Niger - Industrial and Artisan Sector Employment Creation Project

Dommo of The World Bank FOR OFFICIAL USE ONLY Report No. 6291 PROJECT PERFORMANCE AUDIT REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) June 19, 1986 Operations Evaluation 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. ABBREVIATIONS AfDB - African Development Bank BCEAO - Banque Centrale des Etats de 1'Ouest BDRN - Banque de Developpement de la Republique du Niger CMAN - Centre des Metiers d'Art du Niger ENA - Ecole Nationale d'Administration OPEN - Office de Promotion de 1'Entreprise Nigerienne PCR - Project Completion Report SAR - Staff Appraisal Report SSE - Small Scale Enterprise STB - Societe Tunisienne de Banque TA - Technical Assistance UNOA - Union Monetaire Ouest Africaine UNDP - United Nations Development Program UNIDO - United Nations Industrial Developmei.t Organization USAID - United States Agency for International Development COUNTRY EXCHANGE RATES Name of Currency (Abbreviation) Communaut4 Financi4re Africaine Franc (CFAF) Appraisal Year Average Exchange Rate: US$1 = 245 Intervening Years Average US$1 = 315 Completion Year Average US$1 = 365 FISCAL YEAR BDRN October 1 - September 30 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-Genral Operations Evalua*on June 19, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Niger - Industrial and Artisan Sector Employment Creation Project (Credit 809-NIR) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Niger - Industrial and Artisan Sector Employment Creation Project (Credit 809-NIR)" prepared by the Operations Evaluation Department. Yves Rovani by Otto Maiss Attachment 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 diqrirAP withn,ut Wt%rA Rckni t FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) TABLE OF CONTENTS Page No. Preface ** * *** * * * * * * * * * * * ** * * * * * * * * * * * * Basic Data Sheet .......... ... .... *.. ............ ..... ......... o ..... ti Evaluation Summary ........... ...................................... iv PROJECT PERFOl?MANCE AUDIT MEMORANDUM I. ECONOMIC BACKGROUND ..................................... 1 II. PROJ.CT OBJECTIVES AND DESIGN ................................. 2 III. PERFORMANCE OF THE INSTITUTIONS ............................... 5 A. BDRN 6..............,, ......... ........ ........ ........ 6 Be CMAN ........................0000000 *********** * 7 C. OPEN 8... .................................****** 8 IV. UTILIZATION OF THE CREDIT .................oo............ 9 V. EFFECTIVENESS OF PROJECT DESIGN AND SUPERVISION ............... 9 VI. CONCLUSIONS ...* * .......oo....o....... ....................... 11 Attachment: Comments Received from the Borrower .................... 14 PROJECT COMPLETION REPORT Io Introduction ............... .......... ...... 15 II. Th Environment ........... ........******00000*00*********** 15 III. Banque de Developpement de la Republique du Niger (BDRN) *..* 20 IV. Centre des Metiers D'Art du Niger (CMAN) ...................... 24 V. Office de Promotion de L'Entreprise .......................... 26 VI. The Project ....... ........0010....6*0*0**************** *o 27 VII. Conclusions and Lessons Learned ............................... 30 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (Continued) Page No. TABLES 1. Actual and Projected Income and Expenses Statement 1978-83.....33 2. Actual and Projected Balance Sheet 1978-83....................34 3. Actual and Projected Financial Ratios 1978-83..................35 4. Analysis of Loans in Arrar.................................,,36 5. Actual and Projected Operations 1978-1983..o.....,.........37 6. Schedule of Estimated and Actual Disbursements.................38 7. Resource Mobilization 1978-83..................................39 8. Characteristics of Subprojects Under Loan......................40 9. Listing of Subvrojects Financed Under Loan.....................41 10. Performance of Subprojects.....................................42 PROJECT PERFORMANCE AUDIT REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) PREFACE This is a performance audit of the Industrial and Artisan Sector Employment Creation Project (Credit 809-NIR). The project provided a credit of US$5.0 million to the Government of Niger for creation of employment opportunities in small-medium scale enterprises and in artisanal activities, and supported institution building, promotional activities, technical assis- tance, and training that was intended to sustain the developmencal capability of this sector in the future. The project was approved in May 1978 and was fully disbursed in June 1983, a delay of about twelve months ftom the origi- nal schedule. The project consisted of three components: (a) a line of credit and technical assistance to Banque de Developpement de la Republique du Niger (BDRN); (b) technical assistance and finance to the Office de Promo- tion de 1'Entreprise Nigerienne (OPEN); and (c) technical assistance and initial finance to the newly created Centre des Metiers d'Art du Niger (CHAN) to assist artisanal activities. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department, and the Project Com- pletion Report (PCR) prepared by the West Africa Projects Department. The PPAM is based on the attached PCR, the Staff Appraisal and the President's Reports, the credit documents, sector and economic reports, a summary of the Board discussion, the materials in the project file, and discussions with Bank staff. A second IDA line of credit for US$16.0 million (No. 1225-NIR) to provide further assistance to the three institutions was approved in April 1982. The SAR and the first supervision reports of that project were also reviewed to provide continuity. The PCR reviews the project experience candidly and perceptively, particularly in identifying some of the critical issues involved in the design of the project that imposed constraints on the ability of the institutions to perform, and in describing conditions--both foreseen and unforeseen--that arose during implementation and that affected the overall integration of activities among the three institutions. The PPAM elaborates on some of the issues identified in the PCR in terms of the lessons that can be learned for the design of future projects aimed at providing funds, tech- nical assistance, and training for development of smaller scale enterprises. Comments received from the Borrower are reproduced in the Attachment. - It - PROJECT PERFORANCE AUDIT REPORT NIGER - INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) BASIC DATA SHEET (us$ M5 LOAN POSITION As of 02/28/86 Original Disbursed Cancelled Repaid Outstanding Credit Ko. 5.0 5.0 0 0 5.0 CUMULATIVE CREDIT DISBURSEMENT FY79 FY80 FY81 FY82 PY83 (i) Planned .75 2.74 4.65 5.0 5.0 (ii) Actual - 2.1 4.30 4.95 5.0 (iii) (ii) as % of (1) - 77% 92% 99% 100% OTHER PROJECT DATA Original Actual or Item Credit Date Re-estimated Board Approval 05/23/78 05/23/78 Credit Agreement 06/07/78 06/07/78 Effectiveness - 02/07/79 Credit Closing 06/30/82 06/30/83 Borrower Republic of Niger Executing Agency Banqje do Developpement de la Republique du Niger MISSION DATA Month No. of No. of Date of Year Weeks Perwons Manweeks Report Preparation 09/77 n.a. n.a. n,a. 09/19/77 Appraisal 11/77 2.6 2 5.2 04/28/78 Total 2.6 5.2 Supervision I 02/79 1.0 1 1.0 03/02/79 Supervision II 05/79 2.4 1 2.4 09/05/79 Supervision III 10/79 .8 2 1.6 11/26/79 Supervision IV 11/80 2.4 2 4.8 12/29/80 Supervision V 02/81 2.4 4 9.6 06/30/81* Supervision VI 07/81 2.4 2 4.8 07/22/81 Supervision VII 11/81 1.0 1 1.0 11/03/81 Supervision VIII 05/82 1.4 1 1.4 06/08/82 Supervision IX 06/82 .8 1 .8 09/29/82** Supervision X 10/82 .8 2 1.6 12/13/82 Supervision XI 02/83 1.6 1 1.6 06/30/83 Supervision XII 07/83 .8 1 .8 08/15/83 Completion Total 17.8 31.4 * Appraisal of second IDA line of Credit 1225-NIR. ** From this date on missions included supervision of IDA Credit 1225-NIR (approved 04/06/82). - iii - STAFF WEEKS FY78 FY79 FY80 FY81 FY82 FY83 FY84 FY85 Total Preparation 14.6 14.6 Appraisal 30.4 30.4 Negotiation 10.2 10.2 Supervision 1.8 23.2 12.8 15.5 8.2 5.9 .2 3.3 70.9 Totals 57.0 23.2 12.8 15.5 8.2 5.9 .2 3.3 126.1 FOLLOW-ON PROJECTS Industrial Development Project (Cr. No. 1225-NIR) for US$16 million, approved on April 6, 1982. - iv - PROJECT PERFORMANCE AUDIT REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) EVALUATION SUMMARY Introduction As one of the least developed countries, Niger's industrial sector has a very small number of establishments concentrated primarily in foods and beverages, textiles and leather. Total industrial emoloyment is a few thous- and plus a much larger number of artisans, many producing traditional handi- craft items; a much smaller number of artisans may be able to grce4 into modern small-scale industrial enterprises. Markets are fragmented physically due to lack of transport and other infrastructure, and costs of construction and of goods are relatively high in this land-locked country. Skills in the labor force are meager, as is professional management. On both macro- and micro-economic grounds the general economic milieu was not generally favor- able to industrial development (paras. 1-5). Objectives This project was a first attempt by IDA in Niger specifically aimed at stimulating the growth of indigenous small- and medium-sized enterprises through three institutions, only one of which was in active operation prior to the project. The inclusion of three institutions put a premium on cooper- ation among them to carry out specialized functions within the general sys- tem; consequently, the orderly efficient development of these institutions was essentially a concurrent objective of the project, and one that was necessary to success in achieving the employment goals (paras. 6-10). Implementation Experience After an initial favorable start, commitment of the credit slowed perceptibly; funds earmarked for medium-scale enterprises were quickly allo- cated but the funds earmarked for small scale enterprises faltered badly and ultimately only one such loan was made. A job cost criterion that was incor- porated in the project and whose realism was eroded by inflation, unfavorable economic market conditions, and the absence of an effective investment promo- tion effort contributed to dampen the demand for funds. During implementa- tion, funds were reallocated in part because of the lending institution's lagging loan experience. As finally constituted, slightly over 40 percent of the credit was for loans and technical assistance to enterprises, and slight- ly under 60 percent was for institution building in the three organizations. -v - This was approximately the reverse of the percentages intended at appraisal; however, fund allocations do not necessarily reflect the benefits of all kinds realized by the project (paras. 19, 21, 27 and 32). Results The project was largely unsuccessful in achieving the quantitative targets on employment creation and number of enterprises receiving loans. Only six loans in all were made and the employment targets were scaled down. A single loan to an enterprise with questionable economic benefits accounted for 61 percent of the total credit; this was contrary to the original intent of the project. The performance of the subprojects has been poor. The institutions did not stay abreast of each other in their progress toward efficient operations. BDRN's staff grew rapidly but the growth outpaced the ability to upgrade staff capabilities. Other internal weaknesses began to show up, and in late 1984 IDA and the Government agreed on an acti,n program to rehabilitate the institution. The program has been implemented and pro- gress appears to have been tangible. OPEN was unable to build up a staff to do effective investment promotion and did not develop a coherent series of analyses of product lines that potentially had a comparative advantage. It was unable to mount an effective technical assistance delivery system to enterprises. OAN, instead of providing assistance to private artisans in production and marketing, engaged on a course of action that placed it in competition with private artisans. As a result of these experiences, the institutional development did not live up to expectations nor did the enti- ties involved achieve a level of capability to carry out the project effec- tively (paras. 17-26 and 28). Sustainability The institutions clearly experienced a number of setbacks that impaired their ability to sustain effective performance. Some factors were beyond their control and others were internal and subject to change. The consulting firm hired to assist CKAN, for example, could not fulfill its com- mitment to export 50 percent of output, and UNIDO had difficulty in recruit- ing the appropriate experts for OPEN. The experience points to the impor- tance of two factors in implementing successful institutional development. The first is the quality and quantity of technical assistance supplied to the institutions. In this project the technical assistance was insufficient to meet the needs. The second factor is the critical role that must be played by IDA supervision to identify difficulties in technical assistance before they grow into crises, and to take remedial actions early. These institu- tions have gone through a learning period that has been often painful, and they will need continued support before they can sustain an independent effort. Commitment to and determined efforts toward institution building, and close cooperation among the institutions involved, are key elements in promoting and sustaining the overall effort to develop small and medium scale enterprises (parvf. 