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Document of The World Bank

Report No: ICR2496

IMPLEMENTATION COMPLETION AND RESULTS REPORT (IDA-39590)

ON A

CREDIT

IN THE AMOUNT OF SDR15 MILLION (US$22 MILLION EQUIVALENT)

TO THE

REPUBLIC OF KENYA

FOR A

MICRO, SMALL AND MEDIUM ENTERPRISE COMPETITIVENESS PROJECT

December 20, 2012

Finance and Private Sector Unit Africa Region

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CURRENCY EQUIVALENTS

(Exchange Rate Effective June 30, 2012) Currency Unit = Kenya Shilling (Ksh)

US$1.00 = Ksh. 83.95 US$ 1.00 = SDR 0.66

January 1 - December 31

ABBREVIMPACT ASSESSMENTTIONS AND ACRONYMS

BDS Business Development Services BPC Business Plan Competition CAS Country Assistance Strategy DFID Department for International Development EBITDA Earnings before Interest, Taxes, Depreciation and Amortization ERRs Economic Rate Returns ESW Economic Sector Work FSDT Financial Sector Deepening Trust GBSN Global Business School Network GDP Gross Domestic Product GoK Government of Kenya IDA International Development Association IFC International Finance Corporation ICR Implementation Completion Report ISRs Implementing Status and Results Reports IR Intermediate Results IRR Internal Rate of Return M&E Monitoring and Evaluation MFIs Microfinance Institutions MoTI Ministry of Trade and Industry MoI Ministry of Industrialization MSE Micro and Small Enterprise MSMEs Micro, Small and Medium-sized Enterprises MTR Medium Term Review NPV Net Present Value NBFIs Non-bank Financial Institutions PBK Pyrethrum Board of Kenya PAD Project Appraisal Document PDO Project Development Objectives PMC Project Management Contractor QCBS Quality and Cost Based Selection RCF Risk Capital Fund SACCOs Savings and Credit Cooperatives

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SSC SME Solution Center TA Technical Assistance TIPs Technical Implementation Partners TVET Technical, Vocational and Educational Training

Vice President: Makhtar Diop Country Director: Johannes Zutt Sector Manager: Irina Astrakhan

Project Team Leader: Yira Mascaró ICR Team Leader: Xiaofeng Hua

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REPUBLIC OF KENYA Micro, Small and Medium Enterprise Competitiveness Project

TABLE OF CONTENTS

Data Sheet A. Basic Information B. Key Dates C. Ratings Summary D. Sector and Theme Codes E. Bank Staff F. Results Framework Analysis G. Ratings of Project Performance in ISRs H. Restructuring I. Disbursement Graph

1. Project Context, Development Objectives and Design ............................................... 1 2. Key Factors Affecting Implementation and Outcomes .............................................. 7 3. Assessment of Outcomes .......................................................................................... 16 4. Assessment of Risk to Development Outcome ......................................................... 26 5. Assessment of Bank and Borrower Performance ..................................................... 27 6. Lessons Learned ....................................................................................................... 30 7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners .......... 31 Annex 1. Project Costs and Financing .......................................................................... 33 Annex 2. Outputs by Component ................................................................................. 35 Annex 3. Economic and financialAnalysis ................................................................... 39 Annex 4. Bank Lending and Implementation Support/Supervision Processes ............ 44 Annex 5. BenefiarySurvey Results ............................................................................... 46 Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR ..................... 48 Annex 7. List of Supporting Documents ...................................................................... 61

MAP

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D A T A S H E E T

A. Basic Information

Country: Kenya Project Name:

Micro, Small, and Medium Enterprise Competitiveness Project

Project ID: P085007 L/C/TF Number(s): IDA-39590 ICR Date: 12/20/2012 ICR Type: Core ICR Lending Instrument: SIL Borrower: Original Total Commitment:

XDR 15.00M Disbursed Amount: XDR 10.82M

Revised Amount: XDR 10.82M Environmental Category: C Implementing Agencies: Ministry of Industrialization FSD Kenya GBSN Center Kenya BPI Kenya Deloitte Kenya PWC Kenya Kenya Institute of Education Cofinanciers and Other External Partners: B. Key Dates

Process Date Process Original Date Revised / Actual Date(s)

Concept Review: 01/15/2004 Effectiveness: 12/17/2004 12/17/2004

Appraisal: 03/30/2004 Restructuring(s): 12/28/2009 06/29/2012

Approval: 07/13/2004 Mid-term Review: 02/28/2007 12/28/2009 Closing: 06/30/2010 06/30/2012 C. Ratings Summary C.1 Performance Rating by ICR Outcomes: Moderately Satisfactory Risk to Development Outcome: Substantial Bank Performance: Moderately Satisfactory Borrower Performance: Moderately Satisfactory

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C.2 Detailed Ratings of Bank and Borrower Performance (by ICR) Bank Ratings Borrower Ratings

Quality at Entry: Moderately Satisfactory Government: Moderately Satisfactory

Quality of Supervision: Moderately Satisfactory Implementing Agency/Agencies: Moderately Satisfactory

Overall Bank Performance: Moderately Satisfactory Overall Borrower

Performance: Moderately Satisfactory

C.3 Quality at Entry and Implementation Performance Indicators

Implementation Performance Indicators QAG Assessments

(if any) Rating

Potential Problem Project at any time (Yes/No):

Yes Quality at Entry (QEA):

None

Problem Project at any time (Yes/No):

Yes Quality of Supervision (QSA):

None

DO rating before Closing/Inactive status:

Moderately Satisfactory

D. Sector and Theme Codes

Original Actual Sector Code (as % of total Bank financing) Central government administration 5 0 General industry and trade sector 45 72 SME Finance 35 16 Sub-national government administration 5 0 Vocational training 10 12

Theme Code (as % of total Bank financing) Improving labor markets 24 12 Micro, Small and Medium Enterprise support 25 48 Regulation and competition policy 25 3 Rural markets 13 37 Tax policy and administration 13 0 E. Bank Staff

Positions At ICR At Approval Vice President: Makhtar Diop Callisto E. Madavo Country Director: Johannes C.M. Zutt Makhtar Diop Sector Manager: Irina Astrakhan Demba Ba Project Team Leader: Yira J. Mascaro Vyjayanti Tharmaratnam Desai

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ICR Team Leader: Xiaofeng Hua ICR Primary Author: Xiaofeng Hua F. Results Framework Analysis Project Development Objectives (from Project Appraisal Document) The Project aims to increase productivity and employment in participating micro, small and medium enterprises (MSMEs). This objective will be achieved by strengthening financial and non-financial markets to meet the demand of MSMEs, strengthening support for employable skills and business management, and reducing critical investment climate constraints in MSMEs. The project will focus on key value chains and on both formal small and medium enterprises and informal microenterprises that have high potential for dynamic growth, including "graduation" from informal to formal status. Revised Project Development Objectives (as approved by original approving authority) Not Applicable (a) PDO Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : At least 2,500 new jobs created in participating MSMEs Value quantitative or Qualitative)

Zero (0.00) 2,500 1,450

Date achieved 06/15/2004 07/14/2004 06/30/2012 Comments (incl. % achievement)

The number 1,450 is the documented number of jobs created in the end-of-project impact assessment, and should be viewed as the floor for the total number of jobs created under the Project.

Indicator 2 : Value added per worker increases by 20 percent in participating MSMEs Value quantitative or Qualitative)

Zero(0.00) 20% C1A – 7% C1B – 60% C2A – 320%


There was a slight discrepancy in the wording of the indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator in this Datasheet is the modified one.

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(b) Intermediate Outcome Indicator(s)

Indicator Baseline Value

Original Target Values (from

approval documents)

Formally Revised

Target Values

Actual Value Achieved at

Completion or Target Years

Indicator 1 : At least 70 percent of financial institutions receiving grants from the Financial Sector Deepening Trust meet or exceed their business plan targets

Value (quantitative or Qualitative)

0.00 At least 70% 46%


The 46% is based on the available information. In general, FSDT had significant impact on Kenyan financial institutions transformation and outreach as confirmed by a January 2010 independent impact assessment of the program.

Indicator 2 : At least US$11.5m in loans and quasi-equity investment to SMEs disbursed through SME risk capital fund and facilitated through targeted technical assistance, with loan loss rate below 10%


0.00

At least US$11.5 million in loans and quasi-equity investment >10% loan loss

US$17 million in loans and quasi-equity investment (gross) 7.5% loan loss


Indicator 3 : A comprehensive supply chain strategy, which responds to market, technical, human resource and financial needs of key players along the entire supply chain, is created for at least three sectors.


0.00 at least 3 sectors

4 sector strategies (Coffee, Cotton-to-Garment, Leather and Pyrethrum)


Indicator 4 : Increased subcontracting in local supply chains providing at least 50% increase in the level of local sourcing


0.00 At least 50% 1,000%


Indicator 5 : Agreement on training levy scheme, legislation and implementation plan

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0.00 An agreement

An agreement reached on the restructuring strategy and implementation plan


There was a minor discrepancy in the wording of this indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator used in this Datasheet is the modified one.

Indicator 6 : 100 new business case studies introduced into the Borrower's universities' business school curriculum


0.00 100 new business case studies 137 cases

developed


There was a minor discrepancy in the wording of this indicator between the PAD and the DCA, which was addressed by the 2009 project restructuring. The indicator used in this Datasheet is the modified one.

Indicator 7 : Case-based instruction is routinely used in at least one required course in each of the three business schools.


Case-based instruction rarely used in business schools

Case-based instructions in three business schools

Case-based instruction was routinely used in the three participating universities' executive business education programs.


Indicator 8 : At least 200 eligible entrepreneurs apply to the business plan competition in the first year, with at least a 5% increase in the number of eligible applicants annually


0.00 At least 200 applicants

2,092 applicants in 1st round 3,493 applicants in 2nd round An increase of 67% between 1st and 2nd rounds


Indicator 9 : Bank core indicator - Direct project beneficiaries

x


0.00 219,136

Date achieved 06/15/2004 06/30/2012 Comments (incl. % achievement)

Indicator 10 : Bank core indicator - Female beneficiaries Value (quantitative or Qualitative)

0.00 561

Date achieved 06/15/2004 06/30/2012

Comments (incl. % achievement)

This number 561 is the female beneficiaries under C1B only, including female entrepreneur investees and those received technical assistance. No consistent tracking of the number of female beneficiaries under the other subcomponents is available.

Indicator 11 : Bank core indicator - Volume of Bank Support: Institutional Development - SME


0.00 US$2 million US$7.9 million


The end-results included IDA support of C1B, C2A and C2C; hence covering both SMEs and micro-enterprises.

Indicator 12 : Bank core indicator - Volume of Bank Support: Institutional Development - Microfinance


0.00 US$5.75 million US$2.2 million


The end-results was the IDA financing for C1A; hence covering all types of financial institution beneficiaries.

Indicator 13 : Bank core indicator- Volume of Bank Support: Enabling Environment - SME Value (quantitative or Qualitative)

0.00 US$0.5 million

Date achieved 06/15/2004 12/28/2009 Comments (incl. % achievement)

Monitoring stopped for this indicator after the discontinuation of the original Component Three.

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G. Ratings of Project Performance in ISRs

No. Date ISR Archived DO IP

Actual Disbursements (USD millions)

1 11/19/2004 Satisfactory Satisfactory 0.00 2 06/23/2005 Satisfactory Satisfactory 1.51 3 12/20/2005 Satisfactory Satisfactory 2.61

4 06/19/2006 Moderately Unsatisfactory

Moderately Unsatisfactory 2.61

5 12/21/2006 Satisfactory Moderately Satisfactory 2.61 6 06/29/2007 Satisfactory Moderately Satisfactory 2.61 7 12/20/2007 Satisfactory Moderately Satisfactory 3.60





10 06/29/2009 Moderately Satisfactory Moderately Satisfactory 7.02 11 12/22/2009 Moderately Satisfactory Moderately Satisfactory 8.30 12 06/26/2010 Moderately Satisfactory Moderately Satisfactory 9.97 13 04/10/2011 Moderately Satisfactory Moderately Satisfactory 10.98 14 01/03/2012 Moderately Satisfactory Moderately Satisfactory 13.38 15 07/11/2012 Moderately Satisfactory Moderately Satisfactory 16.88

H. Restructuring (if any)

Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made DO IP

12/28/2009 N MS MS 8.30

Main reasons: • Only 20% of the planned outputs were achieved • Disbursement was only 27% 3 years into project implementation • Component Three was not performing Key changes: • Component Three removed • Component Four merged with new Component 3 on government counterpart capacity building and project management • IDA financing reallocated

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Restructuring Date(s)

Board Approved

PDO Change

ISR Ratings at Restructuring

Amount Disbursed at

Restructuring in USD millions

Reason for Restructuring & Key Changes Made DO IP

06/29/2012 MS MS 16.88

Main reasons: • The Project would not be able to fully utilize the IDA financing of US$22 million equivalent • Cancellation of IDA credit proceeds of a project in a client country within a WB fiscal year will allow the utilization of the funding for the country program. Key changes: • US$6 million of IDA financing for the Project was cancelled.

I. Disbursement Profile

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1. Project Context, Development Objectives and Design

1.1 Context at Appraisal 1. Country and sector background: Kenya was on the road to economic recovery in 2003 – 2004 after two decades of economic mismanagement and decline. The economic rehabilitation was guided by a private-sector driven recovery strategy.1 This Government of the Republic of Kenya (GOK) strategy saw the development of Micro, Small and Medium-sized Enterprises (MSMEs) as a main contributor towards income increase and job creation. The importance of the MSME sector in Kenya is evident from the 1999 national Micro and Small Enterprise (MSE) survey which indicated there were 1.3 million MSEs which accounted for 18.4 percent of GDP.2 Most (64 percent) of the MSEs were in trade, followed by services (15 percent). Manufacturing was the third largest sector for MSEs (13 percent). The survey also found that 99 percent of the MSEs employed less than 10 workers, and the remaining one percent was in the range of 10 – 50 employees. In 1999 - 2003, the MSE sector registered an increase of almost 40 percent in job creation (5.1 million employees).3 Meanwhile, larger enterprises’ job creation was stagnant, having only added 20,000 jobs to a total employment of 1.76 million. 2. Constraints to MSME development: At appraisal, several major obstacles to MSME development were identified. The first one was the limited access to finance. In Kenya, the financial market was polarized. At one end of the spectrum, dozens of commercial banks and licensed non-bank financial institutions (NBFIs) serviced a narrow portion of the formal economy; and on the other, over 5,000 microfinance institutions (MFIs) and savings and credit cooperatives (SACCOs) provided microfinance loans to groups of individuals or households. Commercial banks required well-secured collateral and did not have good information on entrepreneurs’ project quality, while most SMEs found it difficult to come up with adequate collateral. MFIs and SACCOs typically financed activities of quick but meager turnovers (e.g. petty trade) or other household income improving businesses. Those small financial institutions did not have the financial strength and institutional capacity to finance MSME growth, to say nothing of startup MSMEs. Equity financing initiatives in Kenya (and elsewhere in Africa) suffered a lack of exit opportunities for investors and high processing cost of large amount of small investments. 3. At the time of project preparation, a Bank sponsored ESW analyzed some key value chains including those for coffee, cotton to garments and pyrethrum.4 The study revealed that the domestic markets failed to provide mutual support systems and value

1 GOK: Economic Recovery Strategy for Wealth and employment Creation, 2003-2007 2 Central Bureau of Statistics: National Micro and Small Enterprise Baseline Survey, 1999 3 Central Bureau of Statistics: Economic Survey 2003 which included domestic servants in the definition of

the informal sector and the statistics from this survey were used as a proxy for SME employment. 4 The World Bank: Kenya Growth and Competitiveness, (Report No. 31387-KE), January 27, 2005

