Zambia - Development Bank Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4515 PROJECT COMPLETION REPORT ZAMBIA: THE DEVELOPMENT BANK OF ZAMBIA (DBZ) (Loan 1210-ZA) May 27, 1983 Industrial Development and Finance Division Eastern Africa Projects Department 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 US$1 = KO.87 Kl = US$1.15 ABBREVIATIONS ADB - African Development Bank DBZ - Development Bank of Zambia DEG - Deutsche Entwicklungsgesellschaft EIB - European Investment Bank KfW - Kreditanstalt fur Wiederaufbau IMF - International Monetary Fund INDECO - Industrial Development Corporation SNDP - Second National Development Plan TNDP - Third National Development Plan ZIMCO - Zambia Industrial and Mining Corporation FISCAL YEAR Government = January 1 - December 31 DBZ = April 1 - March 31   FOR OFFICIAL USE ONLY PROJECT CO1PLETION REPORT ZAMBIA: THE DEVELOPMENT BANK OF ZAMBIA (LOAN 1210-ZA) TABLE OF CONTENTS Page No Preface i Basic Data Sheet ii Highlights iii I. PROJECT OBJECTIVES AND HISTORY 1 II. DWZ's ROLE IN ITS ENVIRONMENT 3 III. INSTITUTIONAL DEVELOPMENT PERFORMANCE 8 IV. FINANCIAL AND OPERATIONAL PERFORMANCE 9 V. ALLOCATION OF BANK LOANS 11 VI. CONCLUSIONS 13 ANNEXES: 1. A Comparison of Actual and Forecasted Operations (1976-80) 15 Balance Sheets (1975-81) 16 Income Statements (1975-81) 17 Financial Ratios (1976-81) 18 2. Summary of All Loans Approved as of 30th June 1981 19 3. Selected Data on A Random Sample of Projects Approved 21 by DBZ. 4.. Subprojects Financed Under Bank Loan 1210-ZA A. Financial Characteristics 23 B. Economic Characteristics 24 C. Operational Data 26 D. Arrears Position on DBZ's loans 29 5. Subprojects Financed Under Bank Loan 1923-ZA A. Financial Characteristics 30 B. Economic Characteristics 31 ATTACHMENT 1: Comments received from the Borrower 32 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.     PROJECT COMPLETION REPORT ZAMBIA - THE DEVELOPMENT BANK OF ZAMBIA (DBZ) (Loan 1210-ZA) PREFACE This report presents an evaluation of the achievements under Loan 1210-ZA to the Development Bank of Zambia (DBZ), a develop- ment bank owned by the Government, several public institutions, and various foreign banks and international institutions, including IFC. Loan 1210-ZA for US$15 million, was appraised in March 1975, approved and signed in February 1976 and became effective in April 1976. The Loan was closed as of October 14, 1982. A second loan (1923- ZA) for US$15 million was appraised in November 1979, approved in December 1980 and became effective in May 1981. The Project Completion Report (PCR) was prepared by the Bank's Eastern Africa Regional Office following a country visit in September 1981, at the same time as the appraisal of DBZ for a third line of credit. The PCR also draws on the staff Appraisal and President's Reports, the loan documents and the project files. The report presents a factual review of DBZ's use of the proceeds of the loan and of its institutional development over the last six years. Comments received from the Borrower were taken into account in finalizing the report and are reproduced in Attachment 1. The assistance and kind cooperation received from Government, DBZ and other officials during the project completion mission is greatly appreciated. This project has not been audited by the Operations Evaluation Department.     - ii - PROJECT COMPLETION REPORT ZAMBIA: THE DEVELOPMENT BANK OF ZAMBIA (DBZ) (Loan 1210.-ZA) BASIC DATA SHEET Amounts (US$M) As of 2/28/83 Original Disbursed Cancelled Repaid Outstanding Loan No.: 1210-ZA 15.0 14.6 0.4 7.28 7.29 CUMULATIVE LOAN DISBURSEMENT FY76 FY77 FY78 FY79 FY80 FY81 FY82 (i) Planned 0.3 5.5 12.5 15.0 15.0 15.0 15.0 (ii) Actual - - - 2.8 8.4 13.3 14.6 (iii) (ii) as % of (i) - - - 19 56 89 97 PROJECT DATA Original Loan Date Actual Board Approval 2/10/76 2/10/76 Loan Agreement 2/18/76 2/18/76 Effectiveness 5/18/76 4/23/76 Loan Closing 3/31/80 7/27/82 MISSION DATA No. of No. of Date of Month, Year Weeks Persons Manweeks Report Identification 11/71 3 2 6 3/72 Preparation 11/72 3 2 6 2/73 Appraisal 3/75 3 2 6 11/75 Supervision I 11/76 2 3 6 3/77 Supervision II 4/78 2 2 4 5/78 Supervision III 4/79 2 2 4 6/79 Completion 9/82 2 1 2 12/82 FOLLOW-ON PROJECT Loan No. 1923-ZA in the amount of US$15 million, was approved on 12/02/80.     - iii - PROJECT COMPLETION REPORT ZAMBIA - THE DEVELOPMENT BANK OF ZAMBIA (DBZ) (Loan 1210-ZA) HIGHLIGHTS The main objectives of the World Bank assistance to DBZ were to help establish the new institution as a viable and sound develop- ment finance company and to provide loan and equity financing for economically, financially and technically sound medium and large-scale projects in industry, agricultural production and processing, and tourism. After a slow and difficult start, due largely to the economic situation that was prevailing in Zambia at the time it was launched, DBZ succeeded in increasing its contribution to the develop- ment of productive sectors in Zambia by providing term financing totalling K93.2 million for projects with a total investment cost of K562.6 million (para. 2.05). At the same time, DBZ has become a financially mature institution. Furthermore, while at the beginning there was a large pro- portion of expatriate staff in managerial positions, the situation has now been changed and practically all managerial