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02. Banco Mundial 2000 project apparisal document for a Competitiveness project

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02. Banco Mundial 2000 project apparisal document for a Competitiveness project Powered By Docstoc
					Public Disclosure Authorized




                                                                          Document of
                                                                         The World Bank



                                                                                                           Report No: 21327-GU
Public Disclosure Authorized




                                                             PROJECT APPRAISAL DOCUMENT

                                                                               ONA

                                                                       PROPOSED LOAN
Public Disclosure Authorized




                                                           IN THE AMOUNT OF US$20.3 MILLION

                                                                                TO

                                                               THE REPUBLIC OF GUATEMALA

                                                                              FORA

                                                                 COMPETITIVENESS PROJECT

                                                                        November 20, 2000
Public Disclosure Authorized




                               Finance, Private Sector and Infrastructure Sector Management Unit (LCSFP)
                               Central America Country Management Unit (LCC4C)
                               Latin America and the Caribbean Region (LCR)
                                                                                   Page 2
Guatemala
        Competitiveness
                     Project                                             ProjectAppraisal
                                                                                        Document




                                  CURRENCY EQUIVALENTS

                           (Exchange Rate Effective September21, 2000)

                                     Currency Unit    Quetzal
                                       7.84 Quetzals = US$1
                                          US$] = Quet7-1


                                          FISCAL YEAR

                                      January 1 - December 31

                             ABBREVIATIONSAND ACRONYMS


               AGEXPRONT- National Export Promotion Agency
               ANACAFE - National Coffee Association
               BDS - business development services
               CAS - Country Assistance Strategy
               COGUANOR- Guatemalan Standards Organization
               CUTRIGUA- Council of Intemational Transport Users of Guatemala
               FDI - foreign direct investment
               FIAS - Foreign Investment Advisory Service
               ICAITI - Central American Institute of Research and Industrial Technology
               ICB - International Competitive Bidding
               IFC - International Finance Corporation
               IT - information technology
               LCR - Latin America and the Caribbean Region
               NGO - non-governmental organization
               NQS - National Quality System
               PROGUAT - Guatemalan foreign investment promotion agency
               PRONACOM - National Competitiveness Program
               SCA - standards and conformity assessment
               SOE - statement of expenditures
               TOR - terms of reference




                               Vice President: David de Ferranti
                    Country Management Unit Director: Donna Dowsett-Coirolo
                       Sector Management Unit Director: Danny Leipziger
                                 Task Manager: James Hanna
                                                                                                                              Page 3
Guatemala CompetitivenessProject                                                                                  Project Appraisal Document



                                                           Guatemala
                                                       CompetitivenessProject
                                                                    CONTENTS


Project Financing Data..........................                                                                                       5

A. Project Development Objective..........................                                                                             6

1. Project developmentobjective
2. Key performance indicators

B. Strategic Context..........................                                                                                         6

1 Sector-relatedCAS goal supported by the project ....................................................................
2. Main sector issues and Governmentstrategy.............................................................................
3. Sector issues to be addressed by the project and strategic choices............................................

(. Project Description Summary .........................                                                                              17

1.   Project components....................................................................................................................
2.   Key policy and institutional reforms supported by the project.................................................
3.   Benefits and target population...................................................................................................
4.   Institutional and implementationarrangements.........................................................................

D. Project Rationale.........................                                                                                         21

1.   Project alternativesconsidered and reasons for rejection ..........................................................
2.   Major related projects financed by the Bank and/or other developmentagencies....................
3.   Lessons learned and reflected in proposed project design.........................................................
4.   Indications of borrower commitment and ownership................................................................
5.   Value added of Bank support in this project..............................................................................

E. Summary Project Analyses.........................                                                                                  23

1.   Economic ..............................................................................................................................
2.   Financial and fiscal ....................................................................................................................
3.   Technical and institutional.........................................................................................................
4.   Social
5.   Environmental assessment.........................................................................................................
6.   Participatory approach...............................................................................................................

F. Sustainabilityand Risks.........................                                                                                   27

1. Sustainability..............................................................................................................................
2. Critical risks .............................................................................................................................
3. Possible controversialaspects....................................................................................................
                                                                                                                           Page 4
Guatemala CompetitivenessProject                                                                               Project Appraisal Document

G. Main Loan Conditions........................                                                                                   28
1. Loan effectiveness......................................................................................................................
2. Conditions of disbursement.......................................................................................................

R. Readinessfor Implementation........................                                                                             29

I. Compliancewith Bank Policies........................                                                                            29

Annexes

Annex 1.                 Project Design Summary.30
Annex 2.                 Detailed Project Description.
     2.1                 Increasing domestic market competition.33
     2.2                 Accelerating foreign investment.37
     2.3                 Expanding in-firrn training and informationmarkets.41
     2.4                 Upgrading firm product and process quality .43
     2.5                 Competitiveness learningand innovationprogram.45
     2.6                 IT-based business development services pilot.53
     2.7                 Business cluster & social responsibilityprogram         .55
Annex 3.                 Estimated Project Costs.57
Annex 4.                 Financial Summary.58
Annex 5.                 Procurement and Financial Management Arrangements                  .59
      Table A            Project Costs by ProcurementArrangements          .66
     Table Al            ConsultantSelection Arrangements    .................................                                     68
      Table B            Thresholds for Procurement Methods and Prior Review.71
     Table C             Allocation of Loan Proceeds.72
Annex 6.                 Project Processing Budget and Schedule     .73
Annex 7.                 Documents in Project File .74
Annex 8.                 Statement of Loans and Credits.75
Annex 9.                 Country at a Glance .76
                                                                                                                                                                                                                                                                                  Page5
               Guatemala
                       Competitiveness
                                    Project                                                                                                                                                                                                                            ProjectAppraisal
                                                                                                                                                                                                                                                                                      Docunent

                                                                                                                                             Guatemala
                                                                                                                                        Competitiveness Project

                                                                                                                        Project Appraisal Document
                                                                                                              Latin America and the Caribbean Regional Office
                                                                                                                             Central America

  _Date:
       November 20, 2000                                                                                                                                                                         Task Manager: James Hanna
 CountryUnit Director.Donna Dowsett-Coirolo                                                                                                                                                      Sector Unit Director: Danny Leipziger
   Project ID: GT-PE-550S4                                                                                       Sector: Multi Sector                                                            Program Objective Category: Private Sector Development
 Lending
       Instrument:SIL                                                                                                                                                                            Prograr of Tageted
                                                                                                                                                                                                                  Intervention:                                                                                      f1 Yes [XI No
                   ProjectFiuau1cing
                                  Datta                                                                                                               [X] Loan                                                      [1               Credit                            [IGuarantete                                       1        Other
                                                                                                                                                                                                                                                                                                                                   [specify]
............ . ... .... ....... -... ..........I.... ... ..........
          .....                                   ..........             ..
                                                                 .......... ............. ................ . ........    .............. -.......... ...........I.......... ..................          .................
                                                                                                                                                                                                 ....... .......                                                     ........   ....... ... ....I.................      .......
               Loan Amount (US$): 20.3 million

                   Proposed Terms: Fixed Spread
                   Grace period (years): 5 years                                                                                                                                                                                                                     Years to maturity: 17 years
                   Commitmentfee: 0.85% first 4 years, 0.75% thereafter                                                                                                                                                                                              Service charge: 0.00%
                   Front end fee on Bank loan: 1.00%

   I........... .......-. ...... .............. .........
                                              ....     ...I............................... ...               .          ..... ......
                                                                                                                                   ....................................... ........
                                                                                                                                                                         .       .....-..... ........    .          ....                 ......
                                                                                                                                                                                                                                                       Local
                                                                                                                                                                                                               ...... ...... .......... .I. I..... ............ ............
                                                                                                                                                                                                                                                ........
                                                                                                                                                                                                                                                                                              Foreign
                                                                                                                                                                                                                                                                                        ..............
                                                                                                                                                                                                                                                                                                 ....... . .........
                                                                                                                                                                                                                                                                                                                                    Total ..
                                                                                                                                                                                                                                                                                                                                  ...... ..... ..
                   G;uatemalan Government                                                                                                                                                                                                                  1.7                                           0.0                           1.7
                   Guatesalan privatesector(individual
                                                     matchingfunds fees)                                                                                                                                                              .


                   Borrower:Republicof Guatemala
                   IBR           2001
                               .......      202
             -.- ................. ... .......                                                                                                                        2032200............ .. ............ ....
                                                                                                                                                   ..... .......I....... ..... .. ....... .
                                                                                                                                                                             ...          .....                ._........................ ..
                                                                                                                                                                                                                   ....                               .... ....
                                                                                                                                                                                                                                             ..................  ..... ..........
                                                                                                                                                                                                                                                                                ......        ........
                                                                                                                                                                                                                                                                                          ...... . ....
                   Responsible agency: The Management Unit of the National Competitiveness Program (PRONACOM)
                                                                       4.4
                                                                    Annual                                                7.8                                         5.8                       2.3~~~~~~~~~Tta ~~Estim ~ ~ ~ ~ ~ .......
                                                                                                                                                                                                                        1.5158 ~ i<^" ~~ ~~~ 3.                                        -.
                                                                                                                                                                                                                                                                                       v0.>
                                                                                                                                                                                                                                                                                       9.S
                                                                                                                                                                                                                                                                                       v
                                                                                                                                                                                                                                                                                       9~~~~~~~~~~~~~~~~~~
                                                                                                                                                                                                                                                                                       ........................................
                                                                                                                                                                                                                                                                ~~~ ~~~~~~-q----4#-^--------w-a-
                   FY                                                         2001                                      2002                                         2003                                     2004
                   Annual                                                      4.4                                       7.8                                         5.8                                        2.3
                   Cumulative                                                  4.4                                      12.2                                        18.0                                       20.3
                   Project implementationperiod: 2001 - 2004
                   Expected effectivenessdate: April 2001 Expected closing date: June 30, 2005
                                                                                               Page 6
Guatemala CompetitivenessProject                                                   Project Appraisal Document

A: Project DevelopmentObjective
1. Project development objective and key performance indicators (see Annex 1):
1. Objective. The purpose of the Guatemala National CompetitivenessProgram (PRONACOM),a
public-private partnership under the Vice President of the Republic, is to advance the nation's
internationalcompetitive standing and accelerate its economic growth. The proposed Project would
advance the Program's objective as well as those of the nation's Peace Accords' by helping
primarily small and micro businesses to generatehigher income and reduce high rates of poverty in
Guatemala. To do so, the proposed Project would support a diversified and mutually reinforcing set
of initiatives on two levels:

       (a) in the business environment - seek to increase the competitiveness of product and factor
       markets via regulatory changes and new public-private institutional partnerships in the areas
       of: (i) domestic competition, (ii) foreign investment, (iii) in-firm skills training and
       information; and (iv) product quality infrastructure;and

       (b) at the firm level - aim to broaden micro- and small business participation in national
       economic growth by (i) promoting increased investment in firm-level pre-competitive
       learning and innovation, (ii) piloting service and delivery innovation in information
       technology-based business development services (BDS), and (iii) expanding business
       developmentclusters and social responsibility.

2.      Performance Indicators. The Project's outcome metrics would be the incremental value
added and employmentgenerated among micro and small businesses. The Project's outputs would be
measured at two main levels: (a) specific institutional development targets for the Competition
C(ommission   (new), "Invest in Guatemala" (upgrade), the National Training Council (upgrade), and
the National Statistics Superintendency(upgrade); and (b) firm-level (i) foreign direct investment,
(ii) worker skills training investments, (iii) pre-competitive investments in product/market learning
and innovation, (iv) internationally recognized product and process quality certifications, and (v)
investments and sub-contractingrelationships generated by business social responsibility programs.
 Project performance would be measured by a representative sample of Project clients stratified by
 income segment, geographical location and sales market, and compared with the baseline control
 group of 296 firms already surveyed to help define Project design.

B: StrategicContext
1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (Annex 1):
CAS document number:                                                                    18036 GU
Date of latest CAS discussion:                                                       July 14, 1998

3.      The World Bank Group's Guatemala Country Assistance Strategy (CAS) for FY99-01
supportsthe implementationof the Guatemala's Peace Program in four priority areas: building social
cohesion, reducing poverty, improving economic management to maintain stability and foster
growth, and modernizing the public sector. The CAS underscores the importance of supporting
programs designed ultimately to end the exclusion that has characterized Guatemala's dualistic
society---Guatemalahas the third highest degree of income inequality (after Brazil and Pakistan)
worldwide among low- to middle-income countries. The proposed Project focuses primarily on the

 Especiallythe two Accords on the Identity and Rights of the Indigenous People (March 31, 1995, Mexico City) and on
SocioeconomicAspects and the Agrarian Situation (May 6, 1996, Mexico City).
                                                                                     Page 7
Guatemala Competitiveness Project                                        Project Appraisal Document

poverty alleviation objective of the CAS, though it also involves other CAS objectives insofar as it
aims to (i) foster inclusion of small business through private sector participation in, and
decentralizationof, business development programs, (ii) increase access of lower-incomebusinesses
to productive opportunities, and (iii) reform the public sector institutions managing policies related
to domestic competition,foreign trade and investment,in-firm skills training, and the product quality
infrastructure.

4.      The Project complements other projects in the Bank's CAS which also relate to advancing
Guatemala's internationalcompetitiveness:notably, in the areas of land reform, the administrationof
justice, rural financial markets, natural resources management, and private participation in
infrastructure. It also reflects the CAS emphasis on an integrated Bank Group approach to private
sector developmentissues, which was preparedjointly with FIAS and IFC. A joint Bank/FIAS team
has collaborated closely on the foreign investment and trade component, which builds upon a FIAS
 1998 FDI promotion strategy for Guatemala. The Project should also offer opportunities for
 enhanced IFC and MIGA cooperation. IFC's assistance strategy entails both investments in
 Guatemala and development of regional financial and physical infrastructure in Central America.
 IFC's current areas of focus in Guatemala include investment and TA support for modernizationand
 expansion of internationally competitive companies, infrastructure, capital markets, agro-industry
 and tourism. MIGA currently guarantees one investmentin Guatemala for a power generator.

2.     Main sector issues and Governmentstrategy:
5.      Weaknessesin International Competitiveness. The long-term aggregate indicators of the
Guatemalaneconomy in 1996,when the Peace Accords ended the country's long civil war, reflect its
basic need to improve Guatemala's internationalcompetitiveness:

        * low per capita growth - very modest long run economic growth rates, combined with
          elevated population growth (2.9% over 1990-96 versus a benchmark 1.4% for lower-
          middle income countries), have yielded either declining GNP per capita (-0.9% over
           1975-85)or only marginal gains (+0.6% over 1986-96);

       *     low capital investment - gross domestic investment averaged a low 6.1% of GDP over
             1986-96,while FDI inflows largely stagnated over 1992-97 at a low 0.5% of GDP ($84
             million in 1997)---versusbenchmarks of 1.1% for LAC and 3.1% in East Asia;

        *    low integration with international markets - total goods and services exports/GDP ratios
             were virtually stagnant between 1992-97, amounting to only 18.5-19.0% which, when
             combined with import trends, yield an openness index which actually declined over the
             period from 46% to 44%; and

             low domestic content in exported products - the share of low value-added primary
             products in total exports (mainly coffee, sugar, bananas, petroleum, and cardarnon)
             remained a high 84% in 1997, and were generatedby relatively few producers. The ratio
             of manufacturing exports/GDP, which some consider as a rough proxy for a country's
             access to international learning and technology transfer and ability to produce at world
             standards, amounted to just 9% of total exports or 1% of GDP.

 6.    Since 1996, efforts to build the economy in the post-conflict era have produced some
 encouraginginitial results. Government investments in basic services---education,health, water and
                                                                                               Page 8
Guatemala CompetitivenessProject                                                   Project AppraisalDocument

housing---rosenotably and were reflected in improvementsin a number of social welfare indicators.
Access to basic infrastructure-power, roads and telecommunications---has increased largely
through a combination of legislative action and privatization. Production of non-traditional agro-
exports grew over 1996-98 by over 10% per annum and generated over US$300 million per year in
export revenues (1998), mainly from vegetables, fruits and preserves, natural rubber, flowers,
ornamentalplants and sesame. In the manufacturingsector, maquila assembly of imported materials
for re-export of textiles and clothing, which represent first-stage entry into international markets,
now employs over 70,000 workers (1998) in mostly large garment manufacturers, textile mills and
manufacturersof garment components.

7.      Still, a variety of indicators show that very strong efforts will be required to substantially
boost social welfare. For example, the Global CompetitivenessIndex, prepared by the Center for
International Development of Harvard University, ranked Guatemala 43rd among the 59 countries
         2
assessed. Though such a ranking should not be overemphasized, it brings out the fundamental
weaknesses that must be addressed. Labor productivity is relatively low, which is particularly a
reflection of low investment in worker skills and inadequate technical and management training. The
costs of transport, energy and telecommunicationsinfrastructure are elevated. Product quality and
certification systems are not available to most firms and seriously compromise product
competitiveness in both local and international markets.                Investment in information
technology/connectivity,and adaptive product research and development for export markets are
similarly low. The cost of capital from the financial sector reflects operating inefficiencies and
inadequatecompetition.

8.     In the export sector, despite recent gains, executives of the Guatemala Export Promotion
Agency (AGEXPRONT)indicate that the majority of the country's 3,000 smaller exporters (not to
mention potential exporters) are inexperienced and lack practical understanding of market quality,
price and delivery requirements. The maquila sector, which represents about three-quarters of the
country's clothing exports to the USA and is operated frequently by large foreign investors,
continues mostly to assemble imported components and has not yet internalized design, skills and
technologies that would enable it to move up the value chain to higher income and more secure
markets. Many maquila firms, which were attracted to Guatemala in part by the availability of US
quota allocations and ten-year income tax incentives, now face the expiration of such incentives.
These firms need to make steep investments in pre-commercial research and development, skills
training and new market linkages to sustain growth, profitability and employment creation---or leave
the country.

9.      In the formal small business sector, there is a wide imbalance in competitive factors in
relation to Guatemala's larger firms. This sector representsthe vast majority of businesses, provides
the economic livelihoodfor over 75% of the labor force, accounts for at least one-third of GDP, and
continues to grow in number---the number of formally and informally established small businesses
tripled over the 30 years between 1964-94 to over 824,000 business units and is now estimated at
                      3
nearly I million units. A survey of 296 formal sector firms to help Project design identified several

2                     Indexis built on the averageof eightsub-indices:
    Its Competitiveness                                                                 finance,infrastructure,
                                                                     openness,government,
technology,management, labor and institutions.
3 Source: the National Statistics Institute (IEN). The Federation of Micro, Small and Medium Scale Businesses
(FEPYME), in its report of March 1999, places the total closer to 700,000 units. Of these, about 290,000 firms were
officially registered in Guatemala (including 65-70% in Guatemala City)---of which some 230,000 are small businesses
consisting of some 190,000 microbusiness units with 0-4 employees and 40,000 small firms with 5-20 employees each.
The remaining 350,000-400,000 units are found in the informal sector.
                                                                                                Page 9
Guatemala CompetitivenessProject                                                    Project AppraisalDocument

                                                                   4
major firm-level constraints to competitiveness in Guatemala: (i) the quality and cost of raw
materials, (ii) the quality and skills of workers (comparable severity among different sized firns),
(iii) the availability of workers, and (iv) access and cost of technology. Small businesses voiced a
substantially greater severity of impact than large firms among these four production constraints
identifiedby the survey.

10.     For example, large firms employ on average 70 college graduates or college students (15% of
their employees), whereas small businesses rely at best on one employee with such schooling.
About one-half of businesses surveyed do not spend resources on research and development, with a
clear relationshipobserved between firm size and the incidence of such. The use of information and
communications technology (IT) is drastically different between small and very large firms for
office administration(21% vs. 92%), production (19% vs. 68%) and quality control and testing (6%
vs. 55%). Constraints to greater use of IT are due particularly to the cost of acquiring and
maintaining it, the lack of qualified personnel and technical assistance to incorporate it, and a view
that it has a poor return on investment. Subcontractingwork, which could be an important market
for small firms, is infrequent---only3 businesses in 10 for industry and 2 in 10 for services use it---
which is due mainly to limited knowledge about such options, a lack of product and process quality
 controlby smaller firms, or a lack of production and price competitiveness.

11.     In the informal microbusiness sector, analyses indicate that, while capital shortages often
head the list of problems among startup businesses, entrepreneurs in ongoing businesses most often
define three other areas as highest priority: (1) weaknesses in business skills, (2) weak buyer-seller
market linkages to higher purchasing power markets and related logistics, and (3) low operating
productivity,resulting particularly from disproportionatelyhigh prices for materials and supplies and
a failure to take advantage of modern methods and production technologies. Human capital
constraints stem from a combination of modest formal education, the necessity of performing most
key business functions in the absence of affordable outside help, and inadequate business training.
Most micro-entrepreneurshave no training in small business management, and are either self-taught
or have learned on-the-job usually in technical areas such as sewing, woodworking and masonry, to
the almost total neglect of planning, purchasing, and other basic business management functions.
The costs and logistics of transportation to purchase materials and to deliver products are usually
very significant. This is coupled with difficulties in communication and, for small formal sector
businesses,a virtual absence of IT. Notwithstanding a desire to grow, most microbusinessesdo not
have a clear idea of how they want to expand their businesses or which assistancethey need. Market
signals from higher income markets---both domestic and international---are weak, as product
promotion is almost always word-of-mouth and limits the entrepreneur to a small circle of
 community clients instead of taking advantage of growth opportunities through, for example,
 subcontractingwith larger firms and internationaltrade.

 12.     Government Strategy. A concerted strategy to raise international competitiveness
 crystallized in Guatemala when public and private sectors leaders united in 1997 with help at the
 regional level from the Central American Project for the Competitiveness and Sustainable
 Development (CLADCDS), a project started with the support of the Harvard Institute for


 4                                        Surveyin WorkingPaper 1, elaboratedwith the supportof the Bank,
     See The Skills,Technology Productivity
                             and
 which covers a representative sample of 296 small, medium and large scale firms in the manufacturing and service
 sectors in metropolitanGuatemala City and in secondary cities. The survey elicited information on employer-sponsored
 training and on a wide range of firms' attributes including size, industry, local or foreign ownership, equipment,
 technology, quality control systems, markets and exports, workforce characteristics, wages, subcontractinglinkages and
 on production.
                                                                                    Page 10
Guatemala CompetitivenessProject                                         Project Appraisal Document

International Development and Michael Porter, and coordinated by INCAE.           This informal
Government-businesspartnership, named the National Competitiveness Program (PRONACOM),
has become a strong and well-recognizedinitiative. PRONACOM is headed by the Vice President
of the Republic, who is charged with facilitating the Program's agenda for improvement in the
national business environment. PRONACOM is directed by an Executive Committee, consisting of
the Vice President, the Minister of the Economy, a Private Sector Coordinator named by the Vice
President, and two members of the private sector named by the Chamber of Industry of Guatemala
and the Exporter's Association (AGEXPRONT), and others named by common agreement of its
members. Its principal functions are to define PRONACOM's agenda and make decisionsregarding
program focus and management, and to make recommendationsto the Government on public policy
and institutional matters. Day-to-day management and technical support for PRONACOM is the
responsibility of the PRONACOMManagementUnit anchored in the Ministry of Economy.

13.     PRONACOM's strategy since mid-1998 has focused on two levels: (i) the business
environment - changes at the macro-level in selected laws, regulations and institutions influencing
business investment and operating performance; and (ii) firm-level support programs - facilitation
at the micro-level and among business clusters and associationsto promote specific investments to
increase competitiveness. PRONACOM's work program has involved vigorous analysis of various
businessenvironmentissues with the assistance of the Japan PHRD Grant administeredby the Bank.
It has used cluster concepts to both facilitate development of a basic knowledge base on competitive
strengths and weaknesses---to date in textiles and clothing, 3 agro-business lines, tourism and
forestry---and to raise public awareness in Guatemala of competitiveness issues, in part by
sponsoring training by local consultants and universities of over 200 people in the cluster
methodology. This has been reinforced by participationof PRONACOMand senior public officials
in various national, regional and international fora (such as in Costa Rica at INCAE to an audience
of Presidents from Central America and, most recently, at the Cluster Conference in Varese, Italy to
an audienceof over 26 country representatives).

3. Sector issues to be addressed by the project and strategic choices
14.     Within the PRONACOMframework,the Project would have a two-pronged focus: (a) in the
business environment, it would make selective regulatory changes and build public-private
institutional partnerships to increase the competitiveness of product and factor markets. These
actions are expected to have a strong enabling effect on small business growth, combined with (b) at
thefirm level, the promotion of sustainable business development service (BDS) markets in order to
substantially broaden small business participation in entrepreneurship and national economic
growth. The following sections summarize the analytical and design work done to date with the
support of the Japan PHRD Grant. Further background and details regarding these proposals are
found in the 9 Project WorkingPapers available in three separate volumes.

 15. Increasing Domestic Market Competition. Although the Guatemalan economy is one of the
most open and business-orientedof Latin America, domestic market competition appears to be still
quite limited in a number of areas. This issue, which the new Government administration has
already signaled as high priority. While there is generally intense competition at the retail level in
the distribution of final goods and services, market structure and/or business practices restrain
competition in some non-tradables, in upstream industries and services, and in some goods of mass
consumption. Interviews with consumers and newcomer entrepreneurs highlight several practices,
which raise barriers to entry for new businesses and diminish competition: (1) vertical integration
with exclusive distribution arrangementsin local markets; (2) restrictive product agreementsthrough
                                                                                    Page 11
 GuatemalaCompetitivenessProject                                         Project AppraisalDocument

international cartels, mergers and acquisitions or licensing; (3) predatory or discriminatory pricing,
through resale price maintenance, market segmentation, or collusion by local dominant firms; and
(4) protection and preferential treatment from the government to forestall increased import
competition arising from liberalization of the trade regime. Such practices tend to undercut the
growth potential of the economy in general and small business in particular, contribute to rent-
seeking behavior, and to government capture by powerful firms.

