Uganda - Industrial Rehabilitation Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 3782-UG STAFF APPRAISAL REPORT UGANDA INDUSTRIAL REHABILITATION PROJECT April 20, 1982 East Africa Projects Department Industrial Development and Finance Division 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 EQUIVALENTS From October 1975 to May 1981, the Ugandan shilling was tied to the Special Drawing Rights (SDRs) of the IMF (SDR 1.00 = U.Sh. 9.66). In June 1981, the Ugandan shilling was devaluated by approximately 90%, and has subsequently been floating in relation to a basket of currencies. As a result, the U.S. dollar/Ugandan shilling exchange rate is subject to change. The annual average exchange rates for the last six years, and the spot rate at the end of September 1981, are as follows: U.Sh. per US$1.00 1975 7.4122 1976 8.3677 1977 8.2656 1978 7.6917 1979 7.4686 1980 7.4242 End September 1981 80.2000 ABBREVIATIONS UCB - Uganda Commercial Bank UDB - Uganda Development Bank UDC - Uganda Development Corporation FISCAL YEAR Government July 1 - June 30 'UCB October 1 - September 30 UDB January 1 - December 31  UGANDA FOR OFFICIAL USE ONLY INDUSTRIAL REHABILITATION PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. INTRODUCTION 1 II. THE ENVIRONMENT 2 A. The Industrial Sector 2 Role and Performance 2 Structure and Organization 3 Constraints and Policy Issues 4 Government Objectiv^s and Priorities 7 Bank Assistance Strategy 8 B. The Financial Sector 9 Institutional Structure 9 Resource Mobilization and Credit Allocation 10 Interest Rates and Inflation 11 III. THE INTERMEDIARIES 12 A. Uganda Development Bank 12 Objectives and Role 12 Capital and Ownership 12 Board and Management 13 Organization and Staff 13 Policies and Procedures 14 Procurement and Disbursement 15 Accounting and Auditing 15 Lending Terms 16 Operations 16 Resources 17 Portfolio 17 Financial Performance and Condition 17 Projected Operations 18 Resource Requirements and Financial Plan 19 Projected Financial Condition and Performance 20 Evaluation 20 B. Uganda Commercial Bank 21 History and Role 21 Capital, Ownership and Board 21 Management, Organization and Staff 21 Policies and Procedures 22 Accounting and Auditing 24 Operations and Portfolio 24 Financial Performance, Situation and Prospects 25 Evaluation 26 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.  Page No. IV. THE PROJECT 26 A. Objectives 26 B. Description 26 Medium and Large Industries 27 Small Industries 28 C. Costs and Financing 29 Medium and Large Industries Component 29 Small Industries Component 30 Terms of IDA Credit 30 D. Project Implementation 32 E. Benefits and Risks 33 V. SUMMARY OF AGREEMENTS REACHED AT NEGOTIATIONS 35 LIST OF ANNEXES 1. Uganda: Industrial Output and Wage Employment 2. Uganda: Structure of Interest Rates 3. UDB : Actual and Projected Operations: 1978 - 1986 4. UDB Actual and Projected Income Statements: 1977 - 1986 5. UDB : Actual and Projected Balance Sheets: 1977 - 1986 6. UDB : Actual and Projected Sources and Uses of Funds: 1979 - 1986 7. UDB Actual and Projected Financial Ratios: 1978 - 1986 8. UCB : Actual Income Statements: 1976 - 1981 9. UCB : Actual Appropriation Accounts: 1976 - 1981 10. UCB : Actual Balance Sheets: 1976 - 1981 11. UCB Actual Financial Ratios: 1976 - 1980 12. Short List of Medium and Large Scale Projects for Rehabilitation 13. Summarized Information on Small Industries for Rehabilitation 14. Terms of Reference for Consulting Firm to assist UDB in Project Appraisal 15. Projected Disbursement Schedule of IDA Credit 16. Selected Documents in Projects File  I. INTRODUCTION 1.01 The Bank Group reconnaissance mission which visited Uganda in July 1979 after the liberation war recommended industry as one of the high priority sectors where the Bank should quickly prepare projects for assistance, and where Government placed priority on such Bank assistance. In particular, the mission reported that the Government was keen on Bank assistance for strengthening the Uganda Development Bank (UDB) so it could play a major role in financing the rehabilitation of industry and agriculture. In view of this recommendation, an IDF mission visited Uganda in December 1979 to undertake a preliminary review of the industry and finance sectors, and assess the potential for Bank Group project lending in these sectors. 1.02 The mission's main findings were; (i) whilst shortages of imported raw materials and spare parts were the major constraints to industrial production, a large number of medium and large scale industrial enterprises would also need to replace obsolete or broken-down plant, machinery and equipment, to be able to produce efficiently; (ii) many small enterprises and entrepreneurs also needed basic equipment, machinery and tools to restart businesses ravaged by years of economic decline and the war; (iii) foreign exchange resources, preferably available on terms that will permit onlending on a medium and long term basis, were urgently needed to finance such replacement investments; and (iv) a basic framework already existed within the financial system to undertake such term lending. Specifically, the UDB as the main national development bank could be quickly strengthened to channel resources for rehabilitation of medium and larger scale enterprises, and the Uganda Commercial Bank (UCB), being the largest bank with an extensive branch network, could effectively lend for the revival of small and cottage industries throughout the country. The mission recommended preparation of a Bank line of credit project for financing capital investments needed in the rehabilitation of the industrial sector, using these two institutions. Such a credit was seen as a necessary complement to two credits then planned for Uganda, from which the industrial sector was going to benefit. These two credits, since approved, were a reconstruction credit which would provide imported raw materials and spare parts, and a technical assistance credit which would provide expatriate assistance for various activities (para 2.15 and 2.16). 1.03 A preparation and preappraisal mission visited Uganda in April/May 1980 to: (i) ascertain and discuss the Government's priorities among industrial sub-sectors and projects for rehabilitation; (ii) evaluate and prepare the two financial intermediaries for channelling a Bank Group line of credit; and (iii) define the scope and content of the project, estimate project costs, and the level of external financing likely to be required. The mission identified a short list of 25 medium and large scale priority projects, drawn from a longer list provided by Government, and requested UDB to compile more detailed technical, financial, and economic information on them. On small industries, UCB was requested to compile information on the rehabilitation needs of its existing clients. In July 1981, an engineering mission visited Uganda and reviewed the engineering and technical feasibility of rehabilitating the 25 medium and large scale projects, among others, and the cost estimates. Final field appraisal of  the project was undertaken in September 1981. This report is based on the findings of all these missions, 1/ as well as on work done on the industrial sector by the economic mission which visited Uganda in September 1981. It recommends an IDA credit of $35 million for the project. II. THE ENVIRONMENT A. The Industrial Sector Role and Performance 2.01 Although Uganda's industrial sector 2/ has always been relatively small, it did in the past make a valuable contribution towards supplying the domestic market with basic goods (e.g. edible oils, soap, paper, and cement) and in some instances, produced a surplus for export (e.g. textiles and copper). During the 1960s and early 1970s, the sector grew at a satisfactory rate of around 6% per annum (similar to the growth rate for the economy as a whole), and accounted for about 16% of monetary GDP and 11% of total GDP (at 1966 prices). The overall growth rate of the industrial sector began to slow in 1970 and has generally been negative since 1972. As shown in the table below, production of many key industrial products in 1980 was only a fraction of earlier peak levels. 