Zambia - Second Development Bank Project

Document of The World Bank FOR OFFICIAL USE Of TLY Report No. 8050 PROJECT PERFORMANCE AUDIT REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) SEPTEMBER 13, 1989 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the perfo.mance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS (Yearly Averages) Name of Currency (Abbreviation): kwacha (K) 1980 (at appraisal): US$1 = K 0.80 1981 : US$1 = K 0.87 1982 : US$1 - K 0.93 1983 : US$1 = K 1.25 1984 : US$1 = K 1.79 1985 : US$1 = K 2.71 1986 : US$1 = K 7.30 1987 : US$1 = K 8.89 ABBREVIATIONS ADB - African Development Bank AFC - Agricultural Finance Company DBZ - Development Bank of Zambia DFI - Development Finance Institution EIB - European Investment BAnk FEF - Friedrich Ebert Foundations FMO - Nederlandse Financierings Maatschappig Voor Ontwikkelingsladen IERR - Internal Economic Rate of Return IFC - International Finance Corporation IMF - International Monetary Fund INDECO - Industrial Development Corporation OED - Operations Evaluation Department OPEC - Organization of Petroleum Exporting Countries PCR - Project Completion Report PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report RSA - Republic of South Africa SAR - Staff Appraisal Report SEP - Small-Scale Enterprise Promotions, Ltd. SSEs - Small Scale Enterprises ZADB - Zambia Agricultural Development Bank ZIMCO - Zambia Industrial and Mining Corporation ZNPF - Zambia National Provident Fund FISCAL YEAR Government: January 1 - December 31 DBZ: April 1 - March 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washengton. DC. 0433 USA. Offere 1t DMectmrCnwai Optewns IvaIluatun September 13, 1989 HEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Performance Audit Report on Zambia Second Development Bank of Zambia Project (Loan 1923-ZA) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Zambia - Second Development Bank of Zambia Project (Loan 1923-ZA)l prepared by the Operations Evaluation Department. Attachment This document has a restricted 4istribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) TABLE OF CONTENTS Page N1o. PREFACE ........................................................... i BASIC DATA SHEET .................................................. iii EVALUATION SUMMARY ............... ..... .......................... v PROJECT PfRFORMANCE AUDIT MEMORANDUB I. INTRODUCTION ............................................. 1 II. PROGRESS IN MEETING STATED OBJECTIVES .................... 1 III. FINDINGS AND LESSONS ..................................... 2 PPOJECT COMPLETION REPORT I. INTRODUCTION ............................................. 7 II. MACRO ECONOMIC, INDUSTRIAL AND FINANCIAL SETTING ......... 10 The Manufacturing Sector ................................. 11 The Policy Framework for Manufacturing ................... 12 The Financial Sector ..................................... 13 III. INSTITUTIONAL DEVELOPMENTS ............................... 16 Issues Outstanding at Appraisal .......................... 16 Developments During Project Implementation and Present Status ......................................... 17 IV. UTILIZATION OF BANK LOAN ........ .................... 21 General Overview ......................................... 21 Financial Characteristics and Performance of Subprojects ............................................ 21 Economic Characteristics and Performance of Subrrojects ............................................ 23 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 (cont'd) Page No. V. OPERATING AND FINANCIAL PERFOMANCE ...................... 24 Operations ...... ................................. 24 Loan Portfolio .................... ...... 25 Equity Portfolio ....... ..................... 26 Financial Performance .................................... 26 Resource Mobilization ....... ................... 27 VI. CONCLUSIONS ....... ...... ................ 28 PCR CHART 1. Organization Chart (1987) .................................... 31 PCR ANNERES 1. Evolution of Staffing 1981-1986 .................. 33 2. List of Sub-Projects Financed Under Loan 1923-ZA ............. 34 3. Summary of Subprojects ........................ ........... 35 4. Economic Impact of Subprojects Financed under Loan 1923-ZA ... 55 5. Financial Characteristics of Subprojects Financed under Loan 1923-ZA ........................................ 56 6. Analysis of Loans Approved up to December 31, 1986 ........... 57 7. Equity Portfolio as of December 31, 1986 ..................... 58 8. Summary of Operations as of December 31, 1986 ................ 59 9. Analysis of Loans in Arrears, 1981 to 1986 ................... 60 10. Projected and Actual Balance Sheets, 1982-87 ..... .... 61 11. Projected and Actual Income Statements, 1982-87 .............. 62 12. Projected and Actual Financial Ratios, 1982-87 ............... 63 13. Resource Mobilization as of December 31, 1986 ................ 64 14. Status of Compliance with Major Covenants ... .............. 65 15. Schedule of Estimated vs. Actual Cumulative Disbursements .... 66 ATTACHMENT Comments Received from DBZ .. ................................ 67 PROJECT PERFORMANCE AUDIT REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the Second Development Bank of Zambia (DBZ) project, involving an IBRD loan in the amount of US$15.0 million to DBZ, with the objective of assisting the development of the industrial, agro-industrial and agricultural sectors of the economy. The loan was approved on December 2, 1980, and became effec- tive on May 1, 1981. Final disbursement was made on April 7, 1987. The original Closing Date of June 30, 1987, was not extended. US$72,629 of the loan was cancelled on June 30, 1987, at the request of the Borrower. 2. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Completion Report (PCR) prepared by the-Africa Region. The PPAM is based on the attached PCR, the Staff Appraisal-and the President's Reports, the loan documents, the summary of the Executive Director's meeting at which the project was considered, a study of project files, and discussions with Bank staff. An OED mission visited Fambia ;n April/May 1987 whilst preparing the case study on DBZ for the OED report entitled 'The Sustain- ability of Development Finance Institutions in-an Evolutionary Environment" (OED Report No. 7658, dated May 15, 1989); that mission reviewed, inter alia, the effectiveness of the Bank's assistance under Loan 1923-ZA. 3. The PCR provides a satisfactory account and assessment of the project experience, reviewing DBZ's utilization of the loan proceeds in the context of the macroeconomic policy environment and DBZ's operational, institutional and financial performance during the period. The PPAR focuses on the success in meeting the project's objectives, discusses the foreign exchange risk, draws conclusions and generally supports the lessons drawn in the PCR. 4. Following standard OED procedures, copies of the draft PPAR were sent to DBZ and the Government. The comments received from DBZ are reproduced as an Attachment to the PPAR. - iii - PROJECT PERFORMANCE AUDIT REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) BASIC DATA SHEET LOAN POSITION (Amounts in USS MI I Ilon) As of Dec. 81s 1988 Original Disbursed Cancel led Repaid Outstanding Loan 1928-ZA 15.0 14.98 0.07 1.71 18.22 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS Fiscal Year Ending March 31 FY82 FY88 FY84 FY85 FY86 FY87 Appraisal Estimate 0.7 2.9 6.2 10.1 18.1 15.0 Actual 6.9 10.4 12.2 14.4 14.9 14.9 Actual as X of Appraisal (X) 848 359 197 148 114 99 Date of Final Disbursement: April 7, 1987 PROJECT DATES Original Revised/Actual Board Approval na. 12/02/S0 Loan Agreement n.a. 01/08/81 Effectiveness 04/08/81 05/01/81 Completion of Comitments 12/81/88 06/30/85 Loan Closing 06/80/87 06/80/87 STAFF INV=T (astaf weeks) EiZE EIZ EIZE fiZS ElAR EY11 fIR ElU ill fiEE lli I1Z IRIL Preappreial 5.0 - 12.9 2.4 19.5 - - - - - - - 39.8 Appraisal - - - - 86.4 4.1 - - - - - - 40.5 Negotiatio - - - - - 15.7 - * * - - - 15.7 Supervislon - - - - - 11.5 5.4 6.8 2.2 8.2 7.9 17.5 54.8 Total 5.0 - 12.9 2.4 56.9 31.2 5.4 7.1 2.2 8.2 7.9 17.5 151.7 - 1v - ii MISSION DATA No. of NO. of Staff Date of MonthiYear Weeks Pesons Weeks Revert Appraisal 11/79 2.5 8 7.5 10/20/90 Post-Appraisal 03/0 1 1 1 04/06/81 Supervision I La 09/81 2 1 2 06/16/62 Supervisolen I 01/83 2 2 4 02/17/83 Supervision III 04/86 2 2 4 08/30/86 Sup2rvision IV 11/85 2 1.5 8 01/24/6 Supervision V 03/66 4 8 12 L Completion 08/87 2 1 2 09/68 OTHER PROJECT DATA Borrower/Executing Agency: Development Bank of Zamble Follow-on Project: Development Bank of Zeamble III (Cr. 1758-ZA) Board Approval: January 0, 1987 Amount: USS10.0 million /a Combined with Completion mission for DBZ I. Lb Combined with appraisal of DBZ III. - v - PROJECT PERFORMANCE AUDIT REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) EVALUATION SUMMARY Introduction 1. The Development Bank of Zambia (DBZ) was established as a statu- tory corporation by an Act of Parliament in 1972 and began operations in .974. The Bank and IFC were instrumental in its establishment. Sixty percent of its share capital is reserved for the Government and its agen- cies, with the remaining 402 available to local private and foreign investors. The Bank granted DBZ a first line of credit totalling US$15.0 million in 1976, at the same time as IFC became a shareholder (PCR, paras. 1.01-1.03). The second line of credit, also for US$15.0 million and the subject of this review, was granted in 1980. A third line of credit, for US$10.0 million, was approved in January 1987 but has not yet been signed (PCR, para. 1.07). Objectives 2. The main objective of the project supported by Loan 1923-ZA was to assist in the development of the industrial, agro-industrial and agricul- tural sectors of the economy, with emphasis on enterprises that create employment, that use local raw material or that earn or save foreign exchange. The project did not emphasis further institutional development (except the calculation of the internal economic rate of return (IERR) and improvements in the supervision function) as DBZ was considered fairly strong institutionally (PPAM, paras. 2.01-2.02; PCR, paras. 1.04-1.05). Implementation Experience 3. The loan was committed and disbursed faster than expected, re- flecting the pent-up demand for foreign currency loans (PCR, para. 1.06). Cost overruns were modest and were due largely to increased domestic costs resulting from inflation and implementation delays (PCR, para. 4.07). How- ever, the number of jobs created, the use of local raw materials and the foreign exchange earned or saved were disappointing (PPAM, para. 2.03; PCR, paras. 4.10-4.12). The IEkR was not consistently calculated and the super- vision plan previously agreed with the Bank was only partially implemented (PPAM, para. 2.04; PCR, para. 3.11). In spite of prohibitions in its policy statement and Bank Loan Agreements, DBZ assumed the foreign exchange risk between the currency of disbursement and the US dollar, passing the risk between the US dollar and the kwacha down to its subborrowers (PPAM, para. 2.05). - vi - Results 4. On the whole, the financial performance of the 22 enterprises financed under Loan 1923-ZA was good (PCR, para. 4.08). By June 1987 seven subprojects had fully repaid their loans tnd only four of the remaining 15 were experiencing difficulties in meeting repayments (PCR, para. 4.04). DBZ's overall arrears, though, began to increase significantly in 1984 as the economic situation in the country worsened. A Debt Recovery Action Plan, prepared with Bank assistance in 1985, has been instituted with promising results (PCR, paras. 5.0. -5.06). DBZ's financial performance, which was strong earlier, has also suffered in recent years, in large part due to the greatly enlarged provisions for possible losses it has had to make. Its debt to equity ratio h4s exceeded the 4:1 limit set in the Loan Agreement with the Bank since 1985 (PCR, paras. 5.10-5.11). Sustainability 5. DBZ is a soundly managed institution. Its conservatism has helped it to weather the several shocks that have rocked the Zambian economy since its establishment. Many of its projects, though, have suffered seriously from those shocks. Their apparent recovery in early 1987 may have been reversed with the Government's economic policy reversal in May of that year. If DBZ's portfolio again deteriorates significantly, DBZ may find itself in financial difficulty. Otherwise, given the continued support of its shareholders, DBZ should be able to sustain its financial viability for the foreseeable future (PPAM, para. 3.01). Findings and Lessons 6. 'While the objectives of the project were not totally achieved, on balance the project can be considered a success (PPAM, para. 3.01; PCR, para. 6.02). It demonstrates anew the importance of sound management, autonomy in personnel matters and investment decisions, systematic super- vision and a sound macroeconomic environment. DBZ's experience with the foreign exchange risk on the Bank and other loans suggests that it may be more advantageous to offer borrowers a choice between taking the exchange risk or having the government take it for a reasonable fee, rather than forcing the risk on them (PPAM, paras. 3.03-3.06; PCR, para. 6.05). PROJECT PERFORMANCE AUDIT MEMORANDUM ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (LOAN 1923-ZA) I. INTRODUCTION 1.01 This Project Performance Audit Memorandum (PPAM) is brief as the Development Bank of Zambia (DBZ) was chosen to be one of the case studies for the OED report "The Sustainability of Development Finance Institutions in an Evolutionary Environment"1 and as such, was subjected to a thorough review. The coverage here is limited to items of particular interest in relation to Loan 1923-ZA. especially those which might not have been fully covered in the Project Completion Report (PCR). II. PROGRESS IN MEETING STATED OBJECTIVES 2.01 The main objective of the project supported by Loan 1923-ZA was to assist in the development of the industrial, agro-industrial and agricul- tural sectors in Zambia, by providing resources for the expansion of existing enterprises and the creation of new ventures in these sactors. In line with the objectives of the Third National Development Plan (1979-1983), the emphasis was on assisting enterprises that are of priority either because they contribute significantly to employment creation or because they use mostly local raw materials and are likely to be foreign exchange savers (SAR,2 para. 3.01; PCR, para. 1.04). 2.02 The project did not emphasize further institutional development as an objective as DBZ was considered fairly strong institutionally. One specific project requirement, though, was that DBZ calculate the internal economic rate of return (IERR) for all subprojects submitted to the Bank where DBZ's financing exceeded K 200,000. Another requirement was that DBZ implement the comprehensive supervision plan which it had prepared and which was designed to formalize supervision procedures and preventve supervision techniques (SAR, paras. 2.14-2.15; Loan Agreement, Sections 3.05 and 3.03; PCR, para. 1.05). 2.03 As noted in the PCR and the DFI Sustainability Study, the 22 sub- projects financed under the loan created 1,010 new jobs at an average cost 1/ OED Report No. 7658, dated May 15, 1989. In what follows, this report is referred to as the DFI Sustainability Study. 2! Staff Appraisal Report of a Second Line of Credit - The Development b&rk of Zambia, Report No. 3202-ZA, dated October 20, 1980. - 2 - per job of about K 58,000. These figures are disappointing compared to expectations (1,800 new jobs at an average cost per job of about K 33,800 - SAR, para. 3.10) and compared to what was achieved under the first project (1,500 new jobs at an average cost per job of K 35,900).3 Only three sub- projects are exporting enterprises, while only five others are foreign exchange savers, the total foreign exchange earned or saved by these eight being about K 20 million. Only six of the 19 subprojects for which this information is tvailable are entirely dependent on local raw materials. Another six depend locally for at least 80% of their raw materials. Five are almost totally dependent on iAported raw materials. According to these measures, then, the primary objective of the project was not totally achieved. 2.04 Eighteen of the 22 subprojects involved DBZ financing of more than K 200,000. However, the DFI Sustainability Study noted that the IERR was calculated in only nine cases, and that a Bank mission in late 1981 reported that the IERR was not being calculated for the larger projects not being submitted to the Bank (Study, para. 2.21). With regard to super- vision, both the PCR and the DFI F, itainability Study note that the new supervision plan was only partly impl -nted, and that supervision remains one of DBZ's weaknesses. Thus, the sank's second objective of improving these two specific areas of DBZ's procedures was only partly met. 2.05 DBZ's policy statement provides that the foreign exchange risk should be borne by either its borrowers or the Government. The Loan Agree- ment requires that DBZ take all necessary steps to protect itself against this risk. The expectation under the project was that this risk would be borne by DBZ's subborrowers. In actual ft. t, though, DBZ has followed the practice of denominating subloans from it. various foreign currency lines of credit (including Bank lines) in US doiiars, thus passing the exchange risk between the kwacha and the US dollar on to its subborrowers. When its foreign currency lines of credit have been disbursed in currencies other than US dollars, though, the risk between the currency of disbursement and the US dollar has remained with DBZ. This violation of its policy state- ment, and of Bank Loan Agreement covenants, has inexplicably gone unnoticed by Bank staff. DBZ's March 31, 1986, balance sheet showed an unrealized exchange loss of K 767,000. III. FINDINGS AND LESSONS 3.01 While the two objectives of the project were not totally achieved, on balance the project can be considered a success. DBZ itself is a soundly managed institution. Its conservatism has helped it to weather the several shocks that have rocked the Zambian economy since its establish- ment. Many of its projects, though, have suffered seriously from those shocks. While most appeared to be recovering in early 1987, with the 3/ PCR on the First Development Bank of Zambia project, Report No. 4515, dated May 27, 1983, Annex 4. -3 - reversal of Government economic policy in May of that year, they may again be in serious trouble.4 If DBZ's portfolio again deteriorates signifi- cantly, DBZ may find itself in financial difficulty. Otherwisc, given the continued support of its shareholders, DBZ should be able to sustain its financial viability for the foreseeable future. 