16.     The previous Guatemalan Government administration enacted a number of important
framework laws to promote increased investment and production efficiency---forexample, related to
foreign investment, telecommunications and intellectual property rights. In case a domestic
competition law is enacted under the Project and thereafter a competition commission is created, it
would fill an important remaining gap by establishing protection against anticompetitive business
practices, reducing barriers to entry for new firms, and providing consumer protection. It would also
be essential to support future international trade negotiations by Guatemala. The basic premise of
such a framework law would be that, insofar as firms do not abuse such provisions, producer
structuresmust be allowed to evolve under market competitiverules.

 17.    The execution and enforcement of the law would depend on transparency and minimalist
 government intervention. The Project concept envisions the creation of a new Competition
 Commission, modeled after the US Federal Trade Commission, Canada's Competition Bureau, or
 Mexico's Federal Trade Commission, as an authority independent of Government charged with
 competition advocacy within Government and the business community, and with exclusive law
 enforcement powers. In this way, the proposal seeks to isolate the Commission from political or
 budgetary interference by interest groups. The Project would support an implementation plan
 consisting of preparation of a competition law, establishment of a Competition Commission and
 development of its functional capacity, a targeted public information and voluntary compliance
 campaign to promote increased competition, and a program of competition analysis. This
 component, reinforced by the broader pro-competition program to be supported by the Project,
 would be expected to ferret out anti-competitive business practices mainly in segments of the
 economywith low export-orientationand high concentrationin the production structure.

 18. Accelerating Foreign Investment. Countries able to achieve higher levels of integration
 with the global economy tend to exhibit higher output growth according to Bank research and other
 sources. This is derived largely from a combination of (i) increased international competitiveness,
 when firms incorporate international best practice technologies, products, designs, technical and
 managerial skills, and (ii) substantially higher growth rates of world trade markets than domestic
 markets. The Project would address three issues that restrain Guatemala's foreign direct investment
 inflow, namely, weak foreign investment promotion, bottlenecks in investment registration, and
 inefficient supply chain services.

 19.     Guatemala has very modest levels and declining inflows of foreign direct investment (FDI),
 moving from 1.4% of GDP in 1980 to 0.5% in 1997, and is in danger of falling further behind other
 reforming countries in Central America, like Costa Rica, Honduras and Panama. Guatemala adopted
 a new foreign investment law in 1998 that is now comparable to its competitor countries for FDI in
 the region. The law provides guarantees of equal treatment for national and foreign investors,
 unrestricted participation of foreign investors in the economy, safeguards against double taxation
 and unrestricted remittance of profits and capital. However, with the convergence towards greater
 openness and the similarity of investment policies across developing countries, this law needs to be
                                                                                    Page 12
Guatemala CompetitivenessProject                                         Project Appraisal Document

complementedwith much more effective national promotion and investment facilitation in order to
attract increasedFDI.

20.     The current FDI promotion unit in the Ministry of Economy, PROGUAT, is constrained by
an overly bureaucratic approach to promotion and by limited resources. In addition, while the
Government's investment facilitation service has improved business registration time over the past
two years, it still takes months according to a separate foreign investors survey conducted for the
Project. It suffers from many administrativebottlenecks and lacks a variety of best practice features.
Under the Project, a public-private joint FDI Promotion Council ("Invest in Guatemala") would be
created, incorporatingthe private sector's strategic vision and management, along with the capacity
built to help preserve the existing investor base, promote Guatemala as an attractive investment
location for new investors, and provide ongoing inputs to policy-makers on how to create a
supportiveenvironmentfor FDI.

21.    Improving the international supply chain of services---that delivers imported inputs to farms
and factories and ships finished goods to export markets---willalso be supported under the Project.
In LAC countries, the supply chain---mainly road and maritime transport, freight forwarding,
warehousing, information systems and insurance services---has become an important competitive
factor, as its aggregate cost amounts to an estimated average of 30-40% of the market price of
manufactured products. Increasing supply chain efficiency typically yields substantial sales and
profitability increases via lower producer-to-marketdelivery times, lower firm inventory levels and
related costs, and reductions in overall freight costs. In Guatemala,the Government and many small
businesses are very concerned that they will not be able to realize such benefits particularly in the
absenceof more competitivemaritime and road transportservices.

22.     For example, the Council of International Transport Users of Guatemala (CUTRIGUA),
representing a large number of Guatemalan importers and exporters, has observed that rates for
maritime transport of containers seem unreasonably high against international benchmarks. Recent
analyses in Guatemala determined that local and international companies associated with
Guatemala's major traditional exports are in a relatively strong position to negotiate transport
services; however, small businesses are subject to bunker, theft risk and other surcharges, as well as
inland haulage charges that are indeed substantiallyabove benchmarks. The basis for such charges
both lack transparency and amount to a very substantial proportion of base rates. To improve
Guatemala's market position for exported goods (including related production of inputs for such
exports), the Project would provide for analyses of the legal, regulatory and institutional framework
of this and other modes of transport in order to identify barriers to entry and, if needed, regulatory
and institutionalchanges to reduce the cost and time of transport of exported goods.

23.     Expanding In-Firm Skills Training and Information Markets. Formal in-firm training
sponsoredby employers and supplied either in-house or by a variety of external institutions can play
an important role in improving the performance and competitiveness of employers. A study of
Guatemalanfirms, prepared as part of Project design, suggests that firms that do such training are on
average about 49% more productive than firms that do not train, controlling for other factors that
influence productivity. Given a firm's unique market-based perspective on skill needs and its
interests in practical application, in-firm training is also a very efficient means of expanding the
nation's endowment of human capital. However, in Guatemala, only about 37% of the firms
surveyed provide such training to their employees. What is more, the incidence of such training is
highly skewed---toward Guatemala City vs. secondary towns and rural areas, toward managerial
                                                                                    Page 13
GuatemalaCompetitivenessProject                                          Project AppraisalDocument

employees vs. production workers (that make up the majority of the workforce), toward large firms
vs. small businesses,and toward firms using new technology vs. those that do not.

24.     About 62% of in-firm training in the formal sector is provided through the public training
institution,INTECAP,which imposes a payroll training levy of 1% on all enterprises with more than
five employees. The remainder is providedby other sources---largerfirms secure their own training
resources (often from overseas), while others utilize a relatively small market of private training
institutions. More robust development of the private training market faces several constraints,
especially for small businesses, including high labor turnover, poor information on the benefits of
training, and inadequate financial resources for training. The payroll levy grant system, as managed
and structured thus far, has not proved effective in addressing these constraints---in fact, only a
relatively small amount of the current payroll levy' is even dedicated to this purpose, as the bulk of
INTECAP's resources are directed towards pre-employmenttraining, the informal sector, facilities,
and surplusresourcemanagement.

25.     With the payroll levy as a funding core, a number of initiatives will be implementedunder
the Project to address market failures in the training market, improve delivery of demand-driven
training, and foster developmentof a private training market. These include (i) carrying out analyses
of the current framework governing the application and administration of the payroll training levy
and thereafter design and implement a plan to improve it, including the possible creation of a public-
private National Training Council to promote diversification of qualified private sector training
suppliers;and (ii) establish under the Council's aegis extension services on a grant basis to provide
information targeted at smaller businesses on the benefits of in-firm training and to help firms to
establish their own in-firm training programs. These initiatives would be complemented by the
Project's firmn-leveland business association level Competitiveness Learning and Innovation
Program component (described below), which would expand funding available for in-firm
upgrading of technical skills of trainers, employees and training facilities in order to better respond
under the new system.

26.     Reinforcement of national information systems is equally important to both firm level
competitiveness and national economic management. In 1999, the Government's Commission on
the Improvement of the National Statistical System prepared a diagnostic of the system which
showed that such infornation is both very limited and not reliable enough. This is in part due to
inadequatecoordinationwithin the System, where there is duplication of effort, inadequate ability to
verify data generatedby different entities making up the System, and insufficient financial, technical
and human resources devoted to it. Under the Project, a draft law, acceptable to the Bank, would be
prepared which would, if enacted, would convert the National Statistics Institute into an
autonomousNational Statistics Superintendencyand key technical services and products upgraded---
including the census and surveys, economicstatistical systems, and demographicand social studies.

27.     Upgrading Firm Product and Process Quality. Any country that expects to compete
successfully in today's global economy needs to know the standards of the markets to which it
exports, have access to internationallyrecognizedtesting and certification organizations, and sustain
a commitment to quality. In turn, these require an appropriate infrastructure for standards and
conformity assessment (SCA). This infrastructure is critically important to a country's ability to
improve quality, reduce costs and keep pace with constantly evolving technology-essential factors
in determininga country's competitiveness. A reputation for complying with standards and assuring
                                                                                      Page 14
Guatemala CompetitivenessProject                                           Project AppraisalDocument

quality can increase market share and merit premium prices for exported commodities and
manufacturedgoods. Product certificationcan be a major asset in breaking into new markets.

28.      The findings of the Guatemala Skills, Technology and Productivity Survey reflect very
serious firm-leveldeficiencies in this area: (i) the majority of firms use only a final inspection of the
finishedproduct or service---fewhave in-process quality control and its incidence correlates strongly
with firm size; (ii) a third of small manufacturingfirms have no quality checks whatsoever; (iii) the
lack of quality control by subcontractors and suppliers is an issue of considerable relevance in all
sectors; and (iv) there is limited recognitionof ISO 9000, particularly among small businesses, and
little understanding of its principles and practices. On the supply-side, country benchmarking for
SCA systems for Central America and elsewhere show Guatemala and most of Central and South
America to be far behind the rest of the world in implementing effective quality practices---
providing standards enquiry points, applying the WTO Code of Good Practice where developing
standards, particularly in regional and international standards and accreditation bodies, and
providing infrastructure (inspection, testing, product certification, quality systems registration and
laboratory accreditation). For example, while ten organizations provide calibration services, only
one is accredited by a recognized body. Only three firms provide consulting in quality. Training is
limited to two short courses---one offered by AGEXPRONT and another by the Chamber of
Industry.

29.     At one time, Guatemala had the basic building blocks for a national SCA system; but the
pieces have fallen into disarray and experienced staff is no longer employed. The Comision
Guatemaltecade Normas (COGUANOR)was founded in 1962 to provide standards and inspection
services particularly in the areas of health, safety, and consumer protection. By 1988 it had
developed 600 standards, all of which were mandatory, and had a total staff of eight professionals.
In this same time-frame, the Instituto Centroamericano de Investigacion y Tecnologia Industrial
(ICAITI) was established in Guatemala City as a regional resource. Hundreds of thousands of
dollars were invested in its metrology laboratory and staff training, but the institute's capabilities
were never utilized to any great extent by Guatemala's neighbors, and its limited number of clients
were almost exclusively from Guatemala. ICAITI, is no longer functioning, while COGUANORis
in a stand-by mode awaiting renewal under the proposed Project.

30.     To address these issues, the Government aims to enhance product and process quality in
Guatemala and strengthen the Government's position in negotiating trade pacts and mutual
recognition agreements. The Project would support the promotion of awareness of quality issues
and practices, provide training to private enterprisesand government agencies, and provide technical
assistance focused on the demand-side. This would complement existing assistance totaling US$1.4
million from Sweden, Germany and Taiwan, which are establishing institutions to supply quality-
related services such as accreditation,metrology and standards development.

31.     Increasing Firm-Level Pre-Competitive Investments in Learning and Innovation. An
important element of a near-term poverty reduction strategy in Guatemala is assistance at the firm
level to help broaden micro and small business participation in entrepreneurship and mainstream
economic growth. Like larger firms, smaller firms face obstacles like a scarcity of modem
managementskills and information,technologicalobsolescenceof plant and equipment,and inadequate
investmentfinancing. But, as in many emerging countries, Guatemalan smaller firms are more likely
to face a number of additionalimpedimentsto becomingmore competitive,both domesticallyand in
export markets. Such firms are constrained in making the needed investments due to (i) economic
factors---such as insufficient information, externalities in skills investments, the perceived (and
                                                                                    Page 15
GuatemalaCompetitivenessProject                                          Project AppraisalDocument

frequently actual) high cost of pre-competitiveproduct/marketdevelopment in relation to extremely
uncertain returns, and access to financing; and (ii) "softer" factors---likea lack of experience, the
 absenceof supportivelocal businessdevelopment                                        confidence.
                                                 tradition,or a lack of entrepreneurial

32. Traditionally,government interventionto promote small business developmenthas often focused
on providing subsidizedcredit for the purchase of capital goods through various means that, instead,
has generally inhibited the development of sustainable financial institutions. Such interventionhas
also promoted business development services (BDS) through public institutions or NGOs---training
of labor and management; extension, consultancy, and counseling; marketing and information;
technology development and diffusion; subcontracting, etc. However, here too, there is broad
consensus among many that publicly-providedBDS often suffers from being too general and supply-
driven, lacks sufficient client attention and quality, and gives little specific attention to building
delivery systems with strong service outreach and financial sustainability.

33. A more markets-oriented strategy is needed in Guatemala which addresses these problems and
focuses on increasing small business access to markets: for the goods and services that micro- and
                                                                                                use
small businesses produce (both domestic and export); for the inputs that such businesses
(including information, technology, and competitively-pricedmaterials); and   for a diverse range of
financial services and BDS needed to support business growth and competitiveness. Accordingly,
the Project would sponsor three initiatives aimed to help strengthen firm-level entrepreneurshipand
 build BDS markets by (1) promoting increased small business investments in pre-competitive
 learning and innovation which utilize BDS, (2) piloting supply-side innovations in information
 technology-basedBDS dedicated to low-income micro and small businesses, and (3) expanding
 concerted action among firms on competitiveness through promotion of a cluster and business
 responsibilityprogram.

 34. Experience in an impressive list of countries suggests that stimulating increased investment in
 well-planned, practical learning and innovation among small firms can help increase their
 competitiveness substantially as a result. Under the Project, a Competitiveness Learning and
 Innovation Program would support pre-competitive investments in entrepreneurial learning
                                                                                                 and
 innovation by at least 300 small and medium scale private firms, associations and      microclusters
 (with legal identity), and at least 10,000 microbusinesses.The Program would provide temporary
 matching grant support to such businesses (50% business recipient, 50% Program) to modify
 business conduct and help develop a tradition of investment in areas such as business planning,
 market research, product and process development, management and technical training, acquisition
 of market and technical information, quality assurance, marketing and distribution pilots. The
  Program would utilize an independent private contractor for Program client assistance and
  management, selected in accordance with the Bank's Consultant's Guidelines and reporting to a
  separate Supervisory Committee setup within the PRONACOM Management Unit. The
  Government would adopt the Program Operational Manual, satisfactory to the Bank, and hire the
  contractor as a condition of loan effectiveness.

 35. To help accelerate BDS market development among low-income businesses, the Project would
 pilot innovation in information technology (IT)-based BDS services.           The pilot, Guatemala
 MicroNet, aims to demonstrate in Guatemala the commercial viability and development impact of
 greater "connectivity" between lower- and higher-income markets, and how to substantially boost
 BDS client scale with financial sustainability. With the reform of the telecom sector in Guatemala in
 1996, substantial progress is being made in basic services and it is a promising time to introduce
 higher value-addedIT services toward these ends.
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 Guatemala CompetitivenessProject                                          Project Appraisal Document


36. MicroNet would deliver under a business plan integrated communications and information
technology IT-based business development services to at least 25,000 micro and small businesses
through a network of a hub and ten community-basedbusiness development centers, tentatively to
be located in Guatemala City (3), Chimaltenango, Quezaltenango/Totonicapan, Escuintla,
Suchitepequez,Sacatepequez, San Marcos and Alta Verapaz. MicroNet services would (i) provide
basic entry-level business skills training, informationtechnology training and distance learning on
microbusiness issues; (ii) make accessible mnodemtraditional communications (phone, fax and
photocopying) and marketing outreach tools (advertising, packaging and labeling) with coaching
assistance, and (iii) offer PC-based workstations, software and coaching for more advanced
microbusinesses to expand entrepreneurial knowledge, prepare strategies on how to grow their
businesses and to solve common problems in production, finance/credit and marketing, and begin to
build networks and basic electronic commerce.

37. To help expand the competitiveness-buildingprocess among groups of firms, the project would
supporta business cluster and social responsibilityprogram. The initialdevelopment integrated
                                                                                      of
clusters in Guatemala---to date in textiles/clothing, agro-industry, forestry and tourism---was
initiated following the study managed by Michael Porter of Harvard University on the
competitiveness of the Central American region. The Guatemalan approach is distinct from most
other countries, relying mainly on regional and local specialists to conduct a first-round overall
diagnostic of competitive strengths and weaknesses of a cluster and to benchmark it internationally.
This more "bottom-up" approach has been largely effective, and has promoted cluster development
in a locally-rooted and cost-effectivemanner.

 38. PRONACOM is consequently planning to strengthen the number of facilitators to manage the
 cluster development process and to establish "micro-clusters" to involve a larger number of micro
 and small businesses. The Project would extend this cluster experience to other parts of the
 economy,with a projected 1-2 new clusters or micro-clustersper year over two years. To do so, the
PRONACOM Management Unit would contract service providers to (i) continue broad promotion,
dissemination and training in the methodology (100% Bank loan financing) in order to foster new
microclusters,(ii) facilitate the organization of new clusters and undertake initial cluster diagnostic
and benchmarkingassessments(50% financing), and (iii) address cross-clusterbusiness environment
 issues, such as on labor mobility, technical barriers to trade, etc. (100% financing). The Project
would also support nascent efforts in Guatemalato promote the developmentof a culture of business
social responsibility (BSR) within the objectives of the Project; namely, toward lower-income
businesses and related households. Under the Project, PRONACOM would first try to develop
through local and cross-country exchanges, workshops, case studies and consulting support a
common understanding of the definition and scope of BSR (100% Bank loan financing), then help
generate specific BSR projects (a) in support of micro and small business development, and (b) in
support of communities located in areas in which large-scale business operates to pursue common
socio-economicinterests (50% financing). This initiative would be extended via collaboration in
internationalBSR events and a public communicationscampaign.
                                                                                                    Page 17
Guatemala CompetitivenessProject                                                         Project AppraisalDocument

C: Project Description Summary
1. Project components       (see Annex     2):

                         .~~~~~~~~~~~~~~~~~~~~~~~Mcos Of iw
 Increasing domestic market competition - advisory services,            Regulatory      0.8     2%      0.8          4%
 training programs and study tours, office facilities, equipment        reform and
 and materials, information dissemination and recurrent cost            institution-
 support on a decliningbasis over 4 years to help (i) design a draft    building
 a competition law that would establish the functional capacity of
 a CompetitionCommission, (ii) execute a public information and
 voluntary compliance promotion program, and (iii) carry out an
 agreed program of investigations and advocacy on competition
 policy.

 Accelerating foreign investment - advisory services, training          Regulatory      7.8     24%      3.6         18%
 programs and study tours, office facilities, equipment and             reform and
 materials, promotion programs and recurrent operatingcosts on a        public-
 declining basis to help over 4 years to (i) create a public-private    private
 FDI Promotion Council, (ii) improve the one-stop investment            sector
 facilitation,and (iii) upgrade the international supply chain.         institution-
                                                                        building

 Expanding in-firm skills training and information markets -            Regulatory      2.6     8%       2.6         13%
 advisory services, training programs and materials, facilities         reform and
 upgrading, equipment, information dissemination and recurrent          public-
 cost support on a declining basis to help over 4 years to (i) adjust   private
 the regulatory framework for the payroll-levy management               sector
 system and implement an in-firm training promotion and                 institution-
 extension services program for small business, and (ii) adjust the     building
 regulatory system to create the National Statistics
 Superintendency (NSS), and upgrade the scope, quality,
 reliability and operating efficiency in the production economic
 and business statistics.

 Upgrading firm product and process quality - advisory,                 Regulatory      2.0     6%       2.0         10%
 training and informationservices, and recurrent cost support on a      reform &
 declining basis to help implement a plan over 4 years to (i)           public-
 promote quality awareness, (ii) provide training in quality            private
 assurance, (iv) establish an SCA international informationcenter,      sector
 and (ii) prepare a program to certify non-traditional activities       institution-
 such as sustainable tropical wood exports, eco-tourism and             building
 organic foods, and factory working conditions in maquila
 industries.


 Increasing firm investments in learning and innovation -               Firm, cluster    19.2   570/o    10.0        50%
 promote increased pre-competitive investments by (i)                   &
 establishing a temporary Competitiveness Learning and                  association
 Innovation Program to provide under agreed firm                        institutional
 competitiveness plans 50-50 matching grant financing to                development
 enterprises, associationsand clusters on an individually-approved
 basis, and voucher grant financing for low-income
 microbusinesses; and a Program client assistance and
 management contract to implement the Program; (ii) piloting IT-
 based BDS to help low-income micro- and small businesses to
 raise earnings by increasing their business skills, market access
 and operational competitiveness; and (iii) providing advisory
                                                                                       Page 18
Guatemala CompetitivenessProject                                            Project Appraisal Document

 services, training programs and materials, and informnation
 dissemination to support a program (i) to promote new business
 clusters and carry out cross-cluster business environment
 diagnostics, and (ii) help develop business social responsibility to
 support small business development.



 PRONACOMManagement           Unit (operational expenditures)       I_I     11     3%        1.1         5%
 Bank loan capitalized front end fee                                        0.2     -        0.2
                               ==t=l                  i'3                   3      1j<,,i       700
                                                                                            20>30

2. Key policy and institutional reformsto be sought:
        *    Increasing domestic market competition - (i) a competition law reflecting local and
             international best practice to ensure competitive behavior in the marketplace and a
             competition commission to implement it, (ii) development of the commission's
             functional capacity, (iii) implementation of a program of investigation and advocacy of
             competition policy, and (iv) a program of public information and promotion of voluntary
             compliance;

        *    Accelerating foreign investment - (i) upgrade PROGUAT via a Government Decree into
             an effective public-private FDI Promotion Council and improve one-stop investment
             facilitation, and (ii) preparation of regulatory changes to reduce the cost and time of
             transport of exported goods by the internationalsupply chain;

        -    Expanding in-firm skills training and information markets - (i) address market failures in
             the training market, improve delivery of demand-driventraining, and foster development
             of a private training market via adjustments in framework governing the application and
             administration of the payroll training levy and sponsor an in-firm training extension
             program for small firms, and (ii) an autonomous National Statistics Superintendency
             which upgrades the scope and quality of economic information;

        -    Expanding product quality technology infrastructure - (i) promotion of quality awareness
             and training in quality assurance practices & in ISO 9000 & 14001 assessment, (ii)
             establishment of a standards and conformity assessment international informationcenter,
             and (iii) certificationof non-traditional activities likely to include eco-tourism,workplace
             standard and tropical timber.

3. Benefits and targetpopulation:
39. The Project would be expectedto lead to greater competitivenessthrough (a) the direct near-term
reduction of firm-level costs or raising of margins, and (b) less tangible but equally critical medium-
and long-term improvements in skills, product and process quality, and R&D innovations. The
adoption and implementation of a competition law would be expected ultimately to foster more
broad-basedgrowth in the private sector, helping to ensure that all firms are treated uniformly, have
reasonably equal market opportunities, and to prevent or correct market failures and distortions that
arise from anti-competitive business practices. For firms participating in the Project's other
programs, benefits would include incremental (i) domestic and foreign direct capital investment, (ii)
investment in worker skills, (iii) pre-competitive investments in product/market learning and
innovation, (iv) internationally recognized product and process quality certification, and (v)
                                                                                  Page 19
       Competitiveness
Guatemala          Project                                                     Appraisal
                                                                         Project      Document
investments and sub-contractingrelationships generatedby business social responsibility programs;
ultimatelytaking the form of increasedvalue added,employment,and fiscal revenues.

40. The Project's direct target population for action on the business environment would be those
institutions and stakeholdersinvolved with developmentof the Competition Commission,"Invest in
Guatemala", the possible National Training Council, and the National Statistics Superintendency.
The clientele of such entities, as well as the other elements of the Project that would provide direct
support to the firm level, are expectedto be primarily micro businesses (less than 5 employees) and
small and medium firms (fewer than 50 employees), which employ a large segment of Guatemala's
economicallyactive population and involve lower income groups in such areas as agro-business,
textiles and clothing, leather goods, wood products, metalworking,and artisanry. Particularlyas firm
size decreases,women and indigenousentrepreneursare expectedto benefit as, in some sectors, they
represent a majority (clothing) or a significantshare of producers within an industry (food, shoes and
leather).

4. Institutional and implementation arrangements:
41. Institutional and implementationarrangements. The Executive Committee of PRONACOM,
a public-private partnership, has exercised strong leadership and closely collaborated with the Bank
in the design of the Project. It would continue to play this role in the implementation phase by
providing directives to the PRONACOM Management Unit for Project execution, as well as the
evaluation of progress and impact against agreed targets. The Project would be managed by the
PRONACOM ManagementUnit, which would be formally established by Ministerial Accord and is
a condition of loan effectiveness,would report to the Executive Committee. The Unit's managing
Director is appointed by the Executive Committee. The Unit, which is physically housed in and has
operated since 1998 as part of the Ministry of Economy, has developed a sound implementation
management capacity. It has gained this capacity through considerable experience in implementing
the PRONACOM program and in collaboration with the Bank in the execution of the Project's
PHRD Grant, including with respect to Bank procurementand financial management practices.

42. To implement the Project, the Management Unit would double its current eight full-time
positions by adding lead specialists to coordinatework on domestic competition, foreign investment,
in-firmnskills training, product quality and IT-based BDS. For business environment issues,
ManagementUnit staff would work in a fully integrated supporting role as it has in the past for line
managers within the Ministry of Economy and institutions outside it for which the Ministry of
Economy has portfolio responsibility. The Ministry has first-line responsibility for competition
policy, foreign direct investment, product quality technology infrastructure, micro and small
business, and supporting responsibility for in-firm training and transportation.

