Zambia - Development Bank Project

Report No. 860a-ZA FILE COPY Appraisal of the Development Bank of Zambia (DBZ) November 19, 1975 Development Finance Companies Department Not for Public Use Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT Kwacha (K) 1 equals US $1.56 ABBREVIATIONS ADB African Development Bank AFC Agricultural Finance Corporation DBZ Development Bank of Zambia DEG Deutsche Entwicklungsgesellschaft EIB European Investment Bank FINDECO State Finance and Development Corporation INDECO Industrial Development Corporation KfW Kreditanstalt f'r 1Wederaufbau NCB National Commercial Bank SNDP Second National Development Plan (1972-76) ZAMDEV Zambia Development Loans Scheme ZEMCO Zambia Industrial and Mining Corporation FISCAL YEAR Goverr!nent: January 1 - December 31 DBZ: April 1 - March 31  FOR OFmFCIAL USE ONLV TABLE OF CONTENTS Page No. BASIC DATA ...................................... i SUMMARY . ........................ iv * I~~~~. INTRODUCTION ... ...o:.........1 II. THE ENVIRONMENT ...1 The Industrial Sector ........... ............ 2 The Role of the Private and Parastatal Sectors ... 2 Industrial Policies and Objectives . . 4 Prospects ...... . ..... .. ... . 5 The Agricultural Sector 5 Financial Institutions 6 DBZ's Role ................................... 9 III. THE INSTITUTION. ... o ........ 10 Charter . . ....... 10 Policies. ............ 10 Board of Directors. . . 12 Management ......... . ............................ 12 Organization and Staff . . ............. 12 Procedures ....... ......t14 IV. RESOURCES, OPERATIONS AND FINANCIAL CONDITION .... 14 Resources . .14 Operations.. 14 Financial Condition . 15 V. PROSPECTS ...............16 Projected Operations ..16 Resource Position and Needs ..16 Projected Income Statements . .17 Projected Balance Sheets . .18 VI. CONCLUSIONS AND RECOMMENDATIONS . .18 This report was prepared by Messrs. Pieter J. M. Bulters and Tom C. Tsui on the basis of their mission to Zambia in March 1975. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS (Continued) ANNEXES 1. Interest Rates in Zambia 2. List of Shareholders 3. Operations Policies 4. Board of Directors 5. Organization Chart 6. Loans Approved as of March 31, 1975 7. Analysis of Loans Approved as of March 31, 1975 8. Balance Sheets and Income Statements 9. Assumptions tor Operational and Financial Forecasts 1976-1980 10. Forecast of Operations 1976-1980 11. Projected Income Statements 1976-1980 12. Projected Balance Sheets 1976-1980 13. Projected Cash Flow Statements 1976-1980 14. Pipeline of Projects as of June 30, 1975 15. Zambian Laws Applicable to the Proposed IFC Investment in the Development Bank of Zambia 16. Estimated Disbursement Schedule for Proposed Loan  -i - DEVELOFMENT BANK OF ZA.MBIA BASIC DATA Exchange Rate: K1 equals US $1.56 Year of Establishment: 1973 Ownership: (as of October 1, 1975) Amount Subscribed (K'000) Class "tA" Government of Zambia 4i,500 Bank of Zambia 500 Zambia National Provident Fund 500 Zambia National Building Society 150 Zambia State Insurance Corporation Ltd. 150 National Coimercial Bank Ltd. 100 Commercial Bank of Zambia Ltd. 100 6,000 Class "B" Deutsche Entwicklungsgesellschaft 1,500 Group of Yugoslav Banks 30O6/ Barclays Bank of Zambia Ltd. 200 Standard Bank of Zambia Ltd. 200 African Development Bank 150 Grindlays Bank International (Z) Ltd. 100 Bank of America 100 Banca Nazionale del Lavoro 100 Den Norske Kredit Bank 50 2,700 Proposed IFC investment 350 Other unsubscribed "Class B" shares 950 Total authorized and issued share capital 10,000 1/ Not yet paid-in.  -ii - Resources Position (as of March 31, 1975) Domestic Foreign Currency Currency (K'million) Subscribed share capital 8.7 Reserves and retained earnings 0.1 - Borrowings 0.1 1.4 Total sources 8.9 1.4 Net fixed assets 0.7 - Loan portfolio outstanding 3.8 Undisbursed loan commitments 0.7 Total uses 5.2 Resources available for commitment 3.7 1.4 Uncommitted approvals 2.1 - Operations (for year ending March 31, 1975) Number Amount (K million) Approvals 1-4 6.6 Commitments 10 2.6 Disbursements 6 1.5 Operating results (for year ending March 31, 1975) (K'000) Gross Income 398 Administrative Expenses 309 Financial Expenses 19 Net Profit 70 Net profit/average net worth (%) 1% Financial Pbsition (as of March 31, 1975) (K million) Total assets 7.1 Net worth 7.0 Debt/equity 0.01  -iii - Interest Rate and Other Charges Interest rates on DBZ's approved loans have varied between 8 11/2% and 10 1/2%. IEZ intends to charge an average rate of 10% with a minimum of 9% in the future. Cormitment fee: Normally, IBZ charges 1% upon approval plus 1% of the unwithdrawn balance on each anniversary date.  - iv - SUMMARY (i) The Development Bank of Zambia (DBZ) was established in July 1973 as a statutory corporation to provide medium and long-term financing to industrial, tourism and large agricultural projects in both the private and public sectors. DBZ is also empowered to provide technical and promotional assistance and management advisory services. While some other existing institutions provide financing to the parastatal sector, the Government wished to establish an independent bank that would undertake thorough project analysis and assist the private sector as well as the parastatal sector. Two Bank missions in 1971 and 1972 studied the feasibility of such a new institution and assisted the Government in its establishment. DBZ has a share capital of K 10 million, 60% of which is reserved for the Government and its agencies and 40% for private and foreign shareholders. DBZ has requested a Bank loan of $15 million and an IFC equity investment of K 350,000 (approximately $550,000 equivalent). (ii) Value-added in manufacturing has increased by over 14% p.a. since 1971 and, in 1974, the industrial sector contributed 13% to GDP. Although it is heavily oriented towards the domestic market and largely depends on imported inputs, it is after agriculture the most promising alternative to Zambia's mining economy. Public sector enterprises in manufacturing are con- trolled by INDECO, the parastatal holding company for industry. In 1974, they accounted for half of the sector's value-added and employment. The Government wants INDECO to consolidate its present operations and improve its efficiency. Although the Government has taken an active role in industry through INDECO, the private sector continues to grow. (iii) Despite Zambia's potential for agriculture, the agricultural sector still accounts for only 10% of GDP and Zambia still needs to import 40% of its food requirements. Especially in view of Zambia's difficult economic condition, the Government is keen to reduce its dependence on food imports. Commercial farming already provides 60% of marketed domestic produce and offers the best short-term prospects for increased agricultural production. (iv) As of October 1975, DBZ had approved 32 loans for K12.6 million; it had not made any equity investments as of that date. DBZ has been successful in tapping some local and foreign resources. It has financed projects in a wide variety of sectors. Most of DBZ's projects are in the private sector and the amount of DBZ's assistance is about equally divided between private and parastatal projects. Although the Government holds the majority of DBZ's share capital, DBZ is free from Government interference in its day-to-day management and selection of projects. The projects financed by DBZ appear econom!cally sound. DBZ's Statement of Policies is satisfactory.  -v - (v) DBZ has good management and a professional staff of thirty (eight of whom are expatriates). DBZ is keen to reduce its reliance on expatriates and has begun a program to train its new Zambian staff. Two DBZ staff members have attended EDI courses and more candidates are expected in the future. (vi) DBZ forecasts an active operational program in the next five years with expected approvals of K10 million in FY 1976 and increasing to K12.3 million in FY 1977 and K15.5 million in FY 1978. These plans include modest levels of equity financing. DBZ has a well-filled pipeline; almost all pro- jects are private and more than half of DBZ's financing would go to private projects. DBZ expects to enhance its economic and financial impact by under- taking syndication of financing for industrial projects of national signifi- cance to which it can make only limited financial contributions. As Zambia faces severe resource constraints brought on by declining copper prices, DBZ's growing project appraisal expertise will be invaluable in efficiently allocat- ing scarce resources. (vii) DBZ is a suitable and creditworthy borrower for a Bank loan of $15.0 million equivalent. The loan would cover one half of DBZ's estimated foreign resource needs through early 1978 and represent about one third of DBZ's overall commitments. DBZ expects to obtain the remainder of its re- source needs from other foreign and domestic lenders. (viii) Recognizing DBZ's expected cost of borrowings, modest forecast pro- fitability during the initial years, and the need to build up reserves, it is recommended that DBZ be granted concessionary tre?atment of commitment charges. An individual free limit of $250,000 and an aggregate free limit of $3.0 million are recommended. (ix) An IFC investment of K 350,000 (equivalent to about US$550,000) in DBZ's share capital is also recommended. DBZ has been designed as a coopera- tive venture between the Government, private and foreign investors and an IFC equity investment is desired both to help complete the financing of DBZ's share capital reserved for private and foreign shareholders as well as to enable DBZ to benefit from IFC's experience and advice that can be important in the development of DBZ's policies and operations through IFC representation on its Board of Directors. Although the Government controls the majority of DBZ's share capital, the Government is keen to have DBZ operate independently and on a commercial basis.   