Barbados - Industrial Credit Project

Documnet of The World Bank FOR OFFICIAL USE ONLY ReportNo. 10741 PROJECT COMPLETION REPORT BARBADOS INDUSTRIAL CREDIT PROJECT (LOAN 2260-BAR) JUNE 19, 1992 MIGOlFIC,H (,()PYrz Rtoport Nc. 10741 -E,AR Type: (PC.h) MASC)N-AN1)YI XWL106 / T9111/ OEDID2 Trade, Finance & Industry Operations Country Department III Latin America and the Caribbean Region This document has a restricted distribution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Barbados Dollar (BD$) US$1 BD$2 BD$1 US$0.50 GLOSSARY OF ABBREVIATIONS BARC - Barclays Bank PLC BDB - Barbados Development Bank BNB - Barbados National Bank BNS - Bank of Nova Scotia CARICOM - Caribbean Community CBB - Central Bank of Barbados CCB - Caribbean Commercial Bank CIBC - Canadian Imperial Bank of Commerce ERR - Economic Rate of Return FRR - Financial Rate of Return GOB - Government of Barbados ICF - Industrial Credit Fund at the Central Bank of Barbados PCR - Project Completion Report PFIs - Participating Financial Intermediaries RBC - Royal Bank of Canada SAR - Staff Appraisal Report FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY THE WORLD BANK Washington. D.C 20433 USA Office of Dfetetot.General Operations Evaluation June 19, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Barbados Industrial Credit Project (Loan 2260-BAR) Attached, for information, is a copy of a report entitled "Project Comoletion Report on Barbados - Industrial Credit Project (Loan 2260-BAR)" prepared by the Trade, Finance and Industry Division, Country Department III of the Latin America and the Caribbean Regional Office, with Part II contributed by the Borrower. No audit of this project has been made by the Operations Evaluation Department at this time. Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT BARBADOS INDUSTRIAL CREDIT PROJECT (LOAN 2260-BAR) TABLE OF CONTENTS Page No. PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . .i EVALUATION SUMKARY .... . . . . . . . . . . . . . . . . .. iii Part I. PROJECT REVIEW FROM BANK'S PERSPECTIVE 1. Project Identity . . . . . . . . . . . . . . . . . . . . . . 2. Background .... . . . . . . . . . . . . . . . .........1 3. Project Objectives and Description . . . . . . . . . . . . . 2 4. Project Design and Organization . . . . . . . . . . . . . . 2 5. Project Implementation . . . . . . . . . . . . . . . . . . . 4 6. Project Results . . . . . . . . . . . . . . . . . . . . . . 5 7. Project Sustainability . ....... . . . . . . .. . .. 7 8. Bank Performance . . .. ....... ... . . ...... . 8 9. Borrower Performance ... ... .. ....... .....8 10. Project Relationship . . . . . . . . . . . . . . . . . . . . 8 11. Consulting Services . . . . . . . .. . . . . . . 9 12. Project Documentation and Data . . . . .. . .v . . . . . . 9 Part II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . 11-13 Part III. STATISTICAL INFORMATION 1. Related Bank Loans .... .... . . . . . . . . . . . . . 15 2. Project Timetable .... . . . . . . . . . ... .... . 16 3. Cumulative Estimates and Actual Disbursements . . . . . . . 18 4. Status of Covenants . . . . . . . . . . . . . . . . 19 5. Use of Bank Resources . . . . . . . . . . . . . . . . . . 20 6. Project Implementation 6.1 Overview of Subprojects . . . . . . . . . . . . . . . 21 6.2 institutional and Industrial Distributions of Subprojects . . . . . . . . . . . . . . . . . . . . . . 22 6.3 Characteristics of Large Subprojects . . . . . . . . . 23 6.4 Actual Performance of Large Subprojects . . . . . . . 24 6.5 Detailed List of All Subprojects by Sector/Subsector . 25 6.6 Project Costs and .'inancing . . . . . . . . . . . . . 29 7. ICF's Financial Performance 71. Audited Income and Accumulated Earnings Statement, 1984-90 . . . I . . . . . . . . . . . . . . 30 7.2 Audited Balance Sheet (as of December 31), 1984-90 . 