Mauritius - Coromandel Industrial Estate Project

RETURN TO FflY REPORTS DESK WITHIN ONE WEEK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use C',RCrJL0ATRTG C39Y TO BE RETURNED TO REPORTS DESK Report No. 178-MAS MAURITUS APPRAISAL OF COROMANDEL INDUSTRIAL ESTATE June 6, 1973 Industrial Projects Department This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency 1 Rupee - .185 us $ 1 US $ - 5.4 Rupees F,puivalents 1 Arpent = 1.043 acres 1 square mile = 2.6 square kilometers Abbreviations DBM - Development Bank of Mauritius UNCTAD - United Nations Conference on Trade and Development DWC - Development Worke Corporation TPT - "Travail Pour Tous" (government work program)  MAURITIUS COROKANDEL INDUSTRIAL ESTATE TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS I. INTRODUCTION 1 II. BACKGROUND 1 A. The Problem - Unemployment 1 B. Government Strategy 2 1. Employment Targets 2 2. Industrial Production for Export 3 3. Export Incentives 4 C. The Manufacturing Sector 5 1. Present Position and Growth Trends 5 2. Expected Growth of Manufacturing Employment 6 3. Industrial Land Requirement Forecast 6 4. Availability of Industrial Land 7 III. THE PROJECT 8 A. Site Location and Size 8 B. Development Plan 9 1. PlotPlani, Factory Buildings and Number of Enterprises 9 2. Other Infrastructure 10 C. Type of Estate Enterprises and Employment 10 IV. PROJECT COST, CONSTRUCTION SCHEDULE AND FINANCING PLAN 11 A. Project Cost and Construction Schedule 11 B. Financing Plan 12 V. PROCUREMENT, USE OF CREDIT AND RATE OF DISBURSEMENT 13 VI. PROJECT AND OPERATING CAPABILITY 13 A. DBM - Financial Capability and Estate Development Experience 13 B. Project Execution 14 C. Operations 15  Table of Contents (Continued) Page No. VII. FINANCIAL ANALYSIS 16 A. Income 16 B. Income and Cash Flow Forecasts 18 C. Balance Sheet Forecasts 19 D. Financial Return and Viability Tests 19 VIII. ECONOMIC AND SOCIAL BENEFITS 21 A. Acceleration of Industrial Investment 21 B. Employment 22 C. External and Internal Economies 22 D. Social Benefits 22 E. Indigenous Entrepreneurship Development 22 F. Fiscal Benefits 23 G. Foreign Exchange Earnings 23 M . SMENTS REACHED AND RECOMMENDATIONS 24 ANNEXES 1. Sectoral Employment and Growth Targets, 1969-1980. 2. Numbers of Development Certificates Approved, 1963-1972. 3. Operating Export Processing Enterprises, 1972. 4. Projected Manufacturing Employment and Land Requirements, 1970-1980. 5. Planned Industrial Sites. 6. Coromandel Industrial Estate - Envirorment. 7. Notes on Development Plan. 8. Export Processing Enterprises Approved and Under Consideration. 9, Capital Cost and Construction Schedule. 10. Distribution of Local Currency and Foreign Exchange Expenditure. 1l. Projected Quarterly Disbursements of IDA Credit. 12, Development Bank of Mauritius - Status. 13. Note on Capability of S.I.G.M.A. 14. Eand and Building Rental Rates. 15. Revenue Build-up and Flow. 16. Management and General Overhead Cost Estimate. 17. Income Statement. 18. Cash Flow Statement. 19. Balance Sheets. 20. Financial Rate of Return. Map This report was prepared by Messrs. C. Goderez and M. Iskander of the Industrial Projects Department.  MAURITIUS COROMANDEL INDUSTRIAL ESTATE SUMMARY AND CONCLUSIONS i. This report analyzes a project to establish an industrial estate at Coromandel, four miles southwest of Port Louis, the capital and major city of Mauritius. The estate, with a total area of about 60 acres would provide, on a rental basis, land and infrastructure for the construction of individually owned factories as well as space in standard buildings for small, medium, and some large scale industry. The total estimated cost of the project is about US$8 million equivalent, of which close to half repre- sents foreign exchange expenditures. IDA has been requested by the Govern- ment to provide a credit of US$4 million for the project. ii. The Mauritian economy, dominated by a single agricultural product (sugar), has been unable to provide sufficient jobs for the expanding work- ing force. Unemployment is estimated to be 41,000 or 17% of the total labor force of 249,000 (out of a population of 823,000). In addition, there are 18,500 relief and development workers (7% of the working force) and under- employment is widespread. Since arable land for all practical purposes is fully under cultivation, agricultural growth and diversification cannot have more than limited impact, leaving industrial development as the major feasible long-term alternative if the unemployment problem is to be solved. Import substitution possibilities are limited because of the small national market and, therefore, industrial growth must be strongly oriented to export pro- cessing activities. iii. In recent years, stimulated by a generous package of incentives, foreign investment in manufacturing has been entering the country at an accelerating pace. The first industrial zone at Plaine Lauzun in Port Louis was inaugurated in December 1970 and will be fully developed and occu- pied by early 1974. Approved new industries are having difficulty in find- ing suitable rented quarters or land for factory construction. In response to the immediate unsatisfied demand for industrial space, which is pro- jected to grow further through the decade, the Government proposes to build the industrial estate at Coromandel and in the future others in a dispersed pattern around the island. iv. The Coromandel Industrial Estate project will be owned and managed by the Development Bank of Mauritius (DBM), a government-owned institution established in 1964 which has gained experience in industrial site planning, development and operation at Plaine Lauzun. The proposed financing consists of a Government equity contribution in DBM of US$4 million equivalent and the IDA credit of US$4 million channeled through DBM. The Investment in the estate would be recovered by rental fees charged the estate occupants by DBM, which in turn would repay the US$4 million of loan funds to the Government over 20 years, including 5 years of grace, at an interest rate of 7.25%. The estate will be developed between 1973 and 1978 and occupancy starting in 1974 is projected to grow in step with the phased development of land and buildings. The financial return of the estate project at an assumed 90% occupancy and competitive rentals is 15.4%.  - ii - v. Among the benefits to be generated by the project are 5,000 jobs by 1980 rising to 8,000 by 1985, most of them involving training and skill upgrading of unskilled and/or unemployed workers. The industries on the estate will represent an estimated capital investment of US$58 million and by the mid-eighties corporate income taxes should approach US$5 million per annum. Net foreign exchange earnings after allowing for profit remittances and repatriation of imported capital, on the conservative assumption that all the invested capital is foreign, should approach US$20 million per annum in the late 1980's. The estate is also expected to act as a strong stimulus to indigenous entrepreneurship and small scale industry develop- ment. Finally, national land use as well as industrial and social infra- structure planning and implementation will be greatly facilitated in response to the guided concentration of industry on the Coromandel estate. vi. In view of the project's technical and financial feasibility and its economic benefits, and the agreements reached during negotiations on necessary assurances as summarized at the end of the report, the project is suitable for an IDA credit of US$4 million equivalent.  I. INTRODUCTION 1.01 Since 1970, as part of its development program, the government- owned Development Bank of Mauritius (DBM) has been leasing space to private firms in standard manufacturing buildings constructed within the Plaine Lauzun industrial zone 1/ at Port Louis, the country's capital and principal harbor (Map). The program has been highly successful and early in 1974 the 110 arpents (115 acres) of the zone are expected to be fully occupied by factories established in these pre-constructed buildings (15 arpents) and individually-owned factories on leased plots (95 arpents). In line with the Government's objective of fostering industry and thereby helping reduce unemployment, DBM has been planning further industrial site development on another 60 arpents at Coromandel, four miles from Port Louis, and in May 1972 the Government approached the International Development Association (IDA) for assistance in carrying out the country's first full-fledged industrial estate at this location. The project would consist of the development of land and the provision of the necessary infrastructure for the settlement of industry including pre-constructed standard buildings to be leased to manufacturing firms. The project is estimated to cost about US$8 million equivalent, of which IDA would contribute half or US$4 million. 2/ 1.02 The consulting firm SCET-International - was selected by DBM in June 1972 to prepare a study to determine: (i) the most suitable location for the industrial estate, and (ii) its technical, financial and economic feasibility. An interim report was submitted in December 1972, and the final report, confirming the feasibility of the project, was completed in January 1973 3/. 