Ghana - Private Enterprise and Export Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 18520 IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CR. 2502-GH) October 29, 1998 Private Sector & Finance Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit: Cedi US $1.00 = Cedi 2,325 (September 9, 1998) FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BOG Bank of Ghana EAP Environmental Action Plan ECRGF Export Credit Refinance and Guarantee Facility EFC Export Finance Company EFO Export Finance Office - BOG ERP Economic Recover Program FINSAC Financial Sector Adjustment Credit GEPC Ghana Export Promotion Council GIC Ghana Investment Center GSE Ghana Stock Exchange IDA International Development Association MFEP Ministry of Finance and Economic Planning NIC National Insurance Commission NPART Non-Performing Assets Recovery Trust NTE Non-Traditional Export PIU Project Implementation Unit - MFEP PFI Participating Financial Institution PVE Potentially Viable Enterprise SCB Standard Chartered Bank SOE State-Owned Enterprise SEC State Enterprises Commission SME Small and Medium Scale Enterprise TIP Trade and Investment Project USAID United States Agency for International Development Vice President :J. L. Sarbib Director :P. Harrold Acting Sector Manager :G. Byam Staff Member :M. Manalo  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE OF CONTENTS Preface Evaluation Summary i Part I Project Implementation Assessment A. Background I B. Project Objectives and Description I C. Implementation Experience and Results 3 D. Major Factors Affecting the Project 8 E. Project Sustainability 9 F. IDA's Performance 9 G. Borrower's Performance 9 H. Assessment of Outcome 10 I. Future Operations 10 J. Key Lessons Learned II Part II Statistical Annexes 12 Table I Summary of Assessment 12 Table 2 Related Bank Loans/Credits 13 Table 3 Project Timetable 14 Table 4 Cumulative Estimated and Actual Disbursements 15 Table 5 Key Indicators for Project Implementation 16 Table 6 Key Indicators for Project Operation 16 Table 7 Studies Included in Project 17 Table 8A Project Costs (US$m) 18 Table 8B Project Financing (US$m) 18 Table 9 Economic Costs and Benefits 18 Table 10 Status of Legal Covenants 19 Table I I Bank Resources - Staff Inputs (Staff Weeks) 21 Table 12 Bank Resources - Staff Missions 22 Appendix: I Final Supervision Mission's Aide Memoire 2 Borrower's Contribution to the ICR 3 IDA's Response to the Borrower's Evaluation 4 Exporters Assisted under the Project Map .This document has a restricted distribution and may be used by recipients oaly in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CR. 2502-GH) PREFACE This is the Implementation Completion Report (ICR) for the Private Enterprise and Export Development Project in Ghana for which IDA Credit 2502-GH in the amount of SDR 29.6 million (approximately US$41 million equivalent at appraisal) was approved on July 26, 1993 and became effective on December 21, 1993. The credit was closed on March 31, 1998, as originally scheduled. As of October 25, 1998, approximately SDR12 million (aproximately US$17 million) was disbursed; final refund of the special account was still taking place when this report was finalized. This ICR was prepared by Marilyn Manalo, Private Sector Finance Group of the Africa Region and reviewed by Gerard Byam, Sector Manager, Private Sector Finance Group and Jerome Chevallier, Project Adviser, Operations Support. Preparation of the ICR began during IDA's final supervision mission in January 1998. The Borrower contributed to the ICR by providing its views as reflected in the mission's aide memoire of February 6, 1998 (Appendix 1), furnishing information incorporated in the report, and providing their own evaluation of the Project's preparation and execution (Appendix 2). A response by IDA on some of the Borrower's comments in their report was necessary and is attached as Appendix 3. A list of private sector beneficiaries under the Project is found in Appendix 4.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (PEED) (Credit 2502-GH) EVALUATION SUMMARY Project Objectives and Description 1. The objective of the PEED project was to foster the growth of private Ghanaian non-traditional exports (NTEs). Project components supporting this objective included: (i) an export credit refinance and guarantee facility amounting to about US$34 million to provide short-terrn pre- and post-shipment finance to participating financial institutions (PFIs) for onlending purposes; and (ii) a technical assistance component amounting to about US$7 million to finance the development and implementation of an international payments settlement system; studies and advisory support for a forward foreign exchange market, an institutionalized short- and long-term debt market, commercial insurance, a credit reference agency; training and development of bankers and exporters; and development of an action plan for a pilot corporate restructuring program. Additionally, following Government's request, assistance for international trade and investment promotion was provided for its London, Geneva, and Washington, D.C. missions. Complementary support to the Project's financial sector focus was provided through the Trade and Investment Project (TIP) of the United States Agency for International Development (USAID). 2. The project focused on the private sector development objectives of the Government and IDA's lending assistance strategy, the thrust of which was to increase private enterprise formation, employment opportunities, and the export base of the economy. The project was justified in that many weaknesses and constraints in the export and financial sectors required catalytic forces that would provide the necessary initiatives in trade finance, develop an ongoing and sustainable capacity among the banks and their corporate clients, and increase direct and indirect employment potential by promoting a supply response in the real sector. While the project incorporated components that were to facilitate the commercial and exporting process, it inadequately addressed subproject repayment as a risk to sustainable banking. 3. The Development Credit Agreement and the Project Agreement included covenants intended to enhance the business environment and boost the growth of private and exporting enterprises. These included: (i) modifications in the Ghana Investment Center's investment and incentive procedures and elimination of its regulatory functions;  ii (ii) eligibility criteria limiting participation in the refinancing facility to private financial institutions after end-1994; (iii) a requirement that the Government employ the proceeds from the repayment of sub-loans to finance export credit needs; and (iv) up-front funding of the export guarantee facility by the Government. Summary of Findings and Future Operations 4. The project was approved at a time when Ghana's macroeconomic performance started to decline (brought about by a slippage in balance of payments and fiscal accounts and substantial wage increases). IDA anticipated that the Government would be able to implement in a timely manner the corrective measures incorporated in its 1993 budget plan. These included: (i) a substantial increase in the petroleum tax; (ii) a marked acceleration in the divestiture of public enterprises; and (iii) increases in the rates of collection on domestic and import taxes. However, implementation of these measures was protracted and fiscal deficits reached high levels leading to macroeconomic instability, large public debts, and the crowding out of private sector borrowers from the financial markets. Implementation of the project was adversely affected by these developments. Adjustments were made to the design of the project to improve the performance of the credit facility, but these efforts proved futile. 5. The implementing unit, the Export Finance Office (EFO), at the Bank of Ghana (BOG), provided a mechanism that fostered the participation of eight banks (50 percent of all banks) and developed their capacity to provide trade financing to direct exporters. About 41 percent of the original allocation of the credit facility, approximately US$13.8 million, financed 84 loans to a diverse (relative to industrial sector and geographic location) group of 65 exporters. Support under PEED and TIP projects contributed to the results summarized below: 1991 1992 1993 1994 1995 1996 1997 Total exports ($m) 1,098 1,105 1,208 1,227 1,431 1,571 1,511 Non-traditional exports ($m) 63 68 72 119 160 276 329 Non-traditional exports 2 8 6 65 34 73 19 growth rate Non-traditional exports as % 226 6 6 10 11 18 of exports The main objective of the project, which was to expand nontraditional exports, has been achieved beyond appraisal expectations. The contribution of the project to this increase is not clear, however. On the basis of assumptions made during appraisal, the line of credit might have helped about 1 1 percent of these incremental exports to materialize. The objective of improving the efficiency of participating banks was not achieved as they were plagued by high default rates and the continued erosion of their financial resources. The envisaged benefits of the TA components did not materialize fully because of protracted implementation, postponement, or cancellation of some TA components. The outcome of the project is unsatisfactory.  iii 6. The approximate total project cost was US$29.5 million with IDA providing about US$16.8 million, the Government and PFIs contributing about US$0.2 million and US$2.9 million, respectively, and the beneficiaries investing about US$9.6 million. Approximately 41 percent of the credit was disbursed. The project closed as originally scheduled. 7. The key factors that affected project execution were the unfavorable macro- economic conditions, problems in the banking system, and the participation by under- developed and under-capitalized enterprises. 8. IDA's performance was deficient. In hindsight, IDA was too optimistic in its judgment that the deterioration in macroeconomic performance in 1992 would be resolved in the short term. Also, as designed, the project did not address credit discipline and repayment performance as major risks to sustainable trade financing and reflected too conservative an estimate of the banking system's contribution to export financing (particularly for cedi-denominated requirements) and an optimistic assumption of PFIs' receptiveness to new, non-traditional exporters. When macroeconomic instability persisted and conditions for the development of the financial sector remained unfavorable, IDA should have canceled the project earlier rather than letting it run its course. 9. The EFO provided coordinating support for the implementing agencies and demonstrated persistence at getting the components off the ground. It was particularly challenged, however, in balancing the need to meet the export objectives of the project, while working to maintain consistent and sustainable banking sector policies. It submitted progress and audit reports on a timely basis. However, its delayed attention to the performance of PFIs and repayment capacity of exporters provided less opportunities for all players to positively influence the outcome of the project. The performance of the Project Implementation Unit (PIU) at the Ministry of Finance (MOF) was unsatisfactory. The MOF staff were under stress, overstretched, and lacked the commitment and capacity to meet the demands of multi-level responsibilities. 10. The limited achievements under the project will be maintained and improved only if the Government rigorously implements policies that consistently support a development strategy guided by the need for macroeconomic stability, a business environment conducive to private investment and export growth, and a disciplined financial system. Also, BOG and PFIs need to recognize that an efficient and competitive financial system is indispensable to export development. 11. In discussing a future operational plan, the Government, BOG and IDA agreed that there were a number of important issues which continued to negatively affect the sustainability of the achievements reached under this Project and other recently completed IDA-supported financial sector development projects. The critical issues which require immediate attention to protect the soundness of the financial system and to address constraints to the provision of term finance for private investment include: (i)  iv Government's high fiscal deficit; (ii) the improper functioning of the treasury bill market; and (iii) serious problems in the banking system including an increasing dependence on investments in Government instruments, growing portfolio problems, imprudent levels of foreign exchange risk, banking system inefficiency, unaddressed problems in specific banks and an inadequate exit policy for insolvent banks. These issues have been examined in a Financial Sector Assessment Report (1998), which serves as the basis for dialogue between the Government, BOG and IDA on the most immediate financial sector needs and the appropriate programs to address these areas and reduce risks. Key Lessons Learned 12. The key lessons are: (a) in the absence of a stable macroeconomic environment, financial sector operations are not likely to succeed; (b) broader achievements under financial intermediary loans are unlikely within an undisciplined credit environment; in this case, measures should be included to address issues relating to governance, management, financial policies, collection performance, appraisal and supervision techniques, and credit risk management policies of PFIs; and (c) when erroneous decisions are made and these mistakes are realized, countermeasures, including project cancellation, should be taken as soon as possible to minimize their cost.  IMPLEMENTATION COMPLETION REPORT REPUBLIC OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT (PEED) PROJECT (Credit 2502-GH) PART I: PROJECT IMPLEMENTATION ASSESSMENT A. Background 1. The Private Enterprise and Export Development (PEED) Project was designed to assist the Government of Ghana (GOG) in implementing its development program, characterized by a shift in focus from economic recovery to policies and investments needed to accelerate economic growth. The Project was designed to build on past achievements and complement projects that aimed at developing the policy and regulatory framework and the financial sector. These projects, funded by the International Development Association (IDA), included the: Export Rehabilitation Project (1435-GH, 1436-GH, F9-GH, 1984), Second Reconstruction and Import Credit (1573-GH, A-3-GH, 1985), Industrial Sector Adjustment Credit (1672-GH, A-13-GH, 1986), the First and Second Financial Sector Adjustment Credits (FINSAC, 1911-GH, 1988, and 5659-GH, 1991), and the Private Small and Medium Enterprise Development Credit (SME, 191 1-GH, 1989). 2. In targeting the development of an enabling business environment, some of the important areas covered in the above credits included exchange rate and price liberalization, import liberalization, export development, technology transfer agreements, removal of price controls, and taxation reforms. In the financial sector, the adjustment credits addressed resource mobilization and credit allocation in the financial system, banking system regulations, restructuring of distressed banks, development of the capital markets, establishment of an institutional framework for non-bank financial institutions, and capacity building in the banking, accounting, and insurance professions. B. Project Objectives and Description 3. The objective of the PEED Project was to foster the growth of non-traditional exports (NTEs). The project components included: (i) an export credit refinance and guarantee facility amounting to about US$34 million to assist exporters in obtaining short-term pre- and post-shipment finance from participating financial institutions (PFIs); and (ii) a technical assistance component amounting to about US$7 million to finance: (a) setting up the Export Finance Office (EFO) at the Bank of Ghana (BOG) that would implement the credit refinance and guarantee facility; (b) training and development of bankers and exporters in the financial methods and practices of export finance; (c) development and implementation of an international payments settlement system; (d) the  -2 - investigation and advisory work on the establishment of a forward foreign exchange market; (e) a study and training program for the development of an institutionalized short- and long-term debt market; (f) an in-country study of commercial insurance products to support commercial companies, establish recommendations and implement appropriate advisory programs; (g) a study on the feasibility of establishing a credit reference agency; and (h) development of action plans to begin identifying legal and business issues necessary for a market-driven pilot corporate restructuring program for potentially viable enterprises within the Non-Performing Asset Recovery Trust (the statutory organization serving as a recovery agent on the non-performing assets of commercial banks). A component to support international trade and investment promotional activities of the Government's missions in London, Geneva and Washington, D.C. was later added in response to the Government's request. 