43. Regarding firm-level Project activities, an independent private contractor would be hired to
provide client assistance and manage the Competitiveness Learning and Innovation Program and
would report to a SupervisoryCommittee within the PRONACOMManagement Unit composed of
the Managing Director of PRONACOM and one representative each from the Ministry's Vice-
Ministry of Micro and Small Business and from the PRONACOM Executive Committee. The
Committee would be responsiblefor selectingthe contractor, adopting the policies and procedures of
the CLIP in the Operating Manual, monitoring progress and compliance with Manual, and
evaluating impact. Initial implementation of the Guatemala MicroNet pilot would be led by the a
Coordinator in the PRONACOM ManagementUnit to complete pre-startup preparations, followed
by a management team hired to implement the business plan. The business cluster and social
                                                                                      Page 20
 Guatemala CompetitivenessProject                                          Project AppraisalDocument

responsibility program would be directed by the current Coordinator in the Management Unit as a
continuation of its work over the past two years on PRONACOM's four existing cluster programs.
Since it is critical that the Management Unit be fully operative from the start of Project
implementation,the staffing of the Unit and creation of the Supervisory Committee within the Unit,
satisfactoryto the Bank, would be a condition of loan effectiveness.

44. The core support service responsibilities of the Management Unit for Project implementation
would include the following:

        *     Carry out the Project Launch Plan;
        *    Perform all Project procurement functions according to the Bank's Guidelines in
             coordinationwith Project institutions;
        *    Perform all Project financial management functions;
        *    Prepare annually by November 30, with inputs from Project institutions and in
             agreement with the Bank, Annual Action Plans for the years 2001-2005;
        *    Prepare Quarterly Project Monitoring and Evaluation Reports on execution and impact
             against agreed institutional development and other performance targets. Quarterly
             reports would include financial management reporting used to monitor progress and
             future disbursements;
        *    Hold a Project Mid-term Review by July 31, 2002;
        *    Ensure general Project coordination between PRONACOM, the Ministry of Economy,
             and other entities involved in Project execution; and
        *    Prepare the borrower's portion of the Project Implementation Completion Report in
             coordinationwith the managing agencies.

45. Project Financial management. The Management Unit would directly manage all project
planning, procurement, physical and financial monitoring and analysis. The Unit would manage
project funds under a Bank-certified financial management system for accounting, reporting, and
auditing. This system, to be defined in a Project Manual of Administrative-FinancialProcedures,
would cover financial management responsibilities,procedures, documentary formats for use of the
Special Account, procurement of goods and services, the Integrated Accounting System, internal
documentary controls and inventory controls over office equipment and supplies. The accounting
and auditing practices, standards and controls, and reporting format and content defined in the
Manual would meet those defined in International Accounting Standards of the International
Accounting Standards Committee and be consistent with the Bank's Financial Accounting,
Reporting and Auditing Handbook (FARAH).

46. Auditing of Project accounts would be carried out by an independent private sector firm
acceptable to the Bank. A specific shortlist of such firms for the Project would be prepared and
reviewed by the Bank for its no-objection. A long-term contract for the life of the project, subject to
annual performance acceptable to the Bank, would be concluded for Project auditing services with
the firm selected. Terms of reference for such audits would be prepared and agreed upon in
accordance with Bank model TORs, covering statements of income and expenses, all sources and
uses of project funds and comparisons with the Bank's Project Appraisal Document, assets and
liabilities, SOEs, Special Account, internal control system, conformity with the Bank's Loan
Agreement. Audit work would begin at the Project's startup to confirm the auditability of the
financialmanagement system. Audit reports would be submitted within 4 months followingthe end
of the fiscal year. The costs of such annual audits are incremental costs and would be included in
project costs and Bank financing. This financial management system would conform to the Bank's
                                                                                    Page 21
GuatemalaCompetitivenessProject                                          Project Appraisal Document

requirementsunder BP1O.02. As a condition of loan effectiveness,the Governmentwould have put
into operation a system, satisfactory to the Bank, for the administrative, financial and accounting
control of the Project, and hire the external auditorsmentionedin this paragraph.

47. Project Monitoring and Evaluation. The Management Unit would be responsible for Project
monitoring and evaluation of progress toward project development objectives and use the Project
Design Summary in Annex 1 as a basis to track the key Project inputs, processes, outputs and
outcome/impact. A data collection system would be prepared for this purpose, which would utilize a
baseline data set from the 296 firm-level survey prepared at Project identification as a control group
and "barameter"of project progress. These same firms would be tracked at the mid-point and end of
the Project and their evaluation data compared with similar evaluations of firms participating in the
Project. The ManagementUnit would utilize the system to (i) prepare quarterly Project Monitoring
and Evaluation Reports on execution and impact against agreed performance targets, and (ii) hold a
Project Midterm Review by July 31, 2002. While the ManagementUnit itself would be responsible
for monitoring implementation activities and outputs, a qualified local firm would be responsiblefor
preparing within this reporting system a regular independent evaluation of Project outcome and
impact.

D: Project Rationale
1. Project alternativesconsidered and reasonsfor rejection:
48. The initial Project concept has been driven by client interests, lessons of experience and a vision
of the most appropriate niche for Bank support, all as outlined below in Sections D3-D5. Given
PRONACOM's sound start with mezzo-levelcluster programs, the main focus of attention has been
on understanding and addressing the constraints in the business environment and designing scaled-
up firm-level support systems.
                                                                                     Page22
        Competitiveness
Guatemala            Project                                                               Document
                                                                            ProjectAppraisal

2. Major relatedprojectsfinanced by the Bank and/orother development):




 Bank-financed
 * Inefficienciesin infrastructure      Private Participation in            U                S
                                        Infrastructure

 * Corruption,contract enforcement      Judicial Reform Project             S               S


* Inequitable access to land resources Land Fund and Land
  and poor title registration systems   Administration Project
                                        (pending signature)
* Improve use & protection of natural
  resources in West. Altiplano Region Natural ResourcesProject
                                        (under preparation)
* Increase product and factor
  market       competitiveness      and El Salvador                         S                S
  integration with the global economy Competitiveness
                                        EnhancementProject
* Increase access of small business
  to international trade markets        Argentina Export                    S                S
                                        DevelopmentProject
* Increase access of small business Ecuador Intemational Trade              S               S
  to international trade markets        and Integration Project             S_S
 Other Development    Agencies
 UNIDO                                  Competitivenessproject -
                                        mainly environment    issues
 Sweden, Taiwan,Germany                 Metrology and other quality
                                        systems support
IP/DORatings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in proposedproject design:
49.     The Project concept addresses policies and issues which are well known through cross-
country analyses and other sources to have strong bearing on international competitiveness. The
approach to each component---the issues to be addressed and methodology to be used---reflect a
blend of specific problems identified in discussions with the Government and in cluster work, and
the cumulative experience of the Bank and other development partners in these areas. In general, the
Project's approach to programns and institutional development relies very much on demand-driven
resource allocation and decentralized, participatory delivery mechanisms, which have tended to
work far better in meeting needs at the firm-level to increasing competitiveness.         Like the El
Salvador Competitiveness Enhancement Project, the emphasis is on specific changes in the
regulatory environmnent, facilitating public or public-private partnerships and firm-level help. The
Project at entry is targeted to achieve early public policy changes and launch institutional support
systems to build firm-level competitiveness,as well as progressively expanding business cluster and
social responsibility.
                                                                                    Page 23
Guatemala Competitiveness Project                                        Project Appraisal Document

4. Indicationsof borrower commitmentand ownership:
50.     Through its initial participation at the regional level and discussions with neighboring El
Salvador, the Government led by the Ministry of Economy has since 1997 developed a strong
interest in the international competitivenesstheme. It has joined together with many private sector
leaders to organize a public-private partnership and prepare a program of action framed as the
National Competitiveness Program (PRONACOM). This core group has through concerted effort
organized a wide variety of workshops, training seminars and media events to expand public and
private sector interest and involvement in this work. In this sense, PRONACOMis developing into
a sound platform for the Project, and its stakeholders view the Bank and the Project as central to
moving forward the competitivenessagenda.

51.     The initial cluster programs in Guatemalahave had several advantages. They have helped to
organize a wide range of entrepreneurs and other players in the production chain to make more
transparent their competitive position and constraints to improving it. They have emphasized the
firm-level view of competitiveness as a key analytical building block. They have highlighted the
need for public sector cooperation to address key bottlenecks originating in the public sector itself.
And they have used international benchmarks to help foster the change process, which has also
simultaneouslyincreased interest in outward orientation. The Guatemalan brand of clustering also
appears to have been internalized by participating local businesses and government and the idea
 seems to be spreading. To date, each cluster has operated with a modest budget and relied largely on
the grassroots participation of businesses and local consultants to establish a basic snapshot of the
 industry and benchmark its competitive features. The Project concept is derived in large part from
 the results of this experience as well as from discussions with and specific requests from
 PRONACOM.Guatemala's new administrationhas provided substantial continuity in support of the
 Project by incorporatingit prominently in its 2000-2004 EconomicPlan.

5. Value added of Bank support in this project:

52.     The PRONACOMExecutive Committee and Bank view the Bank's main role as helping to
(i) leverage the existing cluster work by increasing analytical work, cross-country experience and
internal dialogue on key cross-clusterpolicy and institutional development issues, (ii) ensure that the
PRONACOM agenda is closely linked with social objectives, and that policy/institutionalanalyses
and program development incorporatethe interests of a wide spectrum of socio-economicgroups in
Guatemala, and (iii) help to strengthen PRONACOM processes---particularlyin deepening public-
private cooperationand expanding public and private sector involvement in the PRONACOM---and
its program implementationcapacity.

 E: SummaryProject Analyses

 53.     Economic. The economic benefits of the Project are driven mainly by the policy and
 institutional effects on the business environment generated by technical cooperation and financial
 inputs and direct firm- level catalytic support. Assessing the approach being used and benchmarks
 of experience in projects elsewhere, and taking into account the principal technical and operational
 assumptions made, the best estimates of the expected outcomes over the four-year Project
 implementation period are: (i) foreign direct investment---incremental investment of about $206
 million, an increase in foreign exchange eamings of $280 million (merchandiseand tourism), 20,500
 new direct jobs and 40,000 indirect jobs due to increased linkages, (ii) worker skills training
 investments - 120 newly accredited private in-firm training providers, and 300 new in-firm training
 systems established in small businesses (incremental trained staff counted in CLIP below); (iii)
                                                                                      Page 24
Guatemala CompetitivenessProject                                           Project Appraisal Document

product and process quality - 2,500 small firms implementing or upgrading quality programs and
50,000 student class hours of quality training by year 4, 50 firms exporting certified eco-exports by
year 4, and 12 government agencies with accredited labs or certification programs, or ISO 9000
certificationby year 4; and (iv) MicroNet---at least 25,000 microentrepreneursutilize basic business
training services, make new use of business communicationsand marketing services, and engage in
e-commerce activities; MicroNet achieves financially sustainable network of 10 community IT-
based microbusinesscenters by year 4.

54.     For the Competitiveness Learning and Innovation Program, at least 300 mainly smaller
private firms, associations and clusters would be expected to benefit under Window I and 10,000
microbusinessesunder Window 2 for Project investments in entrepreneurial learning and innovation.
Qualitatively,beneficiaries are expected to accrue domestic and international market awareness and
know-how, forming the basis for changes in business behavior, which in many cases will lead to
increased international competitiveness and outward-oriented growth. In immediate terms, this
change would be reflected in new domestic and internationalbusiness market partners---marketand
product information sources, suppliers, private associations, potential buyers, potential foreign
investors, etc. Quantitatively,the Program is expected to produce incremental domestic and non-
traditional processed export output of at least $60 million, making a substantial and visible positive
impact on worker income and employment. These earnings would be to be felt in (i) higher value
added (mainly wages and profits) in products and new employment,(ii) broader domestic and export
market linkages (more products exported by more firms), and (iii) more linkages to domestic
producers as indirect exporters (share of local raw materials, intermediate & finished goods in
product cost). This incremental output would also generate additional tax revenues expected to
exceed by the fourth year of the Project the cost to the Government in grant funds and related
interest on the Bank loan from the following sources: (1) incrementalpayroll taxes paid by domestic
and exporting firms and by employees, (2) corporate income taxes, and (3) value added taxes
generatedby incremental employeeconsumption outlays.

55.     Financial. The strong institutional development orientation of the Project implies a
significant incremental recurrent cost requirement, estimated at $5.5 million over the four-year
implementationperiod. Given a highly constrained fiscal situation and in order to mitigate risks of
implementation delays, the Bank loan would meet a share of such financing ($1.8 million) on a
declining basis over this period, beginning with 100% of annual costs in Year 1 and falling linearly
to 33% in Year 3.

56.     TechnicaL The main technical challenge of the Project would be to create information-
technology based business development services with strong impact on low-income micro- and
small businesses. While the basic IT infrastructurein telecommunications,internet service providers
and programmers are available to the more advanced portions of the economy, mainly in Guatemala
City, focusing this infrastructureand creatingan effective interface with such clientele in the form of
IT software, program content and training will be a major task. However, initial support for the
MicroNet pilot is quite pronouncedand high quality local and internationalresources are available to
address this challenge.

57.    InstitutionaL The experience during Project design and initial indications in the transition to
a new Government administrationdemonstrate a very strong commitment to PRONACOM and the
Project as one means of advancing it. Thus, while the institutional development agenda under the
Project is ambitious, it is reasonable in light of client ownership of it and the proven capacity of the
PRONACOMManagementUnit to advance its implementation.
                                                                                   Page 25
Guatemala Competitiveness Project                                       Project Appraisal Document

58.     SociaL The Project would address product quality and process standards for non-traditional
activities, such as workplace conditions in maquila operations in the textiles and clothing sector.
This system would provide internationally recognized social assessments and certification, where
firms meet the standard of the adequacy of conditions in the workforce. Through the promotion of
new investment in pre-competitive learning and innovation by smaller businesses outside of
Guatemala City, the Project would also help to extend business development service support systems
to women and indigenous groups to help them build market linkages, upgrade business skills and
information access, and improve product designs and quality. Early consultations have been held
with indigenousgroups about the design of MicroNet and will be continued through a series of focus
groups in the final design phase and implementationof MicroNet services. The social responsibility
program would also aim to build new linkages of support between the larger-scale business
leadership in Guatemalaand the small business community.

59.    Environmental. Environmentalcategory: [I           A       [I      B       [X]      C

The Project would provide support for training in the application of ISO 14,000 environmental
managementpractices, development of a system to certify environmental conformity to ISO 14000,
and training of qualified assessors to perform this task. Part of the application of this system is
developing internationallyrecognized standards, assessment and certification for sustainable tourism
and cultural heritage facilities. The Project is expected to consist primarily of broad-based policy
change, institution-building and technical assistance at the firm-level to build international
competitiveness. As per above, it is also likely to include promoting the use by private firms of
internationallyrecognizedcertification systems for environmentalprotection.

60.    ParticipatoryApproach. As noted above, PRONACOM's basic cluster organizations have
been and will be an important vehicle to bring together public and private interests in the
implementation of the Project. In the analytical work done on the Project to date, inputs have been
provided directly by: the National Council for Development of Micro and Small Enterprises, the
Federation of Small and Medium Guatemalan Enterprises, the Comite Coordinadorde Asociaciones
Agricolas, Comerciales, Industriales y Financieras (CACIF), the National Exporters Association of
Non-Traditional Products (AGEXPRONT), the VESTEX Commission Board of Directors and
Coordinator of the Textiles and Clothing Cluster, the Coordinatorsof the Agro-business Cluster,the
Tourism Cluster, and the Forestry Sector Cluster, the Council of International Transport Users of
Guatemala (CUTRIGUA), and the Camara de Industria. Senior Government authorities and
discussionsto date at the cluster level have significantlydeterminedthe Project's focus regarding the
business environment and newly proposed institutions. Work on specific issue has been
 substantially informed and directed by potential clients and affected groups through the use of
representative surveys,focus groups, cross-country experienceseminars, and workshops.
                                                                                           Page 26
 GuatemalaCompetitivenessProject                                                Project Appraisal Document


8. Checklist of Bank Policies

This project involves:
  [X ] Indigenous peoples (OD 4.20)          [       Riparian water rights
                                                                           (OP 7.50)  (BP 7.50)     (GP 7.50)
  []    Cultural property(OPN 11.03)         []      Financialmanagement (OP 10.02) .           (BP 10.02)
  [1]   Environmental impacts                []      Financingof recurrent costs     (OMS 1.21)
        _(OP4.01)     (BP4.01)    (GP4.01)       _
  []    Natural habitats                     []      Local cost sharing
        (OP4.01)      (BP4.01)       4GP
                                     401               (OP6.30) |           (BP6.30)           (GP 6.30)
  [1
   ]    Gender issues (OP 4.20)              [       Cost-sharingabove country three-year average
   _7                                                  (GP6.30)             (OP6.30)               6(BP6.30)
  [1
   ]    Involuntary resettlement(OD 4.30)    []      Retroactive financingabove nonnal limit
                                                      (OP 12.10)           (GP 12.10)        l
  []    NGO involvement(GP 14.70)            [       Disputed territory
                                                       (OP 7.60)            (BP17.60)          (GP7.60)
  ___                                        [f]     Other (provide necessary details)



61.     Social Outreach Strategy. In Guatemala there are three main population sets that are called
indigenous: Mayas, Xinkas and Garifunas, which constitute approximately 60% of the population.
These groups share the Guatemalan territory with the Ladinos or Mestizos, which represent the
remnaining 40% and are mainly descendants of a mixture of Spaniards and indigenous population.
The Mayas are geographically located in the whole territory, but the higher concentrationsare in the
northwesternhighlands: Huehuetenango, Quetzaltenango,Totonicapan, San Marcos, Alta Verapaz,
Baja Verapaz, Chimaltenango, and Quiche. In Guatemala City, they hold 12% of the population.
They speak 21 different languages, of which Quiche, Kakchikel, Tzutuhil, Kecchi, Mam and
Pocomam are the more important. The Xinkas occupied what is now the Department of Santa Rosa,
the eastern section of Escuintla and Jutiapa near the frontier with El Salvador.

62.    Indigenous people from Guatemala are mainly engaged in agricultural activities. They often
work as low-skilled employees in agro-industrysuch as coffee, cotton, sugar and meat, as temporary
employment during about 6 months of the year. Another agricultural activity, as very small
producers, is the growing of corn and another alternative crop. Corn is used for the survival of the
family and the alternative crop is used to sell and obtain money to pay for basic needs; this crop is
typically a non-traditional agricultural product such as flowers, fruits and some vegetables (broccoli
and Chinese pea). In some cases, indigenous groups sell to medium and larger scale exporters and
are members of cooperatives that are recently trying to export to Central America. When there are
no jobs at the farms or there is no land for the growing of their crops, they become informal
entrepreneurs dedicated to commercial activities in the urban areas or mobile traders that travel to
many villages selling their artisan work and objects for basic needs.

63.    There are around 75 NGOs that work for the development of the indigenous population in
Guatemala. Mostly, they work in infrastructure, health related projects and training for agricultural
skills. Others work with artisans and in literacy and basic arithmetic classes. The largest
organizationsare the Tzukin Pop and Mesa Nacional Maya, composed of indigenous people, which
are coordinators of coordinators of indigenous NGOs. Since 1990, there have been a relevant
number of indigenous organizations with their goals aimed to the Peace Accords. COPMAGUA -
Coordination of organizations of the Mayan people- is the most important one, an association of
                                                                                   Page 27
Guatemala Competitiveness Project                                       Project Appraisal Document

associations. This organizationhas been accredited by the Guatemalan government and is in charge
of the follow up of the Peace Accords. Academia de Lenguas Mayas, is a government autonomous
institution,its goal is to strengthen the Mayan Languages. There are also a number of cooperatives
associated in federations that have a large number of indigenous microbusinesses present, such as
the Federaci6n de Cooperativas de Cafe (Federation of Guatemalan Coffee Cooperatives),
Federacion de Cooperativas Agricolas de Guatemala (Federation of Guatemalan Agricultural
Cooperatives), Federaci6n Nacional de Cooperativas de Ahorro y Credito (Federation of
GuatemalanCooperativesfor Credit and Savings).

64.     The Project incorporates a collaboration strategy based upon the Peace Accords and strong
participationof indigenous people, particularly regarding Guatemala MicroNet, which incorporates
explicit geographical outreach, collaboration with organizations already closely involved with
indigenous peoples, alternative instruments and group-appropriateprogrammatic designs (including
translation of materials into principal indigenous languages). Project design has included
discussions with community leaders to determine how best to bring business training and market
outreach to individuals in the towns and villages through the Committee for the Enhancementof the
Community and the Auxiliary Mayors. Consequently, the MicroNet draft business plan has
geographically configured its network of community IT-based business development services to
directlyreach concentrated areas of indigenous groups, namely in Quetzaltenango/Totonicapan,    Alta
Verapaz, San Marcos and Chimaltenango. MicroNet              will also engage the federations of
cooperatives, where most of them are affiliated, and with the Academia de Lenguas Mayas.
Through such cooperation, it will seek to recruit and train center staff experienced in working in
indigenouscommunities and adapt the services it provides, orally and in written materials, to use the
appropriateindigenouslanguage according to the location of the center.

65.    MicroNetwill also use the radio as a mean of deliveringbusiness training courses in business
planning, market research, production, marketing and finance to indigenous clientele. This is an
importantmeans of communication,given that various radio stations in Guatemala broadcast several
programs in Mayan Languages, and nearly 90% of indigenous people own a radio and listen to it
according to data for approximately4 hours per day throughout the week, including the late evening
and early morning hours. Further, at MicroNet communitybusiness centers, videos will be prepared
in both Spanish and the appropriate Mayan Languages that can be viewed in the indigenous
communitieswith the assistance of the NGOs, Coordinators,and Federations. Finally, in an effort to
enhance the applicability of e-commerce to indigenous people in Guatemala, MicroNet will also
prepare its IT training curriculum, its specialized microbusiness software, and key sector-specific
business informationin the more importantMayan languages.


F: Sustainability and Risks.
1. Sustainability:
66.     The design of the business environment reforms and institutional improvements has been
highly participatory with both the public and private sectors. In addition, Guatemala's new
government administration at the highest levels have voiced their strong commitments which, along
with the continuity in the private sector's involvement throughout the preparation process will
ensure sustained momentum under the implementation phase of the Project and of meeting its
institutional developmentgoals.
                                                                                             Page28
 Guatemala
         Competitiveness
                      Project                                                       ProjectAppraisal
                                                                                                   Document
67.     The Competitiveness Learning and Innovation Program is not intended to be sustained. It
has a defined exit policy, deliberately making it a temporary one-time efforts to reduce market
failures. However, experience elsewhere with mechanisms of this kind show that they are likely to
create three sustainable effects: (i) having helped firms to meet the usually high costs of pre-
commercial learning, particularly for entry into the export market, they encourage a durable
commitmentto new markets as long as operating costs are covered; (ii) having introduced firms to
the benefits of using business development services, firmns  tend to recognize their full value and no
longer need subsidies to motivate their use; and (iii) they encourage development of a local market
of entrepreneuriallearning and businesses support.

2. Critical Risks (reflecting assumptionsin thefourth column of Annex 1):



     Annex 1, cell "from Outputs to Objective"

*   Systemsdesignsnot able to reach smaller frms           M       Explicitagreementwith client and
    and beyond urban areas                                         delivery mechanisms to specifically
                                                                   target these groups

    Annex 1, cell "from Components to Outputs"

Lack of continuity in PRONACOMmanagement                   N       Strong private sector participation
                                                                   expected to ensure sound.

Weak client commitmentto and participation in              N       PRONACOM management and
implementation                                                     strong program ownership.

Delayed passage of the domestic competitionlaw,            M       Government to brief legislators
national statistics law, which require 2/3rd majority of           carefully and hold workshops to
Congress,and other regulatory changes, consequently,               develop/ensure consensus.
slowing Project implementation.



Risk Rating - H (High Risk), S (SubstantialRisk), M (Modest Risk), N (Negligible or Low Risk)


G: Main Loan Conditions

1. Loan effectiveness:

         *    The PRONCACOM Management Unit has been established and staffed, and the
              Supervisory Committee for the Competitiveness Learning and Innovation Program
              created, both satisfactory to the Bank;

         *    an Operating Manual for the Competitiveness Learning and Innovation Program has
              been adopted, a Program client assistant and management contractor selected per Bank
              Guidelines, and an Management Agreement executed between the Government and
              contractor,all satisfactoryto the Bank; and
                                                                                    Page 29
Guatemala CompetitivenessProject                                         Project AppraisalDocument

       *    a financial management system for the administrative, financial and accounting control
            of the Project has been established by the Borrower and external auditors hired, both
            satisfactory to the Bank.


H: Readiness for Implementation

    1. (a) The engineering design documents for the first year's activities are complete and ready for
        the start of project implementation.
X      (b) Not applicable

    2. The procurement documents for the first six months's activities are complete and ready for
       the start of project implementation; and a framework has been established for agreement on
       standard bidding documents that will be used for ongoing procurement throughout the life of
       the project.

X   3. The Project's implementation plan has been appraised and found to be realistic and of
       satisfactory quality.

    4. The following items are lacking and are discussed under loan conditions (Section G): None

I. Compliance with Bank Policies

X    1. This project complies with all applicable Bank policies.
     2. The following exceptions to Bank policies are recommended for approval.           The project
        complies with all other applicable Bank policies.