I. INTRODUCTION 1.01 The Development Bank of Zambia (DBZ) was established in July 1973 as a statutory corporation to provide financial and technical assistance to industrial, tourism and large agricultural projects. DBZ's establishment had been recommended to the Government by two Bank missions in 1971 and 1972 which studied the feasibility of such a new institution. DBZ has requested a Bank loan and an IFC investment. This report appraises DBZ and recommends a loan of US$15.0 million, and an equity investment of K 350,000 (approximately * $550,000), equivalent to 3.5% of DBZ's share capital and 9% of the share capital reserved for private and foreign investors. 1.02 Objectives. The major objectives of the proposed loan and invest- ment are: (i) to provide appropriate medium - and long-term financing to medium to large-scale industrial projects which meet sound economic, financial, and technical standards. This is particularly important in view of the country's growing scarcity of funds for industrial investments and the fact that DBZ is essentially the only financial institution in Zambia providing medium and long-term financing to private industry; and (ii) to assist in the development of DBZ as an effective development institution by further strengthening its appraisal capacity. II. THE ENVIRONMENT 2.01 The economic situation of Zambia is analyzed in the "Economic Position and Prospects of Zambia," report number 4A-ZA dated December 26, 1972. A basic economic mission visited Zambia in June/July 1975. This report reflects the mission's preliminary findings. 2.02 Zambia has a population of 4.8 million, which is growing at an annual rate of 2.9 per cent. In 1974, GDP amounted to K1.8 billion, equi- valent to US$585 per capita. During the first three years of the Second National Development Plan (1972-1976), GDP in real terms grew at 3.6% p.a., only slightly above the growth rate in population and substantially below the Plan's target of 7.4%. 2.03 Zambia's economy is dominated by copper mining which, in 1974, accounted for 41% of GDP, 16% of total wage employment, 40% of Government revenue and 96% of export earnings. From 1964-1974, the annual production of copper has fluctuated between a low of 616,000 tons (1967) and a high of 748,000 tons (in 1969); it was 700,000 tons in 1974. More important were the fluctuations in copper prices which ranged between K718 (in November 1972) and K1,950 (in April 1974) per ton; recently the price has been between K750-K800/ton.  -2- 2.04 The sensitivity of the economy to the fluctuations in copper revenue emphasizes the urgency for Zambia to diversify its economy. Agriculture accounts for only 10% of GDP but holds much potential. Development of the sector requires improvement in planning, changes in pricing policies, and im- provement of extension services and credit facilities. After agriculture, industry is the next most promising alternative to mining. The Industrial Sector 2.05 At independence in 1964, most industries of the former Federation with Southern Rhodesia and Nyasaland were located in what is now Rhodesia. Since then the importance of Zambia's manufacturing sector has increased substantially. Despite setbacks from the closure of the border with Rhodesia in 1973, value added in manufacturing increased by 14.4% p.a. since 1971, almost matching the Plan target of 14.7% p.a. Most of the recent industrial growth has taken place in consumer goods industries such as textiles and wearing apparel, which grew at 18.5% p.a. during 1972-74 compared with an annual growth of 5.5% in chemicals and stagnation in non-consumer goods sub- sectors such as non-metallic minerals. During these years, some ambitious new projects, such as a large vehicle assembly plant and a synthetic textile plant, were implemented; these have contributed little to foreign exchange savings as most of the inputs must still be imported. In 1974, manufacturing output amounted to K255 million and accounted for 13% of GDP. Food and beve- rages accounted for 33% of value added in manufacturing, followed by fabrica- ted metal products (21%), and textiles and wearing apparel (11%). At present, there is little industrial activity related to the copper industry and this is a subsector with some potential. 2.06 Industrial employment in Zambia is currently about 45,000 compared to a national labor force of approximately 1.5 million. The food, beverage and tobacco industry accounts for one-third of industrial employment, textiles and apparel for 20%, and metal fabrication (including machinery) for 17%. One of the Government's major objectives is to increase wage employment. Tne SNDP aimed at 20,000 additional jobs per year, including 5,000 in manufacturing. 2.07 Over ninety percent of all industrial enterprises, employing a similarly high percentage of the industrial labor force are located in the Copperbelt, where all the mining activities are centered, and along the "line- of-rail" that connects the Copperbelt with the south and which includes Lusaka. Any dispersion away from these areas is contingent upon infrastructure development. The Role of the Private and Parastatal Sectors 2.08 Following independence, the Government had little control over the large, foreign-owned private sector which dominated all major aspects of mining, manufacturing, commerce, and banking. In 1966, on the grounds that Zambianization was too slow and investment insufficient, the Government directed  - 3 - the Industrial Development Corporation (INDECO) to participate on its behalf in the industrial sector. INDECO's activities greatly expanded after the Government decided, in 1968, that it would henceforth have a controlling in- terest in all major industries. As of March 1974, INDECO comprised 60 subsid- iaries and associated firms with net assets of K250 million and annual sales of K330 million. They included all major industries and accounted for half of value added and employment in the industrial sector. These companies are grouped into six areas: brewing and distilling, building supplies and engin- eering, manufacturing, chemicals, rural enterprises, and a miscellaneous group. 2.09 INDECO itself is a subsidiary of the Zambia Industrial and Mining Corporation (ZIMCO), which is the overall holding company for the Government's investments in all sectors of the economy. ZIMCO operates through various subsidiaries like INDECO for the indLc6rial sector and FINDECO for the financial sector. The President himself is Chairman of ZIMCO's Board of Directors, which further includes the Ministers of all relevant ministries and the Managing Directors of the various subsidiaries. 2.10 INDECO's profit for 1974 was about 9% of year end net assets and 17% of its net worth. INDECO's profit figures are of limited usefulness, however, since profits of many of its companies are determined largely by Government decisions on prices and, in some cases, offsetting subsidies. INDECO's investments average K30 million per annum or two-thirds of total in- dustrial investment. Most of the investment is financed by funds generated within the group; the second most important source is local financial institu- tions. Local financial institutions consider INDECO a prime risk, especially because of its backing by the Government, and are important sources of funds especially when they have a high liquidity. For large investments, INDECO also obtains suppliers' credits and other foreign financing. 2.11 INDECO promotes and develops projects for its subsidiaries. Because INDECO relies little on government financing, its investment de- cisions are taken independently except for some major projects such as the vehicle assembly and nitrogen fertilizer plants. 2.12 Private initiative and capital are still playing an important role in medium scale enterprises. Such enterprises benefit from the natural protection afforded by Zambia's geographic location and from import duties imposed to protect domestic producers and also for balance of payments reasons. In 1972, the private sector accounted for one half of value added and employment in the manufacturing sector. Much of these private holdings are in the Copperbelt area. Privately controlled enterprises constitute the majority in textiles and wearing apparel, chemicals, fabricated metal products and industries ancillary to the mining sector. (IFC has assisted two private enterprises in Zambia. It has made two equity investments totalling $2.3 million in Zambia Bata Shoe Company Ltd. and a loan and an equity investment totalling $1.0 million in Century Packages Ltd).  -4- 2.13 There is relatively scant information available on small-scale in- dustry in Zambia. The subsector employs less than 20% of industrial workers. Like all industry, small industries (employing 50 or less) are concentrated in the urban centers in the Copperbelt and along the line-of-rail. Small enterprises are most active in clothing, printing and publishing, and struc- tural metal products. Industrial Policies and Objectives 2.14 The Government's major objective for manufacturing is import sub- stitution of food products and some consumer goods. The Second National Development Plan also emphasizes (i) greater capacity utilization, (ii) further processing of raw materials from agriculture and mining, (iii) creation of additional employment, (iv) establishment of rural small-scale industries, and (v) promotion of industrial exports. The Government would like INDECO to consolidate its operations and, except for undertaking some large projects, Improve its efficiency rather than expand. The President has recently reaf- firmed that the private sector has a role to play, especially in small and medium size enterprises. The Government retains the right to nationalize enterprises which, because of their size, are of a national interest but has committed itself to pay in such cases fair and prompt compensation. 2.15 An Industrial Establishment Licensing Act and an Investment Code are being prepared. Licensing of new ventures is not legally required, but most medium and large Zambian and foreign entrepreneurs request authorization from the Ministry of Mines and Industry and submit information about their intended investment such as ownership, financing plan, and employment (Zambians and non-Zambians), to facilitate obtaining concessions and permission to repatriate future earnings. 2.16 Government incentives mainly consist of tariff protection. Import duties range from 0-100% in respect of finished goods and from 0-15% for intermediate goods and raw materials. Capital goods are subject to a 5% duty. All dutiable goods are also subject to a 10% sales tax which applies to some local manufactures as well.. There are also quantitative restrictions which are primarily aimed at preserving foreign exchange. 2.17 Corporate income tax in Zambia is 45%. Interest, dividends, and royalties paid to non-residents from countries without a double taxation agreement with Zambia are subject to a withholding tax of 20%; payments to other non-residents are subject to 10% for interest and 15% for other payments. Foreign shareholders may repatriate each year up to 10% of their paid up capital or 30% of net profits accruing to them, whichever,is less.  -5- Prospects 2.18 Despite Zambia's small domestic market, the need to import most in- dustrial raw materials and the scarcity of entrepreneurs, industrial develop- ment has proceeded at a remarkable pace (para 2.05). Looking to the future, the Government is eager to diversify the economy by expanding the industrial * base. As the Government would like INDECO to consolidate its existing opera- tions and concentrate on a few large projects, the private sector will conti- nue to have an important role to play in Zambia's industrialization process. The Agricultural Sector 2.19 The Government's objectives regarding the agricultural sector have been consistently stated since Zambia attained independence in 1964. Both the First and the Second National Development Plans emphasized the following objectives: (i) to increase rural incomes and thereby redress the rural-urban income disparity, (ii) to become self-sufficient in foodstuffs and cotton, and (iii) to diversify the economy and widen the export base by producing agricultural surpluses. Underlying the first objective are social justice and a pressing desire to curb the rural-urban exodus, in order to avoid overeencen- tration of population and urban unemployment. 2.20 The objectives are reasonable, and Zambia has adequate land resources and sufficient effective demand to attain practically all of them. However, progress towards the Government's goals during the first decade of independence has been very slow. Output of the agricultural sector has grown at the average rate of only 1.7 percent per annum over the last 10 years. Real incomes have not increased and the terms of trade for the Zambian farmers have fallen over 20 percent in the last decade. Zambia is far from being self-sufficient in either food or agricultural raw-material requirements. Currently about 40 per- cent by value of Zambia's marketed food is imported and in 1974 food imports cost the country K 43 million. The import items are mostly beef and dairy products, barley, wheat, rice, edible oil and cotton, all of which can be pro- duced in Zambia. The immediate task of the sector, therefore, remains to fill the growing gap between domestic demand and supply of agricultural produce. As the gap is filled by imports, the problem becomes critical in times of low foreign exchange earnings as Zambia is currently experiencing. 2.21 A unique characteristic of the sector is its dualism. On one extreme, there are about 600,000 smallholder subsistence farmers, using hand tools and traditional technology. These farmers produce primarily for their own sub- sistence requirements with a little marketable surplus from which they derive very meagre incomes. Average family sales are estimated at only about $85 a year (these farmers produce mostly cotton, maize, groundnuts, and free-grazed beef). 2.22 On the other extreme, there are large state and company farms and an economically important group of about 600 commercial farmers. These are located on state land under leasehold. Their area occupies about 3 percent of Zambia. Their farms are large and the land is fair. They are close to the  -6- the line of rail and have good access to market. These farmers use modern methods to produce cereals, dairy products, beef, poultry and eggs for the urban market and tobacco for export. They consist of experienced expatriate and Zambian commercial farmers and a new but growing group of innovative Zambian farmers known as "emergent farmers". 2.23 Commercial farming (public and private, Zambian and non-Zambian) accounts for 60 percent of the total marketed domestic produce, including 60 percent of maize, 35 percent of beef and over a half of the country's milk, pork and tobacco. This subsector can respond rapidly and has the potential for significantly increasing its production in a relatively short period. Moreover, certain areas of agriculture, like large scale wheat growing, ranching and processing, require skills which can best be handled by this subsector for some time to come. The Government has acknowledged these facts. To encourage commercial farmers, the Government granted them several fiscal incentives at the beginning of the last Zambian fiscal year. There are, however, various constraints to increasing agricultural production by this subsector and agricultural credit is one of them. DBZ will contribute towards reducing this particular constraint, by making financial resources available to medium and large scale agricultural enterprises for production and process- ing. The task of small scale agricultural financing will remain with the Agricultural Finance Company of Zambia (see para. 2.35). 2.24 The recent Bank Agricultural and Rural Sector Survey Mission (see Report No. 841a-ZA).has proposed a new strategy for the sector. The strategy identifies two urgent needs, namely to increase agricultural production and lessen dependence on imports and to carry out country-wide rural development by concentrating limited resources in areas of high growth potential. The mission identified several constraints to both. The major constraints related to pricing policies, organization of administration and services, and the marketing system. The Bank is discussing with the Government a series of changes which are needed on key policy issues to overcome these constraints. It is expected that an action program and identification of specific projects will follow, and will lead to increased production and overall rural development. Financial Institutions 2.25 The small stock exchange which operated when Zambia was part of the Federation with Southern Rhodesia and Nyasaland, no longer exists. The Bank of Zambia, which is the central bank, has been the major force in the capital market through issuance of government securities and bonds. Underwriting of securities can be done by commercial banks; however, the market is small and shares in only a few companies, such as Zambia Bata Shoe Company Ltd., have been sold to the public in Zambia. 2.26 There are a large number of financial institutions. In addition to the Bank of Zambia, they comprise four commercial banks and six specia- lized institutions other than DBZ. The largest commercial bank and all  - 7 - specialized institutions are goveQ -ment controlled. Except for the National Savings and Credit Bank, all institutions are involved in financing the in- dustrial sector. While they may overlap on occasion in industrial financing, more often they supplement each other. Interest rates charged on medium to long-term loans range between 7.5%-10.25% p.a., with the majority being bet- ween 8-9%. Annex 1 summarizes the interest rates paid and charged by the various institutions. 