Maldives: Preparing the Small and Medium Enterprise Development Project

Presented to Asian Development Bank 6 ADB Avenue, Mandaluyong City 0401 Metro Manila The Philippines Team Members: Lord, Montague, Team Leader / PSD & SME Development Expert Ehmann, Markus, SME BDS Expert Slee, Laurence, SOE Privatization and Restructuring Expert Waheed, Mohamed, PSD and SME Development Expert Sattar, Shafeenaz, SME Financing Specialist Hussain, Hisaan, Legal Specialist

30 September 2007

M A L D I V E S

Preparing the Small and Medium Enterprise Development Project

TA 4745-MLD

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

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TABLE OF CONTENTS

0. LOAN AND PROJECT SUMMARY viii I. THE SECTOR: PERFORMANCE , PROBLEMS, AND OPPORTUNITIES 1

1. ECONOMIC AND REGULATORY CONTEXT 1 1.1 CHARACTERIZATION OF THE SMALL ISLAND ECONOMY 1 1.2 INTERNATIONAL COMPETITIVENESS 3 1.3 BUSINESSES REGULATOR ENVIRONMENT 4 2. SECTOR AND REGIONAL ANALYSIS 7 2.1 KEY CHALLENGES AND OPPORTUNITIES 7 2.2 GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT 11 2.3 EXTERNAL ASSISTANCE TO SECTOR IN THE ATOLLS 14

II. PROPOSED SECTOR DEVELOPMENT PROJECT 16 3. PROJECT COVERAGE AND IMPLEMENTATION PROCESS 16 3.1 OBJECTIVES, SCOPE AND STRATEGY 16 3.2 TARGETED SECTORS FOR SME DEVELOPMENT 18 3.3 TARGETED REGIONS FOR SME DEVELOPMENT 21 3.4 INSTITUTIONAL DELIVERY MECHANISM 22 3.5 POLICY AND REGULATORY FRAMEWORK 25 4. KEY FEATURE: BUSINESS DEVELOPMENT SERVICES 28 4.1 EXISTING SITUATION IN THE MALDIVES 28 4.2 CLUSTER DEVELOPMENT STRATEGY 28 4.3 ORGANIZATIONAL STRUCTURE 29 4.4 CAPACITY BUILDING 30 4.5 BDS CENTERS IN TARGET REGIONS 31 4.6 TECHNICAL ASSISTANCE AND PROJECT COSTING 33 5. KEY FEATURE: COST SHARING FACILITY 35 5.1 OBJECTIVE AND COVERAGE 35 5.2 OPERATIONAL FEATURES 38 6. KEY FEATURE: CREDIT GUARANTEE FACILITY 40 6.1 FINANCING APPROACH 40 6.2 OPERATIONAL FEATURES 42 6.3 ORGANIZATION 43 7. FINANCING PLAN AND IMPLEMENTATION ARRANGEMENTS 44 7.1 FINANCING PLAN 44 7.2 PROJECT PERFORMANCE MONITORING AND EVALUATION 45

III. TECHNICAL ASSISTANCE 48 IV. PROGRAM BENEFITS, IMPACT AND RISKS 49 V. SOE RESTRUCTURING AND PRIVATIZATION 49

8. OBJECTIVES AND SCOPE 49 9. PUBLIC ENTERPRISE ANALYSIS 52 10. PROPOSED STRATEGY 55


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ANNEX A: DESIGN AND MONITORING FRAMEWORK 57 ANNEX B: GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT 60 ANNEX C: MSME SURVEY OF THREE REGIONS 63 ANNEX D: CLASSIFICATION OF ENTERPRISES 72 ANNEX E: EXTERNAL ASSISTANCE 74 ANNEX F: CREDIT GUARANTEE FACILITY 83 ANNEX G: BUSINESS DEVELOPMENT AND COST SHARING FACILITY 89 ANNEX H: IMPLEMENTATION ARRANGEMENTS 93 ANNEX I: REFERENCES 100


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CURRENCY EQUIVALENTS (as of June 2007)

Currency Unit MRf. 1.00 = US$ 0.0774

US$ 1.00 = MRf. 12.92

ABBREVIATIONS

6NDP Sixth National Development Plan 7NDP Seventh National Development Plan ACDBP Atolls Credit and Development Banking Project ADB Asian Development Bank ADFs Revolving Credit Funds ADSL Atoll Development Project for Sustainable Development BCMW Building Construction and Mechanical Works BDS Business Development Services BML Bank of Maldives CIP Commercially Important Passenger EA Executing Agency EDU Enterprise Development Unit ESTP Employment Skills Training Project gdp Gross Domestic Product HIES Household Income and Expenditure Survey IAS Island Aviation Services Limited IATA International Air Transport Association ICA Investment Climate Assessment IDA International Development Association IFAD International Fund for Agricultural Development IFC Finance Corporation IGAs Income Earning Opportunities IMF International Monetary Fund IPO Initial Public Offering IWDCs Island Women’s Development Committees LC Letter of Credit MACI Maldives Association of Construction Industry MCPI Ministry of Construction and Public Infrastructure MEDT Minister of Economic Development and Trade MEL Employment and Labor MFLC Maldives Finance Leasing Company MMA Maldives Monetary Authority MHREL Ministry of Human Resources, Employment and Labor MOAD Ministry of Atolls Development MoCPI Ministry of Construction and Public Infrastructure


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MOFAMR Ministry of Fisheries Agriculture and Marine Resources MOFT Ministry of Finance and Treasury MPL Maldives Post Ltd MRf Maldivian Rufiyaa MTCC Maldives Transport and Contracting Company MWASS Ministry of Women Affairs and Social Security NDB National Development Bank PE Public Enterprise PEMEB Public Enterprise Monitoring and Evaluation Board PPTA Project Preparation Technical Assistance PSD Private Sector Development PWC Public Works Corporation RDMOS Regional Development and Management Offices SADP Southern Atolls Development Project SIE Small Island Economy SME Small and Medium-Sized Enterprise SME-DP Small and Medium-Sized Enterprise Development Project SOE State Owned Enterprise STO State Trading Organization Plc SWOT Strengths, Weaknesses, Opportunities, and Threats TA Technical Assistance ToR Terms of Reference UN United Nations UNDAF United Nations Development Framework UNFPA United Nations Population Fund UNICEF United Nations Children's Fund UNV United Nations Volunteers WHO World Health Organisation


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LOAN AND PROGRAM SUMMARY

Borrower Republic of Maldives

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

Classification Targeting classification: General intervention

Sector: Industry, agriculture, services and trade

Subsector: Small and medium enterprises (SMEs)

Themes: Sustainable economic growth, private sector development

Environmental Assessment

Category C

Social Sector Assessment

Category C: Involuntary resettlement

Category C: Impact on indigenous people

Program Rationale

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

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

Objective and Scope

The objective of the MSME Development Project Loan is to support the Government’s efforts to (i) develop the entrepreneurial climate and support services that will facilitate growth, (ii) provide the necessary conditions for converting existing entrepreneurial potential into innovative and successful business activities, (iii) attract entrepreneurial leadership from other regions of the country, and (iv) establish broader regional centers for SME activities that are


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driven by growth nodes or networked clusters for supporting activities. To achieve the aforementioned objective, the project loan focuses on the following:

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

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

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

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

The project framework is attached in Annex A.

Loan Amount and Terms

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

Counterpart Funds

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

Executing Agency Ministry of Economic Development and Trade (MEDT)

Risks and Assumptions

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

Technical Assistance

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


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I. THE SECTOR: PERFORMANCE, PROBLEMS, AND OPPORTUNITIES

1. ECONOMIC AND REGULATORY FRAMEWORK

1.1. Characterization of the Small Island Economy

1. SIE Features: The Maldives is a Small Island Economy (SIE) consisting of 26 natural atolls with a total land of less than 300 square kilometers spread over 900 kilometers around the equator.1 There are 1,190 islands in the archipelago, of which 198 are inhabited by a population of 309,000.2 Only 28 islands have a land area greater than a square kilometer.3 Only four islands have a population greater than 5,000 people, and 70 percent of the inhabited islands have a population of less than 1,000 people. In addition to the inhabited islands, 87 islands have been designated and developed as tourist resorts, with an additional 11 islands currently being set aside for development. With a total land area of 2 square kilometers , the capital island of Male’ is home to a third of the population. It is the seat of the Government of the Maldives (Government) and the centre of commerce and business. Concentration of the population in the capital is growing, especially after the December 2004 tsunami destroyed the means of livelihood in many islands.

2. Special Challenges: The Maldives has a number of economic disadvantages similar to other SIEs that undermine the country’s international competitiveness. In small economies like the Maldives the percentage deviation of costs from a medium-size economy are over 70 percent for sea freight, nearly 50 percent for electricity and telephone service, more than 30 percent for both unskilled labor and fuel.4 In sectors like tourism, these high costs translate into a 60 percent overall increase in the cost of tourism, which can be passed onto the high-end consumer of tourism activities but are not readily transferable onto products like handicrafts, agro-industrial products and manufactured goods that compete in fairly homogeneous international product markets. From a policy perspective it does not suggest the need for protection against the rest of the world, but rather proactive policies that seek to overcome, or at least partially compensate for the economic disadvantages associated with the high production and trading costs.

3. Economic Growth: Despite its intrinsic competitive disadvantages, the Maldives has one of the fastest growing economies in Southeast Asia. Two sectors, tourism and fishing, have been the driving forces behind the expansion of Gross Domestic Product (GDP) and employment generation, and have created linkages to other subsectors like local handicrafts, tourism-related activities and boatbuilding. In 2006 the sharp rise in real GDP reflected a 1 For administrative purposes, these atolls are grouped in 20 atolls. 2 Based on 2002 census. 3 Most islands are part of large atolls that surround large lagoons, and all are low lying with none having an altitude higher than 1.8 meters above sea level. The surrounding barrier reefs act as natural protection for the islands from adverse weather conditions during the monsoon seasons. Although no official reference could be identified for the land-mass estimate, the 300 km2 figure is quoted in reports such as the UNEP State of the Environment Report and the FAO Agricultural (Horticultural) Crop Sector Report (FAO, 1994). More recent estimates based on satellite data estimate the area at 227.45 km2 (Naseer and Hatcher, 2004). 4 Based on a survey of SIE relative to other countries using the World Bank’s World Economic Indicators and Global Business Cost Survey, as well as the United Nations trade database (Comtrade), and reported in Winters (2003).


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resumption of growth following the devastation that occurred throughout the country as a result of the tsunami on 28 December 2004 (Table 1). The recovery has been largely driven by tourism sector and brings the country back to its steady-state growth path of around 6 percent a year. GDP per capita has expanded from US$ 2,094 in 2002 to an estimated US$ 2,757 in 2006, the highest in the South Asia region. The economy is largely driven by service industries, which account for about 79 percent of GDP. The main service industries, other than tourism, are real estate, wholesale and retail trade, transport and communications, government administration and financial services (Table 2).

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

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

2000 2001 2002 2003 2004 2005

Primary Sector 9.4 9.5 10.4 9.7 9.7 9.1 Agriculture 2.8 2.8 2.7 2.6 2.6 2.5 Fisheries 6.0 6.1 7.1 6.6 6.6 6.1 Coral and sand mining 0.6 0.6 0.6 0.6 0.6 0.6

Secondary Sector 14.4 15.1 15.6 15.6 15.6 16.1 Manufacturing 8.0 8.1 8.8 8.5 8.5 7.9

of which, fish preparation 2.1 2.3 3.0 3.0 2.7 2.5 Electricity and water supply 3.2 3.4 3.5 3.6 3.6 3.8

Construction 3.2 3.5 3.3 3.5 3.5 4.4 Tertiary Sector 80.1 79.3 77.9 78.6 78.6 78.8

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

GDP total 100.0 100.0 100.0 100.0 100.0 100.0

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

4. Regional Growth Inequalities: Notwithstanding the country’s high economic growth rates in the past ten years, the benefits of that growth have not been equitably distributed to the population at large. Average household income in the atolls is 55 percent of that in Male’, according to the 2002-03 HIES by the Ministry of Planning (2004). Decentralization of economic activity has been undermined by the lack of infrastructure, a poorly developed

Table 1: Maldives General Economic Indicators, 2000 - 2006 2002 2003 2004 2005 2006 GDP at 1995 constant price (USD mn) 546.3 593.0 649.4 613.5 693.3 Real GDP Growth (%) 6.5 8.5 9.5 -5.5 13.0 Population (thousands) 306 315 325 335 345 GDP per capita (USD) 2,094 2,197 2,482 2,350 2,757 Consumer price inflation (avg %) 0.9 -2.8 6.3 3.3 7.0 Current account balance (USD mn) -35.7 -32.0 -129 -287 -358 Exchange rate (avg Rf/USD) 12.8 12.8 12.8 12.9 13.0


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inter-island transportation system, financial system constraints to credit for businesses, and legal and regulatory barriers. Greater opportunities for people living in Male’ has produced a fourfold population expansion in the past 20 years, and it has given rise to a population density in Male’ that is among the highest in the world, a situation made all the more severe by the recent tsunami.5 Lack of infrastructure in the atolls, underdeveloped inter-island transportation, a lack of financial services, and legal and regulatory barriers have all contributed to the wide disparity in average per capita income of Male’, resorts and industrial islands, on the one hand, and other islands in the outer atolls, on the other.

5. Regional Development Strategy: In an effort to ameliorate regional inequalities and reverse migration to the capital, the Government placed regional economic growth and diversification as a key objective of economic development in both the Sixth National Development Plan (6NDP) for 2001-2005 and the present Seventh National Development Plan (7NDP) for 2006-2010. As part of the 7NDP, the Government is developing regional centers that are designed to have airports, ports and other social and infrastructure facilities, and that will be complemented by focus islands on different atolls acting as atoll service hubs and growth centers. The focus islands identified under the 7NDP are to serve as growth centers, fostering employment and income generation opportunities by concentration of development efforts and provision of a higher level of infrastructure to achieve economies of scale. Islands that are of importance to the population consolidation program are likely to have the following characteristics: (a) sufficient land area to support greater numbers of population; (b) proximity to atoll capital; (c) substantial existing infrastructure; and (d) potential for growth because of land area, agricultural, fishery or other commercial activity. The Government expects that these efforts will reduce regional differentials and promote growth and employment opportunities outside of Male’. It also plans to address poverty among the most vulnerable groups, who may not be able to benefit from the growth strategy, by developing special targeted income support programs.

1.2. International Competitiveness 6. Effective Exchange Rate: The international competitiveness of the Maldives is reflected in the real effective exchange rate (RER), which takes into account both general price movements in the country relative to that of each of its trading partners, and the cross exchange rate between the Maldives and each of its trading partners.6 The Maldives has effectively pegged the rufiyaa against the U.S. dollar since 1994. Between 1995 and 2001 that policy 5 In 2006, 35% of the population was located in Male’ compared with 27% in 2000, according to the Ministry of Planning’s 2006 census (Ministry of Planning, 2006). 6 The real exchange rate is a measure of the relative price of non-tradables to tradables and, as such, it measures the cost of producing a good domestically. A relative price rise, for example, reflects an increase in the domestic cost of producing tradable goods, since it makes production of tradables less profitable and induces resources to move to the non-tradables sector. While the concept is straightforward, its empirical measurement is difficult for a country like the Maldives where price series for tradable and non-tradable products are not readily available. Two alternative measures of the real exchange rate can be constructed within the context of the country’s data limitations. The first uses partner-country and domestic price measured in terms of CPI data to construct a real exchange rate index that represents the ratio between non-tradable and tradable prices. Specifically, the real exchange rate is defined in this case as er

t = Pnt/Pf

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

t = (1/en)t Pnt/Pf

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


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caused a 35 percent appreciation of the rufiyaa's real effective exchange rate, which undermined the country’s international competitiveness, discouraged tourism and fish exports and prevented economic diversification. Large inflows of foreign direct investment and tourism created ‘Dutch disease’ symptoms as the overvaluation of the rufiyaa made non-tourism exports such as fisheries and agricultural products less competitive. The large proportion of spending on imported goods and local spending on domestic non-traded goods such as construction also created pressure for capital and labor to move away from the traditional export sector, with a concurrent weakening of the country’s competitiveness and further loss of export incentives for the fisheries and agricultural sectors. Since the depreciation of the dollar since 2002, the ruffia has become increasingly undervalued relative to the Euro.

7. Competitive Potential: Among the major factors inhibiting enterprises from competing effectively in the local, domestic, resort and foreign markets are the lack of equal treatment to them given by resorts and their inability to supply high quality products and services. Costing of services products is not considered to be a major constraint to competing in the various markets

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

1.3 Business Regulatory Environment 8. Effect on Business: The Maldives ranks fairly high in several areas of the regulatory environment affecting the ease of doing business, but its comparative position has recently declined because of increased burdens in a number of areas that especially impact on MSMEs. Downgrading has occurred in (a) ease of employing workers, (b) starting a business, (c) protection of investors, (d) contract enforcement, (e) trading across borders, and (f) ease of closing a business (Table 3). In the remaining four areas of the business regulatory environment there has been no change in the country’s comparative ranking from a year earlier, that is, there has been no comparative improvement in the business regulatory environment (World Bank, 2007).

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

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

World Real Cross-Rates

Europe Asia America Mid.East Oceania 1995 100.0 100.0 100.0 100.0 100.0 100.0 1996 104.9 105.7 105.2 104.7 101.4 100.4 1997 119.8 124.8 119.0 112.8 111.9 112.3 1998 129.5 125.7 135.6 116.6 112.7 136.2 1999 134.9 137.0 137.5 121.2 117.4 138.4 2000 134.8 145.8 131.9 112.7 116.3 143.6 2001 134.9 145.6 133.1 111.3 110.4 148.7 2002 126.8 133.3 127.8 109.7 102.5 134.8 2003 111.7 109.1 117.7 97.8 95.7 108.2 2004 109.1 103.1 116.2 95.4 100.3 98.0 2005 105.5 103.1 110.1 90.2 98.3 91.7 2006 101.9 100.7 104.8 86.6 98.5 90.4 Source: Calculations based on average annual exchange rates and wholesale price indices.


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9. Starting and Closing Businesses: The Maldives is the only country in South Asia that has a legal requirement on the minimum start-up capital. Under the company law, entrepreneur

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

evidenced by the fact the in 2006 over 40 countries eased business entry requirements.

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

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

12. Access to Land: Land access is one of the biggest obstacles to business growth in the Maldives. The majority of business operations are being carried out in rented or leased land and buildings, with the average contract length for land varying from seven years in transport and logistics to between 10 and 14 years in manufacturing and tourism. According to the ICA, more than one-third of the firms in tourism and logistics and about one-fourth in manufacturing have made an attempt to acquire rights to new land or buildings. However, over 60 percent of

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

2006 2005 Change

Overall 53 49 -4 Paying Taxes 1 1 0 Employing Workers 5 1 -4 Dealing with Licenses 9 9 0 Starting a Business 31 33 2 Protecting Investors 60 58 -2 Enforcing Contracts 83 81 -2 Trading Across Borders 91 84 -7 Closing a Business 114 109 -5 Getting Credit 143 143 0 Registering Property 172 172 0

Source: World Bank, Doing Business 2007. Washington, DC.


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manufacturing respondents, around 45 percent of respondents in the tourism industry and transport-logistics have been unsuccessful in acquiring land. Moreover, a comprehensive and transparent regulatory framework for housing and urban management is lacking in the Maldives, and planning and building standards and regulations have been developed in an ad-hoc manner. Following the implementation of the 2002 Land Act, the Government is taking steps to create a market for land sales and is conducting a cadastral survey. Uncertainty nevertheless remains in a number of areas, including the ability of enterprises to transfer land.

Table 5: Strengths, Weaknesses, Opportunities, and Threats (SWOT) Analysis of MSME Development in Atolls Factors Internal External Positive S - Strengths O – Opportunities

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

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

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

Low cost skilled workers Political commitment to private sector development

Schools system for creating knowledge-base society

Development of entrepreneurial infrastructure for MSME services

Cultural, recreational and tourism capacities Existence of experienced entrepreneurs

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

Location of growth modules in targeted regional developmental centers

Negative W - Weaknesses T - Threats Tradition of large enterprises Lack of entrepreneurial mindset

Narrow economic structure Few people oriented to modern working environment

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

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

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

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

Lack of financial resources

Lack of coordination of development activities, especially transportation and communication

13. Access to Financing: The lack of clarity on property rights is a major constraint to accessing finance, as lenders are unwilling to take land as collateral if they are unable to sell it freely upon the borrower’s default. Partly for this reason, access to credit is ranked as the number one impediment to doing business in the Maldives, according to both perceptions of entrepreneurs as reported in the ICA and actual financing conditions relative to those of other countries, as reported in the World Bank’s business survey (World Bank, 2007). The ICA reports that only one-third of businesses use bank loans for their activities. Instead, firms rely on internal funds for working capital. Domestic commercial banks contribute 11 percent to existing working capital and international commercial banks only 3 percent. Indeed, only 25 percent of respondents to the ICA questionnaire reporting making any efforts to apply for loans. Nearly 60 percent of the credit that has been extended is for the tourism sector, followed by commerce


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(import-export operations) and the fisheries sector. Together these three sectors absorb over 85 percent of existing loans. Differences in financial sector development and the regulatory environment often determine the magnitude of SME lending in countries. In Asia countries like the Maldives that have limited SME financing also lack banking intermediation, have weak legislations and poor public finance management, whereas those that have well-development financial sectors tend to have high SME financing.8

2. SECTOR AND REGIONAL ANALYSIS

2.1 Key Challenges and Opportunities

14. Business Environment in the Atolls: Our survey of business conditions and perceptions by MSMEs in three key regions of the Maldives reveal significant differences from those identified by the World Bank’s ICA for businesses operating in the capital of Male’. Table 5 summarizes the major opportunities and challenges to entrepreneurs and businesses in the Northern, Southern and South-Central Development Regions of the country. These findings are based on SWOT analysis of the enterprises in each of the regions by team members and differ from the more detailed MSME survey conducted in those atolls.

15. Internal Constraints: Table 6 shows the ranking of key internal constrains on enterprises in the Northern and Southern Development Regions. Lack of technically skilled labor, labor costs, and accounting skills are the principal concerns of business in both regions. Availability of capital is only a major problem for enterprises in the South-Central Region. In contrast, technology and management staffing is a major problem in the Northern and Southern Regions, but they rank below alls in the South-Central Region.

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

8 RAM Consultancy Services Sdn Bhd, “SME Access to Financing: Addressing the Supply Side of SME Financing”. ASEAN Secretariat, REPSF Project No. 04/003, July 2005.

Table 6: Ranking of Internal Constraints

Region

Total Northern South-Central Southern Technically skilled labor 4.6 4.4 3.2 4.1 Labor costs 3.7 3.9 3.5 3.7 Accounting skills 4.4 2.1 4.4 3.6 Market information 4.2 2.2 4.2 3.5 Management staffing 4.4 2.0 4.2 3.5 Technology 4.0 1.9 4.4 3.4 Capital 2.7 4.4 2.0 3.0 Source: MSME survey in Northern, Southern and South-Central Regions.


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to doing business.9 Corruption, which is ranked among the top five constraints in Male’, is considered to as a somewhat lesser constraint to doing business in the Northern, South-Central and Southern Development Regions.

17. Private Sector Perception of Government: Enterprises have a mixed perception about their relationship with the central and local governments. About one-fourth perceive central government as helpful, while over one-half have an unfavorable perception of

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

18. Legal and Regulatory Constraints: The current legal framework is not sufficiently comprehensive to provide an appropriate PSD enabling environment. One of the major problems of administrating justice is the court system, especially in islands where constraints include lack of trained personnel and substantial bureaucratic delays. People from the atolls and outer islands have to travel to Male’ for the appeal process or what 9 World Bank, “The Maldives: Sustaining Growth and Improving the Investment Climate’. Washington, DC: World Bank, South Asia Region, Finance and Private Sector Development Unit, April 2006.

Table 7: Ranking of External Constraints

Region

Total Northern South-Central Southern

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

Table 8: Constraints on Competitiveness of Enterprises

Region

Total Northern South-Central Southern

Differentiated treatment by resorts 5 3.5 5 4.5

Quality of products 4.7 4.5 5 4.4

Differentiated treatment by authorities 4.3 3.5 3.9 4.1

Production scale 3.8 3.4 3.1 3.4

Price of product 3.5 2.5 1.8 2.6

Source: MSME survey in Northern, Southern and South-Central Regions.


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are often complex commercial issues. The courts lack trained judicial persons throughout all magistrate courts. Nor does the court system have an effective summons procedure or a comprehensive judgment enforcement process. The Government needs to formulate legislations on taxation, bankruptcy, banking and taxation. It also needs to introduce accounting and auditing standards for the private sector. Minimum wage levels need to be introduced as well. Finally, it is essential that impact assessments be carried out a part of the formulation of major pieces of legislations to measure their impact on PSD and MSMEs in particular. Based on a review of relevant commercial and investment laws and regulations, including accounting standards, land tenure and property rights, the focus of support to MSME activity in the atolls should be based on realistic and sustainable approaches for strengthening the MSME policy, legal, regulatory, and accounting framework, and one that contains a detailed strategy and time-bound action plan for MSME development. 19. Transportation: At present the transport of cargo between Male’ and the outer islands relies on the traditional cargo and passenger vessels operating on a fairly unscheduled basis, while the transport of passengers relies on these same vessels and, where possible, on the use of air transport services. There is a fairly significant network of transport operations within islands in the same atoll and between islands of adjacent atolls. While Male’ remains the centre of the transport system, there are growing numbers of hubs. Two regional ports are opening in Kulhudhufushi and S. Hithadhoo, while State Trading Organization Plc (STO) imports cargo directly into S. Gan, and Fari Maldives Pvt. Ltd imports cargo directly into Theefaridhoo.10 The domestic aviation network is largely dependent on seaplanes for the tourist market and wheeled aircraft for the local population. Plans exist to increase the number of domestic airports from four to eleven. Limited ferry routes exist, but regular services tend to be unscheduled and subject to weather conditions. From time to time, foreign companies have established regular ferry services, but these have been short-lived.

20. Skills Deficiencies: According to the 7NDP, the Maldives has one of the lowest labor force participation rates in South Asia (47.7 percent). Youth unemployment is also substantial and has been increasing in recent years, with the result that 40 percent of young women and over 20 percent of young men are currently unemployed. One of the problems is the lack of appropriate skills needed for existing employment opportunities in the Maldives. Educational and vocational institutions have not inculcated enterprise as a career option or provided appropriate business orientation and support skills. According to the ICA survey, most schools only offer commerce subjects and the average pass rate is 25 percent, while the pass rate for English is only 6 percent. In contrast, the pass rate for chemistry, physics, commerce, fisheries, and science ranges from 25 to 45 percent. Difficulty in access to gainful employment has increased the incidence of drug use and delinquency. Despite some improvements, lack of local skilled labor continues to be a major problem in Maldives. Moreover, unskilled worker from a foreign country collects an average monthly pay of MRf 2,000, while a local person needs to be paid at least MRf 2,500 per month. This situation has creates reliance on migrant labor from neighboring countries. In 2004 there were 38,413 expatriates employed in the Maldives, compared with 33,765 in 2003 because of the growth and expansion of business activities.