[signatureIr§
Task Manager: mes             a

[signature]
Sector Directo      anny eipzi

[signature]
Country Director: Donna Dowsett-Coirolo
                                                                                           Page 30
GuatemalaCompetitivenessProject                                                 Project Appraisal Document

                                                  Annex 1

                                Guatemala CompetitivenessProject
                                         Project Design Summary

               *Sumiary
     140Narrativ                     K     eoa          Indatos            Monitorig and        Critical
                                                                            :Valuation         Assumptions
              CAS
 Sector-related Goal:                                                                        (Goal- Bank
                                                                                             mission)
 * Foster economic growth        * Country development benchmark is    *     National        * Effective
    and reduce poverty by                                growthto
                                  to raise overalleconomic             accounts                policy
    increasing    access   to     a sustainable 5-6% per year                                  dialogue      &
   sustainable productive                                                                      project
   opportunities.                                                                              execution
 ProjectDevelopment                                                                          (Objective to
 Objectives:                                                                                 Goal)
 * In the business           * Achievement of institutional            * A representative    * Macroecono
   environment,  increasethe   developmentplansfor Competition             sample      of      mic        and
                    of
   competitiveness product     Commission, National Training               Project clients     political
   andfactormarketsvia         Council, and National Statistics            stratified by       stability
   regulatory changes  and     Superintendency.                            income
   newpublic-private                                                       segment,
               partnerships
   institutional                                                           geographical
                   the
   whichimprove business                                                   location and
                for
   environment microand                                                    sales market,
   smallbusiness  growth;                                                  and compared
                                                                           with a baseline
                   broaden
 * At the firm-level,            * Incremental value added and             control group
   micro-andsmallbusiness          employment generated among              to          be
                in
   participation national          participating micro- and small          established
   economic  growth                businesses.                             duringProject


 Outputs:                                                                                    (Outputsto
 * Increasing    domestic        * Complaints     received, cases               by
                                                                       * Analysis            Objective)
   marketcompetition               investigated& resolved,laws and         PRONACOM
                                   regulationsassessed,product price       Management         * Systems
                                   and industrystructureadjustments,       Unit everysix       designs able
                                   consumer & business opinion             months,using        to      reach
                                   surveys      of      Competition        regular             smaller firms
                                   Commission's work                       reporting           and beyond
                                                                                    of
                                                                           statistics          urbanareas
 * Accelerating       foreign                FDI of $206millionby
                                 * Incremental                             Government
   investment                      12/31/04                                agencies,
                                 *20,500 new jobs created and an           Project
                                   added 40,000 indirectjobs due to        monitoring  and
                                   linkagesby 12/31/04                     evaluation
                                                                           system,and
 * Expanding        in-firm                         privatein-firm
                                 * 120newlyaccredited                      independent
   training and information        trainingproviders.                      impact
   markets                       * 300 new in-firm training systems        evaluations.
                                              by
                                   established smallbusinessesand
                                   2,500 managerial & technical
                                   employees trained.
                                                                                             Page 31
Guatemala CompetitivenessProject                                                  Project Appraisal Document

 * Upgrading firm product        * 800 client firms per year served by
   and process quality             SCA InformationCenter.
                                 * 2,500 smaller firms trained in
                                   application of process & product
                                   quality systems
                                 * 50 fims certified in eco-exports or
                                   in-plant working conditions
                                 * 800    firms implementing         or
                                   upgrading quality programs

 * Increasing        firm        * Incremental local & non-traditional
   investments m learning          exported output of $60 million;
   and innovation                  related wage and employment
                                   growth; incremental tax value
                                   exceeding         CLIP        funding;
                                   sustainable      business      process
                                   improvements by CLIP clients in
                                   management, new tech & marketing
                                   by 12/31/04.
                                 * 25,000 microbusinesses utilize
                                   business skills training, marketing &
                                   e-commercetools to increase market
                                   outreach and income by 12/31/04;
                                   MicroNet        reaches      financial
                                   breakevenby 12/31/04.
                                 * Public          policy          change
                                   recommendations presented to
                                   Cabinet in 2 major areas (eg., labor
                                   policy, air transport) resulting from
                                   cross-cluster       diagnostics     by
                                    12/31/02.
                                 * Established subcontracting & other
                                    sustainable               commercial
                                   relationships between small low-
                                    income firms and larger firms
                                   through BSR program.
  Project Components/Sub-      Inputs: (preparationbudget for each                              (Componentsto
  components:                  component)                                                       Outputs)
  * Increasing domestic market * Adopted        Competition       Law,      *   Monitoring      * Continuity in
  competition                     regulations & operational & HR            system         of     PRONACOM
                                  guidelines by 12/31/01.                   PRONACOM              management
                               * Established functional capacity of         Management
                                  Competition Commission within 6           Unit, Executive     * Strong client
                                  months after Law approval,                Committee of the       commitment
                                  including      complete       trained     NCP, and the           to         and
                                  professional & management staff           World        Bank      participation
                                  and operational infrastructure.           supervision.           in
                               * Acquired public support for                                       implementati
                                  competition policy by 06/30/02, as                               on
                                  per survey results, through seminars,                          * Implementati
                                  workshops and publications.                                      on          of
                                * Completed program by 12/31/03 of                                 proposed
                                  of competitiveness diagnostics and                               institutional
                                  investigations                                                   development
                                                                                                   plans      not
  * Accelerating        foreign * "Invest in Guatemala" promotion                                  delayed by
    investment                    council established & begins                                     slow passage
                                Iproviding     full investor services by                          of regulatory
                                                                                   Page 32
Guatemala CompetitivenessProject                                        Project Appraisal Document

                                  12/31/01                                             changes
                                * 105 new foreign investments
                                  registered and 175 new projects in
                                  pipeline by 12/31/04

 * Expanding in-firm skills * Established functional capacity of
   training & information     Training Council by 6/30/02 to
   markets                    administer revisedregulations.
                            * Guidelines for accreditation of
                              private trainers & establishing
                              Training Council by 06/30/02.
                            * Completed        in-firm     training
                              promotion & extension services for
                              small businessesby 12/31/02.
                            * Established national        statistics
                              superintendency & upgraded scope,
                              quality & reliability of economic &
                              businessstatistics by 12/31/02.


 * Upgrading furm product and * Established quality training system
   process quality              & 50,000 training hours by
                                12/31/03.
                              * EstablishedStandards & Conformity
                                Assessment InformationCenter.
                              * Twelve government agencies with
                                accredited labs or certification
                                programs, or ISO 9000 certification
                                by 12/31/04.

 * Increasing firm investments * Completed at least 300 small
   in learning and innovation    business competitiveness plans and
                                 10,000 microbusiness development
                                 services by 12/31/03
                               * Established hub and 5 community
                                 IT-based BDS centers by 06/30/02
                                 and the remaining 5 centers by
                                 12/31/03.
                               * Established 4 new business clusters
                                 programs & completed cluster
                                 diagnostics, benchmarking &
                                 dissemination of results by 12/31/02
                               * Established a Business Social
                                 Responsibility       system       in
                                 collaborationwith the private sector
                                 by 12/31/01.
                                                                                                Page 33
Guatemala CompetitivenessProject                                                     Project Appraisal Document

                                             Annex 2
                                Guatemala Competitiveness Project
                                     Project Design Summary

                           2.1 Developmentof Effective Domestic Market Competition

Objectives

        Under the Project, the Government will prepare a draft law acceptable to the Bank which, if enacted, would
adopt a new regulatory and institutional framework for competition which, in a neutral and horizontal manner, would
increase the competitive behavior of enterprises and the structure of industry. Such a framework would include (l)
development of the Competition Commission's functional capacity, (2) development of a public information and
disseminationstrategy, and (3) implementationof a corporate competitionpolicy program. The Project would provide a
variety of technical services to help implementthis program.


Main sub-components

        Law, regulations,guidelines and internal documents. The Government would design a draft law and thereafter
present it to Congress for approval. If approved,the Project would prepare implementingregulations, and corresponding
guidelines and interpretationdocuments, which contain standards, methodologies, policy sequence, and administrative
proceduresfor the enforcement of the remedies and actions provided by the Law. These would provide mainly for (see
Appendix 1 for further details):

       *      specific clauses against cartels, distribution restraints, anticompetitivemergers/acquisitionsand abuse of
              dominantposition, both by private and public owned enterprises;
       *      mechanisms to guarantee a minimalist enforcement approach toward enforcement, with a focus on the
              actual exercise of market power and not on the mere holding of a position of dominance or monopoly; and
       *      clear provisions authorizing an independentcommission to provide an ongoing pro-competition advocacy
              role within the governmentto reduce entry barriers and market distortions created by public policies and
              regulations.

       Functional Capacity of the Competition Commission. The new Commissionwould develop a workable structure
and human resource strategy and profile, includingjob-position descriptions and organizational structure, giving due
weight to capacity utilization vis-a-vis capacity building; acquiring standard books, journals, reference materials,
documents,desk-top computers,filing software and other data-informationmanagement systems; establishing electronic
and other communication linkages with major competition authorities in the United States, Europe, Canada and some
other Latin American agencies; and strengthening local training mechanisms and with close monitoring of skills transfer
and in-housetraining.

          Training of the Competition Commission staff on conducting competition case analysis would be another
priority. Such analysisrequires a mix of legal and economictools to address issues such as definitionof relevant product
market, assessing barriers to entry, actual and potential exercise of market power, efficiencies and consumer welfare,
methods for collecting, safeguarding business confidentiality,and analyzing industry and firm level economic data and
evidence, determining fines, penalties, consent orders/decrees, and alternative approaches towards case resolution. To
this extent, the Commission would implement a program of short visits and staff internship programs in collaboration
with major competitionauthorities,i.e., the United States, Canada, Europe, Mexico or Peru.

         Public Information and Dissemination Strategy. The Government would organize a series of public
information-educationseminars, workshops, and conferences for the general public, leading government authorities,
representativesof the main business associations, representativesof the main consumer associations, and leading legal-
economic professional communities in the capital and major regional centers. An informed and healthy public debate
must be fosteredto address critical issues in the enforcementof these provisions. An assessmentmust also be made as to
current views are and what scope there may be to foster competition culture among business people, by providing
support to such communitiesto develop publications, and specialized forums. These activities would aim at generating a
consensus around best practices on the aspects of competitionlaw-policy.
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Guatemala CompetitivenessProject                                                       Project AppraisalDocument


          The program would also involve a strong emphasis on the creation of competition culture and ensuring
voluntary compliance with the principles of competition; incorporation of competition law-policy issues in academic
curricula, including at university level, with particular emphasis in managerial, financial, economic and legal career
streams; internalization of competition principles in business policies, strategies, structures, operations and culture;
effectiveadvocacy role by competition authorities,underpinned by sustained credibility of both policy and implementing
institutions.

          Corporate Competition Policy Program. The Government would design and execute a corporate program as
part of the efforts to ensure voluntary alignment of business activitiesto the law. The Program must recognize that most
businesses do seek to comply with competition policy and that they may benefit by implementing internal mechanisms
designed to assist them to remain within such policy.


Implementation

       The PRONACOM Management Unit's Competition Policy Component Leader would be responsible for
implementationof this component with the support of the following technical assistance program:

                    ActividadesEspecificas                              Cost                   Periodo Ejecuci6n
 Apoyo a la fase de diseflo y discusi6n del proyecto de ley de       US$ 50,000      6-8 meses fmanciado bajo el
 competencia                                                                         mecanismo de reembolso retroactivo
 Desarrollo de legislaci6n y reglamentos de implementacion,          US$ 150,000     4 meses a partir del establecimientode
 incluyendo guias metodol6gicas y normas de organizaci6n y                           la oficina
 funcionamientointemo de la oficina de competencia
 Adiestramiento/capacitaci6n del personal de la oficina de           US$ 100,000     durante los dos primeros affosdel
 competencia para seleccionar y resolver casos (visitas a                            programa
 oficinas de competencia y visitas de expertos)
 Contrataci6n de un experto-residenteque asesore en las labores      US$. 100,000    12 meses. 6 meses en el primer afio,6
 de fortalecimiento institucional, y de desarrollo e                                 meses en el segundo affo.
 implementaci6nde la agenda de trabajo
 Estudios aplicados en sectores fundamentales de la economia         US$ 100,000     durante los dos primeros affosdel
 (i.e., transporte, infraestructura, agricultura, servicios) con                     programa
 miras a desarrollar una agenda de trabajo y de manejo de
 prioridades
 Informaci6n y diseminaci6n al puiblico,gremios empresariales        US$ 100,000     durante los dos primeros aflos del
 y centros de formaci6nacademica                                                     prograrna
 Financiamiento para la adquisici6n de equipos de oficina,           US$ 200,000     durante el periodo de cuatro afios del
 infromatica, libros y materiales de referencia, e instalaci6n y                     programa
 operaci6n de sistemasde internet
 Financiamiento de los costos operativos de la oficina de             US$ N/A        durante el periodo de cuatro affosdel
 competencia (i.e., salarios, oficinas y servicios) sobre una base                   programa
 decreciente en un periodo de cuatro aflos
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                                                                                                            Appendix 1
                                         Competition Law: Content Summary

Objectives and Scope

*     Objective.The draft is conceived with the narrow objective of fostering economicefficiency and consumerwelfare
      through the protection of competition against anticompetitivebusinesspractices, and the reduction of government
      constraints to new entry of firms.

*     Structure. The draft is structuredwith substantiveprovisions as well as proceduralones. The areas covered include:
      horizontal and vertical anticompetitive practices between competitors and non-competitors, abuse of dominant
      position, merger and acquisitions, and competition advocacy to deal with govenrment measures affecting
      competition.

*      Coverage. The draft law applies to all public or private, national or foreign persons, firms and corporations
       performing economic activities, with respect to all conduct, agreements, acts or transactions relating to the
       production and marketing of goods and services. Territorially, the draft law applies to both practices effectively
       performed in the national territory and practices performed abroad but with effects on the Guatemalan markets. It
       has provisions granting primacy of the competitionlaw over other laws, regulations, or administrativemeasures as
       long as they collidewith or oppose its goals and scope.

*      Enforcement. The draft law also provides for enforcementmechanisms and procedural provisions dealing with the
       powers and standardsof the envisioned CompetitionCommissionfor the investigation,adjudication and sanction of
       cases.

Anticompetitive Practices

*      Horizontaland VerticalAnticompetitiveRestraints. The draft law prohibits two types of agreements and practices:
       (i) Horizontal or collusive agreements between competitors such as price-fixing, market allocation, bid-rigging,
       collective exclusion and foreclosureof competition; and (ii) Vertical agreements among firms not belongingto the
       same businesschain such as exclusivedealings,resale price maintenance,and territorial allocation.

*      Abuse of DominantPosition. The draft law proposes a prohibitionof abusive behavior shown in practicestending to
       drive competitors out of the market, obstruct their market access or establish exclusive privileges in favor of
       particular agents. Examples of such behavior include such as predatory pricing, tied-in arrangements, use of
       essential facilities,and exclusivedealings.

*      Mergers and Acquisitions. The draft law treats agreements relating to ownership, integration and other ways of
       controlling the entrepreneurial activities of competitors,at the center of which are mergers, acquisitionsand joint
       ventures under an abuse of dominance standard. It provides for an ex-post review if as a transaction restricts
       competitionor creates dominantfirms able to reduce, impair or prevent competition.

    Enforcement Mechanisms and Procedures

Government Agency Responsible. The draft envisions the creation of a Competition Commission, headquartered in
Guatemala City, with the possibility of having regional offices if necessary. The Commission, modeled after most
international pairs such as the US Federal Trade Commission,Canada's CompetitionBureau, or Mexico's Federal Trade
Commission,is conceived as an authority independentof Governmentcharged with exclusive law enforcementpowers.
This way the draft seeks to isolate the Commission from political or budgetary interferenceby interest groups. The
annual budget is preparedand submitted to Congressindependentlyby the Commission.

    Organization. The Commission,as drafted,is envisionedas a small office with high technical capacity. It would have
    an adjudicativedecision-makingbody composed by three commissioners,one of them the president, all appointed for a
    four-year term by the President. The president would represent the institution and provide leadershipfor education and
    procompetition reforms. An independent Technical Secretary, also appointed by the President for four years, charged
    with case investigationsand policy analyseswould supportthe Commission.

    Transparency.The draft ensures transparentproceduresfor selection of officialsto deliver services, includingclauses for
    confidentiality,conflict of interest, long-term commitment,independence,expertise and ethics.
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 Guatemala CompetitivenessProject                                                          Project AppraisalDocument


Check and Balances. The draft/model incorporates a system of check and balances that provides for both the right of
request before the Commission and before the judiciary the review of decisions, and access to informationon economic
or legal interpretationof the law according to contencioso-administrativo
                                                                        rules and procedures.
Accountability.The draft law requires the Commission to publish an annual report on policy, enforcementand budget
expenditures,and submit it to Congress for review.

Enforcement Powers: The envisioned Commission has two enforcement powers: investigation and adjudication of
anticompetitivepractices. A technical unit headed by a Director following procedural rules set out in the draft law
conducts investigations. The Secretary's findings and draft decisions are submitted to the Commissioners for fnal
adjudication. In addition, the Commission would have regulatory powers that include the authority to issue guidelines,
public notice, individual advice and other regulationsexplainingthe enforcementpolicy.

Competition Advocacy: The Commission would be also entitled to give advisory opinions on other government
agencies' actions, bids and regulatory frameworks for the privatization of public enterprises, and in general any law,
regulation or administrativeact that may impact competition.

Administrative Procedures. The draft law sets forth administrative procedures for conducting investigations.
Investigations might be initiated at the Commission's own initiative or at a private party's request. It also sets a
sequential time frame for proceedings, includinghearings, evidence gatheringand fnal rulings, includinginstruments to
address issues such as definition of relevant product market, assessing barriers to entry, gauging exercise of market
power, evaluation of efficiencies and consumer welfare. Furthermore,the draft law allows for supplementreliance on
laws on civil procedure.

Confidentiality. The draft law ensures that the Commissionthrough the opening of confidentialfiles of restricted access
safeguardscommerciallysensitiveinformation.

Decisions. The draft law foresees several case resolution alternatives. If the Commission's ruling finds that the
investigatedpractice violates the law, it may order the nullificationof the transaction; order the defendant to cease the
practice or impose specificconditions upon its continuation;request the elimination of the anticompetitiveeffects arising
from the practice, or impose sanctions. The draft law also allows the Commission to alternatively issue consent
agreements (negotiatednon-bindingsettlements)by which fmns commit themselves to cease specificpractices and adopt
competitivebehavior.

Penalties. Under the draft law, violations do not cause the imposition of criminal penalties. Rather the draft law
empowers the Commission to impose only administrative sanctions in the form of orders and meaningful fines. In
determining fines, the draft grants broad discretion. Fines vary depending on the type of infringement,the degree of
restriction on competition,the size of the market affected, the market shares held by the offenders and the impact of the
anticompetitivepractice on the relevant market. The Commissionmay impose fines ranging from ten percent (10%) to
fifteen percent (15%) of either the violating firm's annual sales or its assets during the previous fiscal year, whichever is
greater. It may also imposemeaningful fines on those offenderswho do not comply with the decisions.

Private Actions. Under the draft law, an interested party that considers it has been affected by an anticompetitive
practice may sue violatorsfor compensatoryand punitive damages. This remedy is an independentaction brought before
civil courts according to tort law. Admission of this action is dependent on a prior and favorablefinal decision issued by
the Commission.The amount of damagesis measure by the complainingparty and may be adjusted by the courts.
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                                          Guatemala Competitiveness Project

                                          2.2 Accelerating Foreign Investment

         Foreign Investment. Best practice indicates that an investmentpromotion agency is particularly important for
small  countries where domestic markets too small to be unable to attract significant foreign investment eg .Singapore
(EDB), Ireland (IDA) and Costa Rica (CINDE). In general,even the static (employment,foreign exchange)benefits that
result from investmentpromotion activities have been shown to exceed the typical costs of promotion. An investment
promotion programn provides a package of fiscal and non-fiscal support services to foreign investors also leads to
                     that
better returns for a country than a reliance on long tax holidays alone. The existing investment promotion function in
Guatemala is performed within the Ministry of Economy and is known as PROGUAT. Its existing structure, limited
resourcesand absence of national investmentpromotion strategy have made it difficult to conduct an effectivepromotion
function.

Objective

         A new FDI promotion council would be created under the Project that was more flexible than PROGUAT,
autonomousand of an appropriate size to carry out its mandate with efficiencywhile avoiding becoming unnecessarily
large or bureaucratic.It would have the legal status of a PresidentialCommissionto be appointedby the President of the
Republic. Once consolidated after three to four years, it could evolve toward a non-profit organization co-owned and
managedby the private and public sectors.

Activities

         Accordingto best practice, the council would conduct an appropriatemix of activitiesin the followingfour
areas:
         (i) Image-building-- promotionalactivitieswith the objectiveof changingthe image of a country to promote it
               as a place to invest;
         (ii) Investment Generation- firm specificresearch to identify potential investorsfollowed by person to person
               promotion efforts with decision makers;
         (iii) InvestorServicing - pre- and post-investmentservices criticalto expeditingthe investmentprocess and
               keeping existing investorshappy in order to retain investmentand encourageexpansion.(Nearly half of
               yearly FDI flows come from existing investors);and
         (iv) Policy Advocacy - to provide feedbackfrom private investorsand make recommendations the relevant
                                                                                                       to
               decision-makerssuch as departmentalagencies(eg. Ventanilla Unica and ministries representedin the
               Board of Directors) as to further improvementsin the climate for investment.

 Implementation

          Invest in Guatemala would report to a Commisioner and Board of Directors. The PRONACOM Management
 Unit's FDI PromotionComponent Leader would be responsible for implementationof this componentunder the Board's
 direction.

            Invest in Guatemalawould be implementedaccordingto the followingplan:

    Phase                   Acttvities                           Explanation
    Phase 1. Creation of    PresidentialDecree                   Establisheslegal framework for agency
    the Agency
         Month_16                   _1_
                            President appointsCommissioner
                            President appointsprivate sector     Appointed from list of 10 candidatessubmitted by CACIF
                            (2) members    of the board
                             Procurementof long-term advisor     World Bank to develop TOR and drive procurement
                                                                 process
                             General Manager is recruited        Board and Commissionerestablishesterms of reference
                                                                 for recruitmentof GM and superviserecruitment process
                             Recruitment of externalauditor      Board approves
                             Auditor develops audit procedures   Board approves
                             and manual
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GuatemalaCompetitivenessProject                                                               Project Appraisal Document

                                  General Manager recruits staff       Commissionersupervises process     -
                                  Develop businessplan, operating      Developedby senior managementand approved by Board
                                  procedures and manual
   Month 3 - 6                    Training for:                        Expert trainers and international consultant
   Developmentand                     1. Investorservicing             Training includes internal capacity developmentby
   Implementationof                   2. Image-building                participatingin the developmentof systems and materials
   Promotional                        3. Investortargeting
   Capacity                           4. Promotionalmaterials
                 _____________         5.   Fairs and missions
   Month 3 - 9                    Developmentof promotional            Promotionalstand, country brochure, sectorbrochures,
                                  materials                            video/CDRom, developmentof advertisements
   Ongoing                        Establishmentof ad hoc working       To addressspecific topics such as training needs, investor
                                  groups                               welcoming, trade fair preparation
   Month 3 - 6                    Developmentof Management            1. Investor-tracking
                                  InformationSystems                  2. Contact management
                                                                      3. Investorinformationdelivery
                                                                      4. Target company database
   Month 3 - 8                    Competitivepositioningand       Targetsper sector, subsectorwith greatest promotional
   Ongoing                        strategy studies                and clusteringpotential
                                                                  Targetsper sector to be included in businessplan
                                                                  (quantitativetargets and timeframe)
   Month 6 - 8                    Developmentof investordatabases Firm level targeting and promotionalstrategy
   Month 6 onward                 Investorservicing/ aftercare    Ongoingsurvey
                                                                       Policy feedback and recommendations
   Phase II                       Establish two foreign offices        One-on-onepresentationsto target companiesto generate
   Initiate proactive                                                  site visits
   promotion phase
   Month 13
   Month 8 (start                 Provision of full investorservices   Investor information
   provision)                                                          Briefngs and debriefings
                                                                       Investorsite visits
                                                                       Research and investigationon behalf of investors
                                                                       Investor facilitation
                                                                       Investoraftercare
   Month 9 (start)                Working agreementswith Foreign       To coordinatenetworking and promotion activities abroad
                                  Affairs
   Month 7                        Participation in fairs and shows     In line with strategic objectives in target sectors and
                                                                       regions
   Evaluation                     Independentextemal evaluationof Strategic planning as a result of the evaluation process to
   Month 35                       agency performance in compliance refine business strategy for future
                                  with objectives and goals
   Phase III                      Establishmentof third promoter   Expand promotional capacity in areas with greatest
   Expand external                                                 success
   promotion
   Month 37
   Month 37 onwards               Long term institutionalstrategy      Determinelong term institutionalstructure and funding
                                 I and sustainability

            The Minister of Economy, as Executive Board Member, and PRONACOMwill have special roles to play in
monitoring and evaluating the project in the first four years. The General Manager of Invest in Guatemala will be
responsible for providingquarterly reports and an Annual Report for the Board of Directors. The Minister of Economy
will also play a key role in overseeingthe coordinationbetween Invest in Guatemalaand Ventanilla Unica.

         InvestmentFacilitation. Most governmentsaroundthe world have established facilitatingagencies or "one stop
shops" that aim to reduce the difficultiesexperienced by investors in obtaining approvals from the various agencies and
departments. The models for investment approval range from no coordination - where investors are expected to
approach each relevant governmentdepartment or agency separately- to exclusive 'one-stop-shops' with total authority
to grant all approvals,permits and licenses. More common is the "single window" (ventanillaunica) form of the one-
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Guatemala CompetitivenessProject                                                        ProjectAppraisal Document

stop-shopmodel where ministries allocatea person to the one-stop-shopbut retain control and authority. This has been
more successful, particularly where the "ventanilla unica" is constitutedby "account executives" who are responsible
for following through with each investor and have considerableauthority to facilitate approvalsby relevant government
departments.