2.27 Commercial Banks. The State-owned commercial bank is the National Commercial Bank (NCB) which, after being merged with the smaller Commercial Bank of Zambia in March, 1975, has become the largest in the country with assets exceeding K200 million. It is expected to handle the bulk of the commercial banking business of the parastatals. The three private banks are subsidiaries of Barclays, Standard, and Grindlays. In 1974, Barclays held assets of K196 million while Standard held K164 million. Grindlays is the smallest but is the most active in underwriting. 2.28 Commercial banks have granted loans of up to five years for indus- trial projects during times of amr's liquidity such as in 1973, when copper prices were high. However, due tu the Government's decision in January 1974 to encourage importers to use local rather than foreign banks, together with the drastic reduction of copper prices in late 1974, commercial banks' liquidity has become very tight. Consequently, they prefer to provide short-term financing and leave medium- to long-term financing to specialized institutions, such as DBZ. The commercial banks possess no project appraisal capacity. Their medium- to long-term loans carry interest rates between 8.5- 10.0% p.a., with the majority at 9.0%. 2.29 In 1974, Barclays introduced a program called the Zambia Development Loans Scheme (ZAMDEV) to assist small well-established farmers, traders, and manufacturers with 3-5 year loans between K500-5,000 at 9% p.a. The program has been successful; over K420,000 have been loaned to 168 borrowers even though no manufacturing loan has yet been made. Despite its preliminary success, however, Barclays' liquidity constraint limits the future scope of the program. 2.30 Specialized Institutions. The six specialized institutions other than DBZ are the National Building Society, Zambia National Provident Fund, Zambia State Insurance Corporation, National Savings and Credit Bank, Agricultural Finance Corporation, and Industrial Finance Corporation. With the exception of the Zambia Provident Fund and Agricultural Finance Corporation, these institu- tions, as well as the National Commercial Bank, are subsidiaries of the State Finance and Development Corporation (FINDECO), which is the Government's holding company for financial institutions. 2.31 The Building Society was formed after nationalization of three pri- vate building societies in 1971. It obtains funds through savings shares and deposits from the general public and loans from other institutions. As of March 31, 1974, its resources totalled K88 million, of which K63 million were  -8- invested in mortgage loans and the remainder in Government securities, deposits with commercial banks, and non-Government securities. Its industrial financing consists of mortgage financing of industrial buildings for 15 years at 9.0- 10.25% p.a. 2.32 The Zambia National Provident Fund is a statutory board which admin- isters a compulsory retirement savings scheme for Zambian employees. Its total assets as of January 1975 were K120 million. Forty-three percent of its funds were invested in Government bonds, 22% in industrial loans (including loans to INDECO), six percent in industrial equity investments and the remainder in municipalities and parastatals such as the Building Society. Loans of the Fund have maturities between 10-20 years and carry interest rates between 7.5-8.5% p.a. The Fund has no appraisal capacity and lends on the basis of security or guarantees. It is interested in lending to DBZ or financing large projects jointly with it. Its current policy permits it to invest 40% of its surplus funds or about K10 million per year in parastatals and other commercial and industrial enterprises. It has recently agreed to lend to DBZ K 1 million for 20 years at an interest rate of 7.5% p.a. 2.33 The Zambia State Insurance Corporation was formed in 1971 after a merger of all existing insurance companies. As of December 31, 1973, the corporation's resources totalled K48 million, of which K29 million was invested in Government bonds, loans (including mortgages), and various in- dustrial and commercial investments; the rest consisted mostly of current assets (funds on deposit) and some fixed assets. One-fifth of its assets are related to industry. It expects to annually invest between K3-4 million in industrial loans and investments. Having no project evaluation capacity of its own, the corporation would prefer to join a larger consortium for such endeavors. It is also considering the possibility of lending to DBZ. The corporation charges 8.0-9.0% p.a. on term loans of up to 10 years. 2.34 The National Savings and Credit Bank, known as the Post Office Savings Bank until 1973, receives deposits from the general public for which it pays 3.75% p.a. It is empowered to make loans and investments in manu- facturing and other enterprises, but has not done so; instead, it holds nearly two-thirds of its assets, which totalled K13 million, in the Building Society, and the remainder in commercial banks and Government securities. 2.35 The Agricultural Finance Corporation (AFC) was established in 1970 as a subsidiary of the Rural Development Corporation which is a parastatal holding company under the Ministry of Rural Development; it is primarily a credit organization. AFC obtains its resources from the Government which has provided K13 million in interest-free long-term funds, annual subsidies of K500,000 to cover AFC's operating losses and, indirectly, K5 million by transferring at K1 million a loan portfolio from AFC's predecessor on which AFC has collected K4 million and expects to collect another K2 million. AFC has lent between K8-10 million p.a., 95% of which has been in seasonal credit,  -9- mostly in kind. AFC charges an interest rate of 8.0% p.a. The default rate on AFC's loans is high; as of December 31, 1973, it had to make provisions equal to half the loan portfolio outstanding. 2.36 The Industrial Finance Company was established in 1969 as an INDECO subsidiary to finance small commercial and industrial enterprises. It was transferred to FINDECO in 1971. It obtains its resources from commercial banks, the Government, and parastatals such as the Zambia State Insurance Corporation; except for Government funds which are subsidized, the bulk of the Company's resources costs between 7.5-8.5% p.a. The Industrial Finance Company has concentrated on financing the Zambianization of retail businesses and has neglected industrial financing. More recently, it has expanded its activities into hire-purchase financing of private and commercial vehicles, industrial plants, and various equipment and machinery; it intends to start leasing operations. Hire-purchase activities now account for 55% of the Industrial Finance Company's operations which amount to Kl million per annum. Lending to commercial enterprises represent 40% and industrial enterprises only 5%. Loans of the Industrial Finance Company have a maximum maturity of 5 years and carry interest rates between 9-10% p.a. Although it has no upper financ- ing limit, the Company is expected to serve primarily small enterprises (its industrial loans average K40,000). Due to a variety of difficulties such as a high default rate on its loans, continuing operating losses, and shortage of staff, the effectiveness of the Industrial Finance Company is limited, particularly in industrial financing. DBZ's Role 2.37 While most financial institutions provide some medium- and long-term financing on the basis of security, DBZ is the only institution in Zambia which concentrates on medium- and long-term financing of productive enterprises and which has a staff capable of appraising projects. Private projects depend on DBZ for financing whereas parastatals can sometimes obtain financing at better terms from the other financial institutions when these are liquid. Although many parastatal projects are too large for financing by DBZ or another insti- tution alone, DBZ can play a useful role by appraising such projects and inviting other institutions to participate in the financing. 2.38 DBZ was established to finance medium- and large-scale enterprises. DBZ is not intended to serve the small-scale industry and agriculture sectors. Because of the special nature of agricultural credit, it is rec- ommended that DBZ restrict itself to commercial agriculture and that the Government strengthen AFC and expand its activities to provide medium- and long-term financing for small farmers. Unless DBZ is properly equipped for financing small scale industry, the Government should consider strengthening the Industrial Finance Company for this function.  - 10 - III. THE INSTITUTION Charter 3.01 DBZ was established as a statutory corporation in July 1973 under a Development Bank Act and commenced operations in January 1974. According to its charter, DBZ's main function is to provide medium and long-term loan and equity financing for industrial, large agricultural, and tourism projects. DBZ's charter also allows it to provide technical and promotional assistance and management advisory services. 