3.02 As indicated by the subprojects financed under Loan 1923-ZA, DBZ has not made as substantial a contribution to the economy as it might have. Although it has acknowledged the Government's stated economic priorities, these priorities have not been consistently reflected in the mix or in the design of projects which DBZ has financed. Given DBZ's sound .nanagement and well-trained, motivated staff, there is no reason why it should not be able to become more development-oriented. 3.03 The experience with this project adds new emphasis to lessons drawn from other DFC projects. The value of sound, continuous management is well demonstrated here. So too is the importance of being able to attract and retain well qualified staff by being able to offer a suffici- ently attractive compensation package. 3.04 The Government is to be commended for not intruding itself in DBZ's operations. In particular, the Government has given DBZ autonomy in investment decision-making and has not unduly influenced it to lend for specific projects. This has been a key factor in the general quality of DBZ's portfolio. 3.05 DBZ's experience with the foreign exchange risk on the Bank and other loans suggests that it may be more advantageous to offer borrowers a choict between taking the exchange risk or having the government take it for a reasonable fee, rather than forcing the risk on them. 3.06 The importance of timely subproject supervision and systematic collection efforts is highlighted by DBZ's experience. So too, though, is the need for a sound macroeconomic environment, free from distortions which constrain the operations of subprojects and of the DFC itself. 4/ The field work in Zambia for both the DFI Sustainability Study and the PCR took place in early 1987. -5- PROJECT COMPLETION REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJLCT (Loan 1923-ZA) June 1969 Industry and Energy Operations Division Country Department VI Africa Region -7- PROJECT COMPLETION REPORT ZAMBIA SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT (Loan 1923-ZA) I. INTRODUCTION 1.01 The Development Bank of Zambia (DBZ) is a statutory corporation established by an Act of Parliament in December 1972. 1/ It is owned by the Government, several public institutions, various foreign banks and international institutions including the African Development Bank (ADB) and the IFC (IFC owns 2Z of the ordinary shares). The main objectives are to mobilize resources and provide medium- and long-term loans and equity financing to projects in all sectors of the economy. 1.02 The World Bank was instrumental in the creation of DBZ. The Government of Zambia invited the Bank to evaluate the need for a development finance institution such as DBZ in 1971. That mission concluded that none of the financial institutions then in existence including the Industrial Development Corporation (INDECO), a holding corporation for industrial parastatals, was capable of carefully screening new investment proposals and assessing their technical, economic and financial merits. The Government accepted the report and a second Bank mission followed in November 1972 to work out the organization, staffing and other matters relevant to the establishment of the development bank. 1.03 The first World Bank loan (Loan 1210-ZA for $15 million) to DBZ was appraised in March 1975 (Report No. 860a-ZA), approved in February 1976, became effective in Ap:il 1976 and was closed in October 1982. According to the PCR, DBZ had become a financially mature and well managed institution by 1983. It had provided K 93.2 million for projects with a total investment cost of K 562.6 million; replaced expatriate managers by competent Zambian managers; hired and trained a highly qualified cadre of Zambian professionals; and developed sound and consistent operating policies and procedures. However, the PCR pointed out that DBZ had paid less than desirable attention to unemployment, a big problem in Zambia, as its cost per job (US$36,000/job in 1981 prices) was excessive, and that DBZ had not sufficiently encouraged the use of local resources or export-oriented activities. 1/ The Project Completion Report on the first line of credit to the Development Bank of Zambia (DBZ), Loan 1210-ZA, (0ED Report No. 4515 of May 27, 1983) outlined the origin and early developments of DBZ. - 8 - 1.04 The success of the first project, and the demonstrated need for more financial assistance, prompted a second World Bank loan (Loan 1923-ZA) in the amount of US$15 million. That project was appraised in November 1979 (Report No. 3202-A), approved in December 1980 and became effective in May 1981. The main objective was to assist the development of the industrial, agro-industrial and agricultural sectors of the economy with particular emphasis on priority enterprises that would contribute significantly to employment creation, use local raw materials and become foreign exchange savers or earners - in other words, enterprises that would support the Government's objectives as stated in the Third National Development Plan and correct the known defects sighted in the last PCR. The project did not emphasize further institutional development as DBZ was institutionally strong. 1.05 The World Bank loan carried an interest rate of 9kZ and was repayable in accordance with the schedule conforming to the aggregate of the amortization schedules applicable to the subloans. The maximum repayment period for the World Bank loan was set at 15 years. The Government and DBZ agreed to onlend the proceeds of the loan at a minimm interest rate of 122 and to review the rate periodically to ensure that it remained positive in real terms. The foreign exchange risk was to be borne by the sub-borrowers. Other features of the loan included an increased- individual subproject free limit of US$400,000 (instead of US$250,000 with the previous loan) due to the improved quality of DBZ's appraisals. DBZ agreed at negotiations to include the calculation of the economic rate of return in its appraisal of projects in which its total financing would exceed K 200,000, implement a comprehensive supervision plan and maintain the previously agreed to debt-equity ratio of 4:1. Prior to Board presentation, DSZ was requested to adopt an agreed medium-term strategy to promote the use of local resources, and export-oriented and labor-intensive projects. It also agreed to create a unit to assist small-scale enterprises (SSEs). 1.06 Because of the prolonged discussions on the logistics of providing financial assistance to SSEs under the loan, and on the establishment of a revolving fund to finance imported raw materials for existing DBZ clients, the appraisal of DBZ II, which started in November 1979, was not completed until October 1980. Meanwhile, the demand for foreign-denominated loans in the country was rising rapidly. Between November 1979 and April 1981, DBZ had appraised 13 of the 22 projects to be financed under the loan and was only waiting for the Bank's approval of the line of credit. In less than three months after the Board's final approval in May 1981, over 962 of the loan amount was committed nd by March 31, 1983, the loan was 100Z committed and 692 disbursed. Disbursement at the time was 3592 of appraisal estimate. At project completion in June 1987, a tota1 of US$72,629.08 remained undisbursed and was cancelled. 1.07 A third World Bank credit to DBZ (DBZ III) for US$10.0 million was appraised in April 1986.. The amount was smaller than the previous two loans because of limited IDA funds. However, DBZ was expected to obtain foreign exchange resources from other sources such as the Nederlandse Financierings Maatschappij Voor Ontwikkelingsladen (FMO), the European Investment Bank (EIB) and possibly the International Finance Corporation (IFC). The objective of the credit was to support the Government in its major effort of reforming the courntry's macroeconomic and industrial policy framework. It would also help DBZ to upgrade the quality of its portfolio and increase its efficiency in financial and management decision making through the establishment of a management information system. The credit has not been signed because the Government has not been able to maintain the conditions in the Credit Agreement that stipulated that both the interest rate and foreign exchange rate should be freely determined by market forces, and also because of the suspension of Bank withdrawal rights. 1.08 Apart from the DBZ III, other assistance to Zambia included US$62 million for industrial projects in 1985 and another US$50 million for a recovery program. The objectives of these credits were to complement policy reforms by helping productive enterprises to either expand and modernize, rehabilitate or establish new productive facilities. Continued implementation of these projects and the development of new ones have been held up by the current unfavorable policy environment and arrears. - 10 - II. MACRO ECONOMIC, INDUSTRIAL AND FINANCIAL SETTING 2.01 Zambia is a large landlocked country with a total land area of 753,000 square kilometers and a population of 7 million in 1986. Its major mineral resource is copper, accounting for about 15% of GDP and 90X of export earnings in 1986. Copper ore reserves have now been largely depleted. The agricultural land is extensive but agriculture has been relatively neglected. The industrial sector, built around requirements in the mining sector, is fairly extensive, accounting for about 20-22% of GDP, but heavily dependent on imported raw materials. 2.02 GDP grew at about 2.3Z per annum in real terms from independence in 1964 to 1974. In the following year, copper prices dropped by more than 482 in real terms, and have not recovered since. Copper output also dropped from a peak of 713,000 metric tons in 1976 to 560,000 in 1981 and to an estimated 480,000 in 1985. Consequently, growth of GDP stagnated. Population continued to increase at an annual rate of 3.1Z, thus reducing real per capita income from K 264 in constant 1970 prices in 1974 to K 148 in 1982, a decline of 44Z. The terms of trade index also deteriorated from 85 in 1974 to 21 in 1982 and the budget from a surplus of 42 of the GDP in 1974, to a deficit of 252 in 1982. Deficit financing absorbed a large share of the net domestic credit and contributed to the inflation that was running at about 122 per annum between 1979 and 1982. 2.03 The fall in the volume and price of copper, together with the lack of adjustment policies, led to huge balance-of-payments deficits. The current account changed from a surplus of 32 in 1974 to a deficit of 222 of the GDP in 1981 and by 1982, Zambia's external liabilities stood at almost US$4.5 billion of which US$1 billion was in arrears. Commercial sources of credit dried up as banks opened letters of credit only on a cash basis. The decline in foreign resources severely cut the availability of raw materials for import-dependent manufacturing enterprises. Spares and maintenance equipment became scarce and a substantial percentage of capacity in the industrial sector became idle. 2.04 The problems in the economy were caused by several other factors apart from the fall in the volume and prices of copper. Exogenous factors exacerbating the situation included the drought that devastated agricultural land and output for three consecutive years and transportation difficulties that heightened the problems of the landlocked economy. The poor macroeconomic policy environment was also a major endogenous factor. The Government had for many years pursued a pricing and subsidy policy favorable to the urban consumers and thus penalizing agriculture and exports. Poor tax incentives and the low interest rate policies led to a pattern of capital intensive investments, and the highly overvalued exchange rate and protective tariff policies encouraged the use of imported materials at the expense of locally produced materials. 2.05 The effect of these adverse factors was devastating on the Zambian economy. Efforts to revive the economy began late in 1982. With the assistance of the World Bank and an IMF standby arrangement, the - 11 - Government prepared a reform program that included the liberalization of prices, gradual removal of subsidies, producer incentives and foreign exchange liberalization. The kwacha was devalued by 20% in 1983 and pegged to a basket of currencies that allowed for another 13% devaluation by the end of 1984. These measures were, however, insufficient for an economy that needed deep-rooted reforms. In October 1985, the Government introduced another reform package that included the auctioning of foreign exchange and import and interest rate liberalization. In December 1986, Government announced a further reduction of subsidies on maize meal, which resulted in price increases of 1302. The Government abrogated the auction system and the market-determined interest rate system in January 1987. When the auction system was resumed in March 1987, the budget deficits and negative real interest rate issues were left unresolved. In April, after failing to reach an agreement with the IMF, the Government decided to abandon the whole reform program without any viable substitute program. The Manufacturing Sector 2.06 Zambia's manufacturing sector is relatively large and diversified compared to other sub-Saharan Africa countries. It contributes about 20-222 to GDP and accounts for about 13% of modern sector employment. Its per capita contribution to GDP is among the highest in the countries in Sub-Saharan Africa. The sector grew impressively in the first decade after independence in 1964 at an average annual rate of 10% in real terms. Thereafter, its growth fluctuated with the fortunes in the mining sector and the availability of foreign exchange. The factors responsible for the earlier growth included rising incomes leading to higher consumer demand, the growth of the mining sector (which necessitated the establishment of many support manufacturing activities) and the Government's policy of accelerated industrialization through import substitution, heavy protection and public sector investments in heavy industries. The last two factors were also prominent in the sector's sluggish output in later years. 2.07 The sector produces a wide range of goods including food, beverages, tobacco, sugar, textiles, leather goods, clothing, chemicals, fertilizers, cement, metal products, plastics, refined petroleum and machinery. The composition of the sector has changed over time. In 1965, food, beverages, tobacco, textiles, clothing and leather goods dominated, accounting for 6CX of total value added. By 1975, intermediate products and equipment had become dominant, accounting for 492 of the sector's output. Most of the activities are located along the line of rail, from the South, through Central Province and Lusaka to the Copperbelt Province. About a third are in the Central Province including Lusaka. Five of the country's nine provinces have less than 32 of the firns and less than 12 of the sector's employment. 2.08 The manufacturing sector has not been able to respond to its fullest to the unemployment problems of the country even though its share of total modern sector employment improved from an average of 122 between 1974 and 1980, to 132 between 1980 and 1986. Most of the increase in employment was due to growth in the parastatal sector whose capacity utilization and value added were declining at the same time. The sector is highly capital intensive, particularly so in the parastatal subsector where - 12 - the Government, through its credit, interest rate and exchange rate policies, and through the development of heavy industries has encouraged capital intensiveness. On the average, fixed assets per job in the public industrial sector in 1979 was as high as K 23,000 (US$29,000) in 1981 prices. Efforts to reduce capital intensiveness in the sector included the liberalization of exchange rate and interest rate, both of which made capital relatively more expensive than labor. These efforts must be continued if the unemployment problem is to be alleviated. 2.09 Ownership of industry is concentrated in the public sector. The Government since 1968, has pursued an expansionary public sector policy of establishing industries in areas where the private sector is unwilling to enter either because of high risks, low returns or high capital costs. In other cases, national interest prompted Government's involvement. Most public sector investments were highly capital intensive. 2/ INDECC, a parastatal holding company formed in 1968 and consisting of 33 subsidiary enterprises and 4 associated companies, became prominent in the industrial sector. Today, it accounts for about 70% of the sector's assets and 67Z of value added. The private sector, cuntrolling the remaining 302 of the assets, is engaged mainly in basic metals, paper and printing, chemicals, textiles, food and beverages. 