PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: PIDA62854 Public Disclosure Copy Project Name Financing Innovative Startups and SMEs Project in Morocco (P150928) Region MIDDLE EAST AND NORTH AFRICA Country Morocco Lending Instrument Investment Project Financing Project ID P150928 Borrower(s) Ministry of Economy and Finance Implementing Agency La Caisse Centrale de Garantie Environmental Category F-Financial Intermediary Assessment Date PID Prepared/Updated 11-Jan-2017 Date PID Approved/Disclosed 06-Feb-2017 Estimated Date of Appraisal Completion Estimated Date of Board 10-Mar-2017 Approval Appraisal Review Decision The Decision meeting held on 11/23/16 has authorized appraisal of (from Decision Note) the project. I. Project Context Public Disclosure Copy Country Context Morocco has a population of 34.4 million and an estimated nominal gross domestic product (GDP) of US$104 billion (2016). Economic growth has slowed, registering 1.4 percent in the second quarter of 2016 compared to 4.2 percent during the same period in the previous year. Despite improvement in poverty, literacy, and social indicators, vulnerability to poverty remains high, and high unemployment among the educated urban population and youth represents a major social challenge. Total unemployment is at 8.6 percent (2016) with the economy struggling to absorb some 250,000 new job seekers annually. It is estimated that Morocco needs to reach annual growth rates of 5 to ➂❨➂ 7 percent just to absorb new entrants into the labor market. Here the role of firm age and productivity on job creation is important. According to the World Bank Group Report, Jobs or Privileges (2014), start-ups and young, dynamic, high-growth firms accounted for all net job creation in the manufacturing sector in Morocco, offsetting job destruction by all other formal manufacturing businesses. In Morocco start-ups and young enterprises, as compared to all SMEs, face the highest barriers to accessing finance. This is because banks cannot finance start-ups (without requesting substantial collateral) and alternative financing like Venture Capital (VC) that is suited for young high-growth companies is undeveloped. The Government of Morocco (GOM,) through this project, aims to address a market gap in the supply of equity financing for innovative young small and medium enterprises and create a Page 1 of 5 demonstration effect of successful early-stage equity investments to help catalyze a venture capital (VC) market. This will be done through a funding program that will invest in innovative small and medium enterprises (SMEs) alongside private investors, who will play an important role in the Public Disclosure Copy selection of investments. The program will also address weakness in the investment know-how of ecosystem agencies supporting entrepreners (see definition in table 1) and boost scale in the creation of financially viable enterprises (deal flow). Once a critical mass of successful ventures is demonstrated and industry capacity is developed, entrepreneurs will be more encouraged to create businesses, and more VC funds will be encouraged to enter the market. Sectoral and institutional Context Risk Capital and Access to Finance: Despite being the best regional performer with regard to access to finance for SMEs, Morocco➢❨ s financial sector does not address the needs of many innovative high-growth potential companies at the initial stages of their development. The World Bank Group➢❨ s 2017 Ease of Doing Business (DB) publication ranks Morocco comparatively low for Getting Credit (101 out of 189), though there was a slight improvement from 109 in 2016. The situation is particularly dire for young companies. In a recent December 2014 Enterprise Survey of 407 firms, access to finance was cited as a major obstacle by the majority of young companies (three years or less). The Central Guarantee Agency, the Caisse Centrale de Garantie (CCG), has a number of tools to support bank lending to SMEs through guarantees, but CCG Guarantee tools focus primarily on companies with an existing revenue stream and a track record of at least three years. Private Equity (PE) is relatively well developed in Morocco, but Venture Capital (VC) and business ➢❨ angels➢❨ are practically nonexistent. There are 22 equity fund management companies investing in an average ticket size of US$4 million per company. However, data from the Moroccan Public Disclosure Copy Association of Equity Investors (Association Marocaine des Investisseurs en Capital,AMIC) showed that enterprises needing seed, and VC, received 6 percent of the total investments made in 2015➢❨ one of the lowest in the region. Thus, with regard to financing supply, Moroccan start-ups and innovative young SMEs are facing the classic ➢❨ valley of death ➢❨ situation. Based on a full assessment of the market conducted by the World Bank Group project team, including interviews and focus groups with investment funds and entrepreneurs, there is a shortage of financing in the market starting from the pre-seed stage (US$20,000) to early-VC stage (US$2 million). Successful entrepreneurial ventures thrive within ecosystems where they can obtain specialized technical assistance, have access to experienced advice and mentoring (both locally and from overseas), have options for obtaining equity finance, draw on pools of high-quality potential team members, have links to potential clients, and are surrounded by networks of peers and role models within a supportive culture. The current trend in entrepreneurship