21. Getting credit: Historically, most of the credit in the Maldives has been channeled to larger corporations, and the upper end of the medium size market. Particularly small enterprises as well as low and middle-income households still lack access to adequate financial services, in

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


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particular long-term finance either for capital investment or permanent working capital needs. The lack of suitable collateral, viable qualitative information, financial statements and accounts usually places the MSMEs in the high-risk category and they are therefore considered non-bankable. In general, the Maldives ranks 143rd worldwide on the comparative ease of getting credit, which is well below most other South Asian countries. The poor ranking is largely due to the complete absence of a public or private credit registry to facilitate the exchange of credit information amongst lenders. The legal rights of borrowers and lenders are also deficient in most respects because the law requires a specific description of the assets in the security agreement. As a result, it is impractical to use a changing pool of assets (such as in an inventory or accounts receivable) as security for a loan. The secured lender has no priority right to the collateral either in or outside bankruptcy, reducing the chances of loan recovery. If a borrower defaults, creditors are required to go through a lengthy court enforcement process. The lack of a bankruptcy law further reduces the chances of loan recovery in the event a borrower becomes insolvent. All this makes security agreements for MSMEs highly risky, costly and difficult to enforce. The situation could improve if the authorities carry through on plans to set up a credit information bureau with the assistance of the World Bank’s International Finance Corporation (IFC). The Bank of Maldives is also planning to introduce mobile phone banking, which will improve outreach in the atolls. 22. Financial Sector: The financial sector of the Maldives is narrow. There is one locally owned commercial bank, Bank of Maldives (BML), branches of three South Asian state-owned commercial banks, and a branch of HSBC international bank. The BML is jointly owned by the Government (51 percent), island communities (25 percent), and other government agencies (24 percent). The BML has 18 branches that include five mobile branches (dhonis). All these banks follow normal international banking practices and offer letter of credit (LC) facilities and other financing. Banking is regulated by Maldives Monetary Authority (MMA), which acts as the central bank. Banks seldom extend loans with maturities of more than three to five years and the spreads remain high. Lending rates vary from 8 to 13 percent for domestic currency and 7.75 to 13 percent for foreign currency; similar rates apply to the Government. This situation, gives rise to serious impediments to sustained growth of the private sector in the Maldives because of the lack of available information and mechanisms to collect information that makes lenders unable to identify enough profitable projects in a risky environment. The provision of financial services is consequently restricted to low-risk clients or based on excessive collateral requirements instead of a credit analysis relying on financial statements and business plans. Experience from other countries shows that a more flexible and dynamic credit information system will improve the accuracy and cost-effectiveness of credit risk decisions made by financial institutions that, in turn, results in improved access to financial services, in particular for small businesses and individual borrowers.

23. Non-Banking Financial Sector: The non-bank financial sector consists of a government provident fund, a finance leasing company, a housing bank, two insurance companies registered in the country, and some agents for overseas insurance companies. The Maldives Finance Leasing Company (MFLC) provides medium and long-term capital equipment financing. The company was established with assistance from International Finance Corporation (IFC), with technical assistance provided by the National Development Bank (NDB) of Sri Lanka. To date, it has provided lease financing for capital equipment mainly to the tourism sector (nearly 80 percent of the total) for such items as speedboats, live-aboard safari and fishing vessels, dhonis, computers, and excavators. There are limited capital market operations securities trading. Three SOEs are quoted on the stock exchange (BML, State Trading


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Organization (STO), and the Maldivian Transport and Construction Company). The Government plans to list more enterprises on the stock exchange.

24. Lack of Capacities of Domestic BDS Providers. An effective method to build captioned capacities within the MSMEs is to incorporate external business development services. However, the MSME sector in the Maldives is characterized by an almost complete lack of use of these external services, mainkly because of the limited market for BDS that is almost wholey concentrated in Male‘. Government spending on BDS is limited, which in turn effectively constrains the size and development scope of commercial BDS markets. Opening these markets to commercial operators would effectively optimize the allocation of government funds by increasing employment opportunities for the skilled work force in innovative markets, ensuring a more market-oriented BDS with immediate benefits to clients and reduced cost per trainee by allowing for competition.

25. Weak business linkages. Though The Maldives’s tourism sector is booming, impact on the development of rural enterprises and in particular rural manufacturing industries is low due to weak or missing links in value chains e.g. agriculture, agro-industries and tourism. Although the Government has adopted a clusters approach in its 7NDP, it is neither effectively and systematically supporting the development of those clusters nor strengthening of value chains through well-targeted BDS support programs in close cooperation with private sector stakeholders and private BDS providers, which could otherwise build the capacity to sustain and disseminate such programs.

26. Limited Instruments and Capacities to Coordinated MSME Development Policies, Programs and Projects. One of the greatest risks to MSME in the Maldives is the possibility of a continued lack of Government capacity to implement the MSME development program due to inadequate inter-ministerial coordination of private sector development initiatives. At present, the development of a common MSME development and implementation strategy suffers from a profound fragmentation of strategy formulation and decision making, weak communication and weak coordination among government ministries and agencies. These weaknesses have prevented the formulation and implementation of a common MSME development strategy, as well as programs and projects that complement and build on one another. At present, the inter-ministerial MSME Policy Committee is chaired by the Ministry of Economic Development and Trade and consists of representatives from the ministries of finance and treasury, economic development and trade, atolls development, planning and national development, agriculture and fisheries, transport and communications, youth and sports, and higher education and employment. The Committee needs to be strengthened to ensure involvement of senior officials from the ministries and it should meet on a recurrent basis to monitor and maintain quality control of the technical assistance, as well as ensure full participation by key ministries and coordination of existing strategies, programs and projects.

2.2 Government Strategy for Private Sector Development 27. Government Strategy: There are a number of principles underlying the strategy of the Seventh National Development Plan (7NDP) that point to the leading role of MSMEs in private sector development, especially those in the atolls and outer islands, as well as the supportive role of the public sector in creating an enabling environment for the private sector. The Government’s strategy as it relates to the private sector in the regions outside the capital of Male’ aims to improve economic growth by increasing the number and coverage of MSMEs activities and reducing or restructuring state owned enterprises (SOEs).


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

29. Institutional and Infrastructural Goals: Line ministries have increasingly shifted their goals to the enhancement of private sector development through institutional and infrastructural enhancements as a means of facilitating growth and development of MSMEs in the atolls. The Ministry of Human Resources Employment and Labor has established two important programs for matching vocational training and higher education with employment opportunities and needs in the country. The first is the program to expand and improve the quality of vocational and technical education, and the second is the program to expand post-secondary education opportunities. The former includes increased youth skills training opportunities focusing on employable skills for youth, and the latter includes increased numbers of private training providers offering career oriented vocational and technical training. The Ministry of Transport and Civil Aviation has recently focused its efforts on identifying strategies for the development of domestic maritime transport, largely because of the recognition that private sector development has been hindered by the undeveloped status of the country’s transport network. In an effort to ensure adequate access among all inhabited islands, the Ministry is working to implement greater access to all inhabited islands, as well as to establish a sustainable harbor maintenance program. At the same time, the Ministry of Fisheries Agriculture and Marine Resources is making efforts to enhance the role of the private sector and facilitate investment in some areas and activities that will benefit small scale industries in the atolls. Current programs are supporting the establishment and development of a mariculture industry, and implementing fisheries community development programs that provide extension, and other services and 11 H. Abdullah and Z. Ismail, “An Overview of Micro credit and SME financing activities in the Maldives”. Country Paper for SAARC Finance Seminar on Micro Credit Operations, Dhaka, Bangladesh, 21 Dec 2002. 12 EFAD, “Atolls Credit and Development Banking Project Republic of Maldives: Atolls Credit and Development Banking Project: Completion Evaluation Executive Summary. (Undated).


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support to communities. It is also formulating schemes to improve access to knowledge, technology and finance. In agriculture the Ministry is promoting commercial agriculture and poultry farming with the introduction of new crop varieties and animal breeds require comprehensive planning for the sustainable utilization of the nation’s limited land and water resources. A study on agricultural commercialization was conducted to promote MSME development based on a cluster approach to development of the sector in the atolls.

30. Employment Targets: The 2006 Census revealed that 8.3 percent of the adult population is unable to find suitable employment or lacks employment opportunities, thereby being officially unemployed.13 Of the total adult population, 22 percent are economically inactive in the sense of not actively seeking work. The Government has not elaborated any specific targets in its 7NDP to increase the number of economically active population, but is has provided specific guidelines on its strategies to increase employment opportunities for Maldivians. These strategies include (a) the preparation of a human resource needs assessment and design, develop and deliver programs in the key sectors of tourism, fisheries and agriculture, transport and the social sectors; (b) development and implement a national apprenticeship scheme to train school leavers to meet the national skills demand; (c) institute an Employment Act which would include provisions on unfair dismissal, equal pay, sexual harassment and discrimination including an awareness campaign to make the public and institutions and agencies with employment responsibilities familiar with the new provisions; (d) Undertake a joint study with the Human Rights Commission and private sector organizations to improve working conditions in accordance with national and international human rights standards: (e) Establish Employment Services Centre in Male’ and job centers in Baa, Dhaal, Lhaviani and Laamu atolls to provide employment advice to job seekers and employment exchange services for employers and employees and establish job information kiosks; (f) Set up a labor market information system in the Ministry of Higher Education, Employment and Social Security to collect and analyze labor market data for policy development purposes; and (g) promote youth interest in employment.

31. Goals of 7NDP: The overall goal for economic and social development, as set out in the 7NDP and Vision 2020, is the eliminate poverty and improvement in the well-being of the greatest number of Maldivians. The link between achieving this overarching goal and the private sector development in the Maldives is formally recognized in the 7NDP. It explicitly targets private sector participation as one of the key strategies to be pursued in 2006-2010, recognizing that private sector development is critical to achieving the levels of sustainable economic growth required by the country. It recognizes need for partnership between the Government and private sector, a situation that in the past has not always existed and that will require a radical shift in perceptions, attitudes and approaches during the 7NDP period.

32. Private Sector Development Channels: The 7NDP sets out the following key mechanisms needed for developing the private sector: (a) formalizing the economy; (b) improving corporate governance and transparency; (c) promoting responsible business 13 Ministry of Planning and National Development, Maldives Population and Housing Census conducted during 21-28 March 2006. Census 2006 was carried out in all the 196 administrative islands, 88 resort islands and 34 industrial and other islands of the country. Data relating to the size, geographical distribution and socio-economic characteristics of the population such as sex, age, educational attainment, marital status and employment were collected and are presented in these tables. Four questionnaires were administered for census data collection, namely: Household Listing Form, Person's Listing Form, Household Form (includes household and persons information) and Establishment Form.


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practices; (d) maximizing the potential of public-private partnerships, with a view to increasing; (e) private investment in the national economy and to providing opportunities for SMEs and small-scale entrepreneurs to participate in a more competitive environment; and (f) developing linkages within the domestic and international private sectors to share knowledge, expertise, resources, and technology. Within the various sub-goals of the 7NDP, those that apply to the development of the private sector and SMEs are the following ones: (a) a diversified economy (goal 3); (b) improved access and expanded opportunities (goal 4); (c) the elimination of poverty, increased equity, and gender equality (goal 5); and (f) support for the rapid recovery of sub-sectors damaged by the tsunami (goal 1).

33. Measurable Indicators: Realization of these goals is recognized as too broad for developing an action plan with policies, projects, programs and institutional mechanisms. In an effort to operationalize the goals, the 7NDP establishes a set of measurable objectives to increase private sector development, including SME and micro-enterprise development. Volume II of the 7NDP lays out a set of roadmaps within 34 themes covering the 2006-2010 goals. Annex B presents the specific benchmarks associated with actions to be taken in the area of private sector development and related activities in the regulatory environment, skills development and SOE restructuring and privatization.

2.3 External Assistance in the Atolls

34. Asian Development Bank Strategy: The ADB’s operational strategy for 2006-2008 encompasses (i) fiscal management, (ii) regional development, and (iii) the environment.14 Fiscal management supports prudent control that is needed to support a stable and balanced growth, currently projected at 5 to 6 percent a year. The longer-term concern, however, is regional development. The ADB’s support for regional development currently comprises technical assistance for regional planning studies and assistance to prepare future social infrastructural investment projects in specific regional growth centers. It is also assisting in human resource development plans for education, health and population to increase the countrywide availability of these services. Apart from the Tsunami Emergency Assistance Program, it has the Outer Island Development Project ($12 million), the Outer Island Electrification Project ($8 million), the Regional Development Project ($20 million), the Post-Secondary Education Development ($21 million), Information Technology Development Project ($11 million), Domestic Maritime Transport Development Project ($8 million), and the Strengthening Public Accounts and Governance ($5 million).

35. ADB Lending Activity: Up to now the ADB has provided six loans to the Government totally $33.9 million and primarily directed to the power and ports subsectors. The first loan under the Inter-Island Transport Project was unsuccessful because it underestimated fuel costs for two vessels purchased under the loan.15 The second loan for an included five subprojects for atoll harbors, power, and meteorological development.16 The subsequent four loans mainly benefited Male’ and had little direct benefit to the outer atolls.17 Indeed, the ADB’s 2006-2008

14 ADB, “Country Operational Strategy Study: The Republic of Maldives”. STS MLD 95017. October 2005. 15 ADB, “Loan No. 513-MLD(SF): Inter-Island Transport for $1.0 million”. Approved 18 June 1981. For a review of the loan, see ADB, “Interislands Transport Operations Review”. TA No. 679-MLD. 25 April 1985. 16 ADB, “Loan No. 681-MLD(SF): Multiproject, for $2.38 million”. Approved 29 March 1984. 17 ADB, “Loan No. 848-MLD(SF): Power System Development, for $6.1 million”. Approved 28 October 1987; ADB, “Loan No. 911-MLD(SF): Male Port Development, for $6.4 million”. Approved 20 October 1988; ADB, “Loan No.


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country operations strategy notes that, “the Bank’s exclusive focus on Male’ has contributed to the income disparities between those who live in Male’ and the surrounding areas, and those who live in the atolls and more remote regions.”18 The ADB has also provided sixteen advisory TAs totaling $4.75 million, a TA for the preparation of an environmental management strategy, and six TAs for the preparation of loan projects for $0.87 million. These have supported, among others, the preparation of the National Development Plans, including those supporting regional development.

36. United Nations: Five United Nations (UN) organizations maintain residences in the Maldives, namely, United Nations Development Program (UNDP), United Nations Children's Fund (UNICEF), United Nations Population Fund (UNFPA), World Health Organisation (WHO), and United Nations Volunteers (UNV). Their activities are coordinated under the United Nations Development Framework (UNDAF) for Maldives.19 Of these, UNDP provides considerable support to private sector development, and specifically microenterprises and SMEs. In recent years it has provided assistance for agriculture development and credit schemes on the outer atoll groups and for health, women in development, and population planning. Its projects include Atoll Development and Local Governance, Social Mobilization, and a micro-credit fund for schools, jetties and other activities amounting to $400,000.

37. World Bank: The World Bank’s involvement in the Maldives has been somewhat limited. Since 1979 it has financed six projects and produced five formal economic reports. Two educational projects contributed to manpower development and upgrading of the airport in Male’ supported the growth of tourism. Three projects helped modernize the fishing fleet and strengthen public sector capacity in collecting, processing, and exporting fish. Apart from its Post-Tsunami Emergency Relief and Reconstruction Project and Second Post Tsunami Emergency Recovery Credit, the World Bank has a $16 million International Development Association (IDA) funded Integrated Human Development Project. Its four components aim to strengthening delivery of (a) education services; (b) health services; (c) employment services; and (d) community services. The fourth component on strengthening community services will improve service delivery by strengthening community services. The project will strengthen and improve community groups by providing: (a) leadership and management skills training to community based organizations; (b) financial support to community groups, through a community development fund and cooperatives offering community-wide services; (c) support to the development of multi-purpose buildings to consolidate the provision of services; and (d) the development of broad networks on each focus island.

38. International Finance Corporation: The IFC has a portfolio in Maldives that consists of three investments, made up of $1.2 million of equity and $25.5 million of loans outstanding. Its activities have supported private investment in tourism, logistics and the financial sector. Specific projects that is has undertaken since 1995 are as follows: (a) Wataniya Telecom Maldives Pvt. Ltd (August 2005; information sector); (b) Universal Maldiv (March 2005; accommodation and tourism services); Taj Maldives Private Limited (April 2003) Maldives Villa

1121-MLD(SF): Second Power System Development, for $9.2 million. Approved 19 November 1991; ADB, “Loan No. 1226-MLD(SF): Second Male Port, for $8.8 million. Approved 1 April 1993. 18 ADB, “Country Operational Strategy Study: The Republic of Maldives”. STS MLD 95017. October 2005. 19 United Nations, “Development Assistance Framework for Republic of Maldives 2003-2007”. Malé. 26 July 2002.


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Shipping (February 2002; accommodation and tourism services); Maldives Leasing Company (December 2000; finance and insurance); and Villa Shipping & Trading Co. Ltd (May 1995).

II. PROPOSED SECTOR DEVELOPMENT PROJECT

3. PROJECT COVERAGE AND IMPLEMENTATION PROCESS 3.1 Objectives, Scope and Strategy

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

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

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

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

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

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


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

VisionCreate

conditions necessary for

achieving dynamic SME growth for particular

sectors and industries in targeted regions of the country by 2010.

Figure 1 SME Development Strategy for the Maldives

Strategic Goal 1Develop Regional

Support of Business Services

Strategic Goal 3Strengthen

Institutional Support at National Level

Strategic Goal 2Enhance Financial System for MSMEs

in Atolls

Strategic Goal 4Improve

Environment for Doing Business

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

Institutional Capacity Building of Public and Private Sectors

Projects to be ImplementedBDS Centers in Target Regions

Credit Guarantee Program for MSMEsCost Sharing Facility

Media Campaign and SME PortalCapacity Building of Economic Development Unit (EDU) in MEDT

Support for National Chamber of Commerce and Industries

Strategic Goal 5Cluster Approach to

Integrate Target Activities in Atolls

42. Projects: Operational activities focus on a set of projects designed within clusters framework that ensure the mutual support of each activity. The projects are grouped into two types of activities. The first is the set of activities that deliver business development services both in the selected regions of the country and through public and private institutions at the national level. They encompass the BDS regional centers, capacity building of the Enterprise Development Unit of MEDT, support to the national chamber of commerce and industry, and the media campaign and SME portal. The second is the set of financing mechanisms aimed at expanding available funds for MSMEs in the atolls. These include the credit guarantee program, cost-sharing facility and risk capital fund, as well as training and other support needed to ensure their delivery. In several of the proposed pilot projects there exist one or more prerequisites that


18

could be immediately addressed as a means of providing the appropriate facilitating environment for the commercialization activities. Effective implementation of these projects depends upon one or more prerequisites that can be addressed within a short timeframe in order to provide an appropriate facilitating environment for the project activities. These prerequisites are in the form of policies to facilitate the use of productive and financial resources, programs to support production, distribution and marketing of products, new or enhanced institutional capacities, modifications in the legal and regulatory environment, and infrastructural services and support, including transportation and communications.

3.2 Targeted Sectors for MSME Development 43. Rationale for Prioritizing Sectors: Measurable results of MSME development in the atolls will be gauged by the ability of the project to generate successful outcomes that produce high-profile outcomes in a relatively short period of time. To achieve these outcomes, specific sectors are given priority in terms of project support from BDS and financing from preferential sources such as the cost-sharing facility and risk capital fund. Selection of the priority activities has been based on wide-ranging interviews with private sector individuals, especially those located in the atolls, as well as public sector officials in both the atolls and capital. Consideration has also been given to the country’s strategic goals and objectives in the 7th National Development Plan, as well as the broad directions established by Vision 2020, and the Strategic Economic Plan (SEP) and the Integrated Framework (IF).20

44. Competitiveness and Development Impact of Prioritizing Sectors: The sectors that have been selected as having high profiles with potentially large demonstrable effects on the country share several common characteristics such as their strong competitiveness in domestic as well as international markets in terms of high value added products having strong niche market potential, as well as their potentially strong impact on economic development in the atolls and large job creation opportunities. In agriculture, for example, several fruits and vegetables have been identified as having a high commercial market potential, and their selection criteria has been based on the degree of year-round availability, technology needs, transportation and storage requirements, production costs, potential in the domestic, resort and export markets, and value adding capabilities. Indeed, among the vegetable products having commercial potential, medicinal plants score the highest because of their year-round production capability, low storage and transportation requirements, large market potential for resorts and export, and considerable value adding capabilities. In handicrafts, the local industry has suffered from cheap substitute products from Indonesia, Malaysia and Thailand, but the potential for high value-added handicrafts with authenticated product labeling is enormous. Skills development in this sector would provide the basis for establishing supplies to both the booming tourism industry and foreign niche markets in Europe and the United States. Tourism-related activities, like handicrafts, have huge employment generating capabilities. They involve wide ranging activities in the atolls related to housing, water sports, as well as handicraft activities in woodworking and ‘Kunaa’ (‘Thundukunaa’) mats that are authentic to the Maldives. Similarly, fish processing activities rank high in terms of their actual and potential contribution to atoll development and employment generation, and they have a large market potential in the domestic, resort and foreign sectors that have yet to be exploited. The prioritized sectors should 20 See Ministry of Planning and National Development (2005a), “Strategic Economic Plan”. Maldives: Republic of Maldives; and Integrated Framework (2005), “Integrated Framework Diagnostic Trade Integration Study for the Maldives. Draft Report”. Geneva, November 2005.


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ultimately lead to (a) diversification and growth in activities in which the country has a competitive advantage relative to other supply sources, (b) the generation of employment opportunities in rural atolls and island communities, and (c) an equitable improvement of livelihoods across the main regions of the country.

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

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

maintenance of coastal vessels and wholesale trade are also ranked high, albeit lower than the others.

47. Handicrafts: In the past Maldivian craftsmanship of lacquer ware, woven mats, jewelry made of corals, paintings and prints had a worldwide reputation of excellence, but with the influx of cheap, foreign-produced handicrafts the local craftsmen now contribute less than one percent of the domestic market for handicrafts, according to wholesalers interviewed. The reason for the decline is the high cost of producing the products, due to high transportation costs, a fragmented geography that gives rise to diseconomies of scale, and a scarcity of raw materials relative to producers of handicraft products in other Asian countries. Yet the potential for handicrafts to satisfy the growing demands of tourism is huge. Based on interviews with handicraft producers, wholesalers, retailers and the Maldivian Association of Tourism Industry (MATI), the potential volume of sales for the handicraft sector is US$30 million a year and is

Table 9: Ranking of Sectors for MSME Development Ranking Handicraft 1 Agricultural and Agribusiness 2 Tourism-Related Activity 3 Wholesale Trade 4 Construction 5 Fish processing 6 Transport 7

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


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expected to grow to US$50 million annually in five years.21 The relatively high cost of handicrafts is unlikely to drive away customers since the Maldives has successfully created a brand name for its tourist industry and caters to up-market clients. The handicraft sector therefore has the potential for local economic development, particularly in the Northern and Southern Development Regions, through the creation of a handicraft clusters that would support MSME development and generation income for poorer segments of the population, including women. In addition to financing, there is an urgent need to introduce a certification system for authentic products from Maldives. Other promotion activities that are simple to implement are the establishment of a handicraft display center at the airport, support of these products by the Tourist Promotion Board, and improved collaboration with resort owners to promote more Maldivian handicrafts as an act of corporate social responsibility.

48. Agricultural Commercialization: Post-tsunami reconstruction support by donors has focused almost exclusively on the production side of agriculture, leaving many farmers with little or no knowledge about the types of crops required by the market or how to market and distribute the products in the local, Male’ and resort markets. The strategy for agricultural commercialization in targeted atolls seeks to promote a market-driven process that in the short to medium-term will support specific types of activities to the local, Male’ and resort markets. It relies on the following key components: (a) develop distinctive crop types and agribusiness activities for the domestic, resort and foreign markets; (b) adopt a phased approach to project interventions, but provide priority programs to commercialization activities aimed for the domestic and resort markets since development of those activities will provide parallel support to subsistence farming in the inhabited islands; (c) provide for value-added processing industries by facilitating high value-added agribusiness activities and developing a limited but significant number of agriculture-based industries in different parts of the country; (d) adopt a clusters approach to the integration of production, marketing and distribution activities for targeted geographic areas; (e) enhance the catalytic role of public sector for ‘kick-starting’ commercial activities and strengthening private sector commercial activities through national, regional and local projects and programs supported by the ADB and other development partners; (f) provide for an institutional mechanism through the Business Development Services centers in the atolls that will allow rapid decision-making processes to take place; and (g) target the poorest in terms of activities that will combine subsistence and commercial production activities, encourage an increased role of women in agribusiness activities at the local level, and ensure an equitable distribution of benefits from commercial activities throughout the country.

49. Tourism-Related Activities: In 2006 a new leasing process was initiated that represents a significant departure from earlier policies and has caused concern among resort owners and travel agents. Under the new initiative, the Government is leasing 35 new islands, a number that compares with 87 resorts that were introduced to tourism over 30 years ago. The new islands being set aside for resort development will expand resort locations to the Northern, Southern and South-Central Development Regions. Existing and potential synergies of tourism-related activities in the inhabited islands of the outer atolls are therefore expected to provide a large number of new opportunities for MSMEs. Among the activities identified in the field trips are village tours conducted in a culturally sensitive manner that exposes visitors to different facets of Maldivian culture and to add value to traditional activities, some of which may be

21 The figures are based on 600,000 tourists currently visit the Maldives each year and per capita expenditures on souvenirs and handicrafts of US$50. With more than thirty new resorts under construction and planned for the near future, the Tourism Industry predict a million tourist arrivals by 2010.


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disappearing, as well as the introduction of visitors to oral and intangible heritage, including music, languages, oral traditions and the performing arts. Other tours could provide insights into traditional agricultural and fishing activities, demonstration of traditional craft making and description of traditional life styles by villagers.

3.3 Targeted Regions for MSME Development 50. Government’s Regional Development Strategy: Regional development under the 7th National Development Plan (7NDP) continues to support the process initiated under the 6th Development Plan (6NDP). Both Plans have identified the far north and far south regions as the initial focal areas to be developed. The Northern Development Region (NDR) covers Haa Alifu, Haa Dhaal, and Shaviyani Atolls, and the Southern Development Region (SDR) covers Gaafu Alifu, Gaafu Dhaal, Gnaviyani, Gnaviyani and Seenu Atolls. The regional hub for the NDR is Kulhuduffushi in Haa Dhaalu Atoll and that of the SDR is Hithadhoo in Seenu Atoll. During the 7NDP period the Government is establishing three additional development regions to cover the remaining 13 atolls. They consist of the Northern Central Development Region (NCDR), Central Development Region (CDR), and the Southern Central Development Region (SCDR). During the 6NDP’s first phase the objective was to increase the standard of living in the designated regions by promoting economic development, provision of health care services, education and infrastructure; in the second phase, sustainable development is being promoted by (i) increasing employment and investment opportunities; (ii) ensuring adequate infrastructure planning in all sectors; and (iii) improving social development and environmental protection.