2.10 The manufacturing sector is a significant net foreign exchange user. About 50? of the average firm's inputs is imported. Metal enterprises import even as high as 80? of their inputs. On the other hand, manufactured exports are very small, less than 2? of total exports. Main exports of the sector include cement, molasses, copper cable, sulphuric acid, grey cloth, menswear, crushed stone, lime and explosives. These characteristics render the sector vulnerable to reductions in foreign exchange availability. Its capacity utilization dropped from 55? in 1982 to 332 in 1984 as foreign exchange shortages reached crisis level. The Policy Framework for Manufacturing 2.11 In the 1960s and 1970s, the Government's objective was to pursue rapid industrialization as the major engine of growth to increase output and employment and to achieve a rapid Zambianization of the economy. Its strategy included public sector ownership of major industrial enterprises; investment in intermediate sectors (chemicals, fertilizer, cement, etc.), elimination of foreign competition through prohibitive import licensing and tariffs, elimination of domestic competition through restrictive investment, licensing and other regulations; and concentration on import substitution rather than export promotion. 2.12 Policy instruments were designed to support these objectives. The kwacha remained fixed at US$1 = K 0.78 for the 30 years up to 1980, while domestic inflation rose faster than international inflation, thus 2/ Examples are the fertilizer plant, oil refinery, brick factory and cement factory. - 13 - leading to 252 real appreciation of the kwacha against the US dollar between 1974 and 1982, and the encouragement of imports over exports. The tariff policy favored imported raw materials and capital goods which carried zero tariffs. Price controls were imposed at the farm gate level and at the wholesale and retail levels to protect consumers, but created disincentives to farmers and additional distortions to industry. Incentives to the private sector were inadequate as Government increased its involvement in manufacturing and favored making foreign exchange available to parastatals. The system worked ineffectively and its weaknesses were exposed when copper prices took a protracted turn for the worse. Even the 1982 reform package was not enough to revive the economy. 2.13 With the assistance of a 1985 World Bank operation, the Industrial Re-orientation Project (Loan 1630-ZA), and an IMF reform program, Zambia embarked on a new industrial policy regime. A foreign exchange auction system was introduced in October 1985 at which point the exchange rate jumped from K 2.3 to the U.S. dollar to K 5 to K 7 to the US dollar. Trade liberalization was achieved by abandoning the import licensing regime and replacing it with a simple process of import registration. Exporters were encouraged not only by the much more profitable exchange rate but also through an export earnings retention scheme and replacement of export licensing by simple registration. A new Investment Act was enacted in April 1986 providing uniform treatment for the public and private sectors, and streamlining public sector investments for greater efficiency. 2.14 The measures were effective, although harsh on consumers who had to accept lower standards of living. Capacity utilization in industry was estimated to have increased from 422 in early 1985 to 462 in 1986 and private sector capacity utilization increased from 38Z to 54%. It was estimated that factor productivity increased by 10-15Z in line with a 15% increase in value added. Foreign exchange was also utilized more efficiently, generating as much as 101 more value added per unit than before the auction. There were also indications of growth in non-traditional exports. However, mismanagement of foreign exchange reserves followed by expansionary fiscal and monetary policies, after a change in the economic management team in mid-1986, began to exert significant pressure on the system. In addition, the exchange rate began to appreciate in the third quarter of 1986 (there was a 142 appreciation at the end of the quarter). Following the December 1986 riots over the removal of the subsidy on maize meal, the Government suspended the auction system altogether. The whole reform package was abandoned in April 1987 after the failure of the Government to reach an agreement with the IMF (para 2.05). The Financial Sector 2.15 Zambia's financial system is relatively sophisticated although its capital market is still underdeveloped. The financial system includes a Central Bank, nine commercial banks with branches in all major cities, and six specialized parastatal institutions. The state-owned Zambia National Commercial Bank is the largest commercial bank with assets amounting to K 1.3 billion in 1985. Two subsidiaries of British Banks -- -14 - Standard Chartered Bank and Barclays Bank -- have assets of K 1.1 billion and K 1.04 billion respectively. The three banks command 762 of total commercial banks assets in 1985 and held about the same percentage of total deposits. Commercial banks provide mainly short-term (overdraft) loans. About 35Z of their loans go to agriculture, 20X to manufacturing, 222 to transportation, 152 to mining and 8Z to commercial activities. Fifty percent of their loans and advances go to the private sector, 382 to parastatals and the balance of 12% is held to meet statutory requirements. 2.16 The specialized parastatal institutions include: (i) Zambia National Provident Fund (ZNPF) established in 1966, with assets of K 551 million as of March 1984; (ii) Zambia State Insurance Corporation, with total assets of K 415 million as of December 1985; (iii) Zambia National Building Society, with total assets of K 163.4 million as of December 1985; (iv) National Savings and Credit Bank, which operates mainly in the rural areas, and held total assets of K 125 million as of 1984; (v) Agricultural Finance Company (AFC) which is now bankrupt; and (vi) Zambian Agricultural Development Bank (ZADB) with total assets of K 7.9 million as of December 1984. These institutions, with the exception of the AFC and ZADB, mobilize savings which are utilized by the Development Bank of Zambia (DBZ) and other development institutions in the country to provide term loans and equity to the producing sectors of the economy. 2.17 Money and Credit. Developments in the monetary sector have followed largely the fiscal needs of the Government for its debt servicing and deficit financing. In the second half of the 1970s, as Government revenue from copper declined, net credit to the Government grew at an annual rate of 342. Money supply grew at only 10%, however, as the increase in credit was met largely from drawing down ot reserves. In the 1980s, following successive IMF programs, the Government adopted a policy of fiscal restraint, narrowing the growth of its credit demand from 332 in 1982 to 7Z in 1984. In September 1985, a daily auctioning of Treasury Bills was introduced as a means of financing the budget deficit instead of overdraft facilities. The rate of growth of money supply declined from 342 in 1982 to 102 in 1983 and 182 in 1984. In 1985, because of a 2002 devaluation of the kwacha, both money supply and credit rose by 232 and 252 respectively. Tentative figures for 1986 indicate that both money supply and credit have increased more rapidly due to the larger budget deficit and inflation which was over 50X during the year. 2.18 Interest Rates. Until 1982, there was little change in the structure of interest rates in Zambia: the bank rate was 7.52, the lending rates were between 9.52 and 122 and deposit rates were between 4.75Z and 8.25Z. Most of these rates were negative in real terms as inflation ranged from 112 to 20Z between 1978 and 1982. After 1982, Government tried to encourage savings and efficient allocation of resources. Interest rates were increased three times between January 1983 and December 1984, and by the end of December 1984, the maximum lending rate was 17.52 compared to 122 in 1982. Despite the increases all rates remained negative in real terms as inflation increased from 142 in 1982 to 252 in 1984. In September 1985, Government removed all controls on the structure of bank rates and introduced a daily auctioning of Treasury bills which became the principal influence in determining the deposit and lending rates. Immediately after - 15 - the auction was int=oduced, the Treasury Bill rate jumped from 13% to 232 and the bank rate was adjusted from 14.52 to 21Z. In February 1987, the Government abandoned its policy of free market-determined interest rates ard fixed the Bank rate at 20Z instead of the 30Z it had reached. The lid o'. nominal interest rates has made real rates more negative as inflation in March 1987 was estimated at about 55% per annum. - 16 - III. INSTITUTIONAL DEVELOPMENTS Issues Outstanding at Appraisal 3.01 By the appraisal of the second line of credit in 1979, DBZ had become a strong, well-managed and financially viable institution. Not many issues were outstanding. The few outstanding issues discussed during negotiations included: (a) Small-Scale Enterprises. The major issue was determining the role which DBZ should play in promoting small-scale enterprises (SSEs). At appraisal it was noted that there were no viable institutions to cater to SSEs. It was thought that DBZ could take on this role. The Parliamentary Act which established DBZ as a statutory corporation, had limited DBZ to medium to large-scale enterprises. This act was amended in 1982 to enable DBZ to assist SSEs. Although an SSE component to the loan did not materialize because the Government did not want to bear the foreign exchange risk, DBZ, together with Friedrich Ebert Foundations (FEF), a private foundation in the Federal Republic of Germany, established a special unit to meet the needs of SSEs, the Small-Scale Enterprises Promotions (SEP) Limited, which since 1985 has financed SSEs. DBZ abolished its own SSE unit in 1986 after transferring its staff to SEP. With hindsight, one could say that the decision to establish SEP rather than having DBZ take on the aaded respuasibility of SSEs was a wise one. SSEs requirements are definitely of a different nature from those of medium to large-scale enterprises. In addition to financial requirements, they need intensive extension services in nearly all aspects of their operations including production planning, financial management and trade promotions. Had DBZ taken them on directly, they would have constituted a big drain on the scarce managerial and professional talents available at DBZ, with adverse consequences on performance. (b) Operating Policies. At appraisal, two issues were outstanding. (i) DBZ's maximum exposure in individual projects was not defined in the policy statement. It was agreed at negotiation that DBZ's exposure should not exceed 75% of total investment cost including permanent working capital in any single project. Exceptions were to be determined by the particular nature and merits of each project. DBZ has since complied with the requirement. - 17 - (ii) Conditions under which DBZ should implement Special Funds it might receive from time to time were not defined in its policy statement. According to the Parliamentary Act establishing DBZ, such funds could be administered provided they placed no charge or lien on DBZ's funds. But this condition was not considered enough as such funds could tax the limited managerial and technical staff available to DBZ for its regular operations. The appraisal team therefore requested that a provision be made in DBZ's policy statement, agreeable to the World Bank, specifying the conditions under which such funds would be administered in the future. DBZ has now stated that modifications in its normal operational policies will be worked out for each Special Fund and that under no circumstances would the use of such funds conflict with its basic function as defined in its act and Policy Statement. Developments During Project Implementation and Present Status 3.02 Ownership. DBZ's authorized share capital has increased by 246% since inception in December 1972. The company was established with an authorized share capital of K 10 million consisting of 600 Class A shares reserved for the Government and its agencies, and 400 Class B shares for local private shareholders, and international banks and organizations. Parliament approved non-voting preferred interest-bearing shares called Class C shares in 1979. However, none has yet been issued. The K 10 million shares have been fully paid. An increase of K 20 million in share capital was approved by the Board of Directors in 1985 of which K 8.95 million subscribed to by the Government was fully paid by March 1986. Because of the poor response from the Class B shareholders to the new capital increase, the ratio of Class A to Class B shares changed from the 60:40 balance in 1974 to 75:25 in 1986. A capitalization plan to raise an additional K 50 million was approved by the Board in July 1986. The increase was to support the expansion of DBZ's operations and to return the balance between Class A and Class B shareholders to the original ratio. The capital increase was planned over five years ending in 1991. It would bring total issued share capital to K 70 million, a level estimated to be adequate to meet a 4:1 debt to equity catio until 1991, based on projected operations. FMO, which was not previously a shareholder, will acquire 1OZ (K 7 million) of the total share capital by 1991. As of December 31, 1986, total paid-in capital was K 24.6 million, which is in line with the projections but, due to a rapid growth in the portfolio, falls short of the requirement for keeping the debt-equity ratio at a 4:1 level. By 1991, a share capital of K 70 million in nominal terms would support less than 10Z of total loan portfolio as of December 1986 due to the current high rate of inflation. DBZ would therefore have to expand its share capital base almost immediately to comply with the requirement. 3.03 Organization and Management. The Board of Directors approved a new organizational structure for DBZ (see Chart 1) in December 1986 in order to enhance efficiency. The new structure included a regional office at Ndola to supervise the existing portfolio (40% of total DBZ portfolio) - 18 - in the Copperbelt, Northern, Northwestern and Luapula provinces and promote, appraise, implement and supervise new projects in these provinces. Hitherto, DBZ has been less effective in these provinces because of their distances from Lusaka where all members of staff have been housed. In addition to the new office, the internal structure was changed. There are .ow five departments -- two Projects Departments (one at headquarters and the other at Ndola), a Finance Department, a Personnel and Administration Department, and a Post Evaluation and Economic Research Department. Each department is headed by a Director. In addition, a Deputy Director of projects, a Legal Counsel and a Chief Internal Auditor were named as part of the top management team. Below the departments are thirteen divisions each headed by a manager. Unlike the old arrangement where the line functions in operations were under different directors, all line functions (promotion, appraisal, and supervision) have been placed under one directorate. The Post Evaluation and Economic Research Department was created to evaluate projects after completion, thereby providing useful information for policy formulation. The Finance Department was expanded to accommodate a management information system which would enhance DBZ's efficiency and flexibility when it becomes fully operational. 3.04 In the new structure, and unlike the previous one where each function pertaining to the project was handled by different staff in different divisions, a particular project would now be handled by the same project officer from appraisal through supervision. This constitutes an improvement over the previous arrangement because it allows for continuity and deepening of understanding of project issues. However, at the time this report was prepared, the system still lacked adequate staff, both numerically and professionally, for the new structure to effectively operate. There are about 18 operational staff including 4 managers (excluding the 6 professionals in the Rehabilitation, Post Evaluation and Economic Research Divisions). Based on the 74 projects appraised in 1985/86 and about 400 projects under supervision, every project officer would have to appraise 4-5 projects and supervise 22-23 projects as well as promote and administer loans. In addition, DBZ lacked a pool of technical/engineering staff to assist project officers (all existing staff in that cadre have been assigned tasks as operations officers). 3.05 DBZ's management is sound and effective. DBZ has considerable autonomy in its investment decisions. The Managing Director, who joined the institution in 1977, is well experienced and effective. The Directors, except for one, have been with DBZ since at least 1978, and the team appears to be well coordinated. 3.06 Staff Development and Training. Although DBZ is still top heavy, the ratio of managers to professional staff has been reduced considerably. At appraisal in 1979, DBZ had a total staff strength of 95 consisting of 8 managers, 29 professionals an 58 support staff. Total po=tfolio then was K 19.5 million. In the course of loan execution, DBZ expanded its managerial and support staff at the expense of professional staff. As of March 1986, there were 29 managers to 40 professionals and 113 support staff. The reorganization in 1986 rendered some of the management positions redundant. As of March 1987, there were 22 managers - 19 - to 39 professionals, a reduction of 242 in the number of management positions. 3.07 The professional staff is well-trained and competent. All divisional managers and nearly all professionals are university graduates. More than half of the profession.Rl staff has been with DBZ for over five- years, providing vital continuity. Staff turnover is low because the remuneration package is favorable and comparable to that of parastatals and the private sector. 