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chain linkages. Coffee farming suffered from poor labor skills. Coffee processing techniques at coffee farmers’ cooperatives were inefficient. The cooperatives often delayed payments to farmers for months while charging the latter interest on loans. Coffee farmers did not receive feedback on product quality from marketing agencies which were an important player in moving processed coffee to auction floors. Cotton production yields were low: realized production was less than 10 percent of the potential of available cotton land. Cotton farmers were poorly equipped with technical skills and could not afford pesticides and agrochemicals. Seeds provided by ginneries were in poor quality, leading to low quality of cotton. Reject rates on shop floors were high and ginning equipment was outdated. The pyrethrum sector was controlled by the Pyrethrum Board of Kenya (PBK) which failed to provide quality inputs to farmers but controlled the price of their crop. The administrative costs accounted for the entire cost of pyrethrum farming. In all those value chains, public-private consultations were irregular or did not fully involve the main stakeholders along the value chains. 4. There was a mismatch between training offered by Kenya’s formal technical, vocational and educational (TVET) institutions and MSMEs’ skills needs. TVET only provided about 20 percent of training with the rest provided within the MSME sector. Literacy of the Kenyan labor force was among the highest in Sub-Saharan Africa, but labor productivity of Kenya’s manufacturing sector declined from the 1990s. One contributing factor was the problems in the prevalence, level and quality of skills development and technical training. The country’s long existent Industrial Training Levy scheme was designed to offset under-investments in training due to labor mobility. Levies collected from firms with more than five workers funded a dedicated industrial training fund and the levy payers could get the cost of pre-approved training programs reimbursed by that fund. However, the scheme had become obsolete and could not meet Kenya enterprises needs in a more diversified economy. 5. The business and regulatory environment for Kenya’s MSMEs remained cumbersome and costly. While the introduction of the single business permit in 2000 combined 16 individual locally issued business licenses into one, there were still 11 separate procedures for business registration which was estimated to take about 60 days on average. In order to operate officially, a business would need to obtain two general licenses: the single business permit, and the trade license from the Ministry of Trade and Industry (MOTI). Almost every business activity required a special license. All the licenses required fee payments and most had to be renewed annually. The licensing system was prone to rent-seeking and was quite costly to MSMEs. In addition, there were numerous taxes and fees which should be simplified to encourage more MSMEs to move into the formal sector, and meanwhile reduce the Government’s tax administration burdens. 6. Bank assistance program: To support the GOK’s Economic Recovery Strategy, the Bank adopted a Country Assistance Strategy (CAS) in June 2004 and stimulating economic growth featured high in the reengagement strategy. Around the same time, the

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Bank approved a joint IDA/IFC MSME pilot program for Africa (December 2003).5 This pilot program intended to better integrate IDA’s and IFC’s expertise, resources and instruments to: (i) increase access to finance for MSMEs; (ii) build capacity in MSMEs; and (iii) promote business environment reforms. 7. The Project: Against this country and sector background, the Bank approved the Kenya Micro, Small and Medium Enterprise Competitiveness Project (the MSME project or the Project) in July 2004 as a direct response to the identified main bottlenecks of the MSME sector development in Kenya. The Project was the second of the Joint IDA-IFC MSME Program. Detailed discussions of the Project as a main Bank response to the developmental needs of Kenya’s MSMEs are provided in the relevant sections of the ICR.

1.2 Original Project Development Objectives (PDO) and Key Indicators 8. The PDO as presented in the Project Appraisal Document (PAD) was as follows:6 “The Project aims to increase productivity and employment in participating micro, small and medium enterprises (MSMEs). This objective will be achieved by strengthening financial and non-financial markets to meet the demand of MSMEs, strengthening support for employable skills and business management, and reducing critical investment climate constraints in MSMEs. The project will focus on key value chains and on both formal small and medium enterprises and informal microenterprises that have high potential for dynamic growth, including "graduation" from informal to formal status.” 9. The PDO in the Development Credit Agreement (DCA) was similar. 10. The achievement of the PDO was to be measured by two Outcome Indicators:

• “At least 2,500 new jobs created in participating MSMEs, and • Value added per worker increases by 20 percent in participating MSMEs.”

11. At appraisal, the following Intermediate Results (IR) were established, and for which 11 indicators adopted (see the Datasheet of this ICR for details):

• Component One: Increase in commercially sustainable delivery of financial services to MSMEs

• Component Two: (i) Increase in specialized value adding links in supply chains; (ii) Technical, legal, and regulatory framework for redesigning the Industrial Training Levy Scheme is established; and (iii) Improved business management education

5 The Program Framework Document for a Joint IDA/IFC Micro, Small, and Medium Enterprise Development Pilot Program for Africa (IDA/SecM2003-0614). The first project approved under the program was the Nigeria MSME Project.

6 Quotations on the outcome and intermediate results indicators are from the PAD (Report No: 29354-KE, June 15, 2004).

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• Component Three: Improved regulatory environment for doing business in Kenya

1.3 Revised PDO (as approved by original approving authority) and Key Indicators, and reasons/justification 12. There was no revision of the PDO and the Outcome Indicators. 13. The Intermediate Result of the original Component 3 (Improving Business and Regulatory Environment) and the associated three indicators were dropped when the original component was cancelled by the project restructuring in December 2009. 14. Five Bank-wide core indicators on IDA credit disbursement and number of beneficiaries were added as additional Intermediate Results before December 2009 (but the one on disbursement for business environment improvement was dropped after the first project restructuring). The core indicators are listed in the Datasheet of this ICR. The rest of the Results and the related IR indicators remained unchanged as designed, although there were minor alignment in the wording of the indicators between the PAD and the Results Framework used in the Implementing Status and Results Reports (ISRs) at the 2009 project restructuring.

1.4 Main Beneficiaries 15. The primary target group of the Project was Kenya’s MSMEs.7 The Project was also expected to benefit employees of the beneficiary MSMEs and farmers of the value chains to be supported through various capacity building activities and business development services. There was no revision of the main beneficiaries.

1.5 Original Components 16. At approval, the Project had four components including five sub-components, as follows: 17. Component One (C1) Access to Finance (US$10.5 million equivalent): This Component was designed to address the identified access to finance constraints faced by Kenya’s MSMEs. The Component consisted of two subcomponents. 18. Subcomponent A(C1A) – Financial Sector Deepening (US$4 million equivalent of IDA financing) was to co-finance technical assistance under a financial Sector Deepening Trust (FSDT or FSD Kenya)8, in particular those FSDT projects which would support MFIs moving up-market and commercial banks moving down-market, with a view to

7 At appraisal, this economic group was broadly defined by the number of workers. Firms that employed 50-99 workers were considered as medium-sized, those with 10-49 workers were small-sized, and micro-sized firms had a workforce of 1-9 employees. The 2009 MSME legislation uses the same definitions in addition to definitions in terms of annual turnover and capital investment. 8 The FSDT was later named FSD Kenya.

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making available financial products and services suitable to MSMEs. The British Government’s Department for International Development (DFID) was to provide US$10-15 million for the establishment of the FSDT. 19. Subcomponent B(C1B) – SME Risk Capital and Technical Assistance Fund (US$6.5 million equivalent of IDA financing) aimed to bridge the gap between SMEs and the banking world. The Risk Capital Fund (RCF) was to be established by a group of investors including the Bank Group’s International Finance Corporation (IFC), and would offer a mix of debt, equity and quasi-equity products to eligible investees. The IDA credit would finance a portion of the fund’s operational expenses and a parallel technical assistance (TA) fund available to the RCF investees. The IDA credit would also finance a separate TA Fund for technical assistance to SME investees of other risk-capital funds. In addition to the IDA financing for technical assistance activities, the US$15 million Kenya RCF was funded by IFC and other private investments. 20. Component Two (C2) – Strengthening Enterprise Skills and Market Linkage (US$6.5 million equivalent): The objective of this Component was to address the identified market failures to provide skills which would match MSME needs, and offer adequate information and linkages to MSMEs and farmers at the lower end of the value chains. This Component consisted of three subcomponents. 21. Subcomponent A(C2A) – Pilot Value Chain Based Matching Grant Program (US$4 million equivalent of IDA financing) was a supply-side response to MSMEs’ limited access to business development services, and the lack of linkages between MSMEs and from MSMEs to markets. Under the matching grant, the IDA credit proceeds would provide partial financing for eligible training and knowledge-based services for improving MSME competitiveness, and the rest of the cost was to be borne by grant receivers. The grants would provide upon the approval of a value-chain based business plan jointly developed by the main players along the value chain. 22. Subcomponent B(C2B) – Restructuring of the Industrial Training Levy Scheme (US$0.5 million equivalent of IDA financing) aimed to modernize the long-existed scheme to meet the demand for skills in the growing economic sectors. Under this subcomponent a study would be financed to recommend on: (i) a new industrial skills funding strategy; (ii) a new legal, regulatory and institutional framework to support effective delivery of industrial skills; (iii) a future levy fund governance structure and institutional arrangements; and (iv) the upgrading of the industrial training qualification structure. 23. Subcomponent C (C2C) – Global Business School Network/Improving opportunities and training for entrepreneurs and MSMEs (US$2. million equivalent of IDA financing) was to (i) introduce a Business Plan/Innovation Competition modeled on the Development Marketplace;9 and to (ii) support the local Global Business School

9 The Development Marketplace is a ten-year World Bank Institute’s program that provides grant funding for the development and testing of innovative initiatives.

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Network (GBSN) Center to develop locally relevant cases and short courses for effective training of MSME owners and managers in at least three business schools.10 24. Component Three (C3) – Improving the Business Environment (US$2 million equivalent): This Component (US$2 million equivalent) was a response to the identified investment climate constraints. It was expected to contribute to the reduction of compliance costs for the formal sector and provide incentives for the MSMEs in the informal sector to become formal economic entities. This objective was to be achieved through simplification of the GOK’s tax regime for micro and small businesses and consolidation of business startup regulations through a one-stop window approach. 25. Component Four (C4) (US$2.5 million equivalent): The original project design also included a Component Four to finance project management related activities, including: i) institutional capacity building and M&E; and ii) a private sector Project Management Contractor (PMC).

1.6 Revised Components 26. The original Component Three was dropped at project restructuring in December 2009. The original Component Four became Component Three – Institutional Capacity Building and Project Management to finance increased capacity building activities of the Ministry of Industrialization (MOI, project owner)11 and the PMC contract. 1.7 Other significant changes 27. Based on a reassessment of the reduced funding needs, the December 2009 restructuring also reallocated the balance of IDA credit proceeds for the original Component Three (US$2 million) and part of the IDA financing for C1B (US$1 million) to Component Two and the new Component Three (. As a result, the IDA financing for Component 1 decreased to US$9.5 million; that for Component Two increased to US$8.1 million; and a total of US$3.45 million was allocated to finance the new Component Three. 28. The June 2012 restructuring cancelled US$6 million of the IDA credit proceeds when it became clear that the Project would not be able to utilize the balance by the closing date, while the Kenya country program could benefit from the availability of cancelled IDA funds before the conclusion of the fiscal year. 29. The closing date of the Project was extended once, from December 31, 2009 to June 30, 2012.

10 GBSN stands for Global Business School Network. The IFC sponsored the non-profit GBSN to strengthen business schools in the developing countries in 2003. 11 MOI was the legal entity for the overall project when the Ministry of Trade and Industry (MOTI) was split into two ministries in 2008. MOTI was the main Government counterpart and project owner at appraisal and the first three years of project implementation.

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2. Key Factors Affecting Implementation and Outcomes

2.1 Project Preparation, Design and Quality at Entry 30. General design features: A series of analytical work of the GOK and the Bank Group fed into project design.12 The Project factored in the findings and recommendations of those studies, and aimed to address the identified main bottlenecks of MSME development in Kenya. The design clearly took into account the lessons learnt by the Bank Group, other donors and the GOK, as well as the international experience in supporting MSME growth, which featured high in the GOK’s Economic Recovery Strategy. 31. The Project was the second of a Joint IDA/IFC MSME Program which was to introduce innovations in MSME financing and support of market linkages. The design of this Project was based on the framework of the joint program. IFC brought to the project design instruments for supporting MSME development which were evolved through years of direct interactions with the market. The IFC contribution to the project design was reflected in the introduction of SME risk capital financing model from South Africa and the technical assistance to the Risk Capital Fund impact assessment IFC’s locally-based SME Solution Center and the case-study based business education through the Global Business School Network. IDA contributed to the project design with sector analysis on MSMEs’ operating environment, good access to policy makers, and experience in supporting beneficiary capacity building. Notable examples of IDA contribution to the project design included: (i) the co-sponsoring of FSD Kenya; (ii) the addition of technical assistance to the investees of the Risk Capital Fund; (iii) the financing of business development services through a matching grant; and (iv) the Development Marketplace style business plan competitions. 32. Project objectives: The PDO was succinct in defining the expected outcomes (increased productivity and jobs at the participating MSMEs). There was a causal relationship between the PDO and the designed activities. If the expected results of the main interventions at the firm level were achievable within the lifetime of the Project, the designed main activities would directly contribute to the achievement of the PDO. Improved access to finance including risk capital financing would enable the participating MSMEs to survive and expand. Business development services would enable the participating MSMEs to expand plantation acreage, improve product quality, and get better pricing from buyers along the value chains. Those activities, when successfully implemented, would result in more jobs and higher sales or profits at the participating MSMEs. 33. Scope of the Project: The scope covered the main constraints to the MSME development in Kenya. However, this added complexity to the Project. There appears to

12 In addition to the reports referred to in Footnote # 1-4, reports considered for project design included: GOK: Micro and Small Enterprise Sessional paper; the FIS Administrative Barriers study; and the IMF/Bank Financial Sector Assessment Program, for example.

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have been a misinterpretation of the lesson on the need for an integrated approach to support MSME development. The integrated approach to put all MSME-related interventions under one program would be more appropriate at the country level, but could make the scope of a Specific Investment Loan (SIL) operation too complex for a client with limited institutional capacity. Some of the designed interventions, in particular those aimed to improve the business and regulatory environment, might not directly lead to the achievement of the PDO within the lifetime of the project, due to policy lags. Adoption of new laws may take time (decision lag); adopted laws may not be effectively implemented (implementation lag); and implemented laws may not immediately impact the job demand and labor productivity of the participating MSMEs (impact lag). 34. Implementation arrangements: The primary owner of the Project and the main Government counterpart was the Ministry of Industrialization (MOI) which was formed in 2008 after a reorganization of the previous Ministry of Trade and Industry (MOTI). The MOI (represented by a small project secretariat) was to provide policy guidance, and coordinate between the main stakeholders of the Project. The public – private sector Project Steering Committee was envisaged as a forum for information sharing and consensus building on main project issues. Neither the MOI nor the Steering Committee had experience in IDA financed projects, which could have been alleviated if the design were to provide more intensive capacity building support under the Project.

35. The Project assigned project implementation of the firm-level interventions to various Technical Implementation Partners (TIPs, which were private sector contractors engaged in accordance with the Bank procurement guidelines). This proved to be crucial for project implementation. Two inter-governmental agency task forces were responsible for the implementation of the two main country-level interventions (investment climate improvement and training levy regime reform). The Project’s financial and procurement management (as well as the overall M&E) was entrusted to a private sector accounting firm, called the Project Management Contractor (PMC). At the time of project appraisal, corruption within the Government was a serious concern. The outsourcing of project management was to mitigate the risk. However, it appears that the principle-agent relationship was not well established through clear fiduciary arrangements (such as the reporting line, the ownership of project information and outputs, and the contractual remedies when the agent fails to perform). As the contractor was a private sector firm (as compared to an individual consultant), it had to follow the firm’s internal review and clearance procedures, in addition to the Government and Bank procedures. This could cause delays in procurement and disbursement, but the risk was not factored into the project design. 36. Risk and risk mitigation: Country-level risks to the success of the Project were identified and a few of them became the main factors affecting project implementation, such as the risk related to the “ownership of the training levy”. However, the mitigation of this risk, like most of the country-level risks identified at appraisal would depend on factors beyond the Project (e.g. overlapping roles of government agencies for MSME

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development). It appears that the complexity of the Project scope could have been reduced if those factors and the challenges in mitigating the risks were adequately reflected in project design. There was no discussion at appraisal of the project-level risks, in particular the limited institutional capacity of the main government counterpart in managing IDA financed projects. The risk of a poorly performing PMC was overlooked, or at least not sufficiently mitigated by performance based contracts. Those project-level risks turned out to be major obstacles to project implementation.