4. The focus of the Project was in line with the private sector development objectives of the Government and IDA's lending assistance strategy, the thrust of which was to: increase the rate of private capital and private enterprise formation; enhance employment opportunities in the private sector; diversify the export base of the economy; deepen technological capabilities of the private sector; and diversify agricultural and industrial activities in accordance with Ghana's comparative advantage. The Project was justified in that many weaknesses and constraints in the export and financial sectors still prevailed and required catalytic forces to provide the necessary initiatives in trade finance, develop an ongoing and sustainable capacity among the banks and their corporate clients, and increase direct and indirect employment potential by promoting a supply response in the real sector. While, as designed, the Project incorporated components that were necessary to facilitate the commercial and exporting process, it inadequately addressed subproject repayment as a risk to sustainable banking. Complementary support to the Project's financial sector focus was provided through the Trade and Investment Project (TIP) of the United States Agency for International Development (USAID). The TIP focused on supporting the manufacturing and export sectors and committed grant funding to the development of production capacity, technical improvement, design, export systems and foreign twinning arrangements. 5. The Development Credit Agreement and the Project Agreement included loan covenants intended to enhance the business environment and boost the growth of private and exporting enterprises. The key covenants included: (i) modifications in the Ghana Investment Center's investment and incentive procedures instituting a shift from an ex- ante approval process to an ex-post review on all investments, eliminating its regulatory functions, and providing fiscal investment incentives simultaneously with the filing of tax returns; (ii) eligibility criteria that would limit participation in the refinancing facility to private financial institutions after end-1994; (iii) a requirement that the Government employ the proceeds from the repayment of sub-loans to finance export credit needs; and (iv) up-front funding of the export guarantee facility by the Government.  -3 - C. Implementation Experience and Results 6. At the time of project approval, there were concerns with a deteriorating fiscal situation in Ghana, but corrective measures announced by the Government in its 1993 budget were expected to reduce the deficit. These measures included: (i) a substantial increase in the petroleum tax; (ii) a marked acceleration in the divestiture of public enterprises; and (iii) increases in the rates of collection on domestic and import taxes. Implementation of these measures was protracted, however, and fiscal deficits reached high levels leading to inflation, fast increasing public debt, and the crowding out of private sector borrowers from the financial markets. These developments negatively affected the implementation of the Project. Adjustments were made to the design of the Project to improve the performance of the credit facility, but these efforts proved futile and the tangible objectives described in the appraisal report were only partially achieved. 7. The Export Finance Office at the BOG, provided a mechanism that fostered the participation of eight banks (50 percent of all banks) and developed their capacity to provide trade financing to direct exporters. Financial assistance was extended to a diverse group of exporters relative to industrial sector and geographic location. At appraisal, the expected tangible objectives of the Project included a doubling of private sector exports with the share of cocoa and gold progressively reduced as a percentage of total exports; and banks operating competitively and providing viable support to the export sector. Support under PEED and TIP projects contributed to the results summarized below: 1991 1992 1993 1994 1995 1996 1997 Total exports ($m) 1,098 1,105 1,208 1,227 1,431 1,571 1,511 Cocoa as % of exports 35 31 27 26 27 35 32 Gold as % of exports 31 35 41 44 45 39 37 Non-traditional exports 63 68 72 119 160 276 329 ($M ) __ _ _ __ _ _ _ _ __ _ _ _ Non-traditional exports 2 8 6 65 34 73 19 growth rate _ Non-traditional exports as 6 6 6 10 11 18 22 % of exports I I I _I While the expansion of non-traditional exports was achieved beyond appraisal expectations, it did not contribute materially to reducing the share of cocoa and gold as a percentage of exports. The contribution of the Project to the increase of non-traditional exports is not clear. On the basis of assumptions made during appraisal, the line of credit might have helped about 11 percent of these incremental exports to materialize. The objective of improving the efficiency of participating banks was not achieved as they were plagued by high default rates and the continued erosion of their financial resources. The envisaged benefits of the TA components did not materialize fully because of protracted implementation, postponement, or cancellation of some TA components. The outcome of the project is unsatisfactory.  -4 - Export Credit Refinancing and Guarantee Facility 8. The export credit refinancing facility was designed to provide only short-term (maximum 360 days) pre- and post-shipment financing through PFIs for dollar or cedi- denominated sub-loans to direct and indirect exporters. While the need for medium-term financing was known early on, it was not incorporated in the line of credit in support of the Government's position that it would not assume the foreign exchange risk and in recognition of the banks' lack of interest in a medium-term facility without this support from Government. The reference interest rate (RIR) for PFIs on dollar-denominated sub- loans was calculated at 2.625 percentage points above the prevailing Eurodollar London Interbank Offered Rate (LIBOR). On cedi-denominated sub-loans, the RIR for PFIs was based on the commercial banks' average 180-day deposit rate reported to the BOG and calculated quarterly. PFI sub-loans to exporters were made at interest rates based on the PFI-determined spread above the market-determined RIR. The facility was available to all banks that met the eligibility criteria including: compliance with the monetary regulations and banking laws of the BOG; maintenance of a sound financial, institutional, and operational structure and a healthy loan portfolio; and at least 51 percent private ownership starting after December 31, 1994. PFIs assumed the credit risk. 9. The export credit guarantee fund was designed to cover 65 percent of the pre- shipment credit subject to a fee, amounting to 2 percent of the face amount of the cover, paid by the exporter. During project preparation, the development of cross-border guarantees to cover post-shipment risk was rejected based on technical advice provided by the US Export Import Bank, Export Credit Guarantee Department (UK), and COFACE (France). In their opinion, Ghana's export market was too small and had to reach a critical size of at least $1 billion before export credit agencies would find it cost effective to underwrite these risks. 10. Beneficiary exporters (those in the export business, directly or indirectly, for at least two recent years) were required to: submit either an irrevocable documentary letter of credit issued by the importer's bank and relating to the export of goods or services to be funded by the sub-loan or sufficiently documented and verified purchase orders; contribute at least 15 percent of the cost of the investment project from internally generated resources; be financially and technically viable; and have an investment project that did not involve the export of gold, diamonds, cocoa, electricity or raw timber. The maximum size of any sub-loan was set at $500,000 equivalent and maximum sub-loan exposure to any exporter at one time was established at $500,000 equivalent. 11. Commitments under the credit facility was below the rate projected at appraisal prompting country-wide promotional efforts and adjustments to the design of the Project in response to requests made by beneficiaries, PFIs, and BOG. Key modifications included: (i) the replacement of the mandatory 15 percent exporter contribution to the project with the maintenance of a total debt to equity ratio of not more than 4:1; (ii) a waiver on the eligibility criteria for PFIs requiring at least 51 percent private ownership  -5 - after 1994; (iii) inclusion of new banks subject to an initial credit limit based on their capital and reserves; (iv) increased guarantee ceilings and coverage from $125,000 to $500,000 and from 65% to 75%, respectively; (v) decelerated build up of the guarantee facility to provide medium term funds for export lending based on BOG- and IDA-agreed eligibility criteria which included a gradual decrease in non-performing loan portfolio; and (vi) decreased reference interest rate for dollar-denominated loans. 12. Although the modifications doubled the utilization rate of the credit facility in 1996 (34 loans, $5.8 million; compared to 14 loans, $2.4 million in 1995 and 4 loans, $350,000 in 1994), only about 41 percent of the original allocation of the credit facility was disbursed when the credit closed. Approximately US$13.8 million financed 84 sub- loans to 65 exporters (see Appendix 3 for the distribution and characteristics of these sub- loans). About 83 percent of the sub-loans were dollar-denominated. Utilization of the funds remained low because: banks were unwilling to take risks on smaller and new, non-traditional exporters in the absence of post-shipment guarantees and also preferred investing in risk-free BOG and Government paper; there were few viable export projects that banks could not sufficiently support given their liquid positions, except for those having large foreign currency requirements; market interest rates were high; exporters were increasingly requiring medium-term funds; and the Ministry of Finance provided funds to selected PFIs for similar purposes and at below market rates. 13. Under the guarantee facility, nine banks sought cover for 47 loans totaling $4.8 million (ranging from 40 percent to 75 percent of the loan amount). While it was funded up to about $2.5 million in 1997, no claims were granted as these were based on post- shipment problems which did not qualify for coverage. Prior to the credit closing, IDA agreed that these funds could be made available for other export credit needs if BOG decided to implement the EFO's recommendation to abolish the guarantee facility. 14. PFIs (particularly some state-owned banks) have experienced losses because exporters were remiss in servicing their debts. In 1997 when a large number of loans had reached their maturity date, of the over $10 million due, 40 percent was yet to be recovered from about 30 defaulters (65 percent of borrowers who should have been servicing their loans). IDA recommended to the EFO that a PFI continue to be considered eligible only after it could officially document high loan recovery performance under the Project as measured by two criteria: (a) at least a 90 percent recovery rate on the loans due; and (b) at least 90 percent of borrowers servicing their loans on schedule. At this time, only three banks (whose combined participation was about $2 million) were eligible to continue to participate. At end-May 1998, 19 percent of the over $11 million due was yet to be recovered from 22 defaulters (34 percent of the borrowers). 15. With commitments remaining low, following the mid-term review in January 1996, IDA recommended to the Government a phased cancellation of unutilized funds subject to disbursement performance. The Government and BOG rejected this recommendation on the grounds that the export sector was demonstrating very promising  -6 - growth and continued to require support particularly with medium-term funds. A proposal was made to this effect and was seriously considered, albeit belatedly. However, it became prudent to reverse this decision when data (received later) on the existing credit line showed unacceptable levels of repayment. In addition, the prospects of sustainably achieving the Project's objectives was not promising as, historically, the utilization rate of financially sound banks was low under this Project. Also, IDA and the Government agreed that, despite recent reforms and restructuring efforts in the financial sector, a number of issues still needed to be assessed before further investments in the financial sector could be made. These issues continued to threaten the soundness of the financial system and to constrain the provision of term finance for private investments. This is discussed further under the Future Operations section below. Technical Assistance Component 16. This component was designed to finance a program aimed at overcoming deficiencies in the financial and export systems. Assistance included management and technical training, consultant services, equipment and materials to strengthen the export finance infrastructure and build the productive capacity of viable private enterprises. Specifically, the experience and results include the following: 17. Forwardforeign exchange operation. Given the foreign exchange risks faced by exporters on inputs and the absence of a forward foreign exchange market operation, the Project financed a study that determined the level of demand for forward cover, the feasibility of establishing a forward foreign exchange operation, and policy guidelines and procedures for its set up and regulation. Agreements were reached on its importance and mechanisms and BOG commenced preparation work incorporating it in its operations. 18. International payments settlement system. With the subscription of BOG and other banks to the Society for Worldwide Interbank Financial Telecommunications system by March 1994, their capacity to handle foreign remittances. shorten financial processing and repayment time, and reduce risk has greatly improved. The Project funded some costs for hardware, software, and other general common purpose requirements by means of an innovative sale-leaseback operation arranged by BOG. 19. Credit reference agency. A study was conducted to determine the feasibility of establishing an agency that would support the development of credit information on Ghanaian companies and build on the limited capacity of the existing interbank credit information bureau. Following the completion of the feasibility study and based on the recognition that establishing an agency was needed and a viable proposition, the BOG and IDA agreed to implement the second phase of the study. This included the preparation of detailed budget estimates, determination of firm commitments from interested investors and donors, survey of core capabilities of potential management companies, among other requirements, prior to establishing the agency. It was agreed that further support from IDA and the Government could be forthcoming under another  -7 - project if a group of private, independent shareholders and a technical partner formally commit to supporting it. 20. Long-term debt market. This component was completed following the finalization of a long-term debt market development study and the provision of securities market training services to the Ghana Stock Exchange (GSE), brokers, investment advisors, BOG, and MOF in the development and introduction of long-term debt instruments. Further development of long-term debt instruments, a bond rating agency, and new products and services to generate diverse long-term securities was not pursued during the Project implementation period because macroeconomic conditions did not provide a conducive environment for these initiatives to successfully take off. 21. Commercial insurance market. Following the completion of the commercial insurance study, a working committee composed of key stakeholders in the insurance industry agreed that the services of a Technical and Product Development Specialist and a Loss Control and Market Development Specialist was needed to advise the NIC. However, because of implementation delays at the Project Implementing Unit (PIU) at the MOF, office relocation problems faced by the National Insurance Commission (NIC), and other established priorities of the NIC, the Commissioner suggested, and IDA agreed, that the provision of the advisory services be temporarily put on hold and later supported under another ongoing IDA-financed project. 