3.08 DBZ has not provided as much training to its junior professional and support staff as it has done for its managers. While this was not an issue at appraisal in 1979 (most of the staff were still relatively new on the job), it is now because of the need to enhance efficiency. Of the 43 members of staff that have received one form of training or another since 1980, 37Z were managers and 262 were senior professionals while junior professionals were only 21% and support staff only 162. Overseas training for managers constituted 972 of the 1,633 weeks of training in the six-year period. 3.09 DBZ has now proposed further training for the professional staff to enable them to take on new responsibilities under the reorganization. A five-year training program is also in place in which about 79 professionals would be trained in various aspects of DBZ's operations between 1987 and 1991. The level of training envisaged over the period is considered adequate for the staff strength of the institution. 3.10 Audit Requirement. The Loan Agreement specified that DBZ would have its accounts and financial statements audited each fiscal year, and that the audited accounts and report would be furnished to the Bank within six months of the end of the fiscal year. Bank supervision reports indicate that DBZ was in compliance with this covenant, although the audited accounts were in general received two to three months late. 3.11 Operational Policies and Procedures. During project supervision, a number of shortcomings in operations were spotted and addressed. These included: (a) Project Supervision. This remains one of the weaknesses of DBZ, was recognized as such at appraisal in 1979, DBZ was asked to prepare a supervision manual. The manual was prepared but was not fully implemented. Efforts of the staff in the previous Supervision Department were geared towards loan recovery and visits to enterprises were undertaken only when enterprises had fallen into arrears. Even under the new structure where the same project officer would be responsible for everything from appraisal to supervision to portfolio management, it is most likely that supervision would receive less than desirable attention unless there is a careful task budgeting and a consistent monitoring of supervision performance. - 20 - (b) Debt-Equity Ratio. According to the loan agreement, DBZ was required to maintain a debt-equity ratio of 4:1. By March 31, 1985, the debt-equity ratio had risen to 4.8:1 from 3.4:1 in 1984 an by March 31, 1986, despite an increase of K 8.95 million in equity, to 4.9:1. An IBRD supervision report highlighted the problem in 1985 and DBZ responded by an increase in share capital. The ratio was brought down to 4.4:1 in December 1986. The proposed capital increase would enable DBZ to keep the ratio at its present level until 1991, provided its portfolio remains within the projection of K 706 million in 1991. (c) Debt Recovery. During supervision in July 1985, it was discovered that arrears had become a major issue. DBZ had relaxed its debt collection effort and supervision generally while concentrating on new projects. The problem has since then been effectively tackled. A Debt Recovery Action Plan was implemented in 1986 which is proving to be very effective (see paras. 5.04-5.07). - 21 - IV. UTILIZATION OF BANK LOAN General Overview 4.01 Loan 1923-ZA was closed on June 30, 1987. As of March 31, 1985, the loan amount (US$15 million) had been fully committed and US$14.93 million disbursed (See Annex 15). DBZ II financed 22 subprojects with an average loan size of US$673,000, compared to the first line of credit. DBZ I, which financed more projects (47 subprojects) but with an average loan size of only US$310,000. Fourteen of the 22 subprojects were above the free limit Cf US$400,000 with an average subloan of US$1 million. A subloan to Kafue Textiles (US$5 million) for expansion was the largest, accounting for a third of the total IBRD loan. The average subloan size for projects below the free limit was US$101,000, with individual subloans ranging from US$15,000 to Moraka Farms to US$295,329 to Fransheock Farms. About 802 of the total loan amount went to manufacturing activities, mostly expansion activities as was the case with the first line of credit. Another 6% went to agriculture, 102 to transportation and 4Z to services. 4.02 The interest rates charged by DBZ for manufacturing and transportation activities ranged from 12.52 for projects approved in 1981 to 152 for projects approved in 1985, and were 122 to 14.5Z for agricultural projects. During this period, international inflation was very low (less than 1%). Thus DBZ's rate was positive in real terms. Maturity was 6-7 years on the average with 1-2 years of grace. The terms were in conformity with the conditions stipulated in the loan document. 4.03 The foreign exchange risk, initially, was borne by the borrowers, but when the foreign exchange auction system was introduced in October 1985, the Government decided to relieve DBZ's clients from the impact of further depreciation of the currency and fixed the exchange rate on DBE loans contacted before the auction, at the pre-auction rate of K 2.23 to the dollar. 4.04 As of June 1987, all projects had been completed except for Moraka Farms, where the fish pond component was not completed (its foreign exchange requirements financed under the loan have been fully disbursed). As of June 1987, seven subprojects had repaid their loans, eleven others were current in their payments and four (three of which were below the free limit) were experiencing difficulties in repayments. The status of the subprojects as of June 1987 is described in Annex 3. Financial Characteristics and Performance of Subprojects 4.05 The financial characteristics of the projects are summarized in Annex 5. The total investment cost of the subprojects financed was US$68 million (K 58.7 million) of which DBZ financed 402 (the World Bank loan proceeds financed 252 of the total). Projects above the free limit ranged from US$0.66 million for the expansion of Zalbro United Transports to US$33 million for the expansion of production at the Kafue Textile Mills. Total project cost for the eight projects below the free limit ranged from - 22 - US$81,000 for the development of a new goat breed at Grasmere Farms to US$1,430,000 for the expansion of mixed farming at Franshoeck Farms. DBZ financed between 172 and 722 of individual projects, which fell in line with the 752 upper limit set at appraisal. 4.06 Of the 11 subprojects for which information was available, four were completed without any time overrun during their implementation periods. Time overrun was less than 152 in three others and between 35Z and 452 in the rest. Transportation subprojects were the ones most seriously affected by timi overruns, in part because the expected implementation periods underestimated the difficulties existing in the transportation sector. In the case of Kabwe Transport, the insufficiency of foreign exchange at the time of appraisal led to the split of the project into two parts. The second part had to wait until further resources (from cancellations) became available under the line of credit. Some of the enterprises were slow in processing the collateral related documents. 4.07 On the average, there was only a 122 cost overrun for all 22 projects. In six cases, (Anrsex 5), actual costs were below appraisal estimates. Cost savings occurred mostly in the foreign exchange components of these projects, but also due to reductions in subproject scope. One subproject (Central Cigarettes) was completed without cost overrun while the remaining fifteen were completed with cost overruns ranging from 12 for Ndola Engineering Company, to 971 for Moraka Farms. Cost overruns were due largely to increased domestic costs resulting from inflation and implementation delays, and in the case of Moraka, unrealistic estimates of the fish pond component. In addition, projects that were implemented between 1983 and 1985 suffered from the depreciation of the kwacha, which led to higher domestic value of the foreign components of costs. 4.08 On the whole, financial performance of these enterprises was good. Of the 15 subprojects for which up-to-date information was available (Annex 4), net profit margins exceeded the estimates at appraisal in 10 cases, were similar in one case and lower in four cases. Two of the latter (Zambia Knitting and Nemplast) were heavily dependent on imported raw materials. The shortage of foreign exchange caused capacity utilization to decline in both cases, thus leading to losses. 4.09 The net worth of the companies receiving subloans increased by at least 162 in the case of Kabwe Transport Limited and by as much as 4652 in the case of Zambia Bottlers. Loans were rescheduled in eight cases, largely due to delays in implementation. As of June 1987, except for Chartonnel, Unity Transport, Andruk Farms and Moraka Farms, which had serious cash flow problems, all other firms were current in their accounts with DBZ. In two instances (Zambia Knitting Mills and Grasmere Farms), the components of the enterprise financed by DBZ's loan were doing poorly. In the case of Zambia Knitting, the heavy dependence on imported materials had been a drain on operations while in the case of Grasmere, poor transportation facilities resulted in the death of many of the animals before their arrival in Zambia from the Republic of South Africa (RSA). For lack of information, it was possible to calculate ex-post financial rates of return for only two enterprises. The results showed that one of - 23 - the two (Kafue Textile Mills) performed much better than the estimates at appraisal (31? as against 13? at appraisal) while the other, Zambia Knitting, which depended mainly on imported inputs, performed poorly (3.3? as against 17? at appraisal). Economic Characteristics and Performance of SubproJects 4.10 The economic impact of the subprojects is summarized in Annex 4. Ia real terms, the projects have not been as successful as suggested by their financial performances because of the high inflation and overvaluation of the kwacha. However, they have led to the expansion of activities in four major sectors of the economy; manufacturing (which accounted for 10 of the 22 subprojects); engineering services (2 subprojects); agriculture (6 subprojects); and transportation (4 subprojects). Seventeen of the subprojects were expansion and modernization projects and only five rere new. The project did not change the regional distribution of industrial activities in the country as over 90? of the subprojects were located mainly in Lusaka, Central and the Copperbelt provinces, just along the line of rail as typical of other industrial establishments in Zambia. About 1,010 employment opportunities were created or saved (compared to 1,500 under the first line of credit) at an average cost of K 58,000/job. On the average, the investment cost per job was 78? higher than the upper limit of K 30,000/job which DBZ targetted at appraisal and 62? higher than achieved under the first line of credit. The projects above the free limit were much more capital intensive than those below the free limit. While their average cost per job was K 160,000, that of the new projects below the free limit was K 28,000. Nine of the enterprises were owned by Zambians, eight were jointly owned with foreigners and the rest were wholly owned by foreigners. Only one of the subprojects was a joint public/private venture, the rest were privately owned. 4.11 DBZ reported only three exporting enterprises (Serioes Limited, Kafue Textiles and Bimzi Limited). Serioes exports about 52 of its output, Kafue Textiles about 26?, while Bimzi exports 20?. Average net annual foreign exchange earned and saved by the import substituting activities in 1985-86 was K 21.74 million (US$1.71 million). Seven of the sixteen enterprises for which information was available depended solely on domestic sources of raw materials. Capacity utilization ranged from 60X for Nemplast, which depended highly on imported raw materials, to 95? for Bimzi, which had greatly reduced the import content of its output. 4.12 Of the two subprojects for which the internal Economic Rate of Return (IERR) was calculated, Kafue Textile Mills returned an ex-post IERR of 16.5%, which compares favorably with the appraisal estimate of 18?, while Zambia Knitting Mills returned an IERR of 8.52, versus an appraisal estimate of 29?. A major factor for the difference in the performance of these two enterprises must lie in the source of their raw materials. While Zambia Knitting Mills relies on external sources for 75? of its raw materials, Kafue Textiles imports only 40? and in addition, exports about 26? of its final product. In the context of currency devaluation, imported raw materials became very expensive and scarce. thus leading to higher costs of production and lower capacity utilization, and subsequently, lower profits. - 24 - V. OPERATING AND FINANCIAL PERFORMANCE Operations 5.01 From the inception of operations in 1974 to December 31, 1986, DBZ approved 402 loans for a total of K 234 million and made 23 equity . investments amounting to K 5.5 million. Annual loan approvals grew from K 38.1 million in 1981 to K 57.2 million in 1986 at an average nominal rate of 8.4Z (see Annex 8). Approvals in each of the three years - 1982, 1983 and 1984 - were less than estimated at appraisal but 1983 was a particularly poor year, as approvals dropped to only 38Z of the appraisal estimates and were 47Z of the previous year's actual level. Loans in local currency dropped by 68Z that year. The major factor responsible for the drastic reduction was the tightening of domestic credit due to the economic reforms in 1983. In 1986, as foreign exchange became very scarce, the foreign component of DBZ's approvals dropped by 82X. DBZ resolved to borrowing on a short-term basis and at high interest rates from the local commercial banks to finance on a long-term basis. Although DBZ was able to expand its approvals, it did so by pursuing a dangerous trend of borrowing on a short-term basis to on-lend on a long-term basis. 3/ 5.02 Increasingly more resources have been devoted to large-scale operations as their share of total approvals increased from 49Z in 1980 to 63Z in 1986 (see Annex 8). Manufacturing activities continued to dominate. Their share in the number of projects approved by DBZ increased from 49% in 1980 to 512 in 1986 and in amount from 65Z to 682. The agricultural sector's share in the number of projects decreased by 3Z and its amount by 15X. The decline was due to the lack of viable projects in this sector dominated by traditional farmers operating on small scale levels. Shares of other sectors were relatively small but both tourism and transportation claimed larger shar.is as the economy continued to modernize. Industry in Zambia anG OBZ's activities continued to be concentrated along the line of rail in three of the country's nine provinces (Lusaka, Copperbelt and Southern). About 842 of projects financed by DBZ were concentrated in these three provinees. In recent years, DBZ has concentrated on rehabilitation, modernization and expansion projects rather than new projects. The shift in concentration partially explained DBZ's operating success since it allowed DBZ to concentrate on enterprises with good track records. About 90Z of the loans were to the private sector. This also has contributed to DBZ's success. 5.03 Commitments and disbursements have kept pace with approvals. In each of the past five years, commitments have exceeded 852 of approvals and were larger than approvals in 1982 and 1983. Disbursements grew from 3/ Interest rate on borrowings from the commercial banks was 24.252 and maturity was 3 years with no grace period compared with DBZ's average maturity of 6-7 years with 1-2 years of grace. - 25 - K 24.2 million in 1982 to K 55.3 million in 1985 and were estimated to reach K 89.5 million by 1987. As a percentage of commitments, disbursements were lowest in 1984 (66Z) due to the shortage of domestic credit and were as high as 145Z in 1983. Loan Portfolio 5.04 DBZ's loan portfolio was of high quality until 1984 when arrears of over three months started to rise beyond 102 of total portfolio and affected about 282 of the total number of projects and 39Z of the loan portfolio. Arrears mounted as the economic situation in the country worsened and effective demand declined. Most of the manufacturing enterprises (642 of DBZ's portfolio) depended on imported raw materials, which became very scarce as the economy went through a foreign exchange crisis in the early 1980s, and increasingly expensive after 1983 following a series of kwacha devaluations. The situation meant that most import-dependent enterprises operated at low levels of capacity with lower sales and profits and in many instances, with losses. In addition, agricultural enterprises suffered from the drought that persisted between 1982 and 1984. 5.05 The growing arrears problem was partly due, however, to lack of efforts on DBZ's part to collect the amounts overdue. By March 1984, principal and interest in arrears over three months were 152 of loan portfolio (up from 8Z in 1983), and bf March 1985 they had risen to 22Z. Portfolio affected by arrears increased from 22% in 1983 to 342 in 1985 and the collection ratio declined from 812 in 1983 to 632 in 1985. Although provisions had increased from 0.75% of portfolio in 1983 to 2.92 in 1985, the level was too low compared to the rapid growth of arrears. DBZ did not have in place a consistent provisions policy until January 1986 when the Board approved a 1002 provision against principal and interest in arrears for over one year and bad debts, and a 502 provision against arrears between 6 months and 12 months. 