increase the number of economically active population, but is has provided specific guidelines on its strategies to increase employment opportunities for Maldivians. These strategies include (a) the preparation of a human resource needs assessment and design, develop and deliver programs in the key sectors of tourism, fisheries and agriculture, transport and the social sectors; (b) development and implement a national apprenticeship scheme to train school leavers to meet the national skills demand; (c) institute an Employment Act which would include provisions on unfair dismissal, equal pay, sexual harassment and discrimination including an awareness campaign to make the public and institutions and agencies with employment responsibilities familiar with the new provisions; (d) Undertake a joint study with the Human Rights Commission and private sector organizations to improve working conditions in accordance with national and international human rights standards: (e) Establish Employment Services Centre in Male’ and job centers in Baa, Dhaal, Lhaviani and Laamu atolls to provide

13 Ministry of Planning and National Development, Maldives Population and Housing Census conducted during 21-28

March 2006. Census 2006 was carried out in all the 196 administrative islands, 88 resort islands and 34 industrial and other islands of the country. Data relating to the size, geographical distribution and socio-economic characteristics of the population such as sex, age, educational attainment, marital status and employment were collected and are presented in these tables. Four questionnaires were administered for census data collection, namely: Household Listing Form, Person's Listing Form, Household Form (includes household and persons information) and Establishment Form.


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employment advice to job seekers and employment exchange services for employers and employees and establish job information kiosks; (f) Set up a labor market information system in the Ministry of Higher Education, Employment and Social Security to collect and analyze labor market data for policy development purposes; and (g) promote youth interest in employment. 31. Goals of 7NDP: The overall goal for economic and social development, as set out in the 7NDP and Vision 2020, is the eliminate poverty and improvement in the well-being of the greatest number of Maldivians. The link between achieving this overarching goal and the private sector development in the Maldives is formally recognized in the 7NDP. It explicitly targets private sector participation as one of the key strategies to be pursued in 2006-2010, recognizing that private sector development is critical to achieving the levels of sustainable economic growth required by the country. It recognizes need for partnership between the Government and private sector, a situation that in the past has not always existed and that will require a radical shift in perceptions, attitudes and approaches during the 7NDP period. 32. Private Sector Development Channels: The 7NDP sets out the following key mechanisms needed for developing the private sector: (a) formalizing the economy; (b) improving corporate governance and transparency; (c) promoting responsible business practices; (d) maximizing the potential of public-private partnerships, with a view to increasing; (e) private investment in the national economy and to providing opportunities for SMEs and small-scale entrepreneurs to participate in a more competitive environment; and (f) developing linkages within the domestic and international private sectors to share knowledge, expertise, resources, and technology. Within the various sub-goals of the 7NDP, those that apply to the development of the private sector and SMEs are the following ones: (a) a diversified economy (goal 3); (b) improved access and expanded opportunities (goal 4); (c) the elimination of poverty, increased equity, and gender equality (goal 5); and (f) support for the rapid recovery of sub-sectors damaged by the tsunami (goal 1). 33. Measurable Indicators: Realization of these goals is recognized as too broad for developing an action plan with policies, projects, programs and institutional mechanisms. In an effort to operationalize the goals, the 7NDP establishes a set of measurable objectives to increase private sector development, including SME and micro-enterprise development. Volume II of the 7NDP lays out a set of roadmaps within 34 themes covering the 2006-2010 goals. Annex B presents the specific benchmarks associated with actions to be taken in the area of private sector development and related activities in the regulatory environment, skills development and SOE restructuring and privatization.


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1 . 2 . 3 E x t e r n a l A s s i s t a n c e i n t h e A t o l l s

34. Asian Development Bank Strategy: The ADB’s operational strategy for 2006-2008 encompasses (i) fiscal management, (ii) regional development, and (iii) the environment.14 Fiscal management supports prudent control that is needed to support a stable and balanced growth, currently projected at 5 to 6 percent a year. The longer-term concern, however, is regional development. The ADB’s support for regional development currently comprises technical assistance for regional planning studies and assistance to prepare future social infrastructural investment projects in specific regional growth centers. It is also assisting in human resource development plans for education, health and population to increase the countrywide availability of these services. Apart from the Tsunami Emergency Assistance Program, it has the Outer Island Development Project ($12 million), the Outer Island Electrification Project ($8 million), the Regional Development Project ($20 million), the Post-Secondary Education Development ($21 million), Information Technology Development Project ($11 million), Domestic Maritime Transport Development Project ($8 million), and the Strengthening Public Accounts and Governance ($5 million). 35. ADB Lending Activity: Up to now the ADB has provided six loans to the Government totally $33.9 million and primarily directed to the power and ports subsectors. The first loan under the Inter-Island Transport Project was unsuccessful because it underestimated fuel costs for two vessels purchased under the loan.15 The second loan for an included five subprojects for atoll harbors, power, and meteorological development.16 The subsequent four loans mainly benefited Male’ and had little direct benefit to the outer atolls.17 Indeed, the ADB’s 2006-2008 country operations strategy notes that, “the Bank’s exclusive focus on Male’ has contributed to the income disparities between those who live in Male’ and the surrounding areas, and those who live in the atolls and more remote regions.”18 The ADB has also provided sixteen advisory TAs totalling $4.75 million, a TA for the preparation of an environmental management strategy, and six TAs for the preparation of loan projects for $0.87 million. These have supported, among others, the preparation of the National Development Plans, including those supporting regional development. 36. United Nations: Five United Nations (UN) organizations maintain residences in the Maldives, namely, United Nations Development Program (UNDP), United Nations Children's Fund (UNICEF), United Nations Population Fund (UNFPA), World Health Organisation (WHO), and United Nations Volunteers (UNV). Their activities are coordinated under the United Nations Development Framework (UNDAF) for Maldives. 19 Of these, UNDP provides considerable support to private sector development, and specifically microenterprises and SMEs. In recent

14 ADB, “Country Operational Strategy Study: The Republic of Maldives”. STS MLD 95017. October 2005.

15 ADB, “Loan No. 513-MLD(SF): Inter-Island Transport for $1.0 million”. Approved 18 June 1981. For a review of the loan, see ADB, “Interislands Transport Operations Review”. TA No. 679-MLD. 25 April 1985.

16 ADB, “Loan No. 681-MLD(SF): Multiproject, for $2.38 million”. Approved 29 March 1984.

17 ADB, “Loan No. 848-MLD(SF): Power System Development, for $6.1 million”. Approved 28 October 1987; ADB, “Loan No. 911-MLD(SF): Male Port Development, for $6.4 million”. Approved 20 October 1988; ADB, “Loan No. 1121-MLD(SF): Second Power System Development, for $9.2 million. Approved 19 November 1991; ADB, “Loan No. 1226-MLD(SF): Second Male Port, for $8.8 million. Approved 1 April 1993.

18 ADB, “Country Operational Strategy Study: The Republic of Maldives”. STS MLD 95017. October 2005.

19 United Nations, “Development Assistance Framework for Republic of Maldives 2003-2007”. Malé. 26 July 2002.


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years it has provided assistance for agriculture development and credit schemes on the outer atoll groups and for health, women in development, and population planning. Its projects include Atoll Development and Local Governance, Social Mobilization, and a micro-credit fund for schools, jetties and other activities amounting to $400,000. 37. World Bank: The World Bank’s involvement in the Maldives has been somewhat limited. Since 1979 it has financed six projects and produced five formal economic reports. Two educational projects contributed to manpower development and upgrading of the airport in Male’ supported the growth of tourism. Three projects helped modernize the fishing fleet and strengthen public sector capacity in collecting, processing, and exporting fish. Apart from its Post-Tsunami Emergency Relief and Reconstruction Project and Second Post Tsunami Emergency Recovery Credit, the World Bank has a $16 million International Development Association (IDA) funded Integrated Human Development Project. Its four components aim to strengthening delivery of (a) education services; (b) health services; (c) employment services; and (d) community services. The fourth component on strengthening community services will improve service delivery by strengthening community services. The project will strengthen and improve community groups by providing: (a) leadership and management skills training to community based organizations; (b) financial support to community groups, through a community development fund and cooperatives offering community-wide services; (c) support to the development of multi-purpose buildings to consolidate the provision of services; and (d) the development of broad networks on each focus island. 38. International Finance Corporation: The IFC has a portfolio in Maldives that consists of three investments, made up of $1.2 million of equity and $25.5 million of loans outstanding. Its activities have supported private investment in tourism, logistics and the financial sector. Specific projects that is has undertaken since 1995 are as follows: (a) Wataniya Telecom Maldives Pvt. Ltd (August 2005; information sector); (b) Universal Maldiv (March 2005; accommodation and tourism services); Taj Maldives Private Limited (April 2003) Maldives Villa Shipping (February 2002; accommodation and tourism services); Maldives Leasing Company (December 2000; finance and insurance); and Villa Shipping & Trading Co. Ltd (May 1995).


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2 P R O PO S E D S E C TO R D E V E LO PM E N T P RO J E C T

2 . 1 P R O J E C T C O V E R A G E A N D I M P L E M E N T A T I O N P R O C E S S

2 . 1 . 1 O b j e c t i v e s , S c o p e a n d S t r a t e g y

39. Vision: The present project has been designed within the context of an overall SME development vision in the atolls, and one that is driven by strategic and operational goals that, in turn, define the programs to achieve those goals and projects to be implemented (Figure 1). The SME development vision consists of the creation of conditions necessary for achieving dynamic growth of SME activities for particular sectors and industries in targeted regions of the country by 2010. These conditions will be realized by (i) developing the entrepreneurial climate and support services that will facilitate growth; (ii) providing the necessary conditions for converting existing entrepreneurial potential into innovative and successful business activities; (iii) attracting entrepreneurial leadership from other regions of the country; and (iv) establishing broader regional centers for SME activities that are driven by growth nodes or networked clusters for supporting activities.

40. Strategic Goals: The overall strategy and operational goals for SME development support the creation and strengthening of institutional mechanisms that provide entrepreneurs with business development services and financing on a sustainable basis. A clusters approach integrates production, marketing and distribution activities for targeted sectors and geographic areas, and policies and institutional support facilitate the public sector’s involvement in enabling MSME business activities in the atolls.

41. Programs: Four broad-based programs aim to compensate for the unfavorable competitive position that businesses in the atolls face relative to foreign goods and services by lowering the transactions cost of doing business and ensuring the delivery of business services and information where the market fails to provide them. These programs give special attention to those activities that provide differentiated products and services to markets, those that target niche markets, and those that contain high value added. The following key programs form part of the operational strategy for achieving the goals set out for MSME development in the atolls, and aim to translate the vision and operational strategy into reality:

� A program to bolster human resource development by creating business development service centers that provide training programs in entrepreneurship, management, and technical skills for MSMEs and develop appropriate materials for such training, as well as helping to identify commercial opportunities in specific sectors;

� A program to improve access to finance by developing innovative financing schemes using alternative financial instruments such as schemes such as equity financing, while encouraging the development of cooperatives and associations;

� A program to promote a market-driven process through the public and private sector that in the short to medium-term will target specific types of activities in selected regions of the country; and

� A program to enhance the catalytic role of public sector for facilitating commercial activities in the atolls and strengthening MSME activities by improving the policy and regulatory environment.


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Vision

Create conditions

necessary for achieving dynamic

SME growth for particular sectors and industries in targeted regions of the country by 2010.

Figure 1 SME Development Strategy for the Maldives

Strategic Goal 1Develop Regional

Support of Business Services

Strategic Goal 3Strengthen

Institutional Support at National Level

Strategic Goal 2Enhance Financial System for MSMEs

in Atolls

Strategic Goal 4Improve

Environment for Doing Business

Programs to Achieve GoalsBusiness Development Services in AtollsNew Funding Sources MSMEs in Atolls

Institutional Capacity Building of Public and Private Sectors

Projects to be ImplementedBDS Centers in Target Regions

Credit Guarantee Program for MSMEsCost Sharing Facility

Media Campaign and SME PortalCapacity Building of Economic Development Unit (EDU) in MEDTSupport for National Chamber of Commerce and Industries

Strategic Goal 5Cluster Approach to Integrate Target Activities in Atolls

42. Projects: Operational activities focus on a set of projects designed within clusters framework that ensure the mutual support of each activity. The projects are grouped into two types of activities. The first is the set of activities that deliver business development services both in the selected regions of the country and through public and private institutions at the national level. They encompass the BDS regional centers, capacity building of the Enterprise Development Unit of MEDT, support to the national chamber of commerce and industry, and the media campaign and SME portal. The second is the set of financing mechanisms aimed at expanding available funds for MSMEs in the atolls. These include the credit guarantee program, cost-sharing facility and risk capital fund, as well as training and other support needed to ensure their delivery. In several of the proposed pilot projects there exist one or more prerequisites that could be immediately addressed as a means of providing the appropriate facilitating environment for the commercialization activities. Effective implementation of these projects depends upon one or more prerequisites that can be addressed within a short timeframe in order to provide an appropriate facilitating environment for the project activities. These prerequisites are in the form of policies to facilitate the use of productive and financial resources, programs to support


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production, distribution and marketing of products, new or enhanced institutional capacities, modifications in the legal and regulatory environment, and infrastructural services and support, including transportation and communications.

2 . 1 . 2 T a r g e t e d S e c t o r s f o r M S M E D e v e l o p m e n t

43. Rationale for Prioritizing Sectors: Measurable results of MSME development in the atolls will be gauged by the ability of the project to generate successful outcomes that produce high-profile outcomes in a relatively short period of time. To achieve these outcomes, specific sectors are given priority in terms of project support from BDS and financing from preferential sources such as the cost-sharing facility and risk capital fund. Selection of the priority activities has been based on wide-ranging interviews with private sector individuals, especially those located in the atolls, as well as public sector officials in both the atolls and capital. Consideration has also been given to the country’s strategic goals and objectives in the 7th National Development Plan, as well as the broad directions established by Vision 2020, and the Strategic Economic Plan (SEP) and the Integrated Framework (IF).20 44. Competitiveness and Development Impact of Prioritizing Sectors: The sectors that have been selected as having high profiles with potentially large demonstrable effects on the country share several common characteristics such as their strong competitiveness in domestic as well as international markets in terms of high value added products having strong niche market potential, as well as their potentially strong impact on economic development in the atolls and large job creation opportunities. In agriculture, for example, several fruits and vegetables have been identified as having a high commercial market potential, and their selection criteria has been based on the degree of year-round availability, technology needs, transportation and storage requirements, production costs, potential in the domestic, resort and export markets, and value adding capabilities. Indeed, among the vegetable products having commercial potential, medicinal plants score the highest because of their year-round production capability, low storage and transportation requirements, large market potential for resorts and export, and considerable value adding capabilities. In handicrafts, the local industry has suffered from cheap substitute products from Indonesia, Malaysia and Thailand, but the potential for high value-added handicrafts with authenticated product labeling is enormous. Skills development in this sector would provide the basis for establishing supplies to both the booming tourism industry and foreign niche markets in Europe and the United States. Tourism-related activities, like handicrafts, have huge employment generating capabilities. They involve wide ranging activities in the atolls related to housing, water sports, as well as handicraft activities in woodworking and ‘Kunaa’ (‘Thundukunaa’) mats that are authentic to the Maldives. Similarly, fish processing activities rank high in terms of their actual and potential contribution to atoll development and employment generation, and they have a large market potential in the domestic, resort and foreign sectors that have yet to be exploited. The prioritized sectors should ultimately lead to (a) diversification and growth in activities in which the country has a competitive advantage relative to other supply sources, (b) the generation of employment opportunities in rural atolls and island communities, and (c) an equitable improvement of livelihoods across the main regions of the country.