51. Growth Nodes: Within the regions 36 growth nodes are identified: (i) in the Northern Development Region, growth nodes include Huvarafushi Island, which will serve as an international transshipment hub, and Kulhudhuffishi Island, which will serve as the regional hub; (ii) in the North Central Development Region there are six growth nodes, with Naifaru Island serving as the regional hub; (iii) in the Central Development Region there are another nine growth nodes that include the important islands of Thulhaadhoo, Eydhafushi and, to a lesser extent, Kihaadhoo; (iv) in the Southern Central Development Region there are another nine growth nodes, including the one in Funadhoo Island in Laamu Atoll; and (v) in the Southern Development Region has as its regional hub Hithadhoo Island on Addu Atoll, as well as the important growth node in the island of Foammulah in Gnaviyani Atoll.

52. Sequencing of Regions: As a means of ensuring successful implementation of the project loan within the proposed funding level, the MSME development project will adopt a sequencing approach that targets specific regions and subsequently expands the coverage once the programs and atoll-level projects are well established in the selected regions. Identification of the regions is based on discussions with public and private sector officials, interviews with atoll and island chiefs and local business persons during several field visits, and discussions with representatives of development partners that have ongoing projects in the atolls. At the onset it was determined that the selected regions should be aligned with national goals and objectives, particularly, those outlined in the 7NDP, as well as the broad directions set by the Vision 2020, Integrated Framework and the Strategic Economic Plan (SEP). Five criteria were used to rank and ultimately select the sequencing of targeted regions: (i) population; (ii) land area; (iii) infrastructure; (iv) skill levels, traditions and culture conducive to business development; and (v) economic environment conducive to MSME development. Table 10 shows the ranking of the five regions. Based on the ranking, the priority regions are the Northern and Southern Regions (see Figure 2). The secondary region to be targeted at some future date is the South-Central Region.


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3.4 Institutional Delivery Mechanism 53. Institutional Framework: The design and implementation of private sector development (PSD) programs and microenterprise and SME development is currently characterized by profound fragmentation across ministries, and a lack of systematic participation from the private sector. Inadequate coordination among those programs hinders the formulation and implementation of an MSME development strategy in the Maldives. The establishment of the Enterprise Development Unit (EDU) of the Minister of Economic Development and Trade in 2004 was designed to bring together these different PSD and SME development activities under a single institutional mechanism.22 Policy 4 of the 7NDP supports the development of private enterprises by encouraging entrepreneurial development, technology transfer and private sector innovation, and Strategy 4.1 proposes the introduction of private sector development programs for small and medium enterprises (SME) by providing technical assistance to start-up enterprises through the establishment of the SME development unit.

54. Delivery Channels: The present MSME development project builds on existing institutional arrangements and expands its scope from what is currently a centralized system to one focused on delivery of services to entrepreneurs in the atolls. Figure 3 provides a visual summary of the organizational structure of the SME Development (SMED) project. The Ministry of Finance and Treasury will act as Executing Agency and the Ministry of Economic Development and Trade (MEDT) would be the Implementing Agency, with guidance and oversight from the inter-ministerial SME Policy Committee. The EDU will operate as a semi-

22 President’s Office letter 73 of October 7, 2004 approved the establishment of the small business unit. For details, see Ministry of Economic Development and Trade, “Enterprise Development Unit (EDU)”. Undated.

Table 10: Ranking of Regions for MSME Development

Criteria Sector / Industry

Southern Northern South-Central North-Central Central Level Rank Level Rank Level Rank Level Rank Level Rank

Population 71,000 5 56,000 3 46,096 3 55,954 3 26,843 1 Land area 2,350 3 3,951 5 2,297 3 1,720 1 1,005 1 Existing Infrastructure

Airports, roads, harbors

High 5 Moderate 3 High 5 Low 1 Low 1

Skills, traditions and culture + support sectors

Agriculture Moderate 3 High 5 High 5 Low 1 Low 1 Tourism Moderate 3 Moderate 3 High 5 Low 1 Low 1

Handicraft High (mat weaving) 5 Moderate 3 Low 1

High – lacquerwork handloom

5 Low 1

Conducive environment for business

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

High 5 High 5 Moderate 3 Low 1 High 5

Economic activity High 5 High 5 Moderate 3 Low 1 Low 1

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

Prioritization Level Primary Region Primary Region Secondary Region Other Regions

Note: High = 5; moderate = 3; low = 1. Source: Based on joint evaluations of Enterprise Development Unit, Ministry of Economic Development and Trade, and PPTA

Team. Statistical data from Ministry of Planning and National Development (2006), “Population and Housing Census 2006, Preliminary Results”. Male’, Republic of Maldives; and Ministry of Planning and National Development (2005b),”Statistical Yearbook”. Male’, Republic of Maldives.


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autonomous institution providing the necessary interface between the public and private sectors. Business Development Services Centers (BDSCs) located in each of the targeted regions will provide training and other business development support services needed to bolster


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MSME activities, especially in the focal sectors. It will also support entrepreneurs in preparing information needed for financing from three types of mechanisms developed under the present projects. Both the structure and activities of the BDSCs and the financing mechanisms to be developed are discussed in more detail in the next two chapters.

55. Enterprise Development Unit: The basic organizational structure consists of the following Divisions. (i) Policy and Information Division responsible for statistics that will serve for monitoring and evaluation of the project; information gathering and processing; information dissemination; web-site development; and coordination with line ministries and private sector organizations; (ii) SME Services Division responsible for entrepreneurship training; preparation of brochures; management and operation of the handicrafts center; networking of productive and support activities for SME activities in the regions; and supporting linkages for SME financing; and (iii) Regional Outreach Centers responsible for program extension to the atolls in targeted regions; and information gathering and dissemination in the target regions. The structure and functions of EDU will evolve over the course of its development, especially as new staff are training and fielded.

56. Monitoring and Evaluation: An independent unit comprising staff from the Chamber of Industry and Commerce and the Ministry of Economic Development and Trade will provide ongoing monitoring and evaluation (M&E) analysis of the project. It will define the strategy for


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measuring, on an ongoing basis, the program’s performance by identifying the main performance indicators, sources of data and timetable for data collection. It will also set out an evaluation strategy for the program in terms of outcomes related to MSME development in the regions: (i) fostering enterprise development; (ii) contributing to the business environment of the regions; (iii) encouraging the development of cooperatives and clusters in priority sectors; (iv) providing access to relevant information; (v) raising awareness of enterprise development issues in the atolls; (vi) increasing the competitiveness of businesses in the Male’ and resort markets, as well as international niche markets. A key responsibility of the M&E unit will be gathering and processing quantitative information needed to determine the extent to which contributing programs support the achievement of the project objectives.

57. M&E Indicators: M&E indicators will encompass input, process, output and impact indicators. Input indicators will include (i) finance for line of credit; (ii) technical assistance and training for staff of lending agencies, that is, Bank of Maldives branches in the target atolls; (iii) Business Development Service Centers (BDSC) technical assistance to prepare entrepreneurs for screening system; (iv) BDSC co-sharing portfolio management system and client tracking system; and (v) BDSC technical assistance and training to potential borrowers, that is, how to prepare a bankable project. Process indicators will cover (i) number of credit and grant-based operations received and reviewed by the BDSC, Bank of Maldives branches and non-banking sector entities (insurance and fund manager); (ii) total credits and grants approved; and (iii) training of staff completed and number of staff trained. Output Indicators include (i) amount of credit and grants distributed; (ii) loan repayment rate, that is, loan repayment as a percent of repayments due; and (iii) transaction costs of each grant and loan facility. Impact Indicators analyze (i) rates of growth of MSME, by type and location, in the target regions relative to that of the economy as a whole; (ii) employment generation in MSME in each target region relative to that of the economy as a whole. A similar set of input, process, output and impact indicators will be developed for the Business Development Service Centers and is described in Chapter 4.

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

Bill No. Legislation Observations and Proposals

10/96 Companies Act of Maldives

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

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

31/79 Maldives Import Export Law

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

9/96 Maldives Partnership Act

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

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

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

N/A Business Profit Tax Bill

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

• Simplified tax procedures should be set out for MSMEs.


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59. Regulatory and Legal Framework: Despite the existence of commercial legislation in the Maldives, there remains the need to formulate legislations on bankruptcy and insolvency, legislation on banking and taxation laws, as well as accounting and auditing standards for

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

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

Issue standard simple regulations to recognise and govern sole proprietorships.

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

Conduct pilot decentralization of business registrations outside Male’.

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

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

Plan for online registration system.

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

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

Establish regulatory review process for all existing and proposed commercial legislation

Formulate a recourse mechanism to appeal administrative decisions.

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

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

Enact draft laws on Banking, Bankruptcy and Insolvency.

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

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

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

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

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

Develop corporate governance guidelines and disclosure requirements non financial requirements.

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

Establish small claims court to strengthen contract enforcement of MSMEs.

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

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

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

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

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

Develop a simplified tax reporting system for MSMEs.

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

Train, develop and support accounting professionals in the country.

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

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

Leasing Objective: Create enabling legal framework for finance leasing.

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

Introduce accounting standards for leasing.


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business and minimum wage levels. A Business Profit Tax Bill has been drafted, which will offer competitive corporate tax measures that support the growth of MSMEs. Nevertheless, MSMEs will find compliance with the tax rules particularly onerous because they generally have limited in-house resources to deal with complex tax deductions, credits and accounting requirements.

60. Prior to introducing such measures the Government should take steps to simplify compliance with tax rules. For example, the Government can provide single points of contact for example in the BDSCs for MSMEs and on-line information and support services. The BDSCs should also be equipped to answer queries on such matters and support MSMEs with self-help taxation packages. The Government also needs to strengthen its monitoring of regulatory and legal compliance of businesses, and it should facilitate information to MSMEs on regulatory and legal compliance requirements. Table 11 summarizes actions needing to be taken for a business environment that is conducive to SME development.

61. Impact of Business Regulations: In Maldives regulators do not conduct extensive research on impact of regulations on the target groups. Government is unaware of the possible impact the laws and regulations can have on businesses. The resulting lack of an appropriate framework for stakeholder participation prevents private sector from intelligently participating in discussions and forming opinions on the objective of a regulation and its potential impact. Moreover, laws drafted and enacted often lack operative details and usually are left to regulations which are poorly considered.

62. Regulatory Impact Assessment (RIA): The introduction of Regulatory Impact Assessment (RIA) will help the Government to become a facilitator of private sector development. An RIA mechanism will provide Government with an opportunity to weigh and present the relevant evidence on the positive and negative effects of such interventions, including reviewing the impact of policies after they have been implemented. Best practices suggest the need to firmly embed RIA policy in the appropriate legal framework. Institutionalization typically requires endorsement of RIA policy and establishment of a RIA working group adopting a regulatory reform policy at highest political level and establishment of a central regulatory body for the RIA process. The initiative to adopt a regulatory reform policy will need to be endorsed at the highest political level and executed by a RIA task force to set out a national RIA policy. At a minimum, the RIA policy will (i) specify procedures for creating and changing a regulation, and how to apply RIA within the regulatory process; (ii) specify mechanisms for consultation with stakeholders, as well as mechanisms for assuring transparency within the stakeholder consultation process; (iii) specify types and level of regulations subject for reviewing; and (iv) specify enforcement mechanisms, including rewards and sanctions.

63. RIA Monitoring Functions: Initially RIA functions will be assigned to the Monitoring and Evaluation Unit of the project, with the objective of evaluating the impact of actual or proposed regulations affecting MSMEs. The RIA activities will include prioritization of regulations that are likely to have appreciable benefits and costs. The profession staff involved in RIA activities should not be directly involved in the formulation of laws and regulations in other ministries in order to maintain an appropriate level of independence in their monitoring functions.


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4. KEY FEATURE: BUSINESS DEVELOPMENT SERVICES 4.1 Existing Situation in the Maldives

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

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

4.2 Cluster-Based Development Strategy

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


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67. Cluster Experiences: The Maldives has already used clusters approaches in its development planning. The Strategic Economic Plan (SEP) and the Integrated Framework (IP) program both have explored clusters as a means of developing the country’s core sector of tourism, fisheries and agriculture, as well as new activities in information and communications technology (ICT) and logistics.23 Both studies note that successful development of these sectors will require bolstering of key elements in their respective clusters, notably (i) financial services in domestic banking, insurance and reinsurance, (ii) professional and business services in accounting, legal, management consulting, education and training, architecture and engineering, (iii) transport and logistics infrastructure and services, and (iv) communication and telecommunication infrastructure and services.

68. Strategy: Although successful clusters share some common elements with others, each is unique in its ability to addresses a specific set of strengths and weaknesses. For the Maldives, the proposed strategy for cluster development consists of the following elements: (i) bottom-up approach that evolve from local atoll conditions; (ii) separation of responsibilities between the atolls and BMOs and public sector in the capital; (iii) enhanced public-private partnership, with cluster development led by private sector-based leadership groups in the atolls and the public sector and BMOs playing a facilitating role to address common constraints of most clusters in a given sector such as regulations or bottlenecks in the supply chain; (iv) capacity building in both atolls and capital that not only ensures appropriate responsibilities are carried out effectively, but develop dynamic leadership roles in each cluster and eventually development of champions for the clusters.

69. Implementation: Based on these elements, the cluster development strategy for MSME development in the atolls will combine cluster building with reverse planning using a bottom-up approach and an integrated local economic development planning. Rapid implementation of this approach will be achieved through the following six steps: (i) gather SME stakeholders and select the cluster based on predefined criteria such as the employment impact potential; (ii) form the clusters; (iii) conduct participatory rapid economic appraisal (REA) identifying comparative and competitive advantages of the atolls; (iv) develop short-term action plans for local economic development (LED) based on simple and do-able plans; (iv) set up a matching grant fund for ‘light house projects’ of LED; (v) train local facilitators of LED; and (vi) replicate successful activities in other atolls.

70. Capacity Building: The cluster approach aims to achieve its outcomes by helping the various cluster agents to develop a consensus-based approach for the cluster as a whole and by strengthening their capacity to act upon such a approach. Capacity development is based on two components. The first component aims to reduce fragmentation of knowledge, and concurrently to provide an opportunity for MSMEs to draw attention to a common and often very innovative agendas for addressing networking activities in the atolls. The second component of the approach aims to enable the various cluster agents to overcome limitations associated with un-networked traditional practices and put in their place adopt a sustainable, autonomous governance framework which will keep the local economy in a dynamic growth path long after technical assistance has withdrawn from the clusters.

4.3 Organizational Structure

23 See Ministry of Planning and National Development (2005), “Strategic Economic Plan”. Male’, Republic of Maldives; and Integrated Framework (2005), “Integrated Framework Diagnostic Trade Integration Study for the Maldives. Draft Report”. Geneva, November 2005.


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71. Functions: The Business Development Service Centers will be the principal vehicle for delivery of BDS products to MSMEs and will facilitate cluster development in the atolls. Each focal region will have a BDSC offering a wide range of services to MSMEs and cooperative initiatives at cost-based prices. As neither start-ups nor established MSMEs have been exposed to the concept of professional, demand-oriented delivery of BDS at market prices so far, and are therefore unprepared to pay the cost-based price for such services, a Cost Sharing Facility (CSF) will be established as the principal funding mechanism for the development of a commercial BDS market. The CSF will enable the BDSCs to initially offer services at a low, subsidized price. It will also support the BDSCs in developing service products and provide substantial income to the Centers during the three-year funding of the CSF. The Centers will have a business plan indicating core activities, required investment and planned revenue streams. They will develop a clear strategy comprising a vision, mission, goals and line of activities, as well as an annual operational plan.

72. Objectives: The BDSCs will have the following three objectives: (i) provide BDS products to start-ups and established MSMEs; (ii) facilitate Local Economic Development (LED) and cluster development in their respective regions; and (iii) link start-ups and other types of MSMEs to financing opportunities. To meet its objectives the BDSCs will offer a wide range of services classified into four categories: (i) consulting services for business planning and business counseling, identification and provision of information, and coaching; (ii) training services on costing and pricing, marketing and sales, accounting and entrepreneurship; (iii) facilitation services for market access facilitation, accessing finance and facilitating the formation of cooperatives; and (iv) government-related services covering support for business registration and licensing, linking to government databases, and linking to government extension services. To sustain its operation following the termination of the three-year Cost Sharing Facility, the BDSC will become an independent and market oriented service provider with a development and commercial objectives.

4.4 Capacity Building 73. Needs Identification: One of the major constraints to the effective development of MSME in the atolls is the lack of capacity in enterprise development services. The ability of the proposed project to successfully deliver the type of support needed by MSMEs in the atolls will depend on capacity development in the three main channels for BDS (i) The Business Development Services Centers (BDSCs) in each of the targeted regions; (ii) the Enterprise Development Unit (EDU) of the Ministry of Economic Development and Trade (MEDT); and (iii) the Maldives Chamber of Commerce and Industries.

74. Cluster Development: It should be emphasized that capacity building cannot be confined to a once-and-for-all initiative such as the identification/provision of a BDS previously unavailable to the cluster MSMEs. Instead the aim is to enable the various cluster actors to tackle new challenges and to seize upon more ambitious visions on a sustainable basis. Such an objective involves, for example, strengthening the capacity of the target sector businesses to convey their requests to the BDS providers, lowering the risk perceived by BDS providers in doing business with MSMEs, enabling BDS providers and MSME owners to identify institutional partners able and willing to co-finance the development of new BDS, and identifying more effective procedures to assess BDS impact.

75. Enterprise Development Unit (EDU): The EDU is one of the main pillars of the Government’s efforts to create an effective and competitive private sector throughout the country. Following its establishment under MEDT by Letter 73 of the President’s Office in


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October 2004, the EDU currently operates with seven recently hired staff, who are relatively young and in need of experience in facilitating market development and promotion to MSMEs. At the onset, the EDU will need to undertake a strategic planning process consisting of the following steps: (i) assess and adjust its organizational structure in response to the new project; (ii) ensure that all EDU staff works towards a common goal established by the project; (iii) identify the HRD requirements and gaps; (iv) conduct an intensive HRD development program; and (v) focus the relatively limited resources of its staff on key activities.

76. Business Development Service Centers (BDSCs): Since SME development by delivery of BDS is a fairly new concept in the Maldives, an international BDS expert will need to be contracted on an intermittent basis during the first three years of the project. The task of the expert will comprise the following activities: (i) elaboration and fine tuning of the BDSC concept; (ii) acquisition of the BDSC staff; (iii) development of appropriate BDS products; (iv) coaching staff in elaboration of operational plans; (v) on-the-job training of BDSC staff; (vi) monitoring and evaluating project progress; and (vi) knowledge management through workshops, seminars, conferences on the BDSC concepts. Additionally three types of capacity building activities will take place in the BDSCs. The first is training in business planning for start-ups, which consists of developing entrepreneurial competencies, identifying project ideas, business administration training, and elaboration of business plans, including their submission to financial institutions. The second activity involves SME consulting services in the area of enterprise creation, problem and solution identification, organization and management, market analysis, product marketing, finance, and management effectiveness. The final activity is training of trainers in adult education methods, communications and learning methods, training seminar, curriculum design, monitoring the performance of participants, and training skills.

77. Maldives National Chamber of Commerce and Industries (MNCCI): MNCCI has about 460 members, of which 60 to 80 percent are MSMEs, and it provides a range of services in advocacy, lobbying, liaison with Government, and trade fairs. Its effectiveness, however, is undermined by the lack of regional chapters in the atolls, a lack of strategy and plan of activities, and the absence of any BDS products for its members. The major constraints of MNCCI are the lack of a clear cut strategy, lack of professional staff and lack of funding. To address these constraints, SMED project will support MNCCI in its strategic planning process that includes the elaboration of an operational plan and a HRD plan. MNCCI will get an involvement in the operation of the BDSCs in the regions and will be represented in the appraisal committee of the Cost Sharing Fund.

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


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

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

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


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Table 12: BDS CentersPhase I

2008 2009 2010 2011 Sub-TotalINCOME 1000 US$ - 109.2 182.8 313.7 605.7

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

Cost Coverage Percent 0% 10% 33% 100% 44%EXPENDITURE 1000 US$ 58.8 757.2 310.5 313.7 1,381.5

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

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

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

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

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

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

Phase IIUnit of Acct

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

83. Business Development Services Centers: For the BDS Centers (BSDCs) the budget allocation is US$ 1.38 million over three years (Table 11). That amount covers the establishment of two Centers in the Northern and Southern Development Regions, including the


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building and equipping of an office and the purchase of a boat for inter-regional transport by staff members of each Center. It will also cover the competitive salaries of six (6) professional and four (4) administrative staff members, as well as the overhead costs for running the Centers. Technical assistance in the amount of US$ 385,000 will cover the design and implementation of cluster development projects the target sectors. Table 13: Enterprise Development Unit

Phase I2008 2009 2010 2011 Sub-total

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

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

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

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

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

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


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


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5. KEY FEATURE: COST SHARING FACILITY 5.1 Objective and Coverage

85. Framework: The Cost-Sharing Facility (CSF) has an initial capital contribution of $ 1.0 million (MRf 12.7 million), which aims to assist about 300 MSMEs and 25 Local Economic Development (LED) projects related to the four targeted clusters in the Northern and Southern Development Region. The facility will generate activity in the following areas: (i) Business Development Services (BDS); (ii) selected investments, especially for startups and young entrepreneurs; (iii) seed capital to start a business; and (iv) institutional capacity-building for

clusters and associations. Its purpose is twofold: first, to motivate new and young entrepreneurs to start a business by encouraging MSMEs to request non-financial business support from BDS Centers through assistance provided to entrepreneurs lacking access to bank loans in the form

Box 1: BDS Case Study for Start-Up Small Enterprise Shafeenaz Abdul Sattar recently completed a tailoring training course at the Ministry of Youth and Sports in Kulhudhuffushi, capital of Haa Dhaalu Atoll in the northern part of the Maldives. She is very interested in becoming an entrepreneur and starting her own tailoring shop. Last week she hear a radio announcement saying that the Business Development Service Center (BDSC) in Kulhudhuffushi is promoting the start-up of enterprises in the Northern Development Region.

The next day, Shafeenaz visits the BDSC and inquires about the type of support that is being offered. The BDS Officer, Mohamed Luveiz, explains the services of the BDSC and asks about her specific requirements. Ms. Sattar needs a business plan, advanced training in design and tailoring, and equipment for her shop that she plans to put in her home. Mr. Luveiz’s knowledge about the local market and his appreciation of Ms. Sattar’s idea’s suggest to him that it is a viable income-generating enterprise with good growth potential.

Together they draw up an application for support through the Cost-Sharing Facility (CSF). They estimate that the business development services component of the project amounts to MRf 8,000, of which Ms. Sattar will provide MRf 1,600 and the CSF will provide MRf 6,400 as a matching grant. They submit the application to the CSF Committee, which approves the BDS matching grant.

Mr. Luveiz finds that there are four other applicants wishing to start a tailoring and/or design shop in the Northern Development Region. A suitable trainer is identified with the help of the Communications Officer located in the Enterprise Development Unit (EDU) in Male. Within two weeks, the BDSC organizes a training program that consists of the advanced technical training as well as a more general ‘Start Your Own Business’ course consisting of market analysis, organizational and financial planning. After the training the BDSC supports Ms. Sattar in finalizing her business plan for the tailoring shop.

During the course of the training sessions, the BDSC helps Ms. Sattar to prepare a loan application with the business plan. Since she has no collateral, the bank rejects her loan application, and she proceeds to request a matching grant for the investment capital that she needs to start her business. Ms. Sattar orders the equipment and pays her MRf 10,000 share of the project investment to the BDSC. The BDSC then pay the suppliers directly, which totals MRf 50,000, and keeps ownership of the equipment in its name for anywhere between six months and a year, before turning the title over to Ms. Sattar. A short while after receiving the equipment that she’s ordered, Ms. Sattar opens her tailoring shop.


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of a maximum individual support amounting to $ 4,000 (MRf 50,000); secondly, to assist a limited number of cooperative efforts (lighthouse projects) in local economic development in the defined clusters along the line of non-financial business support and joint investments with a maximum individual support of $ 40,000 (MRf 500,000).

Table 14: Cost-Sharing Facility Phase I

2008 2009 2010 2011 Sub-Total Fund Value

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

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

Matching-Grant DisbursementsSmall Matching-Grants

Number of Matching Matching-Grants Number - 50 100 150 300 Average Matching-Grant Size 1000 US$ - 2.0 2.0 2.0 2.0 Maximum Matching-Grant Size 1000 US$ - 4.0 4.0 4.0 4.0 Outlay on Small Matching-Grants 1000 US$ - 100 200 300 600

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

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

MSME Contribution to ProjectsSmall Matching-Grants

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

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

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

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

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

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

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


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


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

MSME Entrepreneur

Business Development

Services Center (BDSC)

Commercial Banking

Institution

CSF Project Appraisal

CommitteeCSF Coordinator

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

Submit proposal and

details on business and

financing

Review proposal and determine if

entrepreneur’s matching funds are available

Identify BDS needs and

financing gap

Submit loan application to

Financial Institution

Assess loan application

Inform MSME about maximum loan eligibility

Forward decision to

BDSC

Review financing plan and request for matching grant

Check documents for

CSF application

Propose terms of CSF

assistance

Forward documents to CSF Project

Appraisal Committee

Final eligibility check and site

visit

Sign CSF Agreement

Transfer matching-grant

to BDSC account

Request applicant to pay matching funds

Deliver BDS

Pay suppliers and service providers

Monitor and evaluate business

development

Supervise and monitor project

Project appraisal and final decision


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

5.2 Operational Features 88. Functions: One of the prerequisite for entrepreneurs to receive CSF support is the completion of an application that needs to be submitted to the CSF Project Approval Committee. The application form covers information about the nature of business, the purpose of the project, details about requested support, market coverage, existing and needed equity, enterprise experience, expected employment generation, and contribution to island infrastructure. In general, support for MSMEs from small matching grants is targeted to all entrepreneurial activities, whereas cluster development efforts from larger matching grants are directed at selected activities in high-priority sectors of the outer atolls. Applications from individuals and groups will be encouraged, especially from cooperatives or cluster-based groups. Examples of the types of activities supported by the CSF are training from business management courses, hiring a consultant to create new handicraft designs, hiring an expert to improve on the quality and efficiency of fish processing, and supporting the purchase of capital investments. Ideally the facility would supplement commercial funding sources rather than replace them. 89. General Eligibility Criteria: The following criteria will be used to determine CSF eligibility: (i) business domicile in the outer atoll islands that are served by a BDSC; (ii) business plans having favourable market prospects;(iii) suitable professional background or management experience of applicant; (iv) cluster or cooperative project proposal in a priority sector; (v) ineligibility for a bank loan; (vi) ability of applicant to provide matching funds.