5.06 Serious efforts to deal with the arrears problem started with the appraisal of the third line of credit in 1986. A Debt Recovery Action Plan detailing steps to be taken was prepared. The first step was to get an accurate cash flow statement of each firm in arrears, followed by the establishment of a system of monthly payments of arrears if debt servicing were possible; if not, grounds for rescheduling were to be determined if future prospect for the firm looked good. In the remaining cases when chances of recovery were low, legal action was to be taken to redeem the loan. Forty firms accounting for ?32 of the arrears as of December 31, 1985 went through the above process effective June 1, 1986. Another 40 firms accounting for an additional 20Z of arrears were selected and tackled effective January 1, 1987. The process yielded good results. By December 31, 1986, 18 enterprises in the first batch had paid off their arrears, four were in the process of clearing their arrears through monthly installments, five were in the process of selling assets to pay off their loans and the remaining twelve were in court for settlement. By December 1986, arrears had fallen to only 122 of total portfolio, which was then - 26 - K 198 million, and collection performance was impressive at 95.6Z of current billings. By March 1987, five enterprises in the second 40 had paid off their arrears, agreements have been reached for installmental payments with eight, three had been rescheduled, negotiations were going on with seven, and the rest had been taken to court. DBZ would have to keep up these efforts to attain its goal of keeping arrears to no more than 10% of total portfolio by June 30, 1987. Equity Portfolio 5.07 DBZ's equity investments grew at an average annual rate of 39Z between 1982 and 1987, although with marginal net increases in the last two years. The investments ranged from 1.12 to 25Z of total equity in a total of 23 enterprises (Annex 7). Most of the investments (802) were in manufacturing activities. About 39% (9 enterprises) were said to be operating without problems, 17% (4 enterprises) with moderate problems and the remaining 44% (10 enterprises) were still under implementation by March 1987. 5.08 Of the nine enterprises operating without difficulties, only one was paying dividends to DBZ (Rover Zambia Ltd. - assemblers of motor vehicles) while the rest were not. DBZ's total equity in all the 23 enterprises was poor, being only 0.26% in 1986 (0.62 on the nine enterprises operating without problems). This raised the question whether DBZ should continue to invest its scarce resources as equity. Meanwhile, management has drastically cut down on approvals for equity investments from 2.4% of total approvals in 1985 to 0.92 in 1986. The projected figures for 1987 were lower than in 1986. 5.09 Performance in this area requires careful monitoring to see why dividends are not declared and to make careful judgements on the type of enterprises to be invested in by DBZ in the future. Financial Performance 5.10 DBZ's financial statements and selected financial ratios for 1982-1986 are summarized in Annexes 10-12. The tables show that while the overall performance was still encouraging as of June 1987, DBZ's profitability, liquidity and indebtedness were worsening, particularly in 1985-1986. In real terms (with inflation rates above 40%) DBZ's performance was poor. Although interest income improved, rising from 9.8% of average total assets in 1982 to 13% in 1986, and growing at an average annual nominal rate of 39.6%, higher finf-ncial charges, due to larger short-term domestic borrowings at high interest rates, and larger bad debt provis,ons rising from K 0.271 million in 1982 to K 4 million in 1985 (K 3.277 million in 1986) eroded profits. As a result, net profit before tax declined from 3.5Z of total assets in 1983 to 1.7% in 1986 and from 11% of average equity to 7.5%. When combined with high inflation, DBZ realized negative return in its investments. Administrative costs remained moderate at about 2% of total assets throughout the period. Spreads, which were low in 1983, improved beginning late 1984 as DBZ introduced variable interest rates for kwacha-denominated loans and were about at their 1982 level of 8.3% by 1986. - 27 - 5.11 The balance sheet also reflected DBZ's declining performance. The current ratio declined from 2.7:1 in 1984 to 1.9:1 in 1986 and the debt service coverage ratio from 1.9:1 to 1.1:1 over the same period. The figures reflected poor collection efforts during the period. By March 31, 1986, DBZ's debt-equity ratio had risen to 4.9:1 as against the 4:1 limit in DBZ's agreement with the World Bank. A number of factors accounted for the deterioration of DBZ's balance sheet. They included the successive devaluations of the kwacha since 1983 which drastically increased kwacha liabilities on foreign currency loans, the increased borrowing from local banks and the slow increase in the share capital of DBZ. A capital of K 24.6 million in 1986 reduced the debt-equity ratio to 4.4:1. Resource Mobilization 5.12 DBZ has been able to mobilize a considerable amount of both domestic and foreign resources for its operations. Total foreign currency resources mobilized as of December 31, 1986, amounted to US$85 million. Of this amount, US$58 million (including Loan 1923-ZA) was mobilized between 1981 and 1984. Major lenders were: IBRD, with two lines of credit totalling US$30 million; ADB, with three lines of credit totalling US$20 million (UA 19.8 million); Arab Bank for Economic Development in Africa (BADEA) with US$10 million; EIB, two lines of credit totalling US$8 million (ECU9 million); and OPEC Fund, a credit of US$15 million. 4/ Of the totil, US$75 million have been committed and US$67 million disbursed. Only US$13 million from OPEC Fund was still available by the end of 1986 for approval; however, these funds are not likely to be used due to the rigorous appraisal and procurement conditions attached to them. The poor economic environment that made it difficult for DBZ to secure foreign loans, forced it to resort to domestic borrowing in 1985 and 1986 (para 5.01). Borrowings from local commercial banks in 1985-86 totalled K 27 million. The loans were expensive, carrying only three years maturity with no grace period, and an interest rate of 24.252. DBZ also raised an additional K 24.6 million in equity capital in 1985-86. As of June 1987, DBZ was negotiating a US$5 million credit with FMO, US$2.5 million with Kreditanstalt fur Wiederaufbau (KfW) and US$10 million with IDA. 4/ Only US$2.0 million of the original US$15 million was approved by DBZ's Board because of the stringent appraisal and procurement conditions attached to the credit. - 28 - VI. CONCLUSIONS 6.01 The Zambian Government's objective of developing a well-managed, profitable financial institution contributing significantly to output and employment in all sectors of the economy in Zambia has, to a large extent, been met. DBZ is today one of the few successful development finance institutions in Africa. The institution can boast of a good management (all Zambians) capable of responding to challenges, highly qualified and competent professional staff, simple and workable operating procedures and a sizeable level of portfolio. Although operating performance has declined since 1981, the problem has been largely due to the worsened economic environment rather than to weaknesses in DBZ's institutional strengths. 6.02 The first and the second lines of credit from IBRD (Loans 1210-ZA and 1923-ZA) have been efficiently utilized. While the first line of credit financed subprojects with a total cost of K 34.8 million and created 1,500 job opportunities between 1976 and 1979, the second line of credit helped to expand the nation's capital stock by K 38.5 million in 1976 prices and created about 1,010 jobs, although at a high cost per job relative to DBZ's target. About 19 of the 22 enterprises supported by the second loan remain financially viable and seven have already repaid their loans. Some of these projects, such as the Kafue Textile Mills, that use mostly local raw materials and export part of their final products are also economically viable. 6.03 One of DBZ's weaknesses is poor supervision which will still need to be emphasized under the new structure. Another area of concern is its inability to respond sufficiently to the unemployment problems. DBZ will in future need to promote more labor-intensive subprojects to help alleviate the unemployment problem. In addition it has not been able to promote enterprises either utilizing local raw materials or that are export-oriented. 6.04 Beyond responding to these challenges, DBZ's future would depend largely on what happens to the Zambian economy. In the last two years, DBZ has found it difficult to mobilize foreign exchange resources due to the country's poor economic policies and the reluctance to lend to Zambia by the international financial markets. Domestic credit has also shrunk. Without a quick solution to the present crisis, there may be a substantial reduction in the size of portfolio and profit at DBZ. 6.05 Some of the lessons learned from this project include: (i) the need to encourage decision-making autonomy for a development finance company. DBZ's autonomy enabled it to make the right decisions and thereby perform well under an adverse macroeconomic environment. For example, DBZ's lending bias towards the private sector helped give it a sound financial base; - 29 - (ii) the need to build up top quality managerial and professional staff. DBZ was able to remain a sound institution, for example, partly because of the high quality of its managerial and professional staff; (iii) the importance of supervision. This cannot be over- emphasized. Part of the reason why arrears mounted in 1984 and 1985 was because of poor supervision. IBRD's emphasis and insistence that DBZ improve its supervision capabilities led DBZ to institute a Debt Recovery Action Plan; and (iv) the need to maintain a sound macroeconomic policy environment. A sound institution without the macroeconomic policy environment to support its operations is not likely to perform at its best. The problems of DBZ and its clients were definitely exacerbated by the poor policy environment existing in the country. - 31 - IfI - 33 - Annex 1 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Evolution of Staffing 1981-1986 Total staff at beginnin of year* 1981 1982 1983 1984 1985 1986 of which support staff 56 64 88 114 113 118 of which professionals 47 51 46 65 69 61 Total Staff who left DBZ 4 13 10 15 19 9 of which support staff 1 5 7 14 8 2 of which professionals 3 8 3 1 11 7 due to resignation 3 9 3 2 9 3 due to termination by DEZ - 3 4 10 7 2 due to retirement - - - 3 - 1 other 1 1 3 - 3 3 Total new staff during year 16 33 55 18 16 12 of which support staff 9 29 33 13 13 8 of which professionals 7 4 22 5 3 4 Total staff at end of year 115 134 179 182 179 182 of which support staff 64 88 114 113 118 124 of which professionals 51 46 65 69 61 58 * April 1 to March 31. - 29 - PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA List of Sub-Projects Financed Under Loan 1923-ZA I/ (US Dollars) Date Subproject Approved Date of Amount Approved Amount Name of Subproject Number by IBRD Commitment2/ by IBRD Disbursed Serioes Ltd Al 06/05/81 08/08/80 408,797 408,797 Kafue Textiles Ltd A2 06/05/81 18/06/81 5,002,454 5,002,45. Zambia Knitting Mills Ltd A3 06/05/81 06/02/81 1,502,619 1,502,619 Nemplast Ltd A4 08/05/81 25/08/81 939,800 936,686 Zambia Bottlers Ltd AS 08/05/81 06/02/81 1,172,412 1,172,412 Amiran Ltd A6 11/05/81 27/02/81 778,366 778,366 Chartonnel Estates Ltd A7 13/05/81 12/02/81 374,088 374,088 Ndola Engineering Ltd A8 05/06/81 17/03/81 397,117 397,117 Central Cigarette Manuf. Ltd A9 16/06/81 10/03/81 684,000 684,000 Zalavi Haulage Ltd AIO 16/06/81 19/07/81 409,403 40),403 Zalbro United Transport All 08/07/81 19/02/81 325,273 325,273 Kabwe Transport Ltd All 15/04/83 27/07/82 564,376 564,376 Wood Processing Ind, Ltd A13 15/04/83 20/04/84 960,373 960,373 BRR Industries Ltd A14 15/04/83 07/04/84 600,000 600,000 Leopard Investments Ltd B1 06/05/81 09/02/81 42,665 42,665 Fransheock Farm Ltd B2 06/05/81 11/02/81 295,329 295;329 Andruk Ltd B4 07/07/81 30/04/81 56,665 56,665 Unity Transport Ltd B5 07/07/81 30/03/81 127,141 127,141 Grasmere Farm Ltd B6 30/03/83 15/04/83 24,665 24,665 BIMZI Ltd 88 02/02/84 29/09/83 98,063 98,063 Moraka Farms Ltd 811 22/05/85 13/01/85 15,000 15,000 Mazembe Tractor Co. Ltd B12 03/06/85 24/10/85 150,000 148,631 TOTAL 14,940,371 14.91%,AA 1/ The following subprojects were cancelled: B3 ($192,500 to Mumana Hotel); B7 ($11.675 to ML Farms);B9 ($95,000 to Shamsa Investments); and B10 ($59,400 to Chinyanauni, Ltd.). 2/ Date when agreement between DBZ and subproject was signed. M 3Annex 3 Page 1 of 20 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Summary of Subprojects SERIOES LTD. Loan Amount: US$408,797 Disbursed Amounts US$408,797 Principal Outstanding as of February 28, 1987: US$57,162 - - Proposed Date of Redemption: September 1988 Serioes Limited was established in Luanshya, Copperbelt Province in 1973. It is 98? foreign-owned. Major shareholders are DEG (23.5Z), and SIFIDA (8.92). Its main activity is to produce men and women's outerwear, uniforms and combatwares both for the domestic and foreign markets. In August 1980, DBZ approved a loan of K 400,000 (US$500,000) to start the production of military uniforms and combatwares amounting to about 331 of company's turnover in 1982 and going up to 432 in subsequent years. Estimated total project cost was K 1.8 million (US$2.2 million) in 1980 prices. DB2's loan was to finance 221 of total project cost; the rest was to be financed through cash generation and bank overdrafts. DBZ's loan was for five years with one year of grace, and at 12.51 rate of interest. Implementation went on smoothly without cost or time overrun. About US$91,203 of DBE's loan was cancelled after the completion of the project. The loan was rescheduled in 1984 due to low profit levels resulting from the lack of foreign exchange for imported raw materials. Serioes is a profitable venture. Net profits were at their lowest level of only 2Z of turnover in 1983, but increased to 10.8? in 1985. Net return on equity in 1985 was 442 which was higher than the appraisal estimate of 301 for that year. Although its current ratio was still low in 1985 (0.98:1), there has been a considerable improvement over the situation in 1981 when it was 0.86:1. About 99 new jobs were created at an average investment cost of K 17,000 (US$21,916) per job which is impressive given the average cost per job of K 23,000 in manufacturing prevailing in Zambia at that time. About 5Z of Serioes' output is now exported yielding some K 1.34 million in foreign exchange earnings. About 752 of capacity is utilized. Although Serioes' debt service coverage ratio of 3.1:1 in 1985 was less than the appraisal estimate of 5.4:1, it still remained satisfactory. Major cause of the lower performance was the 45? devaluation of the Kwacha between 1980 and 1985. Serioes remains a well-managed enterprise. It is currently up to date in its loan repayments. DB2 thinks that the loan would be redeemed on schedule in 1988. - 36 - Annex 3 TABLE A-1 Page 2 of 20 Serioes Limited, Key Financial Indicators (K '000) 1981 1982 1983 1984 1985 Turnover 8321.5 9333.0 8042.2 9157.4 22720.4 Equity 2911.9 3253.6 3332.8 3563.0 5521.7 Long-Term Debt 1163.0 1584.1 1442.6 1071.5 295.9 Net Profit 788.5 673.7 171.2 502.8 2445.0 Depreciation 335.6 363.4 382.3 351.4 365.2 Interest on Lt debt 232.0 372.4 338.1 466.8 864.1 Repayment of Lt debt 142.7 172.3 190.6 560.7 811.6 Ratios Net Return on Turnover 9.5 7.2 2.1 5.5 10.8 Net Return on Equity 27.1 20.7 5.1 14.1 44.3 Debt-Equity Ratio 0.4 0.5 0.4 0.3 0.1 Debt-Service Coverage Ratio 3.6 2.6 1.6 1.5 3.1 KAFUE TEXTILES OF ZAMBIA (KTZ) Loan Amounts US$5.0 million Disbursed Amount: US$5.0 million Principal Outstanding as of February 28, 1987: $3.2 million Proposed Date of Redemption: June 1991 KTZ, a subsidiary of INDECO, is located in Lusaka Province. It has an authorized share capital of K 4.5 million divided as follows: INDECO - 55Z, Textile Consultants and Associates - 13.6Z, CDC - 12.5%, Zambia National Provident Fsnd - 10Z and Barclays Overseas Development Corporation - 8.9Z. KTZ was established in 1966 to produce woven fabrics both for local and foreign consumption. In 1981, DBZ approved a loan of K 4.0 million (US$5.0 million) for the expansion of production from about 11 million meters of textile per year to 19 million meters. Total project cost was estimated at K 23.4 million (US$29.3 millica) of which IFC was to finance 25%, CDC 19.2X, Suppliers Credit 18X, DBZ 17Z and the rest (21Z) from cash generations. DBZ's loan was for 10 years with two years of grace, and at an interest rate of 12.5Z. The project was completed without much time overrun. However, cost overrun in the local currency component was about 100, some of which was redeemed by savings in the foreign component of the project (see Annex 5). The major reason for the cost overrun in the local component was the change in the source of financing for some of the components of the project. Annex 3 - 37 - Page 3 of 20 KTZ is a profitable enterprise. Net profit improved from 10 of turnover in 1982 to 142 in 1986, yielding 272 return on equity. Although KTZ has become more leveraged in 1986 compared to 1984, its debt equity ratio of 2.7:1 in 1986 is still within DBEZ's requirement of 3:1, and its current ratio has improved from 1.41 in 1984 to 1.7:1 in 1986. Despite the country's economic crisis, the estimated ex-post financial rate of return is 30.5Z which compares very favorably with the appraisal estimate of 13%. Kafue Textiles is one of the three exporting enterprises financed under the loan. Exports (mainly