3/ Production of Selected Industrial Goods Peak Year 1980 Ratio of 1980/ Units Year Amount Amount Peak Production (%) Spirits (waragi) '000 liters 1973 910.0 34.0 3.7 Beer m. liters 1973 45.6 12.0 26.3 Cigarettes billions 1974 2.0 0.6 30.0 Fabrics m. sq.meters 1970 49.6 7.5 15.1 Soap '000 tons 1966 14.9 0.4 2.7 Matches (small) '000 cartons 1971 64.0 2.8 4.4 Steel Ingots '000 tons 1970 24.8 1.9 7.7 Cement '000 tons 1971 205.1 4.9 2.4 Paints m. liters 1974 1.9 0.1 5.3 Overall, industrial value added in 1980 was only about one-third of its peak 1972 level, and accounted for less than 8% of monetary GDP and 5% of total GDP. Now, many industries have closed down while others continue to operate at very low levels of capacity utilization. 1/ The reconnaissance mission consisted of Messrs. Nouvel, Mante and Chanmugan; the preparation mission of Messrs. Mante and Murgatroyd; the engineering mission of Mr. E. Espenhahn of UNIDO, and the appraisal mission of Messrs. Mante, Murgatroyd and K.A. Rashid (consultant). 2/ The industrial sector is defined to include: (a) miscellaneous manufacturing; (b) mining and quarrying; (c) crop processing; and (e) construction. 3/ It should be noted that statistics of industrial production in Uganda are not very reliable, because of the general upheaval in the country over the past decade, and because many firms have been unwilling to report accurate figures because of their "magendo" operations.  -3- 2.02 This significant decline in industrial output and value added was not accompanied by a major decline in sector wage employment. According to available data (annex 1) total industrial wage employment increased from about 78,300 in 1966 to about 108,400 in 1971 (up 38%) and then declined by only about 2% to about 106,300 in 1977. Its share of total wage employment rose from 32% in 1966 to 33% in 1971, but had also declined to 29% by 1977. Compared to the decline in sector output and contribution to GDP in the seventies, this marginal reduction in employment implies a significant decline in labour productivity in the sector starting in 1971. This development appears to be a result of pressures on parastatals to retain workers even where production was being reduced. Industrial inestment also suffered a major decline in the decade. Even without data on yearly changes in sector capital stock, it is apparent from the condition of existing factories that there was little new investment over the past decade. Indeed, in more recent years, there is evidence of disinvestment in many areas as obsolete and broken-down equipment were not replaced, and factories were forced to shut-down. Structure and Organization 2.03 As should be expected after such a long period of stagnation and disinvestment, the structure of Ugandan industry has not changed much since 1971 and remains typical of early industrial development. The larger establishments, with the exception of crop processing activities (coffee, and tea), are mainly import substituting in orientation and produce basic consumer goods. The main subsectors are textiles and wearing apparel; food and beverages; leather and footwear; metal working and allied products; wood products; paper products; construction materials; and fertilizers and basic chemicals. There are very few intermediate and capital goods industries, and a notable absence of pure assembly industries making electro/mechanical goods from mainly imported components. Smaller industries are also oriented towards producing basic consumer goods and services for the domestic market. Typical small industry activities include tailoring shops, jaggery mills, maize mills, furniture shops and auto repair garages. Handicraft production has been largely neglected. 2.04 Although industrial structure has not changed much, there appears to have been a considerable reduction in the number of enterprises. In 1971, when the last full industrial survey was conducted, the sector was reported to comprise about 970 establishments employing ten or more people, and a much larger number of cottage industries and small workshops scattered throughout the country. A recent (1981) register of existing industries compiled by the Ministry of Industry records only 464 establishments, including small industries. Of these, 177 (about 40%), were reported to have temporarily shut down. While the coverage of this recent survey is unlikely to have matched that of the 1971 survey, and the two results should therefore be compared with caution, these figures corroborate the conclusion that the size of the sector was considerably reduced over the past decade. 2.05 The organization of industrial activity changed in two important respects during the past decade. First, there was a major shift from a  -4- predominance of private enterprises to public enterprises in the medium and large scale sector. This started with nationalization of some major private industries in 1968, and was accelerated in 1972 by the exodus of Asians, and subsequent acquisition of their enterprises by Government. The result is that almost all medium and large scale industries are now either publicly owned, or have significant public participation. Second, within the expanding public sector, proper organization and control gave way to considerable disorganization. Prior to the nationalizations, the Uganda Development Corporation (UDC), a public corporation set up in 1952, was the main institutional channel for public investment in and operation of industries. It was a properly organized holding corporation with an independent board, and adequate autonomy. After 1972, its operations initially swelled out of control as it was allocated most of the nationalized enterprises, then shrank haphazardly as the same Government reallocated these enterprises, including some originally started by UDC, to Government ministries and other parastatals. In 1974, a number of other specialized public corporations (e.g. National Textile Board, and Wood Industries Corporation) were created to serve as holding companies for various nationalized and abandoned enterprises in the same subsector. The setting up of these corporations, and the allocation of enterprises to them, was neither done in a planned and systematic way nor ever completed. Additionally, successive Governments have changed the degree of autonomy exercised by these corporations to suit their political goals. The result is that the public sector is still disorganized, and suffers from inadequate planning and controls (see para 2.10). Constraints and Policy Issues 2.06 The severe decline in the performance of Ugandan industry described above took place within the context of severe mismanagement of all sectors of the Ugandan economy in the past decade. This economic mismanagement impacted on industrial performance through a number of interelated constraints which are still largely unresolved, and which now represent key policy issues for Government action. 2.07 The primary constraint, as with all areas of the economy, is the acute shortage of foreign exchange. The sector is a major consumer of foreign exchange for imports of inputs, spare parts and capital goods for rehabilitation. Even essentially domestic resource based industries like cotton textiles and leather tanning depend on some imported inputs. Only small amounts of foreign exchange are currently available for sector imports, leading to severe difficulties in selecting beneficiaries and cumbersome allocation procedures. 4/ Since this foreign exchange problem is expected to remain unresolved in the near future, Government policy must address the issues of setting clearer priorities for allocating this scarce resource, and streamlining the approval procedure in a way which is less time consuming but consistent with implementation of the set priorities. 4/ The procedures require approval of import licenses at four levels; Ministry of Industry; Advisory Board of Trade; Ministry of Planning or Commerce and the President's Economic Advisory Committee. The whole process is estimated to take between 5 to 6 weeks.  - 5 - These policy issues are already being addressed in the Bank's dialogue with Government on overall economic policies. Specific understandings on appropriate solutions would be sought in the context of the proposed second reconstruction credit which is being processed together with this industrial rehabilitation credit. 