Solomon Islands - Development Bank Project

31786 - Soz- RESTRIICTED Report No. SOL: Ap-6 7'hi R* hubeen prepared for ASIAN DEVELOPMENT BANK Fe excw of the Bank. APPRAISAL OF DEVELOPMENT BANK OF SOLOMON ISLANDS (SECOND LOAN) November 1980 ,_________________  CURRENCY EQUVENTS (As of 30 September 1980) Currency Unit Solomon Islands Dollar (SI$) SI$1.00 US$1.2294 USLe.00 SI$0.8134 The Solomon Isla'nds currency (SI$) was introduced on 24 October 1977 and pegged to the Australian currency. On 18 May 1979- the S-I$ was revalued by-'5 per cent against the Australian dollar. Since October 1979 the exchange rate of the Sl$ has been determined on the basis of a weighted basket of currencies of the country's major trading partners. ABBREVIATIO AILB - Agricultural and Industrial Loans Board DBSI - Development Bank of Solomon Islands DFI - Development Finance Institution; EDF - European Development Fund GSA - Government Shareholding Agency IBRD/IDA - International Bank for Reconstruction and Development/International Development Association NDP - National Development Plan NPF - National Provident Fuid SIHA - Solomon Islands Housing Authority Sim - Solomon Islands Monetary Authority SSL - Solomon Soaps Ltd, N O T E S The fiscal year of the Government and of the Development Bank of Solomon Islands coincides with the calendar year. The fiscal year of the Agri- cultural and Industrial Loans Board was from 1 October to 30 September of the following year.  FOR OFFICIAL USE ONLY PROJECT FOCUS DESIGN AND RATIONALE 1. The Solomon Islands economy consists of a faL.3.y large subsistence sector which accounts for about 44 per cent of gross domestic product (GDP). Agriculture (including forestry, livestock and fisheries) is the mainstay of the economy, accounting for 70 per cent of GDP and about 90 per cent of the country's exports. To ensure continued economic growth for the maximum benefit of Solomon Islanders and to encourage investment to create employment and cash income, the country's second National Development Plan (1980-1984) aims at spending $230 million equivalent -- or more than double that of the previous Plan which has been completed successfully. *2. In order to create proper credit and promotional facilities for furthering economic development, the Bank provided three technical assistance grants to the Government of Solomon Islands to set up the Development Bank of Solomon Islands as a full-fledged development financing institution (DFI). Bank technical a.ssistance included the provision of the services of an expert to serve as DBSI's chief executive and-to train a Solomon Islander to ultimately take over this position. DBSI's organiz ation, management, staff, operating policies and procedures have improved and are generally satisfactory. A Solomon Islander has been appointed as General Manager and is expected to assume his new responsibilities in th beginning of February 1981. DBSI's operational and financial performance has also been satisfactory and utilization of the first Bank loan has been ahead of schedule. DBSI remains a suitable vehicle for financing development projects and channeling Bank funds to prospective sub-borrowers efficiently. 3, The Bank's proposed second loan of $2.0 million (with which US$1.5 million would be co-financed by IDA) would contribute towards the achievement of the objectives of the Second Plan (NDP II) by: (i) augmenting DBSI's foreign currency resources for the purpose of making medium and long- term loans to meet the foreign exchange cost of projects in the agriculture, manufacturing, transport and services sectors$ and (ii) assisting DBSI in its efforts to continue improving its institutional aspects. The Bank loan will meet part of DBSI's foreign currency requirements for 1981-1982. DBSI will repay the loan to the Government of Solomon Islands as per a fixed amortization schedule over a period of 15 years with 6 years grace, while DBSI will extend subloans for much shorter periods. DBSI will use the (funds received from) 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,  repayments of (the principal of) the subloans not yet due for repaynt to the Government to make further loans in accordanrwi with its Policy Statement. The Bank loan, therefore, would also help DBSI in meeti its local currency fund requirements. The foreign exchange risk on the ank subloans will be borne by the Gover nt. 4. Since its establishment in January 1978, DBSI has made a significant contribution tQ the development of projects and entrepreneurs ng Solomon Islanders for whom DBSI is the main source of financial assistance, From January 1978 through September 1980 DBSI had approved' 2,852 loans amounting to SI$7.9 million; of these 2,513 (or 88 per cent by number) were small loans of only up to SI$1,000, 5. The beneficiaries of the proposed loan are expected to be about 500 subprojects; about 4() per cent of the loan would be allocated to subprojects in agriculture, rural develop- ment and natural resources development; 30 per cent. to manufac- turing and construction; and 30 per cent to comrce, services and transport. The total fixed cost of the projects to be assisted out of the proposed Bank loan is estimated at US$8.4 million; DBSI's share in the financing of the cost of these projects is estimated at US$5.6 million (including the Bank loan and IDA Credit for a combined total of US$3.5 million) or 65 per cent. These projects are expected to generate ad- ditional employment and cash income for about 2,833 people and contribute annual value added estimted at US$6.5 million. The annual total income of the 2,833 people to benefit frao this second loanwould increase by about US$4.5 million which works out to an annual income of US$1,585 per family.  (i) TABLE OF CONTENTS Page I. INTRODUCTION 1 II. BACKGROUND 3 A. The'Econoomic Setting 3 VB Financial Institutions.... 4 Ill. ESTABLISHMENT AND OWNERSHIP 7 A. Bank Technical Assistance 7 B. Establishment 7 C. Capitalization 8 D. Relationship with the Government 8 IV. ORGANIZATION, MANAGEMENT AND STAFF 10 A. Board of Directors 10 B. Management 10 C. Organizational Structure 11 D. Staff and Training 12 V. ACTIVITIES, POLICIES AND PROCEDURES 14 A. Activities 14 B. Policies 16 C. Procedures 18 VI. OPERATIONAL PERFORMANCE - 20 A. General 20 B. Sectoral Distribution of Loans 20 C. Size and Maturity of Loans 22 D. Socioeconomic Aspects 23 VII. FINANCIAL POSITION AND OPERATING RESULTS 25 A. Financial Position 25 B. Operating Results (Income Statements) 28 C. Accounting System and Auditing 30  Page VIII. OPERATIONAL AND FINANCIAL PROJECTIONS 31 A. Operational Prospects 31 B.- Financial Projections 32 IX. UTILIZATION OF PREVIOUS BANK LOAN 36 A. General 36 B. Nature of Subloans 36 C. Procurement Aspects 37 D. Compliance with Loan Covenants 38 E. Socioeconomic Aspects 38 X. THE PROPOSED LOAN 39 A. Loan Amount, Borrower and Executing Agency 39 B. Main Features 39 XI. CONCLUSIONS AND RECOMMENDATIONS 44 APPENDIXES 45  PAPUA . NEW t SIKAIANA SOLOMON ISLANDS GUINEA I CHOISEUL ORTLAND ONTONG JAVA ISLANDS PACIFIC OCEAN IZ24 . ' SANTA ISABEL PROVINCE VELLA LAVELLA KOLOMBANGARA SANTA ISABEL j % (~>KLOMBNEW Gzo GEORGIAA Giz R En a ) MALAITA PROVINCE WESTE RN <2X VANGUNU PROVINCE