22. Training for bankers and exporters. Over 85 bankers and over 200 non- traditional exporters received training on trade finance and export processing from expatriate and locally trained trainers; also four bankers (one from NIB, one from GCB, two from BOG) participated in the Bankers Overseas Attachment Program with the Standard Chartered Bank in London. In addition, consultants in collaboration with the Ghana Export Promotion Council, local bankers, and representatives of exporters and the Federation of Ghanaian Exporters prepared an export credit guidebook. It has been finalized and is ready for publication and subsequent distribution to NTEs and bankers as a reference and decision-making tool. 23. International trade and investment promotion support. The Project supported trade promotion campaigns in Washington, Geneva, London and the domestic market and the design and development of a trade and investment brochure to be used by all trade and embassy representatives. 24. Corporate restructuring. Given the protracted passage of time to implement this component, the business conditions of many of the 20 targeted potentially viable companies with the Non-Performing Asset Recovery Trust (NPART) had changed. By the time the PIU completed the procurement process for consulting services, some companies managed to build up their operations and return to productivity while others ceased to exist. Diagnostic reports for 14 businesses then with NPART were prepared and sent to the respective management for information and consideration of the recommendations made.  -8 - 25. The approximate total project cost was US$29.5 million with IDA providing about US$16.8 million, the Government and PFIs contributing about US$0.2 million and US$2.9 million, respectively, and the beneficiaries investing about US$9.6 million. Approximately 41 percent of the credit was disbursed. D. Major Factors Affecting the Project 26. Macroeconomic conditions. The performance of the Project was negatively affected by the adverse macroeconomic conditions prevailing in Ghana from 1993 through 1997. High fiscal deficits and the associated Government funding requirements led to high inflation, sharp currency devaluations and high interest rates. These had a pervasive negative impact on the financial sector and resulted in the banking system holding large amounts of Government debt, crowding out private sector borrowers from obtaining credit from the financial system, and jeopardizing their ability to meet debt repayment obligations and to develop and expand their export businesses. 1991 1992 1993 1994 1995 1996 1997 Budget deficit (%of GDP) -5 -13 -15 -13 - 10 - 13 - 10 Consumer price index, 1987=100 18 10 25 25 60 46 28 Exchange rate (Cedi/JS$) 375 437 649 957 1,200 1,637 2,053 Interest rates, end of year 20 30 35 33 45 45 45 Treasury bill rate 29.2 19.4 30.9 27.7 35.4 41.6 42.8 Domestic debt - Gov't., 372 535 829 937 1,420 1,535 2,645 public ent. (Cedi bn) Domestic debt - private 89 139 187 273 393 681 1,071 enterprises (Cedi bn) 27. Problems in the banking system. As long as returns on low risk GOG paper was very attractive, banks continued to rely heavily on them to improve their bottom line. As a result they had very little incentive to compete beyond the blue chip market and build their client base, improve financial service delivery, and develop and maximize the use of management and staff banking skills. This translated, among others, to an increasingly non-performing portfolio which more than doubled to about 26.5 percent of loans outstanding (including non-performing loans for government-owned banks at 34 percent compared to foreign-, and privately-owned banks at 10 percent and 13 percent, respectively) in 1997. In addition, high intermediation costs in the banking system (at 22.7 percent of average total assets, inclusive of 3.8 percent profit, in 1997) added to the already prohibitively high interest rates. 28. Participation by developing, under-capitalized enterprises. These enterprises required fturther financial, management and operational assistance to develop and expand their export business and meet bank requirements. With the high interest and fee rates, exporters faced difficulties obtaining funds (for working capital requirements or term  - 9 - loans) for viable export projects, producing and timely delivering quality products, and servicing their debts. Although non-payment was sometimes wilfull, defaulting exporters often rolled over their funds for short-term business needs or for capital expenditure to retool and add value to products in response to changing market demand and regulations (mainly environmental laws for the timber industry) and delayed repayment. E. Project Sustainability 29. Capacity building in the export and financial sectors is a long term process that requires intensive work and commitment from all key players. It is uncertain that the limited achievements under the Project will be sustained unless the Government rigorously implements policies that consistently support a strategy guided by the need for macroeconomic stability and a business environment conducive to private investment and export growth. Also, a concerted and well-directed effort by BOG (and the EFO) and banks is required in the development of an efficient, competitive, and disciplined financial system. In managing the reflows from the credit line, BOG and the EFO will have an opportunity to demonstrate their leadership role in allocating these resources following market-driven policies and their commitment to building efficient and sustainable financial institutions. F. IDA's Performance 30. IDA's performance was deficient. In hindsight, IDA was too optimistic in its judgment that the deterioration in macroeconomic performance in 1992 would be resolved in the short term. Also, as designed, the Project did not address credit discipline and repayment performance as major risks to sustainable trade financing and reflected too conservative an estimate of the banking system's contribution to export financing (particularly for cedi-denominated requirements) and an optimistic assumption of PFIs' receptiveness to new, non-traditional exporters. During implementation, IDA's intervention was insufficient in that, when macroeconomic instability persisted and conditions for the development of the financial sector remained unfavorable, IDA should have cancelled the credit earlier rather than letting it run its course. G. Borrower's Performance 31. The EFO cooperated with PFIs and IDA and provided the necessary support to implement the credit and guarantee facility and the technical assistance components under its charge. However, its performance was deficient in that insufficient attention was given to the non-performing portfolio of PFIs and the inability of exporters to service their loans. As a result, there were less opportunities available for all players to positively influence the outcome of the Project. 32. The performance of the PIU at the MOF was deficient. The MOF staff were under stress, overstretched, and lacked the commitment and capacity to meet the demands of multi-level responsibilities. While IDA repeatedly raised this issue with the MOF,  -10- their lack of commitment to the commercial insurance and the corporate restructuring components managed by the PIU was evident in their failure to change the management of the PIU despite the knowledge that delays were contributing in a major way to objectives of the Project not being met. In addition, the provision of about Cedis 9 billion (from other sources) to two commercial banks for on-lending to exporters at fixed and negative interest rates (22 percent) was erroneous and sent signals that were contrary to market-determined financial policies. H. Assessment of Outcome 33. The Project outcome is unsatisfactory because: (a) although benefits were derived from the availability of the export credit refinance and guarantee facility, the establishment of an international payments settlement system, training for bankers and exporters, and support for international trade and investment promotion, which contributed to the growth of non-traditional exports (fivefold compared to the $62 million level in 1992), default rates were high; (b) although the BOG, the EFO, and PFIs are interested in utilizing mobilized funds, reflows from this Project, and other credit lines to extend credit for non-traditional exports, the credit management capacity of some banks remains weak and the low recovery rates will continue to erode their financial resources; and (c) the objectives of some technical assistance components, designed to provide business assistance to exporters and PFIs, were only partially realized. I. Future Operations 34. A number of areas which continue to negatively impact the potential sustainability of the achievements reached under this Project and other recently completed IDA- supported financial sector development projects have been identified. These areas include the macro-economic framework, banking system and its supervision, the credit disciplinary environment, financial markets development, and formal financial sector outreach. The critical issues which require immediate attention to protect the soundness of the financial system and to address the constraints to the availability of term finance for private investment include: * Government's high fiscal deficit position. In recent years this has led to high inflation, high interest rates, sharp currency devaluations, and large public sector borrowings. These have negatively affected the functions of the financial sector so that the availability of credit to the rest of the economy is limited, savings in domestic currency is stagnant, borrowers' ability to service their loans is jeopardized, the growth and development of the equities and debt markets is constrained, and increased dollarization is occurring in banks; * the improper functioning of the treasury bill market. BOG is often unable to sell its weekly auction offering, yields in auctions are unnaturally stable and, like the  interbank market in overnight funds and the wholesale secondary market in Treasury bills, show no sensitivity to the level of excess reserves; and serious problems in the banking system. These are: (i) an increasing dependence on investments in Government instruments, (ii) growing portfolio problems; (iii) imprudent levels of foreign exchange risk; (iv) banking system inefficiency; and (v) unaddressed problems and inadequate exit policy for insolvent banks. 35. Over the medium term, other issues that will require attention include an inadequate court system which inhibits security and contract enforcement, and an inadequate credit information system. Without well-functioning systems, viable banking is not developed, bankers have little incentive to increase lending activity and the credit decision making process cannot be effectively implemented. These issues were examined in a financial sector assessment report which would serve as a basis for dialogue between the Government, BOG and IDA on the most immediate financial sector needs and the appropriate programs to address these areas and reduce risks. In the meantime, however, because Ghana must continue to develop its trade inflows, there remains the challenge of supporting a policy of export development while systemic weaknesses in the financial and export sectors prevail. J. Key Lessons Learned 36. The key lessons are: (a) in the absence of a stable macroeconomic environment, financial sector operations are not likely to succeed; (b) broader achievements under financial intermediary loans are unlikely within an undisciplined credit environment; in this case, measures should be included to address issues relating to governance, management, financial policies, collection performance, appraisal and supervision techniques, and credit risk management policies of PFIs; and (c) when erroneous decisions are made and these are mistakes realized, countermeasures, including project cancellation, should be taken as soon as possible to minimize their cost.  -12- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 1: Summary of Assessments A}ACSHIEVE T OF~ Substane t0 ial;; Partial 0 Negligible N icable Macroeconomic policies _______ Sector policies _ Financial objectives _ Institutional development _ Physical objectives - exports < Poverty reduction Gender concerns Other social objectives _ Environmental objectives _ _ Public sector management _ Private sector development _ __ Other (specify) Likely Unlikely ~~~~Uncertain C. RAN PERFOMA~CE ~ 1ighl Satifactr SaifcoyDeficit Identification Preparation assistance_________ Appraisal_______________________________ rSupervision__ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Preparation - Im plem entation__ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ Covenant Compliance__________ _ _ _ _ _ _ _ _ _ ~SI I 4N E. ASSESSMENT OF OUTCOME HighlYSatisfactorY~~~~~~ Satisfactory Unsatisfactory~~~ d~~~~ 1:; _________________ mSi'<SSE 06K< E * t t;  GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 2: Related Bank Loans/Credits INVESTMENT CREDITS National Investment Bank (Cr. 1180-GH) Development of SMEs, strengthen National Investment Bank (NIB) 1975 Completed National Investment Bank (Cr. 901 -GH) Development of SMEs, develop a restructuring program for NIB 1979 Completed Export Rehabilitation Project, Export Export sector policy and institutional reform, capacity building of key 1984 Completed Rehabilitation TA, Export Rehabilitation organization and industries in the export sector. Special Fund (Cr. 1435-GH, Cr. 1436-GH, Cr. F-9-GH) ADJUSTMENT CREDITS Industrial Sector Adjustment Credit (Cr. Finance the development of the industrial sector. 1986 Completed 1672-GH) First Financial Sector Adjustment Credit Address resource mobilization and credit allocation, improve the 1988 Completed (Cr. 1911-GH) regulatory framework of the banking system and assist in the restructuring of distressed banks. Second Financial Sector Adjustment Credit Removal of remaining policy distortions, further development of the 1991 Completed (Cr. 2318-GH) financial sector. __  -14- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 3: Project Timetable Identification 12/92 02/92 Preparation 03/92 03/92 Appraisal 06/92 07/92 Negotiations 04/93 04/93 Board Presentation 05/93 05/25/93 Signing 07/93 07/26/93 Effectiveness 08/93 12/21/93 Project Completion 12/97 03/31/98 Loan Closing 3/31/98 03/31/98  -15- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 4: Cumulative and Actual Disbursements (US$ million) FY 1994 4.0 1.7 43 FY1995 18.5 4.1 22 FY 1996 32.2 6.9 21 FY 1997 37.8 12.6 33 FY 1998 41.0 16.8 41  -16- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 5: Key Indicators for Project Implementation Key00X;d t0000 :Q;i Ind0>tIicacor0000u00SS0 : g 000Estimated 0;Actual Export Credit Refinance and Guarantee Facility Commitments 10% 40% Mid-1994 1% 75% Mid-1995 8% 100% Mid-1996 28% Mid-1997 52% International payments settlement Early 1994 Early 1994 system Long-term debt market study 6/30/94 05/95 Forward foreign exchange 6/30/94 11/97 operations study Credit reference agency 6/30/94 Phase 2 (business plan, prospectus, solicitation of investors) - on-going. Commercial insurance study 6/30/94 11/94 Corporate restructuring plans 4/30/94 1997, 1998 Export guidebook 07/31/94 On-going (publication) Bankers training Training plans - annually October, 1995; April, (October) November, 1996; August 1997 Exporters training Training plans - annually June, September, November (October) 1996; April, October 1997 TABLE 6: Key Indicators for Project Operation There were no specified indicators for project operation.  -17- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 7: Studies Included in Project Study Purpose Status Impact Forward Foreign Determine feasibility of Completed - Development of FFE Exchange Operations establishing a forward November 1997 mechanism, operational plans foreign exchange facility, under preparation at BOG draw operational guidelines, procedures Long-Term Debt Develop long-term debt Completed - May Development of long-term Market Study instruments, review 1995 debt instruments not possible legislative framework given unfavorable macro- economic conditions; preliminary recommendations made on establishment of a regulatory commission, Ghana Stock Exchange's role in the financial sector, optimal new products and services, amendments to regulations Commercial Insurance Develop commercial Study completed, Areas requiring expert advice Market insurance industry and November 1994; identified for future support: products. advisory (i) technical and product assistance and development; and (ii) loss product control and market development development postponed Credit Reference Re-evaluate issues and Phase 1 Phase 2 of the study is under Agency constraints in the completed - June implementation (including development of a CRA; 1995; preparation of a business plan create basis for international Phase 2 ongoing and prospectus to solicit firm credit information investor interest). Corporate Development of market- Completed -Nov. Plans under consideration by Restructuring driven restructuring plans 1997 enterprises. for 20 viable enterprises under NPART.  -18- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 8A: Estimated Project Costs (US$ million equivalent) ~AppraslEtmt ___Ata Component Local Foreign Total Local Foreign Total __________________________ _ .: Costsit C osts Costs Coots Costs Co: st Credit Facilities: _ . Export Credit Refinance and Guarantee Facility 15.00 26.00 41.00 12.50 13.28 25.78 Technical Assistance: (a) Export Finance Facilities 0.08 0.57 0.65 0.35 0.35 (b) Financial Infrastructure 0.42 4.43 4.85 0.10 1.77 1.87 (c) Corporate Restructuring 1.00 0.30 1.30 0.10 0.17 0.27 (d) Other Institutional Support and 1.50 1.70 3.20 0.03 1.25 1.28 Support_Studies _ _ . TOTAL 118.00 33.00 51.00 12.73 16.82 29.55 TABLE 8B: Estimated Project Financing (US$ million equivalent) Source Local Freign Totanl Loal ForegLn Tfotal IDA 8.00 33.00 41.00 16.82 16.82 Government 2.00 2.00 0.23 0.23 Exporters 6.00 6.00 9.60 9.60 Local Banks 0.20 0.20 2.90 2.90 Other Commercial 0.30 0.30 Institutions 1.50 1.50 TOTAL 18.00' 33.00 51.00 12.73 16.82 29.55 TABLE 9: Economic Costs and Benefits Data for beneficiary enterprises are not available. Net of duties and taxes.  -19- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 10: Status of Legal Covenants DEVELOPMENT CREDIT AGREEMENT Section Description Class Status Original Revised Date .________ Date 2.03 Closing date 10 C 03/31/98 2.0 Credit terms and conditions 2 C C On-going 3.01 Subsidiary agreement 2, 3, 5 C 3.01 Commitment to project 2, 5 C On-going objectives; continued utilization of project reflows for export credit. 3.04 Revision of the investment 12 C 12/31/93 9/94 policy (ex-post review; fiscal investment incentives) 3.04(b) Elimination of regulatory 12 C 12/31/93 9/94 functions of the Ghana Investment Center. 3.05 Mid-term review, action plan, 9 C 9/30/95, 12/95, report 7/01/95 1/96 4.01 Annual audited financial 1 C Annually statements, SOEs, special (6/30) accounts. 6.0 Effectiveness conditions, legal 5 C 12/21/93 opinion (effective- ness) Schedule I Withdrawal of credit proceeds 2, 5 C Schedule 4, 2 Training program 3 C 10/30 of ______ _each year Schedule 4, 3 Completion of the long-term 3 C 6/30/94 5/95 - long-term debt market and commercial debt; insurance studies. 11/94 insurance Schedule 4, 4 Action plans for corporate 3 C 4/30/94 restructuring component. Schedule 4, 5 Implementation of the credit 3 CP 5/97 reference agency Schedule 4, 6 Implementation of the long-term 3 C 10/95 debt component Schedule 4, 7 Implementation of the 3 CP commercial insurance component _ Schedule 5 Special accounts 1 C  -20- TABLE 10 (cont'd): Status of Legal Covenants PROJECT AGREEMENT Sectio""' Qni 0 Descrip ion 'Class Status Origial Revised Date Date 2.01 Management and execution of project, 5 C implementation procedures. 2.02 Participation agreements 2, 3, 5 C 2.02 Sub-loan administration 2, 3, 5 C 2.06 Subsidiary Administration Agreement 2, 3, 5 C 2.07 Export Finance Program, interest rates, 2, 3 C market conditions 2.08 Mid-term review of the project; action plans 2, 5 C 07/31/95; 12/95; 9/30/95 1/96 3.01 Audit of project financial statements, SOEs, 1 C special account Schedule 1 Procedures, terms, conditions for sub-loans 2, 3, 5 C Schedule 2 Principal terms, conditions of PFI Subsidiary 2, 3, 5 C Loans and Participation Agreements Schedule 3 Procurement procedures. 3 C Schedule 4 Implementation Program for the credit 2, 3, 5 C refinancing and guarantee components Schedule 4, 5 Training program for bankers, exporters 3 C Oct (ann.) Schedule 4, 6 Preparation, distribution - export guidebook 3 CP 7/31/94 Ongoing Schedule 4, 7 International payments settlement system. 3 C Schedule 4, 8 Completion of the following studies: 10 C 6/30/94 11/97 (i) forward foreign exchange operation; and (ii) Credit Reference Agency On- 6/30/94 Phas 1: going 6/95 Phase 2: Ongoing Covenant Types: Present Status: I - Accounts/audits 8 - Indigenous people C - complied 2 - Financial performance/ revenue 9 - Monitoring, review, reporting CD - complied with delay generation from beneficiaries 10 - Implementation not covered by cat. 1-9 CP - complied partially 3 - Flow and utilization of project funds 11 - Sectoral or cross-sectoral budgetary or NC - not complied 4 - Counterpart funding other resource allocation 5 - Management aspects of the project 12 - Sectoral or cross-sectoral or executing agency policy/regulatory/institutional action 6 - Environmental covenants 13 - Other 7 - Involuntary resettlement  -21- GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 11: Bank Resources Staff Inputs (Staff Weeks) Stage of Project Cycle Actual Through appraisal (preparation, pre-appraisal) 43.9 Appraisal through Effectiveness 55.3 Supervision 132.4 Completion 7.0 Total 238.6  GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT (CREDIT 2502-GH) TABLE 12: Bank Resources Missions Performance Rating Number of Number of Special Staff Skills Represented Performance Month/Year Persons Field Rating Days Through 02/12/92- 4 80 Financial Economist, Finance Number of Persons Appraisal 03/12/92 and Private Sector Specialists Stage of Project Month/Year Cycle 05/11/92- 3 21 Financial Economist, 05/17/92 Consultant Appraisal - Board 06/26/92 - 7 154 Financial Economist, Finance Potential disbursement problems due to extremely high interest rates for k 07/17/92 Export and Private Sector small- to medium-sized borrowers; govemment support for the corporate Specialists restructuring strategy. 11/28/92 - 3 36 Financial Economist, Guarantee coverage for post-shipment risks. 12/10/92 Operations and Project Officers Board - 06/93 1 10 Sr. Financial Economist Effectiveness Supervision 06/18/94 - 2 14 Senior Financial Economist, HS HS Reference interest rate for cedi-denominated loans, export credit 07/09/94 Operations Officer guarantee cover, de-regulation of the Ghana Investment Center, selection of viable enterprises, NIC office re-location. 11/02/94 - 2 5 Financial Economist, Projects S S Delays in privatizing state-owned PFIs, deteriorating macro-economic 11/18/94 Officer, Consultant conditions have been negatively affecting commitment rate. 09/25/95 - 3 10 Financial Economist, U S Slow commitment under line of credit component; deteriorating macro- 10/13/95 Operations Officers economic conditions; slow progress under the technical assistance components due to capacity constraints in the Ministry of Finance and the Bank of Ghana, request by government for assistance on a trade and investment promotion program from three embassies: Geneva, London, Washington, D.C.  TABLE 12 (cont'd): Bank Resources Missions Performance Rating Number of Number of Special Staff Skills Represented Stage of Project Month/Year Persons Field Implementation Development Type of Problems/Remarks Cycle Days Objectives 01/29/96 - 4 60 Financial Economist, Financial U S Deterioration in the macro-economic conditions, liquidity in commercial 02/26/96 Specialist, banks and lack of viable projects were negatively affecting project Projects and Operations implementation; need for medium-term resources; modification required Officers, for interest rates, guarantee fees; eligibility criteria for new banks and state-owned PFIs, delays in long-term debt, commercial insurance components. 05/23/96- 3 15 Financial Economist, U S Slow commitment and implementation delays under the TA component; 06/07/96 Project and Operations Officers BOG's role as implementing agency for lines of credit; cancellation of unutilized resources; use of reflow for medium-term credit line; comprehensive plan for commercial insurance for NTEs which is unacceptable to IDA; problems with the consultants for the guidebook. 02/03/97 - 3 25 Financial Economist, U S Implementation for the project continued to be slow; Govemment 02/14/97 Economist, Operations Officer funding a small line of credit following practices contrary to market- determined financial policies; interest rates on cedi-dollar-denominated loans; non-receipt of an action plan from MOF; upgrading the SWIFT system; delays in the production of the guidebook; eligibility of state- owned PFIs. 05/08/97 - 2 30 Operations Officer, Banking U U Project restructuring. 05/24/97 Specialist Completion 01/26/98 - 7 83 Economist, U HU Poor performance of loans under line of credit; recommendation to 02/07/98 Financial Sector Specialist, reverse decision to restructure project because of poor loan repayment Operations Officer performance; support for some on-going components to be provided under Non-Bank Financial Institutions Project: commercial insurance, international payment settlement system, credit reference agency and other TA for the financial sector.  Appendix I GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT PROJECT AIDE MEMOIRE An International Development Association (IDA) supervision mission, comprising Messrs/Mesdames Manalo, Byam, Ferencz, Mozes, Murgatroyd, Paulson, and Wilton, was in Accra from January 26 through February 6, 1998 to discuss the Private Enterprise and Export Development (PEED) Project (Credit 2502-GH). Mr. William Steel, who was in Accra on a separate mission, also supported the work of the mission. We would like to thank the officials at the Bank of Ghana (BOG) including the Export Finance Office (EFO), the Ministry of Finance (MOF), participating financial institutions (PFIs), and various other government and private agencies for the assistance and courtesies extended to the mission. The main objectives of the mission were to review the implementation progress of the Project and to assess the Government's request for additional assistance for the financial sector in light of the upcoming project closing date set for March 31, 1998. A summary of the recommended next steps followed by supporting information on each project component is provided below. These reflect the mission's findings and suggestions at the wrap-up sessions held with the EFO and Dr. Kwabena Duffour, Governor, BOG, and presented to Mr. Victor Selormey, Deputy Finance Minister, MOF. Agreements were not reached during the wrap-up sessions as both Dr. Duffour and Mr. Selormey requested additional time to consider the issues raised and the recommendations made herein. Suggested Next Steps 1. Export Credit Refinance and Guarantee Facility - EFO to allow additional commitment of funds under the line of credit to PFIs that document compliance with two additional eligibility criteria: (i) at least a 90 percent recovery on their PEED loans that fall due, and (ii) at least 90 percent of their borrowers servicing the PEED loans on schedule. EFO to ensure disbursement on approved loans occur on or before the March 31, 1998 project closing date. Funds under the Export Credit Guarantee Fund to be made available for other export credit needs if BOG decides to implement the EFO's recommendation to abolish the Export Credit Guarantee program. 2. Technical Assistance a. Credit Reference Agency - as the consultant's contract calls for completion of the assignment in April, the EFO will pay for work satisfactorily completed by March 31, from the Project funds and charge the remaining cost of services to the NBFI Project. If  2 agreement is reached on the establishment of an agency, support could be considered under the IDA-financed Non-Bank Financial Institutions (NBFI) Project. b. Forward Foreign Exchange Operation - enhance the efficiency and stability of the market so that (i) pricing of forward foreign exchange is at the lowest cost possible and (ii) BOG prudential supervision of both banks and non-bank financial institutions adequately examines the risks created by forward positions. c. International Payments Settlement System - BOG to provide IDA information on system requirements and cost details for funding consideration under the NBFI Project. d. Export Credit Training for Bankers and Non-Traditional Exporters (NTEs) - the Government to continue financing the training program and the publication of the export guidebook possibly from the reflows of the Export Credit Refinance Facility. e. International Trade and Investment Promotion Support - Information Services Department of the Ministry of Communications and the EFO to coordinate the implementation of the eligible activities and ensure that the related goods are delivered and services completed prior to the Project's closing date to ensure these are funded under the Project. f. National Insurance Commission - The Project Implementation Unit at the MOF will not issue any letters of invitation to consultants and will now consider this component completed. 3. Project Implementation a. EFO and the PIU to submit the progress reports for 1997 as soon as possible; b. The Government and IDA to close the Project on March 31, 1998; c. IDA to cancel resources (approximately $20 million) that have not been utilized as of end-July 1998. 4. Assistance for the Financial Sector a. As the mission indicated IDA can support the following proposals under the NBFI Project, the Government will request IDA to modify the legal documents of the NBFI Project to cover support for the following: (i) BOG - the computerization of the on- and off-site monitoring function of the Banking Supervision Department, capacity building in the Monetary Policy and Treasury Management Department and in the Internal Audit Department; (ii) Institute of Chartered Accountants of Ghana b. the Government to request IDA to amend the Public Enterprise and Privatization TA Credit Agreement to include funding for the privatization of banks by February 27, 1998; the Government to provide IDA with terms of reference for the  3 preparation of a privatization strategy for banks and action plan for COOP Bank by February 27, 1998; IDA to provide its comments to the TORs by March 6, 1998; the Government to recruit consultant(s) to implement the strategy and action plan, March 20- April 30, 1998. 