of grey cloth) amounted to 262 of sales in 1986/87 (US$1.74 million), which more than compensated for imported raw materials and spares costing US$1.2 million (excluding US$1.2 million loan repayment during the year). Capacity utilization was estimated at 632. but that was before the modernization of the spinning mills in 1986. About 602 of its raw materials is obtained locally. The investment generated 283 jobs at a cost of K 93,000/job which is very high compared to DBZ's target of-no more than K 30,000 per job. The estimated ex-post economic rate of return is 16.5? which compares well with the 18? projected at appraisal. TABLE A-2 Kafue Textiless Key Financial Indicators (K' 000) 1982 1983 1984 1985 1986 Turnover 31227.1 30205.1 35766.8 61973.8 85157.8 Equity 16537.8 21684.8 26414.5 32307.1 43549.8 Long-Term Debt 11035.9 19367.0 23731.2 44392.9 116237.1 Net Profit 3224.0 6077.8 4625.7 7691.7 11917.6 Depreciationl/ 1716.0 4508.8 5490.4 Interest on Lt debt 1257.0 6935.0 9949.0 Ratios Net Return on Turnover 10.3 20.1 12.9 12.4 14.0 Net Return on Equity 18 24 27 Debt-Equity Ratio 0.9 1.4 2.7 Current Ratio 1.4 1.9 1.7 1/ Plus write-offs against pre-production expenses. Annex 3 Page 4 of 20 ZAMBIA KNITTING MILLS (ZKM) Loan Amounts US$1.52 million Disbursed Amounts US$1.52 million Principal Outstanding as at February 28, 1987: US$964,150 Proposed date of redemption: February 1989 Zambia Knitting Mille, located in Lusaka, was incorporated in 1964 as a family concern. In 1976, it was bought by Universal Finance and Development Company Limited (UFDCL) based in Bermuda. After acquiring ownership, UFDCL embarked on an expansion program and invited a local loan of K 183,000 to the company. Lantana Investments Limited, a Zambian owned entity, also acquired 18% of the share capital. Prior to 1979, ZKH was engaged in the production of hosiery and garments. The new loan of K 1.22 million was to enable the company to branch into the production of knitted fabrics. Total project cost was estimated at K 3.01 million, of which DBZ was to provide K 1.8 million (US$2.3 million) in loans and another K 103,000 (US$128,750) in equity. The rest of the financial requirements were to be met through internally generated funds and bank overdraft. DBZ's loan was for eight years including two years of grace and at an interest rate of 12.5%. Implementation experienced no delay but cost overruns, mainly in the local components, were high (282). The company has remained profitable in the last three years (1984-1986), yielding between 72 to 11? on sales and between 24? to 32% on equity. The debt-equity ratio improved considerably in 1986 (1.1 from 2.3 in 1985) due to higher profits and 20? increase in share capital. Its cash flow position is tenuous as current ratio is less than one and the debt service coverage ratio in the last two years is no more than one. The ex-post estimated financial rate of return is 3.3% which compares poorly with 17? estimated at appraisal. Part of 2KH's problem is due to the poor performance of the fabrics division that was financed under the 1923-ZA loan. The division still depends on imported yarn, which has become very expensive in the light of the shortage of foreign exchange in the country. Economic returns to the project were much lower than estimated at appraisal. The subproject was operating at 70Z of capacity in 1986 compared to the appraisal estimate of 80? for 1985. Total employment generated was 50 which was 7% less than the appraisal estimate and its investment cost per job of K 77,000 was excessive. Its foreign exchange savings was about US$100,000 in 1986. The ex-post economic rate of return was negative (-8.5%) compared to 29? estimate in the appraisal report. Obviously, but for the nominal protection, this enterprise would not have been viable. 39 - Annex 3 Page 5 of 20 TABLE A-3 Zambia Knitting: Key Financial Indicators (K '000) 1983 1984 1985 1986 Turnover 1266.8 3134.2 3156.1 6191.7 Equity 656.5 855.8 1206.6 1775.7 Long-Term Debt 1862.3 1730.0 2741.0 1976.6 Net Profit (390.6) 205.4 350.8 569.1 Depreciation 443.0 459.2 779.4 668.0 Interest on Lt debt 183.3 272.7 438.1 417.0 Repayment of Lt debt 1072.9 1287.4 Ratios Net Return on Turnover (30.8) 6.6 11.1 9.2 Net Return on Equity (60.0) 23.9 29.1 32.0 Debt-Equity Ratio 2.8 2.0 2.3 1.1 Debt-Service Coverage Ratio 1.0 1.0 Current Ratio 1.2 0.7 0.8 0.9 NEMPLAST LTD. Loan Amount: US$939,800 Disbursed Amount: US$936,686 Principal Outstanding as at February 28, 1987; US$401,254 Proposed Date of Redemption: June 1988 Nemplast Ltd., located at Kitwe, in the Copperbelt Province, was incorporated in 1980. It is largely owned by Zambians of Asian origin. Its main activity is to produce PVC (poly-vinyl chloride) coated materials -- artificial leather, rainwear and ventilation ducting materials -- all of which were formerly imported. Production capacity was estimated at 600,000 meters per year. Foreign exchange savings discounted at 1OZ was estimated at K 5.1 million. Total project cost was estimated at K 2.1 million of which equity contribution was K 600,000. In 1981, DBZ approved an equity contribution of K 100,000 and a subloan in the amount of K 1.03 million of which the World Bank loan of K 770,000 was to cover the foreign exchange cost of imported machinery. DBZ's loan was for six years with two years of grace, and at 12.52 rate of interest. Implementation suffered five months delay because of the late approval of foreign exchange by refinancirg agents, thus leading to late delivery of orders. The loan had to be rescheduled in 1982 because of the delay, and again in 1984 as foreign exchange became scarce and expensive. Annex 3 -40 - Page 6 of 20 Nevertheless, Nemplast remains a financially viable enterprise. In the last three years, its net return on turnover improved from 4.4Z in 1984 to 18.9Z in 1986. So did its return on equity, from 5.32 to 38.8X. Its debt-equity ratio is acceptable being only 0.80 in 1986, so also is its current ratio which was about 2 in 1986. Nemplast's debt-service coverage in 1986 was low being only 0.94. This was due to higher costs of servicing foreign denominated loans. About K 12,000 had to be set aside in 1986 as provisions for foreign exchange differences. About 37 jobs were created at an average cost of K 56,000/job which is excessive for a manufacturing enterprise. About 60% of the capacity is utilized because of the shortage of raw materials. Nemplast's management is good, but the company has started experiencing tough competition with imported brands. DBZ is confident that the company will remain profitable and service its loan regularly. TABLE A-4 Nemplast Limited. Key Financial Indicators (K '000) 1983 1984 1985 1986 Turnover 953.1 1615.3 3229.1 Equity 737.1 792.1 965.1 1575.6 Long-Term Debt 1135.4 150.9 1934.1 1252.2 Net Profit by Tax 42.1 173.0 610.6 Depreciation 12.5 10.5 21.4 Interest on Lt debt 198.9 242.6 207.4 Repayment of Lt debt 681.9 Ratios Net Return on Turnover 4.4 10.7 18.9 Net Return on Equity 5.3 17.9 38.8 Debt-Equity Ratio 0.19 2.0 0.80 Debt-Service Coverage Ratio 0.94 Current Ratio 1.62 1.65 1.78 ZAMBIA BOTTLERS LIMITED (ZBL) Loan Amount: US$1.17 million Disbursed Amountt US$1.17 million Zambia Bottlers, manufacturers of soft drinks (Coca-Cola, ginger ale, and lemonade), is a subsidiary of Coca-Cola Export Corporation, USA. It is located in Lusaka. In 1974, it closed 13 of its diabribution centers because of the poor state of its main production line and lack of foreign exchange to purchase raw materials and spares. About 90Z of total input in the form of syrup concentrate is imported. By 1981, about 284 jobs were at Annex 3 - 41 - Page 7 of 20 stake and capacity utilization had fallen to 44Z from the previously utilized 60Z. ZBL approached DBZ for a loan to modernize the company and expand capacity from 2.2 million cases of soft drinks per annum to 3.0 million cases. Total project cost was estimated at K 1.8 million of which DBZ was to finance K 951,000 (US$1.17 million). The rest was to be financed from bank loans and cash generations. DBZ's loan was for 511 years with 1% years of grace, and at an interest rate of 12.5Z. Implementation proceeded sw3othly with no time overrun. Cost overruns, which affected only the local component of investment, were- insignificant. The company is profitable. Turnover has increased by more than four-fold since 1983, and return on equity has improved from 23Z in 1984 to 55Z in 1986. The debt equity ratio has improved from 0.12:1 in 1983 to 0.04:1 in 1986. There are no major problems affecting the company. Capacity utilization has improved to 70Z in 1986 which is higher than the appraisal estimate of 60Z, and all 282 jobs were saved. The loan was repaid in 1984, four years earlier than scheduled. Although ZBL still depends on imported raw materials, which have become very expensive in the light of the auction system, it has been able to pass the increased cost to consumers in terms of higher prices. TABLE A-5 Zambia Bottlers Ltd: Key Financial Indicators (K '000) 1982 1983 1984 1985 1986 Turnover 9466 12277 19136 41602 Equity 3766 4000 6653 12478 Long-Term Debt 445 443 442 441 Net Profit 1322 922 2704 6856 Depreciation 2759 3012 6389 12750 Repayment of Lt debt 336 393 1 1 Ratios Net Return on Turnover 14 8 14 16 Net Return on Equity 35 23 41 55 Debt-Equity Ratio 0.12 0.11 0.07 0.04 AMIRAN LIMITED Loan Amount: US$778,366 Disbursed Amount: US$778,366 Principal Outstanding as at February 28, 1987: US205,558 Proposed Date of Redemption: September 1987 Amiran Limited, located in Lusaka, was incorporated in 1963 and is 100% foreign-owned. It is involved in the distribution of agricultural -42 - Annex 3 equipment and supplies, and farming until 1981 when it Pe 8tof 20 manufacture aluminum irrigation pipes. Hitherto, about 165 tons per year of aluminum pipe were imported into the country. Total project cost was estimated at K 1.3 million (US$1.6 million) of which DBZ agreed to finance the cost of imported machinery and equipment which amounted to K 638,000 (US$778,360). The rest of the project cost was to be financed through bank overdraft, and internally generated funds. DBZ's loan was for five years including one year grace, and at an interest rate of 12.52. Actual project costs were reasonable, being only 13% higher than the appraisal estimate; implementation suffered only one month delay. 'While the company remained profitable, its aluminum pipe component was not profitable until 1985 when it made a 37Z return on turnover. The losses were due to the shortage of foreign exchange for the purchase of necessary inputs (mainly aluminum magnesium). The aluminum pipes component is now operating at about 70% of capacity, which is still slightly lower than the appraisal estimate. The component is highly capital intensive as only eight jobs were created at an average cost of K 179,000 per job. Its value added improved by 332 in 1985 and foreign exchange savings was K 1.64 million in 1985. DBZ has been satisfied with the management and performance in recent years. The company has since 1984 regularly serviced its loan with DBZ. TABLE A-6 Amiran Limited? Key Financial Indicators (K '000) 1982 1984 1985 Turnover 320 678 2095 Equity (66) Long-Term Debt 464 Net Profit Before Tax (44) (579) 766 Depreciation 65 67 100 Interest on Lt debt 87 178 145 Ratios Net Return on Turnover -85 37 Net Return on Equity ------------------/a-------------- Debt-Equity Ratio ------------------n/a-------------- Debt-Service Coverage Ratio ------------------n/a-------------- I Annex 3 - 43 - Page 9 of 20 CHARTONEL ESTATE LIMITED (CEL) Loan Amount: US$374,088 Disbursed Amount: US$374,088 Proposed Date of Redemptiont December 1989 CEL, located 32 km north of Lusaka, was incorporated in 1966. It is 511 owned by Zambians. It is a mixed farming project engaged in the production of milk, beef and maize. In 1981, CEL approached DBZ for a loan of K 340,000 for the purchase of 150 pedigree in-calf Fresian heifers and cows and 6 pedigree Holstein bulls from Zimbabwe. The purpose was to supplement domestic proQuction of milk, which had fallen to only 312 of demand. The project would produce about 1.92 million liters of fresh milk a year. DBZ's loan was for eight years with one year of grace and at an interest rate of 12?. Project implementation was delayed because the company did not complete the security agreement on time. The delay led to a 10? cost overrun, mainly in the local cost components. CEL's accounts are not available but the company is operating with considerable difficulties. Arrears of over three months totalled about K 800,000 as of September 1986. DBZ has taken legal action to recover the loan. .A major factor that adversely affected Chartonel was the drought between 1981/82 and 1983/84. It led to poor feeding of the animals and hence much lower production than estimated at appraisal. It also led to a reduction of the crops output. The project led to the creation of 28 jobs at an average investment cost of K 28,000 per job which is within DBZ's upper limit. NDOLA ENGINEERING COMPANY LIMITED (NECL) Loan Amount: US$397,117 Disbursed Amount: US$397,117 Loan was redeemed in 1986 Ndola Engineering Company, located in the Copperbelt Province, was incorporated in 1970. It is 100? owned by Italians. Its activities include reconditioning heavy duty vehicle engines and manufacturing spares for plants and machineries. In 1981, NECL approached DBZ for a term loan of US$517,500 to expand its engineering workshop. Total project cost was estimated at K 691,000 of which DBZ's loan was to finance the machinery component. The rest of the project cost was to be financed by the promoters and a term loan from the commercial bank. DBZ's loan was for five years including one year of grace and at an interest rate of 12.5Z. Implementation proceeded smoothly without time or cost overruns, and the new machinery went into production in May 1982 as scheduled. Annex 3 - 44 Page 10 of 20 NECL's accounts after 1983 were not available but according to DBZ's staff, the company is operating profitably. Return on equity in 1983 was 182 and has been improving since then. Capacity utilization measured by the number of engines reconditioned has improved from 502 estimated at appraisal to 80? in 1985. NECL has repaid its loan to DBZ and presently does not have any long term debt to service. Twenty-four jobs were created at an average cost of K 24,000 per job which was within DBZ's limit. Its net foreign exchange savings was estimated at K 0.50 million in 1983. Table A-7 Ndola Engineering: Key Financial Indicators (K '000) 1982 1983 Turnover 1310 1386 Equity 559 636 Long-Term Debt 366 389 Net Profit 232 115 Ratios Net Return on Turnover 18 8 Net Ret.urn on Equity 42 18 Debt-Equity Ratio 0.65 0.61 Current Ratio 1.04 0.49 Current Assets 333 305 Current Liabilities 321 624 CENTRAL CIGARETTES MANUFACTURER LIMITED (CCML) Loan Amount: US$684,000 Disbursed Amounts US$684,000 Principal Outstanding as at February 28, 1987: US$119,393 Proposed Date of Redemption: March 1988 CCML Is located in Lusaka. It is 70Z owned by Rothman of Pall Mall (Zambia) Limited and 30? owned by British American Tobacco (Zambia) Limited. In 1979, DBZ advanced K 599,000 (K 527,000 which was financed from an EIB line of credit) for the Phase I of a rationalization and modernization program. Total project cost for that phase amounted to K 851,000. The project was completed on schedule and a second phase totalling K 857,000 was to be implemented between 1981 and 1982. That phase aimed at improving the quality of the tobacco by replacing the old leaf conditioning machines with new ones. DBZ advanced a loan of K 547,000 to purchase the necessary machinery. The rest of the project cost was provided by the promoters. DBZ's loan was for seven years with two years of grace, and an interest rate of 12.5?. Implementation went on smoothly without time overrun. There was a 24? savings on total cost most of it from savings ln the loreign components Annex 3 - 45 - Page 11 of 20 of the project. CCNL is profitable, although with low margins due to the heavy excise duty (about 72Z of total sales). Return on turnover at best was 92 in 1986 and return on equity has ranged from 62 in 1984 to 442 in 1986. The debt service coverage ratio improved from 5.4 in 1985 to 18.1 in 1986. CCML has been able to service regularly its loans with DBZ. About 902 of the total raw materials utilized by the company (mainly tobacco) is obtained locally. The company was operating at about 75% of capacity in 1986, producing 1163 million cigarettes per annum, about the same level it produced in 1981. Its net foreign exchange savings was estimated at about K 10.0 million in 1986. TABLE A-8 Central Cigarettes: Key Financial Indicators (K' 000) 1982 1983 1984 1985 1986 Turnover 48650 54906 65044 71107 92338 Equity 5588 7420 7668 9431 19676 Long-Term Debt 969 954 1143 975 637 Net Profit 677 845 448 1110 8610 Depreciation 272 385 598 643 803 Interest on Lt debt 40 193 193 Repayment of Lt debt 15 168 338 Ratios Net Return on Turnover 1 2 1 2 9 Net Return on Equity 12 11 6 12 44 Debt-Equity Ratio 17 13 15 10 3 Debt-Service ^Ooverage Ratio 5.4 18.1 ZALBRO UNITED TRANSPORT LIMITED (ZUTL) Loan Amount: US$325,273 Disbursed Amount: US$325,273 Loan has been redeemed. ZUTL, located in Choma, Southern Province, was incorporated in 1967. It is 100Z owned by Zambians. It is engaged in hauling coal from Maamba Collieries to Batoka railway siding, 90 km away from the Maamba Collieries Ltd. It also hauls maize and fertilizer under contract for Southern Province Marketing Union. Annex 3 Page 12 of 20 - 46 - In 1981, ZUTL approached DBZ for a term loan of K 400,000 to expand its haulage capacity. Total project cost was estimated at K 557,000 of which K 360,000 (US$450,000) in foreign exchange was financed from the second line of credit to DBZ. The rest of the project cost was to be financed by the promoters. DBZ's loan was for 4.5 years including a