31 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT BARBADOS INDUSTPRIAL CREDIT PROJECT (LOAN 2260-BAR) PREFACE This Project Completion Report (PCR) -eviews the performance of the Industrial Credit Project in Barbados for which Loan 2260-BAR (llS$10.5 million) was approved by the Board on April 12, 1983. The Loan had a credit component of US$10.0 million and a technical assistance (TA) component of US$0.47 million. The proceeds of the credit component were channelled through the Industrial Credit Fund (ICF) established in the Central Bank of Barbados (CBB) for onlending to private enterprises in the industrial and tourism sectors and related services, through financial intermediaries. The loan was closed with the cancellation of US$0.18 million on November 30, 1990, nearly three years after the original Closing Date. Parts I and III of the PCR were prepared by the Trade, Finance and Industry Operations Division, Country Department III, Latin America and the Caribbean Region (LA3TF). Part II has been prepared by the Project Executing Agency (ICF). The entire draft PCR has been sent to the Borrower and ICF for their review and comments. The Borrower approved Part II prepared by ICF without comments on Parts I and III. This PCR is based on the Staff Appraisal Report (SAR); the Loan and Project Agreements; supervision reports; internal Bank memoranda; correspondence between the Bank and the Borrower/CBB/Participating Financial Intermediaries (PFIs); ICF's audited annual financial statements and periodic progress reports; and data compiled by ICF on subprojects and World Bank missions' interviews with selected subborrowers.  - iii - PROJECT COMPLETION REPORT BARBADOS INDUSTRIAL CREDIT PROJECT (LOAN 2260-BAR) EVALUATION SUMMARY 1. Obiectives. The principal objectives of the project were to: (a) accelerate investment to expand industrial output and exports; (b) generate increased employment to absorb part of the expanding labor force and help alleviate unemployment; (c) establish a new mechanism for expanding tha supply of term credit by using all the banking institutions; and (d) contribute to the Government's energy conservation program by financing energy-saving devices and processes (para. 3.1). 2. Implementation Experience. The project did not involve any unusual risks, but the last disbursement took place 31 months after the original Closing Date of December 31, 1987, due mainly to the delay in initiating studies on the tourism industry, and export competitiveness and marketing (paras. 3.2, 5.1 and 8.1). Disbursements of the credit component were completed without major delay. While the banking sector in Barbados was highly liquid during 1984-88, the bulk of credit component was committec1 and disbursed during this period as commercial banks preferred to use long-term resources provided under the project for funding relatively large (US$250,000 to US$1.5 million) term-loans rather than utilize their own contractually ahert-term deposit resources to avoid or minimize the risk involved in term- transformation (paras. 5.1 and 5.2). The project's two-tier credit system under the Industrial Credit Fund (ICF) established by the Central Bank of Barbados (CBB) was timely and appropriate as it became apparent that the Government-owned Barbados Development Bank (BDB) alone could not cover credit demand of various types and scales of private enterprises and that the BDB's performance deteriorated during project implementation (para. 5.3). Also, the organization of ICF, while simple, was appropriate, given the strong support provided by other units of CBB (para. 4.5). On the whole, ICF's performance in implementing the credit component was satisfactory (para. 9.1). 3. Results. The project has largely met its objectives. First, the credit component (US$9.8 million) of the project was used to finance as many as 133 subprojects (as compared with about 100 estimated at the time of appraisal) with aggregate investments of about US$28.6 million. Most of the medium-and large-size subprojects (involving IBRD funding more than US$250,000 but less than US$1.5 million) were export oriented and currently operating profitably. Thus, the project contributed to the expansion of output and exports. Second, although the number of jobs created did not reach the level (of about 1,000) estimated at the time of appraisal, the project did generate at least 426 new jobs. Third, the two-tier credit mechanism introduced under  - iv _ the project made it possible to use commercial banks as intermediaries for developmental-type lending. In addition, results of export competitiveness and iisketing studies financed under the technical assistance component have proviW d a basis for the ongoing policy dialogue between the Government and the Bank (para. 6.5). Although the project provided for financing of aubprojects specirically designed to finance energy saving devices and processes, no such subproject was submitted for financing. 