20 See Ministry of Planning and National Development (2005a), “Strategic Economic Plan”. Maldives: Republic of

Maldives; and Integrated Framework (2005), “Integrated Framework Diagnostic Trade Integration Study for the Maldives. Draft Report”. Geneva, November 2005.


21

45. Leading Business Activities in the Atolls: The survey conducted as part of this PPTA on business activities in key regions of the country shows the types of enterprises that currently operate in the atolls. In the primary sector, fisheries has traditionally dominated activity, with processing limited to so-called Maldivian Fish that take the form of dried, salted and smoked tuna fish products for local consumption and exports to Sri Lanka. Agriculture is the second most important activity of the primary sector in the atolls and have a large, as yet untapped, potential for its commercialization to the Male’ and resort markets, as well as foreign niche markets. In the secondary sector, construction and maintenance of coastal vessels, mainly for fishing, have are traditional island activities for SMEs and have received some support from Government and development partners, especially in the aftermath of the tsunami. In contrast, handicrafts as well as tourism-related service activities have been given little attention, despite their enormous potential, and are therefore in an infant stage of development. Supporting sector activities associated with traditional and emerging activities in the atolls cover transport and communications, logistics, construction and professional services such as legal, financial and business development. These are essential for all activities and therefore are closely linked to the successful development of any type of business activity in the atolls.

46. Ranking Sectors: Table 9 shows the ranking of sectors that are considered as having important potential for MSME development in the atolls. The ranking is based on discussions with public and private sector individuals and scoring by the Team and the EDU/MEDT staff following field trips to the atolls, as well as the compilation and analysis of the survey results. Based on this scoring the leading sectors are handicraft, agriculture and agro-processing and tourism-related activities. Among the remaining sectors, fish processing construction and maintenance of coastal vessels and wholesale

trade are also ranked high, albeit lower than the others. 47. Handicrafts: In the past Maldivian craftsmanship of lacquer ware, woven mats, jewelry made of corals, paintings and prints had a worldwide reputation of excellence, but with the influx of cheap, foreign-produced handicrafts the local craftsmen now contribute less than one percent of the domestic market for handicrafts, according to wholesalers interviewed. The reason for the decline is the high cost of producing the products, due to high transportation costs, a fragmented geography that gives rise to diseconomies of scale, and a scarcity of raw materials relative to producers of handicraft products in other Asian countries. Yet the potential for handicrafts to satisfy the growing demands of tourism is huge. Based on interviews with handicraft producers, wholesalers, retailers and the Maldivian Association of Tourism Industry (MATI), the potential volume of sales for the handicraft sector is US$30 million a year and is expected to grow to US$50 million annually in five years.21 The relatively high cost of handicrafts is unlikely to drive away customers since the Maldives has successfully created a brand name for its tourist industry and caters to up-market clients. The handicraft sector therefore has the potential for

21 The figures are based on 600,000 tourists currently visit the Maldives each year and per capita expenditures on

souvenirs and handicrafts of US$50. With more than thirty new resorts under construction and planned for the near future, the Tourism Industry predict a million tourist arrivals by 2010.

Table 9: Ranking of Sectors for MSME Development Ranking

Handicraft 1 Agricultural and Agribusiness 2 Tourism-Related Activity 3 Wholesale Trade 4 Construction 5

Fish processing 6 Transport 7

Source: Based on joint evaluations of Enterprise Development Unit, Ministry of Economic Development and Trade, and PPTA Team, as well as discussions with businessmen and public sector officials from other ministries.


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local economic development, particularly in the Northern and Southern Development Regions, through the creation of a handicraft clusters that would support MSME development and generation income for poorer segments of the population, including women. In addition to financing, there is an urgent need to introduce a certification system for authentic products from Maldives. Other promotion activities that are simple to implement are the establishment of a handicraft display center at the airport, support of these products by the Tourist Promotion Board, and improved collaboration with resort owners to promote more Maldivian handicrafts as an act of corporate social responsibility. 48. Agricultural Commercialization: Post-tsunami reconstruction support by donors has focused almost exclusively on the production side of agriculture, leaving many farmers with little or no knowledge about the types of crops required by the market or how to market and distribute the products in the local, Male’ and resort markets. The strategy for agricultural commercialization in targeted atolls seeks to promote a market-driven process that in the short to medium-term will support specific types of activities to the local, Male’ and resort markets. It relies on the following key components: (a) develop distinctive crop types and agribusiness activities for the domestic, resort and foreign markets; (b) adopt a phased approach to project interventions, but provide priority programs to commercialization activities aimed for the domestic and resort markets since development of those activities will provide parallel support to subsistence farming in the inhabited islands; (c) provide for value-added processing industries by facilitating high value-added agribusiness activities and developing a limited but significant number of agriculture-based industries in different parts of the country; (d) adopt a clusters approach to the integration of production, marketing and distribution activities for targeted geographic areas; (e) enhance the catalytic role of public sector for ‘kick-starting’ commercial activities and strengthening private sector commercial activities through national, regional and local projects and programs supported by the ADB and other development partners; (f) provide for an institutional mechanism through the Business Development Services centers in the atolls that will allow rapid decision-making processes to take place; and (g) target the poorest in terms of activities that will combine subsistence and commercial production activities, encourage an increased role of women in agribusiness activities at the local level, and ensure an equitable distribution of benefits from commercial activities throughout the country. 49. Tourism-Related Activities: In 2006 a new leasing process was initiated that represents a significant departure from earlier policies and has caused concern among resort owners and travel agents. Under the new initiative, the Government is leasing 35 new islands, a number that compares with 87 resorts that were introduced to tourism over 30 years ago. The new islands being set aside for resort development will expand resort locations to the Northern, Southern and South-Central Development Regions. Existing and potential synergies of tourism-related activities in the inhabited islands of the outer atolls are therefore expected to provide a large number of new opportunities for MSMEs. Among the activities identified in the field trips are village tours conducted in a culturally sensitive manner that exposes visitors to different facets of Maldivian culture and to add value to traditional activities, some of which may be disappearing, as well as the introduction of visitors to oral and intangible heritage, including music, languages, oral traditions and the performing arts. Other tours could provide insights into traditional agricultural and fishing activities, demonstration of traditional craft making and description of traditional life styles by villagers.


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2 . 1 . 3 T a r g e t e d R e g i o n s f o r M S M E D e v e l o p m e n t

50. Government’s Regional Development Strategy: Regional development under the 7th National Development Plan (7NDP) continues to support the process initiated under the 6th Development Plan (6NDP). Both Plans have identified the far north and far south regions as the initial focal areas to be developed. The Northern Development Region (NDR) covers Haa Alifu, Haa Dhaal, and Shaviyani Atolls, and the Southern Development Region (SDR) covers Gaafu Alifu, Gaafu Dhaal, Gnaviyani, Gnaviyani and Seenu Atolls. The regional hub for the NDR is Kulhuduffushi in Haa Dhaalu Atoll and that of the SDR is Hithadhoo in Seenu Atoll. During the 7NDP period the Government is establishing three additional development regions to cover the remaining 13 atolls. They consist of the Northern Central Development Region (NCDR), Central Development Region (CDR), and the Southern Central Development Region (SCDR). During the 6NDP’s first phase the objective was to increase the standard of living in the designated regions by promoting economic development, provision of health care services, education and infrastructure; in the second phase, sustainable development is being promoted by (i) increasing employment and investment opportunities; (ii) ensuring adequate infrastructure planning in all sectors; and (iii) improving social development and environmental protection. 51. Growth Nodes: Within the regions 36 growth nodes are identified: (i) in the Northern Development Region, growth nodes include Huvarafushi Island, which will serve as an international transshipment hub, and Kulhudhuffishi Island, which will serve as the regional hub; (ii) in the North Central Development Region there are six growth nodes, with Naifaru Island serving as the regional hub; (iii) in the Central Development Region there are another nine growth nodes that include the important islands of Thulhaadhoo, Eydhafushi and, to a lesser extent, Kihaadhoo; (iv) in the Southern Central Development Region there are another nine growth nodes, including the one in Funadhoo Island in Laamu Atoll; and (v) in the Southern Development Region has as its regional hub Hithadhoo Island on Addu Atoll, as well as the important growth node in the island of Foammulah in Gnaviyani Atoll. 52. Sequencing of Regions: As a means of ensuring successful implementation of the project loan within the proposed funding level, the MSME development project will adopt a sequencing approach that targets specific regions and subsequently expands the coverage once the programs and atoll-level projects are well established in the selected regions. Identification of the regions is based on discussions with public and private sector officials, interviews with atoll and island chiefs and local business persons during several field visits, and discussions with representatives of development partners that have ongoing projects in the atolls. At the onset it was determined that the selected regions should be aligned with national goals and objectives, particularly, those outlined in the 7NDP, as well as the broad directions set by the Vision 2020, Integrated Framework and the Strategic Economic Plan (SEP). Five criteria were used to rank and ultimately select the sequencing of targeted regions: (i) population; (ii) land area; (iii) infrastructure; (iv) skill levels, traditions and culture conducive to business development; and (v) economic environment conducive to MSME development. Table 10 shows the ranking of the five regions. Based on the ranking, the priority regions are the Northern and Southern Regions (see Figure 2). The secondary region to be targeted at some future date is the South-Central Region.


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2 . 1 . 4 I n s t i t u t i o n a l D e l i v e r y M e c h a n i s m

53. Institutional Framework: The design and implementation of private sector development (PSD) programs and microenterprise and SME development is currently characterized by profound fragmentation across ministries, and a lack of systematic participation from the private sector. Inadequate coordination among those programs hinders the formulation and implementation of an MSME development strategy in the Maldives. The establishment of the Enterprise Development Unit (EDU) of the Minister of Economic Development and Trade in 2004 was designed to bring together these different PSD and SME development activities under a single institutional mechanism.22 Policy 4 of the 7NDP supports the development of private enterprises by encouraging entrepreneurial development, technology transfer and private sector innovation, and Strategy 4.1 proposes the introduction of private sector development programs for small and medium enterprises (SME) by providing technical assistance to start-up enterprises through the establishment of the SME development unit. 54. Delivery Channels: The present MSME development project builds on existing institutional arrangements and expands its scope from what is currently a centralized system to one focused on delivery of services to entrepreneurs in the atolls. Figure 3 provides a visual summary of the organizational structure of the SME Development (SMED) project. The Ministry of Finance and Treasury will act as Executing Agency and the Ministry of Economic Development and Trade (MEDT) would be the Implementing Agency, with guidance and oversight from the inter-

22 President’s Office letter 73 of October 7, 2004 approved the establishment of the small business unit. For details,

see Ministry of Economic Development and Trade, “Enterprise Development Unit (EDU)”. Undated.

Table 10: Ranking of Regions for MSME Development

Southern Northern South-Central North-Central Central Criteria

Sector / Industry Level Rank Level Rank Level Rank Level Rank Level Rank

Population 71,000 5 56,000 3 46,096 3 55,954 3 26,843 1

Land area 2,350 3 3,951 5 2,297 3 1,720 1 1,005 1

Existing Infrastructure

Airports, roads, harbors

High 5 Moderate 3 High 5 Low 1 Low 1

Agriculture Moderate 3 High 5 High 5 Low 1 Low 1

Tourism Moderate 3 Moderate 3 High 5 Low 1 Low 1

Skills, traditions and culture + support sectors

Handicraft High (mat weaving) 5 Moderate 3 Low 1

High – lacquerwork handloom

5 Low 1

Institutions (Reg. Dev. Office, education, Finance)

High 5 High 5 Moderate 3 Low 1 High 5 Conducive environment for business

Economic activity

High 5 High 5 Moderate 3 Low 1 Low 1

Overall Ranking High 4.3 High 4.0 Moderate 3.5 Low 1.8 Low 1.5

Prioritization Level Primary Region Primary Region Secondary Region

Other Regions

Note: High = 5; moderate = 3; low = 1. Source: Based on joint evaluations of Enterprise Development Unit, Ministry of Economic Development and Trade, and PPTA Team. Statistical data from Ministry of Planning and National Development (2006), “Population and Housing Census 2006, Preliminary Results”. Male’, Republic of Maldives; and Ministry of Planning and National Development (2005b),”Statistical Yearbook”. Male’, Republic of Maldives.


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ministerial SME Policy Committee. The EDU will operate as a semi-autonomous institution providing the necessary interface between the public and private sectors. Business Development Services Centers (BDSCs) located in each of the targeted regions will provide training and other business development support services needed to bolster MSME activities, especially in the focal sectors. It will also support entrepreneurs in preparing information needed


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for financing from three types of mechanisms developed under the present projects. Both the structure and activities of the BDSCs and the financing mechanisms to be developed are discussed in more detail in the next two chapters. 55. Enterprise Development Unit: The basic organizational structure consists of the following Divisions. (i) Policy and Information Division responsible for statistics that will serve for monitoring and evaluation of the project; information gathering and processing; information dissemination; web-site development; and coordination with line ministries and private sector organizations; (ii) SME Services Division responsible for entrepreneurship training; preparation of brochures; management and operation of the handicrafts center; networking of productive and support activities for SME activities in the regions; and supporting linkages for SME financing; and (iii) Regional Outreach Centers responsible for program extension to the atolls in targeted regions; and information gathering and dissemination in the target regions. The structure and functions of EDU will evolve over the course of its development, especially as new staff are training and fielded. 56. Monitoring and Evaluation: An independent unit comprising staff from the Chamber of Industry and Commerce and the Ministry of Economic Development and Trade will provide ongoing monitoring and evaluation (M&E) analysis of the project. It will define the strategy for measuring, on an ongoing basis, the program’s performance by identifying the main performance indicators, sources of data and timetable for data collection. It will also set out an evaluation strategy for the program in terms of outcomes related to MSME development in the regions: (i) fostering enterprise development; (ii) contributing to the business environment of the

SMEDCoordinator

Monitoring and Evaluation Officer

Communications Officer

Administrative Staff

Cost Sharing Facility

Coordinator

Figure 3Organizational Structure of SME Development (SMED) Project

SME Development ProjectManagement Unit

Credit GuaranteeFacility

CGF Manager

Accountant

Support Staff

Administrator

DirectorEconomic

Affairs, MEDT

Support Staff

Business DevelopmentServices Center

Center Manager

Business Development

Officer

Trainer for Entrepreneurship

CSF Committee


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regions; (iii) encouraging the development of cooperatives and clusters in priority sectors; (iv) providing access to relevant information; (v) raising awareness of enterprise development issues in the atolls; (vi) increasing the competitiveness of businesses in the Male’ and resort markets, as well as international niche markets. A key responsibility of the M&E unit will be gathering and processing quantitative information needed to determine the extent to which contributing programs support the achievement of the project objectives. 57. M&E Indicators: M&E indicators will encompass input, process, output and impact indicators. Input indicators will include (i) finance for line of credit; (ii) technical assistance and training for staff of lending agencies, that is, Bank of Maldives branches in the target atolls; (iii) Business Development Service Centers (BDSC) technical assistance to prepare entrepreneurs for screening system; (iv) BDSC co-sharing portfolio management system and client tracking system; and (v) BDSC technical assistance and training to potential borrowers, that is, how to prepare a bankable project. Process indicators will cover (i) number of credit and grant-based operations received and reviewed by the BDSC, Bank of Maldives branches and non-banking sector entities (insurance and fund manager); (ii) total credits and grants approved; and (iii) training of staff completed and number of staff trained. Output Indicators include (i) amount of credit and grants distributed; (ii) loan repayment rate, that is, loan repayment as a percent of repayments due; and (iii) transaction costs of each grant and loan facility. Impact Indicators analyze (i) rates of growth of MSME, by type and location, in the target regions relative to that of the economy as a whole; (ii) employment generation in MSME in each target region relative to that of the economy as a whole. A similar set of input, process, output and impact indicators will be developed for the Business Development Service Centers and is described in Chapter 4.