14-26, 34, 35). - vi - Overall Assessment and Lessons Learned This pilot project had many misadventures and disappointments, and its objectives to a large extent have not been achieved. Inadequacies in the design (e.g., rigid lending criteria and procurement guidelines, establish- ment of two entities to provide technical assistance), reinforced by poor and uneven progress in the development of the institutions involved, contributed to this wanting performance. Although some progress was made to turn them into viable and effective institutions, they all have a long way to go and will require further outside help. A second line of credit is supporting the continued development of these institutions. There are a number of lessons that can he learned from this modest project--lessons that mirror those found in- other countries with similar projects: (a) there is a basic need early on for some sector work to identify product lines in which market conditions and resource requirements lead to a reasonable expectation that subprojects can be viable in the economy; (b) when more than one institution is involved in the system, cooperation and clear delineation of responsibilities, and keeping each one of them in step with the others is essential or else the system will not function effectively; (c) institutional development is difficult at best and will take time; relying on newly-createO institution. with limited experience and staff capabilities poses special r.Lsks and the performance targets for each of them must be modest; (d) technical assistance on a continuing basis is at least as important as the supply of funds, and must be monitored closely; this is particularly critical for an institution charged with investment promotion; (e) lending criteria should allow flexibility in application so as not to become barriers to economically viable enterprises; (f) a Bank policy on the use of funds for second-hand equipment is needed; (g) the management skills, inventiveness, and drive of those who lead the institutions is a critical element in success and one that deserves the closest attention; and (h) close supervision by the Bank of these risky com- plicated SSE projects, psrticularly in identification of difficities before they become crises, and the willingness to take early remedial action, are virtually thi only means to avoid the deterioration and ultimate failure of these projects (paras. 40, 41). - 1 - PROJECT PERFORMANCE AUDIT MEHORANDUM NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (CREDIT 809-NIR) 1, ECONGMIC BACKGROJND 1. Niger, in common with a group of other African nations, is one of the least developed of the countries of the world. Although the annual growth rate of GNP fom 1973 to 1982 was over 6 percent, which was very good particularly by Sahalian experience, the average concealed a wide variation of rates within the period. In the early eighties, due to prolonged drought and lagging world economic conditions, per capita income declined and in 1983 was estimated at about US$240. Subsistence agriculture is the dominant form of economic activity, and the mining of uranium provided the major source of foreign exchange during the seventies and supported much of the government's dave.opment expenditures; however, between 1979 and 1982 the world price of uranium dropped sharply and Niger's export earnings declined by half. Government expenditures were not adjusted to this decline, and foreign debt increased rapidly so that by 1983 the debt service payments amounted to over 50% of the country's exports of goods and se'vices. Inflation increased and, finally, the deterioration in both economic and finanical conditions led the government to introduce, with IDA assistance, an austerity program designed to limit the growth of public expenditures (including ntw investment), to stabilize the financial conditions of public enterprises, and reform other policies. It is evident that during the time of implementation of this proj- ect the macroeconomic conditions and policies existing in Niger were not particularly conducive to the stimulation of private investment, although the stabilization measures adopted in 1982-83 should lead to more favorable con- ditions for the second project, which was .pproved in 1982. 2. Microeconomic conditions were also somewhat unfavorable and had the added characteristic that many structural conditions could not be signifi- cantly changed in the short term even in the best of circumstances. The industrial sector is a fledgling in development and consists of three broad groups: about 43 modern enterprises, some of which are privately owned but the larger firms are mostly publicly owned in total or as a majority holding; a second group of small-scale enterprises SSEs in the private sector, vir- tually sll of them with a few employees and with a high mortality rate; and a large number of individual artisans producing traditional handicraft items. The linkages among the three groups, through subcontracting or similar arran- gements, are virtually non-existent; they are essentially non-competing and non-reinforcing elements in the sector. The public enterprises have mostly - 2 - operated at a loss and have had to be supported by budgetary allocations; according to 1983 data, they absorbed over one-third of total crelit and incurred over 40 percent of guaranteed external debt. An evaluation of all public enterprises completed in 1984 is the basis for discussions with the government on a reform of this group. 3. There are physical and economic factors that also adversely affect costs and the growth of markets. It has been estimated that transport costs from the nearest seaports (Cotonou, Lome) account for 25 percent of the cost of goods in Niamey. Much of the eastern part of Niger is much closer to Kano (Nigeria) than to Niamey and a substantial extra-legal trade has existed between Niggrien agricultural products and Nigerian light manufactured goods. Lack of transport facilities prevented the growth of trade to spread to other sections of Niger. Markets are fragmented and fragile. 4. Some of the policies adopted also constrained the development of domesic enterprises. The investment code required 80 percent of equity to originate from domestic resources; since these resources are scarce, this policy may result in undercapitalization of enterprises, making them more vulnerable to market changes and raising the probability of financial fail- ure. Government policies in setting price controls based on cost-plus formu- lae inhibited effective development and lowered the prospects for self-fi- nancing from profits; ho4ever, taxes were assessed on firms that did not take advantage of the benefits offered under the "convention d'etablissement", so that firms had to choose between price controls and taxes. Minimum wage laws are set for a variety of qualifications, professional levels, branches of activity, and experience; the wage costs appeared to be higher than those in neighboring countries. The policies thus had contradictory elements in the granting of incentives and the application of penalties. 5. Both macro and micro conditions in the country were somewhat un- favorable for the initiation of a project aimed at encouraging indigenous small enterprises, and were recognized as such by the project preparation missions. Argu&hly, it was reasonable to expect that the project would be designed to focus on the important issues and on effective institutional and policy measures necessary for successful implementation. II. PROJECT OBJECTIVES AND DESIGN 6. The major purpose of the project was to promote employment creation in industry by providing funds and technical assistance to small- and medium- scale firms, and to strengthen the institutions that were responsible for these activities so that they would be capable of sustained effective ac- tion. Since the project involved several institutions with differing but complementary functions, it was essential that the interrelationships among the institutions and functions should constitute an effective system and not a series of disparate actions. The preparation missions realized that the potential for development of locally-owned small enterprises was limited in a country with little industrial experience and tradition. 7. The project involved three institutions with separate responsi- bilities; two of them were essentially created as a result of the preparation of this project. (a) The Banque de Developpement de la Republique du Niger (BDRN), an existing commercial and development bank, was allocated US$3.60 million of which USS3.25 million was to finance labor-intensive small- and medium-scale enterprises. The remainder was to he used for technical assistance and training to improve the BDRN's Devel- opment Department. An additional US$100,000 was to be used by the 9cole Nationale d'Administration (ENA) to develop a bank management training program. (b) A newly created promotional organization, the Office de Promotion de 1'Enterprise NigArienne (OPEN) was allocated US$0.5 million for financial and technical assistance. (c) The Centre des M4tiers d'Art du Niger (CMAN), which was established during project implementation, was initially allocated US$800,000 for facilities and equipment, technical assistance and for a revol- ving fund for working capital in its support of the artisan sector. 8. BDRN was authorized to finance up to 90 percent of the total cost of small-scale subprojects and up to 75 percent of the total cost of medium- scale subprojects. The criterion for differentiating between the two groups was the investment cost per job. Forty percent of the funds were reserved for small-scale subprojects with an investment cost of US$5,000 equivalent or less and total fixed assets of CFAF 30 million (US$125,000 equivalent) or less. The upper limit on investment costs per job for medium-scale subproj- ects was set at US$15,000 and total fixed assets below CFAF 300 million (US$1.25 million). These limits were established after review of BDRN's pipeline of subprojects and seemed to ensure that there would be a supply of eligible subprojects; it was estimated that the credit would be used by 35 small-scale subprojects and 5 medium-scale ones. The existence of projects in textiles, brickmaking, and agricultural processing in BDRN's pipeline that would qualify for assistance was taken as evidence of the feasibility of the proposed Project. The portfolio of BDRN showed small-scale loans with job costs mostly in the range of US$2,300 - 4,200 for SSE and a bimodal distribution for medium-scale with one concentration in the range US$6,000- 13,000 and a second peak between US$15,000-20,000; the criterion finally selected, of US$5,000 investment cost per job in small enterprises and US$15,000 in medium, appeared reasonable based on this past experience. The average number of employees per establishment (including both small- and medium-scale) and the estimated forty enterprises permitted a further calcu- lation that new employment generated by the project would amount to over 500 persons. 9. The artisan sector was included in the project design because of the prevalence of artisans of various skill levels in the country and because of the modest successful beginnings of a program supported by the National Museum of Niger. There were 25,000 or more artisans, many of them producing traditional handicraft items of leather and jewelry, but others made crude consumer goods from scrap materials and/or engaged in repair activities. They were largely self-taught with a limited range of skills, productivity was low, and they had little knowledge of how to sell their products. The National Museum assisted about 150 artisans producing traditional products in a shop on the grounds of the museum, which sold the products in a boutique. Sales had amounted to about US$150,000 annually and one year a special effort to export achieved sales of US$30,000. 10. A report prepared in 1977 by a consulting firm reviewed the pros- pects, including market research in Europe and Canada, and concluded that the development prospects of the artisan sector were very favorable. In these circumstances a project component to upgrade the quality and the rate of pro- duction of the artisans was included. It was estimated that an additional 370 artisans would be employed, but the added employment was secondary to improving the capabilities of the existing group. Assistance in providing better raw materials (e.g., hides and materials), technical assistance in marketing the products, and training were of primary importance. Direct responsibility for administering the program was taken out of the hands of the National Museum and lodged in a new indepentent entity, the Centre des M6tiers D'Art du Niger (CMAN), under supervision of the Minister of Economic Affairs, Industry and Commerce. A new staff was to be created and satellite branches were to be established. The program envisaged was a substantial expansion of the modest program that had existed under the National Museum. The same consulting firm was engaged to assist CMAN in implementing the program and to assume responsibility to export and distribute 50 percent of the output. 11. In Niger there was no single organization responsible for the pro- motion of indigenous enterprises until the preparation of the project under review. In 1978 the Office de Promotion de 1'Enterprise Nigerienne (OPEN) was established with the functions of promoting new enterprises by preparing analyses of potential investment, providing technical assistance to SSE, pro- viding and sponsoring training in technical and business fields, and adminis- tering a Guarantee and Participation Kr.nd to facilitate investments. In fact, the Fund was not legally created until 1984 and was not operable during the life of this project. 