1.03 This report is based on the SCET study and the findings of an appraisal mission consisting of Messrs. C. Goderez (chief) and M. Iskander (industrial economist) of the Industrial Projects Department which visited Mauritius from January 31 to February 10, 1973. II. BACKGROUND A. The Problem - Unemployment 2.01 Mauritius is a small island (720 square miles) located some 500 miles due east of Madagascar in the Indian Ocean. The population of 823,000 in 1972, while increasing at a rate of only 1.8% per annum (compared to 3% in the 1950's), makes the island one of the most densely populated areas 1/ An industrial zone is an area reserved for industry but without the central management and common service facilities of an industrial estate (see para. 2.20 for further discussion). 2/ Societe Centrale Pour L'Equipement Du Territoire - International (France). 3/ Feasibility Study of Industrial Estates, Main Report and Annexes, January 1973, 420 pages.  -2- in the worid. The economy is overwhelmingly dependent on a single crop - sugar - which during 1967-1970 contributed 33% of GDP, 40% of total employ- ment and 90% of exports. From 1962 to 1969, the economy stagnated and GNP at market prices was only US$200 million in 1971 or about US$250 per capita. As a result of firm sugar prices worldwide and the determined efforts of the Government to accelerate industrial investment, the GNP trend is now rising. Government projections of a 7% annual rate of economic growth up to 1975 are not unrealistic provided sugar prices continue firm and industrialization continues its upward trend. 2.02 There is, however, a serious problem of unemployment and under- employment. Registered enemployed and relief and development workers totalled 59,500 in 1972 or about 24% of the labor force. (Comprehensive registration of unemployed in the last two years probably picked up a substantial number of hidden unemployed who were not included in the 1969 statistics given in the table, para. 2.03). Statistics on the underemployed are unreliable but cannot fail to be very high in a sugar-based seasonal economy. One study in 1961/62 revealed that 7,000 men during the height of the sugar cropping and milling season and 12,700 during the intercrop season were working less than 30 hours per week. Agriculture alone cannot solve the problem, de- spite efforts at diversification into other crops such as tea and ginger, since available arable land is already practically 100% under crop, 95% in sugar alone. B. Government Strategy 1. Employment Targets 2.03 The land constraint and continued population growth have led to the economic development strategy adopted by the Government designed to accomplish a major structural change in the econamy to ensure full employ- ment by 1980. Agriculture's share in the economy, at present about 25% of GDP, is projected to decline to 17% by 1980 while the share of manufacturing is to rise from 15% to 23% of GDP. Industrializatiotn, therefore, is the key long term factor if the full employment goal set by the Government and tabulated below is to be met (Annex 1): EMPLOYMENT TARGET i1969-1980 G Projected Growth 1969 1975 1980 Rate 1969-80 (actual) % Employed (Wage earners and self-employed) 195,000 248,000 325,000 5.3 Relief and Development Workers 16,000 20,000 - - Unemployed 20,000 10,500 - Total 231,000 278,000 325,000 5.3  The table indicates that employment must grow by a total of 130,000 jobs over the decade, or at an annual rate of 5.3%, if the working force, in- creasing at a rate of 3.5% per annum, is to be fully employed by 1980. To achieve this goal, manufacturing employment will have to increase at 9.4% per annum to compensate for slower growth sectors. (If the unemployment and relief and development worker figure was as high in 1972 as indicated in para. 2.02, manufacturing employment will in fact have to grow faster than 9.4% per annum between 1973 and 1980 if the government target is to be met.) 2.04 To deal with the problem of interim unemployment, the Development Plan includes a government work program called "Travail Pour Tous" (TPT) which may receive IDA support through a Rural Development Project currently being appraised. Only projects deemed economically or socially productive are undertaken and these are typically roads, buildings, land clearing and reforestation, bench terracing to increase land availability and rural water supply. Besides providing necessary employment, and added national benefit is derived - upgrading of labor skills such as carpentry, brick- laying and plumbing, creating a resource which will be in growing demand as the industrialization process accelerates. It is expected that as private industrial investment grows, the TPT program will be phased out after a peak in 1975 and disappear by 1980. 2. Industrial Production for Export 2.05 Because of the small national market, import substitution activi- ties have limited potential and in fact the possibilities in this area have been substantially exhausted. Production for export, based primarily on imported raw and intermediate goods, appears to be the only feasible alter- native and the main promotional thrust has been aimed at attracting export processing activities of the type that have flourished in Korea, Hong-Kong, Taiwan and Singapore. Mauritius' major comparative advantage is its ample supply of labor at wage rates about one-third of those in Hong-Kong and Singapore. This advantage is likely to be prolonged for the foreseeable future even though some upward pressure on wage levels can and should be expected because of the predicted economic growth and increasing job opportuni- ties. The same factors are, however, operating in competing countries so that the relative advantage of Mauritius should continue. 2.06 Additionally, factories already established including gem cutting, carved furniture, packaging products, thread and garments among others, have demonstrated the high level of trainability inherent in Mauritian workers. But the success of the campaign initiated in the late 1960's to attract industrial investment to the island must be attributed as well to other factors equally as important as the quality and low cost of labor. These are embodied in a global program of incentives reflecting the Government's determined and pragmatic approach to industrial promotion.  -.4- 3. Export Incentives 2.07 Among the incentives offered are tax holidays of generally 5 to 10 years, no import duties on capital goods and raw materials, credit availa- bility, subsidized power and water rates, free repatriation of capital and dividends, government contributions to the cost of export market surveys, trade fairs and trade missions, and prepared industrial sites offering low cost rental space in first-class reinforced concrete buildings or, alter- natively, loans of up to 50% of building costs repayable over 10 years. Not the least important incentive is the Export Processing Zones Act of 1970, which facilitates for government approved and certified industries the in and out movement of goods, based on ex post facto scrutiny by the National Comptroller. 2.08 The comprehensive incentive "package" offered may perhaps be more concessionary than is necessary to achieve the desired stimulation of invest- ment but has been considered justifiable by the Government in order to maximize the attractions of Mauritius to foreign firms. As noted later in this report, it appears to have been successful in terms of investment flow and job creation and, therefore, changes in terms and conditions should be approached with caution. It may be advisable to reconsider whether or not concessionary rates on power and water, for example, are really necessary. Scheduling of future capital repatriation to help ensure net positive foreign exchange earnings from `e inception of each project might also be feasible without significant deterrent effects on investment. For tile next few years, however, at least until Mauritius becomes better known to the world business zommunity, it would probably be prudent not to alter significantly the present package. 1/ 2.09 Associate membership in the European Economic Comnunity is pendin- (ratification of this status is expected in May/June 1973) and Mauritius based industry is looking forward to easier access to that major market area. Australia has conceded preferential tariff rates on certain Mauritian pro- ducts and exports to that country and to South Africa are growing. Long range prospects for export growth to the U.S.A. and other developed countries will be enhanced once the Generalized System of Preferences of UNCTAD comes into effect. 2.0 A potential investor planning to produce for the world market cannot .lo pbut find Mauritius a desirable location. The incentives and advantages r.merated above, coupled with a pleasant sub-tropical climate, ease of imm' on for expatriate managers and relative political and social stability, 3roven to be effective in attracting a growing number of firms. This basic reality -which supports the feasibility of the proposed project st Coromandei. /5j + Scott (Oxford) in a report "@The Promotion of Export Processing odus,ries in Mauritius", June 1972, opined that the current system of .