2 . 1 . 5 P o l i c y a n d R e g u l a t o r y F r a m e w o r k

58. Legal Recognition of MSMEs: Official recognition of MSMEs will be an important precursor to the establishments of laws and regulations affecting these types of enterprises in the Maldives. The following legislation will need to reflect the status of MSMEs and grant special concessions:

Bill No. Legislation Observations and Proposals

10/96 Companies Act of Maldives

• Presently the Act does not distinguish MSMEs from larger companies except in terms of registration fees based on the share capital of the Company.

• The Act needs to introduce accounting systems and standards necessary for different types of companies.

31/79 Maldives Import Export Law

• Review to award special concessions on import duty of raw materials for MSMEs.

9/96 Maldives Partnership Act

• Currently this Act is targeted towards professional firms and has unlimited liability.

• Recognition of limited liability partnerships and silent partnerships can be introduced.

• Different types of accounting systems and standards should be introduced for different types of partnerships.

N/A Business Profit Tax Bill

• This Bill should be revised to recognize the status of MSMEs and award special tax concessions.

• Simplified tax procedures should be set out for MSMEs.


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59. Regulatory and Legal Framework: Despite the existence of commercial legislation in the Maldives, there remains the need to formulate legislations on bankruptcy and insolvency, legislation on banking and taxation laws, as well as accounting and auditing standards for business and minimum wage levels. A Business Profit Tax Bill has been drafted, which will offer competitive corporate tax measures that support the growth of MSMEs. Nevertheless, MSMEs will find compliance with the tax rules particularly onerous because they generally have limited in-house resources to deal with complex tax deductions, credits and accounting requirements.

Table 11: Regulatory and Legal Framework for MSME Development. IDENTIFIED ISSUE ACTION NEEDED OTHER CONSIDERATIONS

Business Registration Objective: Reduce the barriers and building the necessary system of effective registration for MSMEs.

� Issue standard simple regulations to recognise and govern sole proprietorships.

� Introduce, implement and monitor requirements for submission annual financial reports for registered businesses.

� Conduct pilot decentralization of business registrations outside Male’.

� Plan for a one stop window program for all licensing requirements of MSMEs.

� Introduce facilities for business registration process in the BDSCs in each of the targeted region.

� Plan for online registration system.

� Introduce limited liability partnership and silent partnership enterprises into the regulatory framework.

Regulatory Review and Recourse Mechanism Objective: Develop and strengthen regulatory infrastructure needed for business and enhance governance of relevant government agencies.

� Establish regulatory review process for all existing and proposed commercial legislation

� Formulate a recourse mechanism to appeal administrative decisions.

� Introduce Regulatory Impact Assessment (RIA) by carefully reviewing existing and proposed legislations and regulations and exploring more flexible alternatives to regulation.

Commercial Legal Framework Objective: Develop basic legal infrastructure needed for businesses.

� Enact draft laws on Banking, Bankruptcy and Insolvency.

� Introduce standard court procedures to file for bankruptcy under the Companies Act.

� Review the draft Business Profit Tax Bill to incorporate tax measures that support the growth of MSMEs at most income levels

� Introduce minimum wages and accounting standards to all types of business including sole proprietorships.

� Include MSME legal and regulatory strategies into Civil Justice Action Plan to be introduced by the Attorney General’s Office.

� Enact draft laws on secured transactions, e-commerce and information technology.

� Develop corporate governance guidelines and disclosure requirements non financial requirements.

Improving Judiciary Objective: Strengthen rule of law and increase confidence of the business community in the civil justice system.

� Establish small claims court to strengthen contract enforcement of MSMEs.

� Enact legislation to establish commercial arbitration, mediation and other types of alternative dispute mechanisms.

� Introduce effective judgement enforcement and summon procedures in the civil court.

� Engage in extensive capacity building program for the commercial court system.

Simplified Accounting and Taxation Systems For MSMES Objective: Facilitate enhanced access to finance by reducing the risk related to lack of appropriate financial information.

� Issue simplified accounting guidelines for MSMEs including providing them with the related templates.

� Develop a simplified tax reporting system for MSMEs.

� Issue guidelines and specific requirements to assist the MSMEs to adhere to the formal tax system.

� Train, develop and support accounting professionals in the country.

Credit Information Sharing Objective: Facilitate enhanced access to finance b y reducing the risks associated with limited information on potential borrowers.

� Establish an enabling legal frame for operating of a credit information sharing system including framework to protect the rights of borrowers.

Leasing Objective: Create enabling legal framework for finance leasing.

� Introduce legal framework on leasing covering both financial and operating leasing.

� Introduce accounting standards for leasing.


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60. Prior to introducing such measures the Government should take steps to simplify compliance with tax rules. For example, the Government can provide single points of contact for example in the BDSCs for MSMEs and on-line information and support services. The BDSCs should also be equipped to answer queries on such matters and support MSMEs with self-help taxation packages. The Government also needs to strengthen its monitoring of regulatory and legal compliance of businesses, and it should facilitate information to MSMEs on regulatory and legal compliance requirements. Table 11 summarizes actions needing to be taken for a business environment that is conducive to SME development. 61. Impact of Business Regulations: In Maldives regulators do not conduct extensive research on impact of regulations on the target groups. Government is unaware of the possible impact the laws and regulations can have on businesses. The resulting lack of an appropriate framework for stakeholder participation prevents private sector from intelligently participating in discussions and forming opinions on the objective of a regulation and its potential impact. Moreover, laws drafted and enacted often lack operative details and usually are left to regulations which are poorly considered. 62. Regulatory Impact Assessment (RIA): The introduction of Regulatory Impact Assessment (RIA) will help the Government to become a facilitator of private sector development. An RIA mechanism will provide Government with an opportunity to weigh and present the relevant evidence on the positive and negative effects of such interventions, including reviewing the impact of policies after they have been implemented. Best practices suggest the need to firmly embed RIA policy in the appropriate legal framework. Institutionalization typically requires endorsement of RIA policy and establishment of a RIA working group adopting a regulatory reform policy at highest political level and establishment of a central regulatory body for the RIA process. The initiative to adopt a regulatory reform policy will need to be endorsed at the highest political level and executed by a RIA task force to set out a national RIA policy. At a minimum, the RIA policy will (i) specify procedures for creating and changing a regulation, and how to apply RIA within the regulatory process; (ii) specify mechanisms for consultation with stakeholders, as well as mechanisms for assuring transparency within the stakeholder consultation process; (iii) specify types and level of regulations subject for reviewing; and (iv) specify enforcement mechanisms, including rewards and sanctions. 63. RIA Monitoring Functions: Initially RIA functions will be assigned to the Monitoring and Evaluation Unit of the project, with the objective of evaluating the impact of actual or proposed regulations affecting MSMEs. The RIA activities will include prioritization of regulations that are likely to have appreciable benefits and costs. The profession staff involved in RIA activities should not be directly involved in the formulation of laws and regulations in other ministries in order to maintain an appropriate level of independence in their monitoring functions.


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2 . 2 K E Y F E A T U R E : B U S I N E S S D E V E L O P M E N T S E R V I C E S

2 . 2 . 1 E x i s t i n g S i t u a t i o n i n t h e M a l d i v e s

64. BDS Market: The BDS market is at an infant stage of development in the Maldives, a situation reflected in the general lack of awareness on the part of entrepreneurs (demand side) about these types of services in focused group discussions held with MSME stakeholders in the atolls and in the survey of business conditions in the atolls. The few BDS products that do exist are provided by the public sector and a limited number of private providers (supply side) in the capital and consist mainly of skills-related training courses that do not necessarily induce entrepreneurial activity. Yet BDS products are needed for microenterprises to start or to graduate to SME status in the atolls and islands beyond Male’, especially in the following areas: (i) improved availability and access to information; (ii) access to markets, including transport and logistics support; (iii) access to low cost finance; (iv) affordable technical consultancy and training; (v) basic management training; (vi) start-up training and consultancy; and (vii) training in entrepreneurship.

65. Business Member Organizations: Development of the private sector needs to rely on business member organizations (BMOs) rather than the public sector, but in the Maldives BMOs only exist in the capital city and are limited in their range of activities and service. The four main BMOs are (i) Maldives Association of Tourism Industry (MATI), a well-organized body representing the tourism sector; (ii) Maldives National Chamber of Commerce and Industry (MNCCI), which also acts as the umbrella organization for the Women’s Entrepreneurs Council, represent all sectors of business in Male with more than 400 paying members and at the early stage of institutional development with little coverage of the atolls; (iii) Fishermen’s Association of Maldives (FAM) is a voluntary organization whose activities are limited to Male Atoll; and (iv) Maldives Association of Construction Industry (MACI) representing the construction sector in the capital. With some institutional development support, MNCCI could become an influential BMO for MSMEs in the atolls by providing services such as market information, lobbying and independent M&E of the present projects. Indeed, all BMOs have expressed their readiness to broaden their support of the sectors in which they are involved. MATI volunteers as champion for the development of the handicraft cluster.

2 . 2 . 2 C l u s t e r - B a s e d D e v e l o p m e n t S t r a t e g y

66. Clusters as a Means of Overcoming Size Constraints: Small island economies like the Maldives lack economies of scale that allow them to compete effectively in a globalized economy. MSMEs are unable to capture market opportunities that require large quantity production, homogenous standards, regular supply and reliable access to markets. They also encounter difficulties in achieving scale economies when purchasing inputs such as equipment and raw materials and accessing financial, consulting and marketing services. Small size also constitutes a significant obstacle to internalize functions such as training, market intelligence, logistics and technology innovation and it can also prevent and effective intra firm division of labor. One approach to overcoming the size constraints of MSMEs is through the use of industry clusters and business networks. The success of these clusters relies on (i) the presence of functioning networks and partnerships; (ii) strong innovation base, with supporting research and development (R&D) activities; and (iii) the existence of a strong skills base. Four other factors also contribute to successful cluster development: (i) adequate physical infrastructure, (ii) presence of large firms, (iii) strong entrepreneurial culture, and (iv) access to finance.


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67. Cluster Experiences: The Maldives has already used clusters approaches in its development planning. The Strategic Economic Plan (SEP) and the Integrated Framework (IP) program both have explored clusters as a means of developing the country’s core sector of tourism, fisheries and agriculture, as well as new activities in information and communications technology (ICT) and logistics.23 Both studies note that successful development of these sectors will require bolstering of key elements in their respective clusters, notably (i) financial services in domestic banking, insurance and reinsurance, (ii) professional and business services in accounting, legal, management consulting, education and training, architecture and engineering, (iii) transport and logistics infrastructure and services, and (iv) communication and telecommunication infrastructure and services. 68. Strategy: Although successful clusters share some common elements with others, each is unique in its ability to addresses a specific set of strengths and weaknesses. For the Maldives, the proposed strategy for cluster development consists of the following elements: (i) bottom-up approach that evolve from local atoll conditions; (ii) separation of responsibilities between the atolls and BMOs and public sector in the capital; (iii) enhanced public-private partnership, with cluster development led by private sector-based leadership groups in the atolls and the public sector and BMOs playing a facilitating role to address common constraints of most clusters in a given sector such as regulations or bottlenecks in the supply chain; (iv) capacity building in both atolls and capital that not only ensures appropriate responsibilities are carried out effectively, but develop dynamic leadership roles in each cluster and eventually development of champions for the clusters. 69. Implementation: Based on these elements, the cluster development strategy for MSME development in the atolls will combine cluster building with reverse planning using a bottom-up approach and an integrated local economic development planning. Rapid implementation of this approach will be achieved through the following six steps: (i) gather SME stakeholders and select the cluster based on predefined criteria such as the employment impact potential; (ii) form the clusters; (iii) conduct participatory rapid economic appraisal (REA) identifying comparative and competitive advantages of the atolls; (iv) develop short-term action plans for local economic development (LED) based on simple and do-able plans; (iv) set up a matching grant fund for ‘light house projects’ of LED; (v) train local facilitators of LED; and (vi) replicate successful activities in other atolls. 70. Capacity Building: The cluster approach aims to achieve its outcomes by helping the various cluster agents to develop a consensus-based approach for the cluster as a whole and by strengthening their capacity to act upon such a approach. Capacity development is based on two components. The first component aims to reduce fragmentation of knowledge, and concurrently to provide an opportunity for MSMEs to draw attention to a common and often very innovative agendas for addressing networking activities in the atolls. The second component of the approach aims to enable the various cluster agents to overcome limitations associated with un-networked traditional practices and put in their place adopt a sustainable, autonomous governance framework which will keep the local economy in a dynamic growth path long after technical assistance has withdrawn from the clusters.

23 See Ministry of Planning and National Development (2005), “Strategic Economic Plan”. Male’, Republic of

Maldives; and Integrated Framework (2005), “Integrated Framework Diagnostic Trade Integration Study for the Maldives. Draft Report”. Geneva, November 2005.