12. In the case of all three institutions, viz., BDRN, CHAN, OPEN, echnical assistance was required so that they could effectively discharge their responsibilities. The technical assistance was of two kinds, although there was overlap between them. First, technical assistance was required for the staffs in the management of the institutions, preparation of project evaluations, processing loan requests and similar internal operations. Second, the clients in the private sector required assistance in improving production processes, choosing equipment, increasing productivity, and all other aspects of operating an enterprise. - 5 - 13. The project provided about 27 man-years of technical asssitance: 4 man-years to BDRN; 15 man years to OPEN; 7 man years to CMAN; and about 1 man-year to ENA as advisers/designers of a course on bank management. Over half of the man years were of the first type mentioned above, for internal advice and assistance to the staffs to strengthen institution building. Technical assistance to clients in the private sector accounted for about 12 man-years, three of which were leather experts to supervise production for CHAN and nine man-years of an economist, an engineer, and a financial analyst were to provide industrial extension services for the clients of OPEN. Nigfrien staff being tr4ined by the foreign experts were additional. At least one man year of a training adviser was assigned to each institution, as were senior advisers to management. UNDP/UNIDO provided the technical experts to OPEN. By providing technical assistance both to the institutions and to their clients, the project intended to support both sides of the market. 14. The loans to enterprises by BDRN allowed a maximum of fifteen years including two years of grace; however, &t the initiation of the project it was estimated that funds on-lent to small enterprises could be recycled three times and those to medium enterprises two times. Since Niger is a member of the West African Monetary Union, whose credit and monetary policies are gov- erned by the BCEAO, the interest rate ceiling of 8.5 percent established for small and medium enterprises was supplemented by a government subsidy of 2.5 percent to BDRN for loans made from project funds. The foreign exchange risk is borne by the Government. III. PERFORMANCE OF THE INSTITUTIONS 15. The main criterion for judging the success of the project is whether the institutions involved have attained satisfactory levels of development, whether they have demonstrated the capabilities to sustain the programs that have been created, and, as a necessary corollary, whether the programs themselves are leading toward efficient and effective development. The criterion of sustainability is essential to demonstrate that the project will have a continuous impact and not fade out as a one-shot affair after ex- ternal support is withdrawn. This does not necessarily mean that a single effort at institution building must then proceed on its own momentum for the indefinite future. Institution building takes time and requires nurturing during its early phases. The four years of life of the project under review are relatively short to build a sustainable base in a country as little de- veloped as Niger. But there must be some evidence that progress is being made, project objectives are being realized, and that this learning period holds tangible prospects for future efficient development. 16. One quantitative measure of sustained performance is the amount of new employment that was expected to be generated; this amounted to 870 jobs (i.e. 500 through BDRN loans and 370 in the artisan sector). As the name of the project implies, this was a major objective. Corollary quantitative measures are the number of loans made to small and medium scale enterprises - 6 - and the profitability of the recipients of loans. But there are other consi- derations of equal or greater importance in a project of this type that require qualitative judgements, such as: the success in upgrading the staff to perform their analytical and managerial functions; the efficiency in the allocation of resources to subprojects; and the operation of an industrial extension service to assist individual enterprises. Both the quantitative and the qualitative measures are relevant in an evaluation of the performance of the institutions that make up this project. A. BDRN 17. BDRN has been in existence since 1961 and operates as a commercial and a development bank. Technical assistance was originally provided by the Societ6 Tunisienne de Banque (STB) and this assistance continued through the current project. Commercial banking accounted for 80 percent of the business and provided the profits to support the development banking activities. Other sources of funds for de'elopment included both bilateral and multilat- eral agencies. In the first few years of the project the financial perform- ance of BDRN was judged satisfactory. But, after 1980, conditions worsened due to the significant increases in financial charges and administrative expenses, the drought, the general economic malaise in world markets, plus the growing volume of government debt that BDRN financed. In 1983 arrears affected 25 percent of total loans, a four-fold increase over 1981.1/ That external conditions beyond tFe control of BDRN accounted for some part of the financial deterioration is not questioned. A supervision mission in September 1979 noted that: "the investment environment is clearly very dif- ferent from that prevailing when the project was prepared." But there were other conditions over which internal management had closer control. 18. Upgrading the capabilities of the staff was partly defined in terms of an expansion in numbers and between 1978 and 1984 the BDRN staff increased from 379 to 650, an increase of over 70 percent; the increase in professional level staff was over 175 percent (i.e. from 46 to 127). But the increase in quantities was not matched by an increase in quality. Project evaluations and other analytical and managerial work was not at a satisfactory level at the close of the project, though BDRN had devoted resources to training. The four man-years of technical assistance provided in the project were insuffi- cient to carry out the training required to raise the level of competence of the greatly increased staff. Moreover, the plan for the Ecole Nationale d'Administration (ENA) to institute a bank management training course was a failure. After some preliminary efforts, the plans were abandoned. ENA's resources and orientation were not suitable to the task. 19. In spite of the increased staff, BDRN was unsuccessful in meeting the targets set for lending to SSEs. Although BDRN had lent to such enter- prises from its own resources and had had a pipeline of subprojects, only one 1/ For details on BDRN's financial performance see PCR, paras. 3.09-3.15. - 7 - SSE subproject was financed from the credit. Loans to medium scale enter- prises were, however, quickly used, but a single subproject (a battery plant) used 61 percent of the total credit allocated to BDRN (para. 27). Only 6 subprojects were financed in all. This was far below the estimates made at appraisal. The allocation of the majority of the credit to a single project was also contrary to the spirit and intent of the project. The employment target of 500 new jobs was not met, even after some of the loan funds were reallocated to CMAN and the employment target was reduced. A 1981 supervi- sion mission reported that BDRN was "unable to reach the target group." A major cause of this result was attributed to the job cost criterion of $5,000, which was too rigid and unrealistic in terms of the prevailing eco- nomic conditions. It is true that the inflation eroded the economic realism of the amount, and that it would have been possible to index the target amount to keep pace with price changes and probably that should have been done; but the fact remains that when the target was raised to $15,000 in 1981, the lending program did not increase. The very poor result with re- spect to the number of subprojects supported by the project credit seems traceable to unfavorable economic conditions, environmental constraints, and BDRN's and OPEN's institutional inertia and absence of promotional effort. The projects in BDRN's pipeline (para. 8) failed to materialize, apparently because their sponsors were discouraged by subsequent economic developments and/or cumbersome administrative procedures. 20. To rectify BDRN's weaknesses, IDA formulated an Action Program in October 1984 aiming at the financial and organizational rehabilitation of the institution, including a timetable which was agreed with BDRN and the Govern- ment. BDRN has now fulfilled all requirements of the rehabilitation action program. Tangible progress appears to have been achieved on all areas, in- cluding recovery of bad debts, internal reorganization, and strengthening of management by assigning expatriates to line positions. Also, BDRN's capital base was reconstituted. These actions were undertaken as a condition of the recently approved Structural Adjustment Credit. CMAN 21. CMAN was legally created to administer the program for development of the artisan sector--to achieve greater specialization of functions and attention than was feasible by the National Museum. It got off to a slow start because of delays in passage of the implementation statutes and could not appoint a director to initiate action. There was also a shortfall in the budget allocation for housing for foreign experts which was a source of irri- tation, and it was difficult to assemble a staff experienced in the problems of thi artisans. The consulting firm hired to select the foreign experts had difficulties in recruiting, and the firm did not live up to its contractual commitment to export 50 percent of CMAN's output. The firm blamed this on the poor quality of the products and the low levels of marketable output. Finally, the project funds allocated to CMAN proved to be inadequate for the facilities, equipment, and working capital required. This series of mishaps was never fully overcome, and CMAN seems never to have recovered completely from them. 22. CMAN also embarked on a course of action different from that ori- ginally envisaged. It was to provide technical assistance in production, marketing, and supply of inputs for the independent private artisans; but in- stead it created two government-owned enterprises that competed with the pri- vate sector. This course of action by a new organization, when combined with the problems mentioned above, resulted in an undistinguished performance; CMAN did not develop exports nor provide the needed services to the private artisans. In early 1985, as part of a larger effort to transfer public enterprises to the private sector, the Government undertook to convert the two enterprises into independent cooperatives. 23. The objectives of strengthening C24AN and assisting the artisans have not been attained. The institution has not achieved financial self-suf- ficiency nor has built up export promotion capability. The number of arti- sans employed by CMAN is well below the level originally planned, and its training performance has been weak. "CMAN concentrated its efforts on devel- oping in-house production capacity, while neglecting artisans working outside the Center" (PCR, para. 7.04). C. OPEN 24. The function of OPEN was to take responsibility for promotion of investment and implementation of a technical assistance delivery system for enterprises. A further function of administering a Guarantee and Participa- tion Fund became moot since the Fund was not legally created until 1984. Until the establishment of OPEN in 1978, the Development Department of BDRN tried to perform the promotional role, in the absence of any other agency with this responsibility. Afterwards, OPEN and BDRN had to cooperate closely so that promotion (including the technical assistance) would generate sub- projects that would then be serviced financially by BDRN. This relationship did not develop quickly. There was initial tension between the two and there was more independence of actions than cooperation. 25. Finding appropriate technical staff for OPEN proved difficult. By Fall 1983, there were only eight professionals employed. The foreign consul- tants hired by UNIDO to help client companies consisted of one project econ- omist, one engineer, and one financial analyst. This was rather meager for the task; for example, one engineer cannot be expected to be an expert on bakeries, brickmaking, metal working, and other production. Yet, in starting up a business it is necessary to plan the layout and production processes, choose the machinery, set up controls on costs and inventory, and plan the labor force. Most entrepreneurs of small enterprises know one aspect of the business but seldom all; they frequently are uninformed in choosing equip- ment. This also applies to restructuring existing enterprises. By the close of the project, OPEN was still unable to mount an adequate extension ser- vice. 26. The promotional work suffered from the lack of a systematic attempt to choose for study those product lines that appeared to have a comparative advantage and would be financially viable. The guidance thus provided to BDRN on subprojects for finance was dubious at best. These characteristics are common in new organizations that are attempting to establish an industri- al extension service. The period of time was obviously insufficient to over- come these differences, and the external technical assistance provided was inadequate. IV. UTILIZATION OF THE CREDIT 27. During implementation, funds were reallocated from the BDRN to CMAN, whose start-up costs had been seriously underestimated. The realloca- tion had the following effect: At Beneficiaries Appraisal Actual --------US$000------ BORN for loans 3,250 1,950 CHAN 800 2,182 The actual allocations to OPEN and to BDRN for technical assistance closely approximated the appraisal estimates, with the exception of the item of US$100,000 for training in bank management by ENA which was cancelled after the expenditure of US$22,500. A reclassification of the actuals reveals that slightly over 40 percent was for loans and technical assistance to enter- prises and slightly under 60 percent was for institution building in the three organizations. This result was approximately the reverse of the per- centages intended at appraisal, but the fund allocations do not necessarily reflect accurately the benefits of all kinds realized by the project. 