positions are held by Zambians; DBZ has succeeded in hiring and training a cadre of Zambian professional staff of good quality; it has also developed a sound and consistent set of operating policies and procedures (para. 3.02). Overall, DBZ is now a sound and well managed institution. In some other respects, however, DBZ's performance has not been as satisfactory. For instance, despite the seriousness of the unemployment situation in Zambia, it did not place sufficient emphasis on the employment creation aspect of projects it financed as illustrated by the fact that since 1976, the total investment cost per job created has averaged US$36,000 at 1981 prices and has increased over time (para. 2.08). Similarly, DBZ could have been more active in supporting projects that were based mainly on domestic resources or that were export-oriented. In manufacturing, up to about 50% of DBZ's lending is estimated to have been for projects using mainly imported inputs and this proportion has not significantly varied through time (para. 2.06). Other points of interest are: - Failure of the Industrial Development Act to stimulate investment (para. 2.03). - Efforts by the World Bank to assist enterprises facing shortage of imported inputs (para. 2.07). - DBZ's ability to maintain a large degree of autonomy in its investment decisions (para. 3.05). - DBZ's effort and relative success in resource mobilization (para. 4.06).     PROJECT COMPLETION REPORT ZAMBIA: THE DEVELOPMENT BANK OF ZAMBIA (DBZ) (Loan 1210-ZA) I. PROJECT OBJECTIVES AND HISTORY 1.01 Background. At the request of the Government, a Bank mission visited Zambia in November 1971 to inquire into the possibility of setting up a development bank in Zambia and to outline the basis on which such a bank could be established. The mission concluded that none of the existing financial institutions was able to make a careful screening of new investment proposals by a proper assessment of their technical, economic and financial merits and viability. Although in the parastatal sector INDECO was playing a role in the promotion of new projects by commissioning project studies, there was a need for an institution distinct from INDECO to supplement its efforts and objectively appraise and follow-up projects. The mission therefore recommended the creation of a development bank to fulfil the main functions of mobilisation of resources and promotion and financing of viable projects. In November 1972, a second Bank mission visited Zambia to advise the Government on the organization, staffing and other matters relevant to the establishment of the proposed development bank. 1.02 The development Bank of Zambia (DBZ) was established by an Act of Parliament in December 1972, with 60% of its authorized capital reserved for the Government and Government-controlled financial institutions, and with the main objective to provide medium and long-term loan and equity financing to projects in industry, construction, transport, power, tourism, mining and large-scale agriculture. DBZ -started operations in January 1974, and was granted a Bank loan of US$15 million and' an IFC equity invesment of K350,000 in 1976, and a second Bank loan of US$15 million in 1980. A third Bank loan was appraised in September 1981. Since 1976, IFC has held a seat on DBZ's Board on rotation for one year in every two years, and the Bank has sent full supervision or appraisal missions to DBZ at a rate of one mission per year. 1.03 Loan 1210-ZA. As quoted from the appraisal report (860a-ZA), the major objectives of the first Bank loan and the IFC investment were:"(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". The particular conditions of the World Bank loan were as follows: (i) DBZ would not charge interest rates below 9% without consulting the Bank; (ii) DBZ would  - 2 - calculate the economic rate of return for larger import-substitution projects; and (iii) DBZ would adhere to an agreed Policy Statement complementing its Act. The Policy Statement gave equal priority to parastatal and private projects; emphasised operations in manufacturing, tourism and large-scale commercial agriculture; and required DBZ to observe various standard investment limits, and to pass on foreign exchange risks to its subborrowers or the Government. The first Bank loan was appraised in March 1975 (Report 860a-ZA), approved and signed in February 1976, and became effective in April 1976. Although the loan was utilised very slowly until 1979, it was 98% committed and 95% disbursed as of February 28, 1982. 1.04 Loan 1923-ZA. The main objective of the second Bank loan was to "assist in the development of the industrial, agro-industrial and agricultural sectors" with emphasis on priority enterprises that "contribute significantly to employment creation or use mostly local raw materials and are likely to be foreign exchange savers" (Appraisal Report 3202-ZA). Particular loan conditions were that: (i) DBZ onlends Bank funds at a minimum interest rate of 12%, and reviews annually its interest rate structure to keep it positive in real terms; (ii) DBZ calculates the economic rate of return for larger projects; and (iii) DBZ implements an agreed project supervision manual. Prior to Board presentation DBZ was also requested to adopt an agreed medium-term strategy statement which placed priority on projects based on local raw materials, export oriented or labour- intensive projects, in agriculture, agro-industry, transport, engineering and construction; and required DBZ to create a unit to assist small-scale enterprises. The loan was appraised in November 1979, approved in October 1980, and became effective on May 1, 1981. It was almost fully committed by the end July 1981 and 68% disbursed on February 28, 1982.   - 3 - II. DBZ's ROLE IN ITS ENVIRONMENT 2.01 Past Developments in Manufacturing. Manufacturing industry developed rapidly after independence. From a low base of only 7% of GDP in 1964 it grew at an average rate of 10% p.a. until 1974, more than four times the growth rate of the whole economy. It benefited from a rapid increase in demand for industrial goods, a protected market, and adequate supplies of imported inputs. From 1975 onwards Zambia entered a long recession, caused by declining copper prices; serious transport problems resulting from the closure of the Rhodesian border in 1973; the energy crisis. Manufacturing activity, which is heavily dependent on imported inputs, and absorbs 30-40% of total visible imports, was severely affected by these constraints. Output fell by 20% between 1974 and 1977 and, after a slight recovery in 1978, has stagnated since then. Capacity utilization has gradually declined and by 1981 many firms were working well below 50% of their capacity. 2.02 An important feature of the Zambian economy is the role of the public sector. On the grounds that foreign control was excessive and investment insufficient after independence, the Government expanded its ownership and took a controlling interest in many large manufacturing and commercial enterprises in 1968, in the two mining companies in 1969, and in the major financial institutions except three commercial banks in 1971. It is estimated that currently 50-60% of manufacturing output is generated in the public sector. The Third National Development Plan (1979-83) retained most of the objectives of the Second Plan (1972-76). With regard to manufacturing these include: (i) the promotion of rural and small-scale enterprises; (ii) the establishment of linkages with the agriculture and mining sectors; (iii) the encouragement of exports; and (iv) increasing capacity utilization. To ensure that these objectives are achieved, the Third Plan in particular stressed the need for the Government to undertake a large share of total manufacturing investment. However, apart from providing a statement of the Governments's objectives and intentions, the Third Plan has been of limited significance, since the economic depression and in particular the foreign exchange shortage necessitated a sharp curtailment of the investment plans. 2.03 Policies. In October 1977, the Industrial Development Act was published. It set out to: (a) encourage private investment in manufacturing from foreign as well as local sources; (b) promote exports of manufactures; (c) control the establishment of new or expansion of existing enterprises. The last objective, which has so far been the most significant aspect of the Act, requires the Government to review all applications for industrial licences in order to prevent the creation of over capacity and to ensure that projects are well conceived. The Act has had little impact on investment and  - 4 - exports, mainly because the incentives have been insufficiently attractive and the criteria for qualification too vague. Other ways in which Government influences manufacturing operations is through import licensing and price control. Import licences are issued every six months to individual enterprises. They generally fall well short of requirements which has been the immediate cause of serious underutilization of capacity and delayed maintenance of plant and equipment. Priority allocations are made to producers of (a) essential commodities (e.g. food, soap, cooking oil); (b) inputs for agriculture; (c) inputs for the mining industry; and (d) goods for exports. However, even many of these industries have been forced to reduce output levels. In view of the stringent direct controls over imports, tariffs have played a minor role as a protective instrument. Nevertheless, the tariff system, characterized by high duties on luxury consumer goods and low or zero rates on intermediate and capital goods, has tended to encourage activities that rely heavily on imports, and may have contributed to the growing capital intensity of manufacturing. 2.04 All parastatal enterprises experience a form of price restraint as their prices require approval by INDECO and the Ministry of Commerce and industry. Apart from that, some thirty commodities are subject to formal price control, including twelve "essential" commodities, the prices of which require cabinet approval. Particularly in the case of parastatal producing the "essential" goods, low prices, which fail to provide for an adequate return, have contributed to the losses of these firms. The Government has recently accepted the principle of economic pricing, and parastatals have in some cases been allowed to set prices which better reflect costs. 