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


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91. Organizational Structure: The CSF will be a key SME Development instrument operated by the newly established Enterprise Development Unit (EDU) of the Ministry of Economic Development and Trade (MEDT). It will be organized as follows:

Staffing: MEDT will hire a coordinator for the CSF and appoint an auditor.

Authorization for Disbursements: The facility will be coordinated and administered by the CSF Coordinator and projects supported by the facility will be approved by EDU-nominated CSF Project Approval Committees. These committees will operate at the

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

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

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

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

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

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

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


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national level for cluster development projects and at the regional level for smaller MSME projects.

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

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

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

6. KEY FEATURE: CREDIT GUARANTEE FACILITY 6.1 Financing Approach

92. Background: The general banking practice in the Maldives limits loan amounts for businesses in the atolls to 50 percent of the assessed value of houses and registered vessels. Assets such as motor vehicles, office equipment, inventories and accounts receivables are not accepted by banks like the Bank of Maldives due to the difficulties in monitoring these assets and the lengthy procedures of foreclosures in cases of defaults by the borrowers.24 With only about 10 percent of construction built on same titled land, there is extremely limited collateral that business can use to acquire loans.25 There is therefore a need for new financial instruments that can overcome existing lending restrictions to enhance working capital and encourage investment, without unduly increasing commercial lending risks.

93. Overview: The proposed CGF is a special reserve fund for credit enhancement of SMEs managed by a financial guarantee agency, represented by Allied Insurance Company of the Maldives Pvt. Ltd (hereafter Allied Insurance). The fund size will be $2.5 million, preceded by an initial capital of $0.5 million during its pilot operations. The maximum loan size for individuals is $80,000 (MRf 1 million) and the anticipated average size is $40,000 (MRf 0.5 million). Implementation of the scheme will be based on a selective approach in which guarantees are extended on a case-by-case basis. Loan guarantee coverage will be targeted to a limited number of enterprises selected from enterprises having less than 50 employees and having operations in the target clusters and focused regions of the SMED project. Administration of the facility by Allied Insurance, the only Maldivian insurance company in the country, has been agreed upon with its board members and plans are underway to incorporate the activity within its organization. Insurance coverage will be given to all applying financial institutions for investment and working capital loans to eligible SMEs that have adequate cash flow and securities, based on independent CGF risk assessment and well-defined eligibility criteria. During the implementation of the pilot facility, ADB will cover the costs pertaining to salaries of the manager and support staff, marketing and travel to the focus regions, and Allied Insurance

24 Inventory and accounts receivables are nonetheless often used as collateral in other developing countries, especially for SMEs. 25 Nearly all enterprise owners report needing business loans in excess of their bank-accepted collateral value,

according to the survey of MSMEs in the atolls.


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will cover office and administration costs. At the beginning of the second phase, the CGF capital will be fully paid prior to commencing operations and interest earnings from its long-term deposit with commercial banks will contribute to the coverage of claims and administration costs. Box 3 summarizes the facility.

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

Box 3: Credit Guarantee Facility: Coverage and Organization

Phase 1: Pilot Operations

(2008)

Phase II: Regular

Operations (2009 onward) Characteristics of the Facility

Fund size US$ $500,000 $2,500,000 Functional Approach: Max loan US$ $ 80,000 $ 80,000 Based on a selective approach in which guarantees

are extended on a case-by-case basis Avg loan US$ $ 40,000 $ 40,000

Loan target Number end of year

5 loans in 2008 10 (2009) Eligibility Criteria: 40 (2010) (a) Number of employees less than 50

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

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

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

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

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

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

2727 For a case study on the reasons underlying the failure of some lending programs, see “M. Bechri, T. Najah and J.B. Nugent, “Tunisia's Lending Program to SMEs: Anatomy of an Institutional Failure?” February 6, 2000.


42

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

6.2 Operational Features 95. Eligibility Criteria: The target group eligible for guarantees can be delimited in terms of size, age, ownership, sector, and location of income generating activities. Best practices suggest the following criteria for eligibility in the present scheme: Enterprises with less than 50 full-time or seasonal employees Enterprises that have been operating for over a year Privately owned enterprises in the form of sole proprietorship, private limited liability

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

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

agricultural commercialization, tourism-related activities and fish processing

96. Type of Finance and Size of Loans: Both working capital or funds for investments will be guaranteed. Maximum amounts guaranteed for single borrowers will ensure diversification and sustainability for the fund. The maximum loan amounts for eligible businesses are as follows:

o Working Capital: US$ 40,000 (MRf 500,000) o Fixed asset purchase: US$ 80,000 (MRf 1,000,000) o Contracts with government agencies and bona fide medium and large enterprises (for

example, selected resorts): US$ 80,000 (MRf 1,000,000).

The reason for the differentiation in the ceiling amounts is that, while targeting investment capital is likely to create more additionality, loans for investment have longer repayment periods and are likely to require a larger amount of collateral. They are also less accessible than working capital to borrowers without guarantees.

97. Terms and Risk Coverage: Fees are charged as an annual premium to the amount of the loan guaranteed and as a one-time advance fee. The charge to borrowers will be an annual fee of 1.5 percent, plus a front-end fee of 1.5 percent on the value of the loan.28 The front-end fee is an administration or registration (commission) fee and is intended to discourage unjustified applications. The share of the lending institution in the risk of non-payment by the

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

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


43

borrower is 20 percent.29 Borrowers must pledge any assets acquired with the guaranteed loan as collateral. Commercial banks will be given adequate incentives to maximize loan repayment by borrowers and use a standard means of identifying arrears, including a relatively short and clear-cut maximum period of arrears before being compensated by the CGF. It is proposed that the CGF guarantee up to 80 percent of the outstanding loan principal and up to 80 percent of the foregone interest income during the first three months of arrears. The reimbursement excludes penalty fees and additional administrative costs.

98. Screening and Monitoring: Under the present selective approach, the guarantor has an important function to perform in determining the creditworthiness of the potential borrowers. There should be a clear division of responsibility between guarantor and the commercial bank in approving applications and monitoring borrowers to ensure that functions are not duplicated unnecessarily and that costs and delays are kept low, especially as it relates to bank requirements to fill in additional documents for the guarantee. Allied Insurance has a good working relationship with Bank of Maldives and other commercial banks, and experience has shown that processing times can be considerably reduced by the guarantee scheme through the division of screening and approval functions between the guarantor and commercial bank.

99. Defaults and Claims: The default rate is a prime determinant of a scheme’s viability. A claim rate between 2 percent and 3 percent should be targeted, and the maximum acceptable rate should be 6 percent of outstanding guarantees. A higher rate would suggest that borrowers were not properly screened or that the guarantee coverage was too high or fees too low; in contrast, a rate below 2 percent implies that the scheme is overly cautious in granting guarantees. For the present facility the upper rate of 6 percent has been used in assessing the fund’s sustainability.

100. Marketing: Decentralization of the scheme through branch networks in the focal regions would ensure would facilitate information dissemination about the facility and ultimately assist in the risk assessment. Given the relatively modest number of loans being targeted in the initial years, however, a branch network is not justified. Moreover, the network would require additional staff and overhead facilities that would increase the operating costs of the facilities and possible make it unsustainable. As the facility gains acceptance and recognition among SMEs in the atolls, consideration can be given to incorporating CGF officers in the BDSC of the focal region. In the meantime and during the start-up period, the scheme will need to be pro-active in gaining recognition and acceptance by potential borrowers and commercial banks. In is important to emphasize that the scheme should not be marketed as a form of social banking but as a measure to service, profitable business segments outside of Male’. Moreover, in all marketing efforts, care should be taken not to increase moral hazard by suggesting that credit will not have to be repaid because defaults will be refunded by insurance firm. On the contrary, the involvement of a private insurance company in the scheme should underscore the consequences of non-payments on the loan.

6.3 Organization 101. CGF Staffing and Responsibilities: A CGF Manager and staff located will form a new CGF Division of Allied Insurance. The division will consist of the manager, account officer,

29 The share falls within the desired range of 20% to 30% identified in best practices for credit guarantees. See M. G.

Maiangwa et al, “A Review of Institutional Alternatives to Collateralized Lending”. African Development Review. Volume 16 Issue 3 Page 472 - December 2004.


44

accountant and support staff. The projected revenue and expenses of the facility suggest that the facility will be economically viable based on estimated operating costs of $45,000 and $120,000 interest and operating earnings at the start of regular operations. Details of the organization, staffing and cash flow projections are presented in the annex to this report.

Table 15: Credit Guarantee FacilityPhase I

2008 2009 2010 2011 Sub-TotalFund Value

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

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

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

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


102. Business Plan: The draft business plan in the Annex and its summary in Table 15 demonstrate that the facility is financially viable during its regular operations. A low start-up fund during the pilot phase of the project is unlikely to be sustainable but, once the full funding occurs in 2009, the facility will be able to sustain itself after the completion of the SMED project in 2011.

103. CGF Process: Box 4 illustrates the operational process of the scheme for a particular group of entrepreneurs in Addu Atoll in the Southern Development Region, while Figure 5 provides a visual representation of the process for all types of guaranteed loans under the scheme. The case study builds on the earlier example of a cooperative seeking to commercialize its activities and using the cost sharing facility. Having established the cooperative and used the BDS facility for training and investment activities, the cooperative now seeks to purchase a boat with the help of the credit guarantee facility to ensure the reliability of its deliveries of produce to the two nearby resorts.

7. FINANCING PLAN AND IMPLEMENTATION ARRANGEMENTS 7.1 Financing Plan

104. Expenditures: The Government of the Maldives has requested a loan of US$6.9 million equivalent from ADB for a MSME project to support regional development and enhancement of private sector participation in the economic development of the country. The loan takes into account the strategic importance of developing the private sector in the atolls and the cost of investments and adjustment costs associated with the adoption of the elements in the policy matrix. In addition to the loan, counterpart funding will be used for costs associated with regulatory reforms. Table 16 summarizes the project costs. The investment costs include technical assistance that represents 17 percent of the loan amount.

105. Program Management and Implementation: Ministry of Economic Development and Trade (MEDT) will be the main implementing agency and other ministries will implement pilot projects. Ministry of Finance and Treasury (MOFT) will be the executing agency for the responsible for managing and overseeing the flow of funds for the credit line and grant facilities.


45

The newly created Enterprise Development Unit of MEDT will be responsible for ensuring the participation of all relevant government agencies and business member organization in regulations and policies governing MSMEs, as well as formulation of project activities related to business development services and finance under the project. The period for implementation of the project will be 36 months.

Box 4: CGF Case Study A year after helping to establish a the Agricultural Cooperative Traders (ACT) in Hithadoo Island on Addu Atoll in the Southern Development Region, the cooperative is supplying produce to the two newly established resorts in Addu Atoll. But transportation services are unreliable and costly, and the cooperative members therefore decide to purchase a boat. They calculate that they will need MRf 2,000,000 for the boat and equipment, of which MRf 1,000,000 will need to be in the form of a loan.

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

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

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

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


46

Figure 5: Credit Guarantee Facility (CGF) Process Flow S

ME

Ent

repr

eneu

rC

omm

erci

al B

ank

Fina

ncia

l Gua

rant

ee A

genc

y

Dissemination of information to SMEs

about credit enhancement program and

eligibility criteria

1

Eligible SMEs prepare business

plan

2

Media campaign

Submit application with business plan to Financial Guarantee

Agency

3

Possible use of BDSCs to draw

up business plan

Determine if potential borrower

meets eligibility criteria, review

business plan, and assess its

creditworthiness

4

Issue advance guarantee approval to entrepreneur for

borrowing from commercial bank

5

Guarantee approved? Yes

Terminate process

No

Use advance guarantee to

negotiate loan with commercial bank

6

Loan approved?

Issue 80% coverage of outstanding debt

8

Negotiate loan using guarantee to

enhance credit to SME

7

Yes

9

Issue loan with 1.5% interest premium and 1.5% up-front

fee

No

Terminate process

Accept loan and apply to enhance

working capital and/or for investment

10


47

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

2009 2010 2011 TotalA. BDS Component 1,034.6 2,559.3 809.9 760.9 4,130.0

1. BDS Centers 58.8 757.2 310.5 313.7 1,381.5 Operating Costs 58.8 297.2 310.5 313.7 921.5 Capital Investments - 460.0 - - 460.0

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

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

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

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

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

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

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

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

Phase I: ADB

Cap.Dev.

SME Development Project (Phase II)

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

7.2 Project Performance Monitoring and Evaluation 107. Monitoring and Evaluation: Quarterly reports will be submitted to the ADB on monitoring of project progress. At the outset of the project an independent M&E unit will be established by MEDT and MNCCI, and a project performance management system (PPMS) created within 6 months of project commencement. The monitoring team will work with EDU and each BDSCs to ensure that benchmarks are collected by these units on an ongoing basis. Benchmarks will include BDS-related indicators for training and other product assistances at the atoll level, classified by types of enterprise owner, gender, region and remuneration rates; while financial indicators will cover amounts and numbers of grants and loan types supported and outcomes. To assess incremental benefits from the project, basic enterprise and household data for BDS clients will be maintained. Information will also be maintained on the number of staff associated with BDS and lending support activities, as well as the number of individuals participating in courses and workshops. During the preparation of the final project completion


48

report, the data collected will be used to evaluate the impact of the project at the atoll and sector level, including its effect on women and vulnerable groups.

III. TECHNICAL ASSISTANCE

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

Table 17: Technical Assistance for Capacity BuildingPhase I

2008 2009 2010 2011 Sub-Total1000 US$ 354 341 254 244 839

International BDS Expert 1000 US$ 265.2 165.0 109.9 109.9 384.8 Number of experts person-years 0.8 0.5 0.3 0.3 1.2 Fees 1000 US$ 216.0 135.0 89.1 89.1 313.2 Per diem 1000 US$ 43.2 27.0 17.8 17.8 62.6 Travel 1000 US$ 6.0 3.0 3.0 3.0 9.0

Training in Business Planning 1000 US$ 44.2 58.8 44.2 44.2 147.2 Consulting SMEs 1000 US$ 44.2 117.6 99.9 89.9 307.5

1000 US$ 419.1 137.9 77.5 45.1 260.5 Strategic Planning 1000 US$ 88.4 22.1 11.1 - 33.2 Facilitators Training 1000 US$ 44.2 9.3 - - 9.3 Training of Trainers 1000 US$ 88.4 29.5 14.7 7.4 51.6 Overseas Training for Staff 1000 US$ 66.0 33.0 29.7 26.7 89.4 Training of Financial Guarantee Agency 1000 US$ 132.1 44.0 22.0 11.0 77.1

1000 US$ 88.4 22.1 11.1 5.5 38.7 Strategic Planning 1000 US$ 88.4 22.1 11.1 5.5 38.7

1000 US$ 138.9 27.8 24.9 12.4 65.1 Bank Branch Training Modules 1000 US$ 22.1 5.5 2.8 1.4 9.7 Training on Credit Guarantee Facility 1000 US$ 116.8 22.3 22.1 11.1 55.5

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

BoM/AI

TOTAL

Phase II

BDSC

EDU

MNCCI

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

30 Asian Development Bank, “Memorandum of Understanding, CPS Formulation Mission, South Asia Department, 13-23 May 2007, Male’, Maldives.


49

Consultants and other arrangements satisfactory to ADB. Procurement under the TA will be in accordance with ADB’s Guidelines for Procurement.

IV. PROGRAM BENEFITS, IMPACT AND RISKS 110. Benefits: The project will enhance MSME growth and competitiveness in the atolls and increase the private sector’s role in accelerating economic growth and poverty reduction in the country. The project will support the Government’s development framework for private sector in general and MSMEs in particular through BDS and financing support for MSMEs and entrepreneurial opportunities for the poor. The project will also help develop policy, regulatory, and institutional reforms that are conducive to MSME development. The project will (i) support the Government’s preparation of an MSME development strategy targeting the atolls and outer islands; (ii) provide technical support to strengthen the policy framework and enabling environment for MSME development; (iii) develop MSME business support networks and improve access to affordable BDS, financial services, and financing in the atolls; and (iv) create entrepreneurial and job opportunities for economically vulnerable people in the atolls.

111. Impact: The impact of the project will be evaluated annually based on comparative analysis of post-project information relative baseline information established at the beginning of the project. Data will be evaluated at the enterprise level, at the level of the BDFCs in each region, at the sector level for targeted activities to be supported under the project, and at the level of the central BDS provider level in the public and private sectors.

112. Risks: The largest risk to the project is the lack of capacity within the Government to implement the various activities of of the project loan, as well as regulatory reforms. The Enterprise Development Unit has little, if any, experience with the formulation and implementation of MSME programs and policies and lacks most of the urgently needed technical expertise. To address this risk, technical assistance has been integrated into the project that focus capacity building measures on EDU officials, regional BDFCs, providers of financial services related to the proposed MSME financing instrument, and the independent monitoring and evaluation unit. There is also a risk associated with the lack of inter-ministerial and agency coordination within the Government. Because the project covers sectors related to different ministries involved in agriculture, tourism and fisheries, it requires close consultantion and collaboration among government agencies. The project design addresses this risk by strengthening the newly created EDU to support the overall implementation of the project and thereby address the issue of inter-agency collaboration in MSME development in the atolls.

V. SOE RESTRUCTURING AND PRIVATIZATION31

8. OBJECTIVES AND SCOPE 113. Importance of Public Enterprises: In 2001-2005 Public Enterprises (PEs) accounted for 16 to 19 percent of Government income, and registered an overall growth of 69 percent over

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


50

the four-year period. Three of the PEs accounted for nearly 80 percent of the turnover.32 Maldives Airports Company Ltd (MACL) and Dhiraagau registered the highest revenue growth, measured in terms of absolute values; Island Aviation and Maldives Inflight Catering had the highest growth rates; while State Electric Company, Maldives Post, and Government Hotels experienced negative growth during the period.

114. Government Objectives from Privatization: The privatization and restructuring objectives of the Government and associated policies remain unclear. Ministries lack a common understanding about the objectives to be achieved from privatization, and the priorities for selection of enterprises and the associated privatization or restructuring strategies. Effective restructuring and privatization of state owned enterprises (SOEs) will require the development of a common approach within the Government before proceeding with specific actions.

115. Strategic Issues: Two major initiatives are needed for privatization. First, a corporate tax regime should be introduced to guarantee ongoing revenue streams from the existing institutions once they are fully or partially privatized. Otherwise, the Government will gain a one-off windfall cash injection from the sale, but lose the ongoing dividend streams currently received from profitable public enterprises (PEs). Adequate lead time will be required in excess of 12 months to enable all enterprises sufficient time to implement the financial records required to assess tax liability. Secondly, adequate regulatory regimes should be put into place prior to privatization, not only in areas that will continue to provide monopoly services such as water, sanitation and electricity supplies, but also across the wider competitive market.

116. Other Prerequisites: Current levels of governance, particularly for PEs, have scope for improvement. The capital market and operations of the stock exchange lack appropriate conditions for private ownership development. Adequate contract law and an independent judiciary will influence market attractiveness for foreign investment. Practices such as requiring all shareholders to be present during a court hearing will reduce willingness of overseas investors to consider investing in the country, and therefore the price likely to be received for assets. The Maldives Securities Act (Law 2/2006) applies to all companies considering local floatation on the stock exchange. There are no additional requirements for companies being privatized. However, the Public Enterprises Accountability Bill 2002 still needs to be enacted, as does proposed legislation on banking, and the Business Profits Tax Bill.

117. Proposed Action: Attention should focus on (i) formulating clear policies and objectives on privatization and restructuring, including the treatment and costing of land or rental premises; (ii) introducing the proposed corporate tax regime; and (iii) developing adequate regulatory regimes that will provide safeguards for the national interest in the event that the level of private sector participation is increased in areas traditionally managed by Government.

118. Minister of State for Finance and Treasury-Based Prioritization: All enterprises covered in the present analysis have been corporatized with the exception of Public Works Services, which may revert to the status of a Department of the Ministry of Construction and Public Infrastructure. Discussions with the Minister of State for Finance and Treasury (MoFT) indicate that the following criteria have been applied when determining privatization or restructuring priorities:

Maldives Industrial Fisheries Co (Mifco) has been declared a candidate for privatization, which will hopefully occur before private sector development of the fishing industry adversely affects its attractiveness.

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


51

Maldives National Shipping Line is a priority for privatization because of inadequate returns.

Housing Development Finance Corporation will be floated in 2007 through an Initial Public Offering of 60% of shares, a perquisite for raising $20 million loan finance.

Allied Insurance is planned for privatization in 2007; preparatory work has already commenced.

Nasandhura Palace Hotel will be privatized; the benefits of land sale as opposed to a “going concern” still need to be evaluated.

Maldives Ports could become a Regulator if the proposed transshipment port plans are approved; under these circumstances the Maldives Ports Company could become Male’ Port Company.

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

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

Maldives Airport Company Ltd. is being considered for a management contract.

Villingilli Investments is a priority for review; it has been characterized as “being like dumping money into the open sea”.

119. PriceWaterhouseCoopers-Based Prioritization: The consultancy conducted by PriceWaterhouseCoopers (PWC) selected Maldives National Shipping Company, Nasandhura Palace and Mifco for privatization and Stelco for restructuring. No weighted criteria appear to have been used, and only some priorities coincide with those of the Government. The terms of reference for a technical assistance (TA) to address the needs of these enterprises were issued by ADB during the time that this report was being prepared.

120. MoFT versus PWC Criteria: Two criteria for establishing priorities exist: (i) those developed by MoFT in 2003, and (ii) those proposal proposed by PWC in a report submitted to ADB entitled “Review of State Owned Enterprises in Maldives” (June 2006). These two approaches are markedly different and should be consolidated into once single approach before proceeding with action plans. The criteria developed by MoFT in January 2003 were based on the objectives of increasing private ownership in the overall economy; encouraging savings and attracting new investors. It assumed that legislation on company taxation would be implemented in a timely manner. The MoFT analysis of enterprises used both quantitative and subjective criteria to determine rankings. MoFT envisaged privatization through sale on Maldivian Stock Exchange. Criteria used were as follows: (i) viability: 30%; current profitability: 20%; management: 10%; stability: 10%; net worth: 10%; reserves: 10%; and other: 10%. In contrast, the PWC report suggested the following four unweighted criteria: (i) strategic Importance; (ii) legal and regulatory issues; (iii) future Impact on the government finances; and potential for private sector interest. The results of the two approaches are quite different in terms of the ranking of enterprises (Table 18). A third set of criteria that seems more appropriate to the Government’s strategic objectives is the following: (i) financial returns 40%; (ii)future investment requirements 20%; (iii) current debt or guarantees 15%; (iv) strategic importance 15%, and (v) market attractiveness 10%.


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

PWC Prioritization MoFT Prioritization Total Score33 Privatization Maldives Industrial Fisheries Co Ltd Maldives National Shipping Ltd Nasandhura Palace Hotel

2007 Priorities: Housing Development Finance Corporation34 Allied Insurance35 Maldives National Shipping Ltd Maldives Industrial Fisheries Co Ltd Nasandhura Palace Hotel (possibly land sale) Stelco Maldives Ports Co. Hulhumale’ Development Corporation Ltd Additional Priorities (2003) Dhiraagu Male’ Water and Sewerage Co. Ltd Maldives Airports Company36 Island Aviation Services Ltd Maldives Post Ltd

42% 51% 45% 61%

80% 75% 64% 63% 34%

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

All loss making enterprises

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

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

8. PUBLIC ENTERPRISE ANALYSIS 121. Public Enterprise Relationship to SME Development: There are three possible linkages between PEs and SMEs: (i) SMEs as competitors to PEs; (ii) SMEs as suppliers; (iii) SMEs as outsourcers. In the Maldives the largest opportunities for successful SME–PE linkages exist for PE outsourcing to SMEs, though there has been little evidence of this activity to date. Outsourcing involves contracting out services previously provided in-house. In many instances, the initial approach is to contract existing employees for a specific period of time, after which future contracts become contestable. From a PE perspective, outsourcing is used in conjunction with wider strategic initiatives to reduce the cost structure, an approach that is widely adopted by PEs in developed economies in early stages of commercialization and subsequent privatization. It is also widely used in the private sector as a means of driving down costs.

122. Governance: Boards of Directors for PEs have been appointed by Government, with the numbers ranging between four and ten. There appear to be no clear selection criteria for appointment. Normally one would expect Directors to be appointed based on an appropriate mix of skills for the enterprise concerned, such as finance, strategic planning, legal expertise,

33 2003 Ranking. 34 Planning substantially completed. 35 Planned for 2007. 36 Through Contract management.


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industry expertise, marketing, and industry leadership. An early costless step towards privatization would be to increase the number of private sector directors sitting on PE Boards.

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

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

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

126. Enterprise-Specific Findings: The following points summarize the key conclusions:38

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

Housing Development Finance Corporation (HDFC): HDFC provides finance for house construction or renovation. The Company is scheduled for privatization through an Initial Public Offering of 60% of shares, to be made during 2007. All preparatory work has been completed. HDFC offers no direct opportunities for SME development, because of the

37 Promotion of Corporate Governance and core business; monitoring PEs; recommending composition of Boards of Directors; advising the shareholder on issues relating to policy, restructuring and privatization; advising the shareholder on PE Statements of Corporate Intent, and formulation of PE investment policies and investments. 38 For details, see annexes to report prepared by the SOE privatization and restructuring expert of the Team, entitled, ““ADB TA 4745-MLD. Preparing Small and Medium Enterprise Development Project: Working Paper 2. Public Enterprise Privatization and Restructuring”. March 2007.”


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economies of scale required for successful lending institutions. However, if the Company moves into a vertically integrated real estate development model, then some synergies could exist with the construction industry, both in terms of materials supply and small scale construction.

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

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

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

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


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

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

9. PROPOSED STRATEGY 127. Strategy: The proposed strategy is based on the assumption that a number of PEs will remain in the ownership of the Government for at least the next two to three years, but that the Government is now actively interested in pursuing privatization for selected enterprises. It also assumes that successful conclusion of these transactions will demonstrate benefits to the economy from greater private sector participation in businesses that previously have been the function of the State.

128. Components: The proposed strategy has four components. The first two components contain the overarching goals:

1) Improving governance for all PEs, with the objective of ensuring that all enterprises are operated at internationally accepted and measured best practice standards of efficiency.


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The work would be funded by ADB under the Capacity Building TA proposed in this Working Paper, and

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

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

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

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

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

130. Component (2): The Government already has some initiatives that address the creation of an improved and sustainable commercial environment, which includes approval by the Majlis of legislation relating to company taxation, banking legislation. Further consideration needs to be given to the regulatory environment for all enterprises, with a view to rationalizing the current structure and introducing clearer controls. The consultant is aware that some discussions have been taking place in relation to regulation in the electricity sector; that it is suggested that some Ministries have potential conflicts of interest, and other regulators are permitting infringements of regulations because of short term expediency. Further design may be required to identify the scope of any regulatory review, but that is beyond the scope of this TA.