~.s.entives is yielding in net social benefits about 90% of the optimum -:.* could be achieved, indicating that potential incremental social .-.enefits are small in any case.  -5- C. The Manufacturing Sector 1. Present Position and Growth Trends 2.11 In 1969, manufacturing contributed about 15% to GDP and 13% of total employment (25,000 jobs approximately). The sector is dominated by sugar milling and related industries which generate about 60% of value added and 50% of manufacturing jobs; sugar and tea processing alone in 1969 accounted for 26% of the sectoral work force. At the other end of the spec- trum, small scale manufacturing, defined by the Census of Industrial Pro- duction as establishments employing 10 or less, comprises 95% of total enter- prises (3,471 out of 3,660 in 1968), employs about the same number of workers as the 189 larger enterprises (over 10 workers per enterprise, not including sugar and tea processing) but contributes only 15% of manufacturing output. Except for a government owned sack factory and feed mill, the sector is entirely privately owned. 2.12 During the 1960's, growth in manufacturing was almost entirely in import substitution, with the exception of the major agricultural based sugar and tea industries. During the 10-year period 1963-1972, eac1 /year an average of 8 primarily import substituting "development companies" - were established, generating at their inception about 50 jobs per enterprise (Annex 2). On the other hand, from 1970 to the end of 1972, following the introduction of the export incentive system (para. 2.07), an average of 7 export processing companies per year were created primarily with foreign investment averaging some 100 jobs/enterprise (Annex 3), or double the employ- ment per plant compared to the development companies. 2.13 While the rate of implantation of development companies has been falling off significantly, and may be expected to diminish further since possibilities for additional import substitution are now virtually exhausted, the trend for export processing companies has been rising sharply. On the basis of latest estimates available (Dec. 1972), the number of export proces- sing certificates granted, and projected to be converted into operating plants in 1973 and 1974, totalled 29 corresponding to 14 or 15 new companies per year if all are indeed installed. Allowing for some slippage, it may conservative- ly be expected that, combined, about 16 development and export processing companies will be established annually in the near future. 2.14 An interesting and very significant conclusion of the SCET market study is the high proportion of investments anticipated from firms already established in the better known export-processing zones of Hong Kong, Singapore, Taiwan and others. The success of those nations has raised wages to levels which are progessively more unfavorable compared with those of Mauritius and the politically tense atmosphere of Southeast Asia makes Mauri- tius' relatively remote location - which otherwise would be a disadvantage - appear attractive by comparison. 1/ Locally financed companies which are granted "development certificates"; these carry certain incentives such as tax holidays, credit availability, and reduced tariffs on imported capital goods and materials.  - 6 - 2. Expected Growth of Manufacturing Emplo]yent 2.15 In this section, the manufacturing sector will be treated as com- prising all manufacturing (small, medium and large) industries, excluding sugar and tea processing for which zero employment growth is anticipated in the 1970-1980 decade. Between 1967 and 1970 the total number of manufacturing jobs increased at a rate of approximately 3% per year and it was only from 1970 onward that - primarily due to the influx of export-processing companies - the rate tripled to 9% per year. Total manufacturing employment is estimated to have reached about 22,500 at the end of 1972, of which 11,700 were employed in medium/large scale industry and 10,800 in small establishments and artisan shops. On the basis of the detailed study prepared by SCET, it is further estimated that between 1973 and 1980 some 22,300 and 5,200 new jobs will be created respectively in medium/large and small enterprises so that by the end of the present decade the manufacturing labor force will have reached some 50,000 or about 83% of the Government's manufacturing employment target of 60,400 in 1980 (Annex 4). Based on the evidence available, there is a high probability of equaling or exceeding the predicted growth over the next several years and a lower, but still reasonable, probability of maintaining t *- Awth during the second half of the decade. 2.16 The expected employment creation in medium/large enterprises - of prime concern to the evaluation of the estate project - is based on the following major assumption: (a) the average number of medium/large enter- prises to be established annually in Mauritius will continue to be about 16 as in the recent past; (b) the average employment intensity per plant will be maintained (i.e. at the start of operations, for development companies about 50 persons per plant and for export processing industries about 100 per plant); (c.. 'he composition of the mix between development and export processing companies will shift markedly in favor of the latter; and (d) additional employment creation of about 10% per year will occur in the al- ready existing enterprises as tiiey expand. As a consequence, incremental employment in this segment of industry is expected to increase from about 1,600 per annum to 4,300 per amnunm between 1973 and 1980, or by 15% per year, and by a total of about 22,300 new jobs as mentioned in para. 2.15. 3. Industrial Land Requirement Forecast /_.lm Rational land use planning is particularly important in Mauritius since there is no land reserve to absorb or to mitigate the effects of non- optimal and haphazard land use. A start has been made in land use planning but a much more comprehensive approach is needed and should involve the various relevant government agencies (Ministry of Town and Country Planning, Ministry of Agriculture, DBM and others) in a coordinated program. This issue is dealt with in greater detail in the Rural Development Project Appraisal 1/. Meanwhile, even in the absence of a comprehensive land use plan, the Coromandel project contributes to the objective of rational land use for industry. I/ Rural Development Project Appraisal, Report No. MAS-161, June 5, Annex 2, para. 9.  -7- - 7 - 2.18 Assuming generally accepted average ratios of job creation per unit of land for the types of enterprises likely to be established in Mauri- tius, it is forecast that about 446 arpents of additional factory land will be required between 1973 and 1980 (Annex 4). 4. Availability of Industrial Land 2.19 Under the current Development Plan (1971-1975), nine primary and four secondary smaller areas totalling 660 arpents have been reserved for industry (Annex 5). These include the Coromandel site of 60 arpents but exclude the 110 arpents of the Plaine Lauzun industrial zone which has already been fully allocated. Even assuming a faster industrial growth than des- cribed in the preceding paragraphs, the above areas will amply satisfy in- dustrial land requirements into the early 1980's. Taking into account that many larger enterprises and a significant number of medium-sized establishments are likely to purchase land and develop factory sites independently, notwith- standing the overall land limitation in Mauritius, the planned industrial sites provide an adequate reserve well into the 1980's. The above areas are either unused government-owned Crown Land readily available for development or marginally productive private sugar crop land. 2.20 With the exception of Coromandel, all of the reserved areas are still designated as industrial zones and it is unlikely that all will in fact be converted into estates. An industrial zone is a delineated area reserved for industry where companies buy or lease land from private or public owners, build factories and individually negotiate supply of services such as power and water with the public utilities. There are no common services, central management or special facilities such as pre-constructed standard buildings ready for occupancy, auxiliary power plants, central water storage and sewage treatment as in industrial estates. The centrally planned and managed estate concept offers many advantages, especially to smaller firms seeking rented space in buildings or small parcels of leased land for construction. 