2.08 The second major constraint which has contributed in a substantial way to the decline of industrial production is a shortage of domestic inputs, especially agricultural inputs. A decline in agricultural production, coupled with smuggling, have had a severe impact on the agro-processing industries (e.g. coffee curing, cotton ginning, sugar production, leather tanning, and milk production), as well as on industries using these processed products as inputs. For example, the collapse of cotton output has affected production of textiles, edible oils and soap, while the shortage of hides and skins has affected the leather and shoe industry. The basic reasons for the decline of agriculture were distorted pricing policies, inadequate supplies of imported inputs and incentive goods, and ineffective marketing channels. 5/ These problems are being addressed by Government in its efforts to rehabilitate the agricultural sector. Successful implementation of an agricultural rehabilitation program will be a basic requirement for any significant improvement in industrial performance. 2.09 The third serious problem for Ugandan industry is a lack of skilled staff, mainly technical and engineering staff, but also other management and supervisory personnel. This problem has its origin in the exodus of expatriates and trained Ugandans in the 1970's, and was exacerbated by inadequate facilities for training and development of replacements. Its most serious impact has been a serious deterioration in a number of plant and equipment due to poor maintenance, and an inability to plan and implement subsequent rehabilitation of such facilities. While this problem can best be dealt with on an industry by industry basis through identification of staffing gaps and recruitment of suitable people, it is also important that Government address the broader issue of manpower development through appropriate policies. In the short and medium term, two policy areas need attention. First, it will be necessary for Government to establish a more professionally-oriented and rewarding system of compensation, career development and working conditions in the public industrial sector. This will help improve morale of existing trained manpower and possibly attract Ugandans overseas to return. Second, even with the best of local efforts, it seems inevitable that significant inputs of technical assistance will be needed for a number of years to come. Government recognizes this need and welcomes such assistance. Where such assistance is provided through aid arrangements, it raises no major problems. Major problems however arise for expatriates who are not funded under aid programs, because Government is yet to put into place policies that will permit payment of portions of their salaries in foreign exchange and prompt remittances of such salaries and fees to dependents. Since Government cannot be expected to guarantee such payments in the current tight foreign exchange situation, the most promising short term solution is for Government to seek most of the technical assistance under aid funded arrangements. 5/ For a detailed discussion of the agricultural sector see the Country Economic Memorandum on Uganda; Report No. 3773-UG.  - 6 - 2.10 The disorganization of public sector industry has already been noted (paragraph 2.05). This has become a major constraint on better industrial performance, given the importance of the public sector. Specifically, it aggravates the mismanagement effects of the skilled manpower shortages, leads to political interference in decisions which should normally rest with enterprise management, and has generally created an atmosphere of lack of accountability and proper control in the use of the substantial public resources involved. 6/ Government has indicated that its policies in this area are: (i) to reduce the size of the public sector through the return of some of the abandoned or nationalized properties to the rightful owners, and sale of others to new private investors; and (ii) to properly reorganize the remaining parastatals, appoint managers on the basis of technical qualifications, and give them adequate autonomy in running these enterprises. The practical implementation of these policies is however proving very difficult and slow because of the inherent complexity of some of the issues (e.g. establishing correct ownership); the need for legislative action to provide the legal framework under which some of the decisions can be made (e.g. compensation); deficiencies in the information base (e.g. lack of financial statements) and also political inertia (e.g. slowness in reorganization of UDC). Although some of these related issues will take careful deliberation and years to fully resolve, some measures and decisions can be taken by Government now which would at least improve the climate for rehabilitation. Two such measures are a realistic program for updating the accounts of the major parastatals to provide a basis for decisions on their future, and a specific proposal for reorganizing UDC, the major industrial corporation. The Bank will seek an understanding with Government to allocate funds from the IDA technical assistance credit for the employment of consultants to start updating the parastatal accounts in the context of the proposed second reconstruction credit. The Government has been urged to make a final decision soon on the reorganization of UDC, 7/ a subject on which several proposals have been prepared by UDC technical staff since 1979. 2.11 The fifth major constraint is financial in nature; shortages of working capital and inadequate access to credit from the domestic commercial banking sector even where import licenses have been approved. In general, this reflects problems of creditworthiness of industrial enterprises, rather than any general shortage of liquidity in the banking system (paragraph 2.22). This creditworthiness problem has many causes. First, after years of operating at substantial losses, many enterprises have had their equity bases substantially eroded and have accumulated huge debts, thereby limiting their borrowing capacities. Second, in cases where ownership is not clearly known or established (many abandoned and nationalized enterprises are in this category), the banks are unwilling to extend credit because proper collateral cannot be assumed on the enterprises' assets. Third, after the June 1981 currency float and devaluation, the amounts of credit required to operate at the new costs and 6/ Some of these public enterprises have not produced any audited accounts for years. 7/ Specifically, a decision on which of UDC's past subsidiary and associated companies will be returned to it; which of its existing companies will remain with it; and which other government owned companies will be reallocated to it as new subsidiary and associated companies.  -7- prices are huge in relation to the existing assets of enterprises. Pending a revaluation of such assets (a complex task), the banks are cautious in extending credit. The extent of the problem varies, depending on the enterprise and its history, and solutions will therefore have to be tailored to the peculiarities of each case. To facilitate such financial restructuring of enterprises to be rehabilitated under the proposed credit, IDA will suggest to Government during negotiations that it consider permitting rescheduling or cancellation of tax arrears and other debts owed tu it; deferment of duties and taxes, especially for private companies; providing guarantees to parastatals for commercial credit for working capital; and making budgetary allocations for recapitalizing parastatals. 