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2 . 2 . 3 O r g a n i z a t i o n a l S t r u c t u r e

71. Functions: The Business Development Service Centers will be the principal vehicle for delivery of BDS products to MSMEs and will facilitate cluster development in the atolls. Each focal region will have a BDSC offering a wide range of services to MSMEs and cooperative initiatives at cost-based prices. As neither start-ups nor established MSMEs have been exposed to the concept of professional, demand-oriented delivery of BDS at market prices so far, and are therefore unprepared to pay the cost-based price for such services, a Cost Sharing Facility (CSF) will be established as the principal funding mechanism for the development of a commercial BDS market. The CSF will enable the BDSCs to initially offer services at a low, subsidized price. It will also support the BDSCs in developing service products and provide substantial income to the Centers during the three-year funding of the CSF. The Centers will have a business plan indicating core activities, required investment and planned revenue streams. They will develop a clear strategy comprising a vision, mission, goals and line of activities, as well as an annual operational plan. 72. Objectives: The BDSCs will have the following three objectives: (i) provide BDS products to start-ups and established MSMEs; (ii) facilitate Local Economic Development (LED) and cluster development in their respective regions; and (iii) link start-ups and other types of MSMEs to financing opportunities. To meet its objectives the BDSCs will offer a wide range of services classified into four categories: (i) consulting services for business planning and business counseling, identification and provision of information, and coaching; (ii) training services on costing and pricing, marketing and sales, accounting and entrepreneurship; (iii) facilitation services for market access facilitation, accessing finance and facilitating the formation of cooperatives; and (iv) government-related services covering support for business registration and licensing, linking to government databases, and linking to government extension services. To sustain its operation following the termination of the three-year Cost Sharing Facility, the BDSC will become an independent and market oriented service provider with a development and commercial objectives.

2 . 2 . 4 C a p a c i t y B u i l d i n g

73. Needs Identification: One of the major constraints to the effective development of MSME in the atolls is the lack of capacity in enterprise development services. The ability of the proposed project to successfully deliver the type of support needed by MSMEs in the atolls will depend on capacity development in the three main channels for BDS (i) The Business Development Services Centers (BDSCs) in each of the targeted regions; (ii) the Enterprise Development Unit (EDU) of the Ministry of Economic Development and Trade (MEDT); and (iii) the Maldives Chamber of Commerce and Industries. 74. Cluster Development: It should be emphasized that capacity building cannot be confined to a once-and-for-all initiative such as the identification/provision of a BDS previously unavailable to the cluster MSMEs. Instead the aim is to enable the various cluster actors to tackle new challenges and to seize upon more ambitious visions on a sustainable basis. Such an objective involves, for example, strengthening the capacity of the target sector businesses to convey their requests to the BDS providers, lowering the risk perceived by BDS providers in doing business with MSMEs, enabling BDS providers and MSME owners to identify institutional partners able and willing to co-finance the development of new BDS, and identifying more effective procedures to assess BDS impact.


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75. Enterprise Development Unit (EDU): The EDU is one of the main pillars of the Government’s efforts to create an effective and competitive private sector throughout the country. Following its establishment under MEDT by Letter 73 of the President’s Office in October 2004, the EDU currently operates with seven recently hired staff, who are relatively young and in need of experience in facilitating market development and promotion to MSMEs. At the onset, the EDU will need to undertake a strategic planning process consisting of the following steps: (i) assess and adjust its organizational structure in response to the new project; (ii) ensure that all EDU staff works towards a common goal established by the project; (iii) identify the HRD requirements and gaps; (iv) conduct an intensive HRD development program; and (v) focus the relatively limited resources of its staff on key activities. 76. Business Development Service Centers (BDSCs): Since SME development by delivery of BDS is a fairly new concept in the Maldives, an international BDS expert will need to be contracted on an intermittent basis during the first three years of the project. The task of the expert will comprise the following activities: (i) elaboration and fine tuning of the BDSC concept; (ii) acquisition of the BDSC staff; (iii) development of appropriate BDS products; (iv) coaching staff in elaboration of operational plans; (v) on-the-job training of BDSC staff; (vi) monitoring and evaluating project progress; and (vi) knowledge management through workshops, seminars, conferences on the BDSC concepts. Additionally three types of capacity building activities will take place in the BDSCs. The first is training in business planning for start-ups, which consists of developing entrepreneurial competencies, identifying project ideas, business administration training, and elaboration of business plans, including their submission to financial institutions. The second activity involves SME consulting services in the area of enterprise creation, problem and solution identification, organization and management, market analysis, product marketing, finance, and management effectiveness. The final activity is training of trainers in adult education methods, communications and learning methods, training seminar, curriculum design, monitoring the performance of participants, and training skills. 77. Maldives National Chamber of Commerce and Industries (MNCCI): MNCCI has about 460 members, of which 60 to 80 percent are MSMEs, and it provides a range of services in advocacy, lobbying, liaison with Government, and trade fairs. Its effectiveness, however, is undermined by the lack of regional chapters in the atolls, a lack of strategy and plan of activities, and the absence of any BDS products for its members. The major constraints of MNCCI are the lack of a clear cut strategy, lack of professional staff and lack of funding. To address these constraints, SMED project will support MNCCI in its strategic planning process that includes the elaboration of an operational plan and a HRD plan. MNCCI will get an involvement in the operation of the BDSCs in the regions and will be represented in the appraisal committee of the Cost Sharing Fund.


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2 . 2 . 5 B D S C e n t e r s i n T a r g e t R e g i o n s

78. Functions: The principal vehicle for delivery of BDS products to MSMEs in the atolls are the Business Development Services Centers (BDSCs). Each target region will have a BDSC with a clear mandate and a business plan, indicating core activities, required investment and planned revenue streams. The BDSC will have the following three objectives: (i) facilitate Local Economic Development (LED) and cluster development in its respective region; (ii) provide BDS products to start-ups and MSMEs; and (iii) link start-ups and other types of MSMEs to financing opportunities. Key services to be provided include business counseling, business planning and training in finance, sales, accounting and entrepreneurship; support for business registration and licensing; provision of database, library and information facilities, as well as internet access; support for financing applications to equity providers; market access facilitation; general support for communications technology. The legal form of the BDSC and the physical accommodations and staffing need to be elaborated with MEDT.

79. Staffing: BDSC staffing will consist of both a permanent staff located in each Center, and cross-Center staff that will provide services to all Centers on a rotating basis. Each BDSC will be headed by the Centre Manager, who is familiar with LED methodology and able to direct the operation of the Centre. The professional staff will be composed of SME trainers and a technical expert for each priority cluster, who will also provide technical training and consulting at other Centers. The cross-Center staff will be composed of a team of three MSME promoters and Local Economic Development (LED) facilitators who can provide expertise in a wide range of areas of business development and financial support. At the onset, it is important that a strong incentive scheme be created to attract and retain qualified staff.

80. Sequencing: Establishing the community-wide recognition of BDSCs will be critical to the success of the project as a whole. Three stages are proposed for their establishment: Initially government agencies will use the Centers for the provision of their MSME development services in the atolls. Once the Centers gain recognition in the local community, the Centers will finance their activities from the provision of services leading up to entrepreneurs obtaining financing for their activities. These mechanisms include the provision of grant-based facilities that are conditional on using part of the funds to pay for training and other BDSC products, as well as commissions for helping entrepreneurs to obtain commercial financing of their activities. In the final stage of BDSC’s development, only commercially viable products will be supported to ensure the economic sustainability of the Centers.

81. Performance Measurement: The BDSCs will establish mechanisms, systematic tools and formal systems for measuring operational results related to its activities, including financial support to the entrepreneurs. Among the information gathered by the Centers on a quarterly basis will be the following: (i) number of businesses analyzed; (ii) number of business plans prepared; (iii) number of financial applications processed for each of the financing mechanisms supported by the BDSC; (iv) breakdown of clientele by sector, geographic location, and size of enterprise; (v) number of courses provided and participants in each course; (vi) participant evaluations of each training course; revenue from conditional support for successful applications to various financing mechanisms; other revenue sources; co-sharing grant management, allocation, and monitoring analysis. Each BDSC will be responsible for establishing a results-based management and accountability framework and providing for appropriate mechanisms for measuring and presenting results in relation to its objectives. This process will be established by the Monitoring and Evaluation Unit using systematic, uniform and user-friendly tools for the continuous measurement of results achieved by each BDSC.


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Table 12: BDS CentersPhase I2008 2009 2010 2011 Sub-Total

INCOME 1000 US$ - 109.2 182.8 313.7 605.7 Income from BDS and co-financed from CSF 1000 US$ - 15.6 33.6 46.8 96.0 Income from MSME share of matching grants 1000 US$ - 31.4 56.4 81.4 169.2 Cost-Sharing-Facility (CSF) Interest Income (4.5%) 1000 US$ - 41.3 29.9 11.1 82.3 Target Income from Other BDSC Activities 1000 US$ - 20.9 62.9 174.5 258.3

Cost Coverage Percent 0% 10% 33% 100% 44%EXPENDITURE 1000 US$ 58.8 757.2 310.5 313.7 1,381.5 Gross Salaries 1000 US$ 58.8 127.2 131.0 134.9 393.2

BDS Officers Person-Years 3.0 6.0 6.0 6.0 18.0 Administrative Staff Person-Years 1.0 4.0 4.0 4.0 12.0 Salary of Business Developers (US$1,500/mth) 1000 US$ 18.0 18.0 18.5 19.1 55.6 Salary of Administrative Staff (US$400/mth) 1000 US$ 4.8 4.8 4.9 5.1 14.8 Total Salary of Business Developers 1000 US$ 54.0 108.0 111.2 114.6 333.8 Total Salary of Administrative Staff 1000 US$ 4.8 19.2 19.8 20.4 59.3 Total Gross Salary 1000 US$ 58.8 127.2 131.0 134.9 393.2

Consultancy and Training 1000 US$ - 120.0 132.0 133.8 385.8 Number of Specialists (Consultants) Person-Years 2.0 2.2 2.4 6.6 Remuneration (US$2,500/mth) 1000 US$ 72.0 79.2 86.4 237.6 Per Diem 1000 US$ 24.0 26.4 28.8 79.2 Travel 1000 US$ 12.0 13.2 14.4 39.6 Training Materials and Related Costs 1000 US$ 12.0 13.2 7.2 32.4

Overhead Costs 1000 US$ - 50.0 47.5 45.0 142.5 Marketing 1000 US$ 10.0 7.5 5.0 22.5 Utilities 1000 US$ 12.0 12.0 12.0 36.0 Transport and Staff Per Diem 1000 US$ 18.0 18.0 18.0 54.0 Contingencies 1000 US$ 10.0 10.0 10.0 30.0

TOTAL OPERATING COSTS 1000 US$ 58.8 297.2 310.5 313.7 921.5 Fixed Assets 1000 US$ - 460.0 - - 460.0

Office Building 1000 US$ - 300.0 - - 300.0 Office Furniture and Equipment 1000 US$ - 60.0 - - 60.0 Inter-Island Transport Vessel 1000 US$ - 100.0 - - 100.0

TOTAL CAPITAL INVESTMENTS 1000 US$ - 460.0 - - 460.0 Performance Indicator Goal a/ Percent 37% 59% 100% 66%

Phase IIUnit of Acct

2 . 2 . 6 T e c h n i c a l A s s i s t a n c e a n d P r o j e c t C o s t i n g

82. Technical Assistance: Project costing for the BDS component consists of technical assistance and the project loan. The allocated US$ 1.14 million for technical assistance during the period of the project loan (2009-2011) will be used for capacity building of the three major vehicles of SME development. The first is the BDSCs where an international BDS expert will support (a) the conceptualization, startup and further development of the two Centers for 14 months on an intermittent basis over three years, (b) training in business planning of BDSC staff and selected EDU and MNCCI staff, (c) consulting of MSMEs, and (d) training of trainers. The second part of the technical assistance will be directed towards the support of the EDU’s strategic planning process, as well as the EDU’s staff training to facilitate its economic development activities. The staff will be exposed to best practice techniques through overseas training courses and seminars and through intensive training in development tools and the use of the cost sharing facility. The third part of the technical assistance will help MNCCI prepare for its proactive role in MSME promotion through a professional strategic planning process that will enable the organization to operate outside of Male’, open regional chapters and develop a wider range of services for its members.


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83. Business Development Services Centers: For the BDS Centers (BSDCs) the budget allocation is US$ 1.38 million over three years (Table 11). That amount covers the establishment of two Centers in the Northern and Southern Development Regions, including the building and equipping of an office and the purchase of a boat for inter-regional transport by staff members of each Center. It will also cover the competitive salaries of six (6) professional and four (4) administrative staff members, as well as the overhead costs for running the Centers. Technical assistance in the amount of US$ 385,000 will cover the design and implementation of cluster development projects the target sectors.

Table 13: Enterprise Development UnitPhase I2008 2009 2010 2011 Sub-total

EXPENDITURE 94.9 251.2 105.0 98.4 454.6 Gross Salaries 6.0 36.0 37.1 38.2 111.3

SMED Project Coordinator Person-Years 0.5 1 1 1 3 Monitoring and Evaluation Officer Person-Years 1 1 1 3 Communications Officer Person-Years 1 1 1 3 Administrative Staff Person-Years 1 1 1 3 Salary of Professional Staff (US$1,000/mth) 1000 US$ 12.0 12.0 12.4 12.7 12.4 Salary of Administrative Staff (US$500/mth) 1000 US$ 6.0 6.0 6.2 6.4 6.2 Total Salary of Business Developers 1000 US$ 6.0 24.0 24.7 25.5 74.2 Total Salary of Administrative Staff 1000 US$ - 12.0 12.4 12.7 37.1 Total Gross Salary 1000 US$ 6.0 36.0 37.1 38.2 111.3

Promotion 1000 US$ 81.1 157.0 37.5 32.5 227.0 Media Campaign 1000 US$ 35.0 17.5 17.5 70.0 MSME Portal and Registry 1000 US$ 81.1 122.0 20.0 15.0 157.0

Overhead Costs 1000 US$ 7.8 33.2 30.5 27.7 91.4 Rent 1000 US$ 12.0 24.0 24.0 24.0 72.0 Marketing 1000 US$ - 10.0 7.5 5.0 22.5 Utilities 1000 US$ 3.0 6.0 6.0 6.0 18.0 Transport and Staff Per Diem 1000 US$ 3.0 12.0 12.0 12.0 36.0 Contingencies 1000 US$ 1.8 5.2 5.0 4.7 14.9

TOTAL OPERATING COSTS 1000 US$ 94.9 226.2 105.0 98.4 429.6 Fixed Assets 1000 US$ - 25.0 - - 25.0

Office Furniture and Equipment 1000 US$ - 25.0 - - 25.0 TOTAL CAPITAL INVESTMENTS 1000 US$ - 25.0 - - 25.0


84. Enterprise Development Unit: The salaries of a BDS coordinator, the CSF coordinator, a Monitoring and Evaluation Officer, the Communications Technical Administrator and an Administrator are budgeted at US$ 111,000 for the three years of the project (Table 12). For developing and conducting a media campaign for the stimulation of entrepreneurial activities and the propagation of programs under the BDSCs and the establishment and maintenance of a SME web portal an amount of US$ 227,000 are earmarked. It is expected that the BDS component will operate through office rental of the EDU and, for that purpose, US$ 116,400 has been allocated over the three years of the project.