2.2 Implementation 37. Role of TIPs: All but two main activities of the Project were implemented by the TIPs.13 For instance, TIPs designed the operational policies of the Risk Capital Fund and TA Fund and the scope and approach of interventions under the Value Chains. They engaged and exercised oversight of consultants, and organized stakeholder workshops and training events. Most of the TIPs demonstrated a strong commitment to their respective subcomponents. They brought to the Project the private sector insights and innovations. They were the main force behind the good results achieved at project closure. Two TIPs also benefited from the timely support of the IFC’s field-based SME Solution Center (SSC) and GBSN Kenya center in terms of identifying eligible investees (C1B) and providing guidance to the development of local case studies. The value chain TIP benefitted from hands-on support from specialized consultants that was co-financed by a Japanese grant.14 38. Project restructuring: The December 2009 project restructuring could be considered as a turning point in project implementation. Project implementation started in December 2004 when the IDA credit became effective. However, up to June 2008 only about 20 percent of the expected results were achieved with an IDA financing disbursement rate of 16 percent.15 At the same time, project implementation under the original Component Three suffered long delays in the selection of a suitable consultant. The performance of the eventually selected consultant turned to be unsatisfactory. By mid-2009 it became clear that the Component was overtaken by the parallel GOK reforms. The IFC’s FIMPACT ASSESSMENTS/ICA program had been assisting the Government to carry out reforms in licensing, tax regulations and procedures. The mandate of setting up a “one-stop-service” (OSS) function was assigned by law to the Kenya Investment Authority while the consultant engaged under the Project reported to the MOI via the PMC. The Kenya Revenue Authority adopted a flat tax rate for small firms under a new Turnover Tax in 2007. A number of Mid-Term Review assessments in 2008 – 2009 form the analytical basis of the restructuring.

13 Component 1 was implemented by two TIPs except for the technical assistance for other fund managers which was implemented by the IFC. Component 2 was implemented by three TIPs, except for Subcomponent C which was implemented by a government task team. The original Component 3 was implemented by another government task team. 14 The SSC program has been wound up recently and the GBSN center earlier. 15 Priodos & Facet Project Operational Audit and Impact Assessment contractor: Report on the Second Operational Audit, May 2009. Source Client Connection, “net of Special Account advance which was included in the disbursement table of the Datasheet”.

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39. The 2009 restructuring (i) reduced the complexity in project design by discontinuing the original Component Three; (ii) reallocated the IDA credit proceeds among the main activities to provide more financing for those subcomponents in need;16 and (iii) extended the original project closing date for two and half years to June 30, 2012. Those changes were crucial to the eventual achievement of the project objectives. The June 2012 restructuring was mainly to cancel the unutilized IDA funds (see Section 1.7 for further information). 40. Overall business environment improvement: Thanks to the reforms in the business and regulatory environment, Time for Starting a Business reduced from 60 days in 2003 to 34 days in 2009, and Cost of Starting a Business as a percentage of income per capita declined from 52 percent to 37 percent during the same period.17 Those improvements achieved by the Government (while the original Component Three was suffering delays) were a main factor for the decision to cancel the component at the 2009 restructuring. 41. Improved market for MSME financing: The financial services market in Kenya witnessed significant improvement during the project implementation period. The FSD Kenya’s contributions made the market more client-oriented. This in general benefited the project implementation. A particular example was the adoption of the SACCO Law (led by an intervention under another Bank project18), and the program’s institutional development support (e.g. SACCO automation). Thanks to the law, the sector was regulated from 2011 onward. With the institutional support, the beneficiary SACCOS was in a better position to move upmarket. Another example of an improving environment was the enhancement of the MFI regulatory framework thanks to a new regulation on microfinance institutions (MFIs), and the FSD Kenya program’s direct support to MFIs. 42. Procurement delays: By design the Project had only one main type of procurement activities– selection of consultants under five QCBS packages and a few other packages. However, except for three contracts (for the PMC, the GBSN and the matching grant manager), the selection of the consultants suffered various degrees of delays. The TIPs for Component One were engaged only in December 2006, more than two years after project initiation, and the engagement of the consultant for the business plan competition did not take place until February 2009. Those early delays were mainly caused by the unfamiliarity of the Bank procurement guidelines and the review procedures on the part of the government counterpart and the PMC, which resulted in the long time taken to build consensus within the GOK for the selection of the TIPs.

16 The increased allocations were “funded” by the funding released by the cancellation of the original C3, and the reduction of the funding originally allocated to C1A and C1B. The main activities under C1 were performing well with lower IDA financing needs than what was originally anticipated. 17 For details, please refer to the Project Paper on project restructuring dated December 28, 2009, and the Doing Business in Kenya of 2004 and 2010. 18 The Financial and Legal Sector Technical Assistance Project - FLSTAP

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Contract renewals after the December 2009 project restructuring took an average of six months. The multi-layer process of review and clearance was found to be a main factor of the delays.19 This was particularly true for the implementation of the technical assistance for other fund managers (C1B); the training levy restructuring (C2C); and the business environment improvement (the original Component Three). The delays reflected the general weaknesses in Kenya’s public procurement system, in particular in the institutional capacity and the functioning of the procurement market.20 On the other hand, the split of the previous Ministry of Trade and Industry into the Ministry of Trade and the Ministry of Industrialization was a main factor that was out of the control of the Project. 43. Disbursement delays: Disbursements against contracts were delayed from time to time. The delays affected the TIPs’ financial management and the timeliness of the capacity building activities and the business development services. The multi-layer review and clearance process was a factor. While the PMC was responsible to manage the local currency project account (about 65 percent of project costs were in local currency), the replenishment of the account was up to the MOI, which also had to go through the government internal clearance procedures established by the Treasury. Delinquencies in budgeting for the local account, such as those in 2009 – 2010 and towards the end of the Project, also caused serious payments disruptions. When the project account was not replenished in time, payments to the expensed activities were delayed. In the case of the FSDT subcomponent (C1A), the delays were caused by a lack of alignment between the Bank guidelines and the Government’s procedures; as well as between the Government procedures and the book-keeping practice of the multi-donor trust fund. 44. Project management capacity: The delays in procurement and disbursement once again revealed that the institutional capacity of the MOI as the project owner should have been strengthened early on in project implementation. The outsourcing of the procurement and financial management functions weakened the oversight by the MOI. The private sector contractor, like the main government counterpart, did not have much experience in IDA financed projects and the uneven performance of the PMC further affected project management in procurement, financial management and M&E. The problem was highlighted in the Med -Term Review (MTR) and the PMC contract renewal after the 2009 restructuring enhanced the monitoring of PMC performance. 45. Personnel changes: The Permanent Secretary of the main Government counterpart was replaced at least three times throughout the project implementation period. A replacement of the Permanent Secretary in late 2005 in particular led to

19 A procurement package together with the related procurement documents had to be reviewed and/or cleared by the PMC, the Project Secretariat and the MOI before it was sent for IDA review and no-objection. 20 Kenya Public Procurement Oversight Authority: Assessment of Procurement System in Kenya, October 2007

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months of delays as the project design and personnel arrangements was subjected to another round of reviews. 46. Political crisis: The end-2007 – early-2008 political crisis in Kenya affected project implementation, in particular for the Business Development Services (BDS) activities under the cotton-to-garment value chain in a couple of provinces. While the first round of the main procurement activities was completed before the breakout of the crisis, the turmoil affected the disbursement pace and the collection of the baseline data for the project M&E, since consultants could not travel to Kenya until late 2008. The travel difficulties at the time also affected the pace of project implementation under the other subcomponents. 47. Other: Droughts in 2009 – 2012 affected the results of the value chain interventions in terms of contracted cotton planting acreage and reduced coffee produce.

2.3 Monitoring and Evaluation (M&E) Design, Implementation and Utilization 48. M&E indicators: The design of the M&E indicators represented an effort to quantify the expected results and make them specific and measurable. The design of the M&E indicators also reflected the early stage of the Bank Group’s efforts to refocus on results. The PDO outcome indicators were quite typical economic measurements of competitiveness over the medium to long term. There were minor discrepancies in the wording of the second outcome indicator and the two intermediate results indicators (regarding C2B and C2C) between the PAD and the DCA. The indicators were realigned by the 2009 project restructuring. 49. Outcome indicators: The two outcome indicators turned out to be quite challenging for project M&E in addition to the limited M&E capacity at the overall project level. It appears that the first PDO Outcome Indicator (“at least 2,500 new jobs created”) was set too high to be achieved within the normal life of a Bank financed project in Kenya (5 years). The Outcome Indicator was based on the experience of BP Ltd South Africa. However, South Africa’s MSME workforce was much larger than that in Kenya.21 The economic share of South African SMEs was also much higher (>50 percent of GDP in South Africa vs. >18 percent in Kenya).22 Furthermore, at the time of project appraisal, the South Africa risk capital financing scheme had been in operation for more than 20 years while a similar model was not yet introduced in Kenya. With the benefit of hindsight, it would have been more realistic if the employment indicator had taken into consideration the differences in the size of the economy and the sector between Kenya and South Africa. In addition, the job creation indicator proved to be difficult to

21 By the South Africa Small Business Act 1996 (amended in 2004), micro enterprise employs 1-20 workers, small enterprise 21-50 workers and medium enterprise 51-200 workers (except for the agriculture sector). Kenya’s definition of MSMEs in terms of employment is similar to South Africa’s MSME definition for the agriculture sector. 22 Abor and Cartney, Issues in SME Development in Ghana and South Africa, International Research Journal of Finance and Economics, ISSN 1450-2887 Issue 39 (2010)

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verify under the value chain subcomponent as most of the beneficiaries were smallholder farmers and primary processors, who used more seasonal than full-time workers. 50. The second PDO Outcome Indicator measured productivity increase by value added per worker (which was to be “increased by 20 percent”). Value added per worker is an often used indicator of labor productivity. The challenge to the Project was the difficulty in measuring value added per worker of training and consultants’ reports, as it has been to well-trained economists worldwide. It would be very difficult for the project entities to quantify the indirect impact of the interventions and translate it into value added per worker. Even for the components where the project interventions would have direct impact on labor productivity, the TIPs did not have the in-house capacity to collect, verify, and process data; e.g., to translate casual labor used into number of full time job equivalent and based on which, the calculation of value added per worker. While the problem was alleviated by the built-in arrangement of project impact assessment (two surveys), it affected the regular monitoring and reporting of progress towards achieving the outcomes. 51. Intermediate Results Indicators: In general those indicators were specific and measurable, although some of them were more of component outputs rather than results. However, the indicator for C1A – financial sector deepening (70 percent of beneficiary financial institutions achieve their business targets) was difficult to monitor and evaluate mainly due to concerns related to business confidentiality and transaction cost of collecting and analyzing that level of information. The indicator was clearly for a Result, and the problem could have been addressed if the project design factored in the concerns and provided for the related cost (at least partially). Instead of the requirement for achieving the general business targets, a few but critical targets could have been singled out (e.g., NPL level, business expansion target in the MSME financing market, etc.). 52. Data collection: The Project provided for an impact assessment (IA) coupled with “operational audits”, which reflected the international experience on evaluating developmental impact. The impact assessment was expected to collect baseline data in year one, update them at mid-term and before project closure. The operational audits would validate the robustness of the impact assessement methodology and review project progress towards achieving the objectives. The Impact Assessment consultant was engaged in late 2007, three years after project initiation. While baseline data collection started shortly thereafter, the baseline report was not available until September 2008 and was only finalized in June 2010. The final assessment (second survey) was completed in May-June 2012. The impact assessment contract was directly managed by the PMC which was slow in providing guidance or feedback. Not all the participating MAMEs were willing or able to provide the data needed. The political turmoil at the end of 2007 and early 2008 acerbated the challenges faced by the impact assessment consultant. 53. The information collected by the PMC for a while focused on the uses of IDA credit proceeds, and there was no clear guidance on TIPs’ project status reports, resulting in different forms and focuses of the reports. This problem was addressed in 2009 – 2010 when the PMC used a unified template to collect information. However, the template

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was not aligned with the Results Framework and its targets (except for the requirement on the number of jobs created). It also appeared that data from the TIPs were not diligently verified and transferred into PMC’s M&E reports to the Project Secretary and the Bank. 54. On the other hand, the TIPs maintained their own data collection systems. The TIP for the Risk Capital Fund and TA Fund collected and maintained data on employment, sales (turnovers) and profits of the investees, as well as the number and nature of investment and technical assistance activities. The TIP for the matching grant collected and maintained detailed data on planting acreage, quantity of the cash crops produced, unit price of the produce, quality of the produce, etc., in addition to data on the matching grant and the business development services activities. The TIP for the business plan competition did follow-up interviews of the winners of the competition to learn about the effect of the competitions. Those data collection efforts may not necessarily be in full alignment with the Results Framework, but were crucial to the-end-of-project analysis and this ICR. 55. M&E uses: The uses of the M&E framework were inadequate. It appears that the TIPs were not necessarily familiar with the Results Framework agreed upon at project appraisal. The three Operational Audits in 2007 – 2010 provided good insights on the problems in project M&E and proposed a performance monitoring scheme aligned with the Results Framework (November 2007), but it seems no action was taken on that and other recommendations.23 There was no regular reporting on the progress (or lack of it) towards meeting the Intermediate indicators or achieving the PDO outcomes (except for the number of new jobs created by the investees of the risk capital fund). 56. The PMC was charged with the overall project M&E, but did not have the capacity for the task, especially since the task under this project required good socio-economic analytical expertise and knowledge in both urban SME development and rural cash crop businesses. It appears there was a misunderstanding that the impact assessment at the end of the Project would do the regular M&E job for the Project Secretariat and the PMC.24

2.4 Safeguard and Fiduciary Compliance 57. Safeguard: The Project was a Category C operation. 58. Procurement: The Project was in compliance with the Bank guidelines based on the available information. The delays in procurement could be partly attributed to the nuances in ensuring the compliance.

23 Triodos & Facet: Report on the Operation Audit of the MSME Competitive Project, Bunnik/Nairobi, November 2007, May 2009 and April 2010 24 An impact assessment was mainly to verify and validate the reported progress and results; rather than monitor project implementation and evaluate progress made based on which prompt actions should be undertaken to endure the achievement of the project objectives.

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59. Financial management: There were issues related to account reconciliation and payments documentation in the first phase of project implementation which were addressed in 2008 – 2009. The Project was audited by the Kenya National Audit Office (a semi-autonomous government agency), and most of the project audit reports were unqualified, although the need to educate the Government’s auditors of the differences between cash accounting (government standards) and accrued accounting was a challenge for a while. The MOI was responsible for the internal audits of the Project, but did not carry them out on a regular basis. Financial planning was weak, contributing to the funding gap of the local currency project account in particular towards the end of the Project.

2.5 Post-completion Operation/Next Phase 60. Financial Sector Deepening Trust (C1A): The Trust is a well-funded multi-year program managed by FSD Kenya.25 In the program’s 2011 – 2015 strategy, the target is a 50 percent increase in the number of SMEs served by financial sector. 61. Risk capital fund and TA Fund (C1B): The current investment fund (Kenya SME Fund) and the TA Fund will be wound up in the first quarter of 2013. Discussions are under way between the GOK and the IFC to turn the fund into an evergreen investment vehicle, similar to the South Africa model.26 The parent company of the TIP responsible for this subcomponent is considering raising a Fund 2 for Eastern Africa in 2012. The technical assistance fund extended interest free loans to needed investees and proceeds recovered have been used to finance new technical assistance activities. Based on the IFC information, various entities have approached the Bank Group’s private sector investment arm to collaborate on developing and implementing similar investment model (risk capital fund complemented by technical assistance support). 62. Value-chain based matching grant (C2A): The TIP documented the lessons learnt before the project closure in a series of project documentation reports which contained detailed project outputs, the pending agenda and the recommendations for way forward. Based on those reports, the TIP has decided to retain the matching grant management team for the next 24 months. Efforts are under way to mobilize funds to finance continuous business development services support to farmers and MSMEs along the value chains. A general proposal for the national rollout of a matching grant for the coffee and leather value chains was presented to a number of potential donors including the World Bank. 63. Business plan competition (C2C): The Ministry of Industrialization has decided to work with the private sector to make the competitions a regular event in supporting MSME development in Kenya.

25 www.fsdkenya.org 26 BPI Kenya is the TIP for the subcomponent and its parent company is Business Partner Ltd South Africa.

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64. Case-study based business training (C2C): The participating universities have routinely used the cases developed under the Project in their executive training programs.