28. The allocation of IDA funds and the concentration of 61 percent of the funds lent out in a loan to a single larger enterprise have been men- tioned previously (para. 19). The PCR (para. 6.09) reports that this single subproject was appr-,ved based on its financial prospects and not its economic benefits, which were regarded as questionable. Five other subprojects, only one of which was to a SSE, were also supported. Only two subprojects had an investment cost per job of less than US$6,000. The financial performance of the IDA supported subprojects has been poor, in part due to inadequate appraisal and the virtual absence of supervision (PCR, paras. 6.10-6.11). 1983 data on a sample of five enterprises showed that only one operated at a prof it in the two prior years and four operated at a loss. Three showed greater losses in 1984 than in 1983. V. EFFECTIVENESS OF PROJECT DESIGN AND SUPERVISION 29. IDA had several preparation and pre-appraisal missions to explore the conditions and conduct discussions prior to the decision to go ahead with the project. The project files contain lengthy memoranda reporting on all - 10 - aspects, favorable and unfavorable, that would affect the project, In retro- spect, some greater and more specific analysis of the industrial sector to determine product lines that appeared to be in the most favorable position for growth would have provided better guidance to OPEN and would have given a sharper focus for the promotional work. The BDRN pipeline did provide some insights into likely candidates but this was sketchy and, as a result, insuf- ficient. 30. Although the project emphasized employment creation and targets were set for new employment, the project in fact had as much to do with in- stitution creation and building; the performance on both counts has been poor. The setting of specific employment targets and numbers of firms to be supported created an image of confidence and certainty that was not really justified by the information available, nor were these very specific targets necessary. 31. The creation of an efficient set of institutions was a condition precedent to an expansion of finance to enterprises and to employment in- creases. OPEN was supposed to concentrate on promotional matters so that BDRN could concentrate on banking functions. CMAN was to undertake functions that were not really appropriate for a museum. The creation of two new enti- ties in a country the size of Niger is questionable and may have led to dis- sipation of effort. Moreover, there were risks in expecting new institutions to assimilate the tasks and perform satisfactorily in a short time. A key to success in building an institution is the technical assistance that is pro- vided and the monitoring of the effort. The level of assistance could have been increased, as is illustrated in part by the large reallocation to CMAN, but the greater need was in OPEN, despite the support of UNDP/UNIDO. More- over, it does not appear that the performance of technical assistance was sufficiently monitored. The project files contain fragmentary references to problems arising with technical assistance, but supervision did not seem to identify it as a critical area; however, the PCR has clearly done so. 32. There were two factors impairing implementation that were somewhat beyond the control of IDA's team responsible for appraisal and supervision, and that stemmed from the environment and attitudes prevailing in the Bank itself. First was the imposition of the Job cost criterion of US$5,000 for SSE lending. In its attempts to cope with problems of poverty alleviation and employment creation, the efficacy of job cost criteria received substan- tial support in the Bank. The argument was that this helped conserve the scarce resource of capital and encouraged its wider usagell ft was also sim- ple. The criterion has flaws, however; it focuses on conserving one resource alone, rather than on other resources which, in many countries, including Niger, are equally scarce, such as professional management and skilled la- bor. It does not take account of possible economies of scale at low output levels, nor the fact that labor regulations, covering minimum wages or condi- tions on employment termination, can cause entrepreneurs to choose less labor-intensive processes. The job-cost criterion adopted in the project was not directly related to costs of construction and machinery in Niger and was not adjustable to price increases. But in the prevailing environment in the - 11 - Bank, the inclusion of a Job cost criterion probably was inescapable. How- ever, it was not formulated in a way that would allow flexibility in applica- tion. 33. The second factor that impaired possible adjustments was the lack of official Bank policy on the use of second-hand equipment. The potential benefits are that second-hand equipment is cheaper and usually more labor-in- tensive (e.g. in material handling and electric power [manual operations instead of fractional HP motors in p:oduction processes)); the risks are that an uninformed buyer will buy machinery that may not work properly. The lack of Bank policy, with safeguards, apparently prevented taking advantage of these potential cost-savings in the project. VI. CONCLUSIONS 34. The project under review was the first e' its kind in Niger and of experimental nature. The three institutions that were supported essentially constituted a system, each with specialized functions, but all aimed at pro- viding assistance and/or finance to enterprises. They did not cooperate closely during the project period but this seems to be due, at least in part, to preoccupation with own affairs and developing staff and capability rather than any deliberate avoidance of cooperation. In a further phase of develop- ment, however, the building of systematic cooperation will be essential. The institutions will not be able to sustain a successful program without it. 35. Although some progress was made to turn them into viable and effec- tive institutions, they all have a long way to go and will undoubtedly re- quire further outside help. They cannot yet stand on their own feet. This is less true of BDRN, which has a longer history than the other two, and has recently implemented a rehabilitation program. Commitment to and determined efforts towards institution building (e.g., upgrading project preparation, appraisal and supervision capability, improving the capital structure, and reducing the level of arrears to an acceptable level in the case of BDRN; strengthening of the extension services provided by OPEN) are important elements in promoting and sustaining the effort to develop small- and medium- scale enterprises. 36. The project had specific targets for the amount of loans that would be made and the number of enterprises that would receive loans, but the proj- ect failed to come close to the targets. On the whole, the project experi- ence has not been felicitous. There were a number of reasons for the fail- ure, some external and beyond the control of the institutions and others in- ternal and within their control. The investment climate worsened mid-way in the period and the policy framework lacked consistent incentives. Although substantial technical assistance was allocated both for strengthening the institutions and to help client companies, the amount of technical assistance was insufficient to the task at hand. The growth of BDRN's staff outstripped the capability to train the increased numbers, while OPEN was not able to recruit sufficient numbers of the right skills, even with the help of UNIDO. - 12 - CMAN adopted a course of action that competed with private artisans rather than assisting them. 37. Bank supervision of the project, although close, did not adequately assess the performance of the technical assistance personnel and did not suggest remedial action; yet, technical assistance is at least as important to success as is the supply of funds for investment. The lack was probably most damaging in the case of OPEN whose responsibilities were to initiate or stimulate new investment and then to assist enterprise management to design the facilities, choose the equipment, and carry out production operations efficiently. In important respects, the future development of OPEN is the most important key to success of the system. Many countries have had difficulties in designing and implementing an industrial extension service. 38. The inclusion of the artisan sector was the first in Niger and ap- parently the first time in the region. The Bank had little experience with artisanal problems, and although the museum program provided some insights and the consultant's report was favorable, it might have been prudent to defer involvement or at least to have opted for a modest increase in the museum's program and thereby to learn better how to design an approach. 39. The job cost criterion of USS5,000 in the project was a screen for subprojects, but it did not allow adjustments to be made for increases in in- vestment and operating costs due to the general inflationary conditions after 1980. Consequently, it was ineffective and impaired implementatien since potential subprojects could not meet the test. A more flexible formula to allow for price changes might have avoided many of the problems. The deci- sion to create two technical assistance institutions may have also contribut- ed to the poor project performance. 40. Although the project had many misadventures and disappointments, and its objectives to a large extent have not been achieved, it was a begin- ning. A second line of credit is supporting the continued development of these institutions, and presumably will overcome some of the mistakes and omissions in this project. 41. There are a number of lessons that can be learned from this modest project--lessons that mirror those found in other countries with similar projects: (a) there is a basic need for some sector work to identify product lines in which market conditions and resource requirements lead to a reason- able expectation that subprojects can be viable in the economy; (b) when more than one institution is involved in the system, cooperation and clear deline- ation of responsibilities, and keeping each one of them in step with the others is essential or else the system will not function effectively; (c) in- stitutional development is a difficult and drawn out process; relying on newly-created institutions with limited experience and staff capabilities poses special risks, and the performance targets for each of them must be modest and be kept under constant review; (d) technical assistance on a con- tinuing basis is at least as important as the supply of funds, and must be monitored closely; this is particularly critical for an institution charged - 13 - with investment promotion; (e) investment cost per job as a criterion may have a place but tends to become rigid and unrelated to the costs and envi- ronmental market conditions; if adopted, it should allow flexibility in application so as not to become a barrier to economically viable enterprises; (f) it would be helpful to develop a Bank policy on the use of funds for second-hand equipment; (g) the management skills, inventiveness, and drive of those who lead the instituions is a critical element in success and one that deserves the closest attention; and (h) close supervision by the Bank of these risky complicated SSE projects, particularly in identification of dif- ficulties before they hecome crises, and the willingness to take early remedial action, are virtually the only means to avoid the deterioration and ultimate failure of these projects. - 14 - ATTACHMENT E-909/86 May 27, 1986 FR (Niger) OED TS:bas COMMENTS RECEIVED FROM THE OFFICE DE PROMOTION DE L'ENTREPRISE NIGERIENNE (OPEN) Translation of Incoming Telex Niamey, May 22, 1986 Attention Mr. Otto Maiss Director, Operations Evaluation Department Your evaluation report on the Employment Creation Project for the Industrial and Artisanal sector (Credit 809-NIR) arrived while I was on vacation, which explains the delay in replying. Having now read the report, I find your observations and recommendations pertinent. I have taken very good note of them and will ensure that lacunae in the implementation of the Industrial Extension Service and the execution of bankable subprojects are taken care of. I have no specific comments. Regards, Mahamadou Halilou Director General PROJECT COMPLETION REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (Credit 809-NIR) March 31, 1985 West Africa Projects Department Industrial Development Finance Division - 15 - PROJECT COMPLETION REPORT NIGER INDUSTRIAL AND ARTISAN SECTOR EMPLOYMENT CREATION PROJECT (Credit 809-NIR) I. INTRODUCTION 1.01 The need to create employment through small- and medium-scale enterprises in Niger was identified in 1977. The Sahelian drought of 1975 had brought about a shift of population from land to the cities underscor- ing the need for more employment opportLnities for Niger's growing number of urban unemployed. The labor-intensive smaller and artisan enterprises offered the best prospects for an expansion of urban employment. An IDA project was prepared seeking to promote employment in the industrial sector through an institution building program and through the provision of financial and technical assistance to small enterprises and artisans. Two institutions were selected as intermediaries for the IDA project: The Banque de Dfveloppement de la R6publique du Niger (BDRN) and the Artisan Center of the National Museum of Niger (CMAN). At the time of appraisal both institutions had experienced some successes. BDRN projects had created more than 1,600 jobs at an average investment cost per job of $2,000 for commercial and artisanal services and at an average investment cost per job of $8,500 for medium- and large-scale enterprises. Also preliminary tests on sales of products of the Artisan Center had shown optimistic results. II. THE ENVIRONMENT A. Background 2.01 Niger belongs to the West African Monetary Union which shares a common Central Bank and a common currency (the CFA Franc). The full convertibility of the CFA Franc into French Francs and the liberal foreign trade policies pursued by the Monetary Union members have kept the Niger economy very open in the past. This openness was strengthened by the strong trade links that have always existed between Niger and its neigh- bors, particularly Nigeria. Another important characteristic of the Monetary Union is the strong discipline imposed over monetary and fiscal policies of the member countries, in return for the guaranteed convertibil- ity of the currency. In order to avoid excessive credit expansion, in- creased imports, balance of payments deficits, and a loss of foreign reserves, the common Central Bank is empowered with strong controls over domestic credit ceilings in member countries. 