half year of grace and at 12.5Z rate of interest. Project implementation went without cost overrun but with three- months lag due to delays in loan processing. Until 1984, ZUTL was making losses due to low turnover and delayed implementation. The situation changed in 1984 as the turnover nearly doubled, resulting in a profit margin of 192. Although return on equity fell from 1072 in 1984 to 432 in 1985, that level was still much higher than the 162 estimated at appraisal. The fall in the ratio was partly due to the depreciation of the Kwacha which swelled the cost of imported spare parts and debt servicing. The loan has now been redeemed. A total of eighteen jobs was created at an average cost of K 29,000 which is within DBZ's upper limit. The company is operating profitably and did repay its loan to DBZ in 1987. TABLE A-9 Zalbro United Transport Limited: Key Financial Indicators (K '000) 1983 1984 1985 Turnover 700 1206 1200 Equity (13) 215 372 Long-Term Debt 490 651 Net Profit (180) 230 158 Depreciation 835 606 Interest on Lt debt 37 49 Ratios Net Return on Turnover (Z) (26) 19 13 Net Return on Equity 107 42 Debt-Equity Ratio 2.28 1.75 KABWE TRANSPORT LTD. (KTL) Loan Amount: US$564,377 Disbursed Amount: US$564,377 Principal Outstanding as at February 28, 1987: US$40,883 Proposed Date of Redemption: March 1987 KTL, located in the Central Province, was established in 1972 to carry out road haulage of cargo and fuel in Zambia. It is 1002 owned by Zambians. In 1981, DBZ approved a loan in the amount of K 858,000 (US$1,072,500) to purchase 6 trucks, 10 mechanical horses and 17 Annex 3 Page 13 of 20 - 47 - semi-trailers. Total project cost was estimated at K 1.63 million of which the foreign exchange component to be financed by IBRD's loan was K 634,000. For lack of funds under the line of credit, the project was split into two componentst an IBRD loan of K 451,000 initially, and then another K 183,000 as unutilized approvals become clearer under the loan. The loan was for 4h years with half a year of grace and at 12.5Z interest. The lack of foreign exchange led to a five months delay in project implementation, and caused the loan to be rescheduled in 1983. Actual cost was K 2.54 million implying a cost overrun of 79%, most of which was due to the cost overrun in the foreign exchange component of the project. KTL is a profitable venture. Its return on equity improved from 9Z in 1982 to 23? in 1984, but fell to 14? in 1985 due to a near doubling of the equity to improve the company's leverage. Even so, debt:equity ratio in 1985 was still 3.8:1, which is higher than the average of 3:1 contemplated by DBZ, but still within the limit for its type of operation. A total of 39 jobs were created at an average investment cost of K 65,000 which is high compared to the average of K 41,600/job in the transport industry in Zambia. KTL utilizes 90? of its capacity. Recently, the promoters of the company merged all their concerns together under Amaka Holding Ltd. The accounts for 1986 are not yet available but DBZ thinks that the holding company remains profitable. KTL is current in its obligations to DBZ. WOOD PROCESSING INDUSTRIES LIMITED (WPIL) Loan Amount: US$960,000 Disbursed Amount: US$960,000 Principal Outstanding at February 28, 1987: US$564,479 Proposed Date of Redemption: April 1992 Wood Processing Industry was incorporated in 1980. It was a new industry fully owned by three foreigners who have lived in Zambia for a long time. Its main activity was to produce particle board, which hitherto had been imported into the country. In April 1984, DBZ approved a loan in the amount of US$2.96 million including US$960,000 from the second line of credit which was to finance machinery, plants, equipment and vehicles. Total project cost was K 4.942 million and DBZ's loan was for eight years with two years of grace, and at 13.5Z rate of interest. No information is available about the financial performance of this company. DBZ says that the company, formerly in arrears, is now current in its debt servicing. DBZ advanced another loan in the amount of K 1,120,000 to the company for expansion purposes in 1985. The company is labor intensive. It provided 159 job opportunities at an average investment cost of K 20,000 per job. Annex 3 -48- Page 14 of 20 BRR INDUSTRIES LTD. Loan Amounts US$600,000 Disbursed Amount: US$600,000 Principal Outstanding as at February 28, 1987: US$489,842 Proposed Date of Redemption: not known BRR is wholly owned by Zambians of Asian origin. It is located in Kabwe in the Central Province and was incorporated in October 1980. Its objective is to extract oil from oilseeds and produce oil cake for animal feed. It was scheduled to start commercial production in June 1982. Because of the 14 years delay in obtaining foreign exchange, cost estimates escalated. The project was originally estimated to cost K 2,870,000 in March 1981. That figure increased to K 5,233,000, by March 1983. DBZ had approved K 2,020,000 loan and K 225,000 equity for the company in 1981. An additional K 316,000 in loan was approved in March 1982 and another K 1,322,000 loan and K 55,000 in equity was also approved in 1983. DBZ's equity rose to 21Z and loans to 70Z of total project cost. The second line of credit was to finance K 706,000 (US$600,000) or 23Z of the foreign exchange component, of the purchase of machinery and equipment. DBZ's loan was for ten years with two years of grace and at 14Z rate of interest. BRR was not able to go into production until July 1985. In its first nine months of operation net profit was K 849,000 or 12 percent of turnover. Although BRR faces some competition, it is able to sell its products locally. The company has been able to service its loans with DBZ without any problem. Its debt service coverage ratio in 1986 was 1.6:1 which is reasonable. BRR was able to generate 101 jobs at a high average investment cost of K 51,812 (US$44,057). DBZ is pleased with the management and anticipates no problems in the company's future ability to service its debt. LEOPARD INVESTMENTS COMPANY LIMITED (LICL) Loan Amount: US$42,665 Amount Disbursed: US$42,665 Loan repaid in Feb. 1987 Leopard Investments Company Limited, located in Lusaka province, was incorporated in Zambia in 1958. It is 100% owned by Zambians. Its share capital improved from K 20,000 in 1974 to K 531,600 in 1980. It is principally engaged in beef production. The company took its first term loan of K 252,000 from DBZ in 1977 to expand its Kyndu Ranch and to build an abatoir with a capacity for handling 7,800 cattle per year. On average, only about 3,360 (43% of capacity) animals were slaughtered annually due to low production of Annex 3 Page 15 of 20 - 49 - steers. The company therefore decided to develop another ranch at a new location near Lusaka for breeding steers. It approached DBZ in 1981 for a term loan of K 80,400 to purchase machinery for land development and to construct paddocks and feedlots. Total project cost was K 300,000 of which the foreign exchange component (all financed by DBZ through loan 1923-ZA) was K 34,400 (US42,665). DBZ's loan was for six years including one year of grace and at an interest rate of 121 Project implementation proceeded smoothly and was completed on time without cost overrun. Accounts in the last three years showed that LICL is still financially viable even though performance has been declining since 1985. Net return on turnover declined from 171 in 1984 to 101 in 1986, so did net return on equity, from 10Z in 1985 to 7Z in 1986. The current ratio declined from 4.7:1 in 1984 to 1.4:1 in 1986. The company has redeemed its loans to DBZ and to : another for K 765,000 in January 1986. The declined performance in 1986 reflected the tougher macroeconomic situation in the country which greatly increased costs of imported materials and servicing of foreign loans in kwacha terms. It also reflected the reduced offtake in the herd after the drought which lasted until 1984. The project provided 15 job opportunities at an average cost of K 20,000/job which is reasonable. TABLE B-1 Leopard Investments: Key Financial Indicators (K'000) 1982 1983 1984 1985 1986 Turnover 1010 1531 2015 Equity 1190 1400 1603 Long-Term Debt 149 166 512 Net Profit 174 210 209 Depreciation ----------n/a--------- Interest on Lt debt 56 27 44 Repayment of Lt debt Ratios Net Return on Turnover 17 17 10 Net Return on Equity 7 10 7 Debt-Equity Ratio .06 .07 .17 Debt-Service Coverage Ratio ----------n/a-------- Current Ratio 4.7 2.5 1.4 Annex 3 Page 16 of 20 - 50 - FRANSHOECK FARMS LIMITED Loan Amount: US$295,329 Disbursed Amount: US$295,329 Loan was repaid in 1986. Franshoeck Farms was bought by the present Zambian owners in 1978. It is located in Lusaka Province. It is engaged in mixed farming, producing maize, sunflower, wheat and cattle. The purpose of the loan was to expand the area under cultivation,- and start the production of cattle on a fairly large scale. Total project cost was K 1.04 million of which DBZ was to finance K 0.56 million including a foreign exchange component of K 307,200. The rest was to be financed by the promoters and Barclays Bank. DBZ's loan was for ten years with two years grace, and at an interest rate of 122. 'According to DBZ, implementation went on smoothly without time overruns. Cost overruns, mainly in the local components, were marginal, only 112. Franshoeck has not submitted its accounts as required hence no assessment of its financial and economic performance is possible. However, during a site visit in August, 1986, DBZ discovered that the company was even in arrears on its short-term obligation to the commercial banks. While repayment of arrears to DBZ was being discussed, the management decided to redeem the loan and was able to do so late in 1986. ANDRUK LIMITED Loan Amount: US$56,665 Disbursed Amount: US$56,665 Principal Outstanding as at February 28, 1987: US$19,159 Proposed date of redemption: June 1987 Andruk Limited, located at Mkushi in the Central province, is engaged in crop farming, producing maize, soybeans and sunflower on 245 ha of land. It is owned by a family (husband is Yugoslavian but has lived in Zambia since 1967, and wife is Zambian). Because of increased domestic demand for these crops, the promoters decided to expand the area under cultivation to 395 ha, and requested a term loan from DBZ to purchase a combined harvester in 1981. Total project cost was estimated at K 129,000 of which DBZ was to finance the foreign exchange component totalling X 62,200. The rest was financed through commercial bank loans and additional equity. DBZ's loan was for four years with a year's grace and at a 12% rate of interest. Annex 3 - 51 - Page-17 of 20 Andruk experienced some implementation delays as the harvester did not arrive on time. As a result, the loan had to be rescheduled in 1984 (now redeemable in June 1987, a year after the original target date). The accounts for the company were not available during the mission but according to DBZ's estimates based on on-the-site supervision, Andruk was making a net return on sales of about 202. However, the company is in arrears to DBZ. About 70% of the loan is in arrears of over three months. Andruk has been unable to service its debt with DBZ because of its tight cash-flow situation. It has depended increasingly on bank overdraft at high interest rates for its working capital. The project led to the creation of 15 job opportunities at an average investment cost of K 9,000/job which is very good. UNITY TRANSPORT LIMITED Loan Amount: US$127,141 Disbursed Amountt US$127,141 Principal Outstanding as at February 28, 1987: US$30,400 Proposed date of redemption March 1986 Unity Transport Limited is located at Chipata in Eastern Province. It is owned by two Zambian brothers who started operating with few trucks in 1969 to transport agricultural goods for the Eastern Province Cooperative Union and NAMBOARD. They were just in the process of turning their business into a limited liability company in 1981 when they approached DBZ for a term loan to double capacity because of the increased demand for their services. Total project cost was K 722,000 of which DBZ was to finance K 354,000 (K 144,000 (US$180,000) in foreign exchange). The loan was to help purchase three Mercedez Benz trucks with matching trailers to increase the number of trucks from 4 to 7. The loan was for 5 years with one year of grace and at 124Z rate of interest. Implementation went smoothly but operations declined drastically due to the drought which affected agricultural output between 1982 and 1984, and also due to the heavy cost of repairs and spares after the devaluation of the kwacha. As a result of these problems, Unity Transport was not able to redeem its loan on schedule (proposed date of redemption was March, 1986). It accumulated arrears which was still as high as US$30.400 by February 28, 1987. The company did not submit any accounts to DBZ and hence, it is not possible to evaluate its financial and economic performances. The project generated 21 new jobs at an average cost of K 38,000 per job, which is higher than the upper limit set by DBZ at appraisal, but within the K 41,000 per job in the Transports sector. Annex 3 - 52 - Page 18 of 20 GRASMERE FARMS LIMITED (GFL) Loan Amount: US$24,665 Disbursed Amounts US$24,665 Loan was repaid in 1985. Grasmere Farms Ltd., was incorporated in Zambia in April. 1971. It is owned by a Zambian family of foreign origin, and is principally engaged in livestock farving on 4,000 ha of land in Lusaka province. The company approached DBZ in 1983 for a term loan of K 35,000 (US$30,000) for the development of a new breed of goats. Total project cost was estimated at K 115,000 with a foreign exchange component of K 35,000. The project consisted of constructing a goat pen, a night paddock, development of pastures, purchase from the Republic of South Africa (RSA) of 10 male and 20 female pedigree boer goats, and 400 local goats. DBZ's loan was to purchase the goats from RSA. The management of this company reported a cost overrun of 9% due to an underestimation of the transportation costs of goats from the RSA. About a third of the animals died because of poor transportation arrangements and long period of quarantine. It also took a long time to restore the remaining animals back to good health. According to the management, the project was a disaster due to the factors mentioned above. The loan has been repaid through earnings from other products of the farm. BIMZI LIMITED Loan Amount: US$98,063 Disbursed Amount: US$98,063 Principal Outstanding as at February 28, 1987: US$92,517 Proposed date of redemption: September 1989 Bimzi Limited was incorporated in Zambia in May, 1980, and is located in Lusaka. It is 100% owned by a Zambian family, and it is primarily engaged in the production of leather goods and garments. In 1983, its management approached DBZ for a term loan of K 171,000 (US$104,900) for the purchase of various machines for the expansion of production of leather goods (belts, hand bags, travel bags, wallets, etc.). Total project cost was K 255,000 of which the foreign exchange component was K 147,000 (US$90,200). DBZ's financing covered the foreign exchange component and 22? of local cost component. The rest was to be financed by increases in equity and bank overdrafts. Project implementation was smooth. An additional US$82,137 was later approved to cover increased cost of procurement due to currency Annex 3 53 - Page 19 of 20 changes. Bimzi's turnover increased from K 0.416 million in 1982 to K 8.0 million in 1986 - an increase of about 18002. The company operates at full capacity, with nine product lines and 62 product designs. Although detailed accounts for recent years were not available, net profit is estimated to have increased by 9002 between 1983 and 1985. Bimsi is the only major producer of leather goods in Zambia. Its raw materials (mostly leather) are obtained locally. The import content consists mainly of metal ornaments which are less than 202 of total cost of production. About 202 of the goods amounting to US$240,000 was exported in 1985. The operations are labor intensive. Thirty jobs were created at an average investment cost of K 10,000job which is considered very good. Bimzi has serviced its loans regularly. Its management is good. DBZ envisages no problems with the enterprise in the future. MORAKA FARMS LIMITED Loan Amount: US$15,000 Disbursed Amount: US$15,000 Principal Outstanding as at February 28, 1987: US$15,000 Proposed date of redemptiont January 1993 Moraka Farms had existed as a private farm for some time before 1984 when it was re-organized and formed into a limited liability company. It is owned by a couple. The wife, who owns 502 of the share capital, is a Zambian. Until 1984, the farm was engaged mainly in poultry production, but the owners decided to expand into fish production. In 1984, the company approached DBZ for a term loan in the amount of K 234,000 (K 34,000 of it was in foreign exchange) for the rehabilitation of the poultry component and the development of a fish pond. The poultry section was to be expanded to increase the production of point-of-lay pullets from 15,000 per year in 1985 to 25,000 at full capacity, and the fish pond would produce about 80 tons of fish per annum at full capacity. Total project cost was estimated at K 373,000 of which the promoters were to provide 252 as equity, DBZ, 632 as term loan and the remaining 122 financed through a commercial bank as overdraft. DBZ's Loan was for eight years with one year of grace and at an interest rate of 14.52. The fish pond component of the project has dragged on for a while (project was to be completed in September 1985), and up till now, has not been completed. Actual investment cost is presently estimated at about K 730,000 which nearly doubles the appraisal estimate. A major problem of the company has been the rising cost of local materials due to inflation. The company is in arrears, and DBZ is presently discussing how to resolve the issue. Although still under implementation, the company has had same impact on the economy. Its raw materials are all locally produced and it has generated about six job opportunities, although at a very high cost per Annex 3 - 54 - Page 20 of 20 job. DBZ thinks that at full implementation the project will be economically and financially viable. HAZEMBE TRACTOR COMPANY, LTD. Loan Amount: US$150,000 Disbursed Amount: US$148,631 Principal Outstanding as at February 28, 1987t US$85,066 Proposed date of redemptiont April 1991 Mazembe Tractor Company, Ltd, with locations in both Lusaka and Kitwe, was incorporated in Zambia in February, 1974. It is 10O% owned by Zambians. Its activities include selling and servicing of heavy equipment, and selling of spare parts. In 1985, the company approached DBZ for a term loan of US$150,000 for the purchase of a transmission test bench (AIDCO 850) to replace an outdated one which was no longer functional. About 60Z of the repairs done by Hazembe are for Zambia Consolidated Copper Mines Ltd (ZCCM). ZCCM has had to send the equipment abroad for overhaul at prohibitive prices, ever since Mazembe had found it difficult to meet their demand. The loan was to help save about K 6 million (US$3 million in foreign exchange) on the cost of transportation and repairs abroad. Total project cost was K 434,000 (US$217,000) of which DBZ was to finance 692, the rest was to be financed by the company. DBZ's loan was for 5h years with half a year of grace and at an interest rate of 152. Implementation proceeded without time overrun, but with 192 cost overrun in the local components of the project due to high domestic inflation. No financial statement has been issued since the completion of the project, hence it is difficult to judge the financial impact of the project on the economy. Nevertheless, the enterprise was operating profitably before the project, with a 172 return on equity in 1984 and a 15% return in 1985. The project is however capital intensive generating only 10 employment opportunities at an average investment cost of K 51,000 per job. DBZ stated that the company is operating smoothly without any arrears. The management is said to be competent and DBZ envisages no problems of debt servicing in the future. Anne < 4 :fii,9' w E 1ifi l li i filjli Ki9 a g 8 8 8 8 ljp q ; i - i ta i sk .9 Q 0 é0 0 0 1 0 le m m- ge i 11 一歸． 