         Guatemala currently has a Ventanilla Unica located in the Ministry of the Economy, with budget for 6 staff
members (3 of which are vacant, due to recent governmentchanges). Over the past four years there have been significant
improvementsin the number of steps required to register a company (from 24 to 8 steps, reducing time from up to two
years in some cases to a maximum of 3-4 months). Despite these considerable improvements,a number of bottlenecks
continue to plague the process for investors. These have been identified both in terms of cross-country benchmarks as
well as through the survey of over 75 investors and officials interviewed in Guatemala. The bottlenecks include
consularisation of documents, registration of immovable property/land, work permits and various special regime
approvals.

Objective

         The Project proposes a process to streamline administrativeand procedural barriers to improve the investment
climate. The project will also upgrade the skills of the staff of the Ventanilla Unica and other relevant agencies in line
with internationalbest practice in investor servicing.

Main Sub-omponents and Implementation

  Phase              Activities                            Explanationand expected outputs
  Phase I --         Analysis                              Preparationwork is done, which described the administrative
  completed                                                processesfor approvalof investmentsand identifiedthe major
                                                           bottlenecks.
  Phase II:          Evaluateand prepare sponsorsfor       Find solutions and targets; identificationof sponsorsfor change;
                     change                                and gain committment
  Month I to 2       Procurementof Phase II                This includes:(i)- process consultants;and (ii)- databasesand
                     consultants                           systems consultants.
  Month 2 to 4       Contract consultantsto design and     The internationalconsultantswill report on progressevery three
                     implementprocess of change in all     months. A final presentationwill be a detailed study of the
                     systems                               improvementsand impact,using measurementinstruments
                                                           developed during phaseII includingregional and international
                                                           benchmarks.
                                                           The informationconsultantswill assess the systems aspects and
                                                           make recommendationsfor a comprehensiveinformationsystem
                                                           based on best practice.
  Month 1-6          Recruit 3 senior level staff "account Upgrade investorservicing skills.
                     executives"and train all staff and    Training of local counterpartconsultantsto ensure such capacity
                     delegates from ministries.            is built for future changes.
  Month 3            Establish multi-rninistrytask team,   The leadershipof Invest in Guatemala (Commissionerand the
                     with the leadershipof Invest in       Board of Directors) is key in order to push the implementationof
                     Guatemala.                            changes.
   Month 3-6         Identify and prepare the sponsorsof Developpilot groups involved in identifiedbottleneck areas
                     the change (including individual      which will demonstratelevel of commitmentto change and
                     who is overallmanager/champion), implementation.
                     local counterpartsand relevant
                     agencies.
   Month 5-9         Procure informationsystems            Design information systemin accordancewith expert
                     consultants                           recommendationsand pilot round tables.
   Month 6-9         A study that evaluatesthe potential    The implementationplan will will examinethe major themes and
                     for change and recommendsnext         barriers that are preventingchange, recommendmethodsto
                     steps.                                 addressthese and develop indicatorsto evaluate impact.

   Phase III:         Design strategy and action plan for    The principal result will be the changes and simplificationto the
   Month 9            change program.                        existing procedures.Identify goals and benchmarksfor each step
                     _______________________________         accordingto best practice in the region and interviewswith
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 GuatemalaCompetitivenessProject                                                        Project AppraisalDocument
   Phase              Activities                         Explanationand expected outputs
                                                         governmentagencies.
   Month 10-36        Implement and monitor the changes The followingtools will be used to assist in the change:
                                                             institutionalizethe use of accountexecutives,roundtables
                                                        and incognito inspections
                                                            provide training for managers and employers on how to
                                                        service customers effectively
                                                            establishkey performance indicatorsand weights for
                                                        comparison of performance
                                                            recommendfinancial and non-financialincentive
                                                        mechanismsfor staff
                                                            lift the level of responsibilityby using various tools such as
                                                        suggestionboxes and newsletters
                                                            create competitionbetween agenciesthrough use of
                     I________________________________  publishedcomparativetimes and costs for licenseapplications
  Month 9-18          Implement the new information     Implementationof the informationsystem should complement
                      systemand train staff             and enhancethe new changes in procedures.

         The Ventanilla Unica would report to Pronacom,the Minister of Economy, and Invest in Guatemala. Reports
will be made quarterlyto the Minister of the Economy. The Ventanilla Unica will need to work closely with Invest in
Guatemala and the other relevant ministries to ensure coordination at the technical level and to benefit from the
leadershipof the Board of Directors of Invest in Guatemala. Monitoring indicators specificationwill be a key output of
Phase 2, which will drive the implementationphase (3) and specifytargets for the entire component. These indicators
need to be determined based on two factors: (i) regional best practice as a target; and (ii) the best possible outcome
given Guatemala's specific regulatory context. Phase I will be used as a base for a target of 30% reduction in
processingtimeby 2002 (mid-term review) and by 50% by project completion.

         To improve Guatemala's market position for exported goods (including related production of inputs for such
exports),the Project would also provide for analysesof the legal,regulatory and institutionalframeworkof this and other
modes of transport in order to identify barriers to entry and, if needed,regulatory and institutionalchanges to reduce the
cost and time of transport of exportedgoods. In the area of maritime transport,this is expected to involve developing a
legal framework for maritimecommerce, supportinginstitutionaldevelopmentof a national maritime administrationand
technical assistanceto help shippersbetter understand the freight markets, consolidate their shipments and improve self-
security measures for their freight shipments. In the area of the inland supply chain, the Project would foster strategic
recommendations for addressing constraints at firm, government and cluster level and the establishment of key
performance indicators for monitoring and evaluation, as well as technical assistance to be provided for regulatory
reforms, institutionaland strategy developmentas determinedfrom these recommendations.
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                                         GuatemalaCompetitivenessProject

                                                    Trainingand InformationMarkets
                         2.3 DevelopingIn-Firm SkiOls


Objectives

         This component would address the need for increasing the demand and supply of enterprise training in
Guatemalathrough greaterprivate sector participation. When training is provided or sponsored by employers,the issue
of matching training supply and demand does not arise. Firms train only for needed skills. In most countries,the largest
share of training is provided by employers during employment, either in-house or from external training institutions,
equipment suppliers and buyers, industry groups, and joint-venture partners. Given the limited reach of the public
training institution,INTECAP,to meeting the training needs of small enterprisesand firms in the interior, it is clear that
the private sector will have to take on greaterresponsibilitiesfor meeting its growing skill requirements.

         With changes designed to increaseprivate sector "ownership"of training systems, create an impartial systemof
accreditation of training institutions, and establish proper guidelines regarding the administrationand control of the
payroll levy grant, it is anticipatedthat within a timeframe of three years, a larger number of privatetraining institutions
will develop and a greaternumber of enterpriseswill provide formal training to their employees. Small enterprisesthat
are currently under-served will have greater access to training providers and training resources through better
administrationof the levy-grant and through the matching-grantscheme. Micro enterpriseswhich lack basic training in
simple administrativetasks will be better served under the micro net program. Better dissemination of informationto
enterpriseson the availability of training will increasethe demand for training.

          The demand for and investmentin in- firm training would be further enhanced under the Project by expanding
the total resources availableto formal sector businesses. In addition to reforming the levy system, the Competitiveness
Learning and InnovationProgram (CLIP) will help motivate, on a 50-50 sharing basis with participating private firms,
producer associationsand clusters increasedindividual investmentsin in-firm staff training as part of broader firm efforts
to increase their internationalcompetitiveness.

Main sub-components

              Assess and adjust as needed the levy-grantsystem. The demand and supply analyses indicate a low level of
ownership of the training system in Guatemala. There is low use of services provided through the levy and a low level
of knowledge of the services that are provided. There is also some evidence to indicate a low level of confidence
amongst enterprises in the public training facility. To increase private sector participation, under the Project, the
Governmentwould analyze the current framework and design and implementa plan acceptable to the Bank to improve
the training levy application and administration,includingvia the possible creation of a national training council to (a)
provide policy direction aimed to increaseprivate participationin industrytraining and oversee managementof the levy-
grant system; (2) bring about a substantial simplificationin the regulations,procedures and administrationrequired for
firms to use the levy-grantfunds and an increase in its operationalefficiency. The reforms of the payroll levy systems
would be supported by financing in the first year of an estimated $300,000 from the World Bank loan, diminishingby
$100,000 in each successiveyear over a three-year period to total $600,000..

          Expand informationand outreach to helpfirms increasetheir capacity to invest in in-firm training. Information
 about and access to in-firm training, including the payroll levy in Guatemala is poor. Enterprises need information in
 order to be convincedto participate and invest in training programs and in order to be able to access programs. Under
 the Project, (1) a strong information campaign would be undertaken targeted particularly to the smaller firms which
 would (a) inform them of the benefits of in-firm training, (b) inform them of both the public and private sources of
 training, (c) inform them of the process by which such training and funding can be accessed; and (2) a system of
 extension services would be established and implementedwhich help individual firms to assess their in-firm training
 needs, establish in-firm training policies and managementfacilities, and identify existing training provider options in
 order to acceleratethe absorptive capacity of firms to increasein-firm training investments.

     The development,piloting and expansion of this training promotion and extension services to increase firm-level
 absorptive capacity to invest in training would be financed $1,000,000 of the Bank loan over a three-year period. It
 would cover the cost of promotion and consulting servicesto help introduceand design in-firm worker training systems.
                                                                                                    Page 42
GuatemalaCompetitivenessProject                                                          Project AppraisalDocument

         Diversify and develop the sources of qualif ed training suppliers in the private sector. The supply of training in
Guatemala is relativelyweak and lacks diversity, in no small measure due to monopoly control over the levy fund and
the apparent inaccessibilityof the 80% rebate provision for most enterprises. There has been no significant entry of
private providers into the training market. Enterprises lack choice when seeking training, and are discouraged by the
double payment that would be involved in using providers other than INTECAP. Other mechanisms for industry
direction and leadershipin training do not exist. There is limited capacity for industryneeds in training to be expressed
at the policy level. If created, it is expected that the National Training Council would with INTECAP take steps to (1)
encourage firms now paying the training levy to use this obligation as a credit against approved in-firm training
programs, and (2) substantially broaden the use of private providerseligible to supply in-firm skills training under levy-
grant funding by accreditingqualified private sectortraining providers.

          Upgrading the national statistics system. Under the Project, the system would undergo regulatory
improvementsby designing and taking promotional activities to encourage adoption of a National Statistical System
Law, followed by a program to prepare specific regulations to implement the Law. Ifthe draft law is enacted, the
existing National Statistics Institutewill be redesignedas a National Statistics Superintendency. Work under the Project
would include preparation of a restructuring plan, with detailed organization, functions, and working statistical
methodologies,and a campaignto communicateto stakeholdersand the public such changes. It would also include the
contractingof technical advisors in the fields of census and surveys, economicstatistical systems, and demographicand
social studies to prepare sound technical organizationalunits and starting working programs for the Superintendency. It
would further include facilities upgrading, equipment and computer systems modernization and staff training of
approximately40 staff who will manage and operate the Superintendency.


Implementation

          The PRONACOM ManagementUnit's Training Component Leader would be responsible for implementation
of this component. The component will be accomplishedover a three year period. It benefits from one year of project
preparationthat identified the main constraintsto private sector training and recommended policy measures required to
increasetraining in firms. Execution milestones (I) development of guidelines regarding the administrationand control
of the payroll levy grant system, and (2) developmentof a system of accreditationof training providers. Total cost of the
component is $1.6 million, to be spent in technical support and in-firm training promotion and extension services
respectively, and on revisions to the payroll training levy system. These costs cover equipment costs for support
facilities and technical upgrades, staff and consultantfees, travel costs and technical assistance.
                                                                                                Page 43
GuatemalaCompetitivenessProject                                                      Project AppraisalDocument



                                        Guatemala CompetitivenessProject

                                 2.4 Upgrading Firm Process and Product Quality

          Implementation of effective quality principles and complementary standards and conformity assessment
practices are integral elements of today's global economy. Too many Guatemalan enterprisesand governmentagencies
do not fully appreciate the role of quality in this economy or its markets. Quality is associated with additional costs
rather than less waste, fewer "seconds", and increased profits. A lack of demand for improved quality within domestic
markets is adversely affecting the overall competitiveness of Guatemalan suppliers. The few product certification
programswhich exist have high transactionalcosts and in many sectors insufficient credibility to enhance Guatemala's
reputation as a producer of quality goods and services.

Objectives

          This componentwould facilitate implementationand assure sustainability of a comprehensiveNational Quality
                                 to
System (NQS) fully conformning internationalcriteria and adoption of effective quality practices by both the private
and public sectors. The stature of the NQS and Guatemala's enhancedreputation for quality will strengthen its position
in negotiating trade pacts and mutual recognition agreements, and the application of quality practices would make
Guatemalan goods more competitive in global markets while improving profit margins of enterprises adopting these
practices. The component addresses the need for significant improvementsin quality consciousnessto assure sufficient
demand for standardsand conformity assessment servicesto sustain the NQS and institutions being establishedthrough
Swedish, Taiwan, German, and UNIDO grants. An outreach program would assist 2500 small enterprises to improve
their operations. More than 50,000 student class hours of general quality training would be provided. It is noteworthy
that this component does not address supply-side institutionbuilding. That is being accomplishedthrough the bilateral
grants. As this component focuses almost entirely on demand-side quality initiatives, it is not paced by passage of
legislation establishingsupply-sideinstitutions or the frameworkwithin which they will operate.

Main Sub-components

                 Training is sorely needed throughout Guatemala in basic and advanced quality practices. A major
portion of the component addresses these needs at various levels. Assistanceprovided under the Project would train
small businesses and selected government entities in quality assurance practices, with special outreach to smaller
businesses using proven practices tailored to their particular needs. A Standards and Conformity InformationCenter
would be established,not only to comply with WTO obligations, but also to provide a wide range of export-oriented
services to enterprises and government entities. Resources of the information center would be accessible through
MicroNet. A cohesiveprogram will be developed for certificationof non-traditionalactivities to enhancetheir credibility
and international competitiveness,including (i) sustainable management practices for tropical woods used in exports
under ISO 14000 environmentalmanagement systems, (ii) sustainable tourism, and (iii) social assessments against
standards for child labor and factory work conditions, particularly in maquila export industries. Awareness and
promotion of quality and opportunities afforded by the project would be accomplished by revitalizing the Guatemalan
Organizationfor Total Quality and enabling it to carry the qualitymessagethrough the country.

         Technical assistance would be provided to enable Guatemala to implement its recently defined modern,
coordinated, outward-focussednational quality system. This assistance complements Swedish, Taiwan, German and
UNIDO grants, which focus on institutional elements within the NQS. Study missions would enable governmentand
industry leaders to observe best practices of some very successful NQSs so the most appropriate practices can be
incorporated in Guatemala's system, including incentivesto encourageadoption of effective quality practices within the
public and private sectors. Government agencies,which have major stakes in the NQS, would have opportunitiesto
observe how counterparts in other countries use public and private standards and conformity assessment resources to
achieve their statutoryobjectives. Governmentagencieswould be allocated funds for training and technical assistanceto
upgrade their conformity assessment operations particularly to implement effective quality practices and accredit
laboratories and certification programs. Private enterprises can access the project's Competitive Learning and
InnovationProgram matching-grantfund for these purposes.

        The potential benefits of these initiatives would only be realized if the owners and chief executives of
Guatemalanenterprises recognizethe link between qualityand competitiveness;are motivated to take action within their
operations, and provide incentives and preferences to suppliers that implement effective quality practices. Because
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GuatemalaCompetitivenessProject                                                          Project AppraisalDocument

Guatemala is lagging in all aspects of standards, conformity assessment,and quality-related training and services, it is
essential that governmentincentives and/or preferencesbe introducedto get the attention of the private sector and "jump
start" Guatemala's pursuit of quality. It is also importantfor the Governmentto demonstrate it is really committedto
quality by implementingqualitymanagementsystems within its own agencies.

Implementation

         The PRONACOMManagementUnit's senior Quality Coordinatorwould be responsible for implementationof
this componentover a three-year period. The total cost of the Quality Componentis $2.0 million. More than 75 percent
will be invested in training, study tours, and informationdissemination. Twenty four percent is allocated for technical
consultancy,primarilyby foreign experts. Expenditureswithin Guatemalawill exceed 67 percent for a range of services
including stipends to Guatemalan trainers while they are being trained; salaries to field agents working with small
enterprises and tuition subsidies for these enterprises; and public relations services and expenses associated with
promotion of quality awareness. Less than $9,000 will be expended for computer equipment associated with databases
for the informationcenter, and standard referencematerials to support laboratory accreditation. Based on experienceon
similar projects it is anticipated that more than 60 percent of the Competitiveness Learning and Innovation Program
matching-grantfund may be utilizedby private enterprisesto implementquality-relatedinitiatives.

            The overarchingobjective of nearly every subcomponentis to develop demand for quality services to assure
the sustainabilityof the institutionsproviding these services. Each training subcomponent is based on training trainers
so that Guatemalan enterprises and governmentagencies can utilize qualified domestic trainers rather than depend on
itinerant consultantsand trainers or sendingstaffto other countries for training. Seed money is provided not only to train
trainers, but to acquire classroom-provencurricula and course material. Operational training costs includinginstructors'
fees will be met through conventional tuition fees. Key factors in assuring sustainability are the quality awareness and
promotion campaignand a system of preferences and incentives for suppliers to improve quality. The Standards and
ConformityAssessment InformationCenter should develop a reliable revenue stream by selling very useful information
and services. However, the center will also fulfill Guatemala's obligations under the WTO Agreement and serve as the
nation's "Enquiry Point." In this role it must compile, maintain, and distribute lists of Guatemala's mandatory standards
and regulations. The center will also be called upon to assist ministries and sectors in a variety of ways particularlyto
prepare for trade negotiations. Together, these will increase demand for this training and other quality services. The
special initiative to small enterprises should be self-supportingafter three years if it follows the path developedin Brazil
where small enterprises form self-managed regional chapters within a larger national organization. There will be
occasions, however, where special projects may be beyond the resources of individual chapters or the national
organization.
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GuatemalaCompetitivenessProject                                                      Project AppraisalDocument

                                        Guatemala Competitiveness Project

                              2.5 Competitiveness Learning and Innovation Program

          The CompetitivenessLearning and Innovation Program (CLIP) would help in immediate terms Guatemalan
frms to substantially boost growth, employment and income, particularly through highly beneficial export-oriented
investmentsthat increase integrationwith the global economy. The CLIP would provide non-reimbursableco-financing
from the proceeds of the Bank's loan to help implementinvestments in pre-competitive entrepreneurial learning and
innovation programs---mainlyat the firm level and particularly by small firms and microbusinesses. The CLIP has a
strong economicrationale as a public policy instrumentfor co-investmentin learning, much the same as the country's
formal educationsystem, and is patterned after successfulprograms commonlyfound in OECD countries, advancedEast
Asian countries, and many other client-countries of the World Bank. A CLIP is often preferred to purely public and
centralized support, as it represents a public-private sector partnership in which resource allocation and service
contracting is made at the market level on a demand-drivenbasis without targeting. The program is expected to have
strong economic benefits over about 3 years in incremental exports, workers' income and firm profits, and fiscal
benefits from corporatetaxes, payroll taxes and domestic VAT which are likely to substantially exceedthe cost to the
Governmentof the Program.

CLIP Policies and Operations

        Temporary support and exit policy. The Program is deliberately a temporary effort to reduce market failures.
Consequently, (a) funding is provided only once to a frm (though several grants may be provided to implementone
Competitiveness Plan) to help overcome such failures and facilitate market development of international business
support services, and (b) the Program itself would terminate after its 3-year implementation period. Experience
elsewhereshows that, once the Program has introducedfirms to the benefits of the activities being supported,they will
recognizetheir full value and the asymmetry of information and under-valuationof the benefits of internationalbusiness
supportservices will be substantiallyalleviated;

         CLIP Core Services. The CompetitivenessLearning and Innovation Program would provide technical and
financial assistancemainly to smaller private sector companiesand to micro-business enterprises,with the objective of
assisting them to improve their international competitivenessand integration with the global economy. To facilitatethe
                   of
rapid development this marketplace, the CLIP woulduse a combinationof four interventions:

        e    active promotion to the private sector of the benefits of using business development services to build
             competitiveness;

         -   continuoustechnical assistance,free to individualfirms, on how to (i) develop a competitivenessplan, (ii)
             decide on service usage and apply to Window I or 2; (ii) select service providers; and (iii) implementthe
             plan and use the results;

        *    WindowI grantflnancingfor enterprises,associations and clustersto support through matching grants the
             business development activities of small and medium-sized firms, funded by US$5 million from the
             proposed World Bank loan to the Governmentto co-finance activities and projects that would improve the
             competitivenessof their operations; and

         *   Window2 grant financingfor low-income microbusinessesto support through a voucher system the use of
             development services by micro-enterprises,funded by US$1 million from the proposed Bank loan to co-
             financethe cost of basic business developmentservices.

Window 1 for small firms, associations and clusters

     Objectives. Window I (WI) would offer grant support and related services to about 300 firms over about a two-year
commitmentperiod. These services would be in respect of client-designedprojects that would tend to require from 3-12
months to complete; as a result, the whole program would be completed within about three years. Eligible firms would
be those in the industrial, agro-industrial,agriculturaland services sector. The goals of WI would be:

    *   to facilitate the preparation of firms' business development plans, through the provision of free technical
        assistancein that process
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 GuatemalaCompetitivenessProject                                                           Project AppraisalDocument

    *    to co-finance 50% the execution of these business plans through the offer of non-repayablematching grants,
         reimbursableto WI clients for eligible expenditures

    *    to develop the private sector support infrastructure,by offering similar services to sector associations,cruster
         committeesand commercialservice providers.

     Coverage. A fund of US$5 million for WI would meet the anticipateddemand, based on an assumed average grant
size of US$ 17,000 per firm, of an estimated 300 productive firms in the manufacturing, agro-industry and services
sectors and would be expected to be committed and disbursed over a period of three years. Underpinning this average
would be a client segment with a larger average grant size (perhaps as much as US$ 30.000) for the larger and more
organized firms, with a smaller grant size (less than US$ 10.000)for less developed firms. The actual usage of the total
amount should, however,be determinedonly on the basis of actual demand; there would be no pre-allocation or system
of reservation of funds for any particular sector or activitytype.

      Level of externalflnancial support offered per transaction The level of public sector support has usually been
set at 50% of the total cost of each frm's CompetitivenessLearning and Innovation Plan. There are several reasons
justifying this approach:

    *    to help motivate frms to increase competitivenessin the face of significant barriers perceivedparticularly by
         inexperienced  firms as imperfectionsin the businessenvironmentand high risks of enteringnew markets (domestic
         or intemational);
    •    to reflect the fact that the benefits of such plans tend to have both privately appropriated benefits and
         externalitiesof benefitto others in society;
    -    to ensuresignificant              by
                              contributions fims to the costsof such plans in orderto
    -    reduce the likelihoodof irrelevantor low-valueservicesbeingprocured,whichmay otherwiseresult from providing
         free serviceswhich are not criticallyevaluatedby the fim
    *    increasecommitmentof firmsto the successfulexecutionof projects,and
    -    reduce the need for and cost of detailed oversightof the use of public funds in the course of plan implementation
         and utilizeinsteadan er-post assessmentof performance   focusedon outcomes.

     Basicfirm eligibiliy and co-investment requirement Eligibility would require that a firm is willing to invest at
least 50% of the firm's own resources to cover the costs of a well-defined and time-bound agreed Competitiveness
Learning and InnovationPlan designed to increasethe internationalcompetitivenessof existing products,or develop new
products or new markets. In this sense, participation in the Program is self-selecting,ensuring a firm's commitment to
good implementationand prompting invest of its own resourcesin entrepreneuriallearning.'

     Firm size and Income level. Firms accessing WI of the Program would be limited to small and medium-scale,
which would be assured by virtue of the requirementsthat (a) a total of US$50,000would be the maximum available to
any single firm for all activities---experienceshows, however, that the average co-investment amount per firm is not
likely to exceed an average of about $15,000-20,000,and (b) only firms with fewer than a total of 50 employees would
be eligible.

     Eligiblepre-competitive activities. Activitieseligible for financing under Wl are primarily professionalservice fees
for advice, information,light product and production process adaptation, study tours, product quality and environmental
certification,and training. Salaries, other recurrent costs (such as office rental or advertising)and capital goods, among
others, are not eligible.

    OperatingSequence- Window I wouldoperatebasicallyaccordingto the followingII steps:


5 Program eligibility would not distinguishbetween domestic and international market orientation. For export-oriented
activities, such grants are consistentwith the WTOframeworkand are non-actionablesubsidies as defned in Article 8 of
the Agreement on Subsidies and CountervailingMeasures. They are non-actionable because they are not specific, as
provided in Art. 8, para. I(a): specificity under the WTO rules typically involves a targeting of geographic regions or
economic sectors, and such targeting will be expresslydisallowed under the Program's OperationalManual. Even if a
charge of specificity were made, the activities to be fnanced by the Program would fall under the exceptions provided
for in Art. 8 para. 2, principally the exceptionfor research activitiescarried out on a contract basis for industrial research
and for pre-competitivedevelopment activity. In appropriate cases, the exception for adaptation of existing facilities to
new environmentalrequirementscould also be applicable.
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Guatemala CompetitivenessProject                                                      Project AppraisalDocument

    (1)      the Programwould be widelypromotedthroughoutits life until all fundsare fullycommitted.
    (2)      interestedclients (includingmanufacturingand processingfirms and groups of firmns,       commercial service
             providersand private sector organizations)    would prepare proposals for grant assistance, with support and
             advicefrom the Contractor
    (3)      these proposalswouldbe validatedby the contractorfor conformitywith a framework of rules approvedby
             the Governmentand PRONAMin advance
    (4)      a letter of commitment(GrantAgreement)      would be signedby the Contractorwith the client,oncethe project
              is confirmned being compliantwiththe rules governingthe program
                            as
    (5)      the client would then execute the project and would be entitled to claim reimbursementof 50% of eligible
              expenditures presentationof a claim
                             on
    (6)       a claimfor reimbursement    would consistof concreteevidenceof the completionof the activityin question(or,
              in many cases, a pre-definedstageof such an activity),togetherwith supportingdocumentation
     (7)      the Contractorwould validatethe completionevidenceand documentationand would reimbursethe Client by
              electronictransferto the client'sbank account
    (8)       all disbursements  made by the Contractorwouldbe subjectto independentauditby a privateaudit firm
    (9)       the disbursement   wouldbe made from an imprestaccount(the Grant Account),whichwould be openedby the
              Ministiywiththe Contractoras sole signatory
     (10)      a depositwould be placedin the GrantAccountby the Government,      amountingto the anticipatedvalue of one
              month's expecteddisbursements
     (I1)     the GrantAccountwould be replenishedwhen the value of disbursements        would have reduced to 50% of its
               initial value and the audit of those disbursementwould take place immediately,so as to limit the extent of
               disbursements   pendingauditto a value not normallygreaterthan, say,half a month's averagedisbursements.