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2 . 3 K E Y F E A T U R E : C O S T S H A R I N G F A C I L I T Y

2 . 3 . 1 O b j e c t i v e a n d C o v e r a g e

85. Framework: The Cost-Sharing Facility (CSF) has an initial capital contribution of $ 1.0 million (MRf 12.7 million), which aims to assist about 300 MSMEs and 25 Local Economic Development (LED) projects related to the four targeted clusters in the Northern and Southern Development Region. The facility will generate activity in the following areas: (i) Business Development Services (BDS); (ii) selected investments, especially for startups and young entrepreneurs; (iii) seed capital to start a business; and (iv) institutional capacity-building for clusters and associations. Its purpose is twofold: first, to motivate new and young entrepreneurs to start a business by encouraging MSMEs to request non-financial business support from BDS Centers through assistance provided to entrepreneurs lacking access to bank loans in the form of a maximum individual support amounting to $ 4,000 (MRf 50,000); secondly, to assist a limited number of cooperative efforts (lighthouse projects) in local economic development in the defined clusters along the line of non-financial business support and joint investments with a maximum individual support of $ 40,000 (MRf 500,000).

Box 1: BDS Case Study for Start-Up Small Enterprise Shafeenaz Abdul Sattar recently completed a tailoring training course at the Ministry of Youth and Sports in Kulhudhuffushi, capital of Haa Dhaalu Atoll in the northern part of the Maldives. She is very interested in becoming an entrepreneur and starting her own tailoring shop. Last week she hear a radio announcement saying that the Business Development Service Center (BDSC) in Kulhudhuffushi is promoting the start-up of enterprises in the Northern Development Region. The next day, Shafeenaz visits the BDSC and inquires about the type of support that is being offered. The BDS Officer, Mohamed Luveiz, explains the services of the BDSC and asks about her specific requirements. Ms. Sattar needs a business plan, advanced training in design and tailoring, and equipment for her shop that she plans to put in her home. Mr. Luveiz’s knowledge about the local market and his appreciation of Ms. Sattar’s idea’s suggest to him that it is a viable income-generating enterprise with good growth potential. Together they draw up an application for support through the Cost-Sharing Facility (CSF). They estimate that the business development services component of the project amounts to MRf 8,000, of which Ms. Sattar will provide MRf 1,600 and the CSF will provide MRf 6,400 as a matching grant. They submit the application to the CSF Committee, which approves the BDS matching grant. Mr. Luveiz finds that there are four other applicants wishing to start a tailoring and/or design shop in the Northern Development Region. A suitable trainer is identified with the help of the Communications Officer located in the Enterprise Development Unit (EDU) in Male. Within two weeks, the BDSC organizes a training program that consists of the advanced technical training as well as a more general ‘Start Your Own Business’ course consisting of market analysis, organizational and financial planning. After the training the BDSC supports Ms. Sattar in finalizing her business plan for the tailoring shop. During the course of the training sessions, the BDSC helps Ms. Sattar to prepare a loan application with the business plan. Since she has no collateral, the bank rejects her loan application, and she proceeds to request a matching grant for the investment capital that she needs to start her business. Ms. Sattar orders the equipment and pays her MRf 10,000 share of the project investment to the BDSC. The BDSC then pay the suppliers directly, which totals MRf 50,000, and keeps ownership of the equipment in its name for anywhere between six months and a year, before turning the title over to Ms. Sattar. A short while after receiving the equipment that she’s ordered, Ms. Sattar opens her tailoring shop.


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Table 14: Cost-Sharing Facility Phase I2008 2009 2010 2011 Sub-Total

Fund ValueStart of Year 1000 US$ - 1,000 836 492 - End of Year 1000 US$ - 836 492 - -

Fund Management 1000 US$ 20 50 52 54 155 Fund Coordinator (1 person) 1000 US$ 12 24 25 26 75 Administrative Assistant (1 person) 1000 US$ 3 6 6 7 19 Travel Costs 1000 US$ 3 10 10 11 31 Office Equipment 1000 US$ - 5 5 5 16 Contingencies 1000 US$ 2 5 5 5 14

Matching-Grant DisbursementsSmall Matching-Grants

Number of Matching Matching-Grants Number - 50 100 150 300

Average Matching-Grant Size 1000 US$ - 2.0 2.0 2.0 2.0 Maximum Matching-Grant Size 1000 US$ - 4.0 4.0 4.0 4.0 Outlay on Small Matching-Grants 1000 US$ - 100 200 300 600

Large Matching-Grants

Number of Matching-Grants Number - 4 9 12 25 Average Matching-Grant Size 1000 US$ - 16.0 16.0 16.0 16.0 Maximum Matching-Grant Size 1000 US$ - 40.0 40.0 40.0 40.0 Outlay on Large Matching-Grants 1000 US$ - 64 144 192 400

Total Matching-Grants

Number of Matching-Grants Number - 54 109 162 325 Total Outlays 1000 US$ - 164 344 492 1,000

MSME Contribution to ProjectsSmall Matching-Grants

Percent Contribution from MSME Percent - 20% 20% 20% 20%Total Value of MSME Contribution 1000 US$ - 25 50 75 150

Large Matching-GrantsPercent Contribution from SMEs Percent - 20% 20% 20% 20%Total Value of MSME Contribution 1000 US$ - 6 6 6 19

Total Matching-GrantsTotal Value of MSME Contribution 1000 US$ - 31 56 81 169

MSME Contribution to Investment-Related Matching-GrantsSmall Matching-Grants

Percent Contribution from MSME Percent - 20% 20% 20% 20%Total Value of MSME Contribution 1000 US$ - 20 40 60 120

Large Matching-GrantsPercent Contribution from SMEs Percent - 50% 50% 50% 50%Total Value of MSME Contribution 1000 US$ - 32 72 96 200

Total Matching-GrantsTotal Value of MSME Contribution 1000 US$ - 52 112 156 320

Phase IIUnit of

Acct

86. Definition: The CSF provides a flexible business support instrument to introduce financial incentives into a range of MSME-support initiatives and cooperative ventures, which would otherwise not be viable. It is directed towards entrepreneurs who are planning to start a business, invest, or get BDS for an existing business or cooperative efforts in the field of handicrafts, agriculture, fish processing and tourism-related activities. In practice, CSF-support appears as a discount on market prices by matching part of the cost of a particular service or investment, as in the case of a business plan development or purchase of irrigation equipment.


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Small grants will cover up to 80 percent of the BDS or investment costs for MSMEs, while large grants will cover up to 80 percent on the BDS and up to 50 percent on the Investment on cluster activities. A key feature of the CSF is the quick decision-making process that allows disbursement, possibly within four weeks of the application submission. A broad range of BDS will be covered, including technology upgrading, market and product development, international standards, business and financial planning, training and skills development, management development, and general business strategy.

MSME Entrepreneur

Business Development Services Center

(BDSC)

Commercial Banking Institution

CSF Project Appraisal Committee

CSF Coordinator

Figure 4: Cost-Sharing Facility Process for Cluster Development Initiatives

Submit proposal and details on

business and financing

Review proposal and determine if entrepreneur’s matching funds are available

Identify BDS needs and financing gap

Submit loan application to Financial Institution

Assess loan application

Inform MSME about maximum loan eligibility

Forward decision to BDSC

Review financing plan and request for matching grant

Check documents for CSF application

Propose terms of CSF

assistance

Forward documents to CSF Project Appraisal Committee

Final eligibility check and site

visit

Sign CSF Agreement

Transfer matching-grant to BDSC account

Request applicant to pay matching funds

Deliver BDS

Pay suppliers and service providers

Monitor and evaluate business

development

Supervise and monitor project

Project appraisal and final decision


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87. Rationale: A limited range of enterprises operate in the target regions and most of them have few opportunities to invest in skills development. Small entrepreneurs are nevertheless aware of the importance of human resource investment and know-how development. Without that know-how, these entrepreneurs tend to postpone investments, especially in human resource development (HRD) and information development, which in turn impedes (i) the establishment of new businesses, (ii) competitiveness and growth of existing businesses, and (iii) diversification of activities. Many of the constraints on individual entrepreneur could be resolved through cooperative arrangements, and those areas that have a large potential for economic development, as in the case of the priority sectors identified for development, could be developed through these cooperative efforts. The Government has made it a priority to accelerate private sector development and company growth by supporting businesses in overcoming the prevailing constraints in the outer islands. The proposed co-financing development scheme will contribute to enterprise growth, generate additional employment opportunities in the outer islands, and thereby help alleviate pressure from job seekers on Male’ and its vicinity. It will also help entrepreneurs by encouraging their financial participation through matching grants, and ensuring that they received counseling from the BDSC.

2 . 3 . 2 O p e r a t i o n a l F e a t u r e s

88. Functions: One of the prerequisite for entrepreneurs to receive CSF support is the completion of an application that needs to be submitted to the CSF Project Approval Committee. The application form covers information about the nature of business, the purpose of the project, details about requested support, market coverage, existing and needed equity, enterprise experience, expected employment generation, and contribution to island infrastructure. In general, support for MSMEs from small matching grants is targeted to all entrepreneurial activities, whereas cluster development efforts from larger matching grants are directed at selected activities in high-priority sectors of the outer atolls. Applications from individuals and groups will be encouraged, especially from cooperatives or cluster-based groups. Examples of the types of activities supported by the CSF are training from business management courses, hiring a consultant to create new handicraft designs, hiring an expert to improve on the quality and efficiency of fish processing, and supporting the purchase of capital investments. Ideally the facility would supplement commercial funding sources rather than replace them.

89. General Eligibility Criteria: The following criteria will be used to determine CSF eligibility: (i) business domicile in the outer atoll islands that are served by a BDSC; (ii) business plans having favourable market prospects;(iii) suitable professional background or management experience of applicant; (iv) cluster or cooperative project proposal in a priority sector; (v) ineligibility for a bank loan; (vi) ability of applicant to provide matching funds.

90. Types of CSF Assistance: The procedures for application and disbursement of funds depend on the type of CSF assistance requested. In the case of matching grants for BDS and relatively small investments, the MSME will submit an application to the Regional CSF Project approval Committee. Once approved, the BDSC will submit appropriate documents to the CSF Coordinator in Male’. In the case of matching-grants for BDS and investment for cluster development initiatives, the procedure for approval of a grant for investment is more complex as it usually involves higher amounts (Figure 4).


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91. Organizational Structure: The CSF will be a key SME Development instrument operated by the newly established Enterprise Development Unit (EDU) of the Ministry of Economic Development and Trade (MEDT). It will be organized as follows: � Staffing: MEDT will hire a coordinator for the CSF and appoint an auditor. � Authorization for Disbursements: The facility will be coordinated and administered by the

CSF Coordinator and projects supported by the facility will be approved by EDU-nominated CSF Project Approval Committees. These committees will operate at the national level for cluster development projects and at the regional level for smaller MSME projects.

Box 2: BDS Case Study for a Targeted Cluster-Based Activity

Mohamed Waheed is a farmer in Hithadoo Island on Addu Atoll in the Southern Development Region. He’s been involved in agriculture during the last ten years and since the Tsunami has been supported by a donor-based grant to help with production-based activities. However, he has little if any knowledge about the markets for agricultural products. He also needs help with transportation to the markets and would like to purchase a tractor but does not have the capital needed or scale economies for the capital investment.

The BDS Officer, Mariyam Nisha, has heard about Mr. Waheed’s and finds that it is similar to the situation of other farmers in Hithadoo Island. She organizes a meeting of the farmers and the idea of forming a cooperative is discussed. Together the farmers agree to establish the cooperative and they submit a request to the BDSC for a support package. That package covers the formation of the cooperative, business and marketing plans, and training on cooperative management, with a total cost of MRf 100,000. The proposal is submitted to the CSF Committee, which approves a matching grant of MRf 80,000. The farmers deposit their matching share of MRf 20,000 at the BDSC and the Center then organizes the necessary services for the soon-to-be-formed cooperative. Those services include help in linking the cooperative to the nearby resorts.

When the cooperative is created and registered with MEDT, the members of the cooperative agree that the need cold storage facility, tractor, and some other tools, which together cost MRf 800,000. They can mobilize MRf 400,000 and need another MRf 400,000, which they initially request from the Bank of Maldives branch in Hithadoo. Because the land on which they farm cannot be accepted as collateral, the loan is rejected. Mohamed Waheed then asks the BDS Officer, Mariyam Nisha, for assistance in finding other funding sources. Ms. Nisha suggests the use of another matching grant, which in this case would cover the investment component of the project, and together they complete the necessary application to the CSF Committee.

The CSF Coordinator travels to Hithadoo Island to assess the feasibility of the project and, having found it to be viable, submits the application to the CSF Committee. The Committee approves the matching grant and the accounting officer sends MRf 400,000 to the BDSC. The cooperative accountant deposits MRf 400,000 in matching funds in the BDSC, which in turn administers the MRf 800,000 capital investment. For that service, they charge a 1.0 percent management fee, which helps support the sustainability of the Center.

A year later the cooperative is supplying produce to the two newly established resorts in Addu Atoll. However, transportation services are unreliable and costly, and the cooperative members therefore decide to purchase a boat. They calculate that they will need MRf 1,000,000 for the boat and equipment, and they determine that they will need a loan of MRf 500,000.

The newly established Credit Guarantee Facility (CGF) allows the Bank of Maldives to extend the requested loan to the cooperative using the cold storage facility and tractor as collateral. With that loan, the cooperative is able to provide the resorts with regular delivery of their products and their success serves as a model for other businesses in the region.


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� CSF Coordinator Activities: The CSF Coordinator will be responsible for the development and annual revision of the business plan, development of appropriate application, disbursement and monitoring procedures and the disbursement of grants to the BDSCs, as well as the approval of business service providers like consultants, trainers and technicians.

� EDU Responsibilities: The EDU will develop rules and regulations, define sectors and target groups, as well as other priorities that govern the facility.

� BDSC Responsibilities: The BDSCs will support eligible MSMEs that apply for CSF assistance and they will also identify eligible cluster activities.

2 . 4 K E Y F E A T U R E : C R E D I T G U A R A N T E E F A C I L I T Y

2 . 4 . 1 F i n a n c i n g A p p r o a c h

92. Background: The general banking practice in the Maldives limits loan amounts for businesses in the atolls to 50 percent of the assessed value of houses and registered vessels. Assets such as motor vehicles, office equipment, inventories and accounts receivables are not accepted by banks like the Bank of Maldives due to the difficulties in monitoring these assets and the lengthy procedures of foreclosures in cases of defaults by the borrowers.24 With only about 10 percent of construction built on same titled land, there is extremely limited collateral that business can use to acquire loans.25 There is therefore a need for new financial instruments that can overcome existing lending restrictions to enhance working capital and encourage investment, without unduly increasing commercial lending risks. 93. Overview: The proposed CGF is a special reserve fund for credit enhancement of SMEs managed by a financial guarantee agency, represented by Allied Insurance Company of the Maldives Pvt. Ltd (hereafter Allied Insurance). The fund size will be $2.5 million, preceded by an initial capital of $0.5 million during its pilot operations. The maximum loan size for individuals is $80,000 (MRf 1 million) and the anticipated average size is $40,000 (MRf 0.5 million). Implementation of the scheme will be based on a selective approach in which guarantees are extended on a case-by-case basis. Loan guarantee coverage will be targeted to a limited number of enterprises selected from enterprises having less than 50 employees and having operations in the target clusters and focused regions of the SMED project. Administration of the facility by Allied Insurance, the only Maldivian insurance company in the country, has been agreed upon with its board members and plans are underway to incorporate the activity within its organization. Insurance coverage will be given to all applying financial institutions for investment and working capital loans to eligible SMEs that have adequate cash flow and securities, based on independent CGF risk assessment and well-defined eligibility criteria. During the implementation of the pilot facility, ADB will cover the costs pertaining to salaries of the manager and support staff, marketing and travel to the focus regions, and Allied Insurance will cover office and administration costs. At the beginning of the second phase, the CGF capital will be fully paid prior to commencing operations and interest earnings from its long-term deposit with commercial banks will contribute to the coverage of claims and administration costs. Box 3 summarizes the facility.