2.21 Nevertheless, as already stated, some firms may be expected to establish plants independently either because of company preference, or because their operations do not meet estate standards. For example, these standards normally exclude certain chemical processing industries which even with the best available pollution control technology disseminate odors or irritants and need to be isolated. Generally, the firms preferrring estate locations will be of small to medium size (50 to 200 employees), en- gaged in light manufacturing (apparel, furniture, electronics and other light assembly activities, packaging products, jewelry and ornaments) and inclined to limit their investment to equipment and working capital without tying up substantial capital in land and buildings. SCET estimated that 80% of the new companies, and in particular the export processing firms, would prefer the prepared space and services of an estate and be acceptable as occupants. This distribution pattern appears reasonable based on experience in other countries and the recent history in Mauritius, and implies that of the total projected demand of 446 arpents between 1973 and 1980 (Annex 4), 80% or 360 arpents should take the form of estates. Coromandel will provide 60 arpents within the next few years and the need for further estate projects in the other reserved locations should be continually assessed and implemented as the growth in demand justifies the investments needed.  III. THE PROJEC'T' A. Site Location and Size 3.01 Although the 60 arpents at Coromandel had already been optioned early i2n 1972 bv DBM on the basis of its own evaluation, the SCET feasibility study started with a comparative analysis of altervaative sites. Available alternatives were weighed in accordance with the foilowing criteria: land values, transportation arteries, proximity to the major center of Port Louis, labor availabiLity, land characteristics (load bearing capacity, surface, and tinderground features affecting construction. costs), c.ost of external infrastructure connections (power, water, telephones, drainage and sewage disposail). A first review narrowed the preferred choices to four - Coro- mandel, Vacoas-Phoenix, Curepipe and La Cure (Map) - which were then surveyed in depth to select the one most suitable. it was conclude- that Coromandel is indeed the most economic and therefore the preferred site. DBM purchased the land in February 1973 and preparatory work nas begun to develop it into an industrial estate. Among its outstanding advantages are: (a) Land was purchased at a very favorabIL;& -Price of Rs 15,000 (US$2,900)0/arpent which is well below the current market price of Rs 60,000/arpent (DBM estimate). (b) It is unoccupied and unexploited and had been considered only marginally productive for sugar cane. (c) Located at the southern edge of the District of Port Louis, it is on'ly 4 miles from the urban center but easily accessible to the major labor force of Port Louis by regular bus service which can be expanded as needed. (d) It is bounded on the east by the pri rr highway connecting Port Louis with the airport, which is 30 uulle,i a .ay, and on the north, west and south by secondary roads (Annex (e) Land is only slightly sloping (4 to 6'l); grading costs will there- fore be minimal and surface drainage adequate. (f) High voltage power distribution lines cross the property. (g) Sufficient water of the requisite quality iS readily available from nearby sources. 3.02 In view o`t the projected high demand for industrial sites parti- cularly in the proximity of Port Louis, DBM has taken an option on an addi- tional 120 arpents adjacent to Coromandel, at La Tour, parts of which would be allocated to housing and other social infrastructure. No development work will be undertaken at 'a Tour until 1974 at the earliest when DBM will have to decide whether it wants to expand the Corom&ndel estate through  - 9 - addition of La.Tour or develop a new estate at some other location. Expanding Coromandel has obvious advantages in reducing infrastructure costs, but the possibility of excessive congestion must also be taken into consideration and financial savings in developing the larger estate in one continuous project might be more than offset by the additional social costs of urban congestion. These aspects require further study and, during negotiations, DBM has agreed to consult IDA before proceeding with development of La Tour. B. Development Plan 3.03 A detailed analysis of the physical part of the estate is contained in the SCET Study; the layout of the estate and a brief description of its infrastructure are given in Annex 7. 1. Plot Plan, Factory Buildings and Number of Enterprises 3.04 The site will be subdivided into 25 plots for industry and one plot for a management and commercial center. Average plot size will be 1.9 arpents but the layout provides optimum flexibility for plot sizes to range from 0.5 to 4 arpents per enterprise, or even more, depending on individual require- ments. Following the strong demand for ready-made factory buildings at Plaine Lauzun, over one third of the estate will be reserved for this type of factory building, i.e. primarily for small scale enterprises. Also for these the floor area per factory can be kept very flexible from a minimum size of 2,000 sq. ft. to a multiple thereof. All plots and subdivisions have access to the internal road network and to the various utilities (para. 3.05) that will be provided on the estate. The projected pattern of land usage and of the number of fac- tories expected to settle on the estate is given below: PATTERN OF LAND USAGE, AVERAGE FACTORY SPACE, AND NUMBER OF ENTERPRISES Land Estimated Average Floor Number of Area Floor Space Space Per Factory Factories (arpents) (sq.ft.) (sq. ft.) (a) 12 to 15 Standard Buildings (small/medium scale industries) 27 900,000 7,500 120 (b) Individual Factories (medium/large scale indus- tries) 1/ 20 300,000 30,000 10 (c) Management/Commercial Center 4 60,000 - - (d) Roads, Utilities and Land for Common Use 9 - _ _ Total 60 1,260,000 130 1/ Owner financed, although DBM may extend construction loans out of its general funds.  - 10 - 3.05 The number of factories that will in fact locate on the estate is difficult to predict and the above total of 130 enterprises must be considered a rough approximation only. While the number is based on experience gained at the Plaine Lauzun industrial zone, it will vary with the type of industry that will actually settle on the estate. The individual and the standard factory buildings will be of reinforced concrete construction to withstand the cyclonic winds of the area of velocities of 160 miles/hour and more. The standard factory buildings will have one to three floors and will largely follow the design that at Plaine Lauzun has proved satisfactory both from the point of view of utility and low cost of construction. Individual factory buildings will have to comply with certain architectural guidelines to pre- serve the aesthetic character of the estate. 3.06 The Management/Commercial Center will be a building to house DBM's on-site operating staff, a canteen, bank, post office, and possibly several retail stores. A building and grounds maintenance shop would also be included to store maintenance equipment, tools and materials. Production shops such as foundries and forges are not envisaged as estate-owned facili- ties, but might appear as privately-owned ancillary industries. 2. Other Infrastructure 3.07 Provision of utilities (water, sewage, power and telecommunications) and responsibility for their implementation will rest with the respective public utilities and will therefore not form part of the cost of the project; an exception is the sewage treatment plant which will be constructed by the estate and on its account. Preliminary design standards as included in the SCET study are in line with normal practice in Mauritius and, as they will generally follow those at Plaine Lauzun, are already known to be acceptable to foreign private investors. These standards were discussed during negoti- ations and agreement was reached on satisfactory arrangements to be entered into with the utility companies on the timely construction of their facilities. C. Type of Estate Enterprise and Employment 3.08 The type of export-oriented industries that can be expected to come to the estate will be determined by two principal factors: (a) the availabil- ity of low-cost and quickly trainable labor and (b) the relatively high trans- portation costs overseas. Production therefore will be geared to the manu- facture or partial processing of a wide variety of products, from electronic components to toys, with a high value added, where labor inputs are signifi- cant and where the value of imported materials and components and of the ex- ported product is high as compared to their weight and/or volume. Most of the processes therefore can be expected to be highly labor-intensive. Annex 8 gives a spectrum of the type of products that might be expected to be manu- factured on the estate, together with the countries from which the technical know-how would be supplied. Using the same industry mix as at Plaine Lapzun and the same average ratio of 6.7 workers per 1,000 sq. ft. of floor space as experienced there, Coromandel when fully occupied could employ some 8,000 people.  