      Typical outputs: trained human resources in strategic planning, product development, market standards and
regulations, and quality certification; new information access about overseas product demand & import regulations,
product design, quality and safety standards; packaging & labelingrequirements; competitors and competitive position;
distribution & promotion strategy options, etc; specialist advice on production restructuring measures needed to meet
intemational design, cost and quality control requirements,secure patents, trademarks, licenses as needed and royalty
agreements; and new overseas business partnerships with potential buyers, foreign investors, suppliers, private
associations,and other business partners in more advancedmarkets.

     Plan supervision and reimbursement Under WI, quarterly personal visits and monitoring reports of plan
implementationwould be made by Program management, reimbursement (not upfront disbursement) of 50% of total
qualified expenses underthe Plan, and certificationof all expendituresby qualified independentauditors. PRONACOM,
with the help of qualified independent evaluators, will make a quarterly progress and an impact assessment of the
Program.

     PerformanceIndicators. A preliminaryvision of the benefits of WI the CLIP would include:

     *      sustained increasesin domestic and exportperformance by participatingfirms to an overallincrementalvalue
            of at least US$ 60 million computed from the three-year average performance of participating firms from the
            year followingentry to the Program

      *     modernization of management systems by at least 20% of participating firms, for example, in terms of
            obtaining and maintaining international quality certifications, strengthening of management structures,
            undertakingsignificant,or planned managementtraining programs

      *     introduction of new technology or processes by at least 10% of participating firms, in terms of cost-
            reductions,productivityimprovementprograTns processre-engineering
                                                        or

      *     improvementsin marketingtools such as packaging, promotionalmaterials, adaptation of promotion using the
            World Wide Web, development

      *     enhancement of marketing organization and management, such as the appointment of new agents and
            distributors,appointmentof full-timemarketing or export managementteams of departments.
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Guatemala CompetitivenessProject                                                         Project AppraisalDocument

Window 2 for microbusinesses

    Window 2 (W2) would offer voucher support to micro-enterprisesover a three-year period totaling US$1 million.
The target group would be established micro-enterprises(employing less than five people) with potential for growth.
The goals of W2 wouldbe:

    *    to establish and manage a program of voucher support to the micro-enterprisesector in respect of basic business
         development services

    *    to offer service vouchers to about 10,000micro-enterpriseswith an average value per enterprise of US$ 25

    *    to motivate and pre-qualify at least 50 service suppliersto participatein the Program

    *    to monitor the operation of the programagainst formal quality assuranceobjectives,policies and procedures

    *    to conduct systematic audits of the transparency and professionalism of all phases of the system, from
         promotion through to service delivery, including the actual participation of beneficiaries as claimed by the
         submissionof the voucher.

    Eligible Services. Entrepreneurswould receive a limited number of vouchers (five or six, but in any case, not more
than ten for all types of services) from the Program's centers. Different voucher types would be issued (with different
face values) for different types of eligible service. These services would comprise pre-qualified business development
services in:

    *    businessplanning
    *    product and process development
    *    managementand technicaltraining
    i    marketing and sales
    e    firm support services,such as market and technicalinformation,human resources, finance and administration.

     The vouchers would each have a fixed money value and could each be used only to contribute to the cost of one
eligible service type that would have been pre-qualified for participation in the Program. In order to maintain a control
over the allocation and utilization of overallprogram resources, the vouchers should also have a fixed period of validity
- of the order of six months. Requests for the replacementof expired vouchers should be honored until the last months
of the life of the Program.

     The face value of the vouchers would be set lower than the lowest price available for the service type, usually so as
to require a contributionby the client of at least 20% of the price of the service. In the case of services priced at higher
levels,the proportion of the cost contributedby the client would be correspondinglyhigher. As a result, service suppliers
would be under pressure to keep the price of their services low. On the other hand, because they would have to
contribute part of the price in advance from their own resources, clients would be keen to seek the best quality offer
available. Experience indicates that the value of the vouchers as a proportion of the price ranges from 50% to 80%. In
either case, the contributionof the client is seen as sufficientto ensure commitment. Experiencealso suggests that it is
useful to include a provision in the design of such programsfor a declining value of voucher for secondand subsequent
applicationsby clients.

     Pre-qualification of service suppliers. The focus in the identificationand pre-qualificationof service suppliers is to
establish a high level of dependability in the services to be supported by the program. Word-of-mouthreferral by early
participants is a key factor in ensuring long-term success; as a result, early identificationof quality services relevant to
the commercial development needs of the target firms (micro-businesses)is critical. In practice, such programs pre-
qualify a large number of alternative suppliers of services to the micro-enterprises, in order to ensure a minimum
technical competencein the delivery of the specific service. The process of pre-qualification should continue after the
initial phase, in order to encourage participation by a continuously growing number of service providers, thus
strengtheningcompetitionin the services sector and improvingthe qualityof servicesavailable to micro-businesses. The
voucher program itself does not support the development of services by accredited suppliers, but such development
would nornally be eligible for support under a Matching Grant type of program, if one operates alongside the voucher
program.
                                                                                                 Page 49
Guatemala CompetitivenessProject                                                      Project AppraisalDocument

     Outreach. The numbers involved require the extensiveuse of intermediariesin reaching the target audience of the
programto the extent required by the overall objective of the window. These intermediarieswould includeNGOs, civic
groups, non-bank and bank credit programs aimed at the sector. However, the process of voucher issue would not be
delegated to third parties, in order to maintain a defensible level of consistency and quality assurance in the process.
Instead, a team of ten Guatemalan agents, hired by the management contractor,would be responsible for the issue of
vouchers to micro-entrepreneursin Guatemala City and other areas of the country. The tasks of the agents would be to
(a) promote the voucher program to the micro-businesscommunity through intermediaries and information campaigns,
and (b) assess applicants for compliance with eligibility criteria and issue vouchers to them. Each agent would issue
vouchersto about 100entrepreneurseach week

    OperatingSequence Window 2 would involvethe followingbasic sequenceof operation:

      (I)  the voucher opportunitywould be widely promoted throughNGOs, service suppliersand credit institutions
           servingthe micro-business  sectorthroughoutthe life of the Program,until all funds are fully committed.
      (2)  ten agents of the Program,all trainedin the assessmentof applications,would issue vouchersin accordance
           with specificqualityassuranceprocedures
      (3) two senior executivesof the programwould be responsiblefor supervisingthis team of agents and auditing
           their performance
      (4)  at least fifty service providers would be pre-qualifiedto participate in the Program, under a promotional
           campaignconductedby the seniorexecutivesand wouldbe subjectto continuingaudit by them throughoutthe
           lifeof the Program
      (5) voucherswould be redeemableby the serviceproviderson completionof the deliveryof the service
      (6) the Contractorwould validate the completionevidence and documentationand would reimbursethe service
           providerby electronictransferto the client'sbank account
      (7)  all disbursements  made by the Contractorwouldbe subjectto independentauditby a privateaudit firm
      (8) the disbursement    would be made from an imprestaccount(the Voucher Account),which would be openedby
           the Ministrywith the Contractoras sole signatory
      (9)  a depositwould be placedin the VoucherAccountby the Govenment, amountingto the anticipatedvalue of
           one month's expecteddisbursements,   basedon a planpreparedby the Management       Contractor
      (10) the VoucherAccountwouldbe replenished      when the value of disbursements    wouldhave reducedto 50% of its
           initialvalue
      (11) the audit of those disbursement would take place immediately, so as to limit the extent of unaudited
           disbursements a value not normallygreaterthan half a month's averagedisbursements.
                           to

      Disbursement     procedures. The micro-business client pays his / her cash contribution before the service is
delivered and if satisfied,pays the balance due at the end by handing the service provider the voucher,endorsed by the
signature of the client. Vouchersthat have been so endorsed are redeemableon completionof the service deliveryby the
provider. On receipt of a claim by a service provider,the ManagementContractorof the program validates the voucher
and the signature of the entrepreneur to whom it was issued. He then reimbursesthe service providerto the value of the
voucher.

       Monitoring and supervision of operations and impact The success of voucher programs is based on their
continuingrelevanceto the needs of the clients. The justification for their operation is based on the market-drivennature
of the support they offer to the development of a market in business services for micro-enterprises. The continuity of
that relevance must be ensured through a process of monitoring the patterns of usage of the services supported by the
Program - both to encouragethe development of services demandedby the clients and to avoid the abuse of the system
to develop inappropriateservices, or fraudulentclaims based on no service delivery.

       Experience of voucher programs to date shows that the pattern of usage varies widely between accredited
providers. Effective program management assesses patterns of usage of vouchers to influence the pre-qualification
process applied to service providers and to give feedback to all service providers on demand patterns. This monitoring
process should also monitor the impact of the program in developing secondary demand for these courses, which is not
supported by vouchers. The role of the management in this regard should also monitor the impact of programs on the
participants' conduct of their business through a regular process of surveying practice modifications by them following
the completionof the service offered.
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GuatemalaCompetitivenessProject                                                         ProjectAppraisal Document

Management and Supervision.

   Management. The Program would utilize an independent private contractor for Program client assistance and
management, selected in accordance with the Bank's Consultant's Guidelines and reporting to a separate Supervisory
                                                       6
Committeesetup within the PRONACOMManagementUnit. The principaltasks of the contractorwouldbe to:

    *    promotethe Programservicesand benefitsto the targetaudiencesin the enterpriseand micro-business
                                                                                                       sectors
    *                                                                       plans and build commitmentin participating
         provide assistanceto interestedfirms to preparetheir competitiveness
         frms by providinghigh-qualityservicesto them
    *    appraiseand approveindividualapplicationslessthan or equal to $30,000equivalent
    *    monitorresultsand impactof the programon the operationsof participatingenterprises
    *                                   of               the
         meet the reportingrequirements PRONACOM, Governmentof Guatemalaand the WorldBank.

    Managing the overall Program would be the responsibilityof a PrograrnManager, who would report on policy and
performanceto the SupervisoryCommittee. His operationalresponsibilitieswould be:

    *    key client contact
    *    direction and operationalsupervisionof the Program
    *    establishmentand maintenance of a Program quality assurancesystem to internationalstandards
    *    supervisionof the financial control of Program operations
    *    internalaudit of these operations
    -    relationshipswith the independentauditors of financialdiligence

The other members of the managementteam would be a financialaccountant and a computersystems manager. In orde
to execute the Program efficiently and effectively, the contractor would be required to establish regional windows to
service clients outside the area of GuatemalaCity.

         A key aspect of management is the personal nature of the service suppliedby the Program to its clients through
its professionalstaff. The professionaland supportstaff wouldassist firmsin the developmentof their plans and also, would
operatethe Window I by assistingclients avail of its benefits. This team should possess a range of experienceand expertise
that would be relevant to the profile of beneficiaryfrms. It would operate primarily as advisersto firms, helping them
identifytheir best options for improvingthe competitiveness their frms and for export development As a result, the
                                                               of
                                and
relationshipbetween the teamn their clients should be supportive,rather than judgmental. Ideally, they should see
themselvesas having a role to help firms benefit from the Program,by contnbutingto the analysis of the strategicissues
facingthe firm and identifyingthe best optionsfor addressingthese issues. The role wouldnot in any sense result in the team
memberbeing a consultantwho would solvethe technicalor marketingproblemsfacinga firm

         Program managementwould consistof two SeniorTechnicalConsultants(STCs), one Guatemalanand one with
specific international experience in programs comparable to the CLIP, who would be widely experienced in the major
functional areas of business operations and would have specificexperience in the sectors in which PRONACOMclusters
currently operate. The role of the STCs would be to:

         *   advise and assist client firms and organizations on the preparation of their business diagnostics and
             developmentplans
         *   provide detailed specialistadvice to client firms and organizationsat the stage of preparing their projects
         *   assist clients in identifying not only solutions to the client's development problems, but also, sources of
             these solutions
         *   present project proposals for co-financing to the Program Manager (and the Executive Committee of
             PRONACOM,if required)
         *   monitor and assist clients during project implementation
         *   validate the technical compliance of project execution with the approval agreed between the Program       and
             the Client.

Each STC could be expected to manage a portfolio of about ninety clients in a year - at varying stages of the client
projectcycle.

6As a conditionof loan effectiveness,the Goverrnent would adopt the Program OperationalManual, satisfactoryto the
Bank, and hire the contractor.
                                                                                                   Page 51
GuatemalaCompetitivenessProject                                                         Project AppraisalDocument


        Supervision. The Supervisory Committee would consist of the Executive Director of PRONACOM, a
representative of the Vice-Ministry of Micro, Small and Medium Businesses of the Ministry of Economy, and a
representative of the private sector membership of the PRONACOM Executive Committee. The main role of the
SupervisoryBoard would be to focus on the (1) selection of the contractor,(2) adoption of the Operating Manual and
amendmentsas necessary, (3) regular monitoring of Program implementationby the contractor,and (4) evaluation of its
impact.In addition,where grant requestsby recipients exceeded$30,000 equivalent per investment, such requestswould
be submittedfor review and non-objection by the Committee.

          Programs that are well-supervisedhave significantlybetter records of success than others. The nature of the
supervisionis critical,to ensure that it is and remains sensitiveto the objectives of the Program and not to other agendas.
It is also important that it be constituted in a way that permits it to operate efficiently and transparently. Key design
elements in successfulProgram supervisionwould include:

    *                                                            in
         establishmentof a system of management-by-objectives, the form of annual work plans and targets, which
         would be reported on quarterly
    *    a primary focus on policy guidanceand quarterlyreview of performanceand results against such objectives
    *    delegation of operations and decision-makingon individual grants to the contractor operating under detailed
         policies and procedures- preferablydefined to ISO standards
    *    quarterly ex-postreviews of operationaldecisionson the part of PRONACOM

      Financial Controls. An important issue would be the need to achieve the correct balance between the control and
efficiency aspectsof the operations of the Program. Clearly,as the sovereignborrower of the funds to be used to finance
the Program,the Government of Guatemala has an obligation to ensure that these funds are properly allocated and not
misused in any way. At the same time, the experience of matching grant programs has shown that the application of
public sector financialadministrationnot only does not achieve this goal but, in many circumstances,it can contributeto
its frustration. At best, the adaptation of public sector procedurescan lead to a cumbersomeloss of efficiencythat is at
variancewith the needs for an efficient and transparent system of fnancial control. Best international practice in these
programshas shown that these types of problem are most easily avoided by:

    *    establishinga supervisory Board of mixed private-publicsectororigins
    e    selectingthe members of that Board at a high level of experience and integrity
    i    insisting on the Management Contractor establishing appropriate quality assurance and financial control
         mechanisms and obtaining the approval of the Board for them at the start of the Program (sometimes in
         conjunctionwith World Bank supervisors)
    *    subjectingthe ManagementContractorto regular private sector audit of financial performance
    *    undertaking (usually in conjunction with World Bank supervisors) an annual ex post audit of overall
         professional,technicaland financialperformance
    *    establishinga special Grant Fund bank account in a commercialbank, with the ManagementContractoras the
         sole authorized signatory; the grant funds would be lodged to that account on a phased basis, always ensuring
         that funds wouldbe availableto meet the needs of clients

To increaseProgram transparency,all grant approvalsand rejectionswould be posted daily on the Program's web page.

Expected Socio-EconomicBenefits.

         Qualitativelyspeaking, at least 300 mainly smaller private firms, associationsan clusters would be expected to
benefitunder Window I and 10,000 microbusinessesunder Window 2 for Project investmentsin entrepreneuriallearning
and innovation. Beneficiaries are expected to accrue domestic and international market awareness and know-how,
forming the basis for a change in business behavior, which in many cases will lead to increase their international
competitivenessand outward-orientedgrowth. In immediateterms, this change would be reflected in new domestic and
international business market partners---market and product information sources, suppliers, private associations,
potential buyers,potential foreign investors, etc.

        The expected economic outcome of these outputs will be prepared during Project appraisal. In general,
however, it is expected that the CLIP would produce incremental domestic and non-traditional processed export output
substantially exceeding current levels and make a substantial and visible positive impact on worker income and
employment. They can be to be felt in (i) higher value added (mainly wages and profits) in products and new
                                                                                      Page52
        Competitiveness
Guatemala            Project                                                                Document
                                                                             ProjectAppraisal
            (ii)                                                                               and
employment broaderdomesticand exportmarketlinkages(moreproductsexportedby more fimns), (iii) more
linkagesto domestic                                                                      &
                    producersas indirectexporters(shareof local raw materials,intermediate finishedgoods in
productcost). Tbis incrementaloutputwould also generate           tax
                                                       additional revenuesexpectedto exceedthat the total
grantvalueof theCLIPin the fourthyearof the Program fromthe following                       payrolltaxes-paid
                                                                      sources:(1) incremental
           and
by domestic exporting                          (2)
                        firmsandby employees, corporate    income  taxes,and (3)valueaddedtaxesgenerated by
incrementalemployee  consumption                                                   and
                                 outlays(assumedto be about90°/. of remuneration taking an averageVAT
recoveryrate).

                                                                                 for
        Thesedirectbenefitsshouldbe the basisin manycases fornew capitalinvestment exportproduction  and
                    by
also be accompanied indirect spillovereffects on the domesticeconomy,as the international  know-howand
experiencegainedis acquired                         the
                            throughindirectexporters, mobility trainedpersonnel, entrreneurship, and
                                                              of                 new
                effectsof newproductdesigns,
the demonstration                            technologies        in
                                                         embedded new imported            etc.
                                                                               equipment, The Project
shouldalsoprovidea demonstration                        and
                                  effectto policy-makers other domestic-market                        for
                                                                              firmsof the opportunities
               by
growthprovided increased             with
                           integration theglobaleconomy
                                                                                                  Page 53
GuatemalaCompetitivenessProject                                                        Project AppraisalDocument

                                                                Project
                                        Guatemala Competitiveness

                                 2.6 IT-Based BusinessDevelopmentServices Pilot


         BDS markets are often highly developed in advanced economies. In Guatemala, as most elsewhere in
economicallydevelopment countries, business development services are few and only cover an estimated 39,000 low-
income small business entrepreneurs---lessthan 5% of the market. Existing BDS providers consist mainly of local
universities, the government (INTECAP), specialized management institutions and NGOs. Most universities are not
oriented toward entrepreneurs, do not have non-degree business programs, especially for lower formally-skilled and
lower-income segments of the market, and are not making full use of current distance learnig systems. The
Government's INTECAPprogram does focus assistance on business production issues (though little on management)
but, as most require at least a 6t" grade education, only about 23,000 of its participants are among the low-incomelow-
literacygroups.

         Informationtechnology (IT)-basedBDS offer a very substantial potential to accelerate small business market
access and competitiveness,but require the development of higher value-added information,analytical and marketing
services, and eventually e-commerce capability---just to keep the IT gap from growing rather than shrinking in
Guatemala. IT-basedBDS are available only in modest quantitiesand highly concentratedin the modern sector. Several
commercial for-profit Internet cafes and similar organizations exist which offer basic IT services. Clientele consist
mainly of a mix of students, entrepreneurs and tourists which are among higher educated and upper income groups.
Basic business services are available in a variety of the main urban locations, but support only elementary marketing
needs with basic copying services, letterheads, cards, posters, and brochures. Much more limited are services for
packaging, labeling,fax services,and fast mail services.More limited still among small businesses are access to personal
computers and printing facilities. In addition, few entities provide access to multiple services in one location and most
services are not accompaniedby skilledhuman assistanceand guidance on content and quality---avital input particularly
for those with lower formal education. In fact, most of this entrepreneurialgroup does not even know of the existence of
such services. In the absence of a concertedeffort to expand access to IT servicesfor smaller businesses, large firms and
high-spending,sophisticatedconsumerswill continueto expand the "digital divide".


Objective

          The immediateobjective of MicroNetwould be to raise earnings of at least 25,000 low-incomemicro and small
businesses by increasing their business skills, market access and operational competitiveness.MicroNet, using a for-
profit private-publicsectorjoint venture model, would deliver integrated communicationsand information technology-
based businessdevelopment services (BDS) with strong community outreach and fmancially sustainability. MicroNet's
target clientele would be two large markets: (i) very low-income microbusinesses, the majority of which are the
indigenous Mayan population and female, with low literacy and numeracy levels, only about 2-3 years of primary
education, and limited if any Spanish; and (ii) more complex micro- and small businesses (light manufacturing,
wholesale/retail commerce, and professional/personal services) having sound literacy and numeracy skills, Spanish
facility and with up to 20 employees. Direct consultationshave been held with potential clients among Mayan groups,
which are reflected in MicroNet's business plan (first draft prepared) and would enable such clients to expand beyond
their own low-incomeeconomies to establish market linkages with higher income segments of the national and, for
some, international markets, and to increase competitiveness.The success of MicroNet would be determinedby actual
client outreach, MicroNet fmancial sustainability, and microbusiness development impact on growth client base,
productivity,sales and net income.


Main subcomponents

         The basic strategy behind MicroNet is to help drive small business growth by expanding connections with
higher income segments of the national and international market and building business management skills. Design
services and delivery to match key client characteristic---abilityto pay, prevailing education and experience, gender,
sector, work environment and availability---andexpand mutually reinforcing services having a strong developmental
impact at low-incomelevels.

        MicroNetwould progressivelybuild 3 service lines: (1) to help build microbusinessknow-how and information
technology skills, it would provide (a) business management skills to groups of small business entrepreneurs via non-
                                                                                                 Page 54
GuatemalaCompetitivenessProject                                                       Project Appraisal Document

formal education techniques, (b) information technology training, including an overview of BDS to promote
understandingof their economicvalue, and (c) distancelearningand conferencingon small business issues in Guatemala
and internationally; (2) to facilitate access to new higher income markets, it would provide assisted access to (a)
telephone, fax, photocopies, scanning, e-mail, mail/shipping, computer word processing & printing services, and (b)
coaching and materials, designs and techniquesto increase market penetration through advertising (posters, handouts,
long-distanceadvertising and mail-order), labeling and packaging; and (3) to increase business competitiveness,offer
self-helpand coached(a) productivityworkstationswith software wizards for simplified business planning and problem-
solving in production, fnance/credit and marketing for business expansion; (b) business networking to locate suppliers
and price trends, other sources of business informationand advice, organize group discountpurchasingof raw materials,
etc., and (c) electronic commerce for information exchanges with suppliers, customers and creditors, web page
promotional outreach to new markets, and business-to-businesscollaboration in product design, materials supply and
product distribution.

         MicroNetwould consist of a network of 10 community-basedcenters and a supportinghub, linked to existing
community infrastructure for strong involvement. It would be operated by experienced private sector management
supported by governing partnership of successful local business partners, BDS NGOs and the Government. It would
include a strong staff training program and performance pay incentives, combined with a vigorous BDS promotion
program.

Implementation

          MicroNet has been developed with strong public-private collaboration and, as a pilot initiative, would be
launched as a PRONACOMpublic-private foundation having major synergies for both parties: for the Government, to
exercise its role to encourage (i) broad public awareness of the development value of IT, (ii) private participation in
creating IT applications and local content for lower-income groups, (iii) extension of IT services outside of the
Metropolitanarea, and (iv) increased competition in the local IT services market at reasonable prices. For the private
sector, it would engage successful business managementexperienceand draw upon the capabilities of business-oriented
NGOs, such as AGEXPRONT, ANACAFE and Genesis Empresarial, which have substantive skills and business
interests in the success of the microbusiness sector, and provide new opportunities for local IT providers of intemet
services,programming and local content to reach new markets.

          Initial total capital costs for the network are estimated is US4.0 million, with an additional $0.4 million to
support research and development of other IT services supporting MicroNet's objectives and operations. The Project
would help to implement the MicroNet business plan by mobilizing technical expertise and providing risk-mitigation
capital through the Government to support the costs of pre-operatingand non-operatingdevelopment expenses, and the
transfer of skills and technology. Thesewould include investmentsin developmentof local content in MicroNetservices
and its delivery systems, staff and management training costs, promotion costs to increase awareness of BDS and IT
applications,other non-recurrent costs associated with pilot learning and experimentation, and technical assistance for
MicroNet operations,qualityassurance and impact evaluation.
                                                                                                  Page 55
GuatemalaCompetitivenessProject                                                         Project AppraisalDocument

                                         GuatemalaCompetitivenessProject

                               2.7 BusinessCluster & Social ResponsibilityProgram

                                                         7
         The initial development of integrated clusters in Guatemala---to date in textiles/clothing, agro-industry,
forestry and tourism---was initiated following the study managed by Michael Porter of Harvard University on the
competitivenessof the Central American region. The Guatemalanapproach is distinct from most other countries, relying
mainly on regional and local specialists to conduct a first-round overall diagnostic of competitive strengths and
weaknesses of a cluster and to benchmark it internationally. This more "bottom-up" approach has been largelyeffective,
and has promotedcluster developmentin a locally-rooted and cost-effectivemanner.