24 Inventory and accounts receivables are nonetheless often used as collateral in other developing countries,

especially for SMEs.

25 Nearly all enterprise owners report needing business loans in excess of their bank-accepted collateral value, according to the survey of MSMEs in the atolls.


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94. Selective Approach: The present scheme adopts a selective approach, whereby guaran-tees are extends on a case-by-case basis to SMEs. The potential borrower and guarantor will reviews the project and, once agreed upon, the guarantor will issue an advance guarantee approval to the borrower who, in turn, can use it to negotiate a loan contract with a commercial bank. Under this mechanism, a direct relationship between the guarantor and the borrower exists since the former investigates submitted loan applications and selects the ones to be guaranteed. This reduces the probability of moral hazard on the part of the commercial bank during the screening process and ensures that guaranteed borrowers are indeed in the targeted category intended by the CGF.26 The recommended institutional structure and CGF process flow follows international best practices and lessons learned from other countries.27

Box 3: Credit Guarantee Facility: Coverage and Organization

Phase 1: Pilot Operations (2008)

Phase II: Regular

Operations (2009 onward) Characteristics of the Facility

Fund size US$ $500,000 $2,500,000 Functional Approach:

Max loan US$ $ 80,000 $ 80,000

Avg loan US$ $ 40,000 $ 40,000

Based on a selective approach in which guarantees are extended on a case-by-case basis

10 (2009) Eligibility Criteria:

40 (2010) (a) Number of employees less than 50 Loan target Number end of year

5 loans in 2008

90 (2011) (b) Activities focused on target clusters

Annual fee % 1.5% 1.5% (c) Operations based on one or more focus regions

Up-front fee % 1.5% 1.5% Financial Guarantee Agency:

Risk coverage % 80% 80% Allied Insurance Company of the Maldives Pvt. Ltd.

26 The alternative approach is the so-called portfolio approach whereby commercial banks can attach guarantees to

loans within an eligible category without prior consultation with the guarantor. Eligibility criteria can be defined in terms of the characteristics of borrowers, that is, in terms of size, sector or cluster of operation and location of the enterprise. In contrast to the selective approach, the portfolio approach excludes direct contact between the gua-rantor and the borrower. Instead, the borrow deals directly with the commercial bank, who charges a premiums for the higher risk coverage by the guarantee facility. This approach enables a considerable expansion of activity by reducing time-consuming and cost-intensive screening procedures; moreover, economies of scale associated with increased business volumes allow more cost-effective operations. The disadvantage, however, is that there is less vetting of borrowers and a large proportion of the low risk borrowers awarded guarantees might also qualified for non-guaranteed loans, thereby undermining normal bank operations. Higher default rates occur under the portfolio approach than in the selective approach because all borrowers within a specific category are eligible for the guarantee and because commercial banks often try to reduce their screening costs and are therefore less diligent. The selective approach is therefore more efficient than the portfolio approach since the total cost of mobilizing additional credit is lower than for the portfolio approach, and the quality of loans guaranteed under the selective approach is likely to be higher because screening and monitoring are performed with greater depth. For details, see A. Green, “Credit Guarantee Schemes for Small Enterprises: An Effective Instrument to Promote Private Sector-Led Growth?” United Nations Industrial Development Organization (UNIDO). SME Technical Working Papers Series, Working Paper No. 10, August 2003.

27 For a case study on the reasons underlying the failure of some lending programs, see “M. Bechri, T. Najah and J.B. Nugent, “Tunisia's Lending Program to SMEs: Anatomy of an Institutional Failure?” February 6, 2000.


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95. Phase of the Program: The first phase of the program will focus on institutional organization and staffing, capacity building, and the implementation of a pilot facility in the amount of US$0.5 million that will aim to provide five (5) credit guarantees during the course of 2008. The second phase will establish regular operations of the facility with a capital contribution of US$2.5 million. During the first three years of regular operations, the number of credit guarantees in the portfolio will be targeted as follows: 10 loans at end of 2009, 40 loans at end of 2010, and 90 loans at end of 2011.

2 . 4 . 2 O p e r a t i o n a l F e a t u r e s

96. Eligibility Criteria: The target group eligible for guarantees can be delimited in terms of size, age, ownership, sector, and location of income generating activities. Best practices suggest the following criteria for eligibility in the present scheme: � Enterprises with less than 50 full-time or seasonal employees � Enterprises that have been operating for over a year � Privately owned enterprises in the form of sole proprietorship, private limited liability

companies, or cooperatives � Enterprises with their main operating in one or more of the atolls in the focus regions, that is,

the Northern and Southern Development Regions � Enterprises producing goods and services in the priority sectors, that is, handicraft,

agricultural commercialization, tourism-related activities and fish processing 97. Type of Finance and Size of Loans: Both working capital or funds for investments will be guaranteed. Maximum amounts guaranteed for single borrowers will ensure diversification and sustainability for the fund. The maximum loan amounts for eligible businesses are as follows: � Working Capital: US$ 40,000 (MRf 500,000) � Fixed asset purchase: US$ 80,000 (MRf 1,000,000) � Contracts with government agencies and bona fide medium and large enterprises (for

example, selected resorts): US$ 80,000 (MRf 1,000,000). The reason for the differentiation in the ceiling amounts is that, while targeting investment capital is likely to create more additionality, loans for investment have longer repayment periods and are likely to require a larger amount of collateral. They are also less accessible than working capital to borrowers without guarantees. 98. Terms and Risk Coverage: Fees are charged as an annual premium to the amount of the loan guaranteed and as a one-time advance fee. The charge to borrowers will be an annual fee of 1.5 percent, plus a front-end fee of 1.5 percent on the value of the loan.28 The front-end fee is an administration or registration (commission) fee and is intended to discourage unjustified applications. The share of the lending institution in the risk of non-payment by the borrower is 20 percent.29 Borrowers must pledge any assets acquired with the guaranteed loan as collateral.

28 Best practices recommend charging borrowers annual fees in the range of 1%-2% on top of a modest “front-end”

fee of 1%-2% of the value of the loan. For details, see J. Levitsky, “Best Practice in Credit Guarantee Schemes”. The Financier, Vol 4, No. 1 and 2, 1997.

29 The share falls within the desired range of 20% to 30% identified in best practices for credit guarantees. See M. G. Maiangwa et al, “A Review of Institutional Alternatives to Collateralized Lending”. African Development Review. Volume 16 Issue 3 Page 472 - December 2004.


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Commercial banks will be given adequate incentives to maximize loan repayment by borrowers and use a standard means of identifying arrears, including a relatively short and clear-cut maximum period of arrears before being compensated by the CGF. It is proposed that the CGF guarantee up to 80 percent of the outstanding loan principal and up to 80 percent of the foregone interest income during the first three months of arrears. The reimbursement excludes penalty fees and additional administrative costs. 99. Screening and Monitoring: Under the present selective approach, the guarantor has an important function to perform in determining the creditworthiness of the potential borrowers. There should be a clear division of responsibility between guarantor and the commercial bank in approving applications and monitoring borrowers to ensure that functions are not duplicated unnecessarily and that costs and delays are kept low, especially as it relates to bank requirements to fill in additional documents for the guarantee. Allied Insurance has a good working relationship with Bank of Maldives and other commercial banks, and experience has shown that processing times can be considerably reduced by the guarantee scheme through the division of screening and approval functions between the guarantor and commercial bank. 100. Defaults and Claims: The default rate is a prime determinant of a scheme’s viability. A claim rate between 2 percent and 3 percent should be targeted, and the maximum acceptable rate should be 6 percent of outstanding guarantees. A higher rate would suggest that borrowers were not properly screened or that the guarantee coverage was too high or fees too low; in contrast, a rate below 2 percent implies that the scheme is overly cautious in granting guarantees. For the present facility the upper rate of 6 percent has been used in assessing the fund’s sustainability. 101. Marketing: Decentralization of the scheme through branch networks in the focal regions would ensure would facilitate information dissemination about the facility and ultimately assist in the risk assessment. Given the relatively modest number of loans being targeted in the initial years, however, a branch network is not justified. Moreover, the network would require additional staff and overhead facilities that would increase the operating costs of the facilities and possible make it unsustainable. As the facility gains acceptance and recognition among SMEs in the atolls, consideration can be given to incorporating CGF officers in the BDSC of the focal region. In the meantime and during the start-up period, the scheme will need to be pro-active in gaining recognition and acceptance by potential borrowers and commercial banks. In is important to emphasize that the scheme should not be marketed as a form of social banking but as a measure to service, profitable business segments outside of Male’. Moreover, in all marketing efforts, care should be taken not to increase moral hazard by suggesting that credit will not have to be repaid because defaults will be refunded by insurance firm. On the contrary, the involvement of a private insurance company in the scheme should underscore the consequences of non-payments on the loan.


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2 . 4 . 3 O r g a n i z a t i o n

102. CGF Staffing and Responsibilities: A CGF Manager and staff located will form a new CGF Division of Allied Insurance. The division will consist of the manager, account officer, accountant and support staff. The projected revenue and expenses of the facility suggest that the facility will be economically viable based on estimated operating costs of $45,000 and $120,000 interest and operating earnings at the start of regular operations. Details of the organization, staffing and cash flow projections are presented in the annex to this report.

Table 15: Credit Guarantee FacilityPhase I2008 2009 2010 2011 Sub-Total

Fund ValueStart of Year 1000 US$ 500.0 2,500.0 2,557.2 2,637.4 2,712.8 End of Year 1000 US$ 500.0 2,557.2 2,637.4 2,712.8 2,925.6

Expenses 1000 US$ 26.5 62.4 68.9 73.5 204.9 Manager 1000 US$ 9.4 18.8 19.6 20.5 58.8 Account Officer 1000 US$ 4.7 9.4 9.8 10.2 29.4 Accountant / Secretary 1000 US$ - 4.7 4.9 5.1 14.7 Support staff 1000 US$ 0.9 3.8 3.9 4.1 11.8 Travel (Costs per Domestic Trip) 1000 US$ 3.9 7.8 11.7 13.7 33.2 Rent, electricity, water (500 sq ft) 1000 US$ 5.3 10.5 11.0 11.5 33.1 Telephone , internet 1000 US$ 1.9 3.8 4.0 4.2 11.9 Sundry office expenses, others 1000 US$ 0.4 3.8 4.0 4.2 11.9

Revenue 1000 US$ 26.5 119.7 149.1 148.9 417.7 Interest from Fund Deposit (4.5%) 1000 US$ 22.5 112.5 115.1 118.7 346.3 Operating Result (Gross) 1000 US$ 4.0 7.2 34.0 30.3 71.4

End-of-Year Balance 1000 US$ 500.0 2,557.2 2,637.4 2,712.8 2,925.6


103. Business Plan: The draft business plan in the Annex and its summary in Table 15 demonstrate that the facility is financially viable during its regular operations. A low start-up fund during the pilot phase of the project is unlikely to be sustainable but, once the full funding occurs in 2009, the facility will be able to sustain itself after the completion of the SMED project in 2011. 104. CGF Process: Box 4 illustrates the operational process of the scheme for a particular group of entrepreneurs in Addu Atoll in the Southern Development Region, while Figure 5 provides a visual representation of the process for all types of guaranteed loans under the scheme. The case study builds on the earlier example of a cooperative seeking to commercialize its activities and using the cost sharing facility. Having established the cooperative and used the BDS facility for training and investment activities, the cooperative now seeks to purchase a boat with the help of the credit guarantee facility to ensure the reliability of its deliveries of produce to the two nearby resorts.


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2 . 5 F I N A N C I N G P L A N A N D I M P L E M E N T A T I O N A R R A N G E M E N T S

2 . 5 . 1 F i n a n c i n g P l a n

105. Expenditures: The Government of the Maldives has requested a loan of US$6.9 million equivalent from ADB for a MSME project to support regional development and enhancement of private sector participation in the economic development of the country. The loan takes into account the strategic importance of developing the private sector in the atolls and the cost of investments and adjustment costs associated with the adoption of the elements in the policy matrix. In addition to the loan, counterpart funding will be used for costs associated with regulatory reforms. Table 16 summarizes the project costs. The investment costs include technical assistance that represents 17 percent of the loan amount. 106. Program Management and Implementation: Ministry of Economic Development and Trade (MEDT) will be the main implementing agency and other ministries will implement pilot projects. Ministry of Finance and Treasury (MOFT) will be the executing agency for the responsible for managing and overseeing the flow of funds for the credit line and grant facilities. The newly created Enterprise Development Unit of MEDT will be responsible for ensuring the participation of all relevant government agencies and business member organization in regulations and policies governing MSMEs, as well as formulation of project activities related to business development services and finance under the project. The period for implementation of the project will be 36 months.


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Box 4: CGF Case Study

A year after helping to establish a the Agricultural Cooperative Traders (ACT) in Hithadoo Island on Addu Atoll in the Southern Development Region, the cooperative is supplying produce to the two newly established resorts in Addu Atoll. But transportation services are unreliable and costly, and the cooperative members therefore decide to purchase a boat. They calculate that they will need MRf 2,000,000 for the boat and equipment, of which MRf 1,000,000 will need to be in the form of a loan.

Mohamed Waheed, president of ACT, hears an announcement on the radio about a credit guarantee facility for SMEs that supports the types of activities of the cooperative operating in the region. The facility provides up to MRf 1,000,000 for SMEs like that of ACT, which has been operating in the area of agricultural commercialization for over a year in the southern region. He believes that he is eligible for the guarantee and contacts Aishath Rasha, an officer of the Credit Guarantee Facility Division in Allied Insurance. She explains that for the purchase of a boat to facilitate transport to markets, ACT is eligible for a guarantee on the MRf 1,000,000 loan using the boat as collateral.

The cooperative has already received training in business development from the BDSC in Hithaddo Island and Mr. Waheed uses that training to elaborate on the original business plan to include the new investment. He submits the business plan along with the completed application for the Credit Guarantee Facility (CGF) given to him to Ms Rasha at Allied Insurance. The Credit Guarantee Division processes the application and determines that ACT is eligible for the credit guarantee. Following a field trip to Addu Atoll to discuss the project with the ACT accounting officer and to discuss with the managing directors of the two nearby resorts the potential purchase of fruits and vegetables supplied by ACT, Ms. Rasha and the division director determine that the enterprise is creditworthy and the business plan is viable. Based on these results, the CGF Division of Allied Insurance issue an advance credit guarantee approval to ACT for MRf 1,000,000 loan to purchase the boat.