5. Recommended Financial Sector Assessment - The mission proposed that IDA send a mission to Ghana within the next several months to do an in-depth assessment of the financial sector issues (identified below) and associated issues, their underlying causes, and, to some extent, their costs. IDA would send a mission planning document in advance of such a mission for the Government's review and to actively seek Ghanaian counterpart participation in the financial sector analysis. PEED Project Status Export Credit Refinance and Guarantee Facility Eighty-two sub-loans from eight PFIs were approved under the refinancing scheme for a total of approximately $14.3 million (42 percent of the original allocation for this component). Eighty-six percent of the sub-loans were dollar denominated. Commitments under the line of credit remains low despite several modifications to the project design made in the past in response to market changes. These modifications included: changes in the reference interest rates, equity contribution of beneficiaries, credit guarantee cover, utilization of reflows, and eligibility criteria for new banks. While these changes resulted in some improvements, utilization of the funds continued to be low due to the following reasons: a relatively liquid position of the commercial banking sector, unwillingness of banks to take risks on non-traditional exporters in the absence of post-shipment guarantees, banks' preference for higher returns on BOG paper, provision of funds by the Ministry of Finance to selected PFIs for similar purposes and at below market terms, the general high level of interest rates, and non-traditional exporters' increasing demand for medium-term resources rather than short-term resources. In reviewing the repayment performance under the Project, it is clear PFIs have been experiencing losses because of difficulties in recovering on a timely basis some funds lent. There are many reasons for this poor performance. In the banking system, key weaknesses are reflected in the poorly timed or structured delivery of financial services to the exporters (leading to, for example, the availability of funds when these are no longer needed, utilization of fumds for purposes other than pre-export finance, the exporter's inability to meet the stipulated quantities of an export order) and poor credit management (appraisal, supervision, loan recovery). On the part of the NTEs, though knowledgeable about product sourcing and selling, they are undercapitalized, lack the sophistication in dealing with bank requirements and overseas buyers, and experience difficulties in generating sufficient working capital to keep their export process going when short-term pre- and post- shipment delays occur. Others who decide to respond to changes in regulations (environmental laws, for example) and market demands require longer term funding for capital expenditure to expand or retool and add value to their  4 products and to compete in the export industry. Of the over $ 10 million due at the end of 1997, 40 percent are yet to be recovered. There are about 30 defaulters (about 65 percent of those that received funds and should have been servicing their loans). This is very much in line with the decline in recovery performance of many banks over the years (for example, a sample of six banks showed a recovery range for all loans of 24 percent to 93 percent in 1993 declining to 21 percent to 73 percent in 1996). Given these high default rates, IDA recommended in November 1997 that continued commitments under the line of credit be allowed only after a PFI applying for additional commitments can document that their loan recovery performance under the Project has improved as measured by two criteria: (i) at least a 90 percent recovery on the loans due, and (ii) at least 90 percent of borrowers servicing their loans on schedule. The basis for this recommendation was an understanding reached by the EFO and IDA in 1996 that the reflows from the line of credit would fund a medium-term facility to be made available to PFIs who performed well in related term loan facilities. Performance would be measured by a recovery rate that was at least 70 percent the previous year and increased by 10 percent annually thereafter leading to about a 90 percent recovery rate by late-1997. In reviewing the performance of PFIs in 1997, only three banks (whose combined utilization was about $2 million) would be eligible to continue participating. Also, because of this poor performance, IDA did not approve an earlier request by the Government to expand the line of credit to include medium-term loans to NTEs given the higher risk normally associated with such loans. Based on the slow commitment of funds and the high default rates, the mission discussed with the EFO and the Government its recommendation to close the Project as originally planned in March 31, 1998. Provided PFIs meet the additional eligibility criteria discussed above, it is suggested that commitments under the line of credit continue on the basis that disbursements on loans approved can be completed by the March closing date. The EFO suggested that the closing date be deferred until December 31, 1998 to allow the facility to be available to PFIs for a full five years. The EFO also suggested that the eligibility criteria be reduced to 75 percent recovery. The mission indicated it cannot support these suggestions as there are no market indications that doing so would significantly contribute to the improvement in the overall performance of the Project and the achievement of its objectives. Under the Export Credit Guarantee component, nine banks sought cover for 44 loans (ranging from 22% to 75% of the loan amount) totalling $5.2 million. There were no claims made against the fund as NTEs experienced post-shipment problems which did not qualify for coverage. Given this performance, the EFO informed the mission that it is recommending the abolition of the Export Credit Guarantee program and to make these resources, approximately $5 million, available for other export credit needs. The mission had no objection to this recommendation if BOG decides to discontinue extending guarantees and there are no outstanding guarantees requiring coverage. TechnicalAssistance Component  5 Although overall delayed, there is progress in the implementation of the technical assistance component of the Project. Forward Foreign Exchange Operations The final draft report prepared by the consultants on establishing a forward foreign exchange market operation was sent to IDA for comments. Since the report was written, it is pleasing to see that forward trading has begun in Ghana. The need now is to enhance the efficiency and stability of the market so that (i) pricing of forward foreign exchange is at the lowest cost possible and (ii) BOG prudential supervision of both banks and non-bank financial institutions adequately examines the risks created by forward positions. The mission suggested the following observations be used as a guide to future market development: (a) BOG should ensure its existing supervision of banks and non-bank financial institutions adequately assesses the risks to forward market participants of (i) open positions and (ii) failure to deliver currency by a party to a forward contract. IDA will be happy to send examples of practice in other countries, if required. (b) Participants in the forward market should be limited to institutions already covered by BOG supervision of banks and non-bank financial institutions. There is no need for the BOG to create any further administrative body to license or regulate participation in, or the structure of, the forward market. (c) The BOG should encourage the efficient development of the market so that (i) forward cover is provided at lowest cost and (ii) market participants can cover positions with ease. To this end, the BOG should examine: (i) developing secondary trading in cedi instruments; (ii) the extent to which regulations on banks' ability to have foreign currency assets or liabilities limit banks' ability to cover open forward positions. (d) The BOG does not need to, and should not become, a market maker in forward foreign exchange. If it sees an advantage to doing so, the BOG could enter into covered forward contracts on the same basis as it now enters into spot contracts. Before entering into any forward contracts, the BOG should have a clearly stated policy designed to avoid losses by ensuring (i) avoidance of open positions and (ii) fully commercial market-based pricing of forward contracts.  6 Since additional funding resources to implement the forward foreign exchange operation is not necessary, support for this component would be considered complete with the finalization of the consultant's report. Credit Reference Agency Subsequent to the completion in June 1995 of a study to deternine the feasibility of setting up a credit reference agency (CRA) and the recognition that establishing one is suitable and needed, consultants have commenced the second phase of the study. Under this phase, firm commitments from interested investors and donors will be determined, core capabilities of potential domestic credit reference companies surveyed, budget estimates prepared, and a detailed action plan for setting up the CRA developed. As the consultant's contract calls for the completion of the assignment in April, it is recommended that funds for this component under this Project be used to pay all services satisfactorily completed by end-March. The completion of the study and support required for establishing the agency could be considered under the NBFI Project, following agreements between IDA and BOG. International Payments Settlement System In response to SWIFT's advice to BOG that technical support for the ST200 system will be terminated effective end- 1998, BOG examined their hardware and software system configuration and the need for system updates to ensure reliability and cost effectiveness in international settlement and telex services. BOG informed the mission that it would need IDA's assistance for the upgrade but was not yet in a position to provide information on system requirements or cost details. The mission indicated that when this is available, a request could be sent to IDA for financing under the NBFI Project. Export Credit Training for Bankers and Non-Traditional Exporters Training sessions for NTEs and bankers were offered by GEPC and BOG, respectively, during the third and fourth quarters of 1997 in which a total of 58 NTEs and 16 bankers participated. The objectives of building up the knowledge base of NTEs and bankers and training trainers to continue implementing the program is progressively being achieved. Reports from the expatriate consultants, who have completed their consulting assignments, indicate the courses have been well received and provide useful suggestions on making the program more responsive to customer requirements. On the export guidebook, the mission and the EFO agreed that the latest draft would be reviewed by the Ghana Export Promotion Council before it is transmitted to IDA for comment. In the meantime, the EFO will commence the procurement process for the publication of the guidebook and will make every effort to publish it after IDA's review and prior to the Project closing date.  7 International Trade and Investment Promotion Support In November 1997, IDA approved the trade and investment promotion program submitted by the Information Services Department (ISD) for implementation by Ghana's diplomatic missions in Washington, London, and Geneva. The mission recommended that ISD and the EFO coordinate the implementation of the eligible activities and ensure that the related goods are delivered and services completed prior to the Project's closing date to ensure these are funded under the Project. Corporate Restructuring The consultants have submitted their draft reports for the individual companies that were selected for review under this component. The PIU is reviewing these reports before sending them to the companies concerned for their consideration. With these reports, the component is now considered completed. Commercial Insurance Study The mission discussed with the National Insurance Commissioner the recommendations presented in the commercial insurance study providing the Commission with a loss control and market development specialist and a technical and product development specialist. Because the implementation of this component was delayed by the need for NIC to move to its new premises (a condition for implementing support under the NBFI Project), the Commissioner advised the mission of the need to reconsider this component. He indicated that the Commission has other higher priorities relating to insurance laws, regulations and supervision issues supported by the NBFI Project, which it wishes to implement first. The mission accepted the proposal and suggested, if necessary later on, a request for assistance could be made to IDA for funding under the NBFI Project. The PIU at the MOF was also advised not to issue any letters of invitation to consultants and to consider this component completed. Other Matters The mission requested the EFO and the PIU to submit their progress reports for 1997 as soon as possible. The mission discussed its recommendation to close the Project on March 31, 1998, as originally scheduled, and to cancel the resources (approximately $20 million) that will remain unutilized as of end-July 1998. Government's Request for Assistance to the Financial Sector a. BOG i. Banking Supervision Department (BSD) - BSD requested IDA's support to finance computerizing its off-site and on-site monitoring function and provide related training for its inspectors. In reviewing this request with BSD, the mission noted  8 that BSD continues to monitor the condition of individual banks and the banking industry reasonably effectively. It performs its supervisory function through periodic off-site analyses and annual on-site examinations for both the 17 larger commercial banks as well as the numerous smaller rural banks. Written reports, which cover a broad array of supervisory issues, are generally appropriate in scope and depth and reflect an adequate understanding and perspective of risks facing individual banks. While B SD's response to the problems uncovered is unsatisfactory in important respects, the monitoring function nonetheless adds substantive value although it remains undesirably resource constrained. Many of the analytic and reporting functions are now done manually which is time consuming and creates a potential for hurnan manipulation of data and hence, fraud. The mission and BSD agreed that computerizing the data bases, the mathematical ratio analyses and data flows from the banks to the supervisory function will allow for increased efficiency through improved data management and enhanced analytical ability. It is suggested that this assistance, amounting to approximately $856,000, be provided under the NBFI Project. ii. Monetary Policy, Treasury Management, Financial Markets Departments - BOG advised IDA that it required support in developing targeted open market procedures apart from the auction. This support would include (i) advisory services for three years to oversee the technical and analytical work of the Research and Treasury Departments and (ii) assistance for Monetary Policy Management: Research and Treasury Departments. In addition, it sought support for the establishmnent of a Financial Markets Department to develop BOG's capacity to understand, interact with and develop financial markets in Ghana and provide an independent check on the impact of BOG's actions and policy on the market. In discussing these requests, the mission expressed the importance of BOG adopting a considered approach in defining the advisory assignment and suggested that this should include the definition of performance targets that demonstrate skill transfer to avoid the creation of a void in BOG's skill set upon completion of the assignment. Projected to cost around $500,000 over three years, it was suggested that this request could be met under the NBFI Project. In reviewing the request for the Financial Markets Department, the mission advised that BOG integrate the proposed functions with the existing Research and Treasury Department and that support be provided for staff training (attachment programs, course work) and computers (as part of BOG's integrated computerization program). Projected to cost about $520,000, it was recommended that this request be provided under the NBFI Project. iii. Internal Audit Department - The request for technical assistance for BOG's Audit Department included support for consulting services, computers, library material, training, and procurement of a modem incinerator for discarding torn and mutilated notes withdrawn from circulation. Based on an assessment of the Departmnent's request, the mission recommends support for locally-conducted training programs for its staff, computers, library material and consulting services necessary to update the Department's operational manuals. It was suggested that full advantage of the consultant's advisory services would be attained only if this would be requested and provided after BOG is fully computerized and new hardware and software are installed in  9 all of BOG's departments. The mission also suggested that the Department's computerization requirements should be defined by BOG's Information Technology Department as part of BOG's integrated computerization plan. In addition, the mission recommended that a separate library for the Audit Department should not be created and that the procurement of library materials be done in conjunction with BOG's central library requirements. It was suggested by the mission that funds for the incinerator be covered under BOG's budget. It was recommended that the Audit Department provide IDA with cost estimates for their component for funding consideration under the NBFI Project. b. Privatization of state-owned banks - The Government has requested technical assistance for: (a) post-divestiture activities concerning GCB; (b) the conclusion of the NIB divestiture; (c) the privatization of ADB and COOP Bank; and (d) the restructuring and divestiture of BHC. In principle, IDA agrees to this request. The mission proposes that technical assistance funding would be provided in two phases. Under Phase 1, the technical assistance will be provided to develop a strategy for privatizing the banks and an action plan to address the particular requirements for the COOP Bank. In Phase 2, technical assistance will be provided to implement the strategy and action plan. IDA funding of phase 2 will require IDA's agreement on the implementation strategy developed in the first phase. Also, given that divestiture of the banks is the main objective, IDA proposed to accommodate the funding of this activity under the Public Enterprise and Privatization Technical Assistance Credit (PEPTA). Issues relating to this component which require further consideration include: (i) Implementation Arrangements. The privatization of all non-banking enterprises is currently conducted within the policy framework created by the Divestiture Implementation Committee Act (1993). Consequently, these divestitures are administered by the Divestiture Implementation Committee (DIC). However, for banks, the administering agency has been the FINSAP Secretariat (FINSEC). The issue here is whether the privatization of those banks that remain state-owned should be brought under DIC. This question remains open for discussion. FINSAP has the advantage of having some experience from attempting bank privatization over the last two years. DIC does not have that specialized experience, but it should be noted that DIC lacks expertise in most sectors, and hires the required expertise (by 'outsourcing') as needed. (ii) GCB Privatization. When the Government's request for technical assistance from PEED was provided to IDA, the expectation was that funds would be required for the post-divestiture "due diligence" of GCB. However, the deadline for the sale of GCB to the Malaysian conglomerate has past without successful resolution. As prospects for successful resolution within a short period seem unlikely, the mission strongly recommends the deadline should not be extended. If this recommendation is accepted, technical assistance will be required to devise and implement a new divestiture strategy.  