Maldives Competitiveness and Growth Project

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Country, Sector and Institutional Contexts and Relationship to CPF:Maldives is a small island developing state (SIDS) and an upper-middle-income country with a robust growth trajectory prior to the COVID-19 pandemic. Though the three-month border closure during COVID-19 had significant adverse impacts on tourism and the economy, following the sustained rebound in tourism, the economy grew by 41.7 percent in 2021 and continues to show steady recovery in 2022. However, the Balance of Trade is perpetually unfavorable for Maldives since it imports nearly all consumer goods; and fiscal and debt vulnerabilities have greatly increased since 2019. In addition, domestic labor supply does not satisfy the industry demand in terms of skillset and firms depend heavily on foreign labor. While the Government has made considerable progress in implementing policy reforms, more needs to be done to sustain past gains and accelerate economic growth.Given the ongoing fiscal vulnerabilities, the Government aims to reinvigorate its delayed SOE reform program. This includes: (i) pursuing private participation in SOEs where feasible; (ii) dissolution of nonviable SOEs; (iii) injecting more discipline in the management of SOEs by implementing deeper program and corporate governance reforms; and (iv) subsidy reform.In addition, small and medium enterprises (SMEs) face a volatile operating environment and are subject to many challenges that can be mitigated by enhancing firm capabilities and resolving finance market issues. These challenges include, inter alia, high vulnerabilities to exogenous shocks such as COVID-19; diseconomies of scale that limit firms’ ability to establish comparative advantage; dysfunctional market structures; high transportation costs; skills and employment shortages; limited natural resources; and competition with SOEs.The project is anchored in the Government’s Strategic Action Plan (2019–2023) that puts forward several reforms to facilitate a conducive business environment for trade, investments, and economic diversification. In addition, the project conforms to the priorities of the FY23-27 Country Partnership Framework (CPF). The project’s goals of supporting SOE reforms and SME competitiveness are consistent with the CPF’s High-Level Outcome 1 (HLO 1) Objective 1 on ‘Increasing Efficiency and Transparency in the Fiscal Space’, HLO 2 on ‘Increased Access to Economic Opportunities’, and HLO 2 Objective 4 on ‘Strengthening Overall Competitiveness’. These HLOs and objectives will be achieved through, inter alia, strengthening of the investment climate, access to finance, and private participation. Further, the project aims to use digital technologies for enabling the provision of credit of SMEs, which aligns with the CPF’s cross-cutting theme of ‘Fostering the Digital Economy to Promote Economic Transformation’. The project will also advance the Green, Resilient, and Inclusive Development agenda and address climate change in Maldives by supporting climate resilience of SOEs and climate-smart financing for SMEs in the face of increasing natural hazards.Summary Description of Proposed Project:The project development objective is to strengthen private participation in and financial sustainability of State-Owned Enterprises, and the support mechanisms for the competitiveness of small and medium enterprises.The project components include: (1) Accelerating SOE Reforms; (2) Fostering SME Competitiveness; and (3) Project Management. Component 1: Accelerating SOE Reforms (US$7.0 million)• Subcomponent 1.1: Increasing Private Participation in Ownership of Select SOEs – This subcomponent will finance technical assistance activities such as the following: (a) support to select SOEs to, inter alia, develop policies and business plans, identify specific private participation opportunities, publish in the Gazette, and/or list on a stock exchange, (b) support to onboard transaction advisors (including financial advisors) to advise on the private participation process, and (c) assist in undertaking necessary technical evaluations and due diligence (environmental, social, legal, and technical) of select SOEs to complement and support the work of th e transaction advisors. The due diligence work can be used by the transaction advisors, and it is expected that there will be good collaboration and coordination between the due diligence providers and the transaction advisors. To complement these activities, a communications program will be supported: this will involve the development of an overall communications plan for private participation, a communications plan for each select SOE as they are brought to market, active consultations with stakeholders, preparation of supporting materials, and establishment of a digital presence.• Subcomponent 1.2: Improving Governance of SOEs at the Program and Corporate Level – This subcomponent will finance technical assistance activities such as: (a) providing advice on the design and implementation of SOE laws and regulations and guidelines pertaining to, inter alia, establishment, scope and governance (including on matters related to energy efficiency and climate-resilience of new infrastructure), divestment and dissolution of SOEs, by building on prior and recent recommendations made by the World Bank and other development partners, (b) assisting in capacity building of governmental institutions engaged in owning and monitoring SOEs to improve overall governance of SOEs at the program level, including fiscal management, and capacity building of SOE managers and key staff, (c) providing advice on CGI plans and practices in select SOEs, and (d) providing advice on increased private sector access to SOE procurement opportunities. • Subcomponent 1.3: Reforming SOE Public Service Obligations – This subcomponent will finance technical assistance and consultancy activities aimed at supporting better targeting and accountability of operating subsidies and price and tariff subsidies, including through the development of a white paper and PSO reform plans for significant SOEs, and providing advice on drafting a subsidy reform policy. In the case of tariff and price subsidies with regard to PSO, a core objective is to ensure that the most vulnerable populations are protected through targeting, while SOEs are transparently compensated for the cost of these PSO to ensure their accurate financial accountability. The subcomponent will also finance activities aimed at undertaking stakeholder consultations and communications. Component 2: Fostering SME Competitiveness (US$7.0 million)• Subcomponent 2.1: Digital Financial Infrastructure – This subcomponent would include support for: (a) development of technology platforms to help collect secure SME business data from everyday touchpoints (transactions and income flows), (b) incorporation of value-added business management features (such as predictive analytics and automated loan reminders) in the technology platform to be used by the SMEs, (c) establishment of a proprietary information sharing mechanism with, inter alia, the Credit Information Bureau (CIB), PMU, MoED, and financial institutions, (d) building of alternative credit scoring models based on transactions history and SME cash flow, (e) promotion of financial literacy and technology adoption to ensure robust collection of data, and (f) initiation of an extended consultation and TA program to support financial institutions’ uptake of lending opportunities made possible by this fintech transformation.• Subcomponent 2.2: SME Growth Acceleration Program – This subcomponent will center around a structured, high quality, intensive business support program that will identify an agreed number of high potential SMEs (at least 50 over five years), including targeting of women-owned/led SMEs, and, inter alia: (a) provide growth diagnostics, (b) develop sustainable and climate-conscious action plans, (c) offer performance-based TA from experts/men