Since the Bank of Maldives has a branch in Hithaddo Island, Mr. Waheed decides to approach that bank for a loan and informs Ms Rasha of his plans. Allied Insurance then forwards to the Bank of Maldives a letter of intent with the advanced guarantee approval for the loan. Because Allied Insurance has a good working relationship with the bank, it is able to share its credit report and other verifications of documents on the loan request. Based on the work carried out by Allied Insurance and its own analysis, it approves the loan to ACT with 80 percent guarantee coverage from Allied Insurance, with terms of 10 year repayment at the market interest rate plus 1.5 percent premium for the guarantee, and an additional 1.5 percent one-time fee for processing the loan through Allied Insurance. Bank of Maldives transfers the cash to the boat owner and retains title of the boat during the period of the loan.

In the case that delays in the loan repayment were to arise, the loan contract of the Bank of Maldives and the guarantee issued by Allied Insurance contains clear guidelines for the timely, efficient and transparent procedures for triggering claims. Since the guarantee issue is a second liability, Bank of Maldives would first need to sell ACT’s pledged asset, the boat, before it could call in the guarantee covering its actual losses. This procedure ensures that Bank of Maldives has an incentive to pursue ACT for further collateral collections before it calls in the guarantee from Allied Insurance. Any amounts recovered would be shared between the Bank of Maldives and Allied Insurance, according to the risk-sharing proportion of the loan specified in the guarantee contract. Fortunately, ACT is able to make all of its payments on time and, with the newly purchased boat, it is able to guarantee delivery of its produce to the resorts, thereby ensuring a flourishing relationship with its customers.

TA 4745-MLD: SME Development Project – Draft Final Report

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Figure 5: Credit Guarantee Facility (CGF) Process Flow SME Entrepreneur

Commercial Bank

Financial Guarantee Agency


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Table 16: Project Cost Estimates and Financing Plan ($1000)

2009 2010 2011 TotalA. BDS Component 1,034.6 2,559.3 809.9 760.9 4,130.0 1. BDS Centers 58.8 757.2 310.5 313.7 1,381.5

Operating Costs 58.8 297.2 310.5 313.7 921.5 Capital Investments - 460.0 - - 460.0

2. Enterprise Development Unit (EDU): BDS Development 94.9 251.2 105.0 98.4 454.6 Operating Costs 94.9 226.2 105.0 98.4 429.6 Capital Investments - 25.0 - - 25.0

3. Cost Sharing Facility (CSF) 19.8 1,049.5 51.7 54.1 1,155.3 Fund Management 19.8 49.5 51.7 54.1 155.3 Matching-Grant Disbursements - 1,000.0 - - 1,000.0

4. Technical Assistance for Capacity Building 861.1 501.4 342.6 294.7 1,138.7 BDS Centers 353.6 341.4 254.1 244.1 839.5 Enterprise Development Unit 419.1 137.9 77.5 45.1 260.5 MNCCI 88.4 22.1 11.1 5.5 38.7

B. Financial Services Component 665.4 2,590.2 93.8 86.0 2,770.0 1. Credit Guarantee Facility 526.5 2,562.4 68.9 73.5 2,704.9

Fund Capital 500.0 2,500.0 - - 2,500.0 Operating Costs 26.5 62.4 68.9 73.5 204.9

2. Technical Assistance 138.9 27.8 24.9 12.4 65.1 Bank Branch Training Modules 22.1 5.5 2.8 1.4 9.7 Training of Financial Guarantee Agency 116.8 22.3 22.1 11.1 55.5

C. TOTAL COST 1,700.0 5,149.5 903.6 846.9 6,900.0 1. Technical Assistance for Capacity Building 1,000.0 529.2 367.5 307.1 1,203.8 2. SME Development Project 700.0 4,620.3 536.2 539.7 5,696.2

D. FINANCING 1,700.0 5,149.5 903.6 846.9 6,900.0 1. Capacity Development Assistance 1,700.0 - - - - 2. Project Loan - 5,149.5 903.6 846.9 6,900.0

Phase I:

ADB

Cap.Dev.

SME Development Project (Phase II)

107. Capacity Building: Prior to the loan, capacity building assistance will aim to improve the enabling environment for SMEs by supporting the development of market links and business services, and by addressing financial constraints to credit availability for SMEs. The assistance will include US$1.0 million in capacity building for the BDS and financial services components in the form of support for the development of the BDS Centers, the Enterprise Development Unit and MNCCI. In order to provide that support, assistance will also need to be directed towards enabling the BDS Centers, the EDU and the cost sharing facility. The assistance also contemplates providing a pilot fund for the Credit Guarantee Facility in the amount of US$ 0.5 million, and supporting the staffing and overhead needed for the operation of pilot fund.

2 . 5 . 2 P r o j e c t P e r f o r m a n c e M o n i t o r i n g a n d E v a l u a t i o n

108. Monitoring and Evaluation: Quarterly reports will be submitted to the ADB on monitoring of project progress. At the outset of the project an independent M&E unit will be established by MEDT and MNCCI, and a project performance management system (PPMS) created within 6 months of project commencement. The monitoring team will work with EDU and each BDSCs to ensure that benchmarks are collected by these units on an ongoing basis. Benchmarks will include BDS-related indicators for training and other product assistances at the atoll level, classified by types of enterprise owner, gender, region and remuneration rates; while financial indicators will cover amounts and numbers of grants and loan types supported and outcomes. To assess incremental benefits from the project, basic enterprise and household data for BDS clients will be maintained. Information will also be maintained on the number of staff associated with BDS and lending support activities, as well as the number of individuals participating in courses and workshops. During the preparation of the final project completion report, the data collected will be used to evaluate the impact of the project at the atoll and sector level, including its effect on women and vulnerable groups.


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3 T E C HN I C A L A S S I S T AN C E

109. The technical assistance will be provided in two phases. Phase I will start in 2008 and concentrate on the provision of “capacity building assistance aimed at assisting the Government to build institutional capacity to effectively manage the development process, address existing capacity deficiencies, while helping to meet the demands that are likely to be generated by the envisioned creation of new institutions under the Government’s Roadmap for Reform Agenda.”30 Phase II envisions an integrated project assistance in SMEs, as well as other sectors like transport and the regulatory framework. In the case of the SME development project, technical assistance will support the implementation of various measures to support MSME development, as specified in the program, as well as to provide key institutional capacity building support to the implementing agencies.

Table 17: Technical Assistance for Capacity Building

Phase I

2008 2009 2010 2011 Sub-Total

1000 US$ 354 341 254 244 839

International BDS Expert 1000 US$ 265.2 165.0 109.9 109.9 384.8

Number of experts person-years 0.8 0.5 0.3 0.3 1.2

Fees 1000 US$ 216.0 135.0 89.1 89.1 313.2

Per diem 1000 US$ 43.2 27.0 17.8 17.8 62.6

Travel 1000 US$ 6.0 3.0 3.0 3.0 9.0

Training in Business Planning 1000 US$ 44.2 58.8 44.2 44.2 147.2

Consulting SMEs 1000 US$ 44.2 117.6 99.9 89.9 307.5

1000 US$ 419.1 137.9 77.5 45.1 260.5

Strategic Planning 1000 US$ 88.4 22.1 11.1 - 33.2

Facilitators Training 1000 US$ 44.2 9.3 - - 9.3

Training of Trainers 1000 US$ 88.4 29.5 14.7 7.4 51.6

Overseas Training for Staff 1000 US$ 66.0 33.0 29.7 26.7 89.4

Training of Financial Guarantee Agency 1000 US$ 132.1 44.0 22.0 11.0 77.1

1000 US$ 88.4 22.1 11.1 5.5 38.7

Strategic Planning 1000 US$ 88.4 22.1 11.1 5.5 38.7

1000 US$ 138.9 27.8 24.9 12.4 65.1

Bank Branch Training Modules 1000 US$ 22.1 5.5 2.8 1.4 9.7

Training on Credit Guarantee Facility 1000 US$ 116.8 22.3 22.1 11.1 55.5

1000 US$ 1,000.0 529.2 367.5 307.1 1,203.8

BoM/AI

TOTAL

Phase II

BDSC

EDU

MNCCI

110. Table 17 summarizes the main technical assistance activities, which include (i) technical support to the EDU in its efforts to create a more effective and efficient institutional setup for MSME support, (ii) technical support for the establishment of the BDS Centers, (iii) technical support to MNCCI as the most appropriate private sector representative to promote MMSEs in the outer atoll areas, and (iv) technical support to the banking sector and financial guarantee agency. Consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB. Procurement under the TA will be in accordance with ADB’s Guidelines for Procurement.

30 Asian Development Bank, “Memorandum of Understanding, CPS Formulation Mission, South Asia Department,

13-23 May 2007, Male’, Maldives.


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4 P R OGR AM B E N E F I T S , I M P AC T AN D R I S K S

111. Benefits: The project will enhance MSME growth and competitiveness in the atolls and increase the private sector’s role in accelerating economic growth and poverty reduction in the country. The project will support the Government’s development framework for private sector in general and MSMEs in particular through BDS and financing support for MSMEs and entrepreneurial opportunities for the poor. The project will also help develop policy, regulatory, and institutional reforms that are conducive to MSME development. The project will (i) support the Government’s preparation of an MSME development strategy targeting the atolls and outer islands; (ii) provide technical support to strengthen the policy framework and enabling environment for MSME development; (iii) develop MSME business support networks and improve access to affordable BDS, financial services, and financing in the atolls; and (iv) create entrepreneurial and job opportunities for economically vulnerable people in the atolls. 112. Impact: The impact of the project will be evaluated annually based on comparative analysis of post-project information relative baseline information established at the beginning of the project. Data will be evaluated at the enterprise level, at the level of the BDFCs in each region, at the sector level for targeted activities to be supported under the project, and at the level of the central BDS provider level in the public and private sectors. 113. Risks: The largest risk to the project is the lack of capacity within the Government to implement the various activities of the project loan, as well as regulatory reforms. The Enterprise Development Unit has little, if any, experience with the formulation and implementation of MSME programs and policies and lacks most of the urgently needed technical expertise. To address this risk, technical assistance has been integrated into the project that focus capacity building measures on EDU officials, regional BDFCs, providers of financial services related to the proposed MSME financing instrument, and the independent monitoring and evaluation unit. There is also a risk associated with the lack of inter-ministerial and agency coordination within the Government. Because the project covers sectors related to different ministries involved in agriculture, tourism and fisheries, it requires close consultation and collaboration among government agencies. The project design addresses this risk by strengthening the newly created EDU to support the overall implementation of the project and thereby address the issue of inter-agency collaboration in MSME development in the atolls.


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5 S O E R E S T R UC T UR I N G AN D P R I V A T I Z A T I O N 31

5 . 1 O B J E C T I V E S A N D S C O P E

114. Importance of Public Enterprises: In 2001-2005 Public Enterprises (PEs) accounted for 16 to 19 percent of Government income, and registered an overall growth of 69 percent over the four-year period. Three of the PEs accounted for nearly 80 percent of the turnover.32 Maldives Airports Company Ltd (MACL) and Dhiraagau registered the highest revenue growth, measured in terms of absolute values; Island Aviation and Maldives Inflight Catering had the highest growth rates; while State Electric Company, Maldives Post, and Government Hotels experienced negative growth during the period. 115. Government Objectives from Privatization: The privatization and restructuring objectives of the Government and associated policies remain unclear. Ministries lack a common understanding about the objectives to be achieved from privatization, and the priorities for selection of enterprises and the associated privatization or restructuring strategies. Effective restructuring and privatization of state owned enterprises (SOEs) will require the development of a common approach within the Government before proceeding with specific actions. 116. Strategic Issues: Two major initiatives are needed for privatization. First, a corporate tax regime should be introduced to guarantee ongoing revenue streams from the existing institutions once they are fully or partially privatized. Otherwise, the Government will gain a one-off windfall cash injection from the sale, but lose the ongoing dividend streams currently received from profitable public enterprises (PEs). Adequate lead time will be required in excess of 12 months to enable all enterprises sufficient time to implement the financial records required to assess tax liability. Secondly, adequate regulatory regimes should be put into place prior to privatization, not only in areas that will continue to provide monopoly services such as water, sanitation and electricity supplies, but also across the wider competitive market. 117. Other Prerequisites: Current levels of governance, particularly for PEs, have scope for improvement. The capital market and operations of the stock exchange lack appropriate conditions for private ownership development. Adequate contract law and an independent judiciary will influence market attractiveness for foreign investment. Practices such as requiring all shareholders to be present during a court hearing will reduce willingness of overseas investors to consider investing in the country, and therefore the price likely to be received for assets. The Maldives Securities Act (Law 2/2006) applies to all companies considering local floatation on the stock exchange. There are no additional requirements for companies being privatized. However, the Public Enterprises Accountability Bill 2002 still needs to be enacted, as does proposed legislation on banking, and the Business Profits Tax Bill.

31 This chapter summarizes the report prepared by the SOE privatization and restructuring expert of the Team,

entitled, ““ADB TA 4745-MLD. Preparing Small and Medium Enterprise Development Project: Working Paper 2. Public Enterprise Privatization and Restructuring”. March 2007.” The present summary does excludes (a) the technical assistance on for capacity building to improve governance, and (b) the detailed analysis and recommendations that have been prepared on each of assigned public enterprises. For details, see annexes 5-12 of that report.

32 Dhiraagau 33%; Maldives Airports Authority 28% and State Trading Organization 17%


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118. Proposed Action: Attention should focus on (i) formulating clear policies and objectives on privatization and restructuring, including the treatment and costing of land or rental premises; (ii) introducing the proposed corporate tax regime; and (iii) developing adequate regulatory regimes that will provide safeguards for the national interest in the event that the level of private sector participation is increased in areas traditionally managed by Government. 119. Minister of State for Finance and Treasury-Based Prioritization: All enterprises covered in the present analysis have been corporatized with the exception of Public Works Services, which may revert to the status of a Department of the Ministry of Construction and Public Infrastructure. Discussions with the Minister of State for Finance and Treasury (MoFT) indicate that the following criteria have been applied when determining privatization or restructuring priorities: � Maldives Industrial Fisheries Co (Mifco) has been declared a candidate for privatization,

which will hopefully occur before private sector development of the fishing industry adversely affects its attractiveness.

� Maldives National Shipping Line is a priority for privatization because of inadequate returns. � Housing Development Finance Corporation will be floated in 2007 through an Initial Public

Offering of 60% of shares, a perquisite for raising $20 million loan finance. � Allied Insurance is planned for privatization in 2007; preparatory work has already

commenced. � Nasandhura Palace Hotel will be privatized; the benefits of land sale as opposed to a “going

concern” still need to be evaluated. � Maldives Ports could become a Regulator if the proposed transshipment port plans are

approved; under these circumstances the Maldives Ports Company could become Male’ Port Company.

� Stelco will be restructured in order to address losses made on island generating plants and to position the company for possible foreign investment or public-private partnerships.

� Hulemale’ Development Corporation is a priority for a restructuring review because of the lack of a financial return to Government.