3.02 DBZ has an authorized share capital of K 10 million consisting of 600 "Class A" shares and 400 "Class B" shares of K 10,000 each. The "Class A" shares are reserved for the Government and its agencies and have been fully subscribed and paid-in. The "Class B" shares are reserved for private and foreign shareholders. Eight institutions and a group of Yugoslav Banks have subscribed K 2.7 million out of the K 4 million "Class B" shares. Annex 2 shows a list of DBZ's shareholders. DBZ has requested an IFC investment in its share capital. An investment of K 350,000 (approximately US$550,000 equivalent) is being proposed. This would make IFC the second largest "Class B" shareholder after the Deutsche Entwicklungsgesellschaft (DEG). DBZ is also discussing subscription of the remaining "Class B" shares with other in- stitutions. 3.03 The Government has the formal power to exercise control over DBZ. It owns directly and through various of its agencies about 60% of DBZ's share capital; the Minister of Planning and Finance nominates six of DBZ's ten Board members, including the Chairman and Managing Director; the Act empowers him to give the Board general directions concerning DBZ's policy as he may deem necessary and appropriate in the public interest. In practice, however, the Government is keen to have DBZ operate independently and has not inter- fered in DBZ's operations. The Government has supported adoption of a State- ment of Policies that establishes sound guidelines for DBZ's business as well as the establishment of a broadly based Board. Indeed Government representa- tives on DBZ's Board include two private businessmen. DBZ's independence is evidenced by its rejection of several parastatal projects, some of which had Government support. DBZ's management expects that IFC's investment and assistance will enhance DBZ's effectiveness. Policies 3.04 DBZ has recently adopted a Statement of Policies (see Annex 3), which covers, inter alia, the following policies: (i) Criteria for DBZ's assistance. DBZ's financing will be limited to projects which are financially viable, technically feasible and meet certain economic criteria. DBZ will give equal priority to parastatal and private projects;  - 11 - (ii) Financing limits. According to the Statement of Policies DBZ will normally finance no more than 75% of the borrower's fixed assets, excluding permanent working capital. The Statement of Policies restricts DBZ's equity investment in a single enterprise to 5% of DBZ's net worth or 25% of the share capital of the recipient, whichever is less, and DBZ's aggregate equity investments to 25% of DBZ's net worth. These limits on equity investments are more re- strictive than the relevant limits in the Act, which are 10%, 25% and 100%, respectively, and reflect DBZ's con- servative attitude towards equity investments (see also paras 3.14 and 5.03). The Act limits DBZ's commitments to a single enterprise between a minimum of K 25,000 and a maximum of 20% of DBZ's net worth; (iii) Security requirements. In the past. DBZ has required collateral of at least twice the amount of its loan. This was very restrictive. Other local institutions, which do not appraise projects and rely entirely on security, require between 100 and 125%. The Statement of Policies merely requires DBZ to obtain adequate security. DBZ intends to use this flexibility in its security reqjuirements; (iv) Interest Rate Policy. In the past. interest rates on DBZ7s approve(i loans have varied between 8-l/2 and 1O-l/2,S. Because of dilfferences in the cost of its resources, competitiveness, and differences in risk, DBZ will continue to charge flexible interest rates. DBZ in- tends that, to reflect DBZ's increasing cost of capital, its future lending rate will average 10% with a minimum of 9%. Given the cost of Bank funds, DBZ plans to on-lend the proposed Bank loan at 10-l11%. This will not present any problem in utilizing the proceeds from the proposed Bank loan as funds available to DBZ are limited. Recently, DBZ has charged 10-1/2% for some highly profitable industrial projects, 9-12% for some agricultural projects, and 9% for some large parastatal projects where it participated in a consortium which charged lower rates. DBZ's lending rates seem reasonable in relation to the likely cost of funds and the inflation rate, which has been relatively low (about 7.5% p.a. during the last three years). DBZts interest rate would be only slightly higher than the rate of other institutions (8-l A %-9%). DBZ also charges a commitment fee equal to one percent of the loan amount approved plus one percent of the withdrawn balance on each anniversary date; (v) Repayment period. DBZ's loans have a minimum maturity of two years and maximum maturity of 15 years; (vi) Borrowing policy and debt/equity limitation. The DBZ Act limits DBZ's debt to seven times its net worth. During negotiation, DBZ has agreed to limit its debt/equity ratio for the time being to 4:1. According to the projections, DBZ's debt/equity ratio would not reach 4:1 until March 31, 1980.  -12- (vii) Foreign exchange risk. DBZ's statemient of policies pre- cludes it from assuming the foreign exchange risk on its operations. The possibility of the Government assuming tle. foreign exchange risk has been under discussion but it IIOW appears likely that DBZ will pass the exchange risk onto :its sub-borrowers. 3.05 DBZ is presently establishing a Special Development Fund to finance projects in rural areas on concessionary terms. DBZ's general security and interest rate policies will probably not apply to these operations, which DBZ plans to finance from separate soft resources. DBZ has already obtained K 3.1 million from two bilateral aid agencies. Board of Directors 3.06 DBZ's Board of Directors has 10 members. The Government appoints six Directors, including the Chairman and the Managing Director, while "Class B" shareholders are to appoint four Directors, including the Deputy Chairman. Annex 4 shows a list of DBZ's directors. The Government has appointed as its representatives the Permanent Secretary of Planning and Finance (Chairman), DBZ's Managing Director, the Economic Advisor to the President, the Managing Director of INDECO, and two private businessmen. The "Class B" shareholders have, in the interim, appointed only one director, a representative of one of the local commercial banks. DBZ expects additional representatives of "Class B" share- holders to be nominated in due course. To facilitate IFC's assistance in developing the policies and operations of DBZ, it is proposed that IFC be rep- resented on DBZ's Board. This proposal has the necessary support of a number of "Class B" shareholders. The Board meets about once every two months. It has established an Investment Committee consisting of four Directors to whom it has delegated the approval of loans up to K 100,000. Management 3.07 DBZ's management consists of a Managing Director and a General Manager. The Managing Director was previously a Director of the African Development Bank and an Under Secretary in the Ministry of Finance. He pro- vides DBZ with dynamic leadership. The General Manager was previously one of the general managers of Den Norske Kredit Bank and has been made available for two years to DBZ through NORAD. 3.08 DBZ has a Loan Committee which is chaired by the Managing Director and includes the General Manager and all department heads. All projects must be approved by the Loan Committee before they can be presented to the Invest- ment Committee or the Board. The General Manager heads a staff recruitment committee, which includes all department heads and recommends candidates for employment to the Managing Director. Organization and Staff 3.09 Annex 5 shows DBZ's organization chart and the staff allocated to each department. DBZ's professional staff totals 30, including eight ex- patriates in senior positions. Four of them are financed through bilateral assistance. The terms of most expatriates expire in mid-1976 and DBZ is  - 13 - looking for replacements. DBZ is keen to reduce its reliance on expatriates. It plans to fill most vacant positions with Zambian nationals and has charged one of the expatriates with establishing and conducting a training program for the new Zambian staff. During the last year, two DBZ staff members have attended EDI courses; DBZ is looking for continued EDI support to train the Zambian staff. 3.10 Operations Department. This department is in charge of project appraisal, including engineering studies, and follow up. It is headed by a former Deputy General Manager of the Industrial Development Bank of India. 3.11 DBZ's processing time is short, usually 3-4 months. Project appraisals, which have been of uneven quality in the past, are generally Improving. DBZ has recently prepared a standard format including guidelines for various financial calculations. The market and financial analysis are reasonable. Until recently, DBZ did not make a comprehensive analysis of the economic aspects of its projects. DBZ has now decided, however, to calculate the economic rate of return for all projects exceeding K 160,000. The economic analysis is particularly important as most of DBZ's projects are for import substitution and as no Government agency takes a comprehensive look at the economic aspects of projects. 