3. Assessment of Outcomes

3.1 Relevance of Objectives, Design and Implementation 65. Rating: The overall rating of relevance is substantial. 66. Objectives: Following the successful conclusion of the Economic Recovery Strategy, the GOK adopted a long-term development strategy – Kenya Vision 2030. Vision 2030 aims to turn the country into “a globally competitive and prosperous nation” by the year 2030. 27 The strategy recognizes the important role of MSEs in creating jobs, increasing productivity and improving household incomes, and attaches high priority to the MSE development. Inclusive financial services are another economic priority. The current Bank Country Partnership Strategy (2010 – 2013) directs the resources to support the implementation of Vision 2030. Objective 1 of the Bank strategy is “Unleashing Kenya’s growth potential l”, to be achieved through assistance on improving Kenya’s overall investment climate and MSME firm-level competitiveness. Making the financial sector more responsive to Kenya’s business needs is another main theme of Bank assistance. The Bank has also highlighted the importance of market linkages for the rural population. Viewed against the present Government and Bank strategies, the relevance of the Project’s objectives to increase MSMEs’ competitiveness were considered as high. 67. Design: As discussed in Section 2, the design was based on solid sector-wide analysis, and adopted innovations to address the identified bottlenecks. The core interventions at the firm-level had a clear causal relationship with the intended project outcomes. The design adopted several innovative/experimental delivery mechanisms, inter alia: (i) the support of East Africa’s first multi-donor trust fund (FSD Kenya) for coordinated technical assistance to improve access to finance; (ii) the introduction of a new risk capital financing model (SME Risk Capital Fund and TA Fund); (iii) the value-chain-based matching grant interventions; and (iv) the application of other successful international experience in facilitating MSME development (i.e., case-study-based business training and the Development Market-style support to business plan development). 68. The design, however, could have been entirely composed of those firm-level intervention, in particular since the design and implementation of those innovations were already highly challenging. The economy-level interventions (e.g. on investment climate and government levy scheme) may not directly lead to firm-level productivity increase within three – five years due to the policy lags discussed in Section 2. This type of interventions usually requires intensive inter-government agency coordination, which

27 The GOK: Kenya Vision 2030, 2007; www.vision2030.go.ke

http://www.vision2030.go.ke/

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could consume a lot of the limited project capacity.28 The linkages between the components should have been strengthened by an effective arrangement. In that scenario, for example, the winners of the business plan competitions would be referred to risk capital financing. The financial institutions supported by the Project through the FSD Kenya would work with the matching grant to finance the much needed production inputs for farmers. The impact of the Project would have been much greater. 69. Given the causality between the PDO and most of the designed interventions; the innovative features of the design; and the positive effect of the December 2009 restructuring (which reduced the design complexity), the project design rating is substantial. 70. Implementation: The implementation relevance rating of the Project is substantial. Although the Project suffered serious delays under several subcomponents in the first two to three years due to the factors discussed in Section 2, implementation started to accelerate in 2007 and went into full swing after the 2009 restructuring. Of the eight intermediate results, five were met or exceeded, two were largely met and one was partially met. Those achievements enabled the Project to remain relevant. The Bank’s implementation assistance was in general responsive to the changing needs, as evidenced by the 2009 project restructuring which removed the original Component Three when the targeted improvements of the business environment had already taken place.

3.2 Achievement of Project Development Objectives 71. Achievement of the PDO: There has been reasonable progress in achievement of the PDO. This is confirmed by two separate datasets, one provided by the impact assessment and the other by the TIPs, for the two core interventions. The impact assessment, which this ISR considers to have the more robust findings, was based on survey samples under subcomponents C1A, C1B and C2A, and it concluded that at least 1,425 jobs were created. The impact assessment explicitly found that the Project was “especially successful in boosting MSMEs’ revenue and profit” and that “the project impact on employment is positive”. It also clearly indicated that the estimate of new jobs created was at the low end, as the assessment was only able to cover one of the beneficiary financial institutions under subcomponent C1A (Equity Bank) and it did not cover all the risk capital investees. Hence, the actual number of jobs created is believed to be significantly higher than the explicitly-documented number, which can be considered to constitute a floor for the total number of jobs created. Table 1 summarizes the impact assessment consultant’s conclusions.

Table 1: Project Impact Assessment Conclusions: Original Outcome Indicator End Results Impact Assessment

At least 2,500 new jobs created • C1A – financial sector • Positive impact (1,425

28 It should be noted that combining multiple level interventions was a feature of the pilot Joint IDA/IFC Program. The October 2006 Paper to the Bank Board recommended that “no substantive replication of the Program should be considered until specific results are available and evaluated”.

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Original Outcome Indicator End Results Impact Assessment in participating MSMEs deepening: 170 new jobs

(by the Equity Bank customer sample researched)

• C1B – SME risk capital fund and TA Fund: 290 new jobs (by the investee researched)

• C2A – 965 full-time equivalent new jobs (by the joint sample of coffee and cotton-to-garment value chains researched)

new jobs created)

Value added per worker increases by 20 percent in participating MSMEs

• C1A – financial sector deepening: 7 percent increase in value added per worker (by the Equity Bank customer sample researched)

• C1B – SME Risk Capital and TA Fund: 60 percent increase in value added per worker (by the investee researched)

• C2A –320 percent increase per farm (by the joint sample of coffee and cotton-to-garment value chains researched)

• Especially successful (value added/worker increased by 7percent – 320 percent)

Source: Triodos & Facet: Kenya MSME Competitiveness Project Impact Assessment, June 2012 72. The second dataset, based on reports from the TIPs for subcomponents C1B and C2A (coffee farmers’ cooperatives only), concluded that 1,803 jobs were created. This was also the number of jobs created reported in the project’s last Implementation Status Report, which was prepared before the impact assessment was finalized. The TIP data concerning implementation of the SME risk capital investment support activities tracked the positive changes in the investees’ sales (turnovers), profits and employment, and concerning the value-chain based matching grant it presented increases in the production, produce quality, unit price and uses of casual labor of the coffee farmers’ cooperatives. This ICR takes cognizance of this TIP data, but because verification of these data is challenging, for the purpose of this ICR, the more robust dataset provided by the impact assessment is used to assess PDO achievement. 73. Main Contributors of PDO: At appraisal, it was assumed that the achievement of the PDO in improved productivity and increased jobs would mainly come from two Subcomponents – the Risk Capital and TA Fund, and, the Value-Chain-based Matching Grant (C2A). Those core interventions achieved the expected results which directly led to the achievement of the PDO.

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74. C1B – Risk Capital and TA Fund: With sizeable and long-term risk capital investments (average size of US$200,000 with a 5-year term), and close to two hundreds technical assistance loans, the SME investees were able to expand production, improve sales, retain or hire workers, and raise profitability. Table 2 provides the results chain from C1B to the PDO.

Table 2: C1B – From outputs to outcomes Before

Acquisition After

Acquisition percent Change

Average annual revenue (KSh, mlln) 39.2 55.2 41 Average annual EBITDA (KSh, mlln)29 6.2 6.8 10 Average total direct employment (No) 31 39 28

Source: BPI Kenya, August 2012 75. C2A – Value chain based matching grant: The BDS provided to farmers and primary processors were wide ranging, such as training, quality enhancement, production technique improvements, crop certification, branding, pricing process improvements, market information provision, facilitation of access to credit, and product design and development (e.g. four new Kikou designs).30 Those interventions led to higher yield, more produce in top grade and increased income for farmers. Table 3 illustrates the results chain from C2A to the PDO.

Table 3: C2A – From Outputs to Outcomes – Coffee Value Chain: Before

Intervention After

Intervention percent Change

Average production (kg, mlln) 1.3 1.7 63 Average price per kg (KSh) 34 83 176 Product in top grade (percent of total produce) 32 54 90 Average casual labor used 96 171 44

Source: Deloitte Consultancy Kenya, May 2012 76. Other contributors of PDO: Other subcomponents of the Project, especially the FSDT (C1A) and the case-study-based business training and the business plan competitions (C2C), also contributed to the achievement of the project objectives. 77. C1A – Financial sector deepening: The main contribution of this subcomponent to the achievement of the PDO was the establishment and the success of the multi-donor trust FSDT (FSD Kenya). The Bank was one of the founding donors of the trust fund through the IDA financing provided under this subcomponent. In addition, the Bank participated in the provision of policy guidance to the program on a regular basis, and was a partner to the development and adoption of the key FSD Kenya medium-term strategies (the most recent was the 2011 -2015 strategy). The 2010 impact assessment of

29 EBITDA stands for Earnings before Interest, Taxes, Depreciation and Amortization. 30 Kikoys are traditional garments.

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the FSD Kenya activities in 2005 – 2010 found that the trust fund had made significant contributions to the improvement of an enabling policy and regulatory environment. The assessment report also acknowledged the program’s contributions to a shift in Kenya towards a more client-oriented market, and to the key service providers’ transformation.31 The Project’s financing contributions were mainly to the projects under the program’s inclusive growth theme, which included (but not necessarily co-financed by the Project): supply chain finance facility, skills development growth cap, Northern Kenya Investment Fund, and the Credit Information Sharing Initiative (jointly with CARE). 78. C2C – Improving opportunities and training for entrepreneurs and MSMEs: The main contribution of this subcomponent to the achievement of the PDO was: (i) the introduction of the case-study based methodology into regular university business education programs; (ii) the accumulation of local knowledge in MSME development through case study development; and (iii) the support to entrepreneurs in developing business plans acceptable to banks through the business plan competitions. 79. Achievement of the Intermediate ResultsMost of the Intermediate Result targets of the Project were reached or exceeded, contributing to the achievement of the PDO. The following table provides a snapshot of the results achieved under the core interventions against the original targets. For a complete report of the achievement of the Intermediate Results, please refer to the Datasheet, and Annex 2 of this ICR which also provided a more detailed discussion on the results achieved by component.

Table 4: Achievement of Intermediate Results – A snapshot Original Intermediate Result End-Target Achieved

C1B – SME risk capital fund and TA fund: • At least US$11.5m in loans and quasi-equity

investment to SMEs disbursed through SME risk capital fund and facilitated through targeted technical assistance, with loan loss rate below 10 percent

• US$17 million in gross loans and quasi-equity investments were extended to SMEs with a loan loss rate below 7.5 percent

C2A – Pilot value chain based matching grant: • A comprehensive supply chain strategy,

which responds to market, technical, human resource and financial needs of key players along the entire supply chain, is created for at least three sectors

• Three strategies were developed and implemented for the Coffee, the Cotton-to-Garment and the Leather value chains.

• A strategy was also developed for the Pyrethrum value chain.

• Increased subcontracting in local supply chains providing at least 50% percent increase in the level of local sourcing

• Subcontracting was practiced in cotton ginneries. Between the three beneficiary ginneries, subcontracting increased by 10 times, with 5,600 cotton farmers becoming subcontractors.

3.3 Efficiency

31 Oxford Policy Management and Center for Development Studies: FSD Kenya Impact Assessment, January 2010.

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80. NPV analysis at appraisal: At appraisal, an economic analysis was conducted. Recognizing the difficulties in applying standard economic analysis to the Project, the analysis used a 12-year timeframe, and a number of assumptions which turned out to be unrealistic since there were no existing data on risk capital investees and effects of BDS interventions under value chains in Kenya. The reference country (South Africa) for estimating the efficiency of the risk capital fund was not really a good choice due to the differences in the economic size and structure of the two countries. In general, research conducted by many international experts has proved that it is not very robust to use the traditional economic analysis methodology to quantify the monetary value of capacity building activities and policy advice.32 81. NPV analysis at ICR: For the purpose of this ICR, information on the net present value (NPV) and the internal rate of return (IRR) of the risk capital fund were collected, and proxy NPV and IRR were calculated for the value-chain based matching grant, using the same discount rate as at appraisal (14 percent), and the cash flows of the coffee value chain beneficiaries as proxy for all the value chain beneficiaries. The results are presented in the following table:

Table 5: Project Efficiency – Traditional Analysis: NPV (US$ million) IRR (%) At Appraisal At Closure At Appraisal At Closure Risk capital and TA facility 0.3 0.39 14.7 24 – 27 Value-chain based matching grant

-1.6 0.55 1.6 102

Sources: BPI Kenya, Deloitte Kenya, and ICR team calculation 82. At appraisal, a NPV and an IRR were also estimated for the other subcomponents (except for C1A), but the assumptions for the calculations were not clear. Given the fact that: (i) it is quite challenging (and can be time consuming) to quantify the benefits of training and consulting services even for the international research community; and (ii) the original Component Three was cancelled, this ICR has not done the traditional economic analysis on the benefits of the other main activities. 83. Qualitative analysis: Qualitative analysis of project efficiency has been conducted for this ICR by comparing the status before project interventions and the benefits the Project brought about. Table 6 is a snapshot of the analysis for C1A – Access to finance and C2C – Enterprise Skills. For the complete qualitative analysis, please refer to Annex 3.

Table 6: Project Efficiency – Qualitative Analysis

32 For example, the European Commission found that “Some results can be valued directly in monetary terms, others can be quantified but not valued, while others can be neither valued nor quantified without an enormous effort, which would generally not be worthwhile”. Financial and economic analysis of development projects, ECO-FIN, DG Europe Aid, 2000

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Component Before Project

After Project

Actual Financing (percent of appraisal estimate)

Actual Financing (percent of

2009 Restructuring Reallocation)

Component C1A – Improving Access to Finance:

• Existing FIs unable to provide financial products tailored to MSME needs

• An independent and well-funded trust (FSD Kenya) supported initiatives for the development of the financial service market and improved the overall access to finance indicators of Kenya

• A building society financier was turned into a top-five bank providing SME financing (Equity Bank)

• New financing products such as weather-index-based insurance and warehouse receipts finance were introduced.

50.5 50.5

Component C2C – Enterprise skills development

• MSMEs had difficulty obtaining loans as their business plans were often deemed below-standards by banks

• Follow-up interviews of the 24 winners of the first round of the BPC found that none experienced rejection by the banks and 75 percent of the

112.1 98

23


After Project




new ideas were being implemented.

• Because the event is very popular, the MOI has decided to sponsor it on a regular basis.

• Technical, vocational and educational training in Kenya was not geared with MSMEs’ practical needs

• Training now provided through case-study-based methodology, TA and BDS, as well as business plan competitions in bookkeeping, managing HR, marketing, product and design improvement, etc.

206.7 124

84. Funds utilization: The estimated project cost in foreign currency was US$22 million equivalent at appraisal, for which an IDA credit of the same size was provided. At project closure, US$15.99 million or 72.7 percent of the IDA credit was disbursed. The underutilization of the IDA credit could be characterized by both efficiency gain as well as opportunity loss. On the downside, it appears that the project design and original costing did not adequately factor in the difficulties in engaging suitable project implementing partners and the time needed to complete the detailed design and initiate the innovative solutions. The scarce IDA funding locked by the over-costing of some subcomponents could have been used to finance other projects or to enhance the implementation capacity. 85. On the upside, evidence of efficiency in utilizing the project financing can be found in the following:

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• While IDA funding was budgeted to finance the operational expenses of the Kenya SME Risk Capital Fund, the fund manager (the TIP for C1B) did not utilize the funding as they were self-sustainable.

• The same TIP was able to finance more technical assistance loans with repayments of earlier TA loans; hence the lower than expected drawdown of the IDA financing for the TA Facility. Those two “deviations” from the original design led to a savings of over US$1 million (as compared to the reallocation of the IDA financing at the 2009 project restructuring).

• While the actual average size of the value-chain-based matching grant was ten times smaller than the appraisal estimate (US$75,000 vs. US$750,000), the matching grant supported 45 projects in four value chains as compared to the design estimates of 12 projects in three value chains. This resulted in an over-utilization of the IDA financing (115.6 percent of the reallocation of the IDA financing at the 2009 project restructuring). This performance helped improve the Project’s disbursement rate.

• After the successful conclusion of the first round of case study development and business plan competition, the TIPs launched the second round of the activities. As a result, the appraisal estimates of the number of case studies (100) and competition participants (200) were exceeded (137 new case studies and 5,500 BPC participants), and the IDA credit proceeds reallocated at the 2009 project restructuring for the two activities fully utilized (98 percent for BPCs and 124 percent for case-study based business education).

86. Assessment of project efficiency: Based on the above quantitative and qualitative analysis, the project efficiency could be considered as substantial.