131. Component (3): ADB has already proposed that it provide assistance with privatization for three enterprises, and some restructuring assistance, and the Government has already completed preparatory work for privatization of other PEs such as HDFC and Allied Insurance. There is scope here for additional assistance to be offered by ADB.

132. Component (4): This medium term intervention depends on satisfactory completion of other components, notably component (1) on improved governance and component (2) on creation of the environment for further privatization.


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ANNEX A: DESIGN AND MONITORING FRAMEWORK

Design Summary Targets/ Measurable Indicators

Monitoring Mechanisms Risks and Assumptions

Goal Development of the Maldives’ micro, small and medium enterprises (MSMEs) in selected regions and targeted sectors resulting in economic growth, employment, and poverty reduction through accelerated growth of MSMEs

Increased number of registered and operational MSMEs in selected regions and targeted sectors

Economic reports

including MSME monitoring and evaluation report and official statistics, private sector, and donors ADB review

missions

General economic climate

remains positive Sustained positive

development of the Maldives’ economy

Purpose (1) Set up an institutional framework to support effective MSME sector development

Effective MSME

government office and coordination of MSME policies Strengthened business

representative organizations

Economic reports

public and sector organizations, and international organizations Interviews with

private sector Consultant reports Review missions of

ADB

Political commitment to

undertake reforms at both central and atolls levels Sustained capacity-

building of the Government

(2) Enhance access to BDS products

Increase access of business development services that generate MSME activities in the atolls

Monitoring reports of EDU and M&E Unit

Lack of domestic BDS providers' capability in offering quality BDS

(3) Enhance access to finance for MSMEs

Improved access to finance for MSMEs

Reports and official statistics from MMA ADB review missions

Political commitment to access to finance for MSEs

(4) Improve the regulatory framework for MSMEs

Streamlined and transparent government regulations on business operations

Official copies of decrees and regulations World Bank’s Cost

of Doing Business

Government's close and effective partnership with the private sector

Outputs (1) Institutional and Policy environment

(1) Support EDU/MEDT: Development and

MEDT approval of EDU expansion of activities to atolls

Government decree Budget plans of

Sufficient technical skills locally available


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pilot testing of innovative BDS approaches to value chain BDS, clusters in target regions BDS facilitation

services and information services

Budget figures reflect (i) increased manpower requirements, (ii) increased financial requirements for testing of innovative BDS, and (iii) financial requirements for implementation of activities.

MEDT

(2) Access to BDS products

BDS products and quality of service providers are better known by the clients MSMEs' increased sales,

increased export sales, growth in profitability and increased employment Accelerated growth of

businesses in atoll areas

Number of funded projects MSME market and

domestic BDS provider surveys Financial

statements of selected MSMEs

Sufficient skills with domestic BDS providers available Sufficient number of

skilled people willing to work in atolls

(3) Access to finance Finance to MSEs has increased Accelerated loan

appraisal process Reduced collateral

requirements for MSE loans

Periodic reports of BDFCs and EDU ADB review

missions

Lack of skills of EDU and BDSC staff to implement institutional strengthening measures Willingness of Bank of

Maldives to implement credit guarantee program

(2) Enabling Regulatory Environment

RIA activities included in M&E unit. Regulations are made

transparent to the business community

Interviews with private sector stakeholders World Bank report

on "Cost of doing business" RIA reports

Political commitment to undertake reforms at both central and atoll levels Sufficient resources for

capacity building of regulators

Inputs for the Program 1. Program Loan

Loan effectiveness ($6.6

million from ADB)

Program

documents and Loan Agreement

Assumption: Timely loan effectiveness


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2. Technical Assistance

Government

contribution for the program

TA to support program implementation ($3.4 million) in 2008 - 2010

MOFT budgets Signed TA letter Review missions by

ADB Reports by

consultants Workshops and

seminars

Risk: Timely financial allocation MSME project implementation Assumptions: Consultants are selected in timely and effective manner Risk: Active ownership and monitoring from Government and ADB


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ANNEX B: GOVERNMENT STRATEGY FOR PRIVATE SECTOR DEVELOPMENT

Government Strategy: There are a number of principles underlying the strategy of the Seventh National Development Plan (7NDP) that point to the leading role of MSMEs in private sector development, especially those in the atolls and outer islands, as well as the supportive role of the public sector in creating an enabling environment for the private sector. The Government’s strategy as it relates to the private sector in the regions outside the capital of Male’ aims to improve economic growth by increasing the number and coverage of MSMEs activities and reducing or restructuring SOEs.

Goals of 7NDP: The overall goal of, as set out in the 7NDP and Vision 2020, is the eliminate poverty and improvement in the well-being of the greatest number of Maldivians. The link between achieving this overarching goal and the private sector development in the Maldives is formally recognized in the 7NDP. It explicitly targets private sector participation as one of the key strategies to be pursued in 2006-2010, recognizing that private sector development is critical to achieving the levels of sustainable economic growth required by the country. It recognizes need for partnership between the Government and private sector, a situation that in the past has not always existed and that will require a radical shift in perceptions, attitudes and approaches during the 7NDP period.

Private Sector Development Channels: The 7NDP sets out the following key mechanisms needed for developing the private sector: (a) formalizing the economy; (b) improving corporate governance and transparency; (c) promoting responsible business practices; (d) maximizing the potential of public-private partnerships, with a view to increasing; (e) private investment in the national economy and to providing opportunities for SMEs and small-scale entrepreneurs to participate in a more competitive environment; and (f) developing linkages within the domestic and international private sectors to share knowledge, expertise, resources, and technology. Within the various sub-goals of the 7NDP, those that apply to the development of the private sector and SMEs are the following ones: (a) a diversified economy (goal 3); (b) improved access and expanded opportunities (goal 4); (c) the elimination of poverty, increased equity, and gender equality (goal 5); and (f) support for the rapid recovery of sub-sectors damaged by the tsunami (goal 1).

Measurable Indicators: Realization of these goals is recognized as too broad for developing an action plan with policies, projects, programs and institutional mechanisms. In an effort to operationalize the goals, the 7NDP establishes a set of measurable objectives to increase private sector development, including SME and micro-enterprise development. Volume II of the 7NDP lays out a set of roadmaps within 34 themes covering the 2006-2010 goals. Table B.1 presents the specific benchmarks associated with actions to be taken in the area of private sector development and related activities in the regulatory environment, skills development and SOE restructuring and privatization.

Table B.1: Private Sector Development Strategy and Benchmarks in 7NDP Theme Policy Strategy Performance Target or Indicator

Trade and Investment

Policy 4: Support the development of private enterprises

Strategy 4.1

Introduce private sector development programs for small and medium enterprises (SME) by providing technical assistance to start-up enterprises.

SME Development Unit established by end of 2006. Business assistance package (including the upgrading of MEDT website, brochures and a multimedia CD) for SME2 developed by May 2007.


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Table B.1: Private Sector Development Strategy and Benchmarks in 7NDP Theme Policy Strategy Performance Target or Indicator

Strategy 4.2

Facilitate the establishment & growth of SMEs, especially IT-based firms through providing access to business support services at the Hulhumale’ Business Park/Industrial Zone.

SME unit branch to be extended and established in the Hulhumale’.

Strategy 4.3

Encourage technology transfer, innovation and creativity for businesses.

Intellectual property legislation drafted and submitted to the parliament by end of 2007. Intellectual Property Office (IPO) established and operational by early 2008. E-Commerce Law Drafted and submitted to the parliament by May 2009. Establishment of an E-Commerce Registration Authority (ERA) by September 2010.

Policy 2: Provide a stable and a transparent policy environment by enhancing corporate governance through a strengthened legal and institutional framework.

Strategy 2.1

Develop a legal framework and accompanying institutions to strengthen corporate governance including: (i) a commercial arbitration tribunal; (ii) a mechanism for rating business risk; and (iii) creation of a Good Governance Index.

Draft legal framework to strengthen corporate governance prepared by the end of 2006.

Business Risk Rating and Good Governance Index introduced by June 2007.

Strategy 2.2

Enact a money judgment enforcement bill.

A draft money judgment enforcement bill submitted to parliament by end 2006.

Strategy 2.3

Establish a Maldives Association of Accountants to regulate the accounting profession and to establish private sector accounting standards.

Maldives Association of Accountants established by 2008.

Strategy 2.4

Achieve consistency in formulating, monitoring and enforcing rules and regulations governing business activity.

Review of legislation commenced in 2006 with all regulations reviewed by the end of 2007. Number of legislations reviewed and submitted to parliament by 2007.

Policy 8: Strengthen institutional development of Ministry of Economic Development and Trade

Strategy 8.3

Enhance customer relations through the provision of efficient business support services through a web portal.

Introduce online business registrations by 2nd Quarter of 2007.

Introduce online SME information services (e.g., market and industry information) by 2nd Quarter of 2007.

Employment

Policy 1: To conduct training needs assessments and deliver skills development programs.

Strategy 1.1

Prepare a human resource needs assessment and design, develop and deliver through the four Employment Sector Councils 33 training programs in the key sectors of tourism, fisheries and agriculture, transport and the social sectors.(This strategy will form part of the Employment Skills Training Project)

Number of people provided with competency-based, occupation-specific and nationally-accredited training.

Labor force participation rate increased to 57 percent by 2009.

Strategy 1.2

Develop and implement a national apprenticeship scheme to train school leavers to meet the national skills demand.

1,500 apprentices trained by 2008 in semi-skilled and skilled jobs in demand by the tourism, fisheries and construction sectors.

State Owned Policy 2: Reduction of government involvement in the functioning of SOEs


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Table B.1: Private Sector Development Strategy and Benchmarks in 7NDP Theme Policy Strategy Performance Target or Indicator Enterprises

Strategy 2.1

Increase the sense of corporate ownership among SOEs. Hold corporate governance awareness programs

Strategy 2.2

Improve the performance of public enterprises by providing for the appointment of competency-based boards and for accounting, auditing, procurement and other governance standards and guidelines.

Competency-based boards appointed from 2006 in all SOEs.

Accounting, auditing, procurement and other governance standards and guidelines issued by 2006.

Policy 3: Gradually reduce direct government ownership in SOEs and promote private and joint private/public ownership.

Strategy 3.1

Increase private sector participation in public enterprises by partial divestiture of the Government’s shareholding.

Partial divestiture of the Government’s shareholding in 2 enterprises per year from 2006-2010. Sell to private sector those businesses within state owned enterprises that the private sector can compete in, starting with 2006.

Source: Republic of Maldives, “Seventh National Development Plan: 2006-2010. Volume II”. Male, 2005.


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ANNEX C: MSME SURVEY OF THREE REGIONS

C.1 General Selection of atolls and islands: The survey was conducted in the three development regions; Northern Region, South Central Region and the Southern Region. Islands for the survey were selected on the basis of population size; four islands in the north, four in the south central region and three in the southern region.

Table C1: Characteristics of Regions Atoll Island Population (March 31, 2000 ) Population ranking Both Sexes Male Female Households Northern Region 3 HDH Kulhudhuffushi 6,581 3,131 3,450 1018 8 HA Dhidhdhoo 2,766 1,293 1,473 438 12 HA Hoarafushi 2,221 1,044 1,177 341 14 HA Ihavandhoo 2,062 965 1,097 253 South Central Region 11 L Gamu 2,244 1,176 1,068 337 18 L Fonadhoo 1,740 904 836 262 28 TH Thimarafushi 1,537 782 755 250 33 TH Guraidhoo 1,433 703 730 198 Southern Region 1 S Hithadhoo 9,461 4,184 5,277 1,408 2 GN Fuvahmulah 7,528 3,464 4,064 1,251 7 S Feydhoo 2,829 1,262 1,567 464

Survey dates: The surveys were conducted during the following dates;

o Northern Region: 5 to 8 September 2006 o Southern Region: 12 to 14 September 2006 o South Central Region: 27 February to 3 March 2007

Survey Questionnaire: The survey questionnaire consisted of five main sections;

o Basic Data o Business Opportunities and Constraints o Skills o Business Finance o Business Development Service

Table C2: Number of interviewees and main business activities

Main Business Southern Northern S Central Total % Tourism 0 0 0 0 0% Fisheries 1 18 12 31 14% Agriculture 4 2 14 20 9% Manufacturing 7 14 8 29 13% Services 50 55 36 141 62% Handicraft 0 1 0 1 0% Construction 4 3 4 11 5% Other 0 2 4 6 3% NA 0 2 0 2 1% Total Interviewed 65 91 72 228

Basic Data: Most businesses interviewed in the survey fall in to the most general category of “Services”. These include retail shop operators, teashop and restaurant operators, and even those engaged in activities such as transport.


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Table C3: Registered Businesses Region Total Interviewed Registered % Registered North 91 57 63% South Central 72 33 46% South 65 53 82% Total 228 143 63%

Age of businesses: Of all 228 businesses interviewed in the three regions, 39% have started their businesses during the last five years and 57% of the businesses were started during the last ten years. Only 14% of the businesses were said to be older than 20 years. The South Central has the highest proportion of businesses that started during the last five years with 47%. In the Northern region 38% of those interviewed started their businesses during the last five years, while in the South only 29% started their businesses during the same period. Five percent of those interviewed were unable to state the age of their businesses.

Ownership of businesses: All entrepreneurs interviewed were Maldivian, and with one exception all businesses were privately owned. The gender of business owners was as follows:

Seasonality of operations: Interviewees were asked about the number of months they run their businesses in a year. While most of the businesses were operational throughout the year, others were seasonal or operated during specific months.

Employment: The number of workers employed in the businesses interviewed during the survey indicates the size of the businesses in general. Many of the businesses were owner-operated business, run with the help of family members and many of them too working part time.

Number of workers: Most (96%) of all business interviewed employed less than 5 workers and the average number of workers employed by all businesses interviewed is less than 2.

Employment North S Central South Total % of businesses with less than 5 workers 100% 91% 98% 96% Total no. of businesses interviewed 91 72 65 228 Total workers in all businesses interviewed 119 179 103 401 Average no. of workers per businesses interviewed 1.31 2.49 1.58 1.76

The interviews also asked about number employed during peak and low seasons, number of unpaid family members working in the businesses. Although interviewees answered the questions it is likely to be highly inaccurate due to the small number of workers employed and the level of informality and lack of consistency in payment terms especially to family members. The total number of unpaid family members working in the 228 businesses interviewed is 208 which amounts to 51% of the total number of 401 employed in those businesses. Most of this would likely be the owners of self employed businesses as they would have been counted as

North S Central South Total %

0to5 35 34 19 88 39%

6to10 11 17 14 42 18%

11to15 8 7 8 23 10%

16to20 15 8 8 31 14%

>20 18 6 8 32 14%

n.a 4 0 8 12 5% 91 72 65 228 100%

No. of months of operations North

South Central South

6 1 0 0 7 1 0 0 8 58 0 0 9 3 0 1 10 3 0 1 11 1 2 0 12 24 62 59 seasonal 0 2 0 na 0 6 4 91 72 65


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unpaid family workers. 80 of the 401 workers employed in the 228 businesses interviewed are female which amounts to 19% of those employed in the businesses interviewed in the survey.

Asset value: The businesses interviewed were asked to state the value of their business assets. None of the interviewed maintained records of asset or asset registers neither had they estimated it in the past on a regular basis, hence almost all interviewees estimated the value at the time of the interview. Most business owners were not able to differentiate between assets in their businesses and their personal assets. In other cases the assets overlapped each other as in the case of shop owners and teashop and restaurant operators where the shop or the restaurant is part of the house.

Finally even in cases where some or most assets were valued with some degree of accuracy, interviewees often considered the purchase value of the asset as their current value, without consideration for depreciation or the current sale value of the asset. Hence it is likely that asset values indicated are

overestimated.

C.2 Sales and markets

Markets: As would be expected with businesses of the scale, the main market for the produce is the local market and individuals which would also be part of the local market. In the North where many businesses sell to Male’, the number of businesses which sells to intermediaries is also high as expected, as a large proportion of the produce sold in Male’ is brought to Male’ through intermediaries and middleman which includes traders as well as owners of boats which travel to Male’ with cargo and passengers.

Tourism Markets: The Northern Region is closer to the main tourism zone and therefore some businesses have the opportunity to market and sell to the tourism industry. At the time of the survey only one resort is operational in the Southern Region while there is none in the South Central Region.

Sales Value: In almost all the cases the sales value given by the interviewees is also an estimate of the sales. Few keep records of sales. The figures indicate that 73% of all interviewed generates less than Rf. 50,000 monthly and only 2 of the 228 businesses interviewed estimated their monthly sales to be above Rf. 500,000.

C.3 Communications Means of communication: The most common means of communications in all three regions is mobile phones, the reason being that the mobile phone is the most commonly available means of

assets '000 North S Central South Total <50 25 19 11 55 50to100 26 20 10 56 100to1000 35 23 44 102 >1mil 0 6 0 6 na 5 4 0 9 91 72 65 228

sell to North S Central South Individuals 51 26 29 Local Market 51 46 42 Intermediary 11 0 0 Male' 22 9 3 Resort 7 0 2 Export 0 0 0

Monthly sales '000 North

South Central South All % All

<50 76 56 35 167 73% 50to200 9 11 22 42 18% 200to500 5 3 8 16 7% >500 1 1 0 2 1% na 0 1 0 1 0% 228 100%

Means of communications North S Central South Total 1phone 33 3 33 69 2mobile 75 68 56 199 3internet 5 0 20 25 4tv 14 0 6 20 5radio 9 2 2 13


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communication throughout the country. Although internet is available in most islands, it is not widely accessible to the general public in most and is also new to the older generation of businessmen and women.

Perception on cost of communication: Most of the people interviewed believe that the cost of communications is moderate while only 13% believe that it is excessively high. 58% believe that it is either low or moderate. This is expected

in the context of reduction in mobile phone call charges during the two years proceeding the time of the survey. Mobile phone call charges have been reduced by more than 50% during this time.

C.4 Growth potential and constraints to growth The majority of the interviewees believe that there is potential for growth in their businesses; out of the 225 who responded to the question only 15 stated that there is no potential. There was a limited response when asked about the constraints for growth. Out of the few who responded to the question most stated that market access and finance are the greatest constraints for growth.

C.5 Opportunities and Constraints Internal Problems faced by SMEs: Responses to questions on internal constraints for the development of SME’s indicate that the biggest concern for most is the lack of capital. In all three regions respondents marked the lack of capital as a ‘very big’ problem.

Issues such as the lack of management and accounting skills, management staff and the level of technology is not seen as a problem at the current stage of their businesses.

All Three Regions Internal Problems Very big Big Medium Small No problem Don't know Total Lack of management/accounting skills 7 19 19 13 159 5 222 Lack of technically skilled labor 35 18 16 9 128 7 213 Lack of management staff 13 11 25 12 146 6 213 Low level of technology 9 10 14 12 126 8 179 Lack of market information 15 9 11 10 133 15 193 Lack of capital 114 37 21 8 41 2 223 High labor costs 20 28 42 12 103 16 221

Out of the 223 who responded to the question on lack of capital 151 (68%) perceived it as a very big or big constraint. For the three regions together the next biggest concern is the lack of technically skilled labor. 53 out of the 213 (25%) who responded to the question perceive it as a big or very big constraint. However there is a significant difference in the way this is perceived in the different regions. In the Southern Region 32.7% see it as a very big or big problem, in the Northern Region 15% see it as such and in the South Central Region it is a similar concern only for 4.2% of the respondents.

External Problems faced by SMEs: In the survey businesses were asked to categorize 16 possible external problems that may hinder the development of their businesses as ‘very big’, ‘big’, ‘medium’, ‘small’, or as ‘no problem’.

North S Central South Total %All 1low 26 0 7 33 17% 2moderate 26 32 21 79 41% 3high 21 28 8 57 29% 4excessive 16 9 1 26 13% 195 100%

North S Central South Total Finance 5 1 0 6 Market 5 1 2 8 Labor 0 0 0 0 Inputs/equipment 3 0 0 3 technical 0 0 0 0 Other 3 0 0 3


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Most serious external problems: High utility prices, access and cost of finance rank as the most serious concerns for most businesses. High utility prices rank the highest in terms of the highest number of ‘very big’ or ‘big’ responses. 69% of those who responded to the question on access to finance also see that as a serious problem that affect their businesses.

All three regions External Problems Very Big or Big Total Respondents % High utility prices 145 222 65% Access to finance 103 176 59% Cost of finance 100 152 66% Water and/or electricity access 98 222 44% Land 80 218 37% Shipping and sea transportation services 79 207 38% Air transportation services 69 176 39% Competition with domestic competitors 63 220 29% Access to land 53 158 34% Telephone and/or internet access 46 219 21% Too high taxes & duties 30 174 17% Other fees and unofficial payments 16 162 10% Business licensing & operating permits 16 177 9% Customs and trade regulations 13 149 9% Labor regulations 12 152 8% Competition with foreign competitors 8 173 5%

Competition with foreign competitors is seen as the least important external constraint with only 8 marking it is a very big or big problem and 148 of the 173 who responded to this question stating it as ‘no problem’.

Most serious external problems in the individual regions: Access to/cost of finance, high utility prices and access to water and electricity feature among the most serious concerns in all three regions, which also feature as the four most serious external problems in the survey as a whole. Land and access to land is seen as the most serious external problem in the northern

region.

Awareness of external problems: For the survey as a whole the highest number of ‘don’t know’ entries are in the following areas. It is notable that all the categories involve rules and regulations and business formalities.

External facilities that facilitate businesses: For most people proximity to the market has been the most important facility that has facilitated their businesses. The next most important facility that has helped businesses is seen to be the proximity to reliable transport.

External Facilities that facilitate their businesses North S Central South Near Resort 12 0 24 Near Process Center 7 1 0 Near Market 60 59 50 Near reliable transport 27 34 24 Near commercial facilities 17 33 23 Near training centers 3 0 0

Current markets and expansion into specific markets: Businesses were asked what markets they cater to at present and whether they plan to expand into new markets.

External Problems Don’t know Business licensing & operating permits 36 Too high taxes & duties 34 Other fees and unofficial payments 34 Customs and trade regulations 34 Labor regulations 27


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Where is your market? North S Central South local island(s) 78 64 64 Male' market 22 14 6 Resort(s) 12 3 24 Export market 2 0 0 Other 4 0 0

It is notable that many in the South Central Region plan to expand their markets to include resorts. Five new resorts are under construction in Thaa and Laamu Atolls in which the survey of the South Central Region was conducted.

Relationship with the Government: Most of the respondents perceive their relationship with the central government as well as with the local government as helpful or neutral. 12% of the 190 respondents believe that the central government is very helpful and 13% of the 186 respondents believe that the local government is very helpful in relation to the development of their businesses. 26% of the respondents to the question perceive

the central government to be unhelpful or very unhelpful and 29% of respondents believe that the local government is unhelpful or very unhelpful in relation to the development of their businesses.

C.6 Skills Vocational training of business owners: When business owners were asked whether they have had any vocational education 62 of the 224 who responded to the question stated they have had some vocational education.

The highest number of positive responses to this question is from the Northern Region where 51% have had some training. The lowest is in South Central Region where only 22% have attended some form of training. With the exception of the Southern Region the largest number of owners has trained themselves through self study while in the South the highest number has received training through projects.

North South Central South Do you need more training to improve your business? Yes No Yes No Yes No

Market Expansion North S Central South local island(s) 52 64 64 Male' market 22 14 6 Resort(s) 20 33 20 Export market 5 1 2 Other 5 0 2 No Plans 10 16 5

Relationship with Central Government North S Central South Total very helpful 12 8 2 22 12% helpful 10 21 10 41 22% neutral 34 22 23 79 42% unhelpful 7 10 7 24 13% very unhelpful 11 0 13 24 13% 190 Relationship with Local Government North S Central South Total very helpful 14 8 2 24 13% helpful 16 20 10 46 25% neutral 16 26 21 63 34% unhelpful 4 9 9 22 12% very unhelpful 11 7 13 31 17% 186

Where? School Project Self-study Family North 6 7 12 5 South Central 3 2 11 0 South 4 9 6 0 Total 13 18 29 5


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North South Central South 44 40 52 18 44 17 If so, what kind of training do you need? Formulate a business plan 42 16 47 10 42 16 Informational management 32 19 22 17 28 27 Financial management 43 17 48 7 44 15 Production management 32 17 29 7 26 29 Marketing management 41 15 39 9 42 17 Technology management 28 25 31 6 23 33

The majority of interviewees felt that they needed more training to improve their businesses. The highest number of business owners who felt they did not need further training to improve their businesses were in the Northern Region where 40 of the 84 respondents said they did not need further training.

In the all three regions the biggest need for training was felt in the areas of formulating business plans, financial management and marketing management.

Level of training None Vocational school graduate High school graduate College graduate Don't know North 26 39 10 2 5 South Central 6 47 4 1 3 South 0 45 11 2 0 Total 32 131 25 5 8

Level needed to hire in order to develop businesses: Only 32 respondents stated that they do not see a need for any level of education for their employees in order to develop their businesses. In all three regions the highest number of respondents felt that they need to hire employees with vocational training in order to develop their businesses. Eight of the respondents did not know whether hiring more educated employees will help to improve their businesses.

North South Central South Areas of training for employees Yes No Yes No Yes No Customer services 44 39 37 19 40 21 Accounting 37 45 34 20 36 24 Computer 34 44 28 24 37 24 Accounting and Record keeping 34 43 30 19 25 31 Production-related activities 34 43 32 17 16 37 Distribution-related activities 31 44 30 19 18 35

Type of training needed for employees: In the Northern and South Central Regions all areas of training for employees were felt to be equally important. In the South respondents felt that production and distribution related training was significantly less important than areas such as customer services, computing and accounting.

Type of skilled labor that is most difficult to find: Respondents were asked to name the type of skilled labor that is most difficult to find. The following table shows types of labor mentioned and the number of times each type is mentioned in each of the regions. Carpenter is mentioned 12 times out of a total of 93. Other notable types include technical staff mentioned 6 times, salesman mentioned 5 times and bakers and waiters each mentioned 4 times.

C.7 Business Finance Utilization of loans and credit: According to responses on the question on number times credit or loans that has been availed by the businesses interviewed, the 228 businesses interviewed has availed themselves of loans or credit 297 times. However out of the 228


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businesses interviewed 90 has never benefited from loans or credit, it is only 138 of the businesses interviewed that has ever received a loan or credit from any source. In the Northern Region 56 of the 91, 62% of those interviewed said they have received a loan or credit at least once, in the South Central Region 39 of the 72 interviewed, 56%, has received a loan or credit for their business and in the Southern Region it is 43 of the 65, which amounts to 66%.