2.05 DBZ's role. DBZ has succeeded in rapidly increasing its contribution to the development of the economy. Between 1976 and June 19.81, it provided term financing totalling K93.2 million for 200 projects with a total investment cost of K562.6 million (US$647 million). Of these 116 (58%) were for the expansion of existing enterprises and 84 (42%) for financing the creation of new ventures. These investments resulted in the creation of about 13,000 new jobs. The breadown of DBZ loans by sectors is as follows: Number % Amount % of of of of Loans Total Loans Total Manufacturing 76 38.0 53,035 57 Agriculture 78 39.0 19,946 21 Tourism 7 3.5 2,347 3 Engineering 9 4.5 2,706 3 Transport and storage 15 7.5 7,621 8 Wood Industries 7 3.5 1,498 2 Mining 3 1.5 4,673 5 Quarrying 5 2.5 1,379 1 Total 200 100.0 93,205 100   -5 - In line with the objective of the first Bank loan (para. 1.02), DBZ has extended a major share of its financing to private Zambian-owned enterprises which account for 70% of DBZ's total loan approvals since inception. Officials in the Government and the financial and industrial community widely acknowledge DBZ's growing and pooitive role in the provision of term finance and in the dissemination of more rigorous investment appraisal standards. Selected Issues 2.06 The Foreign Exchange Shortage. The decline in copper prices started in 1970, and continued until 1980. Through 1971-80, Zambia's balance of payments' deficit averaged K140 million per year or 19% of exports and peaked at 85% of exports in 1975 and 38% in 1980. Shortages of imported industrial inputs started in 1975 and have become acute since early 1978. However, DBZ has been slow in placing increased priority on investments in local resource-based or export-oriented projects. During 1974-1980, DBZ has directed most of its lending amount (68%) to manufacturing projects, and its relative contribution to agriculture i15%) has not increased through time (Annex 2). In manufacturing_/ up to about 50% of DBZ's lending is estimated to have been for projects using mainly imported inputs and this proportion has not significantly varied through time. These projects have been operating at 30-60% of production capacity because of limited foreign exchange allocations. DBZ's staff could report no cases where DBZ rejected a project because of its dependency on imported inputs and quoted only 3 approved projects for which DBZ supported changes in design leading to minor savings in imported inputs2/. This performance is disappointing considering that DBZ has 1/ Including farm-based agro-processing activities. 2/ a) DBZ tried to convince Twinkle Shoes to use local leather from Bata but no commitment was obtained and the final outcome is uncertain. b) DBZ urged Mulungushi Lodges to increase its room capacity (as against the restaurant's), but finally rejected the project for other reasons. c) DBZ convinced Sunquick Bottlers to make a minor increase in the use of local citrus as against imported concentrate.  - 6 - had constantly in 1978-81 a large pipeline of project applications from which to choose 3/. 2.07 In addition, DBZ has not been very active in anticipating shortages of imported inputs and in taking appropriate measures, although it must be recognized that DBZ did not have the capability of influencing the foreign exchange availability in Zambia. DBZ first requested the Bank to finance the foreign exchange component of working capital requirements in April 1977, and repeated its requests in 1978 when it specified that the need was for total imported working capital for two years and not initial working capital. In July 1978, the Bank agreed, on an emergency basis, to provide such financing as needed to bring the capacity utilisation of priority enterprises to 10% above cash break-even levels. Under this agreement, DBZ later requested subloans totalling US$2.1 million for only two enterprises manufacturing bed linen and plastic bags, which were autho- rized under the first Bank loan in 1979 4/. The Bank appraisal mission in November 1979 recognized the severity of imported input shortages and prepared in detail a revolving fund for working capital financing as a component of the proposed second loan. At negotiations in September 1980, DBZ requested the Bank to cancel the component on the grounds that its client enterprises importing raw materials were currently operating profitably following an improvement in the 1979 balance of payments. In 1981, however, many enterprises in DBZ's portfolio were again suffering from severe shortages of imported inputs. 2.08 Employment and Small Industries. As compared to other African countries, unemployment and underemployment are particularly acute in Zambia, with only one quarter of the labor force in paid employment and a persistent high rate of rural-urban migration averaging 125,000 people per annum. However, the capital-intensity of industrial investments has remained relatively high mainly due to high transport costs, biases in the incentive system and the general preference of the parastatals sector for large-scale "modern" production techniques 5/. In that context, DBZ does not seem to have placed sufficient emphasis on the employment 3/ DBZ's management does not agree with the gist of the argument presented in this paragraph that DBZ has not done sufficient effort to finance projects that were mainly based on domestic inputs. It believes, on the contrary that DBZ "has encouraged whenever possible the utiliza- tion of local raw materials in import substitution projects" (see Attachment 1, page 4). 