4. Performance of 133 subprojects financed has been mixed. Eleven medium-and large-size subprojects absorbed US$8.2 million equivalent of IBRD resources. Of these eleven subprojects, nine subproject firms were assessed by Bank missions as being operating profitably, one hotel was found to be operating at a loss, and one agroindustry subproject was evaluated by the ICF as being virtually bankrupt. These subprojects created approximately 426 new jobs as against 424 estimated at the time of subproject approval. Except for one virtually bankrupt subproject, all medium-and large-size subborrowers kept their loans current. Performance of 122 small subprojects (which received US$1.6 million equivalent of IBRD resources) is difficult to assess due to the lack of information. However, according to BOB data on subborrowers' debt servicing performance, 37 subloans out of 120 subloans financed by BDB were in arrears for three months or more at the end of February 1991. The total amount of these subloans in arrears was about US$0.7 million equivalent, or 7.1% of total ICF/IBRD subloans (paras. 6.2 and 6.3). 5. _ustiinabilitv. The institutional arrangements for the two-tier credit system, established for the first time in Barbados under this project proved sustainable as the arrangements have worked well under the project and the European Investment Bank has started using the same institutional arrangements (including the same operating guidelines) used in the project. However, with4.n this basic institutional structu~re, its modus operandi should be reviewed from time to time and modified as necessary to correct past mistakes and to deal with emerging issues (para. 7.1). The sustainability of benefits of subprojects financed is difficult to assess precisely. However, most of medium-and large-scale projects have performed well in competirg in regional (and in a limited way in extra regional) markets; they should be abJ.e to adapt to a changing competitive environment. Not all small subprojects would survive over the long run without restructuring of their operations (para. 7.2). 6. Findings and Lessons Learned. The project has largely met its objectives. In retrospect, however, the project experience is instructive in a number of respects. It suggests that specific financial soundness criteria for financial intermediaries to become and remain eligible PFIs should be established at the outset of project cycle. In the absence of such criteria (the establishment and enforcement of which are now mandatory in the Bank), there was no basis on whicn to trigger the disqualification of a weak institution or the enforcement of formulation and implementation by such an institution of an action program for meeting specific financial targets (paras. 5.3 and 8.2). The terms of reference for studies should be agreed upon at an early stage of project cycle to avoid delays in loan disbursements (paras. 8.1 and 8.2).  PROJECT COMPLETION REPORT BARBADOS INDUSTRIAL CREDIT PROJECT (LOAN 2260-BAR) PART I. PROJECT REVIEW4 FROM BANK'S PERSPECTIVE 1. Proiect Identity Name Industrial Credit Project Loan Number : 2260-BAR RVP Unit : Latin America and the Caribbean Country Barbados Sector Industrial Finance Subsector : Manufacturing and Tourism and Related Services 2. Background 2.1 The key components of the development objectives and strategy pursued by the Government of Barbados (GOB) (at the time of project appraisal) were: (a) to foster rapid economic growth and reduce unemployment, mainly by promoting a sustained expansion of tourism and manufacturing; (b) to achieve a higher degree of economic diversification by promoting manufacturing and non- sugar agricultural exports; and (c) to achieve a higher degree of self- sufficiency by promoting the energy conservation and the development of traditional and nontraditional sources of energy. 2.2 The Industrial Credit Project (Loan 2260-BAR) was the Bank's second lending operation in support of the industrial sector in Barbrdos, following the Induscrial Development and Export Promotion Project (Loan 1813-BAR) which was implemented during 1980-85. The objectives of Loan 1813-BAR were largely achieved despite the failure to introduce the economic rental rates for industrial estates component. Under Loan 1813-BAR, the Barbados Development Bank (BDB) was the only financial intermediary used for channelling the credit component of the Bank loan to the industrial sector. At ths time of preparation of Loan 2260-BAR, the Bank and the Central Bank of Barbados (CBB) recognized a need for establishing a new mechanism to use commercial banks, in additior. to 3DB, as a channel for onlending to ensure broader coverage cf cred.t demand of various types and scales of enterprises in the industrial and tourism sectors. 