2.12 Finally, infrastructural services, especially transport, have deteriorated to a point where they impinge on industrial performance. Transport bottlenecks, both on domestic and international routes, cause serious delays in the delivery of crucial inputs to the industrial sector and of final products to markets. The deterioration of Uganda's transport network was due in large part to inadequate road maintenance, the loss or damage to vehicles especially during and after the liberation war, and the impact of the breakup of the EAC on railway and air services. The rehabilitation of the transport sector is a major priority of Government, which has already taken measures to augment the truck fleet. Successful implementation of Government's programs in infrastructural rehabilitation will therefore be important for increasing industrial output and reducing industrial production costs. Government Objectives and Priorities 2.13 Given the serious decline in industrial production and the deterioration of sector assets, Government rightly attaches importance to the reactivation of the sector in its overall strategy for rehabilitating the economy of Uganda. In the short run, the objective is to increase utilization of existing capacity through improvements in the availability of inputs, and through repairs and replacement of broken down and obsolete plant and equipment where justified. Specifically, the Government is aiming at an increase in average capacity utilization from the current levels of about 20% to about 60% over the next two years. This is an ambitious target, given the foreign exchange, manpower, institutional and other constraints on the sector. Nevertheless, it does help illustrate the magnitude of the task ahead and the resultant need to mobilize resources from a variety of sources: public and private, domestic and foreign. 2.14 Even with the best of efforts however, it is unlikely that Government can raise enough resources to reactivate all priority industrial enterprises over the next two years, and possibly even over the next five years. It is important therefore that it set priorities for industrial rehabilitation which would reinforce and complement its overall priorities and strategy for rehabilitating the economy. The broad priorities, given the structure of Ugandan industry, have been rightly set by Government to be basic consumer goods, inputs to the agricultural sector, and construction materials. In its investment program for 1982-1984, these priorities have been narrowed down to about 37 specific projects and programs for which an estimated US$211.5 million will be required.  The Bank has reviewed Government's overall investment program and priorities, including these industrial sector priorities, and have found them to be generally justified, even though the required resources may still be in excess of what is likely to be available. The priorities proposed for this industrial rehabilitation credit fit in with the Government's three year investment plan. 2.15 The Government has yet to formulate policies dealing with such industrial sector issues as tariff protection, investment and export incentives and employment, reflecting the still tentative nature of its overall economic program. On other issues such as ownership and pricing, indications are that the preference is for a mixed economy in which the private sector will have a strong role, and in which market determined prices will play an important role in production and resource allocation decisions. Evidence of these preferences come from a decision to hand-over some parastatals to the private sector, and the decision to decontrol the prices of most manufactured goods in June 1981. The absence of a policy framework on tariffs and incentives should not however seriously hamper effective rehabilitation of the sector in the short and medium term, as long as the specific constraints noted in paragraphs 2.07 to 2.12 above are adequately addressed. Bank Assistance Strategy 2.16 In line with the current focus of Bank assistance to Uganda on rehabilitation and reconstruction of the economy, especially the directly productive sectors, the program in industry is aimed exclusively at rehabilitation. The Bank has already provided imported inputs and spare parts to the industrial sector through the first reconstruction credit approved in FY 1980, and will continue this type of assistance under the proposed second reconstruction credit (para 2.07). Specifically, $30 million of the $70 million currently proposed for this second reconstruction credit is likely to be earmarked for importing raw materials and spare parts for industrial enterprises, selected on the basis of their potential to quickly earn or save foreign exchange, and to contribute significantly to value added. This assistance will enable these enterprises, in the short term, at least utilize their production facilities which are still usable. As noted in paragraph 2.02 however, there was substantial damage to industrial capital assets in the past few years. Medium term increases in industrial output and efficiency will therefore require, in addition to the provision of raw materials and spare parts, an early effort to replace obsolete and broken down equipment. This proposed industrial rehabilitation credit will provide the financial and technical assistance for rebuilding and replacement of industrial capital assets, as a complement to the assistance to be provided under the reconstruction credit. Additionally, a phosphate engineering credit, also planned for FY81, will prepare the way for rehabilitation of Uganda's chemical complex producing phosphate fertilizer. Assistance under these credits will mitigate the critical foreign exchange constraints on the sector.  - 9 - 2.17 A second objective of Bank assistance in the sector is to improve sector planning and help solve the institutional and manpower problems. The technical assistance credit, approved in FY81, provides resources for external technical assistance for management of industrial enterprises, preparatory work on plant and equipment rehabilitation, and staff training and support for institutions dealing with the sector. An industrial sector study, scheduled for FY83, will enable the Bank to advise the Government of Uganda on longer-term industrial strategy and policies beyond rehabilitation, while a parastatal sector study, also scheduled for FY83, will help Government define its policies for dealing with the issues affecting industrial parastatals. B. The Financial Sector Institutional Structure 2.18 The Ugandan financial system comprises the Bank of Uganda which is the central bank performing traditional central bank functions; seven commercial banks; four other credit institutions; two development banks; a post office savings bank; and several insurance companies. 2.19 The seven commercial banks constitute the heart of the system, accounting for the bulk of resources mobilized and allocated by the sector. The Uganda Commercial Bank (UCB), evaluated in Chapter III of this report, is by far the largest of the seven. The remaining six include five foreign-owned banks, (four of which are Ugandan subsidiaries with minority government participation), and a cooperative bank. The foreign-owned banks are Barclays, Bank of Baroda, Grindlays, the Libyan Arab Uganda Bank, and Standard. The Libyan Arab Uganda Bank was engaged in development financing as well as commercial banking activities, but, following the liberation war, both its operations and administration have been taken over by Government due to the changed political circumstances. The Cooperative Bank became a full-fledged commercial bank in 1978 when it began offering checking accounts. Deposits from the general public account for half of its funds, with the Government, on whose behalf it administers specialized lending programs, contributing 41 percent, and only 9 percent from the Cooperative Movement and its members. While the bank is owned by the Cooperative Movement, the Government plays an important role in its direction, with its representatives from the Ministries of Finance, Planning and Economic Development, and Cooperatives and Marketing, as voting board members. During the last decade commercial banking coverage has declined sharply, in line with the general decline of the economy, and the relative increase in subsistence activities. Thus, whereas in 1970 Uganda had 290 bank branches, or one for every 34,000 inhabitants, present estimates are 110 branches, or one for every 116,000 people. 