3.4 Justification of Overall Outcome Rating 87. Rating: The overall outcome rating is moderately satisfactory. 88. Project relevance: The project objectives were highly relevant to the strategic priorities of the GOK and the Bank at both project appraisal and closure. The project design was substantial to the achievement of the project objectives, and project implementation was also substantial in terms of achievement of the expected results. 89. Project efficacy: The Project in general achieved the expected outcomes. 90. Project efficiency: Based on the quantitative and qualitative analysis, the Project was substantial in efficiency. 91. The above factors which have been elaborated in Section 3.1 – 3.3 of this ICR, are the main justifications for a possible satisfactory rating. However, the design complexity, the implementation delays, and the less than satisfactory performance in project M&E brought down the rating to moderately satisfactory.

3.5 Overarching Themes, Other Outcomes and Impacts

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(a) Poverty Impacts, Gender Aspects, and Social Development 92. It appears the SME Risk Capital and TA Fund (C1B) brought significant benefits to female entrepreneurs and workers:

• 38 percent of the technical assistance beneficiaries were women owned SMEs; and

• 48 percent of new jobs created went to female workers (out of the total 1,030 new jobs created).

(b) Institutional Change/Strengthening 93. The Project is likely to have the following longer-term impact on the institutional development of Kenya’s MSME sector:

• The FSD Kenya program demonstrated the benefits of a market development approach, which has been copied in Kenya and other African countries (e.g. Malawi and Tanzania assessment). At the micro-level, the main institutions supported by FSD Kenya reached out to rural, female and younger clients. At the sector/meso-level, business services to retail providers were improved. At the macro-level, policy formulation became more evidence-based.33

• The quasi-equity risk capital financing model (Kenya SME Risk Capital Fund and TA Fund) introduced an alternative risk capital financing approach that is different from the traditional venture capital model and have a better chance of success in a market where investor exist options are limited especially for investments in startup or first phase growing SMEs. Because of the success in the experiment, the parent company (BPI based in South Africa) is mobilizing funds for a new East African Risk Capital Fund, and more risk capital fund managers within Kenya are seeing financing for technical assistance activities.

• The value-chain based matching grant revitalized a number of industry societies and regularized the apex committees’ activities. If maintained, the institutional strengthening would have lasting effect on improved market linkages for cash crop/leather, and primary processing MSMEs.

• The case-study based methodology is now regularly applied in the participating universities with contents on local business development cases.

• The business plan competition model that provides mentoring in business planning to entrepreneurs has been adopted by the MOI as a regular program to support MSME development in Kenya.

(c) Other Unintended Outcomes and Impacts

94. Not applicable

33 OPM & CDS: fsd Kenya Impact Assessment Summary Report, January 2010

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3.6 Summary of Findings of Beneficiary Survey and/or Stakeholder Workshops 95. The end-of-project impact assessment was conducted in May – June, 2012. Below are the excerpts of the Executive Summary of the final report (for details please refer to Annex 5 of this ICR): “Based on the findings detailed above, two key conclusions emerge from this impact study: A. The MSME Project has been successful in improving the performance of the MSMEs that received support from the TIPs included in the research:

• The project has been especially successful in boosting MSME revenue and profit. The impact on value added per worker is also positive: the different sub-components have resulted in increases ranging from 5percent to 60percent.

• The project impact on employment creation is positive. A lower estimate of the jobs created by the three researched sub-components is around 1,500.

B. Although similar services were provided to the beneficiaries of the various sub-components, some beneficiaries applied these services more efficiently to their enterprise than others and hence realized stronger growth of their performance. As can be seen the Project has had positive impact on the beneficiaries. In addition, the research allows for a number of policy recommendations to be made:

• For the non-agricultural sector, focus future financial access interventions on MSME that are more recently established, active in the service sector and/or based in Nairobi.

• Continue supporting the coffee and cotton sector, and perhaps other agricultural sectors, with a focus on farmers with an entrepreneurial attitude because these tend to make better use of the services.”

4. Assessment of Risk to Development Outcome 96. Rating: The risk to development outcome is rated as significant. 97. Government: The risk is moderate. As discussed elsewhere in this ICR, the development of MSME sector remains a high priority in the Government’s development strategy. However, the Government’s institutional capacity in implementing the strategy needs substantial enhancement. Coordination among several government agencies in charge of MSME development remains a challenge. 98. Technical: The risk is moderate. The new instrument for SME risk capital financing is well established and being copied by other fund managers. The significant benefits from tightening up market linkages have demonstrated the merits of the value-

27

chain based approach. Case-study teaching methodology for business education has been adopted. The challenge is how soon the newcomers could copy the success. 99. Institutional: The risk from interruptions in institutional and financial support is considered as significant. While the interventions under the Project are expected to have longer-term institutional impact on the MSME development (see Section 3.5), the time may be too short for the changes to take root as they became visible only in the last three years of project implementation. To sustain the progress made, the new institutions established under the Project will need continuous support, such as the innovative SME risk capital financing model and the revitalized value chain cooperatives. At the time of this ICR, no concrete steps have been adopted to provide funding and/or technical assistance to sustain longer-term institutional development. 100. Other factors: The positive factors considered include: (i) the IFC is taking the lead in the discussions on mobilizing more funding or establishment of an evergreen TA fund; (ii) the SME Risk Capital and TA Fund will continue in operation until the first quarter of 2013; (iii) the private sector SME financier (BPI International) has strong capability in raising funds to replicate the financing model; and (iv) the TIP for the value-chain based matching grant has decided to retain the project management team for 24 months while they are proactively seeking donor funding for the next round of BDS activities. More importantly, the project beneficiaries demonstrated a strong buy-in of the new approaches for enhancing their competitiveness. Based on the TIPs reports, the beneficiaries are motivated to continue to improve business planning, expand operation, or strengthening market linkages for the agriculture produce.

5. Assessment of Bank and Borrower Performance

5.1 Bank Performance

(a) Bank Performance in Ensuring Quality at Entry 101. Rating: The Bank performance in ensuring quality at entry is moderately satisfactory. 102. Project design: The Bank anchored the project design on a number of economic analyses. The project objectives and the main activities as designed were consistent with the GOK and the Bank strategies. The combined Bank/IFC task team brought the Bank’s strengths in policy dialogue and economy-wide/sector-level knowledge together with IFC’s familiarity with the market and the experience in private sector driven interventions at the firm level. As a result, a new risk capital financing model as well as international practices in enhancing value chains, grooming entrepreneurs and business education was introduced in Kenya. 103. The Bank team did not give adequate consideration to the complexity of the “integrated approach” for MSME development which mixed firm-level interventions with economy-wide policy reforms, and required multiple government agencies to coordinate the pace and priorities of their reform programs. The risks at the project level

28

were not properly identified, in particular that of the limited project management capacity and of the separation of project ownership from project management. 104. There was no QAG review on quality at entry. (b) Quality of Supervision 105. Rating: The Bank performance in project supervision is moderately satisfactory. Project supervision: The Bank took actions when major problems were identified in project implementation, including those in procurement and financial management. The ISRs reported the problems and adjusted project ratings accordingly. The replacement of the Task Team Leader at a time when the Project could clearly have benefited from a comprehensive mid-term review delayed the much needed restructuring; nevertheless the December 2009 restructuring was instrumental to the eventual achievement of the project objectives. The IFC’s SME Solution Center (SSC) and the local Global Business School Network (GBSN) center provided strong support from the field to the implementation of the SME risk capital investment subcomponent and the case study development subcomponent. The Bank team also provided technical support to the implementation of the activities under the value-chain based matching grant. The main downside factor for the performance rating was the weaknesses in the utilization of the M&E framework (see Section 2.3 on M&E for a detailed discussion). 106. The rating for Bank performance has also accounted for the fact that information of the target groups (MSMEs) was scarce before the Project; and as the second project in a quite new Bank/IFC joint program at the time of project appraisal, the project design was somewhat experimental. Some innovative delivery mechanisms, such as using private sector technical partners as project implementing entities played a critical role in the achievement of the project objectives, while others in particular the outsourcing of project management added complexity to project implementation and further weakened project M&E. 107. There was no QAG review on quality of supervision. (c) Justification of Rating for Overall Bank Performance 108. Rating: The overall Bank performance is moderately satisfactory. 109. This rating is based on the following main positive factors: (i) good uses of the sector analysis in project design; (ii) introduction of innovative approaches to address the identified MSME development bottlenecks; and (iii) generally good supervision responses to main obstacles of project implementation in particular the 2009 restructuring. The main negative factors considered include: (i) project complexity, and (ii) lack of effective uses of the results frameworks and proactive actions to improve the M&E arrangements. 5.2 Borrower Performance

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(a) Government Performance 110. Rating: The Government performance is moderately satisfactory. 111. Overall Government commitment: The GOK remained committed to the objectives of the Project throughout the project design and implementation phases. Although the end-2007/early-2008 political crisis affected project implementation, the turmoil did not last long. Overall, the political and social environment was stable during the project implementation period. 112. Main Government counterpart: The main counterpart was the Ministry of Industrialization. The Ministry’s project management capacity was quite limited which affected the timeliness and effectiveness of coordination, guidance, problem solving and project M&E. The problem was partially addressed by increased support to MOI capacity building after the 2009 restructuring, which was strongly endorsed by the MOI. 113. (b) Implementing Agency or Agencies Performance Rating: The implementing agency performance is moderate satisfactory. 114. Project manager: The Project outsourced the management of procurement and financial management processes, as well as project M&E to the PMC. The PMC’s performance is considered as moderately unsatisfactory (e.g. for project M&E), which has been factored into the rating for the agencies performance. 115. Implementing entities: The Project adopted an innovative approach towards implementation arrangement. It engaged five Technical Implementing Partners (TIPs) to implement the main activities, making them autonomous in designing and implementing the activities. For the purpose of this ICR, those TIPs are considered as implementing agencies, together with the two government task forces for the training levy scheme reform and the original Component Three. 116. The performance of the TIPs for C1B, C2A and C2C were satisfactory. The TIP for the Risk Capital and TA Fund (C1B) was engaged two years after the project approval in December 2006. By the end of the Project, the TIP had successfully introduced a new risk capital financing model in Kenya. The TIP for the value-chain based matching grant (C2A) was tasked with multi-facet responsibilities. In addition to designing and managing the matching grant, the TIP successfully carried out the many tasks covering four value chains (Coffee, Cotton to Garments, Pyrethrum and Leather) in all the regions of the country. The TIP for the case-study-based business education (C2C) completed the planned activity in time and took the initiative to launch another round of case study development after the first round was successfully concluded. The second round included a train-the-trainers program which broadened the outreach. The TIP for the business plan competition (C2C) managed to conduct two rounds of competition despite the fact that project implementation under this subcomponent started in the last two years of project implementation.

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117. The performance of the TIP for C1A was also satisfactory, given the broad achievement of the FSD Kenya program, although the relevant intermediate result was only partially achieved. The performance of the task force for the training levy scheme was moderately satisfactory due to the long delays in project implementation and the less than fully satisfactory result. The performance of the task force for the dropped original Component Three is not rated. (c) Justification of Rating for Overall Borrower Performance 118. Rating: The overall Borrower performance is moderately satisfactory. 119. This rating takes into consideration: (i) the continuous Government commitment to the objectives of the Project; (ii) the efforts made by the main project owner/counterpart in managing the complex project despite the capacity limitations; and (iii) the satisfactory performance of the TIPs. Factors affecting a would-be higher rating include: prolonged weak institutional capacity in project management, delays in timely budgeting for, and requesting for MOF funding of, project activities, and the moderately unsatisfactory performance of the PMC.

6. Lessons Learned 120. Several important lessons are learnt from this experimental joint Bank/IFC operation.

i. Innovations can succeed under Bank financed projects, if the environment for innovations is favorable (like in Kenya), and the implementing entities know the local market well and are highly motivated (the TIPs under the project were either locally incorporated international firms, or local consultants teamed up with international developmental partners).

ii. Details are important in project design and supervision. Unlike general policy dialogues or the analytical work, investment project design and supervision require attention be paid to implementation details, such as the differences between the procurement and payments procedures of the main players (e.g., between the GOK and the FSD Kenya); the contracting terms (e.g. for the PMC); or the capacity and financing requirements for a complex project M&E. Should this type of detail in project implementation have been factored into the design of the Project or addressed in a timely manner during project supervision, the Project could have achieved more in supporting the MSME development in Kenya.

iii. Better approach is needed for joint IDA-IFC operations. Joint IDA-IFC operations can bring together the strengths of the two institutions in particular for interventions at the firm level. On the other hand, IFC’s instruments are more costumed to project management by private sector entities, while the overall responsibility of IDA-financed projects is always vested in the government. For operations which finance IFC-type interventions, an approach needs to be developed to address, among others, the challenges in transferring IDA funding

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through the government and the project owner to the private sector implementing agencies.

iv. M&E design should factor in the cost and capacity requirement. Should the implications of the Results Framework for the socio-economic analysis capacity of the project entities have been factored into the project design, adequate financing and capacity building could have been provided to enhance the utilization of the Results Framework; or alternatively, a more cost effective approach adopted.

v. Standard economic analysis methodology may not be universally applicable pending the nature of the main interventions of a project. For policy reform and capacity building technical assistance projects, quantification of project benefits in terms of NPVs, ERRs or IRRS will not be very helpful to gauge project efficiency. More effort should be made to qualitative analysis of project benefits.

7. Comments on Issues Raised by Borrower/Implementing Agencies/Partners (a) Borrower/implementing agencies 121. The MOI as the project owner and the main government counterpart provided a review of the Project through the responses to an ICR questionnaire. The feedback is broadly in line with the findings of this ICR. The Government was satisfied with the results of the Project and was confident that the results would be sustained given the favorable policy environment and the institutional development achieved under the Project. Main weaknesses identified include a) the project complexity (the Project was like a multi-project program); b) the weak principal-agent relation with the private sector project management contractor (the PMC acted for a while as if it was that firm’s project); c) the challenges in reconciling government procedures with those of the Project (it was difficult to make timely payments to the FSD Kenya through the Government’s transaction-based procedure); and d) the lack of capacity building support to the project owner. 122. The ICR team agrees to those government views. The draft ICR has incorporated the feedback of the Ministry of Industrialization (the main counterpart), and the final draft has been shared with the MOI. No further comments are received. For the details of the Government’s feedback, please refer to Annex 6 of the ICR. (b) Cofinanciers 123. The was no co-financing of the Project. (c) Other partners and stakeholders 124. The IFC’s comments have been incorporated in the ICR, which are related to the results of the SME Risk Capital Fund and TA Facility, and the lessons learnt from their engagement in the provision of technical assistance to the other fund managers. In general, the IFC as an investor was satisfied with the investment results of the SME Risk Capital Fund. It was recognized that the TIP’s initiative to make the technical assistant

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funding an interest-free loan rather than a grant might be a factor to the effective uses of the support in developing the investees’ capacity, e.g. in finance and accounting and human resource management. 125. The main design weakness identified by the IFC was related to the technical assistance to other fund managers. The design did not factor in the need to first establish and fund those funds (other than the Kenya SME Risk Capital Fund) before technical assistance could be provided to managers of those funds. Another omission identified was the time needed for the other fund managers to adopt the model of combining risk capital investment with technical support in capacity building. According to the IFC, towards the end of the Project, the market became much more interested in the model although there was little time left to utilize the IDA financing allocated to the relevant activity.

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Annex 1. Project Costs and Financing

(a) Project Cost by Component (in USD Million equivalent)

Components Appraisal

Estimate (USD millions)

Restructuring Estimate (USD

million)

Actual/Latest Estimate (USD

million)

Percentage of Appraisal

Percentage of 2009

Restructuring Component 1 – Access to Finance 10.50 9.50 2.57 24.5 27.15

C1A – financial Sector Deepening 4.00 4.00 2.02 50.5 50.5

C1B (i) – SME Risk Capital Fund and TA Fund

2.50 1.50 0.41 16.4 27.3

C1B (ii) – Other Fund Managers TA fund

4.00 4.00 0.14 3.5 3.5

Component 2 – Strengthening Enterprise Skills and Market Linkages

6.50 8.10 9.20 141.5 113.6

C2A – Pilot Value Chain Based Matching Grant Program

4.00 5.00 5.78 144.5 115.6

C2B – Restructuring Industrial Training Levy Scheme

0.50 0.50 0.61 122.0 122.0

C2C (i) – Business Plan Competition 1.40 1.60 1.57 112.1 98.1

C2C (ii) - GBSN 0.60 1.00 1.24 206.7 124.0 Component 3 (Original) – Improving the Business Environment

2.00 0.45 0.50 25 111.1

Component 3 (2010 – 2012) – Institutional Capacity Building and Project Management

2.50* 3.45 3.39 135.6 98.3

C3 - Institutional Capacity Building 1.00 n.a. 1.22 122.0 n.a.