activity is very positive, but the ecosystem is young, it has limited coverage outside Casablanca, and it has gaps in capability and depth. There is a need to provide strategic capacity strengthening for innovative entrepreneurs to help them meet investor requirements. High-priority areas include pre-seed grants to support innovative business concepts; investment readiness (IR) programs and mentoring to help start-ups seek investment; and strengthening the business angel community, important financial and non- financial actors during start-up stages. Page 2 of 5 II. Proposed Development Objectives The project development objective is to facilitate increase of private early stage equity finance for innovative small and medium enterprises (SMEs) in the project area. Public Disclosure Copy III. Project Description Component Name Financing Program Comments (optional) This component will target the following funding categories (angel/seed, early-stage, and VC stage). Equity or quasi-equity capital will be provided by the project to competitively selected intermediaries who will invest equity/quasi-equity capital in young innovative SMEs. The objective is to enable new and existing innovative SMEs to access risk capital, other types of financing (Soft loans), and the critical non-financial support typically provided by equity investors. Component Name Ecosystem Support Comments (optional) This component will support organizations within the entrepreneurship ecosystem in the project area to stimulate new innovative enterprises. Component Name Project Management, Coordination, and M&E Comments (optional) This component will fund the Project Management Unit (PMU) and all of its basic operations, as well as fund the PMU➢❨ s administrative costs for the management and supervision of the project over the project life (six years). IV. Financing (in USD Million) Public Disclosure Copy Total Project Cost: 50.00 Total Bank Financing: 50.00 Financing Gap: 0.00 For Loans/Credits/Others Amount Borrower 0.00 International Bank for Reconstruction and Development 50.00 Total 50.00 V. Implementation The Ministry of Economy and Finance (MOEF) will be in charge of supervising the project and the Caisse Centrale de Garantie (CCG) will be in charge of managing the project. Intermediaries (angel/seed and early-stage/VC investment/fund management companies and ecosystem providers) selected through an international call for proposals will implement the activities under Component 1 and Component 2, respectively. These intermediaries will be referred to collectively as participating financial intermediaries (PFIs). The CCG will host the project management unit (PMU) and be responsible for: tendering and selecting PFIs based on criteria and an evaluation process stipulated in the project appraisal Page 3 of 5 document (PAD) and project Operations Manual (POM); signing legal agreements with each PFI and holding equity shares on behalf of the GOM, conducting monitoring and evaluation of the activities, supervising fiduciary and safeguards management in accordance with the World Bank Public Disclosure Copy guidelines; and reporting to the MOEF and the World Bank. A project Steering Committee (SC) will have broad oversight of the project and will provide strategic advice with regard to the project➢❨ s overall direction and impact within the broader national development agenda. The SC will be chaired by the director of Treasury and External Finance (Department of the Treasury at the Ministry of Economy and Finance - DTFE) at the MOEF. The secretariat will be the CCG. The SC will include high-level public representatives (director general, secretary general, or president-level or their designated representatives) from the Ministry of Industry, Trade, Investment, and Digital Economy (MoITIDE), the CCG, and other ministries who have programs that support entrepreneurship. Project supervision will also include a Technical Committee (TC) that will meet twice yearly or more often, as needed, to review progress on project activities and results indicators. The designated representative from the DTFE will chair the TC, and the TC will receive full reporting from the CCG PMU on the project. It will include designated representatives from the CCG senior management and from the Ministry of Industry. With regard to fiduciary, safeguards, and project reporting, the CCG will report to the World Bank Group. VI. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment OP/BP 4.01 ✖ Natural Habitats OP/BP 4.04 ✖ Forests OP/BP 4.36 ✖ Pest Management OP 4.09 ✖ Public Disclosure Copy Physical Cultural Resources OP/BP 4.11 ✖ Indigenous Peoples OP/BP 4.10 ✖ Involuntary Resettlement OP/BP 4.12 ✖ Safety of Dams OP/BP 4.37 ✖ Projects on International Waterways OP/BP 7.50 ✖ Projects in Disputed Areas OP/BP 7.60 ✖ Comments (optional) VII. Contact point World Bank Contact: Randa Akeel Title: Senior Financial Sector Econom Tel: 473-4152 Email: rakeel@worldbank.org Borrower/Client/Recipient Name: Ministry of Economy and Finance Contact: Nouaman Al Aissami Page 4 of 5 Title: Deputy Director Department of Tresury and Finance Tel: +212 5 37 67 75 01 Email: n.alaissami@tresor.finances.gov.ma Public Disclosure Copy Implementing Agencies Name: La Caisse Centrale de Garantie Contact: Taoufic Lahrach Title: Secretary General Tel: +212 5 37 71 68 68 Email: t.lahrach@ccg.ma VIII. For more information contact: The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 473-1000 Web: http://www.worldbank.org/projects Public Disclosure Copy Page 5 of 5