2.20 The four credit institutions have mixed private and Government ownership. They operate mainly in the areas of mortgage financing and hire purchase, but can also carry out some of the functions of a commercial bank. The largest of these is the Uganda Housing Finance Company, which specializes in mortgage financing. The two development banks are the  - 10 - Uganda Development Bank (UDB), evaluated in Chapter III of this report, and the East African Development Bank, owned jointly by Kenya, Tanzania and Uganda. A third institution involved in term financing of industry, the Development Finance Company of Uganda (DFCU), which is jointly owned by UDC, CDC and DEG, ceased operations in the mid-seventies and is yet to be reactivated. The numerous insurance firms include a wholly Government owned insurance company. Resource Mobilization and Credit Allocation 2.21 The commercial banks account for the bulk of savings mobilized through the financial system because the other credit institutions have been fairly inactive in this area. 8/ In spite of the decline in number of branches over the past decade, time and savings deposits mobilized by the commercial banks increased from Shs 562 million as of December 1970 to Shs 4,494 million in December 1980, an average growth of 25.3% per year in current terms over the period. In real terms however, this represents no growth in financial savings, and reflects the real decline in GDP and the relative increase in subsistence economic activity during the period. It may also be a reflection of significantly negative real interest rates in the latter part of the decade (paragraph 2.23), and the disincentive effects of limited lending options on the willingness of the banks to mobilize savings. 2.22 Compared to savings mobilization, growth in domestic credit was more rapid over the past decade. In December 1970, total domestic credit was Shs 1.5 billion. This had grown to Shs 21.6 billion as of December 1980; an average growth of about 31.8% per year. This development resulted mainly from increased Government borrowing, particularly advances from the Bank of Uganda, to finance its budget deficits. Thus, claims on the central Government, which accounted for 39% of total credit in 1970, had reached a proportion of 72% in 1980. The corresponding shrinkage in credit to the private sector also reflects the effects of declining economic activity on private sector demand for credit. In fact, before the introduction of the financial stabilization measures in June 1981, 9/ private demand for credit from the banking system was very small, and a number of banks were consequently refusing time deposits. There was a large amount of excess liquidity in the financial system, and the commercial banks' ratio of loans to deposits was only 41 percent, compared with the maximum permissible ratio of 70 percent. Most financial transactions were then conducted by operators for speculative purposes, and the need for bank credit was negligible. After June, there are indications that the demand for private credit has increased with the sharp rise in taxes and import duties resulting from the float and devaluation, and some increase in non-speculative economic activity. It appears however that the demand varies from bank to bank, and that while some shifted from excess liquidity to tightness, others have remained very liquid. 8/ There is very little information on savings mobilized through insurance D remiums. 9/ The financial stabilization measures agreed with the Fund include a floating of the Ushs, increases in prices of export crops, a freeing of most other domestic prices from controls, and a limit on domestic credit and the share of Government in it.  - 11 - 2.23 Since 1977 the Bank of Uganda has pursued a policy of specifying ceilings for sectoral credit allocations which are adjusted from time to time. The current ceilings, fixed in June 1981 are; 30% for agriculture; 30% for manufacturing; 15% for trade and commerce; 10% for transport; 8.5% for building construction; 5% for mining and 1.5% for local and urban authorities. In general, credit to the agricultural sector has tended to exceed its limit, whilst manufacturing credit remains well below its limit (about 18%). The demand for credit from the manufacturing sector is rising, especially with the increased availability of foreign exchange for imports of raw materials and spare parts from the first IDA reconstruction credit, and the much larger local currency required to finance such imports after the devaluation. However, as noted in paragraph 2.11, a major difficulty encountered for extending credit to most manufacturing enterprises is the complete distortion of their financial statements resulting from the major devaluation. In almost all cases their assets, valued at old prices, do not provide adequate collateral for obtaining bank credit after the float. An expansion of credit to the sector will therefore require a revaluation of assets, a difficult task in a country where qualified auditors are few. This revaluation problem is the key issue facing the financial sector at present, as it also affects the financial institutions themselves. In the short run it is proposed that Government help parastatal firms through appropriate guarantees to the banks. Private firms cannot however realistically expect such guarantees by Government. For them a rescheduling of Government debts and tax arrears, and a deferment of duties and other taxes by Government, would seem to be the only viable short-run solution to the problem of improving their creditworthiness (para 2.11). Interest Rates and Inflation 2.24 The current structure of interest rates in Uganda is shown as annex 2. The rates were set in October 1981 by the Central Bank, in consultation with the IMF, and range from 8% to 12% per annum for deposits and 13% to 17% per annum for lending. Up to June 1981, Uganda was experiencing inflation in excess of 100%. Following the June 1981 devaluation, prices have stabilized or, in the case of food, fallen some 25%. The current interest rates are therefore positive in real terms. As noted above however, until recently, the demand for credit for productive economic activities was so low in relation to available funds that the level of interest rates was not important in credit allocation decisions. It was also not important in resource mobilization since the banks were not willing to take deposits for want of avenues for lending the funds mobilized. This situation still prevails to a large extent for most banks, making it unnecessary for Government to use the interest rate as an important policy instrument to influence resource mobilization and allocation at this time. However, since the Government has demonstrated a willingness to pursue realistic pricing policies, and since a continuation of the current IMF program is likely after June 1982, it is expected that if the situation on credit demand and mobilization of savings should change sufficiently to warrant an active role for interest rate policy, appropriate adjustments to the current structure will be made by Government.  - 12 - III. THE INTERMEDIARIES A. Uganda Development Bank (UDB) 3.01 Objectives and Role: The Uganda Development Bank was set up by decree in 1972 to promote and finance development. It is empowered to assist in the development of agriculture, industry, tourism, housing and commerce; to provide such assistance in the form of short, medium and long term loans, equity and other share investments, guarantees, and managerial and technical advice; and to administer a credit guarantee fund consisting of contributions from the Government and banks, for assisting marginal borrowers in raising funds from banks and credit institutions. The decree also permits UDB to manage various funds entrusted to it. 3.02 UDB's inception coincided with the mass exodus in 1972 of non-Ugandan citizens, and the allocation of their trading and small manufacturing businesses to new owners without the requisite business experience. These new owners were unable to obtain finance from the commercial banks because they were largely unknown, and UDB was therefore requested by Government to lend to them. UDB therefore started by playing a non-developmental role of providing short term commercial credit. Its role has however not been limited to this. As envisaged under the decree, it has played the role of a multisector development bank by providing long term project finance in the agricultural, industrial, transport and tourism sectors. In addition it has managed two funds (including one for beef ranching development financed under an IDA credit) on behalf of Government. 