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Components Appraisal

Estimate (USD millions)

Restructuring Estimate (USD

million)

Actual/Latest Estimate (USD

million)


Percentage of 2009

Restructuring and M&E C3 - Private PMC 1.50 n.a. 2.16 143.0 n.a. Component 4 (Original) -

(Merged with new C3)


(Merged with new C3) n.a. n.a.

C4A – Institutional Capacity Building and M&E




C4B – Private PMC




Total Baseline Cost 21.50 21.50 15.66 72.8 72.8

Unallocated 0.50 0.50 0.33 66.0 66.0 Physical Contingencies 0.00 0.00 0.00 0.00 0.00

Price Contingencies 0.00 0.00 0.00 0.00 0.00

Total Project Costs 22.00 22.00 15.99 72.7 72.7

Front-end fee PPF 0.00 0.00 0.00 0.00 0.00 Front-end fee IBRD 0.00 0.00 0.00 0.00 0.00

Total IDA Financing Required

22.00 22.00 15.99 72.7 72.7

Original financing cancelled 6.01 27.3 n.a.

(b) Financing

Source of Funds Type of Cofinancing

Appraisal Estimate

(USD millions)

Actual/Latest Estimate

(USD million)


Borrower n.a. 0.5 0.87 174.0 International Development

Association (IDA) n.a. 22.00 15.99 72.7

Note: Total disbursement at project closure 16.88 Balance of Special Account before project account closure (0.89)

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Annex 2. Outputs by Component Output Summary: Most of the outputs planned at appraisal or the 2009 project restructuring were delivered. Below is a summary of the main outputs by component:

Anx2-Table 1: Main outputs delivered: Component Main Output Implementing

Entity C1A – Financial Sector Deepening

• 18 FSD Kenya projects in bank portfolio strengthening and new banking products development

FSD Kenya

C1B (i) – SME Risk Capital Fund and TA Fund

• 98 new instrument investments to support SME startup and first time expansion

• 175 TA loans

BPI Kenya

C1B (ii) – Other Fund Managers TA fund

• 4 technical assistance loans to two fund managers

IFC

C2A – Pilot Value Chain Based Matching Grant Program

• 4 sector strategies • 45 pilot projects • Regular stakeholder forum

consultations • Numerous training activities

Deloitte Consultancy, Kenya

C2B – Restructuring Industrial Training Levy Scheme

• A report on the restructuring strategy and implementation plan

Government task force (Directorate of Industrial Training, MOI and Ministry of Education)

C2C (i) – Business Plan Competition

• Over 5,500 applicants • 2 rounds of completion

Kenya Institute of Management

C2C (ii) - GBSN • 137 local business case studies developed

• Case-study-based instruction routinely used in executive training programs of the participating universities

GBSN Kenya Center

Sources: PMC and TIPs reports In addition, under the C2B – Training Levy Regime Reforms, a consultant report with recommendations on the needed reforms was delivered with delays. The original Component Three produced a consultant report before it was cancelled. The main activity of Component Three after the 2009 restructuring was the financing of the PMC contract. The PMC, on behalf of the MOI, managed: (i) the main consultant selection processes; (ii) the financial management including the disbursement processes; and (iii) the M&E. The required outputs in those areas were delivered, such as: (i) the

36

completion of the procurement processes; (ii) the extension of payments to TIPs; (iii) and the M&E reports. Other outputs of the component included the operational audits and the baseline and impact assessment reports, as well as the project communication materials after the 2009 restructuring strengthened project communication. The capacity building activities for the MOI did not have detailed implementation plan until the last phase of the Project, and were not carried out due to the lack of implementation time. Results Highlight: Financial Sector Deepening Trust (C1A): The subcomponent co-financed 18 FSD Kenya projects. FSD Kenya reported that seven such projects had met their goals. Among those successful FSD Kenya interventions, an index-based weather insurance project enabled 3,279 farmers to buy insurance product covering in total KShs160 million assets; and a warehouse receipts system was established. The TA in portfolio management for Equity Bank helped to turn a building society into a top-five bank in Kenya. Based on the available information on 15 co-financed projects, the target of this subcomponent (at least 70 percent of financial institution beneficiaries meet or exceed business targets) was partially met (46 percent). On the other hand, the FSD Kenya in general achieved good results, as validated by the 2010 program impact assessment (see Table 2 below for details). Two out of the five regulated MFIs received substantial support from the FSD Kenya program regarding the new MFI regulations (approved during the project implementation period). Most SACCOS became licensed. As a partner to the multi-donor program, the Bank contributed to that achievement through policy guidance and strategy development, thanks to the financing vehicle provided by the Project.

Anx2 – Table 2: FSD Kenya performance up to 2010: FSD Kenya Target Indicator Status

Increase in the proportion of adult population using services of formal institutions

29% Target reached

Increase in the number of accounts in the financial sector

5.7 million Target reached

Reduction in the number of financially excluded adult population

30% Target reached

Increase in the credit to the private sector as a percent of GDP

30% Target reached

Reduction in the interest rate spread < 6% Target not reached Source: FSD Kenya Strategy Brief 2011-2015 Risk capital and TA fund (C1B): The subcomponent met the objective to introduce new instruments for risk capital investments to alleviate SME’s funding difficulties (see the Table below for details). US$17 million were provided in gross loans and quasi-equity investments to MSMEs investees in less than five years. The investment portfolio’s loss was low (7.5 percent). The TA facility provided non-interest loans to help the investees to enhance bookkeeping, HR management and marketing for example. The relatively low cost and long term funding coupled with capacity building TA enabled close to 100 entrepreneurs to start up or expand business. The targets of the subcomponent (at least

37

US$11.5 million in investments at a loan loss rate of less than 10 percent) were largely met.

Anx2 – Table 3: New Instrument of Kenya BPI SME Risk Capital Fund: Local market conditions: Risk capital fund actual: Sizeable risk capital not available to SMEs Average US$200,000 Short term loans unable to meet SMEs’ capital investment needs

60 months term for 90% of the investees

High collateral to loan rate (close to 100%) not affordable to SMEs

Average 63%

Prime loan rate not available to SMEs (19% - 23%)

19%

Source: BPI Kenya, August 2012 The TA fund for other fund managers (an activity of the C1B subcomponent) did not take off until 2009 – 2010.34 However, it appears the success of the risk capital fund under the Project was catalytic in creating a risk capital financing market in Kenya, as more investors entered the market towards the last phase of project implementation and four TA supports were provided to two other fund managers under the subcomponent. Value-chain based matching grant (C2A): This subcomponent provided badly needed business development services to farmers and primary processing workshops (e.g. millers, ginneries, weavers, and hike and skin handlers) at a cost sharing basis (1:1) through 45 pilot projects in more than six years of project implementation. Those pilots were guided by four value chain strategies. Subcontracting was used under the cotton-to-garment value chain, where subcontracting increased by more than 10 times.35 Implementation under the pyrethrum value chain was delayed due to delayed liberalization of the sector. Implementation under the leather sector started in 2011 – 2012 and it is too soon to report verifiable results. The subcomponent’s targets (3 value chain strategies and 50percent increase in subcontracting) were exceeded (4 value chain strategies and over 10 times increases in subcontracting). In addition to those results explicitly stated in the project Results Framework, the subcomponent achieved a number of value chain strategic targets in particular under the coffee and cotton-to-garment value chains, for example:

• Coffee value chain - Payment lag to farmers was reduced from 9-12 months to 14 days by most of the beneficiary millers. Share of top grade coffee of total produce increased by 90 percent after project interventions.

• Cotton value chain - A cotton-pricing model improved transparency in determining minimum price.

34 This activity was implemented by the IFC and the delays were due to the time taken to foster other fund managers and raise investments for new SME funds. 35 Data were available on three ginneries and two of them substantially increased subcontracting with cotton farmers.

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Training levy scheme restructuring (C2B): This subcomponent produced a study on the reforms of the levy scheme although there were delays due to some consultant contracting issues. While the consultant deliverable was delayed, the Government amended the relevant law. Given the fact that the consultant report was accepted by the government task force, the target of this subcomponent (agreement on training levy scheme, legislation and implementation plan) was considered as largely met. Case-study based business education (C2C): Under this subcomponent 164 case studies were developed which covered a variety of subject matters, e.g. marketing solutions, HR management, business startup and organizational strategies. The cases were considered as a valuable pool of local knowledge and experience for MSME development. Of the three participating universities, two reported good retention rate of the staff trained and all three were providing case-study based courses at their executive training programs. After the 2009 project restructuring, the local partner of the GBSN initiated a second round of case study development, which introduced a train-the- trainer aspect that broadened the scope of the original sub-component and increased its outreach and sustainability. This local-driven second round was a good step towards more effective business education. The subcomponent was the first main activity of the Project to be initiated (in 2004), and met or exceeded the original targets (case-based instruction is routinely used and 100 new business case studies introduced). Business plan competition (C2C): This subcomponent delivered two rounds of competitions with a total participation of over 5,500 entrepreneurs. The first round of the competition produced 24 winners with the help of international experts. Follow-up interviews of the 24 entrepreneurs found that none experienced rejection by the banks and 75 percent of the new ideas were being implemented. Building on the success of the first round, a local-driven second round resulted in more winning business plans of similar quality. Although the implementation of this subcomponent started only in 2008 (almost four years later than planned), the results exceeded the original targets (at least 200 eligible entrepreneurs participate in competition).

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Annex 3. Economic and Financial Analysis Quantitative analysis: At appraisal, an economic analysis was conducted on a 12-year forecast timeframe. The analysis assumed that: (i) impact would start to be felt during the project implementation; but (ii) the maximum impact would be reached after project completion. The estimated NPV of the overall project in five years was minus US$6.2 million and US$19.8 million in 12 years. The estimated IRR in the same periods was 7.2 percent and 26.7 percent, respectively. The economic analysis at appraisal, however, acknowledged the limitations of the exercise: “lack of reliable time series data required for an appropriate calibration, difficulty in finding the appropriate shadow prices, and difficulty in precisely quantifying the economic benefits and welfare gains or losses especially resulting from capacity building and institutional development.” As discussed in Section 3.3 of this ICR, the economic analysis at appraisal was not necessarily robust due to the challenges in data availability and reliability already identified at the time. In particular, the comparable country used for the calculation of the job creation target was not appropriate, given the differences in the size and sector distribution of MSMEs between Kenya (the project location) and South Africa (the benchmark country); as well as the difference in the life of the risk capital model of the two countries (over 15 years in South Africa and less than 1 year in Kenya). At project closure, the Kenya SME Risk Capital Fund provided the NPV and the IRR of the Fund’s investments, which are reproduced in the following table.

Anx3 – Table 1: Kenya SME Risk Capital Fund efficiency: Total investor drawdowns (KSh): (740,662,577) Total repayments (KSh): 836,470,120 NET repayment (KSh): 95,807,543 NPV 8yrs at 14 percent (KSh): 33,586,202 NPV 8yrs at 14 percent (US$): 394,528 IRR (percentage): 24 – 27

Source: Kenya SME Risk Capital Fund/BPI International In addition, for the sake of the ICR, a quantitative analysis exercise has been conducted to estimate the end-project NPV and IRR of the value-chain based matching grant. As at appraisal, the results of the interventions under the coffee value chain are used as a proxy for the interventions under all the four value chains. The results are as follows:

Anx3 – Table 2: Value-chain Based MG Efficiency: Years Incremental cash flows (US$) 2007 (2,194,447) 2008 2,152,114 2009 2,152,114 2010 3,304,302 2011 3,304,302

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Economic Analysis NPV (US$, 14 percent): 5,536,076 IRR (percentage) 102

Source: Deloitte Kenya and staff own estimates The parameters used for the calculation of the NPV and the IRR of the matching grant interventions are as follows:

• Total incremental sales of 10 coffee farmers’ cooperative societies (US$11,521,884)

• Total matching grants to the 10 cooperatives (US$1,021,092) • Total matching funding provided by the 10 cooperatives at a 1:1 ratio

(US$1,021,092) • Number of the incremental full-time-equivalent labor used by the 10 cooperatives

(483) • Monthly unskilled worker wage in the rural sector, KOG regulation as of May

2012 (KSh 4,258 or US$51 at an exchange rate of 1USD=84KSh) • Matching grant administrative cost for the coffee value chain (US$467,316)

No quantitative analysis is conducted for the other main interventions out of a concern for the robustness of a would-be NPV/IRR analysis, and hence the meaningfulness of the exercise without reliable and clearly attributable data. As a matter of fact, the good monetary value achieved through the matching grant interventions under the coffee value chain should also be attributed to rapidly increasing coffee price in the international market during the intervention years. Qualitative analysis: A qualitative analysis has been conducted at ICR, which compares the market conditions before the Project and the benefits brought by the main interventions. The actual utilization of IDA financing is then compared with appraisal estimates to provide a snapshot of the project efficiency. Details of the qualitative analysis are presented in the following table:

Anx3 – Table 3: Project efficiency: A before and after analysis: Component Before

Project After

Project Actual

Financing (percent of appraisal estimate)



Component One – Improving access to finance:

• Existing FIs unable to provide financial products tailored to MSME needs

• An independent and well-funded trust (FSD Kenya) supported initiatives for the development of the financial

50.5 50.5

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After Project




service market and improved the overall access to finance indicators of Kenya

• A building society financier was turned into a top-five bank providing SME financing (Equity Bank)

• New financing products such as weather-index-based insurance and warehouse receipts finance were introduced.

• Risk capital financing was not available to most of SMEs

• A new risk capital financing model was successfully introduced.

• The investment plus TA support model is being copied by other fund managers.

16.4 (TA financing only, as the investment fund was financed by IFC and 4-5 private sector investors)

27

Component Two – Enterprise skills and market linkages

• Mutual support systems and value chain linkages were extremely weak

• At least 2 value chains (coffee and cotton-to-garment) were revitalized with good results for farmers and primary processors at the low end of the value chains.

144.5 115.6

• MSMEs had difficulty obtaining

• Follow-up interviews of the 24 winners of

112.1 98

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After Project




loans as their business plans were often deemed below-standards by banks

the first round of the BPC found that none experienced rejection by the banks and 75 percent of the new ideas were being implemented.

• Because the event is very popular, the MOI has decided to sponsor it on a regular basis.

• Technical, vocational and educational training in Kenya was not geared with MSMEs’ practical needs

• Training were provided through case-study-based methodology, TA and BDS, as well as business plan competitions in bookkeeping, managing HR, marketing, product and design improvement, etc.

206.7 124

The underutilization of the IDA financing of the technical assistance for other fund managers (under C1B) is an opportunity lost when evaluated against the original targets. A sizeable portion of the credit proceeds (US$4 million) was allocated to the TA for “other fund managers”. However, only about four percent of the allocation was eventually utilized. It appears that the cost estimate of this activity at appraisal did not take into consideration the fact that there were no existing risk capital fund managers other than the Kenya SME Risk Capital Fund in Kenya in 2004 – 2005. It took the IFC a while to mobilize funding for other risk capital investment funds, and convince them of the benefits of the investment plus TA model. Another US$ 4 million was allocated to finance FSD Kenya projects, but only half of the proceeds were utilized. Based on the

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feedback of the MOI and the TIP for the subcomponent at project closure, the main factor in the underutilization was the difficulty to reconcile the government payments procedures with the non-profit institution’s bookkeeping practice.36 The underutilization of the IDA financing for the risk capital subcomponent’s TA fund on the other hand, can be considered as an efficiency gain. The fund manager volunteered not to use the IDA funding to finance the operational expenses as they were self-sustainable. At appraisal, there was no requirement to make the TA to the risk capital fund investees as a loan. However, the fund manager (the TIP) adopted the approach to extend interest-free TA loans to their investees. This could be a main reason for the effective uses of the TA funding (e.g. for the restructuring of an investment when it became delinquent). The repaid proceeds were than extended as new rounds of TA loans. Before the project closure, the Kenya SME Risk Capital Fund received US$391,719 from the Project as the TA funding, but had extended TA loans worth of US$410,000.37 Conclusion: Based on the above quantitative and qualitative analysis, the project efficiency appears to be substantial.