10 (iii) Availability of PEPTA Funds. Are there sufficient funds available under PEPTA to accomodate bank privatization as well as the other correctly structured privatization efforts currently planned? At this point it is difficult to project whether there will be a surplus of funds since over 75% of the credit remains uncommitted and the credit is seven months away from its mid-term. However, in the event that a determination is eventually made that the credit is likely to be short of funds, a case could be made to supplement the credit since a major reason would have been the technical assistance requirements caused by exogenous events such as the financial crisis in Malaysia, and its impact upon the privatization of GCB. c. National Bankers College - NBC requested support in updating and expanding its curricula, by using foreign experts for well defined, short duration courses. The mission and NBC agreed additional support for this purpose, once fully defined, would be possible in addition to that already provided under the NBFI Project. d. Institute of Chartered Accountants of Ghana - ICAG discussed with the mission its plan to set up a school of accountancy in collaboration with a foreign institute of accountants and to establish postgraduate accountancy studies in two universities. At an estimated cost of $300,000, the school will provide students with formal education in accountancy necessary to prepare them for the ICAG qualification examinations and for post graduate studies. The mission recommended that this proposal receive serious consideration and suggested that IDA would be interested in supporting this effort under the NBFI Project but limiting the effort to the creation of one accountacy school in one university, which will prepare students for their qualification examinations and provide post graduate studies. The Institute also submitted a request for funding of consultancy services, training, technical manuals, computers, teaching aids and a vehicle. While it is the mission's recommendation that most of ICAG's ongoing activities be financed from membership fees and possible assistance obtained from the large established accounting firms in the country, it would recommend that IDA provide funds on a one-time basis and on a 60 percent (IDA):40 percent (ICAG) cost-sharing arrangement. It was suggested that ICAG would send to IDA, for funding consideration under the NBFI Project, a more detailed proposal documenting the need for consultancy services; post qualification training activities; training (including technical materials); computer equipment, and teaching aids. Financial Sector Analysis As the mission undertook to review the Government's request for additional assistance to the financial sector, it noted that substantial progress in strengthening the financial sector has been made over the past decade. A number of policies with respect to the regulatory and enabling environment have been reformed and, while there may be a need for some additional refinements, commercial financial institutions find Ghana a satisfactory, if not attractive, environment in which to do business. The Central Bank and its banking supervision function have become stronger and more effective. At the present  11 time, Ghana's major domestic banks are reasonably solvent, liquid, and profitable. Considerable progress is being made in strengthening nonbank financial institutions. However, as the performance of the PEED Project illustrates, some important PFIs are experiencing financial losses on their line of credit onlending because of poor recovery rates. The mission conducted a brief survey of the financial sector to identify factors that contributed to the disappointing PEED results together with remaining financial sector issues that might represent serious risks and/or significant potential future costs to the financial sector in the future or provide possible opportunities for the Bank, if requested, to provide support for Ghana's on-going financial reform efforts. The survey suggested there are still a number of significant financial sector issues that need to be examined in some depth. Key areas identified by the mission as needing early attention are issues relating to long tenn credit for productive investment, macro-economic financial sector environment, the banking system, and formal financial sector system outreach. Highly constrained availability of long term credit is affected by many factors including i) high real interest rates and volatile inflation; ii) inability of banks to mobilize significant long term deposits; iii) investment policies and practices of institutions such as SSNIT that have substantial long term investable funds which are largely unavailable for banking system intermediation; and iv) inadequate market mechanisms relating to secondary markets for government paper, pricing and yield curves, corporate debt instruments, etc. In the macro-economic arena, the high fiscal deficits of the last several years, and the associated government funding requirements, have led to high inflation, sharp currency devaluations, and high real interest rates. These have a pervasive negative and widespread impact on financial sector functioning, which in turn undermines the financial sector's effectiveness in supporting economic objectives. For exarnple, it has: * resulted in the banking system holding large amounts of government debt, thus crowding out credit to the rest of the economy; * discouraged savings in domestic currency, reinforcing the incentives to save in real assets, thus keeping the formal financial system very small. Consequently, bank deposits are still well below 20% of GDP; * jeopardized borrowers' ability to meet debt repayment obligations and their financial health as a result of the wide swings in inflation which first drove real interest rates sharply negative during 1995 and early 1996 and then sharply positive since mid- 1996; * constrained growth, development and deepening of the new equities and corporate debt markets. Important problems remain in the critically important banking system, despite massive past restructuring and an aggressive reform program. Several large domestic banks, despite seemingly satisfactory balance sheets and income statements (temporarily  12 enhanced by large profits on investment in government securities), are showing troubling signs of underlying deterioration that could lead within a year or two to serious financial problems. Non-performing loans are ominously increasing (PEED recovery rates are indicative of similar collection problems on other parts of loan portfolios) due to inefficient appraisal and collection practices, weaknesses in the legal and credit disciplinary environment, and the impact of high real interest rates. Profitable business and attractive customers are being lost to more efficient banks (which is healthy for the system but can hurt big banks' profitability) and it will be increasingly difficult for them to support existing deposits levels with sufficient sound lending business when highly profitable government securities investment opportunities diminish. High administrative costs and loss-making branches as well as inadequate competition in many market areas impose high intermediation costs on real sector borrowers. Bank privatization initiatives for several banks, motivated by a critical need to improve governance, have, to date, achieved unsatisfactory results. Moreover, there are associated costly delays in initiating badly needed internal bank restructuring, management strengthening, computerization, cost reduction, and strengthened competitiveness. Other banking issues include (i) inadequate new bank and NBFI licensing policies/practices and resulting concern that some recently licensed banks and many NBFIs do not have adequate capital and size to maintain soundness if there are large decreases in government debt interest rates; (ii) inadequate exit policies (which have resulted in continued operation of insolvent commercial and rural banks) will in turn, lead to more costly solutions and erode public confidence in the banking system; (iii) bank compliance violations that remain unaddressed because penalties for noncompliance and their imposition are inadequate; (iv) financial statements that do not give adequate advance warning signals because some loan provisioning requirements on nonperforming loans are still too lax; (v) an unequal playing field between some finance companies which are largely in the same lending and deposit business as banks but are subject to laxer regulations which could change rapid growth of unsound NBFIs which collect retail deposits; and (vi) an urgent need for very high quality bank restructuring/advice to enable quick implementation of the best available approach to resolving very serious existing siuations in several small banks; e.g. while the COOP Bank situation needs to be decisively resolved quickly, the mission views a proposal to merge COOP Bank or most of its structure into ADB as highly unwise as it would cause significant harm to ADB. Formal mainstream financial sector outreach to large sectors of the Ghanaian economy and populace is disappointing and leads to low savings mobilization, inadequate funding for important economic activity, and for new and small enterprises, the middle class rural populace and the poor. Among issues in this arena are: (i) inadequate integration of the rural and national financial sectors leading, inter alia, to problems in financing sharp seasonal credit peak requirements and ineffectual collaboration between rural and large commercial banks to finance medium size projects; (ii) situations that catalyzed recent actions by several banks to eliminate rural branches, reduce agricultural  13 lending, and/or substantially increase minimum deposit requirements; (iii) inadequate supervisory and technical support associated with weak rural financial institutions; and (iv) limited use of checks which imposes transactions costs, inconvenience and delay, a need to maintain large cash balances uninvested, and larger bank refusal to cash rural bank checks, often even for the soundest banks. The mission proposed that IDA send a mission to Ghana within the next several months to do an in-depth assessment of these and associated issues, their underlying causes, and, to some extent, their costs. Such an assessment would provide a foundation for (i) understanding vulnerability to risk and costs of suboptimal policies, practices and situations, (ii) identifying needs for reform, (iii) providing advice with respect to future financial sector policy and strategy, and (iv) extending support to build on the substantial progress already made in financial sector and banking system strengthening. It was also proposed that a mission planning document would be sent in advance of such a mission for the Government's review and to actively seek Ghanaian counterpart participation in the mission financial sector work. Accra, Ghana February 6, 1998  Appendix 2 GOVERNMENT OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT (PEED) PROJECT (IDA CR 2502 - GH) IMPLEMENTATION COMPLETION REPORT (ICR) Prepared Jointly by: Export Finance Office (EFO) Bank of Glhana, Accra. & Project Implementation Unit (PIU) Ministry of Finance, Accra September, 1998  GOVERNMENT OF GHANA PRIVATE ENTERPRISE AND EXPORT DEVELOPMENT (PEED) PROJECT IDA CREDIT 2502 - GH IMPLEMENTATION COMPLETION REPORT (ICR) INTRODUCTION A major portion of the Implementation Completion Report (ICR) on the PEED Project was presented by the Government of Ghana at the Country Portfolio Performance Review (CPPR) meeting (Akuse V) of April 1998, as one of the case studies providing lessons in project design and implementation experience. The ICR also takes into account issues and outcomes of the Februarv 1996 Mid-term review; mission visits by IDA staff and interviews with stakeholders especially the exporters, financiers and entrepreneur. The ICR captures the implementation experience of the IDA-financed US$41 million PEED project which was negotiated in April 1993, signed in July and became effective in December 1993 with disbursement commencing in March 1994 - almost a year after the negotiations. This delay was mainly due to the transitional problems arising from the reintroduction of parliamentary democracy and constitutional governance. The project was, however, closed on 3 1t March 1998 as originally scheduled. PROJECT DESIGN In line with the commitment of Government of Ghana (GOG) to the concept of "ownership" and "development effectiveness" of projects, an innovative local counterpart group dominated by the private sector was set up to work with the IDA mission during the project preparation. This unique local counterpart group participated in the structuring of the PEED project to meet its required objectives by assisting in the identification of tr.e needs of the private sector especially the exporters and the entrepreneur who were the ultimate beneficiaries of the project. In spite of this laudable participatory and collaborative approach, a number of components considered critical by GOG and the Private Sector in enhancing the successful implementation of the project, such as a post-shipment insurance facility, were not included in the project. The requirements and components of the PEED project were also synchronised with those of the USAID-supported Trade and Investment Project (TIP) which was in a more advanced stage of preparation. This was to avoid duplication of the efforts and encourage donor collaboration in enhancing complementarily of projects in the same sector. However, the implementation of the two projects did not occur in tandem as envisaged. The TIP was fully disbursed whereas funds under the PEED had to be cancelled. PROJECT COMPONENTS AND MANAGEMENT The Export Financ-, Office (EFO) at Bank of Ghana and the Project Implementation Unit (PIU) at the Ministry of Finance (MOF) implemented the PEED Project. EFO had responsibility for the US$34 million Export Refinance Facility, the Export Credit Guarantee Scheme and the technical assistance components involving (a) the International Payments Settlement System (SWIFT) (b) Credit Reference Agency (CRA) (c) Forward Foreign Exchange Market Development (d) Export Guidebook preparation and (e)  Training for Exporters and Bankers. EFO and the Information Services Department (ISD) jointly managed a latter addition, the International Promotion component of US$500,000.00. The PIU was responsible for three technical assistance components namely the Long Term Debt Market Development, (LTD) the Commercial Insurance Market Development, (CIM) and the Corporate Enterprises Restructuring (CER) of the Potentially Viable Enterprises (PVE's) in the custody of the Non Performing Assets Recovering Trust (NPART). PIU had the additional responsibility for ensuring the implementation of policy issues and convenants embodied in both the Letter of Strategic Development Policy (LSDP) and the Development Credit Agreement (DCA). The managers of EFO, PIU and ISD had proven track record in project management and in dealing with the World Bank. They demonstrated a deep commitment to the implementation of the PEED and performed creditably despite the numerous problems and constraints experienced in the implementation of the project. IMPLEMENTATION EXPERIENCE AND PROBLEMS PIU in conjunction with the Ghana Stock Exchange fuilly implemented the Long- Term Debt Market Consultancy assignment. The study phase of both the CER and the CIM Consultancy assignments were completed. However, implementation problems were encountered in the case of the CIM and CER. The provision of the Business Assistance Fund (BAF) by GOG provided a more credible commitment