          One of the most significant achievements of the cluster program in Guatemala thus far has been the bringing
togetherof private and public sector players who rarely interacted among themselves and certainly not in as coordinated
a manner. In forestry, for example, bringing businesses,environmentalists,engineers and other actors from the sector
around a single table has been a significant achievement. In agro-industry, it has brought large and small producers
together; in clothing, the assemblers and raw material providers are working together on how to produce finished
products that have a higher level of value-added for export than their individual components. Less successfulhas been
the regular involvement of small business. PRONACOM is consequently planning to strengthen the number of
facilitators to manage the cluster development process and to establish "micro-clusters" to involve a larger number of
small businesses.

Objective

        The objective of the cluster program is to stimulate growth, employment and equitable development in
Guatemalain order to reduce poverty in the mediumto longterm. Clusterinitiatives raise the ability of the private sector
to export, invest and create employment opportunities,particularly among SMEs and currently unemployed citizens.
Consequently,indicatorssuch as employment,value-added, exports,growth and others - at sector level - will be the key
performance indicators (KPIs) in the medium to long term. These will be detailed at a cluster level and monitored
regularly by the clusters and Management Unit of PRONACOM. The Project would also support nascent efforts in
Guatemalato promote the development of a culture of business social responsibility (BSR) within the objectives of the
Project;namely, toward lower-incomebusinesses and related households.

Main sub-components

          The Project would concentrate on extending the initial cluster experience to other parts of the economy, with a
projected 2 new clusters or micro-clustersper year over two years. To do so, the PRONACOMManagementUnit would
initial contract service providersto (i) continue broad promotion and disseminationprograms and encourage use of and
provide training in the methodology(100% Bank financing), (ii) facilitatethe organization of new clusters and undertake
initial cluster diagnosticand benchmarking assessments(50% financing), and (iii) assessment and recommendationsof
cross-cluster issues in public policy and institutions constrainingcompetitiveness(100% financing). Once a cluster has
commitment to proceed, performance will be linked to definitionof the cluster, initial workshop and establishmentof a
representative and inclusive Cluster Coordinating Committee; completion of relevant diagnostic studies that identify
current level of competitiveness of firms in the cluster within the national and global context; workshops to validate
analysis and draw up strategic vision and work program for the cluster, including recommendationsfor action at the
micro-, meso- and macro-levels;and establishmentof task groups to carry out the work program with clear performance
indicators.



 7 A"cluster" has the following essential interactive elements: export-oriented manufacturing and services industries,
 their supplier industries (material inputs, trade, distribution and other services), and basic infrastructure systems that
 underpin it (human resources, technology, finance, regulatory environment and physical infrastructure). Cluster
 programsbring together in working groups key private and public sector actors from the cluster to carry out a process
 which mainly involves: (1) initial diagnosis of international competitiveness levels, (2) benchmarkingthese findings
 against trends elsewhere in the world, (3) formulating a longer-term competitiveness vision and strategy, and (4)
 implementinga near-term specificchange program.
                                                                                                  Page 56
GuatemalaCompetitivenessProject                                                        Project AppraisalDocument


         In addition, where PRONACOM itself or clusters express interest in cross-clusterbusiness environment issues
(eg., labor mobility, technical barriers to trade, etc.), the Project would finance economy-wide diagnostic work and
policy/institutionalrecommendationssimilar to those prepared under the Japan PHRD Grant. The results of work on
business environment issues would be brought to the attention of appropriate government authorities through normal
channelsor via PRONACOM'sExecutiveCommitteeheaded by the Vice President of the Republic.

         RegardingBSR, it connotes activitiesundertaken or sponsored by leading Guatemalanbusinessesthat are not of
a charitable nature, but simultaneously advance their longer run corporate strategic interests and specific community
interests. PRONACOM,with inputs from the Council of Foundations,individual business leaders and the Bank, would
anchor this initiative. Under the Project, PRONACOM would first try to develop through local and cross-country
exchanges,workshops,case studies and consulting support a commonunderstanding of the definitionand scope of BSR,
then establish a focus for employing BSR in support of small business development, particularly in the form of
generating subcontracting relationships between small and larger firms. This initiative would be extended via
collaborationin internationalBSR events and a public communicationscampaign.

Implementation

         The PRONACOM Management Unit will continue to be responsible for the day-to-day management of the
cluster and BSR programs and report directly to PRONACOM Executive Committee. It will work closely with the
privates sector, other competitiveness units (eg. CIG, Agexpront) and the various Cluster CoordinatingCommittees.
This Project component will run over two years. The results milestones would be (1) ongoing cluster initiatives with
demonstrableresults as per above, (2) 2 clusters launched per annum with support from PRONACOM,(3) diagnostic
and recommendationsto address 1-2 cross-cutting issues per annum, (4) 2 seminars per annum per cluster held to
showcaseresults and propose further action plans, (5) quantifiableimprovementsin key indicators of competitivenessas
defined per sector eg. exports, investment,productivity, efficiency,(6) subcontractingrelationshipsor other commercial
relationshipsgenerated between small lower-income firms and larger firms, and (7) ongoing support from private sector
and governmentat highest level .

          The total estimated cost of this component is $1.5 million, of which $1.0 million would be financed from the
Bank loan and the remainder by matching contributionsof participating clusters or BSR groups and their private sector
members. Existing clusters and BSR groups could draw on the CLIP for further support once initial funding is used.
T'his could include support for ongoing analytical studies eg. benchmarking surveys, process support eg. facilitation
skills training, appointmentof cluster facilitator/coordinator,outreach and access support eg. for SMEs and rural cluster
role-playersto attend meetings and address specific issues of interest to them, projects with academic and research
institutions in establishing training programs, academic curriculae, research programs and intemships, technology
transfer eg. Joint purchasing of new technology or training, marketing and communication strategy development,
internationalor regional visits to similar clusters, and productivityand trainingprograms at shop-floor level.
                                                                                                                                                                      Page57
Guatemala            Project
        Competitiveness                                                                                                                                                     Document
                                                                                                                                                             ProjectAppraisal

                                                                                        Annex 3

                                             Guatemala Competitiveness Project
                                                                         EstimatedProject Costs




     Increasing domestic market competition                                                                                                        0.4                 0.4         0.8

     Accelerating foreign investment                                                         _30_                                                     .0                4.8         7.8

     Expanding in-firm skills training & informationmarkets                                                                                          1.3                1.3        2.6

     Upgradingfirm product and process quality                                                                                                      0.9              __11           2.0

     Sub-total                                                                                                                                      5.6                 7.6        13.2

     CompetitivenessLearningand Innovation Program
        (i) Window 1 - matching grant financing                                                                                                     5.0                5.0         10.0
        (ii) Window2 - voucher grant financing                                                                                                      2.0                            2.0
        (iii) client assistance and management contract                                                                                             0.8                0.2          1.0

     IT-based business development services                                                                                                         2.2                2.1         4.3

     Business clusters and social responsibility                                                                                                    0.8                0.7          1.5

      Sub-total                                                                                                                                     10.8               8.0         18.8
                                                                                                     ;   ~~            ~ ~  _______.               _____                      __    LI

      Bank loan capitalized front end fee                                                                                                                              0.2          0.2

      Total Project Cost (incl. contingencies)                                                                                                      17.5               15.8        33.3
                        ..    ..   ..        jz......._              ____   M [   ........     _..       _._..        ___          _    ........           __|_...
                    .        '">        -1:-<'.......................-                        .3         e3t'    't13i'*i-......3
                                                                                                                  't ''i.i,R">'
                                                                                                                  .........................
                                                                                                                   s:$';' '
                                                                                                                       3lt<'<i
                                                                                                                                                          Page 58
Guatemala CompetitivenessProject                                                                                                               Project AppraisalDocument

                                                        Annex 4

                               Guatemala Competitiveness Project
                                                Financial Summary
                                                Years Ending December31
                                              (US$ Millions,2001 base year)



    Domestic m & arket qalt tion
      Firprdc        competi
                     roes                                   041                          0.3                                        0.3                                  01                                   0.8
    Foreign investment                                      2.0                          1.8                                        1.7                                  0.6                                 4.3
    Skillstraining & informationmarkets                     1.2                          1.00.26
    Firm product & processquality                           0.5                          0.7                                       0.82.
    Firrn investmnents learning& innovatio
                      in                                    4.                            . _                                      331. _ ,
                           , __
    IT-based businessdevelopment services                   0.9
                                                                           _                                              _         _ _                  _ .          _, _           _ .         .......     .............   ~~~~~~~~~~~~~~~~~~~
                                                                                         1.4                                       1.4                                   064.3
    Competitiveness-building process                        0.3                          0.6                                       0.6                                                                        1.5
            ~~~~~~~~~~~~~~~~~~~.... ........
                            . ..... .......                                                        ......
                                                                                                       ...... .......... .
                                                                                                                __,                            ....._-
                                                                                                                                                    ._.
                                                                                                                                                  _.. ................ .......
                                                                                                                                                                             .............. .......
     PRONACOMManagementUnit                                 0.3                          0.3~                                      0.3                                   0.2                                1.1
     Bank loan capitalizedfront end fee
                                                            ....................          ~~
                                                                                          ~
                                                                                     ..............
                                                                                               ....
                                                                                               ..............
                                                                                               _. _....._.................. . ........................
                                                                                               .......                                                   .... ..........................................................
                                                            0.2                                                                                                                                             0.2
          Total Project Costs                               9.9                       11.4                                         8.8                                   3.2                               33.3


          ntRD o.3                                                                       0.4                                       0.5                                   2.3                                  1.3
         %total                                                 4                          4                                       66                                       16_                            ~~~~~~~~~~~~~~~~~~~~~~
                                                                                                                                                                       . ... . . . .. _ _ _ .. . ............. .. ..
                                                                                                                                                                                                   ._,
                                                                                                                                                                                                   .
                                                                                                                                                                                                   ,
                                                                                                                                                                                                   ..
                                                                                                                                                                                                   _ ... .. ...
                                                                                                                                                                                                   ................


       Private sector fees & rnatching                      5.2                          3.2                                       2.50.                                                       ~i13
       ~~ total
         %                                                  2
                                                            5___                         28                         -2_                                      _12_                               ~3
       Central Governiment                                  0.3                         0.4                                        0.5                                                                   1..7----i--
        °/total
         %                                          _        4 __                        4-                          -_             6 -_                 -
                           .__ _ .        .             _                                                    _                      _                    _,. _ 1 _
                                                                                                                                                               _                              -----.............
                                                                                                                                                                                                      ............~~~~~~~~~~~~~~~~~~~
                                                                                                                                                                                            ....................................................

          Total Financing                                   9.9                    _3.211.4                                        8.8                                                                     33.3
                            00gXXWEW
                                _ ESX              m        ,               m
                                                                            98M0tE}M,0d,'s't,
                                                                               Page59
        Competitiveness
Guatemala            Project                                                         Document
                                                                      ProjectAppraisal

                                          Annex 5
                          GuatemalaCompetitivenessProject
                  Procurementand FinancialManagementArrangements

     A. ProcurementArrangements

     Procurement for the proposed project would be carried out in accordance with World Bank
     "Guidelines:Procurement UnderIBRD Loans and IDA Credits", published in January 1995
     (revised January/August 1996, September 1997 and January 1999); and "Guidelines:
     Selection and Employment of Consultants by World Bank Borrowers" published in January
     1997 (revised in September 1999 and January 1999), and the provisions stipulated in the
     Loan Agreement.


      1) Procurementmethods: The methods to be used for the procurementdescribed below,
      and the estimated amounts for each method, are summarized in Table A. The threshold
      contractvalues for the use of each methodare fixed in Table B.

      Procurement of Works

      Works procured under this project would include the 10 microbusinessdevelopmentcenters
      totaling US$1.2 million equivalent. Contracts for a portion of these works (with an
      estimated value of US$0.8 million) will be procured following National Competitive
      Bidding procedures (NCB), using Bank-issued Standard Bidding Documents(SBDs agreed
      in advance with the Bank. Small works, estimatedto cost less than US$150,000 equivalent
      per contract,up to an aggregateamount of US$0.4 million, may be procuredon the basis of
      at least three quotations received in response to a written invitation, which will include a
      detailed description of the works, including basic specifications, the required completion
      date, a basic form of agreement acceptable to the Bank, and relevant drawings, where
       applicable.

       Procurementof Goods

       Goods procured under this project would include vehicles, computer equipment,
       promotoinalmaterials and office equipment totaling US$3.2 million equivalent. To the
       extent possible, contracts for these goods will be grouped into bidding packages of more
       than $150,000 equivalent and procured following International Competitive Bidding
       (ICB) procedures, using Bank-issued Standard Bidding Documents (SBDs). Contracts
       with estimatedvalues below this threshold per contract and up to an aggregateamount of
       US$1.5 million may be procured using National Competitive Bidding (NCB) procedures
       and standardbidding documentsagreed with the Bank. Contracts for goods which cannot
       be grouped into larger bidding packages and estimated to cost less than US$25,000 per
       contract, up to an aggregateamount of US$0.5 million, may be procured using shopping
       (National /International)procedures based on a model request for quotations satisfactory
       to the Bank.
                                                                                 Page60
GuatemalaCompetitivenessProject                                        Project AppraisalDocument


       Selectionof Consultants,Training and InformationServices

      Consulting,training and informationservices will be contracted under this project in the
      following areas of expertise: domestic competition policies, in-firm training systems,
      foreign direct investmentpromotion, quality standards assessment and conformity,micro
      and small business development services, informationtechnology, and business cluster
      and social responsibility programs. These services are estimated to cost US$20,700,000
      equivalentand would be procured using Bank StandardRequest for Proposals.

      Firms
              All contracts for firms would be procured using QCBS except for small and simple
      contracts under the Competitiveness Learning and Innovation Program estimated to cost
      US$50,000equivalent or less up to an aggregate amount of US$9,500,000equivalent. Given
      the large number of small contracts expectedunder this program, for which maximum sub-
      project grant is $50,000, contracting responsibilitywill be undertaken by a client assistance
      and managementcontractor selectedunder QCBS and satisfactoryto the Bank. The bulk of
      the contracts financed by this Program are expected to be for training and advisory services
      provided by consulting firms, training institutes and NGOs to the beneficiariesof the grants.
      Since beneficiaries(grantrecipients)will be from the private sector and beneficiarieswill co-
      finance the services themselves, procurement of these services from firms and NGOs may
      follow commercialpractices acceptable to the Bank. Selection of services of the Project's
      Client Assistance and Management Contractor will be by QCBS in accordance with Bank
      guidelines.

      Individuals
      Specialized advisory services would be provided by individual consultants selected by
      comparison of qualifications of three candidates and hired in accordance with the
      provisions of paragraphs5.1 through 5.3 of the ConsultantGuidelines,up to an aggregate
      amount of US$3,700,000.

      Operational Costs: Sundry items, office rental and utilities, and incremental salaries
      would be financed on a declining basis and would be procured using the PIU
      administrativeprocedures which were reviewed and found acceptable to the Bank. The
      Bank will finance initially US$60,000 per month in the first year, declining annually in
      accordancewith an agreed plan.

      2) Prior review thresholds: The proposed thresholds for prior review are based on the
      procurementcapacity assessmentof the project implementingunit and are summarizedin
      Table B. In addition to this prior review of individual procurementactions, the plan and
      budget for the PIU OperatingCosts will be reviewed and approvedby the Bank annually.


      B. Assessmentof the agency's capacityto implementprocurement

      The PRONACOMManagementUnit would be responsible for ensuring that procurement
      is carried out in accordance with the Bank's Guidelines for Procurement. The Unit
      would double its current eight full-time positions by adding specialists coordinators for
      the areas of domestic competition, foreigninvestment,in-firm skills training and product
                                                                                                                        Page 61
GuatemalaCompetitivenessProject                                                                              Project AppraisalDocument




                         Programa Nacional de Competitividad
                                                     Relaciones de Trabajo e
                                                         Institucionales


                                                             |Dimedl6n    ltV       |




                                                                                A   !Xw G OM
                                                                                      do



                         odo
                      Ioord=      I      Com.dor             I     C.ordo.dordo           .ons*Sup.dI        C*,mddnoor/r.n
                do Gomunicaol .          de Clut,.                Cul,ms Ngodo
                                                                       do                 Mac                    do MiW
                                                                                                                 dens




       quality. The Unit will conclude an internal contract with the Ministry of Economy's
       project managementunit which is experiencedin procurementand financial management
       to be responsible for the execution of Project procurement decisions taken by the Unit.
       This staff would provide consistent support and oversightof the process in collaboration
       with technical staff having responsibilityfor selectionof consultants and procurementof
       goods and works. The Project would include, in addition to the procurementprocedures,
       the Standard Bidding Documents to be used for each procurement method, as well as
       model contracts for works and goods procured on the basis of three quotations or
        shopping.


                                      Unidad de Gesti6n y Administracion Financiera
                                                 Relaciones de Trabajo
                                                                          Director Ejeoutivo

                                                                 Auditores
                                                                  Extemos


                                                                  Lideres de            Gerente de Gesti6n
                                                                 Componentes             y Administraci6n
                                                                                            Financiera




                                                       1"1
                                                                             Page62
Guatemala
       Competitiveness
                   Project                                           Project
                                                                           Appraisal
                                                                                  Document

     An assessment of the capacity of the PIU to implement procurement actions for the
     project has been carried out and was approvedby the Regional ProcurementAdvisor on
     October 17, 2000. The assessment reviewedthe organizationalstructureof the proposed
     PRONACOM Management Unit, its staffing, operations and procurement experience.
     The current ManagementUnit is soundand well-versedin Bank procurementprocedures,
     having managed a large number of Project preparation activities in the course of 1999-
     2000. The Unit has also benefited from consultationwith other well-run Bank-financed
     project management units in Guatemala. A recent Bank Country Procurement
     Assessment Report (November 1999) found that Bank-assisted projects have generally
     been free of procurementproblems.

     Most of the issues concerning the ManagementUnit have been or are being addressed.
     The risks identified in the assessment include: (i) an expansion in the rate of Project
     activities which exceeds the units ability to manage procurement properly, and (ii)
     adequacy of filing, monitoring and reporting procurement actions. To address these
     risks, the ManagementUnit will be recruitingadditional technical and procurementstaff
     as outlined above, will provide training in Bank procurement procedures for newly
     recruited staff, and (iii) hire a consultant to design a satisfactory system for filing,
     monitoring and reporting procurement activities which is expected to be ready by
     October2000.

     The overall project risk for procurementis Average.

     Although the overall risk assessment resulting from the Management Unit's capacity
     assessment was Average, the Unit has not yet in place a satisfactory system for filing,
     monitoring, and reporting procurementactions. Consequentlythe PIU is not eligible for
     PMR-baseddisbursementson procurement reporting grounds. However, such situation
     would be re-assessedwhen the consultantwork is completed.

     C. ProcurementPlan

     The Government has developed an indicative plan for the four-year period of project
     implementationwhich provides the basis for the aggregate amounts for the procurement
     methods in Table A. A Procurement Plan has been prepared for the first year of project
     implementation and has been found satisfactory. Subsequent plans will be submitted
     yearly as part of the Annual Action Plan.

     D. Frequencyof ProcurementSupervision

     In addition to the prior review supervision to be carried out from Bank offices, it is
     recommended one full supervision mission to visit the field to carry out post review of
     procurement actions six months after Project initiation and yearly thereafter. Based on
     the overall risk assessment (Average) the post-review field analysis should cover a
     sample of not less than 1 in 5 contracts signed.
                                                                                           Page 63
GuatemalaCompetitivenessProject                                                 Project AppraisalDocument

       E. Disbursement

       The closing date for loan disbursementswould be June 30, 2005. The loan proceeds.would
       be disbursedagainst the categoriesshown in Annex 5 Table C. Given the interest of Project
       clients to avoid a hiatus betweenthe design and delivery stages, retroactive financing of up to
       10% of the loan amount ($2.0 million) is proposed for expenditures incurred not earlier than
       12 months prior to loan signing. Disbursementrequests will be based on certified Statement
       of Expenditures (SOEs), except for payments under NCB goods above $150,000 and
       contracts above $100,000 equivalent for consultant firms and $50,000 for individual
       consultants. Documentationfor SOEs would be retained at the PRONACOMManagement
       Unit and availablefor review of the Bank and externalauditors.

       The Bank loan would be disbursed against (a) for works, 100% of foreign expenditures and
       80% of local expenditures, (b) for goods, 100% of foreign expenditures and 80% of local
       expenditures, (c) 100% of consulting services exclusive of those financed under Business
       Cluster Program (50%) and the CLIP, and (d) for the CLIP, 50% of expenditures for
       matchinggrant subprojects,100% for voucher grants, and 100% for the client assistance and
       managementcontract. A special account would be opened in the central bank in an amount
       equivalentto $1.5 million.

       F. Financial managementassessment

       Following World Bank's policy OP/13P 10.02, the LCR Financial Management Unit
       (LCOAA) reviewed PRONACOM's financial management system relating to the project.
       The review was focused on the assessment of the internal control, planning, budgeting,
       accounting and financial reporting system, and audit arrangements.Details can be found in
       the FinancialManagementAssessmentReport dated October20, 2000.

       It was concluded that PRONACOMdid not have yet in place a system satisfyingthe Bank's
       financial management requirements for the project; hence, a pertinent loan condition of
       effectivenesswas recommended.Compliancewith the condition is expectedupon substantial
       completionof the activities detailedin the action plan below:

        1. Organizationand staff

       la. Identificationof staff and structure of PRONACOM'sFM Unit.
       lb. Preparationof position descriptions/Termsof Reference (1 ORs) for FM staff.
       lc. Appointmentof FM staff.
       ld. Selectionof staff from the UDAF that will be part of the project team for liaison/capacity
       building purposes.
       le. Participation of PRONACOMin the launch workshop for the Bank-financedLand Fund
       project.

        2. Proceduralcontrols

        2a. Elaborationand review of the manual for administrative,financial and accounting norms
                      8
        and procedures.
 Amongothers, the manuals will satisfactorily cover applicableareas mentioned in the LAC's "FinancialManagement
AssessmentChecklisft and Bank's "Project Financial ManagementManual".
                                                                                                 Page 64
 GuatemalaCompetitivenessProject                                                      Project AppraisalDocument

         2b. Openingof the Special Account9in US dollars.
         2c. Openingof the bank account for counterpartfunds.

         3. Flow of funds

         3a. Preparationof flowchartsand proceduresfor the flow of funds from every financingparty
         and for each project component.

         4. Planning, budgetingand financialreporting

        4a. Elaboration and review of Annual Operating Plan for 2001, including monitoring
        indicators and use of funds' projections (segregatedat least quarterly), all consistent with the
        Project Appraisal Document and the corresponding cost tables, as well as the Loan
        Agreement's provisions.
        4b. In conjunction with the Ministry of Finance (MOF), preparation of a budget increase
        proposal sufficient to cover external and internal funds necessary to properly implement the
        project during 2001.
        4c. Definition of the formats for the Project Management Reports (PMRs) and annual
        financial statements.
        4d. Definition of the procedures for the distribution, review, analysis and approval of the
        monthly, quarterlyand annual financialmanagementinformation.

        5. Accounting/financial
                              system

        5a. Preparation of accounting manual and chart of accounts for the project (allowing as a
        minimum for classificationof expendituresby disbursementcategory, project componentand
        source of funds).
        5b. In coordinationwith MOF, design of implementationplan for SIGEPRO.
        5c. Readinessof SIGEPROfor accountingpurposes.
        5d. Developmentof filing system for accounting/supportingdocuments.

        6. Externaland Internal Audits

        6a. Preparation,review and approval of short list of firms and audit TORs'0 .
        6b. Appointmentof the external audit firm.

        7. Coordinationamong the participatingagencies

        7a. Preparation,review and approval of the operating manual for the CLIP component.
        7b. Definition of the mechanisms for receipt of funds from the private sector and financial
        inforrnationregarding the FDI, Micronet and clusters.

        Other actions that should be completed not later than six months after the loan effectiveness
        date are:


9 The Special Account will only be used for eligible expendituresunder the Credit (under no circumstancesmay funds in
the Special Accountbe used to cover the counterpart's share of expenditures).Transfers from the Special Accountto
other bank accountswill only be performed to meet eligible expendituresfor a limited period of less than 30 days.
'0 Interim audit visits and correspondingreports would be performed on a quarterlybasis.
                                                                  Page65
                   Project
       Competitiveness
Guatemala                                                              Document
                                                                Appraisal
                                                          Project

     4e. Preparation submittalof first quarterly PMR.
                   and
     5e. Readiness SIGEPRO preparation PMRs.
                  of         for           of
     6c. Appointment an internal
                     of         auditorreporting PRONACOM's
                                               to                     Committee.
                                                              Executive
     6d. Preparation reviewof the annualInternalAudit
                   and                               Program.

                  purposes,PRONACOM preparemonthlyreportson the progressof the
     For monitoring                will
     execution this ActionPlan
             of
                                                                                                                                            Page 66
 Guatemala
         Competitiveness
                      Project                                                                                                ProjectAppraisal
                                                                                                                                            Document

                                                                   Annex             5   - Table A

                                           Guatemala Competitiveness Project
                                       Project Costs by ProcurementArrangements
                                                                   (in US$ million equivalent)




    1. Works
    Facilities Upgrading                                                                        0.8        0.4 (a)                                1.2
         _._______           ______                .__                                           (--~-()    (0.4)                                (0.4)

    2. Goods =_           =
    Office equipment,IT & materials                                      1.2                 1.5           0.5 (b)              -                 3.2
                                                                        (1.2)               (0.7)            (-)                                 (1.9)
    3.   Services                                      _                                                           ____                   ____
    Technical consulting & advisory                                     _-                                  6.6       _                           6.6
    services                                                                                               (5.4)                                 (5.4)
    Trainingprograms, study tours & other                                 -                 _               2.0                                   2.0
    travel                            ____-_                                                               (2.0)                                 (2.0)
    Information& disseminationservices                                    --                                0.5                                  (0.5
                                 .___
                                    __._   ______._.___._                      ...                         (0.5)          __.____                  .5)

    4. Other_____                                                                                                                                        _

    CompetitivenessLearning&
    Innovation Progra_                                      ____                         _____
    •    Matching grant subprojects                                                                         10.0                                  10.0
                                                                                                           (5.0)                                 (5.0)
    * Vouchergrants                                                                                         2.0                                   2.0
                                                                                                           (1.0)                                 (1.0)
    * Client assistance & management                                                                         1.0                                   1.0
          contract      __           _____                          _          _          _____            (1.0)                                 (1.0)
    OperationalCosts                                                                                                                5.5
             _ ______
                _            _                          _       _ _                                   _    (1.8)                                 (1.8)
   PRONACOMManagementUnit                                                            _
                                                                                     . .1                                                         1.I
                                                                                                           (1.1)                                 (1.1)

   Bank loan capitalized front end fee                                                                      0.2                                    0.2
                                                                                                           (0.2)                                  (0.2)
   Total                                                                 1.2                 2.3           29.8                                   33.3
                                                                        (1.2)               (0.7)          (18.4)                                (20.3)


                 Note:       N.B.F. = Not Bank-financed(includes elements procured under parallel co-financing
                             procedures,consultancies undertrust funds, any reserved procurement, and any other
                             miscellaneous items).