3.03 Government intends to build UDB into its major development bank with a substantial role in investment financing in key sectors. In future therefore, UDB will concentrate on medium and long term development lending for commercial agriculture, medium and large industries, transport and tourism. It is expected that its role in lending to commerce and small industries will be discontinued by December 1985. During negotiations of the proposed credit, an agreement to this effect was reached with UDB. 3.04 Capital and Ownership: UDB was set up with an authorized capital of Shs 100 million which was increased to Shs 500 million in April 1981. Government is currently the sole shareholder with a paid in capital of Shs 200 million. Because of the June 1981 currency float and devaluation, Government has decided on a further increase of UDB's authorized capital to enable it to borrow the amounts it needs to undertake lending activities at a level commensurate with its role as Uganda's main development bank. At negotiations of the proposed credit, Government agreed to finalize arrangements to increase the authorized capital to at least Shs 1.5 billion by June 1983, and to pay in an additional Shs 300 million from its own resources by June 1985; of this Shs 100 million will be paid each fiscal year in view of the tight constraints on the Government budget. In addition the Government would use the initial $10 million to be disbursed out of the proposed credit for UDB as additional Government equity in UDB to increase the paid in capital to about Shs 1.3 billion by 1985.  - 13 - 3.05 Board and Management: UDB's Board, appointed by the Minister of Finance, consists of up to seven members, including the Governor of the Central Bank and the Secretary of the Treasury as permanent ex-officio members. The decree establishing UDB stipulates that Board members should have experience in banking and financial matters, and mandates a board meeting at least once every two months. UDB's current board was appointed in September 1981, and it is too early to determine how effective it will be in directing UDB's management. The individual members do however have the requisite background to contribute effectively to the definition of UDB's strategy and provide adequate guidance on its operations. 3.06 A General Manager appointed by the Minister of Finance is the effective chief executive of UDB. The incumbent was transferred in late 1981 from the Libya Uganda Bank, where he had served briefly as a caretaker Managing Director. He is a respected banker with previous experience as the Managing Director of UCB. He also serves on the board of EADB. He has the stature and experience to effectively manage UDB. 3.07 Organization and Staff: UDB has three departments and an internal audit division reporting to the General Manager. A recently created operations department is responsible for all of UDB's project appraisal and follow-up work and for related research. The department has five divisions; agriculture, industry, commerce and trade, livestock and research and promotion. A new finance and administration department has two divisions, one responsible for financial management and accounting, and the other for personnel and office administration. A secretary's department is responsible for legal work and for administrative work connected with the Board. This structure is appropriate for UDB. 3.08 As of September 1981, UDB's total professional staff was 40, including the General Manager and two expatriate advisors. The distribution of these staff among the various units was as follows: secretary's - 3; administration - 4; accounts - 3; internal audit - 2; industry - 7; agriculture - 4; livestock - 5; commerce - 4; and research - 5. This level of staffing and the distribution amongst the various units has been adequate for the current level of UDB's operations. UDB is however about to take on increasing responsibilities, especially in industry and agriculture, where it is to be utilized as a channel for various foreign lines of credits for rehabilitation purposes. To be able to carry out these responsibilities effectively, its staff needs strengthening, both in quantity and quality. 3.09 UDB's management is aware of this need for staff strengthening and has sought the help of various external donors for experienced expatriate staff to fill key positions where suitably experienced Ugandans cannot be found immediately, and for appropriate training opportunities for Ugandan staff. In response, the EEC has already provided two expatriates, an engineer and a financial analyst, to augment the capacity of UDB's industry division. Additionally, UNDP and IDA would jointly finance a  - 14 - program of assistance to UDB involving the provision of; (i) seasoned expatriates to serve as assistant General Managers with line responsibilities for UDB's two new main departments (Operations and Finance) for two years; (ii) an experienced accountant to serve as chief accountant and strengthen the accounts division; and (iii) funds for external fellowships for training of UDB staff. IDA will finance its portion of the budget for this technical assistance from its technical assistance credit to the Government of Uganda, and will be responsible for recruitment for all the positions as executing agency for UNDP. In addition to this program of expatriate assistance, UDB plans to recruit more Ugandan professionals as the need arises. Three of these have already been recruited to strengthen the industry division. 3.10 Policies and Procedures: UDB's investment and financial policies are stated in by-laws adopted by its Board in 1973, and an informal policy statement prepared by its management. The policy statement has been discussed with IDA, and appropriate amendments reflecting suggested changes in UDB operations and the current economic situation in Uganda have been proposed and approved by UDB's Board. 3.11 The revised policy statement includes all the policy guidelines appropriate for a development bank. UDB will limit its exposure per project to the lowest of 80% of the project's cost, or 20% of UDB's net worth. It will not normally finance projects with debt/equity ratios exceeding 5 to 1, and if necessary will make equity investments to keep the financing plan of projects within this limit. Where it takes up equity, it will avoid taking a controlling interest, and its total investments in equity will not exceed its own net worth. UDB will avoid exposure to foreign exchange risks, and will synchronize the maturities of its borrowing with its lending. 3.12 UDB already has well established procedures for processing projects. Its bye-laws prescribe that all applications for financing should be made on a standard form. In addition sponsors are required to submit detailed feasibility studies if available. All applications are preappraised to quickly eliminate those which do not fall within UDB's mandate, and those where the state of preparation by the sponsor indicates that immediate consideration is not merited. Projects which are not rejected after preappraisal are appraised according to guidelines which are adapted to the needs of the sector and the project size. For small industry, commerce and small agricultural loans (these have accounted for a substantial proportion of the number of loans UDB has considered), UDB's appraisal is limited to basic commercial and financial analysis, and has adequately addressed issues. UDB's appraisal of large scale industry projects is comprehensive, and includes calculation of financial and economic rates of return. Because of the very small number of such projects that have been undertaken in Uganda since UDB's inception, its experience in undertaking such comprehensive appraisals has not been very  - 15 - extensive, and it will need some guidance and assistance, especially in technical and economic evaluation, to appraise the larger number of projects to be financed under the proposed credit. This assistance would be provided by consultants and by IDA in its review of subprojects. All appraised projects are reviewed by an investment committee chaired by the General Manager and consisting of all division heads. This committee is responsible for making final recommendations on loans for approval by the Board. 