2.02 Like other Sahelian economies, Niger's is dominated by subsis- tence agricultural activities with millet and sorghum accounting for 80% of the cultivated area. Livestock is also an important source of income for a - 16 - large segment of the population and is one of the country's major export commodities. Despite its meager agricultural resource base, Niger has traditiorally been self-sufficient in food production except during the Sahelian drought in the early 1970s. The discovery of large uranium depos- its in the late sixties, and their development, gave the mining sector an important position in Niger's economy. The sector is now the country's principal foreign exchange earner and an irportant source of Government revenues. 2.03 On balance, Niger's performance during the 1970s was very good, particularly by Sahelian standards. This was largely due to the sound economic policies of the Government which encouraged a rational use of foreign aid and export earnings and limited pricing and other policy distortions, common among most West African countries. However, the 1980s started with signs of longer term economic crisis. Between 1979 and 1982 real prices of uranium fell by more than 50%. Uranium exports stagnated and uranium revenues declined sharply from CFAF 25 billion in 1979 to CFAF 13 billion in 1982. Agricultural production also declined and continued unfavorable climatic conditions forced Niger to increase grain imports. In 1983/84 a serious drought hurt the livestock sector. 2.04 The slowdown in economic activity was not accompanied by re- straints in public spending. The lack of clear signals from uranium market experts led to an uncertainty about the future of the sector. Expecting a quick recovery of uranium prices, the Government continued to implement its ambitious Five-Year Development Plan by increasingly relying on foreign borrowing to finance the public investment expenditures. It was not until 1982 that action was taken to adjust to the reduced export and revenue prospects. 2.05 Although Government revenues stagnated in 1981 and 1982 at a level of CFAF 75 billion, overall Government expenditures grew from CFAF 124 billion in 1979 to CFAF 173 billion in 1982. This was not only due to the Government's aggressive investment strategy but also to the unsat- isfactory financial performance of the parastatal sector which had expanded rapidly during the late 1970s. Poor management and frequently uneconomic Government policies and regulations led to large operating losses in many public enterprises. The increase in Government deficit from CFAF 65 billion in 1979 to CFAF 103 billion in 1982 led to more borrowings and to a severe public debt burden, which grew from 2% of Government resources in 1979 to 20% in 1982. 2.06 Although official development assistance to Niger more than doubled between 1977 and 1981, nearly 50% of its foreign debt was contract- ed on commercial terms. As a result, external debt service payments increased dramatically from $9 million in 1977 to over $200 million in 1983, representing 11% and 53% of the country's exports of goods and services, respectively. This ratio will continue to deteriorate unless debt relief is found. - 17 - 2.07 In 1982, faced with the rapid deterioration of the country's economic and financial situation, the Niger Government introduced austerity measures for the 1982/83 budget and prepared with the assistance of the World Bank a two-year consolidation program for 1983/84 and 1984/85 to restore financial health to the public sector and to help the economy adjust to its new financial constraints. Furthermore, the Government's organizational structure was changed to strengthen the Ministries of Plan and Finance and to give the Prime Minister overall responsibility for the economic and financial management of the country. 2.08 The austerity program was implemented in 1982/83. Government wages and salaries were frozen, benefits to high school students were discontinued and Government purchases of goods and services were tightened. Most importantly, public investment expenditures were reduced and foreign borrowings were curtailed. The consolidation program was subsequently supported by a first IMF Standby Arrangement of SDR 18 million and a CFF of SDR 12 million for 1983/84, and a second IMF Standby Arrangement of SDR 16 million for 1984/85. The objectives of the two-year program are to reduce the Government budgetary and current account deficit and to lay the foundation for an economic recovery. To achieve these objectives, the Government is committed to: (a) implement a fiscal reform program and improve tax collections; (b) limit the growth of current expenditures; (c) initiate measures to stabilize the financial situation of major public enterprises; (d) liberalize marketing and pricing policies; (e) reduce and restructure public investment expenditures; and (f) reschedule the external debt. 2.09 During 1983/84, all measures introduced by the stabilization program were effectively implemented. Furthermore, all the performance criteria under the IMF Standby Arrangements have so far been adhered to, despite the recent drought and the closure of the Nigerian border, both of which aggravated the already poor state of Niger's economy. The budgetary deficit is expected to be reduced from 7.3% of GDP in 1982/83 to 4.7% in 1983/84, reflecting a 50% cutback in investment expenditure, a small increase in tax revenues and a containment of the growth of current expen- ditures to 8%. A considerable reduction has also been achieved in the arrears of public enterprises. On the external side, the current account deficit was reduced from 9% of GDP in 1982 to 4% in 1983, and is estimated to have narrowed marginally to 3.9% in 1984. External debt service pay- ments, which were scheduled to be at a level of 40% of exports of goods and services in 1984, were reduced to 30% as a result of the debt relief obtained from the Paris Club in November 1983 and from foreign banks in early 1984. Further debt relief for 1985 was recently negotiated with the Faris Club in December 1984. Despite this progress, real GDP continued to fall by nearly 4% in 1984, due mainly to the adverse weather conditions prevailing in the Sabel region during 1983/84 and poor agricultural har- vests. 2.10 The Government intends to continue its austerity program in the coming years as indicated in the second Standby Arrangement. However, - 18 - continued austerity will severely constrain Niger's development unless accompanied by further policy measures that will allow the country to restore and maintain a momentum of minimum acceptable level of growth. The Government has therefore requested the assistance of the World Bank to formulate a program of structural adjustment and policy reform to help in its recovery. Such a program is currently under preparation. B. The Industrial Sector 2.11 Nigerien industry is geared toward import substitution and basic agro-processing, although some importance can be attributed to the con- struction-related subsector (building material, wood and metal works). In 1979, only 43 modern enterprises were in operation with total sales of CFAF 16.3 billion. Their structure is given below: Table 1: STRUCTURE JF THE INDUSTRIAL SECTOR (1979) Number of Employment Firms (1977) a/ Sales Value Added Branch Number % Number % CFA billion % CFA billion % Food & Drinks 8 18 781 22 4.3 26.6 1.5 29.3 Textiles & Leather 6 13 1,231 35 5.4 33.4 1.4 26.0 Paper/Printing 4 10 247 7 0.7 4.1 0.3 6.4 Chemical Products 6 13 2.1 12.6 0.7 13.9 Shoes and Plastic 4 10 0.6 3.5 0.2 4.1 Construct. Material 8 21 496 14 1.8 11.0 0.5 9.5 Metal & Wood Prod. 7 15 458 13 1.4 8.8 0.6 10.8 43 100 3,524 100 16.3 100.0 5.2 100.0 a/ Total industrial employment estimated at 5,400. 2.12 Of the 43 existing firms, 23 are privately-owned, 13 are mixed enterprises and 7 are state-owned. Many of them have been either operating at a loss or facing severe difficulties, partly because of input shortages, high transport costs, lack of middle management and skilled labor, and limited market, and partly by competing unreported imports from Nigeria 1/ but, most importantly, by stringent price controls. 1/ There is a difference of 20 to 30% between the official and parallel CFAF/Naira exchange rates. - 19 - C. The Public Enterprise Sector 2.13 The government of Niger owns and operates a large number of public and mixed enterprises which are engaged in a wide range of commer- cial and social activities. The sector has grown rapidly in the seventies, particularly since the advent of favorable developments in the uranium sector. The government's main objective is to ensure state participation in key activities, make up for "shortfall" in private sector initiatives and channel savings into productive investment. Based on 1983 data, there are 53 enterprises with total or majority public participation. These enterprises employ about 13,000 people which represent more than the government itself and about half of the total employment of the modern sector, excluding government. However, their salary share is only 28 percent. They account for 37 percent of total production of the modern sector and 25 percent of value added. Overall the public enterprises sector contributes substantially to the economy, about 10 percent of GDP. Over 40 percent of the country's guaranteed external debt was incurred and over one-third of total credit is absorbed by the sector. The two major suppliers of credit are BDRN and Caisse Nationale du Cridit Agricole (CNCA). 2.14 Although the government has channelled huge amounts of financial resources into these enterprises, the parastatals have not performed satisfactorily. In 1983, more than half of the public enterprises incurred deficits of over CFAF 13 billion. Unable to contribute to their own investment program during the 1970s, the government had to transfer to them increasing amounts of grants and loans for investment. In recent years, however, the difficult financial position of the government itself led to cuts to this sector and thus exacerbated the already poor financial posi- tion of many enterprises. 2.15 The poor performance of public enterprises stems mainly from government interference in investment and pricing decisions as well as day-to-day managerial functions, undercapitalization, insufficient efforts to collect accounts receivable, accumulated arrears, deficiencies in management and accounting practices, and excessive employment of unskilled labor. Moreover, many public enterprises have unclear objectives and priorities resulting in an inefficient government/enterprise relationship. 2.16 Aware that the difficulties facing the public enterprise sector were deeper and broader, the Government commissioned in 1983, with IDA financing, a diagnostic study of all 53 enterprises in the sector (the CEGOS study). The study, completed in April 1984, has been the startirg point for discussions between the government and IDA on public enterprise issues, and the basis of formulating a comprehensive reform of the sector in the context of the Structural Adjustment Credit (SAC). - 20 - D. The Artisan Sector 2.17 The artisan subsector represents, according to Plan estimates, a population of 35,000 of which 10,000 operate in the towns. Their contribu tion to GDP has been estimated at CFAF 23.4 billion (5.2%) in 1979. Artistic artisans (weaving, leather, silver and gold jewelry) work mainly for the tourism market. The National Museum sponsors about 150 artistic artisans and sells their products in its gift shop. Centre des M6tiers d'Art du Niger (CMAN), established under the IDA project under review, employs 60 leather artisans in Niamey. It also operates two other work- shops, one in Maradi and the other in Zinder. 2.18 No assistance has so far been given to production artisans (kitchen utensils, tools and agricultural implements, pottery, food). In Niamey, several hundreds of artisans ir. this category live and work as squatters in the "Boukoki" area where they process salvaged and stolen materials into cheap consumer goods and implements. Previous attempts to assist this group have revealed the complex nature of the problem. A survey is currently being carried out under the IDA second line of credit to determine hov best to assist this group. E. The Banking System 2.19 Eight institutions comprise the Nigerien banking system. The Caisse de Prits aux Collectivit6s Territoriales (CPCT) finances regional infrastructure projects. Sociftf Nig6rienne de Crfdit Automobile (SONICA) offers car loans. Caisse Nationale de Cr6dit Agricole (CNCA) serves the agricultural sector exclusively. Cr6dit du Niger provides housing and consumer loans. Niger has four commercial banks: the Banque Internationale pour le Niger (BIPN) is the oldest commercial bank operating in Niger. Banque Arabe Libyenne Niggrienne pour le Commerce Extfrieur et le D&veloppement (BALINEX) plays a marginal role. Banque Internationale pour le Commerce et l'Industrie du Niger (BICINI) recently opened, while CITIBANK maintains an office exclusively for international banking. Banque de Dgveloppement de la R4publique du Niger (BDRN) is a multipurpose bank which provides both commercial services and development loans and is the key financial intermediary for the development of Niger's economy. In 1980, BDRN provided 56% of all credits in the economy and 65% of term loans and equity participations. III. BANQUE DE DEVELOPPEMENT DE LA REPUBLIQUE DU NIGER (BDRN) A. The Institution 3.01 Established in 1961 by the Government of Niger with the assis- tance of Soci6t6 Tunisienne de Banque (STB), BDRN has been operating both as a commercial and a development bank and has a network of 11 branch offices in operation. As required by its statutes, the Government and - 21 - parastatal organizations own a majority (about 52%) of BDRN's shares. Foreign shareholders including banks own about 29%, BCEAO 12% and the balance, 10%, by private investors, Nigeriens and foreign. 