to the plight of the PVE's which had previously undergone two previous studies funded by IDA and other earlier studies commissioned by GOG. Thus the IDA supported pilot CER programmed with a study phase was less attractive to the PVE's which were craving for real support. Consequently, some of the more eligible PVE's opted for BAF facility and graduated from NPART. An appreciable time was saved when the study phase of the CIM was undertaken by the same consultants working on the Diagnostic Study of the Insurance Industry within the framework of the FINSAP. A Working Committee comprising of the key players within the insurance and export industries and chaired by the Commissioner for National Insurance Commission (NIC) reviewed the study and produced a Programme Implementation Plan (PIP) which was endorsed by IDA. Implementation delays were experienced on account of lack of suitable office accommodation and equipment for NIC. The response to adverts for procurement of consultants made in local papers and the West African magazine was poor. IDA advised a repeat advert which was carried in the "Economist" among others. Convenants and Policy Measures The Project Implementation Unit (PIU) within the World Bank Desk of the Ministry of Finance successfully co-ordinated and collaborated with the GIPC, DIC, SEC, FINSAP, Bank of Ghana and Association of Ghana Industry/PEF among others in ensuring the implementation of the various policy measures contained in the Letter of Strategic Development Policy (LSDP) and in meeting the requirements of the 2  development credit agreement as detailed in the attached Policy matrix labelled as Annex I. Export Refinance Scheme i. PFI Participation The main problem encountered was insufficient Participating Financial Institutions (PFIs) interest in sponsoring applications for PEED funding. Of the 14 banks which signed the Participation Agreement only 8 actually participated in the Project; of the 8, 6 participated actively. The SAR made the following projection for the commitment of funds. By Mid By Mid By Mid By Mid 1994 1995 1996 1997 Level of Commitment 10% 40% 75% 100% The level of commitment at the close of the Project was about 52.6%, which varied significantly from the projected target of 100%. The variance can be attributed to one or more of the following factors: a. the Project was originally expected to become effective by July 30, 1993 but this did not happen until December 21, 1993. The IDA's projections should have been revised accordingly, but they were not; b. the signals from the PFIs, NTEs and other key players on which the IDA projections were based proved misleading. For example, the projections did not envisage the effects of restructuring the state banks on the Project; and the term Export Refinance Scheme turned out to be a misnomer; c. PFIs claimed to have enough resources of their own to finance exports without resource to PEED Project funds; d. some PFIs claimed that the design of the Project which require them to bear the credit risk was a deterrent in view of the risky nature of non-traditional exports; e. the uneasy relationship between bankers and NTEs; this was due to the fact that most NTEs did not have a good track record with the PFIs to merit assistance, this situation was being gradually addressed by the various courses organised under the project for bankers and NTE's. f. IDA consistently ignored the basis for a speedy disbursement of the facility; i.e. satisfying the urgent need for term financing for producting non-traditional commodities for export. 3  ii. Pricing of Loans One of the reasons which made PEED unattractive to some PFIs was the pricing of the facility. Cedi-Denominated Loans Originally, IDA priced cedi-denominated loans at the average 180-day commercial bank deposit rate. The banks added their margin to this figure before on lending to their customers, thus rendering PEED cedi denominated funds uncompetitive. This was because for short-term credits; the banks mobilised their funds through current account deposits. Accordingly, lending at any rate above their cost of funds made economic sense to the banks. EFO suggested to the Task Management that the weight average cost of funds to the banks would yield a more realistic answer. The IDA turned down this suggestion and later IDA decided to abolish cedi -denominated loans. Dollar-Denominated Loans The IDA either deliberately or mistakenly took the Refinance Scheme, which was for short term finance, for term lending and priced the PEED funds at the Prevailing LIBOR + a margin of 2.625%. Following representations from EFO, the margin was reduced to 2.375%. and finally to 1.375%. The only reason IDA advanced for the margin was that they wanted to conform to the practices of IFC. Even the reduced margin of 1.375% still made PEED funds uncompetitive because some PFIs could source foreign funds at much cheaper rates. iii. Financing of Approved sub-Projects The Project authorised EFO to finance sub-projects approved within its free-limits from the EFO Special Account before seeking IDA authorisation. This was a commendable improvement on the SME Project. From August 1996, EFO was inundated with applications from PFIs; this was the direct result of representations made to the banks by the then Governor. The volume was such that the approved sub-projects could no longer be financed from the EFO Special Account. As a solutions, BOG suggested to the Task Management and the Africa Disbursement Division, that for loans above the EFO free limit EFO be permitted to submit a withdrawal application with the loan application so that if, and when, IDA approved and authorised withdrawal from the Credit Account, funds would be made available for the sub-project. IDA declined this suggestion. In order not to compromise the credibility of the project, BOG informed IDA it would finance approved sub-projects from the PEED Guarantee Fund until there were adequate funds in the EFO Special Account. At the close of the Project, most of this funding had been recovered from the Special Account leaving a balance of $1,132,812.78. When this was brought to the notice of the 4  Africa Disbursement Division, they asked BOG to "prefinance" the amount and claim disbursement. We think that since all the sub-projects involved IDA's authorisation, IDA should have taken appropriate action before closure. For example, IDA withheld $1.4 million from our last 3 replenishment applications on grounds of "recovery of Special Account". This amount could have been used to balance the books. Export Credit Guarantee Scheme The usefulness of this scheme was severely handicapped by the preshipment coverage it offered. The PFIs argued that most of the risk involved in non- traditional exports lay offshore. It is understandable that for a new Project like PEED, it was dangerous to offer post shipment coverage limited its attractiveness to the PFIs and rendered the whole Project less attractive. The first $4million repaid from Refinance loans was to be paid into the Guarantee Fund to honour claims. These resources remained idled until the mid-term review. Technical Assistaiice The implementation of this component progressed satisfactorily except for 3 minor hiccups. i. Export Guidebook Originally EFO's suggestion that this be prepared by Ghanaians was accepted by IDA. Later, IDA argued that since the expertise might not be available in Ghana, local consultants may bid but only in collaboration with expatriate consultants. This revision delayed the preparation of the Export Guidebook for at least 2 years. Finally, IDA and BOG agreed that Ghanaian consultant be engaged to edit the draft and make it usable in Ghana. In the event, the Ghanaians re-wrote the text in consultation with GEPC producing a much better book. ii. Credit Reference Agency (CRA) The implementation of the Second Phase of the CRA study was delayed by several months when the PEED Task Management was changed. The new management revised the TOR already agreed with BOG, and in response to which the consultants had submitted their technical and financial proposals in February 1997. As a result of IDA as intervention, the new proposals were sent in May 1997. iii. Forward Foreign Exchitnge Market The consultants revised their draft report as directed IDA and this was sent to IDA for review early in November 1997. IDA's reaction was only conveyed to EFO during the Mission, which began on January 26 1998. 5  Meanwhile, BOG had set up a committee to advise on the implementation of the consultant's recommendations. TERM FINANCING IDA consistently shied away from introducing term financing into the PEED Project. The Project assumed that there were adequate non-traditional commodities for export. Because of our weak production base, Ghana argued for the introduction of term financing into PEED during the negotiations in April 1993. In response to this argument, IDA agreed that after $4million worth of reflow had been credited to the PEED Guarantee Fund, EFO could use the additional reflows to finance term loans. In the issues paper for the mid-term, BOG revisited the introduction of term financing into PEED. IDA would only agree that 50% of reflows be used for term financing. Finally, during a Mission in May 1997, IDA agreed to introduce term financing into PEED. After MOF had signalled its acceptance on September 17 1997, IDA sent a fax on November 19, 1997 reneging on the agreement. They cited the performance of the Export Refinance scheme land the macro-economic situation as reasons for their decision. This was inspite of the fact that IDA's mission of May 1997 had concluded that, "There is a sizeable need (approximately $78 million) for medium-term resources as indicated by several PFI's primarily because of the realities currently faced by the financial sector. There is a shortage of medium- term funds available to private enterprises ......... In this regard, we refer to the SME Project, which was a term facility to illustrate the need for term financing for the NTE sector. Recovery rates recorded by the SME Project, were discouraging. When the Project ended in June 1997, the rate was 50% although by January 1998, this had increased to 60%. Of the 121 sub- projects financed under the SME Project, 7 were in the NTE sector. Out of the 7, 3 have fully repaid their loans, 3 are currently paying and 1 has wilfully defaulted. this would seem to confirm our view that term lending for exports is not as risky as term lending for other areas. Secondly, the macro economic situation at the time IDA reneged on the agreement with MOF was much better than when they agreed to the introduction on their financing. OTHER CONCERNS Loan Recovery The PFIs experienced difficulties in recovering some of the loans on a timely basis. There are mainly reasons for this. These include the poor timing and delivery of financial services and credit to exporters resulting in utilisation of funds for other purposes other than pre-export finance, inability of exporter to meet stipulated export order. Poor credit management i.e. appraisal, supervision and recovery was a common occurrence. On the part of the NTEs, though knowledge in product sourcing and selling, they lacked the sophisticated in dealing with bank requirements. Processing of applications through the banks took so long that in several instances, L/Cs had expired before applications were submitted to EFO, because the Refinance Schemes was a trade finance facility, PFIs tended to release 6  all the approved funds to customers without supervision and in some cased this resulted in misapplication of funds. Performance of IDA Task Management The Task Management tended to ignore signed agreements. For example, in the fax of November 19, 1997, IDA made various recommendations for restructuring the Project. When there recommendations had not been accepted by BOG, and the Project Agreement duly amended, the Task Management started implementing them; according to the Task management, that was how IDA operated. Traditionally, any Mission prepared and discussed their draft aide memoir at a wrap up meeting during which the "next steps" were agreed. This procedure was varied without notice. For the May 1997 Mission, the draft aide memoir was sent to us form Washington in July 1997. The draft aide memoir for the January 1998 Mission was not discussed at a general wrap up meeting, but sought to create erroneous impression that the way forward had been agreed with EFO. Perhaps a more appropriate caption would have been "Mission's decisions" rather than "Agreed Next Steps". Extension of Credit Closing Date The Project documents provided for a closing date of March 31, 1998, but this was based on the assumption that project effectiveness would be achieved by July 1993. However, the Project became effective on December 21 1993. For the Project to run its full five-year term, the closing date ought to have been adjusted accordingly. IDA departed from its practice of extending the validity of lines of credit which disburse slowly. ISAC and the SME Projects were each extended when there were uncommitted funds at the end of the initial closing dates of these projects. In the case of the PEED Project IDA argued that there was no indication that the extension would be beneficial. In this connection, we compare the figures for end 1996, 1997 close Project and reflows re-lent after close of Project. TABLE 1 APPLICATION AMOUNT AMOUNT PERIOD RECEIVED APPROVED $ DISBURSED (NOS) MILLION US$M End 1996 64 11.00 8.1 End 1997 87 17.3 14.3 March31, 1998 90 17.9 14.6 April-August 1998 55 2.6 2.6 From the above table it is abundantly clear that there was no justification for closing the Project on March 31, 1998 since within a period of only five months 55 applications had been processed and $2.6 million disbursed; an empirical evidence of the need for the funds. 7  IMPACT ASSESSMENT Notwithstanding the implementation problems cited above the Project can be said to have achieved its main objective, which was, to expand non-traditional exports. Table 2 below gives evidence of the achievement of the objective. TABLE 2 1991 1992 1993 1994 1995 1996 1997 Total 1098 1105 1208 1227 1431 1571 1517 Non-Traditional Exports $m 62.5 68.4 71.7 119.3 159.7 276.2 329.1 NTEs as % of Total Exports 5.6 6.1 5.9 9.7 11.2 17.6 21.7 No. of Exporters 2822 3188 1980 2529 2802 3339 3278 No. of Products 155 164 185 177 216 231 270 The value of NTEs increased significantly during the Project period from US$119.3 in 1994 US$329.1 m in 1997. Similarly, the number of products and exporters also showed up surges. Whereas the number of exporters rose from 2529 in 1994 to 3278 in 1997, the number of products shot up from 177 to 270 over the same period. The contribution of the Project to the increase in the value of non-traditional exports is evidenced by the value of export revenues of the beneficiaries under the Project as provided by PFIs. (Table 3) TABLE 3 EXPORT REVENUES EXPORT REVEUES PFI BEFORE PEED AFTER PEED FACILITY FACILITY $(MILLION) $(MILLION) Prudential Bank 1.1 2.2 Ghana Commercial Bank 1.7 5.6 National Investment Bank 0.82 5.2 Merchant Bank 17.6 17.4 Some of the beneficiaries interviewed also attest to the fact that the PEED facility contributed to the increase in their production and export levels. It is therefore evident that the availability of the PEED facility has achieved results far beyond expectation. The recovery of funds lent under the Project, which showed unsatisfactory results before the close of the Project, has improved significantly. Two major PFIs NIB and GCB, which performed poorly, have made considerable progress. The comparable recovery rates of the PFIs are as shown in table 4 below: 8  TABLE 4 RECOVERY RECOVERY RECOVERY RECOVERY PFI ASAT ASAT ASAT ASAT 30/9/97 31/1/9 17/3/98 31/8/98 AGRICULT'URAL DEV. BANK 36.1% 91.7% 91.7% 100% GHANA COMM. BANK 51.9% 41.7% 69.3% 76% MERCHANT BANK 23.8% 5.0% 76.4% 91% NATIONAL INVESTMENT BANK 9.0% 10.0% 10.3% 77% PRUDENTIAL BANK 27.2% 74.2% 90.7% 89% STANCHART 100.0% 100.0% 100% 100% CAL MERCHANT BANK 100.0% 64.7% 64.7% 100% Hence, with time it is expected that full recovery is attainable. Training for Bankers and Exporters In all about 200 exporters and over 90 bankers benefited from the specialised training schemes. Judging from the number of participants, course evaluation reports and follow- up interviews the training programmes could be described as an enormous success. The participants expressed satisfaction with the presentations and programme content, which they found very educative and relevant to their various areas of operations. In the case of participant's from rural banks that admitted that their operations did not extend to foreign trade, they intend to introduce it in their training seminars in future. International Payment Settlement System Twelve local banks have been hooked to the SWIFT system. This has had tremendous impact on their operations in various ways. These include enhanced security and speed of payment. The banks also use it to transmit high valued instruments among each other instead of the cheque-clearing system. This had greatly reduced the risks associated with the payment system. Staff of the various user banks also benefited from the training leading to improve skills and knowledge with the result that there is greater efficiency in handling of the SWIFT system. General Observation It is important that IDA as a lender should give serious consideration to the views of the borrower both at the design and implementation phases of Projects and be flexible in resolving implementation problems for the mutual benefit of the lender and the borrower. SEPTEMBER 25, 1998. 