3.13 UDB's supervision procedures call for quarterly visits to each borrower. In practice, this has not been possible because of the security situation and transport difficulties. Clients around Kampala have therefore tended to be adequately supervised while those in distant areas have generally been barely supervised. This is a problem which is faced by all financial institutions in Uganda, and will only be resolved with general improvements in the security and transport situations. 3.14 Procurement and Disbursement: Goods and services to be procured with UDB financing are procured on the basis of competitive bidding or comparative shopping, depending on the circumstances of each project. In each case the method of procurement applicable is identified at the time of appraisal and made a condition of the loan. Disbursements are made by the accounts division after vetting of documents by the relevant sector division where the loan was appraised. Disbursements are normally made to suppliers, and if imports are involved, UDB requests that the goods be consigned in its name. Where disbursements have to be made to the borrowers because of the nature of the project, they are tranched, with later tranches being conditional on evidence of utilization of earlier tranches. These procurement and disbursement procedures are adequate. 3.15 Accounting and Auditing: UDB's accounting system needs improvement to handle foreign lines of credit. In this connection the proposed UNDP/IDA technical assistance to UDB includes funds for the evaluation and redesign of the system. Consultants to do this work have already been selected and a new system is expected to be in place before disbursements start under the proposed credit. The UDB decree prescribes that external auditors be appointed on an annual basis. UDB's auditors since its inception have been Messrs. Lawrie Prophet and Company, a firm of local auditors who were virtually the only audit firm operating in Uganda between 1972 and 1980. Because of the resulting very large work load of this firm, UDB's accounts have been audited with a considerable time lag, and the scope of these audits have not included extensive independent reviews of the portfolio. At the request of IDA, UDB has engaged the services of an internationally known auditing firm as joint auditors with special responsibility for review of the portfolio. In future, UDB would be required to submit audited accounts, including independent evaluation of the portfolio, to IDA within 9 months of the end of its fiscal year. 3.16 Lending Terms: As noted in paragraph 2.23 interest rates in Uganda are set by the Central Bank, and were recently increased as part of the financial stabilization program Government has agreed with the IMF.  - 16 - UDB's current interest rates are therefore 13% per annum for agriculture, 14% for industry and 15% for commerce. UDB also charges borrowers 1% of the amount of loan approved as a one time fee payable at the time of first disbursement. It provides guarantees at a rate of 2% per annum of amounts guaranteed. As already noted, current lending rates in Uganda are well above recent domestic inflation rates, and may continue to be positive in real terms over the next 2 to 3 years if the post June 1981 price stability continues. It is however difficult, in Uganda's current economic situation, to predict long term inflation because the underlying economic factors can change quickly and significantly in either direction. In these circumstances it is difficult to make judgements about the adequacy of lending rates for long term loans of the type UDB makes, and to set rates now which would remain adequate over the life of most of it loans. For the proposed credit, a minimum interest rate of 14% per annum will be charged to subborrowers, in line with the rate approved by the Central Bank for industrial lending. If the price stability which has set in since June 1981 prevails over the next 3 years, this rate would yield a positive real charge on subloans. In view of the uncertainty about the economic outlook however, it is proposed that IDA and Government review this onlending rate periodically during the commitment period of the credit, and adjust it in line with major changes in domestic inflation and in the overall interest rate structure. Agreement was reached with Government on this proposal during credit negotiations. 3.17 UDB's lending is for maturities ranging from 3 months to 15 years. The shorter maturities, (i.e. those of less the 12 months) would be discontinued when UDB stops lending for commerce. UDB does not pass on the exchange risk on its existing foreign lines of credit to subborrowers since Government has agreed to bear such risks, and it does not charge subborrowers for this. For the proposed IDA credit, agreement was reached with Government to carry the exchange risk, and to charge to subborrowers a 1% per annum fee. 3.18 Operations: Annex 3 contains a summary of UDB's operations through December 31, 1980 together with an estimate for the year 1981. Through year-end 1980, UDB had committed 10/ 1839 loans totalling about Shs 366 million. It has not approved any equity investments. The level of new commitments during the past three years has been low relative to previous activity, averaging only about Shs 40 million per year (US$5.3 million equivalent based on predevaluation exchange rates). This lack of growth, even in nominal terms, reflects the highly unsettled environment within Uganda during the time period. The estimated sharp increase in 1981 commitments to Shs 1,343 million (US$16.8 million equivalent) is due primarily to the anticipated commitments in the second half of the year of funds recently borrowed from ADB and the EEC. In addition, commitments of local currency funds are expected to double in 1981 because of increased demand in a more stable environment and availability of new funds from paid-in Government equity. Disbursements have historically been almost as large as commitments, with low levels of undisbursed commitments on a year-to-year basis, because of the small average size and local currency nature of the loans. 10/ UDB does not record approvals separately from commitments.  - 17 - 3.19 To date, UDB's loans have been predominantly of small size; loans of under Shs 500,000 have represented about 95% of the number and 49% of the value of past commitments. The average size of loans has been about Shs 340,000 (US$44,000) for industrial and agricultural loans, with trade and commerce loans typically smaller. Over the 1978-1980 period, industry and transport loans represented about 46% of the number and 57% of the value of commitments. About 28% of the value of commitments have been for agricultural loans and 15% have been for trade and commerce. Industrial lending is widely diversified by subsector. Agricultural lending has focused on livestock for medium scale ranches and crops for farms. 3.20 Resources: Until recently UDB's only borrowing was a Shs 9 million (including accumulated interest) Saudi Arabian loan channelled through Government in local currency. As undisbursed commitments at December 31, 1980 amounted to only Shs 4.4 million, almost all of the current assets (to the extent that current portions of long term loans and accumulated interest are collected) are available for new commitments. With respect to foreign exchange resources, UDB obtained three new lines of credit in 1981: an ADB line of credit in an amount of Shs 970 million (Units of Account 10 million) for industrial rehabilitation; a second ADB line for the same amount for agricultural lending; and an EEC line of Shs 145 million available for lending to medium and small scale industry on a revolving basis. Processing of a number of subprojects under these lines is well underway and UDB expects to commit about Shs 1,250 million or about 60% of these lines of credit in 1981, leaving about Shs 835 million available for future commitments. 