3.02 At the time of appraisal BDRN was an effective banking insti- tution, with commercial activities representing 80% of its operations. These commercial activities were BDRN's primary source of profits and provided a base for supporting its development and promotion activities. B. Organi ation and Management 3.03 BDRN's Board of Directors consists of 11 members and is chaired by the Minister of Finance. The General Manager has been recently appoint- ed. As of September 30, 1984 BDRN employed 650 people, including 127 professionals. This represents a 47% increase in staff over 1979 when total staff numbered 442 of whom 100 were professionals. BDRN has been investing considerable effort in the training of its staff. During 1983 a total of CFAF 54.8 million was spent by BDRN for this purpose. C. Operations 1978-1984 3.04 Commercial Banking. Commercial banking represents about 80% of BDRN's business and its primary source of income. BDRN carries out all commercial transactions, including agricultural trade credits, overdrafts and international transactions. It is through these commercial activities that BDRN has been able to support its development financing and investment promotion activities. 3.05 Development Financing. BDRN's Development Department is respon- sible for all medium and long-term financing to the public and private sectors. With the exception of personal automobile purchases and housing, this Department carries out all economic research, project studies, ap- praisals of term credits and equity investments, statistical analyses and supervision of BDRN's portfolio. It has been remarkably active in project promotion and has played a crucial role in developing entrepreneurship in the country. Despite these successes, however, preparation of projects has been seriously hampered by lack of suitably trained staff. With the creation in 1978 of the Office de Promotion de 1'Entreprise Nig6rienne (OPEN) to deliver technical assistance to smAll-scale enterprises, BDRN was able to focus its limited resources to its credit activities. 3.06 Major resources for financing development activities come from equity, term deposits, BCEAO rediscounts and foreign lines of credit from bilateral (CCCE, KFW, USAID) and multilateral (IDA, AFDB) sources. BDRN's portfolio has almost doubled between 1978 and 1980 (from CFAF 6.7 billion to CFAF 13.3 billion) but declined to CFAF 11.6 billion is 1983. Its development activities account to 29% of total loan portfolio outstanding, compared to 23% in 1978. - 22 - 3.07 State Operations. In addition to its normal development and commercial banking operations BDRN has assisted in the financing of several projects for the State of Niger. BDRN's outstanding portfolio of such credits which amounted to CFAF 6.3 billion as of September 30, 1977, has almost quadrupled, reaching a total of CEAF 22.0 billion as of Septem- ber 30, 1983. 3.08 Resource Mobilization. BDRN mobilized during the 1978-1984 period a total of $76.7 million, about 45% of which were credits to the state. Details are given in Table 7. D. Financial Performance, 1978-1984 3.09 During 1978 and 1979 BDRN operated at a profit, which represented 57% of average equity in both years. However, total profits may have been overstated on account of insufficient provisionL. In 1980, BDRN's profitability started declining. Expressed as a percentage of average total assets, net profits declined from 5% in 1979 to 2% in 1980 and a negative .4% in 1983. Expressed as a percentage of average equity, net profits declined from 13% in 1980 to a negative 4% in 1983. BDRN Financial Indicators 1980 1981 1982 1983 Net Profit (loss) FCFA w, 891 1,043 428 (324) Net Profit as % of average equity 13 13 5 (4) Net Profit as % of average total assets 2 1 .5 (.4) Total Debt/Equity Ratio 8 9 10 9 Long-term Debt/Equity Ratio 4 5 5 6 3.10 BDRN's decline in profitability in 1980-1982 is mainly due to significant increases in financial charges and administrative expenses which grew at an average rate of 71% and 30% respectively. Income during that period increased only by an average of 32%. In 1983 BDRN's income declined by 2% while financial and administrative costs continued to grow, although at a more modest rate of 7% (Table 1). 3.11 The rapid deterioration of BDRN's financial position was aggra- vated by (a) the large number of government debts being financed by BDRN; (b) BDRN's extensive use of short-term resources to finance medium- and long-term loans; and (c) the increase in the number of bad debts and in total arrears in BDRN's portfolio. In 1983 total principal affected by arrears was CFAF 2.5 billion or 25% of total loans outstanding, a level which represents a 43% increase over the level of 1982 and more than 4 times the level of 1981. - 23 - 3.12 Although arrears on term portfolio in 1983 was CFAF 2.5 billion, according to the Helios study (para 3.15) the potential loss in BDRN's portfolio, including arrears on its short-term portfolio, is estimated at about CFAF 22.6 billion, or 29% of total portfolio. The bulk of this amount, about CFAF 20.1 billion, is in BDRN's short-term portfolio. Furthermore, since 1980, BDRN has been generating artificial surpluses by underestimating the level of provisions that would be required to reflect its deteriorating portfolio. 3.13 During the 1980-1983 period there was a serious deterioration in BDRN's liquidity. Short-term deposits declined from CFAF 33.4 billion in 1981, to CFAF 17.7 billion in 1983, while short-term lending to parastatals grew from CFAF 31.7 billion in 1980 to CFAF 42.2 billion in 1983. Govern- ment deposits during this period remained constant at CFAF 4.5 billion, yet medium-term credits to the government reached in 1983 a total of CFAF 21.9 billion. In order to fill this serious resource gap, BDRN was forced to borrow costly short-term funds. What aggravated BDRN's already precarious position was that while PDRN had to honor payments on loans it had contracted on the government's behalf, there was no formal agreement between them spelling out the terms and conditions of BDRN's loans to the Government. Following a recommendation of the IDA Action Program for PDRN's rehabilitation, an agreement has just been reached with the Govern- ment in which the Government inter alia will assume responsibility for debts contracted on its behalf (para. 3.17). 3.14 BDRN's serious difficulties were confirmed it a consultant study reviewing parastatals in Niger, which was completed in November 1983. This study underlined BDRN's weaknesses, including the deterioration of its liquidity and inadequate provisions, and recommended an in-depth study of BDRN's portfolio to assess a more appropriate level of provisions and the restructuring of BDRN's capital. Following this recommendation the Govern- ment hired the consulting firm HELIOS to carry out such an in-depth review. The study was financed by CCCE. 3.15 The HELIOS study, which covered BDRN's financial position as of September 30, 1983, was issued in May 1984. It analyzed in detail BDRN's weaknesses and came to the following main conclusions: 1. BDRN's potential portfolio losses for 1983 were underestim2ted by BDRN and its provisions of CFAF 12,300 million therefore were not adequate. A larger amount of CFAF 22,600 million for provisions is necessary to realistically reflect potential losses. 2. An imbalance in sources and uses of funds has forced BDRN to borrow expensive foreign funds, resulting in (a) extremely tight liquidity, (b) higher level of indebtedness and (c) increased financial charges. - 24 - 3. BDRN is no longer a profitable institution. Income during the next two years will at best just cover operating expenses and will not allow BDRN to cover new risks or rebuild its capital. E. Prospects 3.16 Following the HELIOS study, an IDA mission visited BDRN in October 1984 and formulated an Action Program for the financial and organ- izational rehabilitation of the institution. The Action Program including a specific timetable was discussed and agreed with the Government and BDRN. Some of the recommendations of the Action Program have already been imple- mented. BDRN no longer prefinances government investment, and the Govern- ment has signed an agreement by which it will assume the financial liabili- ty for all the debts that BDRN has in the past contracted on its behalf. Most of the recommendations concerning BDRN's reorganization are under way and BDRN is discussing a possible long-term technical assistance contract with the Chambre Syndicale des Banques Populaires and with the Union des Banques de Paris. 3.17 The recommendations to reduce BDRN's operating costs and level of arrears and on the consolidation of BDRN's capital structure, however, remain to be implemented. Given the important role of BDRN in Niger's financial system, its rehabilitation will be addressed in the context of the forthcoming Structural Adjustment Credit (SAC) to Niger. IV. CENTRE DES METIERS D'ART DU NIGER (CMAN) A. The Institution 4.01 The Artisan Center of the Museum of Niger was established in 1967 as an exhibition center of Nigerien crafts, including leather, jewelry and metalworks, textiles and ceramics. Through the Artisan Center, the Museum sought to promote quality craftsmanship and artisan employment while preserving traditional techniques and culture. B. Operations and Prospects 4.02 At the time of appraisal the more than 160 craftsmen affiliated with the Museum were organized as a self governing cooperative. Most of CMAN's craftsmen worked on the Museum grounds, which lacked modern facili- ties and affected the craftsmen's productivity. The Center's funds were not adequate to allow purchase of good quality skins and the only other source of working capital was client deposits against special orders. Consequently, most sales were by special order, little inventory was maintained and small quantities of goods were produced. - 25 - 4.03 During project implementation CMAN was established as an indepen- dent entity. While coordinating with the Museum, CMAN was now under the supervision of the Ministry of Economic Affairs, Industry and Commerce. As an independent entity, CMAN started operations with a workshop and boutique in Niamey which sold until 1983, when their operations stopped, about CFAF 10 million worth of leather craft every month. Soon after its creation CMAN established two regional cooperatives, one in Maradi and one in Zinder. However, during project implementation, the role of CMAN gradually changed from that originally envisaged for it by IDA. Instead of training artisans in leather works and, once trained, installing them as independent producers and helping them start commercial productions, it essentially created two government-owned SMEs, one in Niamey and one in Maradi, thereby competing directly with private sector SMEs. CMAN basically provided these workshops with raw material and technical assistance and marketed their product through the boutique in Niamey. 4.04 CMAN's experience with the consultants during the early and critical stages of the project was not a success. Several consultants in the taam were not qualified to provide the type of training needed for CMAN leather artisans, and tensions developed between the team and Niger authorities on housing and transportation. Furthermore, the consulting firm did not fulfill a commitment in its contract to export and distribute 50% of CMAN's output which was blamed on quality and lower than expected levels of production. With the failure of the first phase of technical assistance, IDA missions considered further technical assistance to CMAN as indispensable. Since the credit did not provide financing for a second phase of technical assistance, the Government requested a reallocation of IDA funds to finance 8 man-years of technical assistance to CMAN as well as CMAN's investment (equipment) and working capital needs. The second contract with the consulting firm which followed was carefully designed in order to avoid similar tensions from developing. Performance of consultants during the second phase was good. 4.05 In addition to the early tension between CMAN's management and the technical assistance team, CMAN's operations were aggravated by other serious operational and organizational difficulties including (a) lack of bylaws, (b) management weaknesses, and (c) inadequacy of bookkeeping, accounting system, reporting and inventory control. CMAN achieved neither financial self sufficiency nor the capability to promote exports. IDA missions repeatedly, but to no avail, urged the Niger authorities to consolidate CHAN and revert it to its original concept as envisaged under the project. In February 1985, in its effort to transfer many public enterprises to the private sector, the Niger government announced that CMAN's operations in Niamey and Zinder were stopped and that legal arrangements were under way to convert them into independent cooperatives. This arrangement will also apply to the Maradi workshop upon completion of discussions with the Canadian government, which financed most of the equipment in the Maradi workshop. Although IDA would no longer be involved in the future of these cooperatives, the next IDA mission plans to assess - 26 - the appropriateness of financing these cooperatives through the second line of credit or through the Participation and Guarantee Fund. V. OFFICE DE PROMOTION DE L'ENTREPRISE NIGERIENNE (OPEN) A. The Institution 5.01 OPEN was established in 1978 to provide technical assistance to small-scale enterprises, defined as enterprises