36 The Government’s payments procedures were transaction based, while the FSD Kenya did not separate financing sources. A “performance-based” solution was adopted in 2006 – 2007, which used the FSD Kenya’s business plan as the basis for IDA financing. The MOI reported that the business plans were too generic for them to identify the FSD Kenya projects eligible for IDA financing under the Project. 37 A final disbursement of US$179,222 brought the total utilization of the IDA financing for the TA Facility to 38 percent of the allocation.

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Annex 4. Bank Lending and Implementation Support/Supervision Processes

(a) Task Team members

Names Title Unit Responsibility/ Specialty

Lending Frank Ajilbola Ajilore Resident Representative CAFW7 Abayomi A. Alawode Practice Manager FFSDR Fatiha Amar Program Assistant MNSSD Simon Andrews Regional Manager CEAR3

Vyjayanti Tharmaratnam Desai Senior Private Sector Develop. Specialist CICIS Task Team Leader

Pascale Helene Dubois Evaluation and Suspension Officer OES Rogati Anael Kayani Consultant AFTPE Andrei Mikhnev Senior Private Sector Developm CICBR Ndiritu Muriithi Operations Officer CAFAF

Ismail Samji Senior Investment Officer CGFTG - HIS

William F. Steel Consultant ENVGC Dileep M. Wagle Consultant AFTFP Dahir Elmi Warsame Senior Procurement Specialist AFTPE

Supervision/ICR Yira J. Mascaro Lead Financial Sector Specialist AFTFE Task Team Leader Henry Amena Amuguni Sr Financial Management Specialist AFTME Matilde Bordon Senior Investment Policy Officer CICIN Maria Elizabeth Carneiro Finance Assistant CTRLA Irene F. Chacon Operations Analyst AFTFW Yeshareg Dagne Program Assistant AFTFE Gisela Durand Consultant LCSPS Eme Essien Manager CAFAF Sachin Gathani Consultant AFTFE John Michael Graglimpact assessment Projects Officer CAFAF

Caroline Kidiavayi Program Assistant AFCE2

Yasuo Konishi Consultant EASRE - HIS

Chaoying Liu Results Measurement Specialist

CDIMPACT

ASSESSMENTS

Nora McGuire-Wien Consultant AFTPS-HIS

Andrei Mikhnev Senior Private Sector Developm CICBR Joel Buku Munyori Procurement Specialist AFTPE Connie Musabi Muteshi Consultant CAFIC Josphine Kabura Ngigi Financial Management Specialist AFTME

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Steven M. Mukaindo Legal Counsel LGAM Christian Johannes Nieuwoudt Financial Analyst CTRLA

Kevin Njiraini Principal Investment Officer CF2S6 Ganesh Rasagam Lead Private Sector Development AFTFE Luba Shara Senior Monitoring & Evaluation CAFAF Dimitri Stoelinga Consultant CICBR Dileep M. Wagle Consultant AFTFP Dahir Elmi Warsame Senior Procurement Specialist AFTPE Moses Sabuni Wasike Sr Financial Management Specialist OPSOR Xiaofeng Hua Senior Financial Sector Specialist AFTFE ICR author

(b) Staff Time and Cost

Stage of Project Cycle Staff Time and Cost (Bank Budget Only)

No. of staff weeks USD Thousands (including travel and consultant costs)

Lending FY04 44.02 205.22 FY05 4.00 26.87 FY06 0 0.00 FY07 0 0.00 FY08 0 0.00

Total: 48.02 232.09 Supervision/ICR

FY04 0 0.00 FY05 44.27 128.89 FY06 42.62 127.63 FY07 37.59 120.81 FY08 30.50 139.98

FY09 35.85 170.25 FY10 16.14 129.00 FY11 15.09 90.65 FY12 23.00 133.38 FY13 7.86 40.82

Total: 252.92 1081.41

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Annex 5. Beneficiary Survey Results The Project design included an Impact Assessment and several Operational Audits. Below are the excerpts from the Executive Summary of the final Impact Assessment Report: Quote: “For the FSD project sub-component there is positive growth in employment between 2008 and 2011 from 5,45 to 7,6 FTEs per MSME, i.e. a 39percent increase. Based on the number of MSMEs that were researched this implies that 170 jobs were created. Since only a fraction of the MSMEs supported by Equity were included in this study the actual number of jobs created is likely to be substantial higher. Furthermore, there is an increase in both revenue and profitability of the MSMEs that received loans from Equity Bank. Average turnover increases from KSh. 8 million in the year before the loan KSh. 15 million in 2011. Average profit per MSME increases from KSh 1.2 million in the year before the loan to KSh 3.7 million in 2011. These figures translate to a 7percent increase in value added per worker, going from KSh374.000 per FTE in 2008 to KSh400.000 per FTE in 2011. 1.2 Risk Capital Fund For the risk capital sub-component we a find positive growth in employment, from an average of 40 FTEs per MSME in 2009 to 50 FTEs per MSMEs in 2011, a 25percent increase. Based on the number of MSMEs that were researched this implies that 290 jobs were created. Furthermore, profitability amongst MSMEs that received loans and/or equity through BPI also increased. Between 2009 and 2011 profits went up with 79percent, from circa KSh 4,7 million to KSh 8,4 million per MSME. Furthermore, revenue went up from KSh 45 million to KSh 60 million per MSME, a 33percent increase. The value added per worker from went from KSh 300,000 to KSh 477,000, a 60percent increase. 1.3 Value Chain Matching Grant For the coffee farmers targeted by the value chain matching grant sub-component (i.e. the treatment group), crop yield increased by 210percent between 2007 and 2011, which is a larger increase than for the farmers not targeted (i.e. the control group). Furthermore, crop revenue went up from KSh 6500 in 2007 to KSh 42.500 in 2011, again a larger increase for the control group. Expenditures on agricultural inputs went with 35percent for the treatment group versus a decrease for the control group. Finally, the number of seasonal employees and the annual number of days of labor per seasonal employee went up with 35percent and 60percent respectively for the control group, versus a reduction for both these indicators for the treatment group. For the cotton sector, crop yields and crop revenue in the treatment group increase with 40percent and 110percent respectively which is a smaller increase than for the control group. Expenses on inputs go down with 70percent for the treatment group, which is larger reduction than for the control group. Finally the number of seasonal employees and

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the number of days worked per seasonal employee go up substantially for both treatment and control group, and the increase is larger for the treatment group. For the joint sample of coffee and cotton farmers, seasonal employment went up by 0,8 FTEs per farm. For the 1190 farmers were researched this comes down to the creation of at least 965 FTEs of seasonal labor. Triodos Facet MSME Competitiveness Project Impact Evaluation 2 Furthermore, the value added per farm increases with 195percent for the control group, from KSh 4.100 to KSh 12.100, and with 320percent for the treatment group, from KSh 6.200 to KSh 26.100.” “Based on the findings detailed above, two key conclusions emerge from this impact study: 1. The MSME Project has been successful in improving the performance of the MSMEs that received support from the TIPs included in the research: a. The project has been especially successful in boosting MSME revenue and profit. The impact on value added per worker is also positive: the different sub-components have resulted in increases ranging from 5percent to 60percent. b. The project impact on employment creation is positive. A lower estimate of the jobs created by the three researched sub-components in around 1500. 2. Although similar services were provided to the beneficiaries of the various sub-components, some beneficiaries applied these services more efficiently to their enterprise than others and hence realized stronger growth of their performance. As can be seen the project has had positive impact on the beneficiaries. In addition, the research allows for a number of policy recommendations to be made: 1. For the non-agricultural sector, focus future financial access interventions on MSME that are more recently established, active in the service sector and/or based in Nairobi. 2. Continue supporting the coffee and cotton sector, and perhaps other agricultural sectors, with a focus on farmers with an entrepreneurial attitude because these tend to make better use of the services.” Unquote

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Annex 6. Summary of Borrower's ICR and/or Comments on Draft ICR The Borrower has not prepared a standalone post evaluation of the Project. The Ministry of Industrialization (MOI), as the government owner of the Project, has provided responses to an ICR questionnaire used by the ICR author to collect feedback from the project entities.38 The ICR has taken into consideration the feedback, and is shared with the MOI. No further comments have been received. The following are the summary of MOI’s feedback to the questionnaire. Question No. 1 - Project Relevance √ Yes, I agree (that the Project adequately addressed the main challenges faced by Kenya’s MSMEs).

• Access to finance: There has considerable systemic change and development of products targeting the MSME sector. This has been as a result of the success demonstrated by Equity Bank that received technical assistance from the Financial Sector Deepening sub-component of the Project. Similarly, there has been increased access to formal financial institutions, including agency banking and mobile banking resulting into an increased percentage of Kenyans having access to formal financial services. The banking Industry has grown and 43 commercial banks, 1 mortgage finance company, 6 deposit taking microfinance institutions, 2 credit reference bureaus, 3 representative offices of foreign banks and 124 foreign exchange bureaus.

• Stronger market linkages: Value chain approach has now been adopted in the development of sectors including the concept of undertaking value chain studies. Based on the experiences of the MSME Project’s value chain approach in the cotton, coffee, leather, and pyrethrum value chains, 20 value chain studies have been undertaken out of which 6 have been prioritized for cluster development and implementation. These include the ICT, Fish, Beef, Cut-flowers, Tourism, and Horticulture.

Question No. 2 - Project Complexity: √Yes, I agree (that the MSME project scope and structure was appropriate for addressing the main sector issues) but the design of the Project scope had shortcomings.

• Too many project sub-components: Each of the sub-components was equivalent to an individual project and having many implementing partners made it very complex. Further, some inherent implementation challenges, that included the

38 MOI feedback to the KE MSME ICR Questionnaire, December 28, 2012

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need for working together by competing private sector institutions affected smooth implementation.

• Ownership: Whereas the project was being coordinated by the MoI, the Ministry was not directly involved in administering the project funds. This at times made the TIPs feel more answerable to the Project Management Contractor than the Ministry thereby affecting effective M & E initiatives. Similarly, the respective project implementers were mainly indicating the activities as being undertaken by their respective institutions thereby denying the project, and by extension the Ministry, visibility.

• Project Management Contract: This concept was new in Government implemented projects and this concept was not fully owned by the Kenya Government. The norm is to create a Project Management Unit within the implementing Ministry and then employ experts from the private sector during the project implementation period.

• Project Awareness: The project activities were mainly demand driven. This meant that beneficiaries must approach the implementers for participation. However, with limited awareness of the project, it took time for beneficiaries to start benefitting leading to slow uptake of project funds. Similarly, due to project complexity, and a high turnover of MoI Project Secretariat staff and Project Steering Committee members, new project staff and PSC members spent a lot of time understanding the project thereby affecting the oversight role and project implementation guidance.

Question No. 3 – Components Design √Yes, I agree (that the design of the three components clearly defined main activities which were closely related to the project objectives) but the components (or individual component/subcomponent) design had shortcomings.

• Access to Finance: The SME Risk Capital Fund operations are a relatively new concept in Kenya. The concept was therefore a good idea but during design, proper analysis should have undertaken on how entrepreneurs who appreciate taking loans alongside the TA Fund. Similarly, some portion of the TA funding should have been provided as seed money to act as an incentive for attracting fund managers to issue alongside their mobilized funds for TA purposes;

• Acceptability by Fund Managers: It took a lot of sensitization to encourage some Fund Managers to participate in the project. Direct benefits to the Fund Managers were limited and most of them did not want to be involved in collecting the TA loans. The perception affecting by Fund Managers was that it increased their responsibility beyond their direct control and also would also result into higher administration costs.

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• Improving Business Environment: The complexity of the project and the ‘bureaucratic design’ made the project almost irrelevant with regard to reform initiatives. In developing the project, reform areas by the respective Government agencies, such as tax reforms, licensing reforms, industrial training levy, were incorporated but were being implemented faster by the respective institutions without incorporation of findings by studies done within the project. This contributed significantly to the cancellation of component 3 – improving the Business Environment. Similarly, the restructuring of the Industrial Training Levy Scheme was almost overtaken by events as DIT developed the draft legal framework before the completion of the study.

• Consultancy Contracts: Some of the contracts for the Technical Implementing Partners were time based as opposed to lump-sum based. This made it difficult for better control and achievement of milestone (performance basis). This affected quality of implementation in some areas as the contractors were content with the long period contracts and were not challenged enough to excel in service delivery.

Question 4 - Institutional Arrangement √No, I do not agree (that the designed institutional arrangement was appropriate for effective project implementation).

• Project Steering Committee: This was to give the overall leadership role for the project. However, the members kept changing, including the Chairman (PS) and it took a long time for the new members to understand the project thereby affecting timely decision making. This also affected the momentum of the implementation of project activities and reporting structures

• Project Management Contractor: The PMC was initially slow in providing detailed performance reports. They mainly focused on financial reporting and it therefore took a long time in developing appropriate performance indicators.

• Project Management: The project being a GoK and World Bank was using both the procedures for the two institutions in procurement, financial regulation and project implementation. The PMC, being a private institution may not have been fully appraised on the government procedures and much time was taken in the learning process. Similarly, given that the PMC were running all the operations of the project, the awareness within the Ministry on the project activities and requisite procurement approvals and financial projection of project activities was limited.

• Communication and outreach component: The original design did not have this component. This resulted into low awareness and appreciation of project activities leading to low demand from targeted beneficiaries.

• Procurement issues: PWC, being a private institution had some difficulties in presenting their cases in the Ministerial Tender Committee, which is a GoK

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requirement and this delayed procurement of some technical implementers/contractors.

• Financial procedures: GoK was not directly involved on the day to day financial operations of the project and hence were not fully in the picture on cash flow requirements. These caused delays, including making provision in the Ministry’s budget for voted funds in the succeeding financial years. Several consultants had payment delays, especially towards the project closure, as uptake was significantly increased and this was not envisaged by Government Officials involved in making budgetary provisions.

Question No. 5 - Results Framework √Yes, I agree (that the design of the Results Framework was realistic, appropriate and attributable to the Project; and the methodologies for collecting and processing data were sound) but the design of the Results Framework had shortcomings.

• The PDO’s were generally broad and required “SMART’ Intermediate results indicators to monitor progress on a regular timely basis;

• The activities of the 3 components, though mutually complimentary, were generally diverse with some relating directly to the beneficiaries whereas others were indirect interventions. For instance, calculating no. of employees under the pilot value chain matching grant was difficult whereas the interventions indicated increased productivity which normally results into increased employment.

• The Project Appraisal Document should have put more emphasis on the quarterly performance reports alongside the financial monitoring reports. The envisaged baseline studies were not carried out earlier or before implementation of project activities. This posed some challenges during the Operational Audit and Impact Assessment activities of the project.

Question No. 6 - Risk Assessment √Yes, I agree (that a) the risk assessment at the time of project appraisal identified the

key risks relevant to the achievement of project objectives and project implementation; and b) the proposed risk mitigation measures were effective and adequate) but the Risk Assessment at the design phase had shortcomings.

• Private-public partnership in infancy: Suspicion between the Public and Private sector players still exists with the latter doubting the performance and reliance of their counterparts and the former looking down upon the others as inferior. Similarly, though in a project setup, the private sector implementers gave the impression to the beneficiaries that it was their project. Most beneficiaries and small service providers became aware of the role of government when the unfortunate delay in payments scenario arose.

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• Ineffective Donor Coordination: The Private Sector Development Strategy (PSDS), developed in 2006, was created to assist in creating synergies and coordinated efforts on similar project implementation. However, its implementation was not effectively carried out and hence donors still conduct their interventions independently creating overlaps. The situation is made worse by the lack of suitable mechanisms to evaluate performance of the respective development partners, especially on interventions involving system change/behavioral changes and those conducted by many players.

Question No. 7 – GoK’s Performance √No, I do not agree (that the Government’s performance at the time of project preparation and appraisal was satisfactory).

• The design of the project is unique, including aspects of financial management. All the project implementation of the various sub-components was carried out by Private Sector Players. The project design also left out participation of Government institutions, such as the Development Financial Institutions under the Access to Finance Component.