Sources of credit and loans: 84% of total loans/credit has been from the Bank of Maldives; of the 297 times loans or credit has been received by the businesses interviewed, 250 are from the Bank of Maldives. The regional breakdown is also similar to the total; Northern Region: Total loans /credit received: 132 Bank of Maldives loans: 105 Bank of Maldives loans as % of total loans/credit availed: 79.5% South Central Region: Total loans /credit received: 75 Bank of Maldives loans: 61 Bank of Maldives loans as % of total loans/credit availed: 81.3% Southern Region: Total loans /credit received: 90 Bank of Maldives loans: 84 Bank of Maldives loans as % of total loans/credit availed: 93.3%

Frequency of loans and credit by sector: Most loans and credit has been availed by the Services sector. This is expected as 62% of the total interviewed fall under this category. The Services sector includes retailers and traders who are more confident of their businesses and are more reputed in the islands as established “businessmen”. The next highest is manufacturing followed by fisheries. This is directly related to the distribution of businesses interviewed; 14% in fisheries and 13% in manufacturing.

Loan/ credit and gender: Overall the 37 women-owned businesses interviewed have received loans or credit a total of 40 times, while the 190 businesses owned by men have received loans or credit a total of 257 times. Thirteen percent of the businesses interviewed in the Northern Region are owned by women and they have received 10% of the loans or credit of the total received in the region by all interviewed. In the South Central, while 17% of the businesses interviewed are women owned they have received 13% of the loans and credit and in the southern region 19% of the loans or credit received by all was for the 20% of businesses that are owned by women.

Details of last two loans received by respondents: Respondents were asked to provide details of the last two loans they have received. The details include the size of the loans, maturity period, interest rates and fees, other costs, cost period, repayment period and time take to process the loans. The following table provides information on the number of responses received for each of the details of the loans. All the loans for which details have been provided were from Bank of Maldives. Therefore details such as maturity and interest rates have been assumed to be common for all. However responded were pressed to provide details on other costs, and time taken for processing.

Size of loans: Respondents in each of the regions were asked to provide details of their last two loans. The amounts given by those who responded to provide an indication of the size of loans they have received. In the Northern Region most of the highest number of loans is below


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Rf. 15,001. The exact figure given by most in the category is Rf. 15,000. The responses in the South Central Region and the Southern Region also give a similar result. In all three regions most of the loans for which data is received falls below Rf. 500,000.

Asset value of businesses and the number and size of loans availed: As expected businesses that have higher asset values have taken more and higher value of loans. In the Northern Region businesses with an asset value of less than Rf 50,000 have taken a total of 15 first and second loans, businesses with asset values between Rf 100,000 to 1,000,000 have taken 37 first and second loans. Almost the same difference in number of first and second loans is seen in the Southern Region. Although the difference is smaller, the trend is still the same even in the South Central Region.

The average value of loans also gives an indication of what businesses in each category needs and what the bank is ready to offer these businesses. While the average value of first and second loans for businesses with asset values less than Rf 50,000 range from Rf 43,000 to Rf 145,000, the average value of loans received by businesses in the 100,000 to 1,000,000 category ranges from Rf 244,000 to Rf. 569,000.

C.8 Business Development Services

Development of business idea: Respondents were asked how they developed the idea for their businesses. The overwhelming majority of respondents said that they developed their idea through market analysis. The next highest is through local fairs and with the support of government programs. 14 said they continued their traditional family businesses. Although 35 said they got the idea for their businesses through the support of government programs, when asked whether they have received government help to develop their businesses only two in the Northern Region and two in the Southern Region said they have received government help to develop their businesses.

All regions Yes Market analysis 208 With the support of a government program 35 With the support of international donor program 10 Through contacts with foreign/ business partners 18 During local trade fairs 40 During international trade fairs 11 Family tradition 14 Others in the island were doing it 9 Others (list if yes) 0


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ANNEX D: CLASSIFICATION OF ENTERPRISES

Classification of Enterprises: Current information maintained by the Government and the Maldives National Chamber of Commerce and Industry provides limited information on ownership, employment, turnover, or capital investment. There are about 2,500 registered businesses at MEDT, and about one-fifth of these have reportedly submitted information on their annual turnover. Until now, lack data has prevented businesses from being classified, but the 7NDP calls for the introduction of on-line business registration procedures in 2007 that will

facilitate the procedure, broaden the coverage, and help classify businesses.

Definitions of MSMEs: Most people invoke the recent study by Ministry of Atolls Development on income generating activities in the outer atolls for the definition of microenterprises and SMEs in the Maldives (Table D1). While the definition is generally in line with that of other developing and transition economies, it requires a narrower definition since the present coverage has the potential for one type of enterprise to overlap with another.1 For example, a firm may have less than 5 employees and be classified as a microenterprise but, as indicated in the MSME survey described in Annex C, it can generate monthly sales of more than Rf 50,000 and therefore be classified as a small-size enterprise.

Proposed Definition for Maldives: To overcome these potentially conflicting definitions of MSMEs, and because of the unreliable data on enterprise assets and sales figures uncovered in the MSME survey, it is suggested that only number of employees be used to classify enterprises in the Maldives. Recent works on MSMEs throughout the world that include some SIEs provide a standard for classification.2 Table D2 shows

1 For a survey of SME definitions currently used in transition economies, see United Nations Economic Commission for Europe, “Small and Medium Size Enterprises in Countries in Transition”. Series: Entrepreneurship and SMEs, 2006. 2 For details, see “Micro, Small, and Medium Enterprises: A Collection of Published Data”, a database maintained by the Small and Medium Enterprise Department of the International Finance Association, World Bank. The dataset is a collection of publicly available data on MSMEs in over 100 countries that includes several indicators of a country's business environment.

Table D.1: Definition of Microenterprises and SMEs Used by Ministry of Atoll Development

Enterprise Size

Micro Small Medium

Number of Employment 1-5 6-20 21-50

Total Assets (MRf)

5,000 – 50,000

51,000 – 100,000

100,001 – 1 million

Sales (MRf/month)

50,000 or less

50,001 – 200,000

200,001 – 500,000

Source: Ministry of Atoll Development, Old, Existing and Potential Income Generation Activities in the Maldives. Funded by UNDP and UNESCAP, May 2004.

Table D.2: Enterprise Classification in Selected Countries (number of employees)

Enterprise Classification

Micro Small Medium

Bermuda 1-4 5-9 10-49

Puerto Rico 0-4 5-19 20-49

Albania 1-4 5-19 20-49

Australia 0-4 5-19 20-199

Botswana 0-4 5-49 50-99

Czech Republic 0-5 6-19 20-249

Egypt 1-4 5-14 15-49

El Salvador 0-4 5-49 50-99

Hong Kong 0-4 5-19 20-99

Jamaica 1-2 3-4 5-9

Jordan 1-4 5-19 20-99

Korea, Rep. 0-4 5-19 20-99

Norway 0-4 5-19 20-99

Singapore 0-4 5-19 20-99

Thailand 0-4 5-19 20-99

Virgin Islands 0-4 5-19 20-49

Source: Database maintained by Small and Medium Enterprise Department of the International Finance Association, World Bank, “Micro, Small, and Medium Enterprises: A Collection of Published Data”.


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the definition used by two other SIEs for which data are available, as well as selected countries. These countries generally define microenterprises as having up to four employees; small enterprises as having five to 19 employees; and mediums size enterprises as having from 20 to 49 or 99 employees. In the case of the two SIEs, the maximum size of medium size enterprises is 49. There are exceptions, of course. The Czech Republic defines microenterprises as having up to five employees, and many larger economies define them as having up to nine employees. For medium size enterprises, Bermuda classifies companies with up to nine employees as being medium size; Botswana and El Salvador use an upper limit of 49 employees; and some economies such as Mexico, Sri Lanka, New Zealand and the Philippines has an upper limit of 99 employees. For medium-size enterprises, the range varies from an upper range of 49 employees for the SIEs and some other countries to 99 for most other countries, with considerably higher upper limits for Australia and the Czech Republic.

Proposed MSME Definition for the Maldives: It is appropriate to follow the definition of MSMEs used by other countries, particularly SIEs. In general, countries rely on number of employees, although a limited few use annual sales, annual gross income, turnover or assets.

Since these figures are not readily available in the Maldives and enterprises themselves often do not have reliable estimates, it is preferable to adopt the dominant classification scheme based on number of employees in the Maldives. Using the classifications adopted by other SIEs and the majority of countries reported in Table D3, we propose a classification of 0-4 employees for microenterprises, 5-19 employees for small- size enterprises and 20 to 49 employees for medium-size enterprises.

Table D.3: Proposed MSME Definition for the Maldives

Enterprise Size Number of Employees

Micro 0-4 Small 5-19 Medium 20-49


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ANNEX E: EXTERNAL ASSISTANCE

E.1 Overall and Sector-Specific Support to Private Sector Development There have been a number of donor-supported projects on private sector development in general and for sector-specific activities (Table E.1). Among the most important recent contributions are the World Bank’s Investment Climate Assessment (ICA), which provides a ranking of major constraints and challenges facing the private sector, and the sector-specific strategies of the new tourism masterplan, the ADB’s agricultural commercialization PPTA and the FAO-funded masterplan for agriculture, and the ADB-funded domestic maritime transport and employment skills training projects. The first section of this annex describes these and other projects in terms of their overall PSD support, while the following section describes the contribution of external assistance to income-generating and micro-credit activities in the atolls, as well as specific support to the development of agriculture, fisheries, handicraft, construction, transport, shipbuilding. The final section covers external assistance for employment and skills development, specifically as it relates to closing the skills gap and developing an integrated human development approach to employment generation.

Table E.1: Summary of External Assistance to Private Sector Development

Sector Activity Report

Multi-Sector

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

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

ADB, “Loan No. 681-MLD (SF): Multiproject, for $2.38 million”. Approved 29 March 1984. ADB, "Technical Assistance to the Republic of Maldives for Capacity Building for Regional

Development". TAR MLD 36079, March 2003. Ministry of Atoll Development, Old, Existing and Potential Income Generation Activities in

the Maldives. Funded by UNDP and UNESCAP, May 2004. Ministry of Planning and National Development, National Recovery and Reconstruction

Plan: Programmes and Projects. Male', March 2005.

Agriculture

Asian Development Bank, “Commercialization of Agriculture in the Maldives”. TA No. 4337-MLD, June 2005.

World Bank, “Potential for Agricultural Products”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.

Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and Food and Agriculture Organization of the United Nations, The Agricultural Development Master Plan of Maldives. Draft Report. Tcp/Mdv/3001: Master Plan for Sustainable Food Security, Agriculture and Regional Development, January 2006

Construction World Bank, “Case Study on Construction Industry”. In The Maldives: Sustaining Growth

and Improving the Investment Climate. Annex 3. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.

Fisheries World Bank, The Maldives: Sustaining Growth and Improving the Investment Climate.

Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.

Handicraft World Bank, “Case Study on Handicraft Industry in Maldives”. In The Maldives: Sustaining

Growth and Improving the Investment Climate. Annex 4. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.

Power ADB, “Loan No. 1121-MLD (SF): Second Power System Development, for $9.2 million. Approved 19 November 1991.


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ADB, “Loan No. 848-MLD (SF): Power System Development, for $6.1 million”. Approved 28 October 1987.

Tourism Ministry of Tourism, “Mid Term Evaluation and Recommendations: Maldives Tourism Master Plan, 1996 – 2005”. Undated.

Transport

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

ADB, “Interislands Transport Operations Review”. TA No. 679-MLD. 25 April 1985. ADB, “Loan No. 1226-MLD (SF): Second Male Port, for $8.8 million. Approved 1 April

1993. ADB, “Loan No. 513-MLD (SF): Inter-Island Transport for $1.0 million”. Approved 18 June

1981. ADB, “Loan No. 911-MLD (SF): Male Port Development, for $6.4 million”. Approved 20

October 1988.

Skills Gap Closure

ADB, “Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Employment Skills Training Project”. Loan 2028-MLD, approved on 2 December 2003

ADB, “Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Postsecondary Education Project”. September 1998.

ADB, "Report and Recommendation of the President on a Proposed Loan to Maldives for the Employment Skills Training Project". Manila (Loan 2028-MLD, approved on 2 December 2003).

World Bank, “Maldives: Integrated Human Development Project”. IDA/R2004-0168/1, June 16, 2004, and World Bank, ““Maldives: Integrated Human Development Project – Additional Financing”. March 14, 2006.

Investment Climate Assessment: The recently released ICA by the World Bank is an important guide to areas requiring attention for the promotion of private sector development in the Maldives.3 Unfortunately most of the enterprises covered were in Malé Atoll. Nevertheless, the ICA points to constraints to doing business in the Maldives that are likely to apply to businesses operating in other atolls. The top five obstacles identified by the businesses surveyed were (i) lack of access to finance; (ii) high cost of finance; (iii) lack of access to land; (iv) lack of skilled labor; and (v) corruption. There is, however, a high degree of diversity across sectors with respect to the relative significance and severity of other constraints affecting enterprise performance. Access to and cost of finance nevertheless emerged as the major obstacle to businesses in all major sectors, including the construction, handicraft, and agriculture sectors.

Tourism Masterplan: Two ten-year masterplans have been formulated for the tourism sector since 1980, the second one having been completed in 2005.4 The most recent Master Plan contained the following polices and strategic objectives are recommended: (a) tourism should be private sector led, where the roles of the public sector are regulating and providing supportive environments, while the private sector under takes commercial operations; (b) tourism activities should produce not only short term financial returns but adequate long term financial and economic benefits to firms and the population at large; (c) beneficiaries of tourism should be all Maldivians disregard of their location, as such, they should be in the center of all planning processes; (d) tourism should be developed with dignity. Religion, culture and traditions should not be compromised for economic benefits; (e) Maldivian culture, traditions and 3 World Bank, The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006. 4 Ministry of Tourism, “Mid Term Evaluation and Recommendations: Maldives Tourism Master Plan, 1996 – 2005”. Undated.


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way of life, is an asset, not an impediment for tourism, therefore, revival, rejuvenation and sustenance of the authenticity of folklore, cultural dances, art and crafts and traditional ceremonies should be made a priority in all tourism projects; (f) environmental resources should be used in a sustainable manner; (g) capacity should be planned and expansions controlled, so as to maximize economic, environmental, and social benefits; (h) efforts should be made to ensure that the islands are used for the purpose for which they are most appropriate, and activities undertaken in one should not jeopardize the productive capacities of others. To attain the strategic objectives, implementation guidelines focus on two major areas consisting of product development management and growth management. Product development addresses the issue of diversification of the product, source, and target market and enhancing the tourism inputs, while growth management primarily focuses on spatial and temporal expansion plans. Product development management aims at sustaining the industry, by devising mechanism that ensures continued development of tourism. To do so, it is recommended to adopt a ‘whole of destination’ framework, attract innovation and creativity to the industry, undertake pilot demonstration projects and create an enabling environment for the private sector led development.

Tourism Expansion Plans: In 2006 a new leasing process was initiated that represents a significant departure from earlier policies and has caused concern among resort owners and travel agents. Under the new initiative, the Government introduced 35 new islands for leasing. This number compares with 87 resorts that were introduced to tourism over 30 years. The likely impact of this rapid expansion is that access capacity will be strained and the basic tourism model will undergo unknown modifications since little research information is available on the impact of accelerating growth. As part of this process, a new public enterprise has been proposed to manage at least 50 percent of the new resorts and it is unclear how the entity will achieve its stated objective of encouraging wider Maldivian participation in resort ownership. Maldives has long relied on a public sector role limited to creating the environment for sound investment in tourism and managing the leasing process-with private sector firms bidding on individual islands.

Fisheries: Fisheries have traditionally been the backbone of the country’s economy, providing around 80% of export revenue. Although its contribution to GDP has since been overtaken by tourism, fisheries remain the most important sector in terms of employment and income in Maldives. The World Bank’s ICA describes recent developments in the sector and its evolution from a traditional subsistence-based pole and line tuna fishery to numerous largely artisan-based commercial fisheries. About 30-35 percent of the population lives on income received directly or indirectly from fishing. Fisheries are vital in that it provides most, if not the sole, employment and income earning opportunities for atoll women. In terms of output, the fisheries sector has grown steadily in recent years. Increased catch was recorded for both pelagic and reef fish fishery. Revenue generated from the export of marine products has also increased during the past years increased.

Agricultural Commercialization: In 2005 the ADB completed a comprehensive study on the potential commercialization activity in the Maldives.5 The strategy for agricultural commercialization seeks to promote a market-driven process that in the short to medium-term will target specific types of activities to these three markets. It relies on the following key components: (a) develop distinctive crop types and agribusiness activities for the domestic, resort and foreign markets; (b) adopt a phased approach to project interventions, but provide

5 Asian Development Bank, “Commercialization of Agriculture in the Maldives”. TA No. 4337-MLD, June 2005.


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priority programs to commercialization activities aimed for the domestic and resort markets since development of those activities will provide parallel support to subsistence farming in the inhabited islands damaged by the tsunami; (c) provide for value-added processing industries by facilitating high value-added agribusiness activities and developing a limited but significant number of agriculture-based industries in different parts of the country; (d) adopt a clusters approach to the integration of production, marketing and distribution activities for targeted geographic areas; (e) enhance the catalytic role of public sector for ‘kick-starting’ commercial activities and strengthening private sector commercial activities through national, regional and local projects and programs supported by the ADB and other development partners; (f) provide for an institutional mechanism that will allow rapid decision-making processes to take place; and (g) target the poorest and most tsunami-affected areas of the country in terms of activities that will combine subsistence and commercial production activities, encourage an increased role of women in agribusiness activities at the local level, and ensure an equitable distribution of benefits from commercial activities throughout the country.

Agricultural Masterplan: The FAO-funded Agricultural Masterplan for the Maldives sets out three core objectives for the sector: (a) achieve sustainable and optimal utilization of potential agricultural resources to maximize the sector’s contribution to national economic development without jeopardizing the environmental beauties and values; (b) increase the productivity of agricultural commodities and livestock products to make available safe and nutritious local food and meat supply and to reduce reliance on food imports; and (c) establish a diversified and vibrant national economy through private sector oriented and sustainable agribusiness system development with a reliable competitive edge.6 The overall strategic policies set out consist of (a) optimization of the cultivable land and water resources utilization for sustainable and environmentally viable agricultural and agro-forestry development; (b) intensification and diversification of subsistence food crops and commercial cash crops and production of these crops for domestic, resorts and export markets through ecologically sound improvement in productivity; and (c) development of agribusiness system by creating conducive and enabling business environment and a regulatory framework through harmonized public and private partnership. The strategic components in the private sector growth promotion include: (i) improvement of environment for competitive private sector growth, inequitable and distorted tax structure, and laws, regulations and practices that inhabit private sector development or distort market mechanisms; (ii) facilitation of access to capital through a more efficient financial sector; (iii) simplification of access to land by introducing uniform and simplified land tenure system with commercial development needs; (iv) facilitation of domestic and foreign investment by the private sector by rationalizing the promotional, regulatory, licensing and policy formulation functions of the financial and monetary authorities; and (v) development of agribusiness by redefining the role and functions of the ministries concern, especially MOFAMR.

Transport Masterplan: The ADB-funded Domestic Maritime Transport Project identifying ways to improve maritime transport and to develop a project for possible ADB financing.7 Aspects that have been addressed include the facilities required for maritime transport and the technical, institutional and policy solutions needed in order to improve safety, efficiency and accessibility of the existing system. In addition, the TA identified a delivery mechanism for maintenance of the proposed facilities, comprehensive improvements targeting efficiency, and financial 6 Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and Food and Agriculture Organization of the United Nations, The Agricultural Development Master Plan of Maldives. Draft Report. Tcp/Mdv/3001: Master Plan for Sustainable Food Security, Agriculture and Regional Development, January 2006. 7 ADB, “Domestic Maritime Transport Project”. Draft Final Report. TA 4395-MLD, August 2005.


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mechanisms geared to achieve effective and consistent operation and maintenance of the facilities and vessels. The project has its origin in the Transport Master Plan which is still at the final draft stage. The masterplan will provide a holistic approach to the development of the transport sector, which seeks to integrate the access to and provision of air, sea, and surface transport services. Its key elements consist of (a) the development of a transport grid involving air, sea and land transport; (b) the development of international airport(s) to integrate and sustain activities in the larger national arena;(c) the development of Malé Commercial Harbor and the regional ports to cater to the developmental needs of the country;(d) the development of inter-island transport networks (both by air and sea) with special emphasis on realizing synergies;(e) the development of sustainable and efficient intra-island transport networks, taking into consideration the increasing demand for motor vehicles, congestion and pollution; (f) the development of sustainable and efficient inter-island transport networks, taking into consideration the increasing demand and number of sea-based vessels and pollution; and (g) the harmonization of the transport system with the growth of the tourism sector. There are four policy guidelines, the second of which provides for the development of a nation-wide transport grid that recognition of the role of the private sector. The policy favors the domestic private sector by requiring foreign firms to pay a royalty that is not levied on domestic firms.

Education and Vocational Training: The ADB-funded Employment Skills Training Project is assisting the Maldives make better use of its human resources potential by increasing the number of Maldivians actively participating in the labor force.8 The project will provide employment-oriented skills training in various occupations to make the prospective Maldivian employee more attractive to the employer. In the process, in-country capacity to deliver competency-based skills training will be strengthened. Together with the provision of employment-oriented skills training, career guidance in schools and social marketing will contribute to making training and employment more attractive to the prospective Maldivian employee. The overall objective of the project is to increase the number of Maldivians, men and women, actively participating in the labor force and employed. The project will (i) provide youths with employment-oriented skills training; (ii) increase capacity to design, develop, and deliver employment-oriented skills training; (iii) improve public perception of training and employment in locally available skills-oriented occupations; and (iv) strengthen labor administration and labor market analysis. The project aims to train about 6,000 youths, at least 40% of whom will be female. The project implementing agency will be Employment and Labor (MEL). A project steering committee will be established to facilitate policy dialogue, advise the project manager of concerns and issues related to all aspects of project implementation, and facilitate coordination between ministries and agencies. A project implementation unit will be established. Working groups will be organized to coordinate and guide the implementation of project components and activities. The main project benefits are: (i) more youths provided with employment-oriented skills training; (ii) more skilled Maldivians in the labor force sharing in the benefits of economic development; (iii) increased capacity in country to design, develop, and deliver demand-oriented skills training; (iv) strengthened labor administration and labor market analysis at MEL. The direct beneficiaries of the project will be: (i) unemployed youths, including women; (ii) island communities; (iii) various ministries and agencies addressing the issues of the youths, human resources development, and training delivery; and (iv) public and private training providers. Benefits to the country will accrue through human development that is necessary for economic growth. The provision of skilled labor will also contribute to meeting the macroeconomic goals of

8 ADB, "Report and Recommendation of the President on a Proposed Loan to Maldives for the Employment Skills Training Project". Loan 2028-MLD, approved on 2 December 2003.


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the country, notably addressing the balance of payments and retention of foreign exchange. The project will have three components: (i) increasing access to good quality employment-oriented skills training; (ii) social marketing, and improving career guidance and awareness of employment opportunities; and (iii) capacity strengthening of the Ministry of MEL. Training in the project will be delivered in three geographic regions, namely, Malé island and adjacent atolls, the Northern Development Region, and the Southern Development Region. The project will focus on delivering training in four sectors: tourism, fisheries and agriculture, transport, and the social sectors.

E.2 Support to Atolls-Level Income-Generating and Financing Activities Potential for Income Generating Activity in the Atolls: One of the most important recent studies on cross-sectoral income generating activities in the Maldives has been produced by the Ministry of Atoll Development with the support of UNDP and UNESCAP.9 The study points to a number of important findings that are important to the present project on SME development in the Maldives, especially in terms of occupational information, skills gaps, and specific income generating activities and business profiles. In general the study found a large difference between business activities and opportunities across islands, a situation that is likely to grow if left untreated. The poor in most islands face large constraints to accessing income earning opportunities (IGAs) because of their lack of skills and access to capital. Most of businesses that do exist are started and owned by men with their own savings and are operated largely with family labor. Women play important roles in terms of providing labor but seldom provide managerial or financial support. Yet while formal group income generating activities are relatively uncommon, where they do exist they are most commonly done by women under the auspices of Island Women’s Development Committees (IWDCs). There are nonetheless many more exclusively male occupations than exclusively women occupations, which aggravates the existing situation in which the female labor force participation rate is only 37 percent compared with a 71 percent rate for male labor

Potential for Agriculture Products: In 2005 the ADB completed a comprehensive study on the potential commercialization activity in the Maldives.10 It identified six fruits and seven vegetables having high commercial value in the country. They are dry and green coconuts, bananas, papayas, watermelons, mangoes, medicinal plants, chilies, pumpkins, eggplant, cucumbers, tomatoes, and cut flowers. The selection criteria for those were based on the perennial nature of the plants, technology, transport, storage and production costs, market potential for domestic, resort, and international markets, and value-adding capacity. The World Bank subsequently reported the results of the study as part of its ICA.11

Potential for Handicraft Industry: In the Maldives, some crafts are highly concentrated in specialist islands (such as lacquer ware and fine mats) while others are undertaken throughout the nation (tailoring, boat building).12 The World Bank’s 2006 ICA includes a special study on

9 Ministry of Atoll Development, Old, Existing and Potential Income Generation Activities in the Maldives. Funded by UNDP and UNESCAP, May 2004. 10 Asian Development Bank, “Commercialization of Agriculture in the Maldives”. TA No. 4337-MLD, June 2005. 11 World Bank, “Potential for Agricultural Products”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006. 12 Enterprise Development Unit, “National Handicraft Centre”. Malé. Ministry of Economic Development and Trade, 2006.


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the handicraft industry in the Maldives.13 The absence of a linkage between the tourist industry and the rest of the economy is nowhere more apparent than in this industry. Traditional handicraft products are not generally valued in the Maldives and they have lost their place to substitutes that can easily be imported from other countries at cheaper prices. Handicraft and gift shops for tourists in Malé contain mostly imported products from Indonesia, Thailand, India, and Sri Lanka, often with signs indicating that they are products of the Maldives. The relatively high cost of handicrafts is unlikely to drive away customers since in the past the Maldives successfully created a brand name for its tourist industry and caters to up-market clients. The major problem currently facing the industry is the migration that has occurred since the tsunami and the loss of equipment and stocks to the Tsunami tidal waves that struck islands where handicrafts were produced. Since then, many of these people have been relocated to temporary shelters provided by the Government of Maldives and lack financial assistance for much-need start-up capital. In addition to financing, there is an urgent need to introduce a certification system for authentic products from Maldives. Other promotion activities that are simple to implement are the establishment of a handicraft display center at the airport, support of these products by the Tourist Promotion Board, and improved collaboration with resort owners to promote more Maldivian handicrafts as an act of corporate social responsibility.

Potential for Construction Industry: The World Bank’s 2006 ICA includes a special study on the construction industry in the Maldives.14 Based on interviews with a representative sample of the construction firms owned by the Maldivians, the study examined SMEs as well as the construction industry as a whole, as represented by the Maldives Association of Construction Industry (MACI). It identified lack of skills and education of available workers as an important problem needing attention for the industry to become competitive with foreign competition, as well as improved access to finance, lower utility costs, resolution of land policy constraints, governance, streamlining bureaucratic processes, improved labor laws, better commercial laws, improved infrastructure, training and capacity building, better standards, and further improvements in public-private sector dialogue and partnership. Until then, the industry feels that it needs protection against foreign competition, a view often expressed by businesses from all sectors in the Maldives.