3.12 DBZ has begun to follow up on some of its projects for which dis- bursements have been made but has not yet established a systematic follow- up system. DBZ is aware of the importance of supervision and has recently recruited an officer and two assistants for this task. 3.13 Promotion and Planning Department. The department is headed by an economist provided from bilateral assistance. Its main function is project identification and promotion but, so far, it has concentrated on policy for- mulation, preparation of background papers and market studies for the opera- tions department. 3.14 With regard to project promotion, the major contribution of this department will probably be in the refinement of the project proposals which are not yet fit for financing when they are presented to DBZ. Most of these projects are expected to be private as parastatals have their own staff to develop projects. DBZ has not yet made any equity investments as its manage- ment has understandably wanted to build up a fairly strong and quick yielding portfolio in order to get DBZ off to a sound start. However, to become effective in project promotion, DBZ must become more willing to take equity participations. 3.15 Finance Department. The head of this department is an experienced expatriate who previously occupied a similar position with the Tanzania Invest- ment Bank. Besides the preparation of financial statements, budget and finan- cial forecasts and the investment of liquid funds, this department is also responsible for disbursements and collections of loans. The department is pre- sently developing an internal reporting system taking into account the Bank's audit and reporting requirements.  - 14 - 3.16 Administrative Department. This department, which is headed by a Zambian, is responsible for the Board secretariat and personnel administra- tion. Recruitment is handled by Management. DBZ does not have a lawyer and relies for legal matters on a private law firm. DBZ intends to recruit a loan administrative officer with a legal background. Procedures 3.17 Shortly after DBZ's establishment, UNDP provided an expert to formulate procedures for DBZ such as an operations manual and guidelines for portfolio supervision. DBZ is adapting the procedures to its specific needs. They generally form a sound basis for DBZ's operations. DBZ's standard Loan Agreement with clients is satisfactory. DBZ is presently considering some changes which were proposed by the Bank. 3.18 Procurement and disbursement. DBZ normally asks its clients to obtain quotations from several suppliers and to choose the ultimate supplier in consultation with DBZ. DBZ bases its disbursements on the general pro- gress of a predetermined investment program. To meet the Bank's disburse- ment requirements, DBZ will relate its financing and disbursements to specific items of expenditure for Bank-financed projects. 3.19 Audit. DBZ has appointed Coopers and Lybrand as its auditors. The audit report for FY 1975 (ended March 31, 1975) was brief, reflecting DBZ's young age. DBZ has agreed that future audits will comply with the Bank's il- lustrative audit form to the extent that the supplementary information is re- levant for DBZ's operations. IV. RESOURCES, OPERATIONS AND FINANCIAL CONDITION Resources 4.01 As of March 31, 1975, DBZ's resources totalled K10.2 million, consist- ing of the subscribed share capital (KS.7 million of which K6.9 million was paid-in), reserves and retained earnings (K100,000), and a loan from the African Development Bank (K1.4 million at 7% p.a.). Recently, DBZ has also arranged to borrow a total of K7 million from the Bank of Zambia (K5 million at 7%), the Government (Kl million at 7%), and the Zambia National Provident Fund (Kl million at 7.5%). The maturities vary between 8-20 years; however, no repayment schedule has yet been specified for the Government loan. Operations 4.02 During its first full year of operations (ending March 31, 1975), DBZ made a good start and approved 14 loans for a total of K6.6 million; this compares favorably with the performance of other dfcs during their initial year of operation. From April to October, 1975, DBZ approved 18 more projects  - 15 - for a total of K6 million. As of June 30, 1975, DBZ had signed contracts for 22 projects, accounting for K7.8 million, and disbursed K4.1 million. DBZ's ability to keep the time lag between approvals and commitments as short as it has is an important achievement. DBZ has not yet made any equity investments or guarantees. 4.03 DBZ has been aggressive in seeking sound projects during its first year. DBZ's impact on those projects have been necessarily limited due to the lateness of its entry. DBZ is eager to increase its role in project for- mulation and preparation, and it fully expects to do so as its staff acquire further experience and expertise. To enhance its impact on large national projects whose financing requirements exceed DBZ's exposure limits (para 3.04), DBZ is planning to undertake syndication of such projects, as it has already done in two cases. 4.04 Among the 14 loans approved during FY 1975 (Annex 6), there were five domestic resource-based projects: one for vegetable and fruit growing/ storage, one for sugar processing (this project is expected to create 2,300 additional jobs) one for quarrying, and two cattle ranches. Although most DBZ-financed projects, like the majority of manufacturing interprises in Zambia, rely on imported inputs, they appear economically well conceived. Three of the loans involve projects with some export features. DBZ has not directed its lending to any particular sector and has financed a wide variety of projects. (Twenty-five percent of all projects financed until June 30, 1975 were for agriculture but they accounted for only 8% of the total amount). 4.05 Eighty percent of the projects approved as of March 31, 1975 (Annex 7) are private; they account for one third of the approved amount. About half the loans were for new projects; expansions of on-going enter- prises accounted for 80% of the approved amount. Most of DBZ's assistance is for projects in Lusaka, the Copperbelt and along the line of rail. Most loans have been to projects that appear to have very good financial prospects. The median loan size is K123,000. The loan maturity ranges between 5 and 13 years and averages 8.7 years. The average interest rate is 9%; DBZ intends to charge an average rate of 10% with a minimum of 9% in the future. 4.06 Most of the approved projects are directed towards the domestic market. Although DBZ's past appraisals do not include a thorough economic analysis, the projects appear generally economically sound in view of high transportation costs on similar imports. The average cost per job created is $20,000 which is reasonable. Financial Results and Condition 4.07 Annex 8 shows DBZ's income statements and balance sheets. As of March 31, 1975, DBZ's loan portfolio amounted to K 3.6 million; DBZ had invested K 2.5 million in liquid assets at an average yield of 5.8% p.a. During FY 1975, administrative expenses amounted to 4% of total assets which  - 16 - is reasonable for a new institution. Net profits amounted to 1% of share capital on an annual basis. The low profitability is common for a new institution and DBZ's financial condition is sound. V. PROSPECTS Projected Operations 5.01 DBZ expects that approvals will amount to K10 million in FY 1976 and will increase gradually to K22 million in FY 1980 (Annexes 9 through 13 show DBZ's projections through FY 1980 together with the underlying assumptions). This forecast level of operations seems reasonable in view of DBZ's approvals to date and its large pipeline of projects. 5.02 DBZ has a well-filled pipeline of projects. As of October 1975, the pipeline consisted of 23 projects for a total amount of K 7.1 million (see Annex 14). The pipeline included only one parastatal project, a fishery project which accounted for forty percent of the amount. Of the private projects, nine accounting for half of the amount are for industry. They cover a variety of subsectors. Most of them either will use domestic raw materials, be labor intensive or take advantage of high transport costs to Zambia. DBZ's pipeline also includes two hotel projects and five bakeries. In consistence with the Government's emphasis on increasing food production, one third of DBZ's private projects under study (accounting for 10% of the amount) are for agricultural schemes, including farm and cattle ranch development and poultry farms. AFC provides only short-term financing, and DBZ is the only institution that can finance these projects. 