3.21 Portfolio: As of June 30, 1981 UDB had a portfolio consisting of 1,071 loans with a value of about Shs 126 million. While detailed information on loans in the portfolio is not available, they appear to be well diversified on a subsectoral basis, with very few projects still under implementation. All the loans were in local currency. The quality of this portfolio is not good, which is not surprising in view of the extremely difficult conditions which UDB has been facing. As of June 30, 1981, 672 loans were in arrears totalling Shs 95.2 million. Arrears of over three months affected 63% of the number of projects and 60% of the value of the loans oustanding. However, total arrears, including interest, amount to 76% of the value of the principal oustanding suggesting that arrears have been accumulating over a considerable period of time for many of these projects. In addition to the arrears, UDB has written off Shs 32.3 million relating to 597 projects as bad debts. Existing provisions totalling Shs 12.9 million are clearly inadequate and UDB plans to have provisions carefully reviewed, and probably increased substantially, in conjunction with the audit now in process for the 1980 and 1981 accounts (para 3.15). It should be noted however that after the June 1981 float and devaluation, the value of this portfolio has been significantly reduced (from $15.8 million equivalent to $1.6 million equivalent), and its quality therefore has very little impact on UDB's future financial viability and creditworthiness. 3.22 Financial Performance and Condition: Annex 4 shows UDB's audited income statements for 1977-1979, unaudited 1980 accounts and estimated accounts for 1981. UDB has made losses, usually small, in every year except in 1980. It is anticipated that, following the audit, the 1980  - 18 - accounts will show a relatively large loss because of an increase in provisions which may, consequently, sharply reduce the provisions expense estimated for 1981. Despite low financial expenses, UDB has been making little profit before provisions and taxes because of administrative expenses, which amounted to 7.2% of average total assets in 1980. The high administrative expenses are a consequence of UDB's sensible strategy of attempting to hold its existing organization relatively intact even though lending levels were not increasing in a highly inflationary environment. The anticipated marked deterioration in profitability in 1981 is due, in part, to UDB's gearing up to support sharply increased levels of lending in late 1981, hence providing relatively little financial income to support the increased expense. Whilst the recent increases in interest rates will improve profitability, the principal source of improvement should come from sharply increased levels of loans outstanding relative to operating expenses. 3.23 UDB's balance sheets, cash flow statements and financial ratios for the past four years (Annexes 5, 6 and 7) reflect the relative stagnation of its operations. While the net loan portfolio oustanding decreased over the period, total assets increased by about Shs 94 million because of an increase in paid-up capital. The bulk of this capital increase was invested by UDB in treasury bills, with the result that a high proportion of its assets as of December 1980 (27%), was very liquid. Because of its limited past borrowings, UDB's debt to equity ratio was very low at 0.1/1 as of December 1980. 3.24 Projected Operations: Projections of operations for UDB through 1986 are shown in annex 3. These projections are in current terms and assume a gradual improvement in economic conditions in Uganda over the period. UDB has, excluding the 25 subprojects identified for this industrial rehabilitation credit, a pipeline of 30 agricultural projects representing loans of Shs 34 million and 17 industrial projects which would require about Shs 185 million in UDB financing. Based on this pipeline, UDB expects its new local currency commitments to nearly double in 1981 and again in 1982 from its very low 1980 base. Thereafter, it projects a moderate 22% annual average growth in nominal terms, with agricultural lending growing somewhat faster than industrial lending. As already noted (para 3.03), UDB plans to gradually phase out new trade and commerce lending over the next four years because of difficulties in administering and collecting this large portfolio of very small loans in a non-priority lending area. 3.25 UDB made its first foreign exchange loans in 1981. Because of the urgent needs for rehabilitation of a number of relatively large scale projects and the anticipated availability of substantial funding for this purpose, UDB's foreign exchange commitments and disbursements during the 1981-1984 period are projected to be extremely large relative to past lending levels and its existing total asset base. Total commitments are expected to average Shs 1,900 million over these four years compared with 1980 commitments of Shs 49 million (or about Shs 490 million in comparable post-float shillings). Eighty percent of the commitments for these four years would be for industrial and transport projects. In 1985 and  - 19 - thereafter, foreign exchange lending is expected to continue, but at lower levels after the principal rehabilitation requirements have been funded. Annual disbursements, similarly, are expected to be high, about Shs 585 million in 1981 and Shs 820 million in 1982. These large increases in UDB's operations are a necessary response to the funding requirements of the urgent national economic rehabilitation effort, in the absence of other national institutions which could share responsibility for this role. It will, of course, impose a major challenge and significant strain on UDB to implement this program. 3.26 Resource Requirements and Financial Plan: UDB's operations plan for the three year period ending December 31, 1984 calls for about Shs 5,677 million in foreign exchange commitments and Shs 673 million in local currency commitments. Anticipated uncommitted resources at the beginning of the period included Shs 1,262 million in foreign exchange and Shs 55 million in local currency. The financial plan for the 1982-1984 period is forecast as follows (in Shs million): Foreign Local Total Total Commitments from 1982 to end 1984 5,677 673 6,350 Resources Available for Commitment at end 1981 ADB I and II 837 - 837 Indian Loan 425 - 425 Local Resources - 55 55 Subtotal 1,262 55 1,317 Resource Gap 4,415 618 5,033 To be financed by: IDA Credit 2,400 - 2,400 OPEC/EIB Co-financing 1,600 - 1,600 Unidentified New Borrowing 415 - 415 New Paid-in Equity (from Govt) - 161 161 Cash from Operations - 264 264 Collections - 298 298 Subtotal 4,415 723 5,138 3.27 The proposed IDA credit would finance 54% of the foreign exchange resource gap over the three year period. The proposed OPEC/EIB co-financing is at an early stage of discussion and if it is made available in the amount indicated, would finance an additional 36% of the gap. UDB has not identified other sources of foreign exchange during the time period to finance the remaining 9% although they are hopeful that they might obtain an additional loan from ADB, probably for agricultural lending. The financial plan shows available local resources in excess of requirements because of limited local currency lending opportunities. Consequently, current assets available for short term investment will be substantial.  - 20 - 3.28 Projected Financial Condition and Performance: UDB's projected financial statements and financial ratios are shown in Annexes 4, 5, 6 and 7. After a substantial loss in 1982, due to the need to take large provisions 11/ related to potentially significant bad debt risks associated with the large increase in the loan portfolio, UDB is expected to make a small after tax profit in 1983. Thereafter, profits steadily increase and reach Shs 147 million or an adequate 2.3% on average total assets by 1986. It should be noted that these projections, which depart dramatically from previous history of the institution and reflect large loans to potentially high risk clients, are subject to an unusually large range of variation. To ensure profitability in this high risk situation, UDB needs unusually large spreads on its onlending; hence the 7