Potential for Transport: The ADB’s Domestic Maritime Transport PPTA was completed in 2005 and addresses harbor investments in the outer islands and in Malé, and a program proposal for the improvement of safety and operational conditions of boats involved in domestic maritime services.15 The PPTA addresses the lack of reliable services and inadequate infrastructure that are major obstacles to safe and efficient domestic maritime transport. Inter-island shipping services are operated entirely by the private sector, while the Government provides essential infrastructure such as harbors, and regulatory functions like maritime safety. An integrated, efficient transport network that linking Malé, the regional centers currently under development, and the surrounding atolls would facilitate an equitable distribution of economic growth and opportunities through the Maldives. The PPTA therefore proposes assistance to improve the domestic maritime transport system to provide safer, more efficient and more

13 World Bank, “Case Study on Handicraft Industry in Maldives”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 4. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006. 14 World Bank, “Case Study on Construction Industry”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 3. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006. 15 ADB, “Domestic Maritime Transport Project”. Draft Final Report. TA 4395-MLD, August 2005.


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accessible services. For the outer islands, four new harbors are proposed for (a) Ihavandhoo, costed at $1.152 million; (b) Nolhivaramu, costed at $0.922; (c) Thulhaadhoo, costed at $0.559; and (d) Kulhudhuffushi, costed at US$1.054. There is also a pilot regular shipping service based on inter-atoll government-sponsored regular shipping services for the main islands of Faafu Atoll (Nilandhoo, Magoodhoo, Biledhdhoo and Fieeali). The key Ministries responsible for the sector are the Ministry of Transport and Communication (MTC), the Ministry of Construction and Public Infrastructure (MCPI), and the Ministry of Atolls Development (MOAD). A road map for sector policy reforms is being prepared under the ongoing project preparatory TA, and will be implemented under the project. This will include (i) creation and enforcement of appropriate safety standards for ships operating in domestic maritime services, and (ii) policy and regulatory framework for public service obligations on regular domestic maritime transport services.

Potential for Shipbuilding: Under the aforementioned Domestic Maritime Transport PPTA of the ADB, there is a proposal for a loan-based program for the improvement of safety and operational conditions of boats involved in domestic maritime services. Under this scheme, the ADB would provide loan finance to be on-lent to finance boat construction and improvement, as a means of improving the quality of the domestic maritime transport fleet and providing an incentive for boat owners to place their boats on regular scheduled services by providing easier access to finance for actual and potential boat owners. Specific proposals include (a) that the Bank of Maldives (BML) be appointed the intermediary responsible for on-lending part of the proceeds of the proposed ADB loan to suitable borrowers for the purposes of investment in boats approved by MTC; (b) that the interest rate be agreed with the Government and preferably be below the standard rate of BML; (c) that the proposed repayment period be a maximum of 15 years; and (d) that one of the on-loan conditions be the employment of the boat concerned on a regular scheduled service. An economic appraisal of a hypothetical boat constructed under this scheme and employed on a regular service yielded an economic internal rate of return (IRR) of 12 percent.

E.3 Support for Employment and Skills Development Closing the Skills Gaps: The ADB’s Employment Skills Training Project (ESTP) was implemented in 2004 for a five-year period to increase the number of Maldivian men and women actively participating in the labor force and employed.16 It extends the work undertaken before 2004 by the ADB’s Postsecondary Education Project.17 The ESTP will (i) provide youths with employment-oriented skills training; (ii) increase capacity to design, develop, and deliver employment-oriented skills training; (iii) improve public perception of training and employment in locally available skills-oriented occupations; and (iv) strengthen labor administration and labor market analysis. The total cost of the project is estimated at $7.5 million equivalent. It will be delivered in three geographic regions: the island of Malé and adjacent atolls, and the North and South Regions.18 The project will support: (i) training for potential new entrants in occupations of priority need; (ii) training for occupations currently occupied by expatriates; (iii) training of

16 ADB, “Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Postsecondary Education Project”. September 1998. 17 ADB, “Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Employment Skills Training Project”. Loan 2028-MLD,. approved on 02 December 2003 18 This consists of North Thiladhunmathee Atoll (Haa Alifu), South Thiladhunmathee Atoll (Haa Dhaalu), NorthMiladhunmadulu Atoll (Shaviyani), Malé Atolls, North Huvadhoo Atoll (Gaafu Alifu), South Huvadhoo Atoll, (Gaafu Dhaalu), Foamullah Atoll (Gnaviyani), and Addu Atoll (Seenu).


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individuals engaged in the informal sector to enhance income generation opportunities; and (iv) training for occupations of future need as identified by national economic priorities. The Ministry of Finance and Treasury (MOFT) is the Executing Agency (EA) and the implementing agency is the Ministry of Human Resources, Employment and Labor (MHREL). One of the key features of the ESTP is the participation of the private sector. Extensive consultations were held with the private sector during the PPTA. The project design is based on the active participation of employers to ensure market orientation, relevance, and quality of skills training programs. This process will ensure (i) increased access to quality employment-oriented skills training in selected regions, (ii) social marketing and improving career guidance and awareness of employment opportunities, and (iii) capacity strengthening of MHREL. Training will focus on delivering training in four key sectors: tourism, fisheries and agriculture, transport, and the social sectors.

Integrated Human Development Project: The World Bank’s Integrated Human Development Project has a component covering employment and skills development in the Maldives.19 Component 3 of the project aims to enhance employment prospects of individuals, particularly those residing in remote atolls by (a) supporting cost effective job information and job counseling services through (i) a national jobs information network, (ii) job centers on focus islands, (iii) career and employment counseling through job centers and (iv) business centers to facilitate business development; and (b) expanding existing micro-finance programs to the focus islands. The counselors in the job centers will help link individuals, as needed, to a national skills development program run by the Ministry of Labor and financed by the ADB, and an externally-funded micro-finance program operated by the Atoll Development Committees. Linkage to these services will allow individuals to access income opportunities in remote atolls. By connecting individuals to market-based employment generating initiatives, this part of the project will help improve economic growth on focus islands, and thereby increase the likelihood of migration from other islands. The resulting higher population density will enable the realization of economies of scale, and hence the establishment of new economic activities or sectors on focal islands.

Atoll Development Project for Sustainable Development: Under the UNDP-supported Atoll Development Project for Sustainable Development (ADSL), micro-credit is being offered for community development and social mobilization interventions in six atolls through community-owned revolving credit funds (ADFs). UNDP for development of The Development of Credit Schemes in the Atolls technical assistance in 2006 was renamed Assistance for SMEs Development in the Atolls to be piggybacked to the proposed loan under the same project title. The project has suffered from inadequate human resource capacity and funds have tended to be used for participatory local governance and development planning process, rather than social mobilization of the poorest population segments. The result has been that individual loans have been offered to segment of the population that could access credit from commercial banks and benefit from cheap credit at the expense of the poorest population segments. As a result, UNDP is phasing out the program.20

19 World Bank, “Maldives: Integrated Human Development Project”. IDA/R2004-0168/1, June 16, 2004, and World Bank, ““Maldives: Integrated Human Development Project – Additional Financing”. March 14, 2006. 20 UNDP, “Strategy and Implementation Plan for Re-alignment of Current UNDP Maldives-supported Programmes involved in credit provision”. Final Report, 31 May 2006.


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ANNEX F: CREDIT GUARANTEE FACILITY

Objective: The CGF seeks to generate more loans for more SMEs by shifting the lender’s so-called risk-reward frontier, that is, by reducing both actual and perceived risk. The CGF is expected to enable financial institutions to offer loans that have a reduced conventional collateral requirement. The capital-backed structure of the guarantee fund will ensure prompt guarantee payment to financial institutions, thus reducing the impact of defaults on capital at risk and cash flow. The business presented in this annex demonstrates that, if managed correctly, the CGF will be financially viable and sustainable.

F.1 CGF Organization Overview: The CGF will be administered by Allied Insurance Company of the Maldives Pvt. Ltd, Male, which is the only insurance company in the Maldives. The management has expressed its interest in administering the new facility, and the board has approved the new product. Allied Insurance can provide office infrastructure and equipment to the CGF, thus ensuring that the fund capital can be fully utilized for guarantee risk coverage and associated operating costs. Advantages: In contrast to creating a new CGF institution, its placement as a division of Allied Insurance offers the following advantages: (i) according to Allied Insurance management, they would not require a special license or permit from the Maldives Monetary Authority (MMA) to enter into issuing credit guarantees since they are already a licensed insurance company; (ii) the CGF can use existing facilities (Allied Insurance head office and agents in outer atoll islands), and possibly draw on existing staff and institutional capacities such as recruitment, secretarial support, accounting, and product advertisement; (iii) placing the CGF in the existing organization enhances career development, and thereby enhances the CGF attraction to well-qualified staff; and (iv) there are mutual synergies between the CGF and Allied Insurance’s traditional business, such as extending the range of collateral towards non-traditional business assets to create demand for insuring these assets.

Regulatory Framework: The Maldives Monetary Authority (MMA) has stated that any institution that enriches the Maldivian financial market is welcome and will enjoy full support by MMA. According to Allied Insurance management, as a licensed insurance company they do not need a special license or permit from MMA to enter into the business of issuing credit guarantees. It is nevertheless suggested that MMA review and eventually amends its current regulation to ensure prudent and effective application of the CGF. Among the possible amendments are (i) MMA releasing the CGF from the 25 percent compulsory deposit requirement, thus allowing it to gain higher deposit interest on the unused fund capital (in another foreign assisted scheme, MMA has reduced the compulsory deposit rate to 15 percent); (ii) MMA issuing regulation that ensures adequate CGF liquidity and maintenance of the fund capital, including prescribing maximum risk levels for interest-bearing fund deposits, limiting the leverage and defining a minimum CGF liquidity ratio in relation to the guarantees issued; (iii) regulation and guidelines determining the institutions and types of activities, such as credits and leasing, that can be covered by the credit guarantee and the asset / risk quality of financing instruments that can be insured; (iv) defining reporting requirements and supervision mechanisms for the CGF; and (v) amending supervision and reporting standards for financial institutions, for example, with respect to considering credit guarantees when calculating the capital adequacy ratio.

Management: The Board of Allied Insurance will appoint a CGF Manager (head of division), who will be responsible for the management of the credit guarantee facility, including: (i)


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management of the fund in such a way that it maximizes income under the prevailing investment regulations so that it allows withdrawing from the funds for promptly settling claims, other liabilities and current expenditures; (ii) negotiating with the participating financial institutions the terms under which the facility will guarantee loans, including applied loan appraisal standards, collateral requirements, monitoring and supervision, reporting, access to files and documents, conditions under which claims are accepted and refused, loan recovery procedures, fees and charges; (iii) monitoring and ongoing review of the performance of the risk portfolio. The CGF manager will be responsible for the result of the credit guarantee facility.

Domicile: Even though the loans to be covered by the CGF are those from clients in the outer atolls, the facility should be domiciled in the head office of Allied Insurance in Male’. Geographically, Male’ is situated in the centre of the country, while the focal regions cover both the north and south of the country. Moreover, the aforementioned advantages of establishing the CGF as a division of Allied Insurance can best be realized if the facility operations are located within Allied Insurance’s head office.

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

Implementation Phases: CGF implementation should progress through the following phases: 1. Preparation (prior to loan signature)

Drafting governing and related regulation for credit guarantees (MMA); Final decision on CGF legal form and institutional set-up (i.e. independent entity, or division

of Allied Insurance) by the Government of the Maldives; Legal preparation for CGF establishment (Allied Insurance board decision, CGF

administration contract between Allied Insurance and Government.) 2. Institution Building (approx. 3 months)

Recruitment and selection of management and staff Training of management and staff Providing premises Setting up work plan Initial staff capacity building

3. Business Preparation (3 months) Preparation of operations manual, forms, formulation of contracts Preparation of annual and medium-term business plan, and simulation of default scenarios

under various cost and income assumptions Quarterly and annual budgets Socialization of procedures and fees to participating FI Development and sanctioning of fund management policies Development of a reporting format including indicators or ratios reflecting the loan portfolio

quality Development of a monitoring and evaluation system for, among others: Loans, debtors, and

creditors, pricing policy; and CGF budget (income versus expenses and claims).


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4. Pilot operation (6 months) Based on US$ 0.5 million fund, issuing and administering guarantees to five targeted SMEs

at a standardized risk coverage and fee structure, with restricted geographical and sector focus.

Maintaining CGF exposure and fund deposits at a level sufficient to cover 50 percent of the value of outstanding guarantees at any one point of time.

Evaluating pilot experiences, and reviewing and adjusting CGF policies, operations and fees, as well as governing regulation, accordingly.

5. Regular operation (ongoing) Based on a US$ 2.5 million fund, extend regional coverage and range of partner institutions; Gradually developing a more differentiated range of guarantee products (for example,

different guarantee ratios).

Technical Assistance: Successful implementation of the CGF will be contingent on the availability of adequate and sufficient technical assistance (TA). The TA needs to cover, among others: (i) assistance to MMA in creating and amending, respectively, adequate regulation on CGF operation, supervision and reporting, as well as on the consideration of credit guarantees in the overall regulatory framework for financial institutions; (ii) assistance and advice to CGF management in Allied Insurance on the establishment, operation and development of the facility; and (iii) capacity building for CGF staff, including initial loan officer training, on-the-job support during pilot operation, and providing opportunities for experience exchange with other CGF in Asia by means of study tours, and conference participation.

F.2 Guarantee Product and Procedures Principles: International experience demonstrates that a credit guarantee facility can be effective and sustainable if the following conditions are met: (a) lenders can receive good repayment through prudent screening, monitoring and collection procedures, and intelligently structuring collateral requirements; (b) risk is adequately shared between the borrower, lender and guarantor; with sufficient risk remaining with the lender to ensure diligent loan appraisal and effective recovery of defaulted loans; (c) guarantee fees are high enough to cover risk and low enough not to put off borrowers; (d) fees and investment income for the guarantor are high enough to cover expenses and default; (e) fund procedures are adequately designed for clear selection and evaluation standards; and (f) the guarantor is credible, pays out quickly and in well defined mutually agreed and verifiable circumstances.

Risk Mitigation: The CGF is geared towards improving SME access to finance, by partly substituting physical collateral and decreasing the collateral ratio of loans. Consequently, guarantees will not require the availability of sufficient bankable collateral in the form of buildings or vessels. The CGF will, nevertheless, develop adequate mechanisms for reducing and mitigating default risks. Developing such mechanisms and standards will take place during the negotiation of individual guarantee contracts.

Selection Process: The present scheme adopts a selective approach, whereby guarantees are extends on a case-by-case basis to SMEs. The potential borrower and guarantor will reviews the project and, once agreed upon, the guarantor will issue an advance guarantee approval to the borrower who, in turn, can use it to negotiate a loan contract with a commercial bank. Under this mechanism, a direct relationship between the guarantor and the borrower exists since the former investigates designated loan application and selects the ones to be guaranteed. This reduces the probability of moral hazard on the part of the commercial bank during the screening process and ensures that guaranteed borrowers are indeed in the targeted category intended by


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the CGF. The recommended institutional structure and CGF process flow follows international best practices and lessons learned from other countries.

Claims Handling: The guarantee can be claimed if a debtor’s arrears amount to more than three monthly installments and appropriately warnings have been issued. Prior to issuing a claim, however, the efforts should be made to restructure and possibly reschedule the loan. The role of the CGF in claim recovery will need to be defined during the inception phase. The CGF can either rely on the lender’s debt recovery efforts or ask for the collateral being handed over by the lender for liquidation by the CGF in exchange for paying out the guarantee.

F.3 Business Plan Business Development: The CGF will require some 6 months preparation for staff recruitment and training, preparing manuals and procedures, during which time the facility will manage a pilot fund of US$ 0.5 million. During regular operations, ten guarantees are projected for the first year and thereafter the number of guarantees is assumed to increase by twenty each year. By the third year of regular operations there will be roughly 25 new guaranteed loans in each of the two focal regions. It is further assumed that lenders will primarily look for coverage of medium- to long-term loans, with an average term of 5 years.

Table F.1: Number of Guaranteed Contracts

Pilot Regular Operations 2008 2009 2010 2011

New guaranteed contracts 5 10 30 50 Risks/accounts in portfolio (end of year) 5 15 45 95

Guarantee Portfolio: An average loan amount of MRf 500,000 (US$ 40,000) is assumed over the project period. It is furthermore assumed that the loans to be guaranteed will be annuity loans with 12 percent interest a year. This rate corresponds to the current market rate of 10.5 percent, plus 1.5 percent guarantee charge, and is comparable to the 11.75 percent a year interest that BoM is charging for its so-called Target Group Loans (TGL)21. Under these assumptions, loan repayment gradually increases from 15.6 percent of the principal in the first year to 25 percent of the principal in the fifth and last year. Defaults: Normal default rates for SME credit guarantee facilities are between 2 and 3 percent, the present calculation are based on a conservative rate of 6 percent. To simplify calculations, it is furthermore assumed that all defaults will occur one year after the loan has been disbursed. By then, 16 percent of the principal will have been repaid, resulting in a net default rate of 5.4 percent on the loan principal. In practice it is likely that default occurrences will be relatively evenly distributed over all loan age classes, suggesting that actual defaults will tend to occur at a later point in time, at a lower outstanding loan balance, and after the CGF has collected more guarantee commissions than currently projected.

Contract Balance: The CGF’s balance of loans under contract is projected to increase from MRf 2.4 million at the end of 2008 to MRf 12.7 million by the end of 2011. The projection has been made on a quarterly base, whereby loan repayment has been calculated annuity-based, on those loan amounts that have not yet started to default. Loans in arrears have been left in the contract balance for two more quarters (i.e. one quarter for getting 90 days in arrears, and another quarter for the lender to call in the loan and initiate legal proceedings), and then they have been written off and removed from the contract balance.

21 TGLs are collateral-free, but limited to Rf 15,000 (D1,170), which is insufficient for most small and medium

enterprises.


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Table F.2: Projected Credit Guarantee Loan Activity


New guarantee contracts No. 5 10 30 50 New contract value @ MRf 500,000 / loan MRf 2,500,000 5,000,000 15,000,000 25,000,000 Loan repayment during the period MRf 70,477 281,909 2,251,954 5,828,769 Defaulted and written off loans during the period MRf 121,476 235,905 621,919 Balance of loans under contract – Start-of Year MRf 2,429,523 4,718,091 12,748,046

Balance of loans under contract – End-of Year MRf 2,429,523 7,026,138 17,230,233 31,297,358 US$ 189,806 370,098 1,375,385 2,849,891

Operating Income: On the guarantee portfolio, the CGF will gain the following income: (i) 1.5 percent contract fee on new contracts; (ii) 0.375 percent quarterly commission on the outstanding loan balance; and (iii) 0.375 percent quarterly commission on 90 days foregone interest, i.e., on 3 percent of the outstanding loan balance. Against this income are claims that need to be honored, which amount to 80 percent of the outstanding amount of defaulted loans, plus 80 percent of 90 days foregone interest on these loans, i.e., 80 percent of 3 percent of the outstanding amount of defaulted loans.

Claim Recovery: The CGF will be able to recover some of the claims from foreclosing on the collateral. Even though the collateral will be below current industry standards, it will still be substantial. In the case of investment loans, the CGF should secure the fixed assets; for working capital loans, 100 percent bankable collateral is assumed. When defaults occur, about 15 percent of the loan principal will already been repaid, so the collateral should allow substantial recovery. An average 25 percent recovery from claims has been assumed, with an average claim recovery period of one year.

Table F.3: Projected Operating Income of CGF


Contract Fee MRf 37,500 75,000 225,000 375,000 Quarterly Commissions MRf 13,375 26,750 199,074 465,817 Total Fee and Commission Income MRf 50,875 101,750 424,074 840,817 Claims on defaulted loans (80% coverage) MRf 9,718 18,872 497,535 Claims on 90 days foregone interest (80% coverage) MRf 292 566 14,926 Total Guarantee Claims Paid MRf 10,010 19,439 512,461 Claim Recovery (25% of previous year’s claims) MRf 30,369 58,976

Operating Result (Gross) MRf, 50,875 91,740 435,004 387,332 US$ 3,975 7,167 33,985 30,260

Operation Costs: The following costs have been included in the management and operation of the facility: (i) staff costs, (ii) travel costs to the target regions, (iii) office rent and operation, (iv) telecommunications and Internet, (v) other office expenses. Various expenses cover the cost of office equipment maintenance and renewal. Since the facility will be implemented as a division of Allied Insurance, administration costs should remain modest. Initially the facility will require a fund manager and one account officer, supported by one administrative staff (accounting and office assistance), who can initially work on a part-time basis.

Table F.4: Staffing of Financial Guarantee Agency

(MRf/ Month)


Manager 20,000 0.5 1 1 1 Account Officer 10,000 0.5 1 2 2 Accountant / Secretary 5,000 0 1 1 1 Support staff 4,000 0.25 1 1 1 Total Staff 1.25 4 5 5 Domestic Travel (Trips/Year) 5,000 10 20 30 35


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Administration Costs: The following additional details have been considered budgeted: (i) Staff costs: Monthly staff costs have been estimated based on actual salaries that are being paid in the Maldives to qualified staff. In addition, extra costs such as allowances, incentives for achieving pre-determined targets, and costs for business uniforms have been considered; (ii) Travel: Travel costs have been calculated based on an estimate of required domestic trips; (iii) Rent and telecommunication: Estimates have been based on current costs paid by similar operations; (iv) other office expenses: These expenses include office material, equipment maintenance and replacement, and other administration costs such as newspapers and receptions; (v) cost increases: Annual costs have been adjusted for inflation over the project period. The table below presents and sums up the projected development of CGF administration costs.

Table F.5: Operating Costs of Financial Guarantee Agency

(MRf/ Month)

Annual Increase


Manager 20,000 4.5% 120,000 240,000 250,800 262,086 Account Officer 10,000 4.5% 60,000 120,000 125,400 131,043 Accountant / Secretary 5,000 4.5% 0 60,000 62,700 65,522 Support staff 4,000 4.5% 12,000 48,000 50,160 52,417 Travel (Costs per Domestic Trip) 5,000 4.5% 50,000 100,000 150,000 175,000 Rent, electricity, water (500 sq ft) 15,000 4.5% 67,500 135,000 141,075 147,423 Telephone , internet 6,000 6.0% 24,000 48,000 50,880 53,933 Sundry office expenses, others 4,000 6.0% 24,000 48,000 50,880 53,933 Total MRf

357,500 799,000 881,895 941,357

In US$

27,930 62,422 68,898 73,543

Interest Income: As capital-backed credit insurance, the CGF will earn interest from depositing its fund capital and accumulated reserves at credible financial institutions. The scenario assumes that 4.5 percent interest a year will be earned, since the fund will be deposited with different maturities, and can thus benefit from higher interest rates on long-term deposits. It is anticipated that MMA will not impose a compulsory deposit on this fund (which would, among others, constrain fund liquidity and the ability to pay out guarantees), or, at least, that MMA will reduce the compulsory deposit from 25 percent to 15 percent.


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ANNEX G: BUSINESS DEVELOPMENT AND COST SHARING FACILITY

G.1 BDS Centers in Target Regions Strategy and Organization: Field research conducted under this project shows that the economic activities of MSMEs in the atolls are limited. Two of the major obstacles facing MSMEs are (i) the limited access to all types of business development services (BDS) like information, marketing services, communication and training; and (ii) the inability to access finance at reasonable costs. On the supply side, there is a complete lack of private sector based providers of BDS in the atolls and only a few public sector based services for business development. On the demand side, MSMEs are unaware of the concept of professional support for enterprise development, despite their urgent need of it. The current market volume of BDS is non-existent, as all services from public providers are delivered free of cost.

In the absence of private sector providers of BDS in the regions, as well as of business membership organizations like chambers or business associations, there will be established Business Development Service Centers (BDSCs) as new institutions in each of the focal regions for the delivery of business development services to MSMEs and as facilitators of Local Economic Development (LED).

Functions: The Business Development Service Centers will be the principal vehicle for delivery of BDS products to MSMEs and will facilitate cluster development in the atolls. Each focal region will have a BDSC offering a wide range of services to MSMEs and cooperative initiatives at cost-based prices. As neither start-ups nor established MSMEs have been exposed to the concept of professional, demand-oriented delivery of BDS at market prices so far, and are therefore unprepared to pay the cost-based price for such services, a Cost Sharing Facility (CSF) will be established as the principal funding mechanism for the development of a commercial BDS market. The CSF will enable the BDSCs to initially offer services at a low, subsidized price. It will also support the BDSCs in developing service products and provide substantial income to the Centers during the three-year funding of the CSF. The Centers will have a business plan indicating core activities, required investment and planned revenue streams. They will develop a clear strategy comprising a vision, mission, goals and line of activities, as well as an annual operational plan.

Objectives: The BDSCs will have the following three objectives: (i) provide BDS products to start-ups and established MSMEs; (ii) facilitate Local Economic Development (LED) and cluster development in their respective regions; and (iii) link start-ups and other types of MSMEs to financing opportunities. To meet its objectives the BDSCs will offer a wide range of services classified into four categories: (i) consulting services for business planning and business counseling, identification and provision of information, and coaching; (ii) training services on costing and pricing, marketing and sales, accounting and entrepreneurship; (iii) facilitation services for market access facilitation, accessing finance and facilitating the formation of cooperatives; and (iv) government-related services covering support for business registration and licensing, linking to government databases, and linking to government extension services. To sustain its operation following the termination of the three-year Cost Sharing Facility, the BDSC will become an independent and market oriented service provider with a development and commercial objectives. Within the context of a suitable legal form of operation, the BDSC will need to consider the following activities: (i) participation of business membership organizations like MNCCI and MATI; (ii) ability of the organization to receive funds; (iii) possibility of the organization for staff participation through incentive and other forms of motivation; and (iv) ensuring the development goals of MEDT.


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Staffing: BDSC staffing will consist of three permanent professional staff: one (1) manager and business consultant; one (1) trainer for entrepreneurship; and one (1) cluster development facilitator, along with two (2) support staff to be located at each Center. A major challenge will be the identification of suitable professional staff as the required set of qualifications is difficult to find in Maldives. Also the willingness of qualified professional staff to work and live outside of Male is limited. Therefore the SMED project will offer an intensive HRD program to the selected BDSC staff and a competitive salary package exceeding usual government salary range for similar positions. An incentive scheme will be developed that links the BDSC staff directly to their achievements in employment and income generation in the respective region.