2.3 Sector development objectives noted in para. 2.1 above and the CBB's objectives to increase development-type lending by commercial banks were adequately reflected in the design of the project. In the aftermath of decline in performance of the ~_'du3trial and tourism sectors, the Government in 1985 initiated discussions with the Bank on studies to identify steps to be taken to improve Barbados' overall international competitiveness and marketing. These discussions resulted in the use of Loan 2260-BAR to finance  -2- two studies on "Export Competitiveness and Marketing" and "Tourism Development" (paras. 3.2, 5.1 and 11.1). 3. Prolect Oblectives and Description 3.1 The project aimed to support the development of the industrial and tourism sectors by making term resources available through participating financial intermediaries (PFIs). The specific objectives were to: (a) accelera.e investment to expand industrial output and exports; (b) generate increased employment to absorb part of the expanding labor force and help alleviate unemployment; (c) establish a new mechanism for expanding the supply of term credit by using all the banking institutions; and (d) contribute to the Government's energy conservation program by financing energy-saving devices and processes. In addition to financing the establishment and e7yansion of business ventures, the project was also intended to help maintain the viability of existing enterprises by providing them with working capital to increase the prevailing low utilization of installed capacity. 3.2 The project provided: (a) US$10.0 million for on-lendirg to all productive activities in the industrial and tourism sectors and related services; (b) US$0 25 million for a consultant for two-years to build up an apex institution (Industrial Credit Fund--ICF, see paras. 4.1 and 4.4) and its staff; and (c) an unallocated amount of US$0.22 million that could be used for technical assistance (TA) to finance sectoral studies or program needed in the course of project implementation or to strengthen the Barbados National Bank (BNB), Barbados Development Bank (BDB), or ICF. CBB was able to establish and manage ICF without a need for consultant assistance arising. At the request of the Government, the Loan and Project Agreements were amended in November 1988 to reallocate US$0.25 originally allocated for TA to ICF and unallocated US$0.22 million to finance the two studies noted in para. 2.3. 4. Proiect Design and Organization 4.1 To accomplish the project objectives, a two-tier credit system was established, comprising the CBB as the apex institution and a network of PFIs qualified by CBB. CBB established a special fund, the Industrial Credit Fund (ICF), with separate financial resources, accounts and staff for on-lending through PFIs. The Government of Barbados (GOB), the Borrower, passed on the Bank loan proceeds of the credit component as an equity contribution to ICF. Thus, the GOB assumed the foreign exchange risk as well as variations in the Bank's lending rate. All financial institutions legally established in Barbados and accredited by CBB were eligible to participate in the ICF scheme. ICF's Statement of Policies, accepted by the Bank, did not specify financial soundness criteria for financial institutions to become eligible for participating in the scheme. PFIs were to be responsible for administering  -3- all subloans. ICF, mainly through CBB's Supervision Department, would follow %%p on the PFIs' operations, check, on an ad-hoc basis, the performance of final beneficiary firms and ensure the p-oper utili7ation of ICF resourcos for the purposes of the project. 4.2 ICF's financing was available for all productive private enterprises in the industrial and tourism sectors and related services for new ventures, expansion, renovation and restructuring of existing firms, working capital for increasing capacity utilization and energy conservation devices. Subloans for working capital not associated with the fixed asset investments were limited to an aggregate amount of US$5.0 million, but such subloans were not made. The Bank loan would reimburse CBB for 90% of ICF d