5.03 In view of the usual low initial returns on equity investments, DBZ does not intend to make any until FY 1977 and the amount of such in- vestments is expected to remain relatively low thereafter. This reflects DBZ's rather conservative attitude. DBZ is aware, however, that if it wants to be effective in project promotion it should be willing to provide more equity financing once it is better established. Resource Position and Needs 5.04 As of March 31, 1975, DBZ's uncommitted resources amounted to K3.0 million, including K1.4 million of the ADB line of credit. According to DBZ's projections, its resource requirements will develop as follows (amounts in K million):  - 17 - Year ending March 31 1976 1977 1978 1979 1980 Available for approvals at beginning of year 3.0 (5.4) (16.2) (29.6) (45.6) New share capital 1.3 - - - - Internal generation of funds /1 0.3 1.5 2.1 2.8 3.8 Approvals during the year 10.0 12.3 15.5 18.8 22.0 Cumulative resource requirements 5.4 16.2 29.6 45.6 63.8 /1 Cash from operations plus loan collections minus debt repayments. To cover its operations until the end of FY1978, DBZ needs K30 million in addition to the increase in paid-in share capital to K10 million. Of this amount approximaLely 1'. 24 million is needed to finance the import component of DBZ's operations. DBZ expects to obtain K14 million from local sources, K 8 million of which will be used for financing imports. It has already reached agreement with the Bank of Zambia, the Government and the Zambia National Provident Fund for a total amount of K 7 million during FY1976. DBZ expects to obtain K 6 million more from foreign sources, such as the African Development Bank, Kreditanstalt fur Wiederaufbau and the European Investment Bank. It is proposed that the Bank fill the remaining resource gap with a loan of K10 million ($15 million). This amount would cover one third of DBZ's operations and one half of its foreign exchange requirements through FY1978 (ending March 31, 1978). Projected Income Statements 5.05 Annex 10 shows DBZ's projected income statements assuming that DBZ will earn a spread of two percent on the average cost of borrowings. The pro- jected income statements-can be summarized as follows (amounts in K'000): Year ending March 31 1975 1976 1977 1978 1979 1980 (actual) Total Revenue 398 836 1,683 2,815 4,068 5,478 Net Profit 70 168 331 482 636 950 Net profit as % of average share capital 1% 2% 3% 5% 6% 9% Net Profit as % of average net worth 1% 2% 3% 42 5% 8% The projections indicate that the return on net worth (after adequate provisions) will increase from 1% in FY1975 to 8% in PY1980. As a statutory  - 18 - corporation, DBZ is exempted from corporate taxes. The projected level of profitability is modest but sufficient to maintain an adequate equity base. Although profit may allow some small dividends, the return on equity will be modest. (According to the Act, DBZ can pay dividends only after at least three profitable years). DBZ's administrative expenses as a percentage of average total assets are expected to decline from 4% in FY1975 to 1% in FY1980. This requires strict control over administrative expenses but seems feasible. DBZ's debt service capacity will be adequate with an interest and principal coverage exceeding 1.6 throughout the period. Projected Balance Sheets 5.06 Annex 12 shows DBZ's projected balance sheets. DBZ's total assets are projected to increase from K7.2 million at the end of FY1975 to K64 million at the end of FY1980, which represents an average growth rate of more than 50%. Provisions will amount to 1.7% of the outstanding loan and equity portfolio in FY1980. DBZ's debt/equity ratio will reach 3:1 during 1979 and 4:1 at the end of FY1980. VI. CONCLUSIONS AND RECOMMENDATIONS 6.01 The manufacturing sector, which has increased substantially since Zambia's independence, will have an important role to play if the nation is to move away from its dependence on the mining sector. Government should formulate policies and design a consistent set of investment incentives to spur industrial activity. Pending the enactment of the proposed code (see para. 2.15) there is sufficient investment activity to Justify DBZ's role. It is important that DBZ use proper economic criteria in selecting projects and that, ultimately, the Government apply such criteria to all projects implemented in Zambia. While the parastatals have some access to other financial institutions, private enterprises essentially can obtain medium and long-term financing only from DBZ. 6.02 DBZ has a dynamic management which has succeeded in recruiting suitable staff and established a good track record in terms of its volume of business and ability to keep its project processing time to a minimum. DBZ's projects are generally financially and economically sound. In view of its promising start, it is likely that DBZ's impact on projects will grow rapidly as it gains the necessary experience. DBZ has been able to build up a substantial pipeline of interesting projects which are, on the whole, consistent with Government's objectives for Zambian industry. The industrial projects in the pipeline cut across a wide variety of manufacturing subsectors. 6.03 To cover its operations until March 1978, DBZ needs K30 million in new resources, of which K24 million would be for imports. DBZ expects to obtain K20 million from local and foreign sources. It is recommended that  - 19 - the Bank lend DBZ $15 million (approximately K10 million) to fill its remaining resources gap and that IFC invest up to K350,000 (approximately $550,000 equivalent) in DBZ's share capital to increase the subscription of "Class B" shares. 6.04 The loan would finance the c.i.f. cost of imported goods, the estimated foreign exchange component of imported goods purchased in Zambia and civil works. It would be repaid according to a flexible amortization schedule, conforming to the aggregate amortization schedules of DBZ's subloans which have a maximum maturity of 15 years. Since DBZ is a new com- pany, has not yet had time to develop its operations, and will have a low profitability during its early years, it is recommended that DBZ be given concessional treatment of commitment charges which would only accrue on amounts authorized for specific subprojects. DBZ would need the Bank's prior approval for all projects using $250,000 or more of the proposed loan and would not be able to use more than $3 million in total without the Bank's approval. Given the cost of Bank funds, DBZ nlans to on-lend the proceeds of the loan at an interest rate of 10-1/2%, with the foreign exchange risk borne by the sub- borrowers. 6.05 Justification. The proposed loan will serve to alleviate Zambia's shortage of funds for industrial investments by providing term financing to medium- and large-scale industrial projects which meet appropriate economic, financial, and technical criteria. The loan and equity investment will also provide the opportunity to assist the further development of DBZ as an effec- tive appraiser and allocater of scarce resources. At present, DBZ is the only Zambian institution undertaking comprehensive project appraisals. The industrial sector has a potentially significant role to play in reducing Zambia's dependence on the mining sector. 6.06 The proposed IFC investment would make IFC the second largest "Class B" shareholder and, with the support of a number of other "Class B" shareholders, would allow it to be represented on DBZ's Board of Directors. DBZ is looking for the technical support of IFC, which through its membership on DBZ's Board is expected to reinforce the Bank's efforts to strengthen further DBZ. As no other institution in Zambia is designed to provide medium and long-term finance to the private sector, a significant portion of DBZ's business will be with private enterprises. The Government controls the majority of DBZ's share capital, but is keen to have DBZ operate independently and on a commercial basis.   ANNEX 1 DEVELOPfEWT BANK OF ZAMBIA Interest Rates in Zambia (as of March, J.975) Interest Rate per Annum (%) Bank of Zambia, discount rate 5.0 Interest rates on fixed-term deposits or. savings accounts National Credit and Savings Bank Accounts 3.75 Coomercial Banks Savings Accounts 4.0 Commercial Banks Fixed-term Deposits 3-6 months 4.0 6-12 months 4.5 1-2 years 5.0 2-3 years 5.5 3 years and over 6.0 Zambia National Bailding Society Savings Shares 3.5 Investment Shares 6.0 Deposits (3 to 60 months) 3.0-7.25 Governmient stock (long-term bonds) 7.25 Iending rates on coumercial banks overdrafts 7.5-10.0 Lending rates on medium- to long-term loans Comercial banks 8.5-10.0 Agricultural Finance Corporation 8.0 Inchdstrial Finance Corporation 9.0-10.0 Zambia National Provident Fund Loans to municipalities 7.5 Indastrial loans 7.5-8.5 Zambia National Eiilding Society Mortgage loans - Residential properties 7.5 Mortgage loans - Commercial and industrial properties 9.0-10.25 Zambia State Insurance Corporation 8.0-9.0 Development Bank of Zambia 9.0-10.5 IBRD/DFCD May, 1975  ANNEX 2 DEVELOFMENT BANK OF ZAMBIA List of Shareholders (as of October 1, 1975) Amount subscribed (K'O0O) "CLASS A" Shareholders The Government of Zambia 4,500 Bank of Zambia 500 Zambia National Provident Fand 500 National Commercial Bank Ltd. 200 Zambia National Bailding Society 150 Zambia State Insurance Corporation Ltd. 150 6,000 "CLASS B" Shareholders Deutsche Entwicklungsgesellschaft i,500 Group of Yugoslav Banks 30C;/ Barclays Bank of Zambia Ltd. 200 Standard Bank of Zambia Ltd. 200 African Development Bank 150 Grindlays Bank International (Zambia) Ltd. 100 Bank of America 100 Banca Nazionale del Lavoro 100 Den Norske Credit Bank 50 2,700 Proposed IFC investment 350 Other unsubscribed "CLASS B" Shares 950 Total authorized and issued share capital 10,000 j/ Net yet paid in. IBRD/DFCD October 28, 1975  ANNEX 3 Page 1 of 3 DEVELOPMENT BANK OF ZAMBIA OPERATIOMS POLICIES (Approved by DBZ 'S Board of Directors on August 15, 1975) I. GENERAL 1. DBZ is a national development institution, and shall contribute to the development of economically viable enterprises in Zambia in all the sectors of the economy mentioned in the DBZ Act, mainly:- a) manufacturing industries; b) ranching and large scale agriculture; c) tourism. 