Starting the BDSC: Establishing a region-wide recognition of BDSCs will be critical to the success of the project as a whole. Three phases are proposed for their establishment. The first phase will focus on recognition gains in the local community. It will rely on a media campaign initiated by MEDT, as well as an awareness campaign of the BDSC staff presenting their services. Business training on starting a business for government-sponsored programs like the entrepreneurship training for youth and women will further support the BDSC in gaining recognition. In the second phase, the BDSCs will provide training to MSMEs in the atolls co-financed by the CSF. The third phase of the BDSC will gradually adjust prices their market level and subsidies will gradually be eliminated. During this period the BDSC will generate its revenue solely from the provision of commercially viable products to the MSMEs, as well as facilitating the implement of government and donor sponsored development-based activities for SMEs.

Monitoring and Evaluation - Performance Measurement: The BDSCs will establish a performance measurement framework as a systematic tool for measuring operational results related to the Centers’ activities, including CSF-based financial support to entrepreneurs. Among the information gathered by the Centers and published on a quarterly basis will be the following: (i) number of businesses consulted; (ii) number of business plans prepared; (iii) number of financial applications processed for each of the financing mechanisms supported by the BDSC; (iv) breakdown of clientele by sector and size of enterprise; (v) number of courses provided and participants in each course; (vi) participant evaluations of each training course; (vii) revenue from conditional support for successful applications to various financing mechanisms; (viii) other revenue sources; and (ix) Cost Sharing Fund management, allocation, and monitoring analysis. Each BDSC will be responsible for establishing a results-based management and accountability framework.

G.2 Costing Investment and Operation Costs: The total volume of finance allocated to the establishment and three-year operation of two BDSCs in the northern and southern development regions is nearly US$ 1.5 million. Of that, almost US$ 0.6 million will be directed to the construction and equipment of the two Centers and the purchase of the required inter-island transport vessel for each Center. The operating costs for two Centers and three-years of operation are estimated at US$ 0.9 million, of which US$ 0.4 million will go into staff-related expenses and another US$ 0.4 will be allocated for the purchase of consultancy services and the conduct of training courses. The overhead costs for marketing, utilities and travel costs are projected at US$ 0.14 million for both Centers over the three years.

Income: As the BDSC will require some time to gain regional recognition, the projected income for the BDSC for the first year of operation is estimated at 10 percent of its operating costs. As the BDSC improves its service provisions and proves its potential for value-adding to businesses, the request for its services from MSMEs, cooperatives and government line agencies will gradually increase. During the course of the second year, the income of the


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BDSCs will cover already 33 percent of the operational costs and will gradually cover 100 percent of operational costs in the third year. The overall coverage of operational costs over the three years of starting and operating the BDSC is calculated at 70 percent, and the income from BDS co-financed from CSF will be approximately 60 percent of the total income generated by the Center. The income from the SME share from matching grants and the income share from other BDSC activities are both estimated at approximately 20 percent of total income each.

Sustainability: As the BDSCs will be newly created, sustainability issues need to be addressed at the onset of the establishment of the Centers. The Centers will need to focus on long-term sustainability issues during their initial period of operation and while being funded by the CSF and other SMED project financing. The following conditions need to be created at the onset: (i) the BDSCs should be established with sufficient start-up capital, including investment in its own office building with training hall and its own means of transport; (ii) the legal basis for the BDSCs should ensure that they are market-oriented and able to operate as commercially viable entities at the end of the SMED project; (iii) the services provided by the BDSCs should be the focal point of the SME media campaign initiated by the MEDT at the start of the SMED project; (iv) staff incentive scheme should be directly related to the income generated by the Centers; (v) during the first three years of operation the revenue generated from BDS co-financing from the CSF, as well as the income generated from MSME’s share from matching grants and the income share from other BDSC activities shall be flowing into a special BDS fund to be established by the Centers and deposited in a Bank of Maldives account; (vi) services offered by the BDSC to MSMEs will continue to be subsidized by contributions from the special BDS fund after termination of the matching grant scheme of the CSF;(vi) BDSCs activities should be linked to government programs and donor activities geared towards the promotion of MSMEs, Local Economic Development (LED) or the promotion of specific industry clusters; and (vii) following the completion of the SMED project after three years, the BDSC staff will be downsized and some of the staff reassigned to newly established BDSCs in other regions of the country. This sustainability strategy should ensure that the pilot Centers for MSME development in the atolls will provide a long-term contribution to the development of the private sector in the atolls.

G.3 Cost Sharing Facility Coverage: The proposed size of the CSF is US$ 1.0 million (MRf 12,700,000) and will be distributed to about 300 MSMEs and 25 cooperative initiatives for Local Economic Development (LED) in the targeted pilot clusters in the Northern and Southern Development Regions. This coverage has been calculated from population figures in the vicinity (over 30,000 inhabitants) and the estimated number of microenterprises in the proposed target atolls (over 1,000 microenterprises).

Matching Grants: The facility will limit requests for support by applying a minimum matching-grant volume of US$ 400 (MRf 5,000) and a maximum matching-grant volume of US$ 4,000 (MRf 50,000) for MSME support; for the targeted clusters, the minimum matching-grant will be US$ 2,000 and the maximum will be US$ 4,000.

Matching-Grants for Clusters: Twenty-five cluster related matching-grants are projected over the three-year period. As the identification and preparation of these projects is complex and time consuming it is expected that only four projects will be introduced in the two target regions during the first year of BDSC operation, followed by nine projects in the second year and 12 projects in the third year.


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Fund Management: The cost projection for fund management is US$ 103,000, based on a streamlined management structure comprising a CSF Coordinator and an Administrative Assistant located in the EDU office in Male. The workplace will be equipped by the Project Fund. About 10 applications for matching grant will be process each month for submission to the Committee. The CSF Coordinator will travel up to five times a year to each BDSC to coordinate and monitor, as well as visit the cluster development projects.

MSME Contribution to BDS-Related Matching-Grants: Cost coverage by the BDSC through income generating activities can only be estimated at this point. Considering that no income is expected during the preparatory phase, the estimated income per center for 2.5 years is as follows: Income from BDS and co-financed from CSF $ 420,000 Income from MSME as their share (20 percent) for matching grants $116,000 Total income $536,000

Implementation and timeframe: The program last three years and it could be sustained if it were to have a positive impact assessment at enterprise level.

Table G.1: Main activities and timeframe for the CSF establishment Activities Timeframe Pre-preparation (phase 0) Month Role of MEDT/EDU and EDU/BDSC regarding CSF is confirmed -5 Preparation of rules and regulations (EDU) -4 to –3 Announcement ToR for the position of Cost Sharing Facility Coordinator and Administrator

-2 to -1

Preparatory (phase 1) Month Appointment of Sharing Facility Coordinator and Administrator 1 Training of professional staff on-going MIS 2 to 4 Annual CSF action plan approved by MEDT 3 to 4 Marketing strategy developed ( with EDU and BDSCs) 3 to 4 Promotional materials developed (with EDU and BDSC) 4 to 5 Pre-launch marketing campaign (with EDU and BDSC) 6 Marketing campaign on-going Implementation (phase 2) Month Program launch 7 Feed-Back meetings with stakeholders Twice yearly after launch Monitoring, impact and completion evaluations 18 and 36 Annual action plans Yearly

Monitoring and supervision: Each BDSC will submit an annual progress report to the CSF Coordinator on the supported enterprises. Cost coverage of the monitoring and evaluation field visits are covered by fees charged by the BDSCs and supported by the CSF. For the CSF supported investment activities, each BDSC will submit a progress report six months after the release of funds. An overall evaluation of the CSF will take place in the middle and end of the project.


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ANNEX H: IMPLEMENTATION ARRANGEMENTS H.1 Purpose and Outputs Objective: The major objective of the ‘The Maldives Micro, Small and Medium Enterprises Development Project Loan’ is to support the Government’s efforts to (i) develop the entrepreneurial climate and support services that will facilitate growth, (ii) provide the necessary conditions for converting existing entrepreneurial potential into innovative and successful business activities, (iii) attract entrepreneurial leadership from other regions of the country, and (iv) establish broader regional centers for SME activities that are driven by growth nodes or networked clusters for supporting activities. To achieve the aforementioned objective, the project loan focuses on the following: (a) bolster human resource development by creating business development service centers that provide training programs in entrepreneurship, management, and technical skills for MSMEs and develop appropriate materials for such training, as well as help to identify commercial opportunities in specific sectors; (b) improve access to finance by developing innovative financing schemes using alternative financial instruments such as equity financing, while encouraging the development of cooperatives and associations; (c) promote a market-driven process through the public and private sector that in the short to medium-term will target specific types of activities in selected regions of the country; and (d) enhance the catalytic role of public sector for facilitating commercial activities in the atolls and strengthening MSME activities by improving the policy and regulatory environment.

Focus: The MSME Development Project Loan and associated technical assistance (TA) will focus on four major outputs (i) a policy coordination framework on SME development; (ii) improved business regulatory environment; (iii) enhanced MSMEs' access to non-financial business development services (BDS) and (iv) enhanced MSMEs' access to market-based finance. These components aim to help the Government of the Maldives to increase private sector activities in the high value-added, labor-intensive MSMEs segments of the economy leading to the creation of jobs for the country for the increasing number of new entrants into the labor market. Support will be given for specific activities designed to (i) establish and sustain programs in the BDS centers, (ii) provide capacity building to the Enterprise Development Unit of the Ministry of Economic Development and Trade (MEDT) and business member organizations (BMOs), and (iii) ensure sustainable access to MSME financing.

H.2 Methodology and Key Activities TA Components: The TA component of the MSME Development Project Loan will fund consultants with expertise in the MSME sector and related areas who will conduct in-depth consultations with the Government and private sector stakeholders. A consultative approach is a critical part of the process to produce targeted outputs, and will be followed by a number of roundtable discussions and workshops for knowledge transfer needed to implement the policy conditions under the Program. The Asian Development Bank (ADB) will monitor the process closely to ensure the quality of outputs, including training.

H.3 Cost Estimates Loan Amount: The proposal consists of a loan of US$6.9 million for the development of MSME Development Project Loan, preceded by US$1.7 million for activities related to capacity building. The ADB will provide US$1,000,000 in 2008 to build the capacity for MSME development in the atolls. Under the loan and in 2009-2011 the Government will finance US$1.2 million of capacity building activities related to MSME development in the atolls. The loan takes into account the strategic importance of developing the private sector in the atolls and the cost of investments


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and adjustment costs associated with the adoption of the elements in the policy matrix. In addition to the loan, counterpart funding will be used for costs associated with regulatory reforms. Table H.1 summarizes the project costs. The investment costs include technical assistance that represents 17 percent of the loan amount. Table H.1: Project Cost Estimates and Financing Plan ($1000)

2009 2010 2011 TotalA. BDS Component 1,034.6 2,559.3 809.9 760.9 4,130.0

1. BDS Centers 58.8 757.2 310.5 313.7 1,381.5 Operating Costs 58.8 297.2 310.5 313.7 921.5 Capital Investments - 460.0 - - 460.0

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

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

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

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

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

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

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

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

Phase I: ADB

Cap.Dev.

SME Development Project (Phase II)

TA Phases: The technical assistance will be provided in two phases. Phase I will start in 2008 and concentrate on the provision of “capacity building assistance aimed at assisting the Government to build institutional capacity to effectively manage the development process, address existing capacity deficiencies, while helping to meet the demands that are likely to be generated by the envisioned creation of new institutions under the Government’s Roadmap for Reform Agenda.”22 Phase II envisions an integrated project assistance in MSMEs, as well as other sectors like transport and the regulatory framework. In the case of the MSME development project, technical assistance will support the implementation of various measures to support MSME development, as specified in the program, as well as to provide key institutional capacity building support to the implementing agencies.

22 Asian Development Bank, “Memorandum of Understanding, CPS Formulation Mission, South Asia Department, 13-23 May 2007, Male’, Maldives.


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Table H.2: Technical Assistance for Capacity BuildingPhase I

2008 2009 2010 2011 Sub-Total1000 US$ 354 341 254 244 839

International BDS Expert 1000 US$ 265.2 165.0 109.9 109.9 384.8 Number of experts person-years 0.8 0.5 0.3 0.3 1.2 Fees 1000 US$ 216.0 135.0 89.1 89.1 313.2 Per diem 1000 US$ 43.2 27.0 17.8 17.8 62.6 Travel 1000 US$ 6.0 3.0 3.0 3.0 9.0

Training in Business Planning 1000 US$ 44.2 58.8 44.2 44.2 147.2 Consulting SMEs 1000 US$ 44.2 117.6 99.9 89.9 307.5

1000 US$ 419.1 137.9 77.5 45.1 260.5 Strategic Planning 1000 US$ 88.4 22.1 11.1 - 33.2 Facilitators Training 1000 US$ 44.2 9.3 - - 9.3 Training of Trainers 1000 US$ 88.4 29.5 14.7 7.4 51.6 Overseas Training for Staff 1000 US$ 66.0 33.0 29.7 26.7 89.4 Training of Financial Guarantee Agency 1000 US$ 132.1 44.0 22.0 11.0 77.1

1000 US$ 88.4 22.1 11.1 5.5 38.7 Strategic Planning 1000 US$ 88.4 22.1 11.1 5.5 38.7

1000 US$ 138.9 27.8 24.9 12.4 65.1 Bank Branch Training Modules 1000 US$ 22.1 5.5 2.8 1.4 9.7 Training on Credit Guarantee Facility 1000 US$ 116.8 22.3 22.1 11.1 55.5

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

BoM/AI

TOTAL

Phase II

BDSC

EDU

MNCCI

TA Amounts: Table H.2 summarizes the main technical assistance activities, which include (i) technical support to the EDU in its efforts to create a more effective and efficient institutional setup for MSME support, (ii) technical support for the establishment of the BDS Centers, (iii) technical support to MNCCI as the most appropriate private sector representative to promote MMSEs in the outer atoll areas, and (iv) technical support to the banking sector and financial guarantee agency. Consultants will be recruited in accordance with ADB’s Guidelines on the Use of Consultants and other arrangements satisfactory to ADB. Procurement under the TA will be in accordance with ADB’s Guidelines for Procurement.

D. Implementation Arrangements Implementing Agency: Ministry of Economic Development and Trade (MEDT) will be the main implementing agency and other ministries will implement pilot projects. Ministry of Finance and Treasury (MOFT) will be the executing agency for the responsible for managing and overseeing the flow of funds for the credit line and grant facilities. The newly created Enterprise Development Unit of MEDT will be responsible for ensuring the participation of all relevant government agencies and business member organization in regulations and policies governing MSMEs, as well as formulation of project activities related to business development services and finance under the project. The period for implementation of the project will be 36 months.

Consultants: The consultants will prepare a detailed work plan before the start of services, which will include a timetable for deliverables defined under each TA component. All reports will conform to ADB format and will be reviewed by MEDT and ADB. Draft final reports will be submitted within the deadline specified in the work plans after incorporation of feedback from MEDT and ADB. The final report, incorporating comments of MEDT and ADB should be submitted upon completion of services. The TA activities are scheduled to commence in 2008 and to be completed by December 2011.


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E. Terms of Reference for Consultants The work plan and consultant selection are subject to refinement by ADB, based on the needs of ADB and government agencies.

1. International Consultants

a. International MSME Policy Specialist (54 person-months)

The MSME Policy Specialist (MSMED Project Coordinator) will have a university degree in economics or political science or related fields and extensive working knowledge of (i) small enterprise development and related policy framework, and applicable international experiences especially in small island economies; (ii) demonstrate good understanding of the history and development of the Maldives economy and the development stage of the country’s regulatory environment and private sector development, under which MSMEs. Tasks and responsibilities include consultancy, training and preparing the reports on the following activities:

(i) Based on in-depth consultation with the MEDT and other relevant agencies, help implement the MSME Development Project Loan by drafting and regularly reviewing a detailed work program for Enterprise Development Unit (EDU) and MEDT in coordination with the BDS advisor (see below).

(ii) Draft a plan for collection of information on the MSME sector.

(iii) Assist EDU in commissioning of sector studies and MSME sector analysis as qualified inputs to the formulation of MSME White Papers and coherent inputs to the formulation of MSME policies and program interventions of MEDT and the inter-ministerial technical committee.

(iv) Assist EDU to monitor and evaluate existing MSME support programs and regulations governing the sector, as well as propose future support measures. In this context assist EDU to organise round tables with the private sector on MSME support programs and help to enter stakeholder feedbacks and the results of systematic sector analysis into policy discussions and the formulation of MSME support programs.

(v) Based on consultation with relevant stakeholders assist EDU to further simplify and accelerate business formalization in the context of doing business in the Maldives.

(vi) Assist and support ADB missions with related activities, as well as conduct discussions and workshops with the relevant stakeholders for effective program implementation.

(vii) Hold workshops and other dissemination events to inform stakeholders and raise public awareness of the MSME development framework and reform of business laws and regulations.

b. International BDS Product Development Specialist (14 person-months intermittent)


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The specialist will have a university degree in economics or related fields and extensive working knowledge in the field of business development services (BDS); and should demonstrate good understanding of the history and development of the Maldives MSME sector and the development stage of the country’s BDS sector. The tasks and responsibilities include consultancy, training and preparing reports concerning following activities:

(i) Assist the SMED Project Coordinator (MSME Policy Specialist) in the elaboration and review of work plans for the implementation of the ADB MSME Development Project Loan under MEDT.

(ii) Assist MEDT/Enterprise Development Unit (EDU) in the implementation and evaluation of a comprehensive BDS supply and demand study and the dissemination of the results.

(iii) Based on the study results and further round tables with MSMEs examine the possibility and eventually develop standard BDS to be marketed under the cost sharing facility in close cooperation with the MEDT/EDU.

(iv) Enhance the capacity of EDU/MEDT staff to carry out cluster and value chain analysis and design cluster and value chain projects.

(v) Enhance the capacity of the appraisal panel of the CSF in classifying and approve or reject project applications.

(vi) Based on consultation with EDU staff and representatives of atoll MSMEs (i) design and plan local cluster support projects, (ii) assist EDU staff in acquiring financial resources for their implementation and (iii) finally assist also in actual implementation of pilot cluster initiatives.

(vii) Advise EDU staff how to encourage stakeholders to support local economic development (LED) beyond a cluster context by applying modern up-to-date participatory LED methods.

Based on consultation with EDU staff and representatives of atoll MSMEs (i) conduct value chain analyses, (ii) assist EDU and MEDT staff to identify weak or missing links as well as solutions to overcome these weaknesses, (iii) assist to acquire financial resources for value chain projects and (iii) assist in their actual implementation.

2. Domestic Consultants

a. Domestic Coordinator (54 person-months)

The domestic coordinator will have a university degree and understand private sector development issues; have experience working with international consultants and ADB; and provide inputs related to the program framework, especially for issues related to implementation of the MSME development policy, including the shift of the role of GOM to its facilitating role. The domestic coordinator will undertake the following tasks:


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(i) Under the guidance of the international policy specialist and the BDS product development specialist, collect and analyze required information and data, and make these available in an organized, readable form.

(ii) Assist in implementation and gradually start to implement training programs designed by the international policy specialist and international BDS product development specialist.

(iii) Arrange, organize and gradually start to implement round tables and stakeholder workshops, and assist the international MSME policy specialist in preparing materials.

b. Domestic Cost-Sharing Specialist (75 person-months)

The specialist will have a university degree in economics or related fields and extensive working knowledge with (i) the establishment; (ii) marketing and (iii) evaluation of cost sharing or matching grant schemes. The domestic specialist should also demonstrate good understanding of the history and development of the MSME sector and should know the strengths and weaknesses of business sector organisations and private BDS providers. Tasks and responsibilities include the following:

(i) Implement the proper institutional set-up of the cost sharing facility based on consultation with MEDT/EDU.

(ii) Assist in the recruitment of the CSF staff.

(iii) Implement CSF policies and standard operating procedures including strict monitoring and evaluation.

(iv) Select BDS providers eligible for providing services under the scheme.

(v) Conduct staff training including the training of EDU staff and the staff of pre-selected BDS providers to be able to market the CSF to the targeted regions of the Maldives.

(vii) Enhance capacity of EDU staff and staff of pre-selected BDS providers to draft high quality CSF applications.

c. Domestic Credit Guarantee Specialist (59 person-months) The domestic Credit Guarantee Specialist should have the following key qualifications: (i) at least 5 years of demonstrated experience in cash-flow based lending; (ii) experience in micro and small loan/lease appraisal, supervision and monitoring technology; and (iii) good knowledge of the banking system in small island economies. The consultant’s main objectives and responsibilities will be as follows:

(i) Streamline or strengthen credit approval procedures and management practices needed to develop a well performing MSME portfolio;


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(ii) Train Credit Guarantee Facility staff with respect to best practice in micro and small loan/lease appraisal, supervision and administration skills;

(iii) Develop demand driven products in credit guarantees;

(iv) Improve management and MIS specifically geared towards MSME portfolio;

(v) Strengthen marketing of micro and small loans guarantees.


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ANNEX I: REFERENCES

Abdullah, H. and Z. Ismail (2002), “An Overview of Micro credit and MSME financing activities in the Maldives”. Country Paper for SAARC Finance Seminar on Micro Credit Operations, Dhaka, Bangladesh, 21 Dec 2002.

Asian Development Bank (ADB, 1981), “Loan No. 513-MLD(SF): Inter-Island Transport for $1.0 million”. Approved 18 June 1981.

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

Asian Development Bank (ADB, 1985), “Interislands Transport Operations Review”. TA No. 679-MLD. 25 April 1985.

Asian Development Bank (ADB, 1987), “Loan No. 848-MLD(SF): Power System Development, for $6.1 million”. Approved 28 October 1987;

Asian Development Bank (ADB, 1988a), “Loan No. 911-MLD(SF): Male Port Development, for $6.4 million”. Approved 20 October 1988.

Asian Development Bank (ADB, 1988b), “Loan No. 911-MLD(SF): Male Port Development, for $6.4 million”. Approved 20 October 1988;

Asian Development Bank (ADB, 1991), “Loan No. 1121-MLD(SF): Second Power System Development, for $9.2 million. Approved 19 November 1991.

Asian Development Bank (ADB, 1993), “Loan No. 1226-MLD(SF): Second Male Port, for $8.8 million. Approved 1 April 1993.

Asian Development Bank (ADB, 1998), “Report and Recommendations of the President to the Board of Directors on a Proposed Loan tto the Republic of the Maldives for the Postsecondary Education Project”. September 1998.

Asian Development Bank (ADB, 2003a), “Report and Recommendations of the President to the Board of Directors on a Proposed Loan to the Republic of the Maldives for the Employment Skills Training Project”. Loan 2028-MLD,. approved on 02 December 2003

Asian Development Bank (ADB, 2003b), Report and Recommendation of the President on a Proposed Loan to Maldives for the Employment Skills Training Project. Loan 2028-MLD, approved on 2 December 2003. Manila

Asian Development Bank (ADB, 2003c), "Report and Recommendation of the President on a Proposed Loan to Maldives for the Employment Skills Training Project". Loan 2028-MLD, approved on 2 December 2003.

Asian Development Bank (ADB, 2005a), “Country Operational Strategy Study: The Republic of Maldives”. STS MLD 95017. October 2005.

Asian Development Bank (ADB, 2005b), “Domestic Maritime Transport Project”. Draft Final Report. TA 4395-MLD, August 2005.

Asian Development Bank (ADB, 2005c), “Commercialization of Agriculture in the Maldives”. TA No. 4337-MLD, June 2005.


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Enterprise Development Unit (2006), “National Handicraft Centre”. Malé. Ministry of Economic Development and Trade, 2006.

Food and Agriculture Organization of the United Nations (FAO, 1994), “MDV/92/TO1 – Report to the Government of the Republic of Maldives on the Agricultural (Horticultural) Crop Sector”, February 1994.

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

International Finance Corporation (2007), “Doing Business: Maldives”. Available: www.doingbusiness.org.

International Fund for Agricultural Development (IFAD, undated), “Atolls Credit and Development Banking Project Republic of Maldives: Atolls Credit and Development Banking Project: Completion Evaluation Executive Summary.

Ministry of Atoll Development (2004), Old, Existing and Potential Income Generation Activities in the Maldives. Funded by UNDP and UNESCAP, May 2004.

Ministry of Economic Development and Trade (MEDT, undated), “Enterprise Development Unit (EDU)”. Male’, Maldives.

Ministry of Fisheries, Agriculture and Marine Resources, the Republic of Maldives and Food and Agriculture Organization of the United Nations (2006), The Agricultural Development Master Plan of Maldives. Draft Report. Tcp/Mdv/3001: Master Plan for Sustainable Food Security, Agriculture and Regional Development, January 2006.

Ministry of Planning and National Development (2006), “Maldives: Population and Housing Census 2006. Preliminary Results”. Maldives: Republic of Maldives.

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

Ministry of Planning and National Development (2005b), ”Statistical Yearbook”. Male’, Republic of Maldives.

Ministry of Planning and National Development (2004), “Household Income and Expenditure Survey, 2002-2003”. Maldives: Republic of Maldives.

Ministry of Tourism (undated), “Mid Term Evaluation and Recommendations: Maldives Tourism Master Plan, 1996 – 2005”. Male’, Maldives

Naseer, A. and B.G. Hatcher (2004), “Inventory of the Maldives’ coral reefs using morphometrics generated from Landsat ETM+ imagery”. Coral Reefs 23: 161-168.

President’s Office letter 73 of October 7, 2004 approved the establishment of the small business unit. For details, see Ministry of Economic Development and Trade (MEDT, Undated), “Enterprise Development Unit (EDU)”.

RAM Consultancy Services Sdn Bhd (2005), “SME Access to Financing: Addressing the Supply Side of MSME Financing”. ASEAN Secretariat, REPSF Project No. 04/003, July 2005.

Republic of Maldives (2005), “Tsunami Impact and Recovery, Joint Needs Assessment”. Annex 2, 2005.

UNDP (2006), “Strategy and Implementation Plan for Re-alignment of Current UNDP Maldives-supported Programmes involved in credit provision”. Final Report, 31 May 2006.


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

United States Department of Commerce (2005), “Doing Business in Maldives: A Country Commercial Guide for U.S. Companies”. U.S. Department of State, 2005.

Winters, L. Alan (2003), “Beautiful but Costly: Business Costs in Small Economies”. Centre for Economic Policy Research, London and Centre for Economic Performance, London School of Economics. First Draft.

World Bank (2006a), The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, World Bank. April 2006.

World Bank (2006b), “Case Study on Handicraft Industry in Maldives”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 4. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, World Bank. April 2006.

World Bank (2006c), “Potential for Agricultural Products”. In The Maldives: Sustaining Growth and Improving the Investment Climate. Annex 2. Washington, DC: Finance and Private Sector Development Unit, South Asia Region, The World Bank. April 2006.

World Bank (2006c), “Maldives: Integrated Human Development Project”. IDA/R2004-0168/1, June 16, 2004, and World Bank, ““Maldives: Integrated Human Development Project – Additional Financing”. March 14, 2006.

World Bank (2007), “Doing Business in South Asia 2007”. Washington, DC.

Maldives: Preparing the Small and Medium Enterprise Development Project

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