IV. PROJECT COST, CONSTRUCTION SCHEDULE AND FINANCIAL PLAN A. Project Cost and Construction Schedule 4.01 The cost of the project, detailed in Annex 9, is summarized below: CAPITAL COST ESTIMATES Local Foreign Total Local Foreign Total % (Rs. million) (US$ million) Land 0.90 - 0.90 0.17 - 0.17 2.1 Infrastructure 1.51 0.97 2.48 0.28 0.18 0.46 5.8 Buildings 12.22 13.18 25.40 2.26 2.44 4.70 59.2 Engineering and Supervision 0.65 - 0.65 0.12 - 0.12 1.5 Sub-total 15.28 14.15 29.43 2.83 2.62 5.45 68.6 Contingencies - Physical 1.44 1.42 2.86 0.28 0.27 0.55 6.8 - Price Escalation 6.48 4.00 10.48 1.20 0.74 1.94 24.6 Total 23.20 19.57 42.87 4.31 3.63 7.94 100.0 4.02 The cost estimates were prepared by SCET in January 1973 on the basis of actual costs incurred in the ongoing construction of similar works on the Plaine Lauzun industrial zone. Land was purchased by DBM in February 1973 and construction is expected to commence by mid-1973 and to end by December 1978. Initial contracts for construction will be let for only portions of the total work, including 40% of the standard buildings between (about 300,000 sq. ft. of leasable floor space), the Management/Commercial Center (60,000 sq. ft.), and 60% of leasable land (12 arpents) plus 60% of roads and other infrastructure. As presently planned this contractual phase will be completed by the end of 1975 and the remainder of the buildings and the infrastructure will be built between 1976 and 1978. Phasing construction over a 5-year period is designed to insure full occupancy of land and build- ings as soon as they are ready. Given current forecasts of supply and demand for industrial land and buildings, the construction period is somewhat lengthy. However, the construction plan is flexible enough to allow the estate management to adjust the speed of construction in the light of realized and prospective rates of occupancy. 4.03 Physical contingencies of 10% of project costs (before contingen- cies) - and excluding land which has already been purchased - are included in the above estimate. Price escalation (starting with Jan. 1, 1974) has been based on current trends, i.e. 12% per year on local currency expenditures and 8% per year on foreign exchange expenditures. With these contingencies and particularly since it is likely that the overall construction period  - 12 - can be compressed, cost estimates are considered realistic. Nevertheless, during negotiations assurances were obtained from the Government that it wtll supply any funds - both local and foreign - that may be needed to com- plete the project, on terms satisfactory to IDA. 4.04 Various estimates have been made by DBM and SCET (Annex 10) of the foreign exchange and local currency components of the building construction and infrastructure works. The above split of about 54% local and 46% foreign probably underestimates the foreign exchange requirements which may be as high as half of total project cost. The IDA credit of US$4.0 million is based on the assumption that the foreign exchange component will be a maxi- mum of 50% of project cost. B. Financing Plan 4.05 The project will be financed as follows: FINANCING PLAN Rs million US$ million Government equity contribution 21.4 4.0 Proceeds of IDA credit 21.4 4.0 Total 42.8 8.0 The US$4.0 million equivalent contribution by the Government would take the form of an equity subscription in DBM. 4.06 The IDA credit would be made to the Government, which would onlend the proceeds to DBM at an interest rate of 7.25% per annum and repayable over 20 years including 5 years grace, the latter corresponding to the approxi- mate duration of construction. T'o avoid putting additional risks on DBM on account of its agency role of executing the project on behalf of the Govern- ment, during negotiations the Government proposed and it was agreed that it would guarantee DBM against project losses. This would be accomplished by the Government reimbursing DBM for project operating losses incurred in any fiscal vear in excess of cumulative earned surplus from project operations.  - 03 - V. PROCUREMENT, USE OF CREDIT AND RATE OF DISBURSEMENT 5.01 The proceeds of the IDA credit will be used for expenditures on the construction of roads, standard buildings and other infrastructure works, but not for the purchase of the estate land and the engineering contract. The land has already been acquired and the engineering contract will be negotiated with S.I.G.M.A., a local firm of engineers, at a fee of 2% of the value of civil works. S.I.G.M.A. is well known to DBM as competent firm which has successfully carried out important public works in Mauritius and is considered qualified by IDA. 5.02 Tender notices for goods and services contracts (excluding the engineering contract) will be made known to all local embassies and consulates of the Association's member countries and Switzerland, in addition to adver- tisement in Mauritius. 5.03 IDA funds will be disbursed against certified progress payments on eligible contracts. The ratio of IDA to government contributions in these contracts will be 52/48; this takes account of the Government's additional payments for land and the engineering contract. Quarterly disbursement forecasts of the credit are shown in Annex 11. As indicated in para. 4.04, a minimum of 91% of the credit is expected to be used for foreign exchange purchases but this could possibly reach 100%. VI. PROJECT AND OPERATING CAPABILITY A. DBM - Financial Capability and Estate Development Experience 6.01 DBM, the proposed owner and executing agency of the project, is an autonomous public sector institution, established in 1964 to foster industrial and tourism development and agricultural diversification. Share capital of Rs. 10 million (US$1.85 million) is owned 80% by the Government and 20% by the Bank of Mauritius (Central Bank). As of June 30, 1972, total resources of DBM were Rs. 71 million (US$13.2 million), consisting of Rs. 22 million capital and reserves; Rs. 18 million debentures and bonds outstanding; Rs. 29 million government loans; and Rs. 2 million deposits. Annual dis- bursements have increased at an average rate of 20% between 1965 and 1972. In mid-1972, DBM obtained a US$3.5 million IDA credit of which US$400,000 was allocated to the construction of standard buildings at Plaine Lauzun and US$100,000 to finance the Coromandel industrial estate feasibility study. Industrial building construction and leasing has been underway at Plaine Lauzun for some years and DBM has gained considerable experience in planning, executing and management of standard buildings as well as in general super- vision of the industrial zone at Plaine Lauzun. Annex 12 gives more back- ground on DBM's activities, financial position and prospects.  - 14 - 6.02 Management of the estate by DBM is, furthermore, advantageous because of the combination with possible loan financing of individually owned factory buildings and equipment for estate enterprises. Assuming that estate enterprises will borrow as much as 60% of the value of their equipment and up to 50% of the cost of buildings, total loan requirements between 1974 and 1980 could reach approximately Rs. 162 million (US$30 mil- lion) or an average of about Rs. 23 million (US$4.3 million) per year. The average figure, however, would follow a growth curve so that annual require- ments in the mid-1970's will be lower, perhaps in the US$2 to 3 million range, and may rise to US$5 million or more late in the decade. Approvals of .1ans to medium/large scale enterprises by DWI were US$1 million in FY1971 (ended June 30, 1971), US$1.5 million in FY1972 and are expected to reach US$4 million in FY1973, a probably exceptionally high figure. Assuming that a current "normal" rate of lending is about US$3.5 million per year, and con- sidering that about 70% of DBN's portfolio is in manufacturing, DBM seems now to be lending to this sector at about the rate predicted for the immediate years ahead at Coromandel - US$2-3 million per year. 6.03 Although DBM is the primary source of development lending, in addi- tion the six conmercial banks in Mauritius have recently begun to participate with DBM on a 50:50 basis in development loans of up to 7 years to medium/large scale industry at the same interest rate as DBM's (8.5%). Commrrcial bank credits to industry, including short-term, increased by 70% in FY1971 and anotlher 58% in F9Y1972, reaching Rs. 55 million in June 1972, corresponding to 17.8% of total credits outstanding (Rs. 308 million). 1/ If we assume that 10% of this industrial credit is medium-long term development finance, it would appear that Rs. 5.5 million (US$1 million) has been channeled into in- dustrial development finance by the commercial banks out of total resources of i's. 308 million (US$57 million). This activity has started only in the last two to three years and can be expected to grow. The resources of DBM plus the resources and growing involvement of the commercial banks appear to be adeeuate to meet the estimated demand for industrial equipment and factory building finance at Coromandel. B. Project Execution 6.04 Additional staff is needed for the project and a separate unit will be established within DBM with prime responsibilities for project implementa- tion. DBM plans to recruit a civil engineer as a full-time Project Manager and a project accountant, responsible for the day-to-day management of the project. Both will work under the overall supervision of the Head of DBM's Industrial Section and be supported by other DBM staff as may be required 1/ Bank Supervision Report, March 11, 1973, "The Development Bank of Mauritius."  - 15 - from time to time. An important function of the accountant will be to set up separate project bookkeeping and accounts to facilitate financial control and future evaluation of the estate's performance. 6.05 As in the past at Plaine Lauzun, further technical expertise will be supplied by a Mauritian architect who will be responsible for building design, preparation of building tender documents, evaluation of bids and supervision of construction. The architect would report to the Project Manager and act as the owner's (DBM) representative in all dealings with the contractors. S.I.G.M.A. will provide engineering design services, i.e. detailed engineering of the Coromandel development plan. The five partners are experts in land surveying and land use planning, structural design and engineering, soil mechanics, hydraulics, road building and factory, commercial and residential building design (Annex 13). C. Operations 6.06 As early as possible but not later than mid-1974, a Manager of Promotion and Sales, and later in that year, when the first occupants are expected to enter Coromandel, an Estate General Manager will be added to the management team with the necessary staff. These arrangements, together with the overall support of DBM, are expected to provide adequate assurances that the project will be executed properly, and were confirmed during negotiations. Further competence of DBM in estate management is planned to be acquired through study trips to Singapore, Hong Kong, Taiwan and Israel, among others. DBM's Industrial Section Head has already undertaken the first of such trips. 6.07 Despite the encouraging demand forecast, DBM plans to start addition- al promotional efforts to attract foreign investment and thereby help ensure full occupancy of the estate as quickly as possible. Such efforts would include: (i) preparation of up-to-date promotion brochures; (ii) interna- tional and national advertising of the Coromandel estate and the investment incentives; (iii) enlisting the cooperation of chambers of commerce, interna- tional banks, foreign government trade promotion organizations, and interna- tional development institutions (e.g. African Development Bank and UNIDO), in order to maximize contact with the world business community. Attendance at trade fairs and visits to foreign countries together with private Mauritian buisnessmen are intended to be arranged to make contact with possible invest- ors. Occasionally, it might also be justified to contract consultants in certain priority target countries such as Hong Kong, Taiwan, Singapore, Australia, South Africa, Germany, France, England, Japan and the U.S.A., to conduct promotional programs. 6.08 Admittance to the estate will require DBM approval. DBM will appraise the viability of each applying company as it does in its other operations, independently of whether or not it will be asked to provide  - 16 - financing for equipment purchases. Since one of the prime objectives of the estate is to overcome the unemployment problem in the country, preference will be given to the establishment of labor over capital-intensive manufac- tures. Furthermore, criteria for settlement on the estate, including the establishment of ecologicalistandards, architectural guide-lines and building regulations as well as standard lease contracts and general estate rules, are being developed and will be submitted in a form satisfcory to IDA before end-1973. 6.09 Although special assistance to occupant firms in training their employees to higher skills is a feature of some estate projects in other developing countries, no similar activity is planned at Coromandel. Foreign firms have been training specialized staff as needed at company expense and there does not seem to be any strong pressure to increase the already at- tractive incentive package (para. 2.07) by a government supported training program tied to either Coromandel or Plaine Lauzun. Industrial training programs do exist under the aegis of the Ministries of Education, Labor and Immigration with, in some cases, support from UNDP and the ILO and additional programs are being planned.1/ These training programs have been providing a flew o~f i^ntice skilled workers (carpenters, bricklayers, plumbers) as welw, as more skilled personnel (technicians including draftsmen, machinists, instrument mechanics). Training in commercial administration is available on the university level. In view of the existing and apparently broadly based national training effort, it was concluded that no special program was needed as part of the project. VII. FINANCIAL ANALYSIS A. Income 7.01 Land and buildings will only be leased. Currently, undeveloped land, to the limited extent available in the Port Louis area, is being leased at an annual rental of Rs. 6,000 to 8e,00 per arpent. By mid-1974, when occupancy will begin, a land lease rate at Coromandel of Rs. 10,000 per arpent cf developed land is assumed; this is considered a conservative assump- tion and competitive with alternative sites in the Port Louis area. Based on past trends and projected demand, the annual lease rate can reasonably be expected to increase by at least 8% per year for the foreseeable future. Lease rates will be fixed for a three-year term (the customary period already established at Plaine Lauzun) and at each three-year renewal thereafter it Is assumed for purposes of the financial projections that the rate will be increased by 25%. By way of comparison, at the most recently established export processing zones in Taiwan, occupants have to pay an annual land rental of about Rs. 35,000 per arpent. 1/ Bank/IDA report AE-30a, "Mauritius: 4-Year Development Plan - An Assessment", October 24, 1972, p. 14-25.  - 17 - 7.02 Building rentals are projected to start at Rs. 5.0/sq.ft/year. Rentals at Plaine Lauzun have recently been increased to about Rs. 4.0/sq. ft./year, and DBM plans to increase this to Rs. 4.5-5.0/sq.ft. during the course of 1973. Starting rentals at Coromandel can therefore be reasonably set at Rs. 5.0/sq.ft. in 1974. As with land leasing, building rental contracts will be at fixed rates for three years, renewable thereafter every three years with an assumed 25% increase in rent for each three-year period. This is a conservative assumption when compared to the inflation assumed in esti- mating project cost (Annex 14). 7.03 The starting land lease and building rental rates, being competitive with other rates in the Port Louis area, are readily acceptable to potential occupants. Although the assumed increases of 25% every three years are con- sidered conservative, the actual lease terms need not necessarily contain such a rigid formula, but rather provide for a reassessment in the light of actual experience. The guiding criterion should be competitiveness. In addition, to protect the financial position of the estate, agreement was reached during negotiations that there will be consultation with IDA, whenever, for any reason, the return on total capital employed falls below 10% per annum. This leaves open the question of what measures should be adopted if the project fails to yield such a return. Corrective action might involve measures quite distinct from changes in rentals. This rate of return test, in effect, establishes a revenue "floor" which assures coverage of debt service and operating costs as well as the use of capital in the project in as productive a way as elsewhere in the economy. 7.04 The total revenue build-up and flow from land leases and building rentals is detailed in Annex 15. Although the demand forecast indicates that 100% occupancy is a reasonable likelihood, all projections of income have been set at 90% occupancy of developed land and buildings. 7.05 Annex 16 lists the management and general overhead breakdown under (i) salaries and general overhead, (ii) insurance, (iii) building and ground maintenance and (iv) international promotion. These expenses will start in 1974 and build up to Rp. 930,000 per year by 1979, the first year of "normal" operation after completion of construction, corresponding to 15% of revenue in that year. Thereafter, it was assumed that operating costs could be maintained at the same rate, (i.e. 15% of revenue). A special provision of Rs. 100,000 per year for international promotion is limited to the five-year period 1974-1978, although this activity may have to be continued if occupancy runs significantly lower than predicted. Additional operating costs are (i) depreciation of 5% per year on infrastructure and buildings and (ii) 7.25% interest on the outstanding loan. The depreciation rate of 5% per year - a conservative building depreciation rate - has been applied to the total project (less land, which is not depreciated) since buildings account for over 90% of the project cost and any adjustment for differing rates applic- able to other infrastructure items would have been insignificant.  - 18 - B. Income and Cash Flow Forecasts 7.06 Income and cash flow forecasts at 90% occupancy are shown in Annex 17 and 18 respectively and are summarized below: COROMANDEL - SUMMARY INCOME AND CASH FLOW FORECASTS, 1974-1983 (Rs. millions) Construction 1974-75 1976 1977 1978 1979 1980 1981 1982 (cumulative) Land for lease (arpents) 12 14 19 19 19 19 19 19 Buildings for rental (thousand sq. ft.) 360 560 760 960 960 960 960 960 Income Revenue 1.1 2.0 3.2 4.6 6.2 6.6 7.1 7.8 Operating Costs 0.4 0.7 1.3 1.9 2.5 3.1 3.2 3.3 (incl. depreciation) Income before Interest 0.7 1.3 1.9 2.7 3.7 _3.5 3.9 4.5 Interest 0.4 0.6 0.9 1.2 1.6 1.5 1.4 1.4 Net Income 0.3 0.7 1.0 1.5 2.1 2.0 2.5 3.1 Cash Flow Sources of Funds Net Income 0.3 0.7 1.0 1.5 2.1 2.0 2.5 3.1 Depreciation 0.1 0.3 0.7 1.1 1.6 2.1 2.1 2.1 Government Equity 7.3 4.5 4.6 4.9 - - - Long Term Debt 7.3 4.5 4.7 4.8 - - Total Sources 15.0 10.0 11.0 12.3 3.7 4.1 4.6 a.2 Application of Funds Estate Development (includes buildings) 14.6 9.0 9.3 9.7 - - - - Debt Repayment _- - - 0.8 0.9 1,0 1.1 Total Sources 14.6 9.0 9.3 9.7 0.8 0.9 1.0 1.1 Surplus 0.4 1.0 1.7 2.6 2.9 3.2 3.6 4.1 Cumulative Surplus 0.4 1.4 3.1 5.7 8.6 11.8 15.4 19.5 Debt Service Coverage - - - - 2.2 2.4 2,8 2.3 %i7 Since the estate is a government-owned operation it does not pay ,,come tax. As shown above there will only be a small cash surplus from the --ations in 1974 and 1975,when revenue on leased buildings will begin to build raising net in-ome and cash surplus to Rs. 3.2 million and Rs. 8.6 million respectively in 1979, net income and cash surplus continue to in- crease on account of highe- rental rates reaching a hefty Rs. 13 million and Rs. M10 million respectively in 1993, the last year of debt repayment.  - 19 - 7.08 Debt service coverage starts at a comfortable 2.2 in 1979, the first year of debt amortization, and increases thereafter to 3.0 in 1983 and 6.2 in 1993, the last year of debt amortization. C. Balance Sheet Forecasts 7.09 Projected balance sheets of the estate operation are summarized below from Annex 19. The starting year corresponds to the beginning of the second and last construction contract period (para. 4.02): COROMANDEL - SUMMARIZED BALANCE SHEETS, 1976-1982 (Rs. million) 1976 1977 1978 1979 1980 1981 1982 Assets Current 1.4 3.1 5.7 8.6 11.8 15.4 19.5 Fixed (Net) 23.2 31.8 40.4 38.8 36.7 34.6 32.5 Total Assets 24.6 34.9 46.1 47.4 48.5 50.0 52.0 Liabilities and Equity Current - - 0.8 0.9 1.0 1.0 1.1 Long Term Debt 11.8 16.4 20.5 19.6 18.6 17.6 16.5 Equity 12.8 18.5 24.8 26.9 28.9 31.1 34.4 Total Liabilities and Equity 24.6 34.9 46.1 47.4 48.5 50.0 52.0 Current Ratios - - 6.7 9.6 11.8 15.4 17.8 Debt/Equity Ratio 48/52 47/53 45/55 45/55 42/58 39/61 36/64 7.10 Liquidity, or the current ratio, of the project is satisfactory throughout the period of repayment of debt. The earned surplus credited to the project will accrue in the total earnings of DBM from all its operations and be rolled over in its normal lending program. 7.11 During negotiations assurances have been obtained that independent audits will be conducted of the estate operations in a manner satisfactory to IDA. D. Financial Return and Viability Tests 7.12 The financial rate of return of the project was calculated with costs and revenues in constant 1973 rupees (Annex 20). Based on 90% occu- pancy over a 20-year project life and a residual value equal to the book value of investment, i.e. land valued at the actual price paid in 1973 (Rs. 900,000) and no residual values for the buildings and infrastructure, the rate of return is 10.3%. Compared to the most recent estimate of op- portunity cost of capital of 8%1/, the project is acceptable. However, land values, which have more than doubled since DBM optioned Coromandel in early 1/ M.F.G. Scott, "Estimates of Accounting Prices in Mauritius", April 1972 (mimeographed paper), p. 14.  - 20 - 1972, will continue to increase, and the re4z.:)-ocejl. gs will have a useful life far beyond 20 years especially if they are properly maintained, as is assumed in the project operating costs. If we assume a realistic net present value of Rs. 900,000 for the land and a residual value of half the initial investment cost for buildings and infrastruicture, the rate of return increases to 12.4%. In addition, if we assume that rental rates will in- crease by 3% per year to reflect the increased scarcity of industrial land and buildings, the internal rate of return is 1534ZO This last case is the most realistic one, since it accounts for both residia; values in the build- ings and the scarcity value of the land. 7.13 Actually, there are two important interdependent variables which affect income and profitability. These are (i) rate of occupancy and (ii) land lease and rental levels. Assuming 80% occupancy and a rental rate of Rs. 5.0 per sq. ft. (equivalent in total revenue to '10X occupancy and a rental rate of Rs. 4.0 per sq. ft.), the rate of return is 13.0%. This is regarded as a realistic lower bound, for the fol.owving reasons: (a) DBM has a long waiting list for buildings at Plaine Lauzun at rental rates of Rs. 4.0/sq. ft./year and soon to rise to 3s, s 45-5.01sq, lt,year; (b) the Coromandel estate will meet only about 13% of thie estimated demand for standard buildings for the period 1973-1980, and no other estate projects are currently planned. 7.14 Although considered very unlikely to occur, a further return test was made assuming that construction ceases after the initial contract period (1973-75) because of lagging investment and lower than expected occupancy. Based on a reduced cost of US$2.7 million and 75% occupancy over 20 years, the financial return is 8% indicating that even on this basis the project is feasible. 7.15 The projections based on constant terms not only show favorable rates of return but the projected debt service and current ratios are also more than adequate. DEBT SERVICE AND CURRENT RATIOS IN CONSTA.'NT TERMS PROJECTIONS 1980 1981 1982 1983 1984 Debt Service Coverage 2.4 2.4 2<4 2.4 2.4 Current Ratio 12.2 13.7 16.1 17.3 18.6 7.16 In reality, the return of 10.3% derived from the constant rupee projections (Annex 20) understates the financial return of the project. On the basis of current rupee projections outlined in para. 7.01-7.10, and again assuming only 90% occupancy over 20 years of project life and no residual value, the return would be 15.0%.  - 21 - 7.17 In conclusion, the analytical tests of project profitability demonstrate that the project is viable and justifiable. The sensitivity of the project to occupancy rates lower than projected is apparent, but it is very unlikely that occupancy would in fact drop to a point at which the financial return would be less than 8Z (assumed opportunity cost of capital). In any case the project yields substantial economic and social benefits as described in the following chapter. VIII. ECONOMIC AND SOCIAL BENEFITS 8.01 A rigorous measure of the national benefits generated by the project would require a "with and without" ("with the project" and "without the proj- ect") comparative analysis. This in turn would require credible estimates of the effect of the project on the rate of factory investment from which all costs and benefits are derived - and this cannot really be quantified with any degree of accuracy. Undoubtedly, many industries have been and would continue to be established in Mauritius even if no estate were ever built. Prepared sites and services accelerate the investment decision process and in some cases might be a plus factor inducing a company "go" decision on investment which otherwise might have been "no go" or "wait". In the absence of an accepted methodology to quantify the incremental benefits of the "with" situation, the paragraphs following will make qualitative judgements of the hard-to-quantify benefits and numbers will be used only for reasonably credible estimates. A. Acceleration of Industrial Investment 8.02 The project will facilitate and accelerate factory investment, particularly by foreign firms acting alone or in joint ventures with local capital. Assuming (i) an average capital/output ratio of 3.5 1/ for the type of industries foreseen and (ii) output (value added) of US$3,000 2/ per employee at full occupancy in 1979, capital invested in the estate industries will be US$58 million and value added per annum US$17 million. Although the full amounts cannot be attributed wholly to the estate, it is clear that many of the foreign firms are specifically attracted to the ready availability of standard buildings and the infrastructure services. Since the bulk of the investment will be foreign capital inflow, a substantial part of the total new investment can be attributed to the estate. It is also reasonable to assume that local capital, which otherwise might leave the country in whole or in part, will be a significant fraction of the whole. 1/ The current ratio for existing export processing industries in Mauritius. 2/ Currently, value added per employee is under US$2,000 but this will be increasing as efficiency improves and more sophisticated processes and products are introduced.  - 22 - B. Employment 8.03 The completed project will house industries providing employment for 5,000-6,000 by 1979, rising to a peak in 1985 and beyond of perhaps 8,000. Approximately 14% of the new factory jobs needed nationally between 1973 and 1980 (38,000) would, therefore, be created on the estate 11. The situration level by 1985, equal to 170 jobs per arpent, is high in comparison to usually accepted criteria and can be explained by the high allocation of land (57%) to multi-level standard factory buildings for smaller and more labor intensive activities. A very high percentage of workers will be trained to higher skills and earning power than they have had in the past. Construc- tion workers may average 1,000 to 1,200 during the construction period of 1973 to 1978. As in the case of investment, a substantial part of the new investment is directly the result of the establishment of the estate. C. External and Internal Economies 8.04 The concentration of industries on the estate, as opposed to the haphazard and dispersed pattern which would occur otherwise, greatly facilitates rational planning and installation of external infrastructure (power, water, sewage, roads, etc.). Costs will be lower since external networks will be less dispersed and time schedules for planning and imple- mentation compressed. Within the estate, there will be internal economies resulting from lover cap'tal investment per factory because of common utilities and services. D. Social Benefits 3.05 With estate management in control of the quality, cleanliness and appearance of factories as well as standards of employee services, the working environment will be greatly improved. Among the common facilities foreseen are (i) a central canteen (many small firms make no provision for lunch facilities), (ii) an employees association and athletic field. Air pollution control standards will be enforceable and the common sewage treat- ment complex will eliminate liquid and solid waste problems. Town planning, including housing and transportation, schools, hospitals, and other social infrastructure can be developed efficiently for the concentration of workers which might correspond by 1985 to a family population of about 35,000. E. Indigenous Entrepreneurship Development ,..<.6., A number of the industries already established are joint ventures o; -mixed foreign and local capital. Future growth can be expected to show a --7sing trend in local participation as domestic capital accumulation and .ocal management tapabilities grow. In the small scale industry sector, growth will assuredly accelerate in response to the need for ancillary supply 1f! As noted in para. 8.01, a more meaningful figure would be the job aation i"with" the estate less the job creation "without" the estate, the incremental jobs attributable to the estate.  - 23 - of services, parts and components to the larger industries. DBM is already implementing an organized program of small scale industry development by means of a special lending program (maximum loan is Rs. 10,000 at a concessional interest rate of 4.5% per annum and pay-back of up to 10 years) and the Coro- mandel estate, by concentrating a large number of small enterprises at one location, will provide a framework for more efficient transfer of technical and financial assistance, management training and marketing guidance. With- out the establishment of Coromandel as a focal point for these programs, these programs would not be as successful or, at the least, would be more expensive for an equivalent result. F. Fiscal Benefits 8.07 Industries will generally be certified as "development" or "export processing" and these enjoy income tax exemptions of 5-8 years and 10 or more years respectively. Fiscal income in the form of taxes on profits, therefore, will not be realized until the 1980's. Assuming a 4/1 ratio of gross product value (GPV) to added value or GPV of approximately US$100 million in the mid-1980's 1/ and taxable profits of 10% on sales of US$10 million, corporate income taxes at 45% would equal US$4.5 million per year. Of course, without the expense of the estate some increase in tax revenues would occur from those enterprises that would be established anyway. The question is whether the net benefits (i.e. tax revenues minus estate expenses, capital and operating) are greater with the estate or without it. Since it has earlier been indicated that the bulk of new investment will be in the form of foreign capital inflow and that many enterprises are specifically attracted by the advantages of the estate, it is probable that the net benefits with the estate are greater; notional estimates under several assumptions tend to confirm that conclusion. Personal income taxes will add to the fiscal income but no effort has been made to estimate this amount. Finally, the estate is projected to yield an operating profit and this will accrue to the Government as the owner of DBM. G. Foreign Exchange Earnings 8.08 Net foreign exchange (FE) inflow attributable to the estate based industries can only be roughly estimated. The basic assumptions are (i) that profits after taxes will be entirely repatriated and (ii) capital investment will be repatriated over time as permitted by the incentives granted. The estimate implies that all investment is foreign capital. If, in reality, some portion of the investment were to be indigenous, profit repatriation and capital repatriation would be reduced and the net foreign exchange inflow would be increased. Value added approximately represents the foreign exchange earned over the above the cost of imported materials. The inflow and outflow estimates for the post construction operating period is tabulated below; 1/ GPV in 1980 would be an *stimated US$68 million; allowing for dollar escalation and increasing productivity, GPV rises to US$100 million (estimated) in the mid-1980's.  - 24 - ANNUAL NET FOREIGN EXCHANGE EARNINGS, 1980-1990 (US$ million) Inflow 1980 1985 1990 Added Value /1 19.0 28.0 45.0 Outflow Profit Repatriation /2 11.0 18.0 20.0 Equity Capital Repatriation /3 6.0 6.0 3.0 Net FE earned 2.0 4.0 22.0 /1 Assumes constant growth rate of 10% per year. /2 Assumes that most tax holidays have run out by 1990; profits in that year therefore reflect tax paymenits. /3 Assumes 10 year capital recovery on average; for companies esta- in the mid-1970's this outflow will cease by the late 1980's. IX. AGREEMENTS REACHED AND RECOMMENDATIONS 9.01 During negotiations, the Government of Mauritius agreed to: (a) Consult with the Association prior to taking a decision to expand the Coromandel estate at La Tour (para. 3.02); (b) Onlend the proceeds of the IDA credit of US$4.0 million to DBM on terms satisfactory to IDA (para. 4.06); (c) Provide local currency finance of US$4.0 million equivalent to DBM as equity and in a timelv manner as required by the progress of the project (para. 4.05); (d) Finance any cost overrun of the project, both local and foreign currency expenditures, on terms satisfactory to IDA (para. 4.03); (e) Arrange to finance and cause to be implemented in a timely manner the necessary external and internal infrastructure installations specified as public utility responsibilities (para. 3.07); (f) Cause DBM to establish a management unit with the necessary outside assistance for execution and operation of the estate and support it with additional DBM staff as required (paras. 6.04-6.06); (g) Arrange for DBM to set up separate project accounts (para. 6.04) and have them audited by independent auditors acceptable to the Associatior (para. 7.11);  - 25 - th) Set initial land lease and building rentals acceptable to IDA, maintain these rentals at competitive levels and consult with IDA whenever the rate of return on total capital. employed in the project falls below 10% per annum (para. 7.03); (i) Reimbure DBI in any fiscal year for losses in excess of the cumulative earned surplus from estate operations (para. 4.06); and (j) Prepare, prior to December 31, 1973, tormal criteria governing acceptability of industries as estate occupants and estate building standards satisfactory to TDB (para. 3.07 and 6.06). 9.02 In view of the foregoing agreements, the project provides a suit- able basis for an IDA credit of US$4.0 million equivalent to the Gover,amelnt of M'auritius on normal IDA terms. Industrial Projects Department June 6, 1973   MAURITIUS COROMANDEL INDUSTRIAL ESTATE SECTIORAL EMPLOJYMENT AND) GROWTH TARGETS, 1969-19Fak Employment Eiployment Employment Emloyment Employment % of total 1969 Creation Targets Creation Targets Employment Activities (actuall) 10-1975 1975 1970-1980 1980 1980 Agriculture including live- stock, forestry, fisheries 76,200 16,600 92,700 32,900 109,000 33.5 Mining and Quarrying. 400 250 650 600 1,000 0.3 Manuf actui5ng sugar and tea processing 6,600 0 6,600 0 6,600 2.0 other (enqloying 10 or more) 9,000 8,000 17,000 35,400 44,400 13.7 other (artisans) 9.4o 2,00 11.400 _6 16,000 J .9 Sub-Total 25,000 10,000 35,000 42,000 67,000 20.6 Construction, and Public works 13,000 7,500 20,500 17,000 30,000 9.2 Public Utilities 1,300 750 2,050 1,700 3,00 0.9 Transport and C0fflVnicatiofns 13,400 2,700 16,700 6,600 20,000 6.2 Trade 19,800 4,100 23,900 8,200 28,000 8.6 Services (including tourism) 32,100 8,800 4