with fixed assets below CFAF 30 million. However, so far only 10% of projects assisted are small scale. Most of the technical and financial assistance required to launch OPEN was provided by a UNDP/UNIDO project of $1.5 million. IDA contributed $500,000 to finance a senior advisor and some installation and operating costs. The institution's objectives were the following: (1) Promote new enterprises and investments. (2) Provide technical assistance to new as well as ongoing small-scale enterprises. (3) Provide and sponsor training in management, basic business skills and technical expertise. (4) Administer a Guarantee and Participation Fund and eventually a program of common services to small enterprises. B. Organization and Management 5.02 OPEN is managed by a General Mai:ager responsible to a 14-member board representing various ministries and professional organizations. The board is chaired by the Ministry of Mines and Industry. As of September 30, 1983, OPEN had 26 employees, including 8 professionals. OPEN has a strongly committed management although it still has a long way to go before it can perform its role effectively. There is also a need to improve staff skills in order to respond to the technical assistance needs of Nigerien entrepreneurs. C. Operations and Prospects 5.03 Although OPEN has been operating since 1978, a number of issues continue to be unresolved: (1) The Guarantee and Participation Fund was only incorporated in 1984 and haa not yet been used by OPEN. (2) The OPEN project p4- line shows bias in favor of large-scale enterprises with investment zost per job sometimes reaching $63,000. (3) OPEN's extension services are still iridequate. - 27 - 5.04 The second IDF line of credit (1225-NIR) which includes $1.9 mil- lion for technical and other assistance to OPEN as well as contribution to construction of OPEN's premises, provides a basis for continued dialogue between OPEN and IDA. However, there is a clear need for OPEN to adopt a coherent strategy taking into constderation: (a) the establishment of some order of priority among industrial branches on the basis of their comparative advantage and business prospects; (b) a subsectoral approach deriving from (a) above rather than an ad hoc project-by-project promotional policy, which has resulted in a pipeline of sometimes questionable projects; (c) the need for OPEN to act as a coordinator or referral agency and not necessarily as a "doer". Rather than being overstaffed and over-equipped and performing itself all technical assistance functions, OPEN should, whenever appropriate, and within the limited possibilities in Niger, refer its clients to the suitable source of specialized expertise (engineering, training and financing). 5.05 OPEN has demonstrated a real commitment to its objective of promoting Nigerien enterprises. IDA's support remains crucial in helping OPEN define a strategy and become an effective SME support institution. VI. THE PROJECT A. Objectives 6.01 The primary objective of the project was to promote the creation of employment in the industrial sector of Niger and to strengthen the sector's institutions through the provision of technical and financial assistance and improvement in industrial policies. The project consisted of three major components which are summarized as follows: (1) $3.60 million to BDRN, including (a) a line of credit of $3.25 million to finance labor-intensive small- and medium-scale enter- prises through BDRN; (b) $350,000 for technical assistance and training to upgrade BDRN's Development Department; and (c) $100,000 for assistance to the Ecole Nationale d'Administration to develop a Bank Management training program. (2) $500,000 to establish, in cooperation with UNDP, the Office de Promotion de 1'Entreprise Niggrienne (OPEN). - 28 - (3) $800,000 in financial and technical assistance to CMAN to improve artisan employment and productivity in the leather craft subsector to cater to the export market. 6.02 The line of credit to BDRN was expected to provide financing for fixed investment and permanent working capital to small- and medium-scale labor-intensive projects. At least 40% of the line of credit was original- ly reserved for small-scale subprojects with an investment cost per job of $5,000 or less, and with total fixed assets below CFAF 30 million. The remaining 60% was to finance medium-scale enterprises with fixed assets below CFAF 300 million and with an investment cost per job of more than $5,000 but less than 15,000. IDA was to review thoroughly investment proposals for medium-scale enterprises to assess their economic justifica- tion and capital efficiency. 6.03 BDRN was authorized to finance both loan and equity investment up to 90% of total cost of subprojects for small-scale enterprises and up to 75% for medium-scale enterprises. 6.04 Terms of BDRN's subloans were flexible with a maximum of fifteen years including two years of grace. The onlending rate was 11%. For small-scale enterprises the BCEAO's ceiling of 8.5% was supplemented by a Government subsidy to BDRN of 2.5%. B. Project Implementation 6.05 BDRN acted as administrator of the line of credit on behalf of the Government without assuming the financial liability. The Government assumed the foreign exchange risk for a fee of 0.5% to be passed to BDRN's clients. BDRN also administered the technical assistance components and transferred the funds to the various project institutions (BDRN itself, OPEN and CMAN) as grants from the government. As the administrator of the IDA funds, BDRN performed very well. It ce"tralized reporting require- ments, processed disbursement requests for all project components and played an advisory function to OPEN and to the Artisan Center. Despite a five-month delay in project effectiveness, project implementation got off to an extremely good start. By end August 1979 more than $1.2 million were committed under the project and $168,319 were disbursed. However, during 1980 project implementation including commitments slowed down. One of the factors contributing to the slowdown was the deterioration of the country's economic and financial environment and the slowdown in industrial invest- ment activity. Two features in the original project design also affected project implementation, namely (a) the $5,000 investment cost per job ceiling in the IDA project agreement and (b) the lack of funds available to CMAN. 6.06 The effect of the $5,000 cost per job ceiling on the project was that not enough subprojects could be found that met this requirement. While the medium-scale subproject category was completely disbursed by end of 1980, only one small-scale enterprise had been submitted to IDA by BDRN - 29 - for financing. This did not necessarily reflect BDRN's project pipeline as BDRN had already financed many more small-scale projects from its own resources and an African Development Bank (ADB) line of credit. The $5,000 ceiling became gradually more unrealistic following the considerable rise in prices in Niger and a dollar depreciation of 15% between 1977 and 1980. BDRN requested and IDA agreed to increase the ceiling to $15,000. 6.07 The second factor that delayed project completion was the lack of funds available to CMAN. In order to assist with CMAN's needs to finance its investment program and additional technical assistance, the Niger authirities requested from IDA a reallocation of $1,008,000 from the line of credit and other surplus categories to the CMAN component. IDA author- ized the reallocation to cover CMAN's working capital and fixed asset needs pending the effectiveness of the second IDF project. C. Utilization of the Credit 6.08 Following the reallocation of IDA funds, the credit was utilized somewhat differently than anticipated during appraisal. The following is a comparison of the appraisal estimates and actual allocation of IDA funds: Appraisal Actual Beneficiaries Estimates Allocations US$ BDRN: Line of credit to finance MSE & SSEs 3,250,000 1,949,807 T.A. and Training 350,000 373,568 Total BDRN 3,600,000 2,323,375 CMAN 800,000 2,181,856 OPEN 500,000 469,747 Training of BDRN staff (through ENA) 100,000 25,022 TOTAL 5,000,000 5,000,000 6.09 The line of credit was used to finance 6 subprojects, only one of which was a small-scale enterprise (as defined in para 6.02). The other sub-loan amounts varied from US$75,449 to US$1,190,476. Three out of 6 subprojects accounting for only 9% of the line of credit are in the food processing subsector. 61% of the credit amount was used for a single subproject, Wonder-Niger, which manufactures batteries. Based on project files, this subloan, which represented 33% of the line of credit before reallocation, was approved on the basis of its financial prospects and not on its economic benefits which were at the time judged as limited. Five out of six subprojects accounting for 95% of the amount are in urban locations. The average investment cost per job for these 6 subprojects was US$7,550 (Table 8). - 30 - D. Performance of Subprojects 6.10 The actual 1983 data provided on a sample of 5 subprojects was sketchy yet adequate to show that the overall financial performance of subprojects financed by the IDA funds has been mediocre. Only one enter- prise, Boulangerie Arlit, has been operating at a profit since 1981. Four enterprises operated at a loss during the 1981-1983 period, and three reported greater losses in 1984. Capacity utilization has also been low. Even the profitable Boulangerie Arlit utilizes about 47% of installed capacity, while the other three average about 27%. 6.11 A closer follow-up/supervision of these enterprises by BDRN could have given us a greater insight on the type of difficulties encountered and help determine ways in which they can be rehabilitated. However, in the absence of such details, which could have been provided by OPEN had it played its role effectively, it is hard to say that any of these enterpris- es would be viable even in an economically and financially favorable environment. VII. CONCLUSIONS AND LESSONS LEARNED 7.01 This innovative and pioneering IDA project was the first attempt to assist Niger's growing number of urban unemployed and artisans. However, its success has only been limited. 7.02 The assistance to BDRN had some success in building up BDRN as a financial institution: (1) BDRN performed effectively in utilizing the IDA credit. (2) There was a significant upgrading of BDRN's Development Department and (3) BDRN senior staff received satisfactory training. However, the project objectives for the promotion of labor intensive subprojects were far from being achieved. While the project was expected to assist a total of 40 enterprises, of which 35 small-scale and 5 medi- um-scale, it actually assisted in the financing of 6, only one of which was a small-scale enterprise. The project created only 282 jobs compared to the original target of 500. As mentioned earlier in the report the country's economic difficulties created an environment that was not condu- cive to industrial investment and consequently had a significant effect on the outcome of the project. This was aggravated by a shortage of small entrepreneurs in Niger and the lack of programs to develop entrepreneurships. However, number of characteristics in the project design, also contributed to this shortfall. (1) The capacity for adequate project identification and technical assistance, responsibilities of OPEN, should have been available at the same time as the financial assistance. In this project it was not possible because of delays in OPEN becoming fully operational. (2) Although one may argue that a $5,000 investment cost per job is already too high a limit for an SSE, in the context of Niger it - 31 - proved to be too low. The consumer price index in Niger showed an inflation rate of roughly 12% per annum, while investment costs increased at a faster rate due to substantial price increases for equipment, transportation, wages, construction and energy. It was felt that the investment cost per job test lacked the necessary flexibility to adjust for these price changes. As a result, very few projects could be found that met the IDA standard. (3) Finally, in the absence of relevant IDA policies and guidelines, the line of credit could not be used for loans to SSEs using second-hand equipment. These SSEs purchased equipment informally, and were thus unable to provide satisfactory docum- entation. The scope for SSEs acquiring second hand equipment is evidenced by the fact that in FY79 and FY80, BDRN financed 24 such subprojects, averaging CFAF 0.5 million each, on the more flexible USAID/Conseil de 1'Entente line of credit as well as from its own internally generated funds. This also allows for more adapted technology. 7.03 Despite the many physical and operational constraints that OPEN continues to face, the project objective of establishing an institution with an industrial promotion role has been largely achieved. OPEN is in operation, has had some success, and its management has demonstrated a strong commitment to the promotion of Nigerien enterprises. IDA support has been crucial in the establishment of OPEN, and through the second line of credit (1225-NIR) IDA continues its support by providing OPEN with $1.9 million to assist the institution in (a) addressing operational con- straints; (b) establishing a Technical Unit; and (c) contributing to construction of an office building to accommodate a growing OPEN staff. 