"See TableA-I forconsultant
                          selection
                                  arrangements.
                                                                                                  Page 67
Guatemala CompetitivenessProject                                                       Project Appraisal Document


a/ Three quotations (ie.: Contracts for small works procured under lump-sum, fixed-price contracts awarded on the
basis of quotations obtained from three (3) qualified domestic contractorsin response to a written invitation . The award
shall be made to the contractor who offers the lowest price quotation for the required work, and who has the expertence
and resourcesto complete the contract successfully).

b/ Shopping (National and International)

c/ Consultants Services. Contracts awarded to firms using Quality-and Cost-Based selection (QCBS) and Least Cost
selection (up to an aggregate amount of $1,000,000) and to individual consultants in accordance with paragraphs 5.1 to
5.3 of the Consultants Guidelines (up to an aggregate amount of $2,000,000).

or:

c/ Consultants Services. Details provided in Table A-I

         Figures in parenthesis are the amounts to be financed by the Bank loan.
                                                                                               Page68
Guatemala
        Competitiveness
                     Project                                                          ProjectAppraisal
                                                                                                     Document

                                                 Annex 5 - Table Al

                                    Guatemala Competitiveness Project
                                            Consultant Selection Arrangements

                                                 (in US$ million equivalent)


                                                                       ~~~d
                                                                       1e4io~~~~~~                          Cs
                                                                                                        T0nota

                                                Q~S      QBS
                                                         $f1~I~CS         CQ          Othr      N.B.F
A. Firms                             9.5                                              7.8 (a)              17.3
                                    (7.1)                                              (4.5)              (11.6)


B. Individuals                                            -                           3.7 (b)              ( 3.7
                                                                               ____    (2.2)               (2.2)
Total                                9.5                                                11.5               21.0
    _   _ =______________________   (7.1)                                              (6.7)              (13.8)

                 Note: QCBS = Quality- and Cost-BasedSelection
                        'QBS = Quality-basedSelection(price not a factor)
                        SFB = Selectionunder a Fixed Budget
                        LCS   =   Least-Cost Selection
                        CQ = SelectionBased on Consultants'Qualifications
                        Other (a) = Selection of firms and NGOs for sub-projectsfinancedby CLIP, using
                               commercial practices (Section 3.12 of Guidelines),based on use of roster
                               continuouslyopen for registration and on proceduresdescribed in Operating
                               Manual.
                               (b) = Selectionof individual consultants(per Section V of Consultants
                        Guidelines)

                        N.B.F. = Not Bank-financed.
                        Figures in parenthesisare the amounts estimate to be financedby the Bank loan.
                                                                                                                                                          Page 69
Project Appraisal Document
                                                                                                                            Project Title: Competitiveness Project
Country: Guatemala
Procurement Plan
                                   Est,Cost        SelectionfProcurement   Request Expression of        Invite              CAwardContract      Implementation
           Contract
                              I (US$ million)              Method            Interest/Advertise     Propossls/Bids
Increasing domestic market competition
                                      0.2         QCBS                     10/00                   11/00             1/01                    2/01
Design/implement competition l
law
                                      0.2         QCBS                     4/01                    5/01              7/01                    8/01
Make operational Competition |
Commision
                                      0.1         QCBS                     1/02                    2/02              4/02                    5/02
Public infornation programt
                                      0.1         QCBS                     1/02                    2/02              4/02                    5/02
Compliance program            |
                                      0.2         Shopping                                         7/01              9/01                    10/01
Computer & office equipment

Accelerating foreign investment
                                       0.2        QCBS                     4/01                    5/01              7/01                    8/01
Promotional materials
                                       0.3        NCB                      3/01                    4//01             6/01                    7/01
Equipment & computers
                                _      0.4        QCBS                     1/01                    2/01              4/01                    5/01
FDI promo advisory services
                                       0.4        QCBS                     2/01                    3/01              5/01                    6/01
Investment registration
facilitation system                                                                      .



Expanding in-firm skills training and information markets
                                         0.6        QCBS                   10/00                   11/00             1/01                    2/01
Adopt regulatory changes &
establish Training Council
                                         1.0        QCBS                   1/01                    2/01              4/01                    5/01
Training promotion &
extension services
                                         1.5        NCB                    3/01                    4/01              6/01                    7/01
Expand specialist facilities
                                         0.2        QCBS                   2/01                    3/01              5/01                    6/01
Technical advisors   to establish
Statistics Superintendency                        I_I
                                         0.2        Shopping               4/01                    5/01              7/01                    8/01
Computer equipment for
Statistics Superitendency
                                         0.1        QCBS                   4/01                    5/01              7/01                    8/01
Training Statistics staff

Upgrading firmproduct and process quality
                                     0.35          QCBS                    11/00                   12/00             1/01                    3/01
Quality training and outreach
services
                                    0.175         QCBS                     2/01                    3/01              5/01                    6/01
SCA information center
development
                                    0.050         QCBS                     12/00                   1/01              2/01                    3/01,
Non-traditional product &
process certification
                                    0.075         QCBS                     10/00                   11/00             1/01                    2/01
Quality awareness & promotion
                                    0.100         NCB                      10/00                   11/00             1/01                    2/01
                                                                                             Page 70
 Guatemala Competitiveness Project                                                Project Appraisal Document

Increasingfirm   investments in learning & innovation

MicroNet leasehold                    0.6          NCB                 11/00                         12/00     2/01    3/01
improvements
MicroNet computer & office            0.7          ICB                 11/00                         12/00     2/01    3/01
equipment
MicroNet advisory services           0.3           QCBS                 11/00                        12/00     2/01    3/01
MicroNet staff training program      0.2           QCBS                11/00                         12/00     2/01    3/01
(4) Cluster diagnostic &             0.4           QCBS                2/01 (first one, repeat       3/01      5/01    6/01
benchmarking analyses                                                  every 6 months after)
(2) Cross-cluster public policy      0.2           QCBS                9/01                          10/01     12/01   1/02
assessments & proposals                        I                   I
Business social responsibility       0.2           QCBS                1/01                          2/01      4/01    5/01
groups technical advisory                                                                        -



WorldBankUser
Q:VIHDOCS\Guatemala\2PREP\OVERALL\ProcurementPlan\Procurement
                                                        Plan.doc
                                                                                      Page71
Guatemala            Project
        Competitiveness                                                                     Document
                                                                             ProjectAppraisal


                                             Annex 5 - Table B

                               Guatemala Competitiveness Project
                       Thresholds for ProcurementMethodsand Prior Review

        pdiftlre                     Value
                               Contract                      Fiiemint                     Subjeci
                                                                                  Contracts      to
        Category                 (Threshold)                    Method              Pror ReviewI
                                                                                 EstinatedTotalValue
                               US$thousands                                               to
                                                                                    Subject Prior
                                                     _____________                     Review
 1. Works
                                    >150                       NCB                 First 2 contracts
                                    <150                  Three Quotations          Post Review
 2. Goods
                                   >150                          ICB                      All
                                  >25>150                       NCB                First 2 contracts
                                     <25                       Shopping              Post Review
 3. Services
 Firms                              >100                   QCBS                        All
                                    <100               CommercialPractices           TORs Only

 Individuals                         >50              SectionV Guidelines                 All
                                   >20 <50            Section V Guidelines           TORs only
                                     <20              SectionV Guidelines            Post Review

 Total value of contracts subject to prior review:                                      $21.0

       ProcurementRisk Assessment:
 FOverall                                                            Hmgh
                                                                  Averge
                                                                     Low

 Frequency of procurement supervisionmission proposed:                       l     Eery 12 months
                                                                                                      Page 72
GuatemalaCompetitivenessProject                                                            Project AppraisalDocument

                                            Annex 5 - Table C

                               Guatemala Competitiveness Project
                                        Allocation of Loan Proceeds

                       ZzpenitureCatg                              Amount in         Financing
                                                                      US$nilllonPercentag

   1. Works
   Facilities upgrades                                                  0.4                         80% local
                                                                                                   100% foreign
   2. Goods
   Office equipment, computer hardware and software                     1.9                         80% local
   and materials                                                                                   100% foreign

   3. Consulting Services                                                                          100%
   Technical consulting & advisory services                             5.4
   Information dissemination & promotion services                       0.5
   CLIP assistance and management contract                              1.0
   PRONACOM Management Unit 1/                                          1.1

   4. Training                                                          2.0

   Competitiveness     Learning & Innovation
   Program2/
   5. Matching grant subprojects                                        5.0                        100% of
                                                                                           amounts disbursed
   6. Voucher grants                                                    1.0                        100% of
                                                                                           amounts disbursed 3/
   7. Operational Expenditures                                          1.8                          4/
   8. Bank loan capitalized front end fee                               0.2                    Amount Due

  [Total      ; ; 7f                                         I3       0
                                                                     ;0.2     0    0   !     : 0     61% 0        I

1/ Eligible expenditures include fees and travel costs for PRONACOM Management Unit, contract staff, fees for
financialaudits and project impact evaluation.

2/ Eligible expenditures include informationservices, training, travel, demonstrationequipment,technical advisory
services fees, quality or environmentaltesting and certifications insofar as they contribute directly to the approved
program. Salaries, other recurrent costs (such as office rental or advertising)and capital goods, among others, are
not eligible.

3/ While the voucher value would be fixed and covered 100% by the Bank loan, the value at which it would be fixed
will not exceed 80% of the estimated value of the eligiblebusiness development service.

4/ Recurrent costs would be financed on a declining basis: 100% until disbursements under this Category have
reached an aggregate of $800,000; 67% until disbursements under this category have reached an aggregate of
$1,400,000,and 33% thereafter.
                                                                                        Page 73
GuatemalaCompetitivenessProject                                              Project AppraisalDocument

                                                Annex 6

                           Guatemala Competitiveness Project
                           Project Budget and ProcessingSchedule

   A. ProjectBudget(US$000)                                  Planned                  Actual
                                                          (At PAD stage)
                                                              660.0                   $643.4

            Schedule
   B. Project                                               Planned                   Actual
                                                                  stage)
                                                      (At fnal PCDI


   Time taken to prepare the project (months)                12 months               12 months
   First Bank mission (identification)                          4/98                    4/98
   Bank final project preparation mission                     10/25/99                10/25/99
   Fornal concept review meeting                             03/07/00                 03/07/00
   Begin Bank pre-appraisal mission                           03/20/00                03/20/00
   Appraisal mission departure                              07/05/00                  09/18/00
   Loan Negotiations                                          08/07/00                11/08/00
   Loan approval by Bank Board of Directors               September 2000              12/21/00
   Loan signature                                         November 2000                 2/01
   Planned Date of Effectiveness                           January 2001                 4/01

   Prepared by: PRONACOM

   Preparation assistance: PHRD Grant.




             of
   Composition BankTaskTeam

   Jim Hanna              Task Manager & specialist in microbusinessservices
   Geeta Batra            PSD staff specializingin in-firm training systems
   Ben Rowland            FIAS specialist in foreign direct investment
   Mike Goldberg          LCSFP staff specializingin microbusiness
   Kate Kuper             LCSFP Young Professionalstaff specializingin FDI & trade
   Mario Marroquin        GuatemalaCity WB Office specializingin BSR
   Luis Tineo             PSD consultantspecializingin domestic competitionpolicy
   Lily Franchini         LCSFP staff assistant
   Manuel Vargas           LCR specialistin financialmanagement
   Quality AssuranceArrangements

   Luis Guasch              Sector Manager
   Hong Tan                 PSDBE
                                                                                 Page 74
GuatemalaCompetitivenessProject                                       Project AppraisalDocument

                                           Annex 7

                             GuatemalaCompetitionProject
                                  Documents in the Project File

The Business Environment

1. Survey of Firm Skills Development, Technology and Productivity, GSI, July 1999.

2. Increasing Domestic Market Competition, Luis Tineo, Claudia Curiel & Gabriel Muadi,
   November 2000.

3. Accelerating Foreign Investment and Trade
   3.1 Foreign Investment and the Free Trade Regime, The Services Group, November 1999.
   3.2 International Supply Chain Development - Phase 1:Mritime Transport, WEFA,
   Septermber 1999.
   3.3 International Supply Chain Development - Phase 2: Inland Haulage, WEFA, July 2000

4. Expanding In-Firm Skills Training Markets, CIEN and GSI, September 1999.

5. Expanding Firm Product/Process Quality Technology Infrastructure, Robert Toth & Luis
   Cordero, December 1999.

6. Improving the National Information System, Emmanuel Seidner, February 2000.

The Firm Level

7. Increasing Firm Investments in Learning and Innovation, Trade Development Institute,
   December 1999.

8. Business Cluster Development Program
   8.1 PRONACOM 1999 Program of Activities, PRONACOM, December 1999.
   8.2 Forestry, IDC, June 1999.
   8.3 Agro-Industry: Beans, Santa Cruz, Salazar & Asociados, July 1999.
   8.4 Agro-Industry: Potatoes, IDC, September 1999.

9. Business Social Responsibility, Luisa Fernanda de Bosch & Mario Marroquin, December
1999.

Bank Staff Assessments

Procurement Capacity Assessment Report. The World Bank's Latin America and Caribbean
Region Private Sector Development Cluster, September 18, 2000
Financial Management Assessment Report. The World Bank's Latin America and Caribbean
Region Financial Management Unit, October 20, 2000.
    Guatemala CompetitivenessProject                                                                                                                                         Page 75
                                                                                                                                                                      Project AppraisalDocument



                                                                                            Annex 8
                                                                                Statement of Loans and Credits
                                                                        Status of Bank Group Operations in Guatemala
         ClosedProjects        23
                                                                                     As of Date 11/13/2000

      Active Prolects                                                                                                                                             Oifference Between
                                                     Last PSR                                                                                                     Expected and Actual
                                               Supervision Rating bi                                    Original Amount In USS Millions                             Disbursements'

   Project ID                  Project N   Development     Implementation      Fiscal Year       IBRD              IDA           GRANT        Cancel.   Undisb.       Orig. Frm Rev'd
                                           O_beti,ves         PErores
   P048657                     GT INTES                           S               1998           15.7               0                     0        0       5.3          5.3          0
   P047039                     GTJUDS                             S               1999             33               0                     0        0      29.8          7.3          0
   P048654                     GTTAXS                             S               1998           28.2               0                     0        0      24.5         24.5          0
   P007223                     GTA3ASS                            S               1997             33               0                     0        0      10.3           -1          0
   P040198                     GT/FISIS                           S               1999             50               0                     0        0       8.2        -24.1          0
   P049386                     GTARECS                            S               1999             30               0                     0        0      27.3          8.9          0
   P049616                     LANDAS                             S              1999             31                0                     0        0      26.4            7          0
   P054462                     LANOFS                             S              1999              23               0                     0        0      22.8          7.2          0
   P048756                     PRIVPlF                            U              1997              13               0                     0        0       9.8          8.9          0
   P035737                     RURALS                             S              1998            66.7               0                     0        0      48.9          3.8          0
   Result                                                                        Result         323.6               0                     0        0     213.2        47.7           0




a Intended disbursements to date rminusaclual disbursemerds to date as projected at appraisal
                                                            Page 75.1

                 CAS Annex B8 (IFC) for Guatemala

                                   Guatemala
                              Statement of IFC's
                         Held and Disbursed Portfolio
                                As of 9/30/00
                           (In US Dollars Millions)

                                     Held                   Disbursed

FY Approval Company         Loan Equity Quasi Partic Loan Equity Quasi Partic
        1997 Aceros          13.5     0     0 9.33 13.5        0     0 9.33
        1994 Fabrigas        2.63     0     1      0 2.63      0     1      0
        2000 Frutera            7     0     0      0     7     0     0      0
        1998 LaFragua          20     0     0      0    20     0     0      0
        1997 Orzunil        12.91 1.17      0 14.7 12.91 1.17        0 14.7
        1996 Pantaleon       12.5     0     0      0 12.5      0     0      0
1993/96      Puerto Quetzal     0     0     0      0     0     0     0      0
        1993 Vigua           4.13     0     0      0 4.13      0     0      0

      Total Portfolio:      72.67   1.17    1 24.03 72.67   1.17        1 24.03


       Approvals Pending Commitment
                       Loan Equity Quasi Partic
                                                                                                                                  Page 76
                                                     ANNEX 9

                                   Guatemala at a glance                                                                                        9/12100

                                                                         Latin    Lower.
POVERTYand SOCIAL                                                     America    middle.
                                                       Guatemala      b Carib.   Income                 diamond"
                                                                                               Development
1999
          mid-year(millions)
Population,                                                   11.1        509     2,094                            Lifeexpectancy
GNP percapita (Atlasmethod, USs)                             1,660      3,840     1,200
GNP(Atlas method,US$ billions)                                18.4      1,955     2513
Averageannual growth,1993-99
Population(%/6)                                                2.6        1.6       11
Laborforce (%)                                                 3.6        2.5       1.2        GNP                                           Gross
                                                                                               per                                          primary
Most recentestimate(latestyear available, 199349)                                              capita                                    enrollment
Poverty(% of populationbelow nationalpoverty line)              75
Urbanpopulation(% of total population)                          39         75        43
Life expectancy birth (years)
                 at                                             64         70        69
Infant mortality(per 1,000 live births)                         37         31        33
Childmalnutition (% of childrenunder 5)                         27          8        15                        Accessto safewater
Accessto improvedwatersource (% of population)                  67         75        86
llliteracy(%ofpopulation age /5+)                               32         12        16
Grosspnmaryenrollment (Y.of schoolage population)               88        113       114                    Guatemab
    Male                                                        93                  114               -Lower-middle-income              group
    Female                                                      83                  116    1
KEY ECONOMICRATIOSand LONG-TERMTRENDS
                                                   1979       1989       1998      1999
                                                                                                       ratios"
                                                                                                Economic
GDP (US$billions)                                   6.9        6.4       18.9       18.0
Gross domesticinvestment/GDP                       18.7       13.5       16 0       15.7                              Trade
Exportsof goodsand services/GDP                    21.3       17 3       18 6       18.8
Gross domesticsavings/GDP                          14.2        8.3        7.7        8.3
             savings/GDP
Gross national                                     16 1        80        10.5       11 5
Currentaccountbalance/GDP                          -3 0       -5 4        -5 5      -5 3       Domestic        I
Interest payments/GDP                               0.7        1.3         0.7       08        Savigs                     1              Investment
Total debt/GDP                                     15.2       31 5       20.9       22.6       S
Total debt service/exports                          7.3       19.6         98        9.6
Presentvalue of debtWGDP                                                 22.6
Presentvalue ofdebt/exports                                             105.2
                                                                                                                    Indebtedness
                                    1979489 1989-99           1998       1999    1999-03
(averageannualgrowth)
GDP                                        0.4       4.1       5.1         3.5       5.0                 -Guatemala
GNP per capita                            -2 3       1.5       2.8         0.6       2.4                                     group
                                                                                                            Lower-middle-mcome
Exportsof goodsand services               -3.7       6.5       6.0         4.8       7.9


STRUCTUREof the ECONOMY
                                                   1979       1989       1999      1999                        and
                                                                                               Growth investment GDP(%)
                                                                                                     of
(% of GDP)                                                                                     30
Agriculture                                        25.4       25.6        23.4      23.1
Industry                                           21.5       201         20.0      20.1        1a -
  Manufacturing                                    16.3       15.2        13.5      13.4
Services                                           53.1       54.3        56.6      56.8        o          .        .;
                                                                                                          94         95       9     7      98
Pnvateconsumption                                  78.7       83.8        86.8      85.9        las
Generalgovernment consumption                       7.1        7.9         5.6       5.8                              GDt           0.GDP
Importsof goodsand services                        25.9       22.5        26.9      26.2

                                                 197989     1989-99      1998      1999                     and
                                                                                               Growth exports imports
                                                                                                     of              %)
(average annualgrowth)
Agnculture                                           0.7        2.9        3.5       222
Industry                                            -0 6        4.2        5.2       41        20
  Manufacturing                                     -0.3        2.8        3.6       2.6                                            r
Services                                             0.6        4.6        5.8       37        1s
Pnvateconsumption                                     0.8       4.3        5.5       30         o
Generalgovernmentconsumption                          2.8       4.5       10.6       4.8                                            94s7 gosa 9
Gross domesticinvestment                             -3.3       5.2       21.9      -4.0       -1i
Importsof goodsand seMces                            -4.2       9.0       23 0      -1 7                  -Erxports                      iOsmports
Grossnationalproduct                                  0.1       4.2        5.5       3.2

                             estimates.
Note 1999 data are preliminary
"The diamondsshow four keyindicatorsin the country(in bold)comparedwith its income-groupaverage.If data are missing,the diamondwill
  be incomplete.
                                                                                                                           Guatemala
                   FINANCE
PRICESand GOVERNMENT

Domestic   prices                     1979    1881e     11N8     legs        Inflation(%)
(% change)                                                                       1
Consumerprices,average                 113     114       70       49         ro'
Implicit GDPdeflator                    8.6    10.9      6.8      6.6
Central Govemment finance
(% of GOP, includes cuffent grants)                                          o
Currentrevenue                                            9.9      9.8                        94   95    96    97   9s                         99
Currentbudget balance                                     24       16                              GOPdeflatDr *CpI
Overallsurplus/deficit                                   -2.5     -3.1                        -GDP    detlator    CPI


TRADE

(US$mil/ions)                         1J79     118S     199      119SS          and Import
                                                                           Export        levels(USSmlil.4
Total exports(fob)                            1,126    2,847    2,488    5,000
  Coffee                                        380      581      561    4                                                                 _
  Sugar                                          92      314      192
  Manufactures                                           929      839        3,000
Totalimports(cif)                             1,641    4,651    4,558        2,0
  Food                                          231      969      960
  Fuel and energy                               212      284      321        ,
  Capitalgoods                                  352    1,373    1,289                o                                         _
Exportpriceindex (1995=100)              ..      84       89       81                               t      9s  r       a           ss      9
Importprce index (1995=100)              ..     101       93       91                                   flExports         U Imports
Terms trade(1995=100)
      of                                 ..      84       96       90

      of
BALANCE PAYMENTS

(USSmillions)                          1978    188       1910     199              account
                                                                             Current           to
                                                                                         balance GDP(%)
Exportsof goodsand services           1,449   1,465     3,455    3,475       0
Importsof goodsand servioes           1,784   1,869     5,028    5,005                   _6                                1
Resourcebalance                        -335     .404   -1,573   -1,530   ,2
Netincome
Netcurrent transfers
Currentaccount balance
                                         3
                                       123
                                      -209
                                               -195
                                                148
                                               -451
                                                        -169
                                                         705
                                                       -1,037
                                                                 -200
                                                                  783
                                                                 -947
                                                                         -




                                                                         .
                                                                                     1111111   1
Financingitems (net)                   183     364     1,279      822
Changesin net reserves                  26      88      -243      125    -s
Memo:
Reservesincluding gold (US$milions)    718     329     1,209    1,084
Conversionrate (DEC,local'US$)          1.0     2.8       6.4      7.4

EXTERNALDEBTand RESOURCE
                       FLOWS
                                      1979    1181      1991     11s
(US$millions)                                                                          of
                                                                             Composition 1999debt (US$mill.)
Totaldebt outstandingand disbursed    1,050   2,651    3,944    4,061




                                                                                               9
  IBRD                                  108     261      203      258
  IDA                                     0       0        0        0                                           258
Total debt service                     113     304       396      386                         1268
  IRD                                   10      48        26       31
   IDA                                   0       0         0        0
                                                                                                                                   1299
Composition net resourceflows
             of
  Officialgrants                        20      127      152       71
  Officialcreditors                    126       16      124       58
  Privatecreditors                      61        7      -52      -46
  Foreigndirectinvestment              117       76      673      155
  Portfolioequity                        0        0        0        0                                            682
World Bankprogram
 Commitments                             0       29      154       23        A - IBRD                                      E - Bilateral
  Disbursements                         47       14       30       70            8-IDA             O- Othermultilateral    F-Private
  Principalrepayments                    2       27       14       15            C-IMF                                     G Short-term
  Netflows                              44      -13       15       55
  Interestpayments                       8       21       12       17
  Nettransfers                          36      -34        3       38

          Economics
Development                                                                                                                             9/12/00
                                                                                                                                                                                                                                                                                         29282
                                                                                                                                                                                                                                                                                      IBRD

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                                                                                                                                                                                                                                                                                              JULY 1998

				
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