14 apparent improvement in design relative to traditional approaches, there remains the central concem about whether MGFs are helping to create additionality, i.e. benefits beyond what the private sector would otherwise be able to produce, in the form of economically efficient enterprises in a sustainable market for services. If for example the constraint on enterprise demand for business services is simply lack of finance, rather than high risk aversion due to lack of information, then market activity stimulated by a temporary injection of liquidity will most likely fizzle out when the source of funding ends.

4.9 Another study of the Mauritius project<sup>33</sup> focused on enterprise efficiency. Additionality required that enterprises were econonlically efficient, capable of creating spillover benefits, and able to absorb assistance effectively. If the wrong enterprises were targeted then the rationale of the assistance intervention was in doubt, so an appropriate enterprise appraisal procedure was needed. The _ideal targets_ were firmns that did not show financial profits (so could not get market finance) but were economically efficient and could achieve maximum benefits per assistance input. (The worst-case recipients were ones that were both financially and economically unprofitable and needed subsidies just to stay afloat).

4.10 The contrary view<sup>34</sup> is that the momentum of activity itself is critical for the development of the market (reducing transaction costs for all players), and that a first-in-first-out approach to subprojects with minimum transaction costs is essential to build the services market. Detailed appraisal procedures introduce bureaucracy and discretionality. The strength of the Mauritius project was its flexibility, simplicity in operation, management autonomy, and simple subproject selection.

- 4.11 Figure 5 is a stylized representation of the two views.

**Figure 5 Two views of the design of matching grant funds**

|A. Enteprises selected<br>through appraisal|B. Enterprises selected<br>first-come-first-served|
|---|---|
|* higher transaction costs|*<br>lower transaction costs|
|* lower market momentun|*<br>higher market-momentum|
|* higher subproject additionality<br>* more economically efficit|*higher market additionality<br>*more x- efficient|

4.12 On the one hand the appraisal approach may reap extemalities but it may be more discretionary, bureaucratic and slow disbursing, thereby running the risk of failure to develop the momentum to create a market. On the other hand the non-targeting approach avoids discretionary approvals, has higher rates of disbursement -but is potentially less able to target the externalities. In reality these are not mutually exclusive. Without creating a sustainable market the targeting approach cannot achieve additionality in the longer run. Without creating additionality the non-targeting approach cannot maintain a sustainable market in the long run.

4.13 In practice both approaches could also fail to meet their objectives if they are not designed and managed properly. In the case of targeting there is risk that the wrong projects are selected, or that initial

- 33 See Tyler Biggs "a microeconometric evaluation of the Mauritius Technology Diffusion Scheme" World Bank, RPED discussion paper November 1999.

- 34 See Dan Crisafulli: op cit, and Andrew Singer's comments on the Biggs study (Jan 2000).