7.04 IDA's objectives of strengthening CMAN and assisting Niger's artisans have fallen short of expectations. Since its creation, CMAN has encountered numerous difficulties, incluuing uncertainty about its legal status, the lack of financial independence and inadequate financial re- sources. CMAN employed only 80 artisans instead of the 370 expected during project appraisal, and if the amount allocated to CMAN is considered as investment, the average IDA share of the cost of training each artisan is $27,273 instead of appraisal estimate of $2,162. Until 1983, CMAN did not export any of its production despite IDA's urging. Consequently, when the local market became saturated, CMAN's finished goods inventory reached CFAF 40 million. This was particularly critical at a time when CMAN urgently needed cash to purchase raw material. CMAN's training performance was also very weak. CMAN concentrated its efforts on developing in-house production capacity, while neglecting artisans working outside the Center. Furthermore, although CMAN's artisans operating in Niamey and Maradi were adequately trained for about three years, none of them left CMAN to start his own workshop, as anticipated during project appraisal. By 1983, CMAN - 32 - was operating more as an SME competing with leather artisans, than as an institution providing training and extension services to them. 7.05 The IDA project objective of developing a satisfactory curriculum for a Bank Management training program in ENA was not achieved. Training in banking proved incompatible with public administration education which was ENA's main responsibility. The suitability of this component was later questioned by IDA supervision missions, since in most countries training in banking is done by the banking system itself. 7.06 The risk of not achieving the project's employment creation targets was recognized during appraisal. BDRN had in the past favored capital-intensive projects and it was feared that a stagnant export market for artisan products would jeopardize the artisan component. In order to minimize these risks, the project included technical assistance to all three: BDRN, CMAN and OPEN. Assistance to these institutions was contin- ued under the second IDF line of credit. Nevertheless, despite all the assistance provided, the effectiveness of these institutions remains in question. 7.07 A favorable economic and financial environment is critical for the success of a project of this type. Nevertheless, the outcome of this project is instructive in many respects: an investment cost per job criterion should not be used rigidly but should take into account inflation and increases in investment costs; the provision of finance to SSEs should be done simultaneously with delivery of technical assistance; the critical role of investment promotion should be performed by a strong investment promotion institution; the artisan sector is an area where it is difficult for IDA, with its limited experience and expertise, to make a meaningful and successful contribution; finally, it may be appropriate for IDA to consider allowing SSEs and artisanal subborrowers' funds for financing second-hand equipment, which would have beneficial effects in terms of lowering capital intensity and enabling the choice of adapted technology. - 33 - NIGER TALE I BAUM DE DEVELOPPENENT DE LA REPUILIGIE DU NIGER Credit 809-it PROJECT COWLETION REPORT Actual & Projected Incase and Expenses Stategt 1978-1983 (CFAF e.) 1978 1979 1980 1901 1982 1983 Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual INCONE Financial Incoe * 3,882 1,935 5,676 2,025 8,224 2,066 10,831 2,203 12,797 2,350 12,529 Other Incose 28 893 22 982 28 1,060 28 1,145 28 1,237 18 Total Incs 3,910 2,826 5,698 3,007 8,252 3,126 10,865 3,348 12,825 3,587 12,547 EPENSES Financial Charges 1,524 1,530 2,769 5,015 7,562 8,011 Adainistrative Expenses 592 525 742 630 1,058 756 1,383 907 1,601 1,088 1,818 Provisions 1,351 344 2,053 356 2,458 357 2,250 359 2,717 363 2,877 Depreciation 84 78 77 88 83 93 110 96 142 103 165 Total Expenses 2,027 947 2,872 1,074 6,368 1,206 8,756 1,364 12,022 1,554 12,871 Net Profit before Tax 1,883 1,881 2,826 1,933 1,884 1,920 2,107 1,984 803 2,033 (324) Taxes 352 697 511 737 993 768 1,064 795 375 813 0 Net Profit after Tax 1,531 1,184 2,315 1,196 891 1,152 1,043 1,189 428 1,220 (324) * Projected figures are net of financial charges VAPID Karch it, 1985 - 34 - NISER TABLE 2 BANIlE BE DEVELOPPEENT DE LA REPUBLIQUE 0D1 NISER Credit 809-NIR PROJECT CONPLETION REPORT Actual and Projected Balance Sheet 1978 - 1983 (CFAF million) 1978 1979 1980 1981 1982 1983 Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual ASSETS Current Assets Cash 2,071 1,301 2,770 1,869 4,286 2,550 6,530 3,155 4,913 3,900 2,298 Net Short Term Assets 22,990 21,384 27,139 22,206 37,250 23,000 49,096 23,838 48,972 24,716 43,552 Net Current Assets 25,051 22,685 29,909 24,075 41,536 25,550 55,626 26,993 53,885 28,616 45,850 State Credits 4,863 6,339 5,856 6,339 10,102 6,339 16,549 6,339 21,742 6,339 21,936 Term Portfolio 6,039 4,600 9,281 4,946 12,227 5,165 11,791 5,480 12,023 5,871 10,362 Equity 751 766 920 946 1,030 1,156 1,078 1,396 1,150 1,661 1,275 Net Portfolio 6,790 5,366 10,101 5,792 13,257 6,321 12,869 6,876 13,173 7,532 11,637 Wet Fixed Assets 902 826 994 813 1,336 795 1,632 812 3,869 749 6,684 T 0 T A L A S SE T S 37,606 35,216 46,860 37,019 66,231 39,005 96,676 41,020 92,669 43,236 86,107 LIABILITIES & EQUITY Liabilities Current Accounts 22,391 15,300 28,598 16,000 25,787 16,800 36,140 17,600 40,303 18,500 29,728 Term Borrowings 1,189 1,413 1,815 1,612 6,677 1,847 14,058 2,071 17,493 2,367 24,999 Niscellaneous Deposits 11,127 6,9800 10,002 6,800 15,951 6,800 16,946 6,800 12,673 6,800 11,389 Other Liabilities 107 7,512 139 7,512 10,302 7,512 11,343 7,512 13,9814 7,512 12,076 Total Liabilities 34,914 31,025 40,554 31,924 58,717 32,959 79,387 33,993 84,293 35,179 79,192 Equity Share Capital 1,150 1,150 2,500 2,300 2MO 2,300 2,500 2,300 3,000 2,300 3,000 Reserves, General Provisions & Retained Earnings 1,642 3,039 3,906 2,795 5,014 3,746 5,799 4,735 5,386 5,751 4,915 Total Equity 2,792 4,189 6,306 5,095 7,514 6,046 9,299 7,035 8,386 8,051 7,915 TOTAL LIABILITIES & EQUITY 37,606 35,214 46,860 37,019 66,231 39,005 86,676 41,018 92,669 43,230 96,107 tAPID Narch 15, 1985 - 35 - NIER TAILE 3 MBE DE RVELOPEIEMT IE LA REPUltl0E IU NISER Credit 809-WIR PROJECT COMPLETION REPORT Actual and Projected Financial Ratios 1978-1983 1978 1979 1990 1981 1982 1983 Actual Projected Actual Projected Actual Projected Actual Projected Actual Projected Actual L.T. Debt/ Equity Ratio 0 0 0 0 1 0 2 0 2 0 3 Total abt/Eqaity Ratio 12 7 6 6 8 5 9 5 10 4 10 Current Ratio I I I I 1 1 1 I 1 1 1 Profit as I of Average Total Assets 4 3 5 3 2 3 1 3 0 3 (0) Profit as of Average Equity 51 32 51 26 13 21 13 18 5 16 (4) Financial bp.as 1 of Average Total Asset * 4 3 5 7 8 9 Administrative & General Exp. as I of Average Total Assets 2 2 2 2 2 2 2 2 2 3 2 lacoe from Loan portfolio as I of Average Loan Portfolio 12 9 17 7 19 7 19 7 21 7 21 Provisions as I of Outstadifng Loan& ilnvet't Portfolio 4 1 5 1 4 1 3 1 3 1 4 ------------ * Necessary figures are not specified in projected financial statemts for calculatin ratio VAPID larch 15, 1995 - 36 - NIBER TABLE 4 BANGUE DE DEVELOPPERENT DE LA REPUBLIUE OU NIGER CREDIT 809-NIR PROJECT CONPLETION REPORT Analysis of Loans in Arrears 1980 1981 1982 1983 1. Total Nuber of Loans 106 116 127 130 II. Total Loans Outstanding (CFAF a.) 12,227 11,791 12,023 10,362 1. Nusber of Loans in Arrears N.A. 23 37 55 -as % of Total Nuber of Loans 20 29 42 2. Total Principal Affected by Arrears (CFAFe.) N.A. 528 1,727 2,478 -as I of Total Loans Outstanding 4 14 24 3. Total Arrears (CFAF a.) N.A. N.A. N.A. N.A. - as 1 of Total Loans Outstanding 4. Total Principal in Arrears (CFAF a.) N.A. 52 200 506 - as % of Total Loans Outstanding 0 2 5 5. Total Interest in Arrears (CFAF e.) N.A. N.A. N.A. N.A. - as % of Total Loans Outstanding VAPID "arch 15, 1985 - 37 - NIGER TABLE 5 BANQUE DE DEVELOPPENENT DE LA REPUBLIQUE DU NIER Credit 809-NIR PROJECT COMPLETION REPORT Actual vs Projected Operations 1978-1983 (CFAF sillion) 1980 1981 1982 1983 ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL PROJECTED ACTUAL APPROVALS SSE 2,473 180 3,257 215 1,646 260 2,744 Other 3,200 1,157 1,800 945 1,500 1,089 0 Equity 245 210 89 240 280 265 0 TOTAL 5,918 1,547 5,146 1,400 3,426 1,614 2,744 COMMITTNENTS SSE 1,979 174 2,042 208 1,129 251 1,981 Other 3,200 868 1,800 709 1,500 817 0 Equity 245 0 89 0 234 0 47 TOTAL 5,424 1.042 3,931 917 2,863 1,068 2,029 DISBURSEMENTS SSE 5,722 171 3,407 204 2,850 247 1,612 Other 3i139 803 1.843 749 1.988 790 243 Equity 245 210 89 240 234 265 47 Undisb. Others 0 0 0 0 0 0 0 TOTAL 9.106 1,184 5,339 1,193 5,072 1,302 1,902 IAPID arch II, 1905 - 38 - NISER TABLE 6 SANQUE DE DEVELOPPEENT DE LA REPUBLIQUE DU NIGER Credit 809-NIR PROJECT CONPLETION REPORT Schedule of Estimated vs Actual Disbursements (US $ 000) Appraisal Estimate A c t u a l FISCAL PER PER I OF % OF YEAR : QUARTER QUARTER CURULATIVE QUARTER CURULATIVE ESTINATE TOTAL LOAN 1979: First Quarter 0 0 - - - - Second Quarter 200 200 - - - - Third Quarter 250 450 - - - - Fourth Quarter 300 750 - - - - 1980: First Quarter 400 1,150 170 170 15 3 Second Quarter 480 1,630 120 290 18 6 Third Quarter 510 2,140 840 1,130 53 23 Fourth Quarter 600 2,740 970 2,100 77 42 1981: First Quarter 600 3,340 730 2,830 85 57 Second Quarter 600 3,940 1,111o 3,940 100 79 Third Quarter 400 4,340 161, 4,100 94 82 Fourth Quarter 310 4,650 200 4,300 92 96 1982: First Quarter 200 4,850 120 4,420 91 98 Second Quarter 150 5,000 200 4,620 92 92 Third Quarter - - 250 4,870 97 97 Fourth Quarter - - 80 4,950 99 99 1983: First Quarter - - 50 5,000 100 100 VAPID - 39 - NIGER TABLE 7 BANGUE BE DEVELOPPEAENT DE LA REPUBLIQUE DU NIGER Credit 809-NIR PROJECT COMPLETION REPORT Resource Iobilization During Jan.1979 - Dec.1984 Amount in Including Outstanding Date of Orig. Denoe Aount in Years Grace Balance laterest SOURCES OF FUNDS Approval (eillion) US $ Maturity Period Guarantor uS $0 Rate -------- ------- ------------ --------- --------- ----- --------- ------------ ------- FOREIGN DEBT IDA/l 06/07/78 US 2.3 2,300,000 12.0 3 Soverneent 1,944,450 8.0 CCCE-SNTN 1 08/22/78 FF 24.0 2,352,941 10.0 2.5 6overnment 1,607,843 6.0 CCCEISONITEITIL 01/26/79 FF 7.1 696,078 7.0 3.5 Soverneent 441,176 6.0 CCCE-STO 2 04/13/79 FF 4.3 421,569 10.0 2.5 Sovernaent 264,706 6.0 AD8/2 12/11/80 UC 7.0 7,294,729 10.0 3 6overnment 1,656,741 8.5 CCCE-SNTN 3 06/23/81 FF 4.0 392,157 12.0 3.5 Soverant 333,333 8.5 00AD (OLAN0 12/11/81 CFAF 590.0 1,282,609 10.0 3 Soverneent 16,304 11.5 19D12 04/20182 SOR 14.0 16,000,000 15.0 3 Government 2,832,737 8.0 SWEs 10.5 Other CCCE-SNTN 4 10/29/92 FF 4.0 392,157 12.0 3.5 Sovernsent 392,157 CCCE-SNTN 5 10/29/82 FF 2.0 196,078 12.0 3.5 Sovernment 196,078 CCCEIOPt FF 1.3 127,451 5.0 Governsent 39,216 5.0 TOTAL FOREIGN DEBT 31,455,769 9,726,741 FOREIGN CREDITS TO THE STATE Midland Bank (Infrastructure) 12/07/79 FF 120.0 11,764,705 8.5 2.0 Governmt 8,784,314 TB + 1.625 DP (Palais des Congres) 10/20/80 FF 34.0 3,333,333 7.0 3.5 Government 3,284,314 TO8 + 1.625 InterUnion lRoute Nyrriab-Boure) 12/16/80 FF 65.0 6,372,549 8.5 2.0 Governeent 5,509,804 TSB + 1.5 BFCE (Ecole des Sciences) 04/20/82 FF 28.0 2,745,098 8.5 2.0 Governent 2,715,686 TB + 1.5 IP (Route NY-Aeroport) 04/23/82 FF 30.9 3,019,608 8.0 1.5 Government 2,960,784 TB + 1.625 BFCE IForaco) 10/20/82 FF 30.0 2,941,176 7.0 3.0 Government 2,901,961 TO + 1.5 Midland Bank(Route NY-Balleyara) 04/13/83 FF 20.0 1,960,784 6.0 2.5 Government 1,960,784 TSB + 1.625 DNP (Palais des Congres) 04/13/83 FF 26.0 2,549,020 7.0 Government 2,509,804 TM + 1.625 TOTAL 34,686,273 30,627,451 OTHER CREDITS BFCE / VITRA 02/13/80 CFAF 93.2 202,600 4.0 1.0 25,333 7.0 8FCE /SRN Building 09/13/82 FF 45.5 4,460,784 5.0 2.0 4,019,608 10.0 CNCA 188RV Building 09/13/82 FF 25.0 2,450,980 8.5 4.0 2,450,9180 TO8 + 1.75 BAP /Sonara II Building 04/21/83 FF 35.0 3,431,373 8.5 2.0 3,431,373 TIG + 1.75 TOTAL SOURCES 76,687,779 50,261,486 MAPID March It, 1985 - 40 - NIGER TABLE 8 BANQUE DE DEVELOPPENENT DE LA REPUBLIOUE DU NIGER CREDIT 909-NIR PROJECT COMPLETION REPORT Characteristics of Subprojects Financed under the Credit Amount % of Total of Bank X of Amount of Number Sub-loans Total Number 4t Sub-loans 1. Sectoral Distribution $ Food Processing 3 183,882 50 9 Manufacturing 1 1,190,476 17 61 Tourism 1 500,000 17 26 Car Repairs 1 75,449 17 4 Total 6 1,949,907 100 100 2. Investment Cost Distribution Less than $100,000 1 16,287 17 1 $100,000 to $200,000 3 243,044 50 12 $200,000 to $500,000 1 500,000 17 26 $500,000 and over 1 1,190,476 17 61 Total 6 1,949,807 100 100 3. Size of Loan Distribution Less than $100,000 3 154,786 50 8 $100,000 to S500,000 1 104,545 17 5 $500,000 to $1,000,000 1 500,000 17 26 Over $1,000,000 1 1,190,476 17 61 Total 6 1,949,807 100 100 4. Distribution of Cost Per Job Less than $6,000 2 604,545 33 31 $6,000 to $8,000 2 1,2'6,703 33 62 $8,000 to 510,000 2 13 .499 33 7 Total 6 1,949,807 100 100 5. Project Location Rural 1 104,545 17 5 Urban 5 1,845,262 83 95 Total 6 1.949,807 100 100 WAPID March 15, 1985 - 41 - NIGER TABLE 9 BANQUE DE DEVELOPPEENT DE LA REPUBLIQUE DU NIGER Credit 809-NIR PROJECT COMPLETION REPORT Listing of Subprojects Financed under the Credit Bank Total Subproject Sub-borrower's Subloan DFC 11 2! Number Name Sector Products Amount $ Financing $ Type Location Ownership A-1 Hotel a Zinder Tourism Hotel 500,000 527,273 N Urban P/D A-2 Boulangerie Arlit Food Bread 104,545 110,909 N Rural P/D Processing A-3 Wonder - Niger Electr. Ind. Batteries 1,190,476 1,500,952 N Urban P/ A-5 Boulangerie de Food Bread 63,050 122,614 N Urban P/D Tahoua Processing A-6 Garage Abba Moustapha Garage Car repairs 75,449 107,240 E Urban P/D B-1 lada Baraze Food Ice 16,287 16,287 E Urban P/D Processing 1 N=New, E=Expansion 21 P=Private, DuNajority Domestic WAPID March 15, 1985 - 42 - cm[? 8M9flt P'errcse e4 SuØbsiut Joh treated haveteat ¢at lavst~t Colst* ovefuøi kt*4l iU I Nr J 4t m le t Proft iLesi Capacty broect &-errew C WM . Unrrø Oolsys tit. ktul dr Us$ CW . UU N . uuglia tr lit. ktol i i~thi 1 1 l Lit. kthl list ktou it. tts 83 lst. kttl 1 4.1 . t Ziadr 232 toe (53) 9 34 42 24 14,834 S,59 113,219 75 18,136 >45) ll res. I4 rs 6-2 Isiaagerae erlat 39 44 13 12 14 16 14 6,056 5,978 110 14 6 4 l7i5 986 A-3 Ua4r-Nige 552 653 18 3 109 200 83 11,009 ?,8 1,110 1,3m0 102 497) 264. 21 i A.5 ftilangrie 4e tha 48 U 1 12 15 12 k20> b,95? 9,239 120 49 3 W2> 905 63 &-b earne imwer 35 45 28 12 le 1e k44 4,22 9,783 49 53 I <4> m.*. s.1 1- 1 ada Z4 rao4 ? 5 4 2 (m? 3,904 7,609 22 .a. 4 #.a. 1~Udge a. ida 'leaves of 300 rauilea gule *Nh ti, 18