• The capacity building component for the Ministry staff was also controlled by the PMC making ownership, interest and understanding of the project implementation process averse to Ministry staff. Similarly, training activities under the project were initially not synchronized to the Ministry’s annual training requirements before this shortcoming was identified and addressed during the mid-term review process.

• There was also lack of awareness of the project implementation amongst the Ministry staff thereby limiting the integration of the project activities to the Ministry’s co-activities.

Question No. 8 – The World Bank Performance Yes, I agree (that the World Bank’s performance at the time of project preparation and appraisal was satisfactory).

• The project was a pilot, one of the 7 being implemented in different countries. The World Bank was instrumental in creating linkages, for instance, the World Bank group has been working with the Financial Sector Deepening (FSD), on the development of the financial sector in Kenya. The project’s contribution to FSD, therefore created synergies and supported MSME development alongside the financial sector development. Through linkages created within the project activities, the FSD help establish the warehouse receipting and weather insurance as financial products to support the pilot value chain matching grant activities and other agricultural related initiatives.

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• The World Bank had been supporting various other reform initiatives. This including the judiciary and legislative reform initiatives were integrated to the improving business environment component of the MSME Project. This resulted into establishing technical task forces comprising of stakeholders relevant for the Improving Business Environment component and restructuring the Industrial Training Levy Scheme that help harmonize and integrate the reform activities with MSME development.

• Support to diagnostic studies by the World Bank, such as the Value Chain Studies, was very useful in identifying the areas of intervention by the project in the respective value chains. This concept has since become a necessity for the promotion and development of industrial clusters under the Vision 2030 flagship projects in the manufacturing sector.

• The World Bank support was very instrumental to the design of the Global Business Schools Network (GBSN) and Business Partners International (BPI) Sub-components. The technical implementing partners, GBSN and BPI were already collaborating with the International Finance Corporation prior to the implementation of the MSME Project and were two institutions critical in the implementation of the respective sub-components.

• However, the proposal for the PMC as one of the institutions involved in project implementation; and the project costing for the respective project components was not very well executed despite the involvement of the World Bank in the Project Appraisal Document.

Additional comments: The project design was good, in an ideal situation, but did not factor in the prevalent conditions at the time of project implementation that included:

• Infancy in the Public Private Sector Partnership • Evaluation on ensuring ownership of the project by the various implementing

players and beneficiaries • Bureaucratic nature of some private sector institutions that delayed efficient and

effective execution of the project activities • Inadequate capacity of some of the various private sector institutions in

implementing such programs. The project, though not conventional, assisted in capacity building of private sector project implementers to enhance their skills base for effective project implementation

• High staff turnover at the various level of implementation, that includes Ministry staff, key PMC staff, restructuring of ITL consultancy consortium, change of World Bank TTLs amongst others

• Long disbursement mechanisms that facilitate flow of project funds from the World Bank to the Project Account

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• Lack of liberalization in some sectors, such as the Pyrethrum sector, where until the project closure, pyrethrum processing is still controlled by a Government institution, the Pyrethrum Board of Kenya. The project interventions had been designed to assist the sector integrates and operates in a liberalized environment.

• Lack of willingness by financial institutions to divulge information about their operations

• Lack of capacity by beneficiaries to contribute under the Pilot Value Chain Matching Grant Fund. This was prevalent in the cotton sector where the beneficiaries, especially farmers, were generally poor. The mid-term review had proposed the reduction of ratio of the matching grant to beneficiary contribution from 50-50percent to 75percent:25percent. However, this was not implemented.

• Lack of effective mechanisms to support contract farming within the various agricultural value chains. It was observed that some farmers were not faithful to the agreement with processors who provided financial support for seed and fertilizer purchase in the understanding that the produce will all be sold to the processors.

• The cyclical nature of interventions at the production level of the value chain (coffee and cotton) and synchrony with disbursement of mobilization fees was not always harmonized and this caused long implementation delays.

• The lack of readily available business development service providers in some of the remote areas of intervention by the pilot value chain providers delayed implementation.

Question No. 9 – Project Relevance √ Yes, I agree (that the project has been in line with GoK’s strategy and priorities throughout the project implementation period ).

• All the three project components being implemented are addressing strategies identified in the following Government Policy documents on SME Development: (i) Sessional Paper No. 2 of 2005 on Development of Micro and Small

Enterprises for Wealth and Employment Creation for Poverty Reduction (ii) National Industrialization Policy framework (2012-2030) (iii) Public Private Partnership Act (iv) Private Sector Development Strategy (2005 – 2012) (v) Strategy for the revitalization of the Agricultural Sector

• The Kenya Vision 2030. The vision has identified several sectors to support the development of the country into middle country status. These include, under the economic pillar: Financial services, manufacturing, wholesale and retail etc.

Question No. 10 – Achievement of the Project Development Objectives

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√Yes, I agree (that the project has achieved its PDOs). • Over 2,500 new jobs were created with several more indirect jobs created through

the value chain matching grant; local case teaching; and the Business Plan competition.

• Over US$ 17 million worth of loans disbursed with less than 7.5percent level of bad debts against PDO of US$ 11.5 million in loans and quasi-equity investment to SMEs disbursed with less than 10percent loan loss rate.

• Comprehensive value chain strategies for the cotton, coffee, leather and pyrethrum value chains were effectively identified through value chain studies leading to productivity, competitiveness, and increased incomes. Institutional framework through legal establishment of the Cotton Development Authority and the Kenya Leather Development Council was a demonstration of the effectiveness of the policy lobbing strategy developed by the respective Apex Committee’s as part of their strategic plans.

• Through initiatives of the project of engaging local business development service (BDS) providers, the various value chain beneficiaries, especially cooperatives, appreciated the role of BDS. This significantly increased the subcontracting of local service providers with some cooperatives even starting the processing of their own coffee. The project also observed the certification of cooperatives in the coffee sector through UTZ Kapeh, fair trade and other certification processes through local service providers.

• The Directorate of Industrial Training (DIT) was restructured into an autonomous institution named the National Industrial Training Authority following the enactment of the Industrial Training (Amendment) Act, 2011. The newly established Authority will among other issues be involved in assessing and collecting industrial training levy and fees.

• Over 104 case studies were developed against a targeted rate of 100 local case studies. The local case studies developed were sector based and related to specific business issues (challenges). Case based instruction and teaching has been introduced and integrated in the curriculum of the business schools of the three participating universities namely: JKUAT, Kenyatta University and Strathmore Universities. The 3 universities have come together, post project completion, and have agreed to develop local case studies based on successful business personalities. This will be undertaken through support from the respective organizations whose case studies are being developed and showcased.

• The Ministry, has post project implementation, partnered with the International Labour Organization’s Youth Enterprises Program for conducting the Business Plan Competition.

Question No. 11 – Component Results

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√Yes, I agree (that the results indicators have been met for the components) but there are shortcomings.

• The exact number of jobs was difficult to measure especially for the components that were indirectly contributing to the beneficiaries. This includes the subcomponents: FSDT; Pilot value chain matching grant (Consultancies created vis-à-vis cooperatives supported); restructuring of the industrial training levy fund; and local case teaching.

• Systemic change was observed through direct and indirect interventions such as: increased financial products to MSMEs; Credit rating; opening of branches by financial institutions and introduction of agent banking due to the results of FINACCESS (Financial Access surveys); value chain approach to sector development; increased demand for BDS services and certification of cooperative societies; creation of centres for entrepreneurial excellence for MSMEs and use local case teaching; and greater interaction between universities and MSMEs

Question No. 12 - Results Framework √Yes, I agree (that you have regularly used the framework to monitor and evaluate progress made under the project.

• Phase 2 of the project extension enhanced the results framework and revised performance indicators. This assisted in evaluating progress on a quarterly basis; and

• The project activities were mainstreamed in the Ministry’s Performance Contract and the results framework assisted in monitoring and evaluating progress.

Question No. 13 – Implementation Delays (causes) √Weakened management commitment to the Project due to changes in institutional policy and/or priorities √Delays in assigning staff to work on the Project and providing budget for the PMU/PIU and the technical teams √Changes in main staff for project management and implementation √Lack of technical capacity for implementing the Project √Unforeseen technical difficulties √Procurement regulation and procedures of the Government and/or your institution √The World Bank’s procurement guidelines and procedures √Quality of financial management and planning √Internal control problems Question No. 14 - Project Restructuring √Yes, I agree (that the restructuring was effective to the extent that the main obstacles to achieving the PDOs were dealt with and the specific implementation problems were overcome).

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• Project absorption increased significantly through increased awareness and understanding by beneficiaries. Demand for project services increased significantly;

• Reallocation of funds from slow moving sub-components to needy areas assisted in deepening initiatives started, and supporting sustainability of the interventions

• Closer collaboration between the project Secretariat and PMC. Short term World Bank consultants also assisted in monitoring. In particular, the holding of weekly project implementation status meetings between the PMC, World Bank and Project Secretariat assisted in fast tracking project implementation.

• Institutional capacity was built at the Ministry, Project Secretariat and PMC levels. Better control of World Bank procurement and financial requirements has been developed; and some technical implementing partners, such as those involved in value chain development, are considered authorities in the subject matter by other players involved in development work.

Question No. 15 – Risk Management √Yes, I agree (that risks to the MSME project have been identified and addressed on a regular basis) but there are shortcomings.

• Financial flow: The risk of project demands was not properly analyzed. Initially the absorption was low thereby affecting planning for funds to be requisitioned from the World Bank. This was then improved but again, risk of not including the required financial needs for the project in the Government budget was not envisaged.

• Awareness and Ownership: The risk of the effect of awareness and ownership on demand and service delivery was not properly evaluated. After increased awareness, demand for participation by fund managers significantly increased but deals were slow in coming after signing contracts.

Question No. 16– Project Costing and Financing Yes, I agree (that the costs involved are reasonable and the financing plan for the project is adequate) but there are shortcomings

• Allocation of funds within the sub-components was not adequately planned with Access to Finance component receiving a lot of funding against other sub-components. Re-allocation had to be done to other sub-components such as the value chain matching grant; GBSN and restructuring of the industrial Training Levy Scheme.

• Allocation for counterpart funding had to be increased midstream and at some point, its inadequacy almost resulted in delays of payments to consultants whose total payment included an allocation of counterpart funding.

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√No, we are not aware (that the estimated Net Present Value (NPV) of the MSME project at appraisal was US$19.8 million). Question No. 17 – GoK/Your Team’s Performance √Yes, I agree (that the Government’s/Your team’s performance in project implementation is satisfactory) but there are shortcomings.

• Weakened management commitment and guidance affected the Governments’ contribution to the project. The project had to hold 3 PSC sensitization retreats better understanding of the project’s objectives and complex implementation guidance by incoming/new members;

• As the project was entirely being implemented by private sector players, ownership and interest was low leading to difficulties/delays in adhering to GoK procurement procedures such as approvals from the Ministerial Tender Committee. Similarly, the accounting and auditing of the project’s activities was done separately from that of the Ministry’s activities which is normally not the case with other projects.

• Lack of understanding on the World Bank procurement and financial regulations affected project implementation. The project had difficulties in reporting and auditing of the financial statements due to the need to meet World Bank requirements and Kenya National Audit Office procedures and guidelines.

Question No. 18 – The World Bank Performance √Yes, I agree (that the Bank’s performance in project supervision is satisfactory).

• The World Bank held training sessions and workshops on its requirements for the entire Worlds Bank portfolio and provided a forum for projects to share experiences;

• The World Bank short term consultants assisted in monitoring performance and this assisted project implementation. The World Bank TTL, was posted in Kenya and this assisted in understanding requirements for ‘No Objection’ and quick processing of the same. The World Bank representatives also held various meetings with the specialists on Finance, procurement and communication. The Task Team Leader attended PSC meetings as ex-officio members and this created awareness of World Bank requirements, procedures and processes. This helped improve the level of implementation.

Question No. 19 – Project Sustainability √ Negligible to Low (the risk to the Project’s outcomes and results) Identified main risks:

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• Some activities of the pilot value chain matching grant may not be extended after the project. This is in the pyrethrum and coffee sector. These value chains do not have respective statutory bodies that bring together representatives in the various levels of the value chain such as the Cotton Development Authority and Kenya Leather Development Council.

• Discontinuity in the activities of the SME Risk Capital and TA Funds. Whereas an ‘evergreen’ was created that is currently being used by Business Partners International, it is inadequate. Other interested fund managers cannot assess the fund at BPI.

Outlines of GoK’ plan/strategy for enhancing MSME competitiveness in the next three to five years:

• The Ministry, through its field offices will continue supporting the MSMEs in provision of Business Development Services through Constituency Industrial Development Centres and SME parks. Value addition activities and through the National Industrial Development Plan, 7 sectors have been identified for development.

• The Ministry will continue with activities of increasing the productivity of the MSMEs through training in collaboration with the Productivity Centre of Kenya. Ministry institutions, such as Numerical Machining complex is already being engaged to support subcontracting activities for MSMEs in machine tools, spares and machine components.

• The Ministry, in collaboration with private sector players, will continue running the Business Plan Competition.

• The Development Financial Institutions are being re-capitalized and restructured to provide more funding to MSMEs.

• Other strategies for MSME development that have been put in place will support market access; quality enhancement; human resource skills development; facilitate incubation and sub-contracting; transfer of technology; Standardization and certification.

Question No. 20 – Lessons Learned

• The Project Management Unit should be within the relevant Ministry/Department and not entirely in the private sector for full ownership and effective implementation of the project;

• Communication and outreach component should be incorporated for the success of any project both in attracting demand and communicating successes;

• Capacity Building of the Project Secretariat should begin during the Project Preparation Stage and measures to retained the trained staff put in place for the entire period of project implementation;

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• The project design should be simple with limited targeted beneficiaries and not multi-sectoral and complex as the MSME Project. Each of the components would have been an entire project on its own.

• Though intended, the complementarity and integration of the various sub-components was not effectively undertaken. Similarly, each of the components would have easily operated effectively as standalone projects.

• Value Chain matching Grants operate better in a fully liberalized environment and ‘Apex Committees’ should be legalized through statutory legislation for effectiveness and continuity.

• Value Chain approach is the most effective way of developing a sector as all the facets are considered through a concerted & integrated approach. ‘A chain is as strong as the weakest link’.

• Use of local case studies is an effective way of linking Universities to the MSMEs and enhancing entrepreneurship and competitiveness by MSMEs.

• SME Risk Capital funds are more effective when disbursed with a technical assistance component. This further increases productivity of the MSMEs and reduces the loan default rate considerably.

• SMEs begin to engage and use consultancy services when they understand its importance through piloting.

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Annex 7. List of Supporting Documents 1. The World Bank: Project Appraisal Document, Kenya MSME Competitiveness

Project, June 15, 2004 2. The World Bank Kenya MSME Competitiveness team: Identification, Appraisal,

Supervision and MTR aide memoirs 3. The World Bank: Project Paper, Restructuring of the Kenya MSME Competitiveness

Project, December 28, 2009 4. The World Bank: Project Status and Implementation Reports, June 2005 – June 2012 5. The World Bank: Kenya Growth and competitiveness, January 27, 2005 6. The World Bank: Kenya Country Partnership Strategy for FY2010-13, March 23,

2010 7. The World Bank: Doing Business in Kenya 2012 8. The World Bank: A review of the Joint IDA-IFC Micro, Small and Medium

Enterprise Pilot Program, October 2006 9. The Government of Kenya: Kenya Vision 2030, October 30, 2006 10. Triodos &Facet (project impact assessment consultant): Kenya MSME

Competitiveness Project Impact Report, June 2012 11. Triodos & Facet: Kenya MSME Competitiveness Project Baseline Survey reports,

September 2008, March 2009 and June 2010 12. Triodos & Facet: Kenya MSME Competitiveness Project Operational Audit reports,

November 2007, May 2009 and April 2010 13. FSD Kenya: FSD Kenya Strategy Briefs 2011 – 2015 14. Oxford Policy Management & Center for Development Studies (independent

reviewer – FSD Kenya IMPACT ASSESSMENT): FSD Kenya Impact Assessment Summary Report, January 2010

15. Business Partners, South Africa (Parent company of the TIP for C1B): Annual Report 2012

16. Deloitte Consulting Ltd, Kenya (TIP for C2A): Value-chain based Matching Grant documentation reports, 2012

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