� Maldives Airport Company Ltd. is being considered for a management contract. � Villingilli Investments is a priority for review; it has been characterized as “being like dumping

money into the open sea”. 120. PriceWaterhouseCoopers-Based Prioritization: The consultancy conducted by PriceWaterhouseCoopers (PWC) selected Maldives National Shipping Company, Nasandhura Palace and Mifco for privatization and Stelco for restructuring. No weighted criteria appear to have been used, and only some priorities coincide with those of the Government. The terms of reference for a technical assistance (TA) to address the needs of these enterprises were issued by ADB during the time that this report was being prepared. 121. MoFT versus PWC Criteria: Two criteria for establishing priorities exist: (i) those developed by MoFT in 2003, and (ii) those proposal proposed by PWC in a report submitted to ADB entitled “Review of State Owned Enterprises in Maldives” (June 2006). These two approaches are markedly different and should be consolidated into once single approach before proceeding with action plans. The criteria developed by MoFT in January 2003 were based on the objectives of increasing private ownership in the overall economy; encouraging savings and attracting new investors. It assumed that legislation on company taxation would be implemented in a timely manner. The MoFT analysis of enterprises used both quantitative and subjective criteria to determine rankings. MoFT envisaged privatization through sale on Maldivian Stock


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Exchange. Criteria used were as follows: (i) viability: 30%; current profitability: 20%; management: 10%; stability: 10%; net worth: 10%; reserves: 10%; and other: 10%. In contrast, the PWC report suggested the following four unweighted criteria: (i) strategic Importance; (ii) legal and regulatory issues; (iii) future Impact on the government finances; and potential for private sector interest. The results of the two approaches are quite different in terms of the ranking of enterprises (Table 18). A third set of criteria that seems more appropriate to the Government’s strategic objectives is the following: (i) financial returns 40%; (ii)future investment requirements 20%; (iii) current debt or guarantees 15%; (iv) strategic importance 15%, and (v) market attractiveness 10%.

Table 18: Comparative Ranking for Privatization using PWC and MoFT Criteria

PWC Prioritization MoFT Prioritization

Total

Score33

Privatization Maldives Industrial Fisheries Co Ltd Maldives National Shipping Ltd Nasandhura Palace Hotel

2007 Priorities:

Housing Development Finance Corporation34

Allied Insurance35 Maldives National Shipping Ltd Maldives Industrial Fisheries Co Ltd Nasandhura Palace Hotel (possibly land sale) Stelco Maldives Ports Co. Hulhumale’ Development Corporation Ltd Additional Priorities (2003) Dhiraagu Male’ Water and Sewerage Co. Ltd

Maldives Airports Company36 Island Aviation Services Ltd Maldives Post Ltd

42% 51% 45% 61%

80% 75% 64% 63% 34%

Retention with Significant Restructuring Maldives Transport & Contracting Co State Trading Organization

All loss making enterprises

Retention with no Restructuring Maldives Port Company Maldives Water and Sewerage Co Bank of Maldives Island Aviation Services Hulhumale’ Development Corp Ltd

Source: Based on information compiled from MoFT and PWC report entitled “Review of State Owned Enterprises in Maldives”. Submitted to Asian Development Bank, June 2006.

33 2003 Ranking.

34 Planning substantially completed.

35 Planned for 2007.

36 Through Contract management.


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5 . 2 P U B L I C E N T E R P R I S E A N A L Y S I S

122. Public Enterprise Relationship to SME Development: There are three possible linkages between PEs and SMEs: (i) SMEs as competitors to PEs; (ii) SMEs as suppliers; (iii) SMEs as outsourcers. In the Maldives the largest opportunities for successful SME–PE linkages exist for PE outsourcing to SMEs, though there has been little evidence of this activity to date. Outsourcing involves contracting out services previously provided in-house. In many instances, the initial approach is to contract existing employees for a specific period of time, after which future contracts become contestable. From a PE perspective, outsourcing is used in conjunction with wider strategic initiatives to reduce the cost structure, an approach that is widely adopted by PEs in developed economies in early stages of commercialization and subsequent privatization. It is also widely used in the private sector as a means of driving down costs.

123. Governance: Boards of Directors for PEs have been appointed by Government, with the numbers ranging between four and ten. There appear to be no clear selection criteria for appointment. Normally one would expect Directors to be appointed based on an appropriate mix of skills for the enterprise concerned, such as finance, strategic planning, legal expertise, industry expertise, marketing, and industry leadership. An early costless step towards privatization would be to increase the number of private sector directors sitting on PE Boards.

124. Public Enterprise Monitoring and Evaluation Board (PEMEB): Government, as shareholder, also exercises governance through the activities of the MoFT, specifically the Public Enterprise Monitoring and Evaluation Board (PEMEB). Staff turnover within PEMEB has reduced its current effectiveness and direction, and resulted in a loss of ‘institutional memory’ on where and how it can add most value on behalf of the shareholder to the overall performance of the enterprises. Staff in PEMEB require additional training to enable them to add value. The number of staff to receive this training will need to reflect the likely level of government ownership of trading enterprises in the next two to three years. Technical assistance is proposed for PEMEB to improve governance.

125. Public Enterprise Commission: MoFT has been considering the establishment of a 9 member Public Enterprise Commission employing 15 staff. Responsibilities would be somewhat similar to the existing functions of PEMEB37. It is difficult to see the justification for establishing an additional institution to perform, absorb or duplicate the responsibilities of PEMEB. It is also hard to consider that 15 staff is required to supervise PEs in a country with only 300,000 people. There appears to be little scope for improved governance of PEs, and more detailed development is required on what frameworks should apply.

126. PE Dividend Payments: Until a corporate taxation system is introduced, PE dividend payments remain an important source of Government income. These are not necessarily paid promptly. Outstanding payments from 2004 amounted to Rf 30 million. Total payments expected in 2006 are Rf453 million, of which 24 percent was still outstanding at 31 August 2006. One reason given is that this was to assist PEs with cash flow difficulties. This consideration would normally have been applied at the time that the dividend was declared. The quality of governance vary between different PEs. Some, such as MWSC, exhibit very high degrees of competence; others, such as Island Aviation Services show strong management and awareness of where improvements are required. Others have scope for improvement.

37 Promotion of Corporate Governance and core business; monitoring PEs; recommending composition of Boards of

Directors; advising the shareholder on issues relating to policy, restructuring and privatization; advising the shareholder on PE Statements of Corporate Intent, and formulation of PE investment policies and investments.


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127. Enterprise-Specific Findings: The following points summarize the key conclusions:38 � Addu Investments Ltd: Addu Investments is a development vehicle for a high value, up

market resort. Requirements will change once the resort has been fully commissioned. In the short term Addu Investments offers no opportunities for MSME linkages, apart, possibly, from contracts associated with the resort development, such as materials, foodstuffs or specialist labor. In the longer term the resort operators may consider opportunities such as contracts to operate souvenir shops, or recreational activities. Addu Investments is not considered a priority for privatization or restructuring.

� Housing Development Finance Corporation (HDFC): HDFC provides finance for house construction or renovation. The Company is scheduled for privatization through an Initial Public Offering of 60% of shares, to be made during 2007. All preparatory work has been completed. HDFC offers no direct opportunities for SME development, because of the economies of scale required for successful lending institutions. However, if the Company moves into a vertically integrated real estate development model, then some synergies could exist with the construction industry, both in terms of materials supply and small scale construction.

� Island Aviation Services Ltd (IAS): IAS provides a mix of services related to air travel, including domestic air services, ground handling, cargo handling, general sales agency, and the CIP lounge service at Male’ International Airport. The Company is also expanding into regional air services. There is some competition for domestic air travel as well as general agency business, but ground handling, cargo services and the lounge are all monopolies. There are a number of strategic options for support to IAS. However, some of these initiatives have already been activated by IAS, with support for such topics as benchmarking and improved governance. Because of this, no specific action is proposed. Most IAS services are capital intensive, thus limiting the scope for specific linkages with SMEs. The major opportunity appears to be outsourcing some services such as cleaning.

� Maldives Airports Company Ltd (MACL): MACL is responsible for providing or contracting all airport services at Male’ International Airport, and for the provision of safety and refueling services at regional airports. A Master Plan to position the Company for future needs is currently being completed by international consultants. It is envisaged that this will call for significant additional investments to enable the airport to cater for projected tourist growth. Because of the major investments that may be identified in the detailed Master Plan, no short term interventions are recommended at this juncture. The position should be reviewed when specific development requirements have been identified. There may be opportunities for small niche providers under the new Master Plan. However, any initial investment costs may present a barrier to entry to this market segment.

� Maldives InFlight Catering Ltd. (MIC): MIC is already a Joint Venture Company, providing adequate financial returns, which are likely to increase when the construction of additional hotel rooms at Hulhule Hotel is completed. There is no pressing need for restructuring or further privatization initiatives. The main opportunities that exist are in the area of foodstuff supplies. The Company already makes local purchases, but has occasional problems regarding quality and reliability of service. It would prefer fewer, rather than more, local providers.

38 For details, see annexes to report prepared by the SOE privatization and restructuring expert of the Team, entitled,

““ADB TA 4745-MLD. Preparing Small and Medium Enterprise Development Project: Working Paper 2. Public Enterprise Privatization and Restructuring”. March 2007.”


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� Maldives Post Ltd. (MPL): MPL is currently a monopoly provider of postal services in a deregulated market, and a competitive provider of other services such as courier deliveries. Although MPL is fully corporatized and pursues commercial objectives it does fulfill the social objectives of providing loss making mail services to island communities. The MPL does not have an adequate information base to enable it to be aware of (i) how efficient it is compared to other postal service operators, and (ii) profitability by business line, or the extent of cross subsidization. Similarly, PEMEB has no measures of efficiency, except for dividend yield. MPL perceives that its core business is at some risk from new market entrants and possible future declining mail volumes as alternative technologies replace written mail. It therefore wishes to diversify its operations to provide a greater spread of revenue. The MPL is keen to receive assistance with (i) identifying the scope for improved efficiency, using international benchmarking as a starting point in this process; (ii) developing capacity for strategic planning and feasibility studies into new venture. Technical assistance has been discussed and ToR drafted and agreed upon by the MPL Director in order to achieve these goals.

� Male’ Water and Sewerage Co. Pvt. Ltd. (MWSC): MWSC is a joint Venture operation, and the dominant provider of water, and the sewerage operator for Male’, including Villingilli, and Hulhumale”. License limitations prevent growth in revenue and profitability beyond what will occur with population growth and increases in per capita consumption. MWSC is therefore seeking to move into additional geographical markets, in particular the northern and southern development nodes. Because of the limited population size, it will be difficult for any operator to make these profitable. MWSC is therefore interested in exploring alternative business models such as Build Own Transfer (BOT) or Build Own Operate Transfer (BOOT) or a variant whereby MWSC remains on call to local operators. The feasibility of such a study requires more detailed exploration. MWSC is also considering moving into international consulting, to capitalize on their expertise in operating small scale, island based water and sewerage services. Discussions have taken place with MWSC senior management, who are interested in receiving technical assistance aimed at assessing the feasibility of a BOOT scheme. The proposed technical assistance will require 6.5 and 9 person months of international and national consultants, at an estimated cost of $202,000. The principal opportunity for improved SME linkages with MWSC lie in outsourcing some existing services, such as security and cleaning. This is being explored. If services are expanded to include the northern and southern nodes, and these are operated locally, then additional opportunities will arise.

� Public Works Services (PWS): PWS is the only PE included in the ToR for this component of the study that is not fully commercialized and corporatized. A final decision on whether to operate PWS as a Government Department or as a commercial concern is still under consideration in the Ministry of Construction and Public Infrastructure (MoCPI). Financial records are poor or non-existent; the absence of clear functions means that forward planning is difficult, leaving management in a reactive mode, with no real performance measures. It was suggested to PWS and senior staff at both PWS and MoCPI that a TA funded by ADB could identify present levels of efficiency and scope for improvement, and form the basis for strategic decision on the future shape of the institution. The TA could also assist with the development of a regulatory framework for the construction industry. The latter would facilitate further expansion in the construction sector by SMEs. However, despite a number of follow ups by the consultant, no interest has been shown in developing this concept. PWS has perhaps the greatest opportunity for development of SMEs if functions can be divested to local institutions. One possible barrier will be the relatively high level of expatriate labor employed by PWS, and the difficulties local SMEs would have in offering similar employment opportunities.


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5 . 3 P R O P O S E D S T R A T E G Y

128. Strategy: The proposed strategy is based on the assumption that a number of PEs will remain in the ownership of the Government for at least the next two to three years, but that the Government is now actively interested in pursuing privatization for selected enterprises. It also assumes that successful conclusion of these transactions will demonstrate benefits to the economy from greater private sector participation in businesses that previously have been the function of the State. 129. Components: The proposed strategy has four components. The first two components contain the overarching goals: 1) Improving governance for all PEs, with the objective of ensuring that all enterprises are

operated at internationally accepted and measured best practice standards of efficiency. The work would be funded by ADB under the Capacity Building TA proposed in this Working Paper, and

2) Creating the enabling environment in which there is no “downside” from future privatization because an adequate company tax regime; regulatory environment and commercial law procedures have been approved, making the Maldives an attractive destination for international investors. The work would be championed by MoFT. No ADB involvement is envisaged, as this is essentially a requirement to demonstrate political will by enacting legislation that has already passed through the drafting stages.

The second and third components provide the strategic goals: 3) Address enterprise-specific privatization and/or restructuring initiatives in the short run

through detailed analyses of priority PEs agreed by the Government. These can include those organizations already agreed between the Government and ADB, and other PEs such as HDFC which have been identified independently by the Government. Some of this work is already approved for funding by ADB, although specific requirements are currently being reviewed.

4) Achieve additional performance improvements over the medium term in those enterprises identified in the acting on priorities identified as underperforming, using benchmarking or ratio comparisons. The actions required will vary. They could involve privatization, strategic realignment, restructuring, efficiency and effectiveness studies and business process reengineering; and management changes. This work could be funded by ADB.

130. Component (1): Propose TAs detail the work on improving governance and two enterprise-specific projects, in terms of feasibility studies for diversification of the product/service range for MPL and the establishment of water supply and sewerage services in the northern and southern development nodes, under the leadership of MWSC.


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131. Component (2): The Government already has some initiatives that address the creation of an improved and sustainable commercial environment, which includes approval by the Majlis of legislation relating to company taxation, banking legislation. Further consideration needs to be given to the regulatory environment for all enterprises, with a view to rationalizing the current structure and introducing clearer controls. The consultant is aware that some discussions have been taking place in relation to regulation in the electricity sector; that it is suggested that some Ministries have potential conflicts of interest, and other regulators are permitting infringements of regulations because of short term expediency. Further design may be required to identify the scope of any regulatory review, but that is beyond the scope of this TA. 132. Component (3): ADB has already proposed that it provide assistance with privatization for three enterprises, and some restructuring assistance, and the Government has already completed preparatory work for privatization of other PEs such as HDFC and Allied Insurance. There is scope here for additional assistance to be offered by ADB. 133. Component (4): This medium term intervention depends on satisfactory completion of other components, notably component (1) on improved governance and component (2) on creation of the environment for further privatization.

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