2. DBZ shall invest on the basis of national priorities for economic and social development as laid down in Development Plans. *,thin this framework, DBZ shall give equal priority to parastatal and private projects. 3. DBZ shall only finance projects which are technically feasible and financially viable. Wthen these requirements are satisfied, DBZ shall give priority to projects contributing towards:- - foreign exchange savings and possible earnings. - development of local technology and of manpower skills. - permanent employment. - use of local raw materials. - development of related industries. - Zambian ownership and management. 4. DBZ will not subsidise enterprises or projects. 5. DBZ shall to its best endeavour identify investment opportunities and present them to potential Zambian and foreign investors. 6. DBZ shall, where appropriate and possible, offer technical assistance and advice to its clients in matters of project planning, organisation and financing. II. INVESTMENT POLICY 1. DBZ shall grant medium and long term loans wihose terms and conditions such as repayment periods, interest rates, commitment and other charges will vary with the requirements of each project. It may also invest in the share capital of enterprises, underwrite securities and guarantee debts.  ANNEX 3 Pge 2 of 3 2. DBZ's financial assistance shall notamount to less than K25,000 in any one project. 3. DBZ's total outstanding commitments in favour of one single enter- prise shall neither exceed 20% of DBZ's net worth nor 75% of the enter- prise's fixed assets. Exceptions to this rule must be determined by the particular nature and merits of a project. 4. DBZ's total investments in the form of equity participation shall not exceed 25% of the Bank's net worth. In one single enterprise, DBZ's maximun equity investment shall not exceed 5% of the Bank's net worth nor, in normal circumstances, 25% of the share capital of the enterprise. 5. DBZ's funds shall not normally be committed specifically for the financing of working capital. 6. Where appropriate, DBZ may join with other financing institutions, local or foreign, in financing projects. 7. DBZ shall endeavour to distribute its investments among the various sectors of the economy mentioned in the DBZ Act, and to the different provinces of Zambia. III. RELATIONSHIP WITH CLIENTS 1. DBZ shall not seek to obtain controlling interest in a project or enterprise. It will also generally avoid assuming management responsi- bilities in such projects or enterprises. 2. When deciding upon its investment, DBZ shall take into account all financial requirements of the project or enterprise for the duration of its investment. 3. In accordance with normal banking practice, DBZ will require its clients to provide and to maintain adequate security, to keep records and accounts in accordance with sound accounting practices and to furnish whatever information on their operations and accounts DBZ deems desirable. DBZ will have the right to inspect the enterprises and projects if finances. 4. Business secrets and other information furnished by applicants or clients will be treated as confidential by DBZ. IV. FINANCIAL POLICY 1. As an independent institution, DBZ shall at all times manage its funds in such a way that it can honour its obligations. The Bank's profit margin must at all times be sufficient to cover the operating costs, to build up provisions and reserves, and to renumerate its share capital.  ANNEX 3 Page 3 of 3 The minimum interest rate charged by DBZ shall thus substantially reflect its cost of capital. 2. To this end DBZ shall:- - require adequate security for its loans; - maintain a satisfactory balance between the maturities of its own obligations and those of the loans it grants; - ensure that either the borrowers or the Government incur the foreign exchange risks in respect of funds borrowed in foreign currency by the Bank; and - make adequate provision against potential losses and build up reserves to a level consistent with sound financial practices, taking into account the size and quality of its portfolio of loans and investments as well as the need to pay dividends to share- holders. 3. Vhenever the Bank considers it necessary to increase capital resources for operations, DBZ will endeavour to raise funds at best possible terms locally or abroad. V. SPECIAL FUNDS From time to time, Special Funds may be placed under the Bank's administration, ear-marked for specific purposes or categories of borrowers. Modifications in the Bank's normal Operational Pblicies will have to be worked out for each Special Fund. IBRD/DFCD October 28, 1975  ANNEX 4 DEVELOPIENT BANK OF ZAMBIA Board of Directors (As of October 1, 1975)) Board Member Position Appointed by Mr. F. N. Walusiku Permanent Secretary Class A shareholders (Chairman) Ministry of Planning and Finance Mr. C. N. Lihusha Haaaging Director, DBZ " " i Mr. J. B. Nyirongo Managing Director, INDECO Mr. L. M. Lishomwa Special Assistant to the President on Economic affairs " Mr. E. J. Shamwana Solicitor "" Mr. M. S. Siame Chairman of M. S. Company " " Hr. F. H. Nkhoma General Manager, Barclays Class B shareholders (Standard, Bank (Zambia) Ltd. Barclays, and Grindlays Banks) EBRD/DFCD October 28, 1975 a  i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 4 ANNEX 5 DEVELOPMENT BANK OF ZAMBIA ORGANIZATION CHART (AS OF OCTOBER 1, 1975) Board of Directors Chairman: Mr. F.M. Walusiku P.S. Ministry of Planning & Finance Loan Committee Chairman: Mr. Lihusha Managing Director Mr. C.N. Lihusha Mr. |uardt (eap.), Maagr r.W p),Maagr r ahMaagM.he omanScrtaChrrman: Mr. Lynth Mr. B.A. Lenth (exp.) |Mr. Pasitkari (exp.) | Promotion & Planning Department Opiierations Department Finance Department -Administrative Departrnent, Mr. Rudhardt (exp.i. Manager Mr. Wadw,ha (exp.), Manager Mr. Rahnman (exp.), Manager Mr, Chemnbe, ComPany Secretary 1 Senior Economist 4 Senior Project Officers (2 exp., 1 vacant) 1 Accountant 1 Assistant Secretary 3 Economists (i vacant) 4 Proiect Officers 11 vacant) 2 Assistant Accountants 1 Personnel Officer 2 Assistant Economists (1 vacant) 2 Assistant Proiect Officers 1 Executive Officer 1 Senior Loan Officer (vacant) 2 Loan Administrative Officers (1 vacant) 3 Assistant Loan Administration Officers 1 Engineering Consultant (exp.) 2 Engineers (vacant) Employment Professional staff 30 Of which: Zambians 22 Expatriates a Vacant Professional Positions 8 Total 38 Note: lexp.) = expatriate. IBRD/DFCD October 28, 1975 World Bank.- 15325  DEVELOPMENT BANK OF ZAMBIA Loans Approved as of March 31. 1975 (Amounts in K I 000) Ownership Type of Amount Maturity Interest Total Othr Sources of Finance Borrower Economic Activity Location h private X Zambian Project Approved (year) rate Project Cost Equity Loans 1. Walkover Estates Agricultural estate Lusaka 100 50 new 90 10 9 180 90 2. Universal Footwear Shoe manufacturing Lusaka 100 51 expansion 50 5 9 60 10 3. Vimal Textiles Towel manufacturing Lusaka 100 51 new 170 10 9 230 60 - 4. Indeco Indutrial Holdings Bag manufacturing Kabwe - 100 rehabili- 1300 8 8.5 7,600 1050 5250 tation (suppliers credit) 5. Reform bakery Bakery Kafue' 100 100 new 27 5 9 54 27 - 6. Nova Knit Polyester fabrics Ndola 100 49 new 440 5 9 740 300 - 7. African Properties Cattle, farm Kabwe 100 95 expansion 123 13 9 266 143 - 8. Dunelm Estates Cattle & Poultry farm Chipate 100 51 expansion 86 12 9 117 31 - 9. Medwich Clothing Garmet manufacturing Kitwe 100 84 expansion 262 7 10 462 200 - 10. LECO PVC blendings Mwancha 100 - new 75 5 10 200 125 - 11. ZNWMC Storage & distribu- Kabwe - 100 expansion 1400 12 9 5100 2100 1600 tion (Building society) 12. Century Packages Packaging materials Lusaka 100 68 new 500 8 10 1670 670 500 (IFC) Ltd. * 13. Zambia Sugar Co. Sugar production Lusaka 30 75 expansion 2000 8 9 30000 11000 17000 (various sources) 14. Southern Quarries Quarrying Livingston 100 100 expansion 105 5 10 134 29 _ Total 6628 46813 15835 24350 * Joint Operations with IFC IBRD/DFCD November 1975  ANNEXI DEVELOPMENT BANK OF ZAMBIA Analysis of Loans Approved as of March 31, 1975 (Amounts in K'OOO) No % Amount % A. Type of Project New 6 43 1,302 20 Expansion 8 57 5 326 80 17 100o xL. 100 B. Ownership (Private /Public) Privrate 11 7Q 1,928 29 Public 3 2- 4,700 71 C. Ownership (Zambian/Foreign) Zambian 12 86 6,113 92 Foreign 2 1 515 8 % 100 ~6,628 -im D. Location Lusaka 5, 37 2,810 42 Kabwe 3 21 2,823 43 Copperbelt 3 21 777 12 Other 3 21 218 3 4i 10-0 =, T- E. Economic Act'