4/ This financing probably helped the linen manufacturer to avoid major work stoppages and losses, but the other enterprise received increased foreign exchange allocations from the Government in 1980 and seemed to have considerable inventories in 1981. 5/ In 1979, fixed assets per employee in the public industrial sector averaged as high as US$23,000, even though at historical costs and net of depreciation.   - 7 - creation aspect of projects it financed. Among the new 6/ projects approved by DBZ since 1976 7/, the total investment cost per job created has averaged US$36,000 at 1981 prices, and has increased through time. 2.09 IBZ might have achieved a higher employment contribution by assisting the small-scale enterprises (SSE) sector despite the higher risks and expenses involved. In its first appraisal in 1975, the Bank recommended that DBZ should not engaged in this activity until it was better established. In the second appraisal in 1979, Bank staff and consultants noted a lack of financial assistance for SSEs in the country, and prepared in detail a loan component for SSE financing through DBZ and commercial banks. However, the Government was not prepared to assume the related foreign exchange risk, presumably for budgetary reasons, unless IBRD agreed to finance the component on IDA terms; and the component was eventually cancelled. In 1981, DBZ was successfully mobilising soft-term funding from bilateral donors to launch an SSE financing programme. 2.10 Interest Rates. DBZ has charged interest rates ranging from 9% to 10% in 1974-75, which were increased to 12% - 12.5% in 1980-818/. In addition DBZ's clients assumed the foreign exchange risk. fn relation to the international inflation rate during that period, which varied between 8% and 12%, DBZ's lending rate was positive in real terms. However although consistent with the overall interest rate structure in Zambia, DBZ's lending rates were significantly below local inflation during the years 1976-78 when local price increases9/ averaged about 18% per annum. In 1980, DBZ's lending rates were again positive in real terms as compared to the local price inflation estimated at 10-11%. 6/ For all sectors including agriculture, and excluding expansion projects which generally create few jobs but may save some existing jobs. 7/ From April 1976 to March 1981. 8/ Except that it has charged 6% under its Special Fund for Rural Development. 9/ Low income consumer price Index, Monthly Bulletin of Statistics.  III. INSTITUTIONAL DEVELOPMENT PERFORMANCE 3.01 From the Bank appraisal in 1975 to 1981, DBZ has rapidly developed its organisation from four to eight departments including a new legal department and separate departments for industrial appraisal, agriculture appraisal and project supervision. Professional staff has increased by about 9% per year from 30 to 50, with a roughly constant proportion of 30% of expatriates mostly funded from bilateral grants. However, expatriates have been shifted to advisory positions, and Zambians now man eight out of the ten top and middle management positions, as compared to two out of six in 1975. DBZ has been running an active staff development programme which provided training abroad for more than 60% of its professional staff. Although salary increases were constrained by Government directives for parastatals and averaged only 7% per annum, voluntary staff departures have remained limited at a rate of about 9% per year, and DBZ has been able to build up a Zambian professional staff of good quality. 3.02 DBZ has developed a sound and consistent set of operating policies and procedures. In particular, it has repeatedly upgraded its investment policies and project appraisal procedures in close consultation with the Bank. With the building-up of its staff capabilities, it has been able to correct earlier deficiencies in the appraisal of project management, technical aspects and debt servicing capacity. In reviewing subprojects submitted by DBZ, Bank staff generally acknowledged the good quality of DBZ's appraisal reports, and seldom raised questions before approving subprojectsl0/. In 1979, DBZ issued an improved appraisal manual providing comprehensive guidance to its staff. Overall the objective of the first loan to further strengthen DBZ's appraisal capacity (para. 1.03) thus appears to have been substantially achieved. In addition, DBZ prepared in 1980 a comprehensive supervision plan and procedure manual which was reviewed during the second loan negotiations and found to be satisfactory. DBZ has sound and comprehensive accounting and financial management systems and uses appropriate procurement and disbursement procedures. 3.03 DBZ and the Bank Group have generally maintained a constructive dialogue throughout this period of rapid development of DBZ. DBZ and Government officials have expressed appreciation for the technical assistance provided by Bank staff and the IFC Director, particularly in the rigorous review of investment proposals and in the development of DBZ's project appraisal and supervision procedures. 10/ In only 16% of cases. All subprojects submitted were eventually approved.   -9- Selected Issues 3.04 Single Project Exposure Limit. A provision of DBZ's Policy Statement agreed in 1975 expressed the upper limit on DBZ's financing for a single project as a proportion of 75% of the enterprise's fixed assets. This has resulted in DBZ's financing up to 100% of total project costs in the case of some 15 expansion projects sponsored by existing enterprises with large fixed assets, and the provision had significantly advantaged expansion projects as opposed to new enterprises. The appraisal mission of the second loan, in 1979, recommended that the clause be changed so that DBZ would not normally finance more than 75% of any single project's total capital cost, including permanent working capital. During negotiations in 1980, DBZ agreed to revise its policy accordingly. 3.05 DBZ's Independence. DBZ's 1972 Act empowers the Minister of Finance to give policy directives to its Board, nominate six of the ten Directors and approve the terms of employment of DBZ's staff. During the first loan appraisal, although the Bank expressed concern regarding these formal constraints on DBZ's autonomy, it recognized that the "Government was keen to have DBZ operate independently and had not interfered in DBZ's operations." DBZ has generally been free from specific Government directives 11/, and has in particular rejected several parastatal project proposals promoted by the Government. In a few isolated cases, however, DBZ appears to have been lenient in the approval of parastatal projects. Overall however DBZ has been able to maintain a large degree of autonomy in its investment decisions and the management of its operations. This is reflected in the decreasing share of DBZ's total financing for Government-controlled enterprises, from an average of 56% during 1974-1978 down to 18% during 1979-1981. IV. FINANCIAL AND OPERATIONAL PERFORMANCE 4.01 Operations. As of June 30, 1981, DBZ had approved 200 loans totalling K93.2 million of which 45% had been disbursed, and 11 equity investments totalling K1.3 million. DBZ's approvals have stagnated in the first three years and thereafter accelerated sharply until 1981 (Annex 1 Page 1). On average, through FY1975-81, DBZ's approvals have increased at a rate of 34% per year in current terms, which compares well with the rate 6f 27% forecasted by the Bank in the first loan appraisal. However, DBZ's disbursements have lagged considerably 11/ In 1976, however, the Finance Ministry instructed DBZ and other financial institutions to make no loans to enterprises without worker participation, but his instruction soon became obsolete.  - 10 - behind approvals, and averaged only 42% of the optimistic Bank forecasts during FY76-FY801/. Aside from the general economic uncertainties, these slow disbursements resulted largely from delays in finalising collateral arrangements and obtaining clients' contributions. During 1979-80, DBZ has set up its own legal department for finalizing security arrangements before project approvals and expediting pending legal matters, and has introduced improved checks on clients' financial capabilities. In FY80-81, disbursements had finally started to increase, at a rapid rate of 78% per year. Overall DBZ has made a remarkable performance in achieving a rather rapid growth in operations at times of economic difficulties, while maintaining satisfactory project processing capability. 4.02 Characteristics of DBZ's loans are summarised in Annex 2 and a random sample of 20 projects is analyzed in more detail in Annex 3. DBZ's loans have ranged from K27,000 to K4 million, averaged K470,000 per project and 17% of total costs of projects. The total costs of the projects financed have ranged from K43,000 to K40 million and averaged K2.8 million. Over three quarters of the loans approved carried interest rates of 11.5% to 12.5% and maturities of 5-10 years. DBZ's lending has generally been consistent with the general investment pattern in Zambia. Up to 68% of total lending was for manufacturing projects mostly in the food, textiles, chemicals and metal sectors prevalent in Zambia; 15% was for agriculture and the remainder for transport, mining and tourism. Most of the 100 manufacturing projects were solely geared to import substitution, and only five were reported to have some export potential (e.g. cigarettes, sugar, batteries, poultry meat and lawn mowers). About 70% of loan amounts were concentrated in projects located in Lusaka and Copperbelt Provinces. 4.03 Portfolio. Overall, DBZ's portfolio is of acceptable quality, although it contains many projects dependent on a continued supply of imported inputs and a few large parastatal projects with insufficient equity basis (para. 3.05). As of June 30, 1981, DBZ's portfolio totalled K43 million with 98.2% in loans and 1.8% in equity investments. Loan arrears of more than 3 months amounted to K409,000 and affected 27 loans accounting for 9% of total loans outstandings, which is not excessive considering the economic situation. Losses on loans are unlikely as DBZ has applied a prudent policy in requiring securities equivalent to 125% of its loan amounts. Financial Condition 4.04 Financial Position. As shown in Annex 1 (Page 2), DBZ's total asssets grew during FY1976-81 at a rapid rate of 26% per year, although slower than forecasted by the Bank because of the lag in disbursements (para. 4.01). Despite this rapid growth, DBZ has constantly kept a strong financial position, mostly due to its large 12/ Based on the assumption that loans would be fully disbursed on average within 15 months of approval dates.   - 11 - equity funding and sound financial management. As of March 31, 1981, DBZ had a low long-term debt to equity ratio of 1.0 and a high current ratio of 2.3. 4.05 Profitability. DBZ's profit is exempt from tax and has increased by47%per year since FY76 to reach K1.6 million in FY81 (Annex 1, page 3). This profit represented about 6% of average total assets in FY81 and 11% of average equity, and DBZ profitability thus appeared acceptable, although still moderate when compared to local inflation. Actually, DBZ's profitability has been consistently higher than the appraisal forecasts, mostly because DBZ has gradually increased its lending rates, and has made no provisions for losses until 1981 (following its auditors' recommendations) in view of the high security coverage on its loan portfolio (para. 4.03). 4.06 Resource Mobilisation. In spite of a difficult economic situation, DBZ has achieved an effective resource mobilisation to support its growth, although it has occasionally been short of resources for lack of planning. As of September 31, 1981, DBZ had collected total foreign exchange resources of K38 million including the two World Bank loans (61%) and loans from ADB, EIB and DEG. In addition to its ordinary share capital and retained earnings, it had raised total domestic resources of K23 million from local commercial banks and financial institutions (77%) and from the Central Bank and the Government, in the form of medium-term promissory notes, non voting preference shares and long-term borrowings. DBZ's ordinary share capital of K10 million has been widely subscribed by the Government and local public financial institutions (60%), and by DEG (15%), local commercial banks, EIB, IFC (3.5%), Yugoslav banks, Japanese banks, ADB and other foreign commercial banks. V. ALLOCATION OF BANK LOANS 5.01 Loan 1210-ZA. As shown below, loan utilisation has been minimal from effectiveness in April 1976 to end 1977. For financing its investments, DBZ was then using its large paid-in capital given the absence of foreign exchange restrictions, and its ADB and local loans which carried lower interest rates than the Bank loan (7% versus Disbursements Commitments % % Net Cumulative US$'000 % US$'000 Actual Forecast At December 31, 1976 213 1 - - 14 1977 1,785 12 36 - 60 1978 5,885 39 1,164 8 97 1979 14,412 96 4,245 28 100 1980 14,676 98 11,553 77 100 At October 2, 1981 14,863 99 13,781 92 100  - 12 - 8.5Z). Thereafter, the utilisation of the Bank loan followed the pattern of DBZ's overall operations (para. 4.01), with an acceleration in commitments in 1978 and long lags in disbursements. The loan was committed mostly within the years 1978-79 and disbursed mostly within the years 1979-81. Overall, actual disbursements have been moch slower than had been expected at the time of appraisal, but .ais is largely a reflection of the Bank's optimistic assumption that DBZ's subloans would be fully disbursed within 15 months of the approval date. 5.02 Bank Loan 1210-ZA was used to finance the 47 subprojects listed in Annex 4. Twenty-three subprojects representing 76% of the Bank financing were above the Loan free-limits' / and subject to the Bank's subproject review and approval procedure. In its subproject reviews, the Bank made constructive comments on the quality of projects resulting in changes in project design in a few cases14!, and on DBZ's appraisal methodology, notably for the calculation-of rates of return. DBZ's loans have carried interest rates of 10%- 12.5% and maturities of 4-12 years (Annex 4-A), consistent with DBZ's normal terms. Two Bank subloans totalling US2.1 million were extended for financing imported raw materials under an emergency scheme (para. 2.07). 5.03 The economic characteristics of the 47 subprojects, detailed in Annex 4-B, generally match DBZ's overall investment pattern discussed in para. 4.02. DBZ's total loan amount for these subprojects is concentrated in manufacturing projects (69%), within five subsectors: chemicals and plastics (16%), textiles (16%), food 15/ (15%), paper (12%) and metal products (10%); with the remainder in transport and storage (14%), agriculture (14%) and tourism (3%). Except for a producer of car batteries, projected to export some 40% of its production, all manufacturing subprojects are geared to import substitution, and 55% of them are using mainly imported raw materials. About 75% of the projects and 78% of DBZ's loan amount are concentrated in the two urban provinces of Lusaka and the Copperbelt. About 43% of loan amounts have been for setting up new activities, while 57% are for expansion projects. Economic rates of return of subprojects ranged from 10% to 44% and averaged 25%, generally reflecting a strong potential for effective import substitution. 13/ US250,000 per subloan and us $3 million on aggregate. 14/ Adding a yarn dyeing unit; changing for cheaper cattle suppliers. 15/ Including farm-based agro-processing.   - 13 - 5.04 Subproject operational performance is described in Annex 4-C. As compared to DBZ's appraisal schedule, 17 of the 47 projects have incurred additional implementation delays of more than 6 months, and up to 3 1/2 years. This slow implementation may be primarily attributed to external economic factors (e.g. transport bottlenecKs, building materials shortages) and delays in the finalization of security arrangement (para. 4.01). In addition, some delays appear to be due to poor management appraisal, or to technical design defects overlooked at appraisal, particularly in the case of the earlier projects. Twelve projects have incurred cost overruns of more than 10%, due primarily to the implementation delays, and to a few project additions decided on and financed by the owners. As shown in Annex 4-D, three of the 47 sub-projects have significant arrears of more than 6 months on DBZ's loans: (i) a tourist lodge in the Southern Province making heavy losses due to a lack of functional transport access, which is closely supervised by DBZ; (ii) a pig farm which is now expected to clear its arrears as it finally became profitable in 1981 with the improved availability of imported stockfeeds; and (iii) a beef and soya farm which hired a competent manager in 1980 after a period of heavy losses and is now expected to clear its arrears. 5.05 Loan 1923-ZA. With the recent acceleration in DBZ's operations, this loan was virtually fully committed for 17 subprojects within the three months following its effectiveness on May 1, 1981. Most of these subprojects are still under implementation. A description of the financial and economic characteristics of the subprojects according to DBZ's appraisal estimates is presented in Annex 5. DBZ's loans to these subprojects total K14 million or 13% of total project costs, and carry interest rates of 12%-12.5% and maturities of 4-10 years. DBZ's total loan amount is again concentrated in projects in manufacturing (73%), and located in Lusaka and Copperbelt Provinces (85%). Out of the 10 manufacturing subprojects, three are based mainly on local raw materials, and two are reported to have some export potential (textiles, cigarettes). VI. CONCLUSION 6.01 The general objectives of the Bank to help establish DBZ as a sound and viable development finance institution capable of allocating resources to worthwhile medium and large-scale project in productive sectors, have largely been met. In just a few years, DBZ has become a financially mature institution; it has also attracted and trained a dedicated Zambian staff both at the professional and managerial levels. Furthermore, through6ut a difficult economic period with no investment in real terms in the country, DBZ has achieved a rapid growth of operations supported by an effective resource mobilization, while maintaining a strong financial position and increasing its profitability. It has also developed comprehensive and well-formalized operating policy and procedures.  - 14 - 6.02 However, despite Bank's insistence, DBZ has not placed sufficient emphasis on the employment aspects of projects it financed nor has it made a significant contribution in assisting the country to counteract the long- standing balance of payment disequilibrium. 6.03 Whiie the First Line of Credit had been designed to finance the purchase of equipment and other fixed assets, the Bank agreed, on an emergency basis, to finance imported working capital in order to raise the capacity utilization of priority enterprises. In doing so, the Bank showed a flexibility in responding to country needs which is worthwhile keeping in mind for similar situations in other countries.   DEVELOPMENT BANK OF ZAMBIA (DBZ) A Comparison of Actual and Forecasted 1) Operations (1976-1980) (K'O0O) hear Ending March 31 1975 1976 1977 1978 1979 1980 1981 Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual oire6ast Actual Actual APPROVALS .oans 6628 10000 7582 12000 5672 15000 10749 18000 11856 21000 21269 38087 Equity -- -- -- 250 312 500 150 750 90 1000 250 557 TOTAL APPROVALS 6628 10000 7582 12250 5984 15500 10899 18750 11946 22000 21519 38644 COMMITMENTS Loans 4288 na 9004 na 4032 na 7997 na 12120 na 16776 26103 Equity -- -- 82 380 90 250 557 TOTAL COMMITMENTS 4288 9004 4114 8377 12210 17026 26660 DISBURSEMENTS Loans 3838 6550 5622 10750 3549 13125 4304 16125 4860 19125 9842 15587- Equity -- -- -- 250 -- 500 282 750 148 1000 8 250 TOTAL DISBURSEMENTS 3838 6550 5622 11000 3549 13625 4586 16875 5008 20125 9850 15837 1) As per the Bank appraisal in 1975 na = not available O  DEVELOPMENT BANK OF ZAMBIA (DBZ) A Comparison of Actual and Forecasted 1) Balance Sheets (1975-1981) (K' 000) As of March 31 1975 1976 1977 1978 1979 1980 1981 Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forc4fEcastT Actual ,ETS Current Assets 2681 2376 2723 2913 3521 2618 621 2801 701 2552 1301 1888 DBZ Loans 3839 10350 9425 20125 12651 31027 16296 43429 19548 57856 24868 38174 Equity Investments -- 250 -- 750 282 1500 431 2500 439 490 Less Provisions -- (98) * (263) -- (467) _ (709) __ (996) __ Net Fixed Assets 559 1287 1105 1614 1098 2146 1209 2392 1191 2392 1607 2428 TOTAL ASSETS 7079 13915 13253 24639 17270 36074 18408 49413 21880 64304 28215 42980 2) o LIABILITIES Current Liabilities 63 107 79 125 79 140 172 155 931 170 1520 823 Long-Term Borrowings -- 3524 3922 13899 6951 24837 7495 37524 9040 51451 8452 20704 Paid-in share capital 6900 10000 8900 10000 9450 10000 9450 10000 10000 10000 15425 17425 Retained earnings 116 284 352 615 790 1097 1291 1733 1909 2683 2818 4028 Total Net Worth 751E TM/ 23 T25 TC 1U2E 11097 TD74T TI7M TTlW TMZ