細總U !!!;；、 ，。，,,’〕〕〕〕〕〕〕―: l。〔······一”,&&’···一“ 57 - Annex 6 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Analysis of Loans Approved up to December 31, 1986 (Amounts in K'OOO) A. SIZE Number % Amount % I - 50,030 29 77 1,060 0.4 50,001 - 250,000 183 45.5 23,689 10.1 250,001 - 500,000 86 21.4 28,932 12.4 11*1 34,504 500,001 - 1,000,000 41 14*8 Over K I million 57 14.2 145,768 62*3 ZO-2 100.0 233,953 100.0 B. SECTOR Agriculture 155 38.6 39,604 16.9 Manufacturing 205 51.0 159,529 68.2 Mining & Quarrying 8 2.0 7,702 3.3 Tourism 16 4.0 16,034 6.9 Transport 15 3.7 6,434 2.8 Distribution 2 0.5 2,400 1.0 Construction 1 0.2 2,250 0.9 Trade - - - - 402 100.0 1-33,953 100.0 C. TYPE OF PROJECT New 235 58.5 129,211 55.2 Expansion 138 34 3 66,998 28.7 Rehabilitation 29 7.2 37,744 16*1 D. OWNERSHIP 402 100.0 T53,953 100.0, Private 362 90.0 165,087 70.6 Public 40 10.0 68 866 29.4 T2 T-00. 0 233:953 -10-0.0 E. LOCATION (Province) Lusaka 165 41.0 85,770 V-.7 Luapula 6 1.5 2,632 1.1 Central 40 10.1 17,686 7.6 Copperbelt 93 23.1 78,870 33.7 Eastern 16 4.1 6,373 2.7 Northern 24 6.0 11,679 5.0 North-Western 8 2.0 1,565 0.7 Southern 41 10.2 28,272 12.1 Western 9. 2.2 1 106 0.41 402 T-65.0 233:953 100.0 F. TERM Up to 5 years 68 16.9 23,859 10.2 5 10 years 312 77.6 196,041 83.8 10 15 years 21 5.2 13,053 5.6 Over 15 years 1 0.3 1,000 0.4, 402 100.0 T33,953 100.0 G. INTEREST RATE Up to 9% p.a. 35 8.7 12,687 5.4 9 12% p.a. 170 42.3 58,644 25.0 12 15% p.a. 21 5.2 29,344 2.6. I/ Including Forestry and Fishing. including Agro-Industries. 1RUEM 024E17 REEIRT ZAMBIA ^kvelopment BEnk of 7abia (DB) - lIom 1923-MA %4uity Förtfolio as of DmeMer 31, 1986 latest year knnt of ~hch actual thTany Projected DEZ DZ Share DLvidendM finanial Net tjany Dividnå Capital ~nvestment O<nership Received data Profit Net Worth DZ's in 1987 (K'00) (K'00) (%) 1985 1986 avaUiable (K'0O0) (KI'000) Provi~inna (K'000) I. Projects QperatiT without Probes 1. Saza Spinning M lsLtd 2,910 508 17.4 - - 31/12/85 - - - - 2. Swarp Spitrdzr Milis Ltd 4,000 400 10.0 - - 31/12/86 5,294 27,503 - - 3. Plywood M~mf. Ltd 1,600 360 22.5 - - 31/03/83 140 1,154 - - 4. BRR Industries Ltd 1,325 280 21.1 - - 31/03/86 - - - - 5. Rmer ZamMia Ltd 2,200 220 10.0 13 14 31/12/85 419 6,357 - 700 6. Zmin Knittirg ills 838 207 24.7 - - 31/03/83 390 650 - - 7. a Batteries Ltd 3,050 200 6.6 - - 31/03/86 1,683 10,938 - - 8. Nempast ltd 750 126 16.8 - - 31/03/86 611 1,576 - 9. Cntury Packages ltd 834 82 9.8 - - 31/03/86 373 - - - Subtotal 17,507 2,383 II. Projects Qperatirg with Mderate Problem 0) 1. NLtroge imn. (Z) Ltd 137,780 1,700 1.2 - - 31/03/86 (42,179) 160,781 - - 2. KaleyaS nallholder Itd 1,000 250 25.0 - - - -- 3. aluta Utoya Ltd 120 30 25.0 - - - - - - . 4. Footrks td 75 15 20.0 - - - - - - - Subotal 138,975 1,995 III. Projeets ier Twifimntation 1. Allen Ri¥ncerix ltd 116 28 24.1 - - 31/03/86 9 92 - - 2. Cisyao. ltd 144 24 16.7 - - - - - - - 3. Lindex Enterprises ltd 200 17 8.5 - - - - 4. Aloy ta Products 910 10 1.1 - - - 5. Omnica & n. Supp y ltd 1,887 377 20.0 - - - - - - 6. sha Starch Id 1,000 200 20.0 - - - - - 7. hiskne ud 880 140 15.9 - - - - - -- 8. Chvwa 1e Projert L1d 415 103 24.8 - 9. Mfw est~ ltd 450 100 21.7 - - - - - - - 10. Mfm Inveshtens Id 377 80 21.2 - - - - Subtotal _ 1il 0-7-9 'rAL 162,871 5,457 13 14 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Summary of Operations as of December 31, 1986 (K'000) Year Ending March 31 1982 1983 1984 1985 1986 1987 Approvals 1/ Projected Actual Projected Actual Projected Actual Actual Actual Projected Equity Investments 300 190 300 67 300 638 1,001 506 Local Currency Loans 11,664 17,682 13,997 5,620 16,796 10,738 16,810 52,200 Forex Loans 14,256 7,288 17.107 6,12 20 529 18,119 28,525 5 000 - Total 26,220 25,160 31,404 11,810 37,625 29,495 46,396 57,706 113,942 Commitments Equity Investments 300 190 300 12 300 638 1,001 500 500 Local Currency Loans 11,178 18,660 13,414 8,181 16,096 11,608 15,291 43,578 8,119 Forex Loans 13,662 12,092 16,394 8 858 19,674 12,946 25,968 10,896 18,266 Total Commitments 25,140 30,942 30,108 17,501 36,070 25,192 42,260 54,254 99,957 Disbursements Equity Investments 300 453 300 500 300 170 27 500 500 LocaL Currency Loans 10,246 12,374 12,296 12,075 14,755 6,167 14,554 37,920 73,668 Forex Loans 10,875 11,340 13,298 12,805 15,958 10,310 18.640 16,925 15 318 Total Disbursements 21,421 24.167 25,894 25,380 31,013 16,647 33,221 55,345 89,486 1/ Net of CanceLlations 60 Annex 9 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Analysis of Loans in Arrears, 1981 to 1986 (in K Million) Ending March 31 1981 1982 1983 1984 1985 1986 NUMBER OF LOANS IN ARREARS Total number of loans in portfolio 191 224 283 288 315 303 Number of loans in arrears over 3 months 39 45 63 82 106 117 - as % of total loans 20 20 22 28 34 39 PRINCIPAL AFFECTED BY ARREARS Total principal outstanding 42 58 84 100 136 177 Principal affected by arrears over 3 months 8.7 25.8 39.3 67.1 90.1 - as a % of total principal outstanding 15 31 39 49 51 TOTAL AMOUNTS OVER 3 MONTHS IN ARREARS Principal 1 2 4 10 20 18 Interest 1 2 3 5 10 12 Total 2 4 7 15 30 30 - as 2 of total principal outstanding 5 7 8 15 22 17 COLLECTION PERFORMANCE Arrears at beginning of year Principal 1 1 2 4 10 20 Interest 1 1 2 3 5 10 Total 2 2 4 7 15 30 Collections during year Principal 2 7 9 11 15 24 Interest 2 5 8 12 11 18 Total 4 12 17 23 26 42 Collection ratio 1/ 100 86 81 74 63 81 I/ As % of amount coming due. M gm- g PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Projected and Actual Balance Sheets, 1982-87 (K'000) (9 months) Fiscal year ended March 31, 1982 1983 1984 1985 1986 1987 ASSETS Projected Actual Projected Actual Projected Actual Actual Actual Actual Cash and Bank Deposits 550 3,005 550 6,386 550 10,184 11,954 12,883 11,093 Other Current Assets 988 2, 898 174 4898 - 7,021 14,097 17,227 29,325 Total Current Assets 1,538 5,903 724 11,284 550 17,205 26,051 30,110 40,418 Portfolio Loans 52328 57,776 70,392 84,452 92,246 99,510 136,062 177,150 197,829 Staff Housing Loans 500 198 500 839 500 2,216 3,813 5,384 9,465 Equity Investments 1,402 913 1,702 1,413 2,002 1,583 1,842 4,218 4,675 Net Fixed Assets 1,637 3,308 1,652 3,961 1,667 4,602 4,921 5,406 6,189 Other Investments - - - 40 - 84 136 425 - TOTAL ASSETS 57,405 68,098 74,970 101,989 96,965 125,200 172,825 222,693 258,576 a=mm amm mm mammes sfmm nomm mass=ss a LIABILITIES AND EQUITY Current Liabilities 500 2,710 500 4,388 500 6,195 9,411 13,964 31,841 Medium & Long Term Debt 33,041 40,111 49,871 68,062 70,949 91,823 135,371 174,790 184,894 Subordinated Loans 10,000 7,425 10,000 10)000 10,000 10.000 10,000 10,000 101000 Total MLT Debt 43,041 47,536 59,871 78,062 80,949 101,823 145,371 184,790 194,894 Special Funds - 3,033 -- 3,602 - 333 26 (803) - Equity: Share Capital 10,000 10,000 10,000 10,000 10,000 10,000 10,000 18,950 24,550 Accumulated Reserves 3,864 4 819 4 599 5 937 5 516 6 849 8 017 6 59 7.291 Total Equity 13,86 14.81 lfW~9 15,93 15.51 10584 18'17 7t,509 3184 Unrealized E-change Lotss - - - - - - - (767) -- TOTAL LIABILITIES AND EQUITY 57,405 68,098 74,970 101,989 96,965 125,200 172,825 222,693 258,576 o- PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Projected and Actual Income Statements, 1982-87 (K'000) (9 months) Fiscal year ended March 31, 1982 1983 1984 1985 1986 1987 INCOME Projected Actual Projected Actual Projected Actual Actual Actual Actual Loan Income and Charges 6,032 6,698 8,163 9,503 10,798 12,765 19,418 25,452 25,884 Other Income 89 491 32 1,003 20 937 2,364 1,190 375 TOTAL INCOME 6,121 7,189 8,195 10,506 10,818 13,702 21,782 26,642 26,259 EXPENSES Financial Charges 2,551 3,322 3,993 5,061 5,763 8,168 11,125 14,804 16,371 Administrative Expenses 1,098 1,280 1,209 1,574 1,332 2,093 2,724 4,352 5,229 Depreciation 54 111 54 218 54 295 387 547 657 Provisions - 271 - 635 -- 434 4,001 3,277 2,100 Loss on Exchange -- -- -- - - - -- (383) (402) TOTAL EXPENSES 3,703 4,984 5,256 7,488 7,149 10,990 18,237 23,363 24,759 NET PROFIT BEFORE TAX 2,418 2,205 2,939 3,018 3,669 2,712 3,545 3,279 1,500 Taxes 1,100 1,030 1,100 1,400 1,100 1,300 1,877 1,640 - NET FROFIT, AFTER TAX 1,318 1,175 1,839 1,618 2,569 1,412 1,668 1,639 -- PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Projectedl/ and Actual Financial Ratios, 1982-87 (K'000) Provisional (9 months) Fiscal year ended March 31, 1982 1983 1984 1985 1986 1987 Income Statements as % Average Total Assets Projected2/ Actual Projected Actual Projected Actual Actual Actual Actual Loan Income and Charges 12.0 9.8 12.3 11.1 12.5 11.1 13.0 12.8 10.8 Other Incone 0.2 0.8 0.1 1.2 0.1 0.9 1.6 0.7 - Total Incone 12.2 10.6 12.4 12.3 .6 12.0 14.6 13.5 10.9 Financial Charges 5.1 4.9 6.0 6.0 6.7 7.0 7.5 7.5 6.8 Administrative Expenses 2.2 1.9 1.8 1.9 1.5 1.8 1.8 22 2.2 Provisions - 0.4 - 0.7 - 0.4 2.7 1.7 0.9 Others3/ -- -- -- 0.3 -- 0.3 0.3 0.53/ 0.44/ Net Profit Before Tax 4.8 1.7 4.4 3.5 4.3 2.4 2.4 1.7 0.6- Profitability Indicators Net Profit as % of Av. Equity 10.2 8.1 12.1 11.0 14.6 8.6 9.6 7.5 -- Portfolio Income as % of Average Portfolio 13.0 16.6 12.9 13.3 12.9 13.8 16.4 16.2 13.8 Financial Charges as % of Borrowing 8.3 . 7.4 8.9 8.2 8.5 8.9 Spread 8.3 5.9 4.9 8.2 7.7 4.9 Financial Structure Indicators Long-Term Debt,-quity year end 1.4 1.7 2.0 2.6 2.7 3.4 4.8 4.9 4.4 Debt Service Cc ,rage Ratio 5.1 1.4 4.9 I.b 5.1 1.9 1.4 1.1 1.8 1/ As contain, in the appraisal report. 2/ 1982 figui are based on total assets in 1982. 3/ Depreciat' Loss on foreign exchange. 4/ Including for foreign exchange loss. - 64 - Annex 13 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Resource Mobilization as of December 31, 1986 Grace Interest Amoint Amount Date of Maturity Maturity Period Rate Commission Disbur.ed as Outstanding Commitment (Amount) (Years) (Years) % % of 12/31/86 as of 12/31/86 A. LOCAL (K '000) (K '000) (K '000) RESOURCES GRZ 04/04/75 1,000 13 5 6.25 - 1,000 462 ZNPF 12/19/75 1,000 12 4 7.5 - 1,000 648 ZNPF 1980 2,250 24 4 8.5 - 1,834 1,834 ZNPF 01/27/83 10,000 7 - 8.75 - 10,000 7,418 ZNPF 09/23/85 10,000 5 - 12.0 - 10,000 9,244 Barclays Various 10,000 3 - 8.75 - 10,000 10,000 Citibank Various 5,000 3 - 24.25 - 5,000 5,000 Standard Various 16,000 3 - 24.25 - 16,000 16,000 ZNCB Various 6,000 3 - 24.25 - 6,000 6,000 BCCI Various _5000 3 - 9.0 - 5.000 5,000 Subtotal 66,250 65,834 61,606 B. SUBORDINATED LOAN STOCKS BOZ 04/01/83 4,425 - - 15 - 4,425 4,425 ZSIC 04/01/83 4,575 - - 15 - 4,573 4,575 ZNPF 04/01/83 1000 - - 15 - 1,001) 1,000 Subtotal 10,000 10,00() 10,000 TOTAL 76,250 75,831. 71,606 Borrowings by DBZ as of December 31, 1986 B. FOREIGN EXCHANGE ADE I 07/23/73 UA1,800 10 3 6 1 4,337 429 ADB II 06/26/80 UA8,000 12 3 7.5 1 17,894 15,042 ADS III 03/12/82 UA10,000 12 3 7.5 1 19,309 20,641 IBRD I 07/23/73 US$15,000 14 3 8.5 - 33,512 608 IBRD II 01/08/81 US$15,000 14 3 9.2 - 34,387 36,284 EIB 1 01/31/78 ECU2,500 8 4 5.45 - 5,232 2,178 EIB II 09/30/81 ECU6,500 8 4 8 - 11,767 12,040 Risk Capital 09/30/81 ECU1,500 5 1 4 - 5,747 6,168 DEG 08/20/80 DM 6,000 10 2 8 - 5,014 1,775 BADEA 02/24/82 US$10,000 8 3 8 - 17,287 17,209 OPEC FUND 07/13/82 US$15,000 15 5 1 - - - FMO 04/10/84 DFL 6,000 6 4 8.5 1.5 9,090 9,914 TOTAL 163,576 122,288 - 65 - Annex 14 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Status of Compliance with Major Covenants 1. DBZ shall charge an interest rate if In compliance. at least 12% p.a. on all its subloans. 2. DBZ shall take all steps satisfactory to In compliance. the Bank so as to protect itself against DBZ passed on the risk of loss resulting from changes in the risk to subborrowers. rates of exchange between currencies (including kwacha) used in its lending and borrowing operations. 3. DBZ shall furnish to the Bank, no later than In compliance. six months after the end of each fiscal year, its audited financial statements. 4. DBZ shall maintain a debt-equity ratio not Non-compliance. exceeding 4:1. DBZ's current (1986) debt-equity ratio is 4.9:1. - 66 - Annex 15 PROJECT COMPLETION REPORT ZAMBIA Development Bank of Zambia (DBZ) - Loan 1923-ZA Schedule of Estimated vs. Actual Cumulative Disbursements (US$ '000) Appraisal Actual Actual as % Year and Quarter Estimate Disbursements of Estimate FY81 June 30, 1981 950 FY82 Sept. 30, 1981 - 3,090 - Dec. 31, 1981 200 4,830 2,415.0 Mar. 31, 1982 400 5,870 1,467.5 June 30, 1982 700 7,920 1,131.4 FY83 Sept. 30, 1982 1,100 9,800 890.9 Dec. 31, 1982 1,600 10,210 638.1 Mar. 31, 1983 2,200 10,350 470.5 June 30, 1983 2,900 10,660 367.6 FY84 Sept. 30, 1983 3,600 11,630 323.1 Dec. 31, 1983 4,400 12,020 273.2 Mar. 31, 1984 5,300 12,200 230.6 June 30, 1984 6,200 12,820 206.8 FY85 Sept. 30, 1984 7,200 13,570 188.5 Dec. 31, 1984 8,200 13,830 168.7 Mar. 31, 1985 9,200 14,410 156.6 June 30, 1985 10,100 14,530 143.9 FY86 Sept. 30, 1985 10,900 14,780 135.6 Dec. 31, 1985 11,700 14,850 126.9 Mar. 31, 1986 12,400 14,850 119.8 June 30, 1986 13,100 14,920 113.9 FY87 Sept. 30, 1986 13,800 14,920 108.1 Dec. 31, 1986 14,300 14,920 104.3 Mar. 31, 1987 14,700 14,920 101.5 June 30, 1987 15,000 14,930 99.5 ATTACHMENT Page 1 of 2 DEVELOPMENT BANK OF ZAMBIA Coments Received from DBZ Telephone: 219614-9, 217065 All correspondence to Development House Telegram: DEVBANK be addressed to the Katondo Road Telex: ZA 45040 Man.im oreto P.O. Box 33955 LUSAKA g ZAMBIA Your Ref: Our Ref: Dz 25 July 1989 Mr Alexander Nowicki Division Chief Policy-Based Lending, Industry Public Utilities & Urban Sectors Operations Evaluation Department 1818 H Street N.W. Washington D.C. 20433 USA Dear Mr Nowicki SECOND DEVELOPMENT BANK OF ZAMBIA PROJECT LOAN (1923-ZA) PROJECT PERFORMANCE AUDIT REPORT I wish to acknowledge receipt of your letter of 22nd June, 19F9, together with the Project Performance Audit Report. Your candid observations and comments on DBZ will be a useful input in our future policy formulations and modifications. Meanwhile, I take this opportunity to comment on the following issues you addressed: a) Foreign Exchange Risk We appreciate and take note of your comments and views regarding DBZ's practice of assuming the foreign exchange risk between the US Dollar and the currency of disbursement and the passing of the risk between the US Dollar and the Kwacha down to DBZ sub-borrowers. However, we cannot at the moment take a precipitate decision until we have critically evaluated and found a feasible modality acceptable to all parties concerned including the Government authorities. b) Debt-Equity Limits of 4: 1 After 1991 we expect again to increase DBZ's share capital to bring it in line with growth in its portfolios. c) Employment creation by DBZ Funded Projects Economies of developing countries like that of Zambia are prone to frequent devaluations resulting in increased local 2/..... ATTACHMENT - 68 - Page 2 of 2 currency cost for the same unit of foreign currency. This tends to pervert the ratio of labour employed to capital. All the same, we shall endeavour to encourage projects that absorb more labour than capital. d) Import - Dependence In the last two years, although this may not apply to the projects financed under Loan 1923-ZA, the Bank has vigorously pursued a policy of financing projects that are export oriented with a sound local base of raw materials. This policy will be pursued indefinitely. I trust you will take my comments and remarks above into consideration when you compile your final report. Yours sincerely J D K Mtumbi ACTING MANAGING DIRECTOR c c Senior Permanent Secretary Ministry of Finance & National Commission for Development Planning LUSAKA Permanent Secretary Ministry of Commerce & Industry LUSAKA