9  Appendix 3 The World Bank Resident Mission in Ghana Telephone: (233-21) 229681 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT 69 Eighth Avenue Extension Cable Address: INTBAFRAD INTERNATIONAL DEVELOPMENT ASSOCIATION Northridge Residential Area Facsimile: (233-21) 227887 P.O. Box M27 Telex: 2207 Accra, Ghana October 28, 1998 Mr. M. A. Quist-Therson Director, World Bank Desk Ministry of Finance Accra Dear Mr. Quist-Therson: Re: Ghana - Private Enterprise and Export Development Project (Cr. 2502) With reference to your letters of September 28 and 30, 1998, this is to confirm that we have received the Government's contribution to the Implementation Completion Report. As indicated in IDA's letter of August 4, 1998, the main text will be included unedited as Appendix 2. However, I would like for the record to respond to some comments in the Government's report. We also intend to include this response as an annex in the ICR. Under the sections "Performance of IDA Task Management" and "General Observations", the Government's report suggested that IDA "tended to ignore signed agreements", imposed its decisions on the Bank of Ghana, and remained inflexible in considering the Govermment's views. We assume the Government was largely referring to (i) IDA's recommendations that: (a) poorly performing banks not be allowed to continue participating in the Project; and (b) the free limit for sub-project approvals be eliminated; and (ii) IDA's reversal of an earlier decision to restructure the Project to include a medium-term credit facility. You will recall that when the recommendations were made to BOG (late in 1997), arrears ranged from about 23-40% of amounts due from about 65% of the borrowers who should have been servicing their loans. Mindful of the need to ensure the Project did not contribute to the further erosion of participating banks' resources, IDA felt it unwise to continue to commit funds while the matter of poor loan repayments remained unresolved and overall achievement of Project objectives remained uncertain. After we had made our views known to you, we debated these issues on several occasions. However, their resolution was overtaken by decisions reached by BOG, the Government, and IDA (in March 1998) to close the Project as originally scheduled. On the matter of IDA imposing its decisions without prior consultation with BOG following the January 1998 mission, the Government's report did not accurately reflect the fact that the mission and I met with both the Ministry of Finance and BOG in wrap-up sessions prior to the mission's departure from Accra. We did not agree on next steps then as both the MOF and BOG requested additional time to review and discuss the mission's findings and recommendations. Final agreements on the mission's "Suggested Next Steps" were reached at a March 1998 meeting I had with the MOF and BOG and formalized in my letter to the Government of March 20, 1998. This is not to suggest that Government and IDA Headquarters: Washington D.C.  Mr. M.A. Quist-Therson -2- Oct. 28, 1998 agreed fully with each other, but by the end of those meetings you had accepted the reasons why IDA did not feel able to consider any extension to the credit. We would also like to complement the Government's report on the Credit Reference Agency component. Following the completion of a feasibility study by the consultants and findings that establishing a CRA was a viable proposition, a decision was made to have these same consultants continue with Phase 2 of the work, i.e., preparing the business plan, soliciting investors, etc. The study also sparked interest in possibly incorporating credit reference and credit rating functions under one establishment. Prior to changes in task management, BOG, IDA, IFC, experts in the field, and the consultants were in the midst of discussing this possibility. After prolonged discussions, decisions were made to revert to the original plan of a credit reference agency only because having both functions under one organization would put potential investors in a conflict of interest position. Adjustments to the TOR were necessary to incorporate these decisions. In addition, IDA's comments to the consultant's financial and technical proposal were required mainly to ensure the consultants: (i) closed gaps on available information that could prevent accurate assessment of the demand for a CRA (for example, the disclosure of information laws); and (ii) did not conduct a survey of international standards and benchmarks as the technical partner was expected to have this information. Finally, I would note that it was unfortunate that IDA and the Government did not find the occasion to discuss this ICR more fully together, and come to joint understandings about the lessons from this operation. However, it is never too late for us to learn lessons from these experiences, so we look forward to an appropriate occasion to review this operation more fully. Let me conclude by thanking you for the serious and conscientious job you made of carrying out the Government's analysis of this operation, which provides us with serious cause for reflection on how we can do much better in future operations to assist the development of the Ghanaian private sector. Yours sincerely, (Signed) Peter Harrold Country Director for Ghana  Private Enterprises and Export Development Project Appendix 4 (Cr. 2502-GH) Page 1 of 5 Exporters Assisted Under the Project I ; kn ' fo . Uonp'.-- '......... n"0. ' Prduct i Regi.on- tUS- gricultural B-28 Cashew & Spices Ltd Cashew Greater. Accra 178,659 evelopment Bank B-29 Commodimex Ltd Cotton Seeds Greater. Accra 107,195 B-13 Keb Farms Limited Foodstuffs Greater. Accra 15,000 B-22 Sabary Enterprise Ltd Coffee Greater. Accra 200,000 B-52 Sabary Enterprises Coffee Greater. Accra 161,140 Subtotal 661,994 Continental B-11 Juaben Oil Mills Palm Kernell Ashanti 5,500 cceptances Ltd. B-41 Juabeng Oil Mills Palm Kernel Expellers Ashanti 50,000 B-1 Juabeng Oil Mills Ltd Palm Kenell Cake Ashanti 36,000 B-2 Merki Woodworks Ltd Wood Products Greater. Accra 50,000 Subtotal 141,500 Ghana B-10 Asel Adc Ventures Teak Lumber Greater. Accra 17,863 Commercial Bank B-32 Atakora Brothers Voacanga Seeds Greater. Accra 17,650 B-40 Bedora Enterprise Scrap Metals Greater. Accra 43,000 B-5 Broadlands Enterprise Ltd. Scraps Greater. Accra 25,000 B-20 Broadlands Enterprise Ltd Scrap Metals Greater. Accra 25,000 B-17 Colour Chart Ltd Garments/Gts. Card Greater. Accra 100,000 B-46 Colour Chart Ltd Greetings Cards Greater. Accra 100,000 A-i Combined Farmers Limited Pineapples Greater. Accra 125,000 B-21 Combined Farmers Ltd Pineapples Greater. Accra 125,000 B-26 Doswak Enterprise Voacanga Seeds Greater. Accra 126,000 B-57 Doswak Enterprise Ltd Greater. Accra 45,100 B-25 Elmako Enterprise Ltd Vegetables Greater. Accra 15,625 A-19 Farmers Services Co.Ltd Sheanuts Upper West 500,000 A-11 Farmers Services Ltd Sheanuts Upper West 500,000 A-9 Johnson Farms Complex Sheanuts Northern 416,541 A-20 Johnson Farms Complex Ltd Sheanuts Northern 566,541 B-3 Johnson Farms Complex Ltd Sheanuts Northern 100,000 B-4 Johnson Farms Complex Ltd Sheanuts Northern 50,000 B-19 Johnson Farms Complex Ltd Sheanuts Northern 150,000 B-37 Marcus Hughes Supplies Wildlife Gt. Accra 7,000 B-16 Oda Sawmills Company Ltd Boules Eastern 200,000 B-45 Oda Sawmills Ltd Boules Eastern 157,500 B-51 Oda Veneer & Plywood Plywood Eastern 200,000 A-5 Yadco Enterprise Ltd Coffee Greater. Accra 300,000 A-14 Yadco Enterprise Ltd Coffee Greater. Accra 300,000 A-16 Yadco Enterprises Coffee Greater. Accra 450,000 Subtotal 4,662,820 Merchant Bank A-10 Astek Fruit Processing Ltd Fruit Juice Greater. Accra 300,000 B-33 Cream Timber Moulding Timber Mouldings Western 100,000 B-44 Fabi Timbers Lumber Ashanti 150,000 A-13 Maxwell Owusu Timbers Lumber Ashanti 400,000 B-34 Rad Forest Products Lumber Western 100,000 B-35 Ras Wood Products Lumber Ashanti 150,000 A-12 Saoud Timber Timber Ashanti 500,000 B-36 Specialised Timber Ltd Timber Ashanti 200,000 B-43 Standard Wood Products Lumber Western 50,000 B-31 Western Hardwood Lumber Western 100,000 Subtotal 2,050,000  Private Enterprises and Export Development Project Appendix 4 (Cr. 2502-GH) Page 2 of 5 Exporters Assisted Under the Project |ainal B-23 African Wisdom Gh Ltd Foodstuffs Greater. Accra 50,000 Ivstment Bank A-3 Aluminium Enterprise Ltd. Aluminium Sows, Greater. Accra 381,818 B-55 Betty "O" Limited Foodstuffs Greater. Accra 30,000 B-12 Concordia Ventures Seafoods Greater. Accra 60,000 A-8 Eastern Alloys Aluminium Products Greater. Accra 300,000 A-4 Equinox Tradehouse Coffee Greater. Accra 500,000 A-2 Equinox Tradehouse Ent. Ltd Coffee Berries Greater. Accra 500,000 B-7 Gelina Tropical Products.Ltd Coffee Berries Greater. Accra 178,629 A-6 Gelina Tropical Products Ltd Coffee Greater. Accra 500,000 A-18 Ghana Manganese Co Ltd Manganese Western 600,000 B-9 Golden Atlantic Seafoods Ltd Seafoods Greater. Accra 17,863 B-42 Miranda Enterprise Foodstuffs Greater. Accra 15,000 B-14 Paddican Limited Coffee Greater. Accra 200,000 A-17 Samartex Timber & Plywood Lumber Western 1,379,310 A-7 Transport & Commodity Gen Cassava Chips Greater. Accra 267,295 B-24 Transport & Commodity Ltd Cassava Chips Greater. Accra 100,000 B-27 Vidacom Ltd Foodstuffs Greater. Accra 50,000 Subtotal 5,129,915 Prudential Bank Ltd. B-38 A. A. Dimbala Farms Ltd Sheanuts Greater. Accra 100,000 B-39 Cann & Kaa Ltd Foodstuffs Greater. Accra 50,000 B-50 Fio Enterprises Foodstuffs Greater. Accra 50,000 B-54 Nabe Wood Processing Timber Western 100,000 B-53 Naktan Ltd Papaya Greater. Accra 120,000 B-47 Paragon Fisheries Marine Products Greater. Accra 150,000 B-56 Tfa Enterprise Salt Greater. Accra 50,000 B-49 Yahwe Salom Farms Ltd Cashew Ashanti 100,000 Cayuga Tradin G & Farms Ent. Papaya Greater Accra 50,000 B-64 Fellilud Farms Limited Pineapple Greater. Accra 20,000 B-62 Fio Enterprises Foodstuffs Greater. Accra 100,000 B-61 Mashaco Ltd Pineapple Greater. Accra 50,000 Naktan Ltd Papaya Greater. Accra 200,000 B-60 Seafare Limited Seafoods Greater. Accra 30,000 B-57 Telecity Co. Limited Salt & Coffee Greater. Accra 50,000 Subtotal 1,220,000 Standard B-48 Food Distributors Int. Foodstuffs Greater. Accra 200,000 Chartered Bank B-59 Kokobin Farms Company Pineapple Greater. Accra 40,000 B-30 Magdanielli Designs Garments Greater. Accra 60,000 A-21 Magdanielli Designs Ltd Garments Greater Accra 237,053 Subtotal 537,063 Trust Bank B-8 Dwumfuoh Mensah & Compan Foodstuffs Greater. Accra 30,000 B-6 Marimpex Limited Coffee Greater. Accra 20,000 B-15 Marimpex Limited Coffee Greater. Accra 7,000 Subtotal 57,000 TOTAL 14,460,282  Private Enterprises and Export Development Project Appendix 4 (Cr. 2502-GH) Page 3 of 6 Credit Standing Of Exporters Assisted Under The Project (as of May 1998) D~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ Amoustns h~(SS I An~eui~t Amount Current I OLEM ktrnrdf Doubt %1 Sau Bank ::: j D:sburset Outstanding (<t1 Da D0i ) (< Da I I ( . >D _ .:. i: :: : Agricultural B-28 Cashew & Spices Ltd. 178,659 Fully Paid Development B-29 Commodimex Ltd. 107,195 Fully Paid Bank B-13 Keb Farms Limited 15,000 Fully Paid B-22 Sabary Enterprise Ltd. 200,000 Fully Paid B-52 Sabary Enterprises 161,140 161,140 161,140 100 Subtotal 661,994 161,140 24 Continental B-ll Juabeng Oil Mills 5,500 Fully Paid Acceptances B-41 Juabeng Oil Mills 50,000 50,000 50,000 100 Ltd. B-1 Juabeng Oil Mills Ltd. 36,000 Fully Paid B-2 Merki Woodworks Ltd. 50,000 Fully Paid Subtotal __141,500 50,000 35 Ghana B-10 Asel Adc Ventures 17,863 Ful y Paid Commercial B-32 Atakora Brothers 17,650 Fully Paid Bank B-40 Bedora Enterprise 43,000 43,000 43,000 100 B-S Broadlands Enterprise Ltd. 25,000 Fully Paid B-20 Broadlands Enterprise Ltd. 25,000 Fully Paid B-46 Colour Chart Ltd. 100,000 100,000 100,000 100 A-1 Combined FarmersLimited 125,000 Fully Paid B-26 Doswak Enterprise 126,000 80,900 80,900 64 B-57 Doswak Enterprise Ltd. 45,100 45,100 Not Yet Due B-25 Elmako Enterprise Ltd. 15,625 15,205 15,205 97 A-19 Farmers Services Co.Ltd. 500,000 Fully Paid A-11 Farmers Services Ltd. 500,000 Fully Paid A-9 Johnson Farms Complex 416,541 Fully Paid A-20 Johnson Farms Complex Ltd. 566,541 466,541 Not Yet Due B-3 Johnson Farms Complex Ltd. 100,000 Fully Paid B-4 Johnson Farms Complex Ltd. 50,000 Fully Paid B-19 Johnson Farms Complex Ltd. 150,000 Fully Paid B-37 Marcus Hughes Supplies 7,000 7,000 7,000 100 Sub-Std B-16 Oda Sawmills Company Ltd. 200,000 Fully Paid B-45 Oda Sawmills Ltd. 157,500 Fully Paid B-51 Oda Veneer & Plywood 200,000 87,852 87,852 44 Current A-5 Yadco Enterprise Ltd. 300,000 Fully Paid A-14 Yadco Enterprise Ltd. 300,000 300,000 Not Yet Due A-16 Yadco Enterprises 450,000 450,000 .. Not Yet Due Subtotal _ 4,437,820 1,595,598 9 Merchant A-10 Astek Fruit Processing Ltd. 300,000 Fully Paid Bank B-33 Cream Timber Moulding 100,000 36,101 36,101 36 B-44 Fabi Timbers 150,000 Fully Paid A-13 Maxwell Owusu Timbers 400,000 16,560 16,560 4 Sub-Std B-34 Rad Forest Products 100,000 Fully Paid B-35 Ras Wood Products 150,000 Fully Paid A-12 Saoud Timber 500,000 Fully Paid B-36 Specialised Timber Ltd. 200,000 Fully Paid B-43 Standard Wood Products 50,000 37,132 37,132 74 B-31 Western Hardwood 100,000_ 100,000 100,000 100 Doubtful Subtotal 2,050,000 189,793 X 9  Private Enterprises and Export Development Project Appendix 4 (Cr. 2502-GH) Page 4 of G Credit Standing Of Exporters Assisted Under The Project (as of May 1998) National B-23 African Wisdom Gh Ltd. 50,000 40,000 40,000 80 Investment A-3 Aluminium Enterprise Ltd.. 381,818 Fully Paid Bank B-55 Betty "O" Limited 30,000 30,000 Not Yet Due B- 12 Concordia Ventures 60,000 50,000 50,000 83 Loss A-8 Eastern Alloys 300,000 300,000 300,000 100 A-4 Equinox Tradehouse 500,000 Fully Paid A-2 Equinox Tradehouse Ent. Ltd. 500,000 Fully Paid B-7 Gelina Tropical Products.Ltd. 178,629 Fully Paid A-6 Gelina Tropical Products Ltd. 500,000 500,000 500,000 100 A-18 Ghana Manganese Co Ltd. 600,000 250,759 Not Yet Due B-9 Golden Atlantic Seafoods Ltd. 17,863 Fully Paid B-42 Miranda Enterprise 15,000 15,000 15,000 100 B-14 Paddican Limited 200,000 Fully Paid A-17 Samartex Timber & Plywood 1,379,310 1,285,861 Not Yet Due A-7 Transport & Commodity Gen 267,295 164,766 164,766 62 B-24 Transport & Commodity Ltd. 100,000 100,000 100,000 100 Subtotal 5,079,915 2,736,386 . . 23 Prudential B-38 A. A. Dimaa Farms Ltd 100,000 Fully Paid Bank B-39 Cann & Kaa Ltd. 50,000 Fully Paid Ltd. B-50 Fio Enterprises 50,000 Fully Paid B-54 Nabe Wood Processing 100,000 83,309 83,309 83 B-53 Naktan Ltd. 120,000 Fully Paid B-47 Paragon Fisheries 150,000 Fully Paid B-56 Tfa Enterprise 50,000 50,000 Not Yet Due B-49 Yahwe Salom Farms Ltd. 100,000 Fully Paid Cayuga Tradin G & Farms Ent. 50,000 50,000 Not Yet Duie B-64 Fellilud Farms Limited 20,000 20,000 Not Yet Due B-62 Fio Enterprises 100,000 100,000 Not Yet Due B-61 Mashaco Ltd. 50,000 50,000 Not Yet Due Naktan Ltd. 200,000 Not Yet Due B-60 Seafare Limited 30,000 30,000 Not Yet Due B-57 Telecity Coe Limited 50,000 50,000 50,000 100 Subtotal 1,220,000 433,309 . 11 Standard B-48 Food Distributors Int. 200,000 Fully Paid Chartered B-59 Kokobin Farms Company 40,000 40,000 Not Yet Due Bank B-30 Magdaneli Designs 60,000 Fully Paid A-21 Magdanieli Designs Ltd. 237,053 237,053 Not Yet Due Subtotal 537,053 277,053 . Trust Bank B-8 Dwumfuoh Mensah & Company 30,000 Fully Paid B-6 Mariinpex Limited 20,000 Fully Paid B-15 Marimpex Limited 7,000 Fl tlly Paid Subtotal 57,000 __ . TOTAL 14,185,282 5,443,279 391,992 300,000 159,001 272,206 914,766 15  Private Enterprises and Export Development Project Appendix 4 (Cr. 2502-GH) Page 5 of 5 Guarantees Approved By EFO ~~~~~~~~~~ - tf , .... , I "....... n4#-L Owany:: Neat org :cover,Md Agricultural Sabary Enterprises 200,000 150,000 75 No Development Soloadams Company Ltd. 20,000 13,000 65 No ank Keb Farms Ltd. 18,800 14,100 75 No Glikwood Gh Ltd. 10,000 7,500 75 No John Lawrence Farms 88,600 57,590 65 No Vitanous Farms Ltd. 6,700 4,333 65 No Furm SadolEngterpis 151,515 113,636 75 No Subtotal 364,100 261,523 Barclays Furmado Ghana Ltd. 250,000 162,500 65 Yes Guarantee expired ank (GH) Ltd. A. A. Dambala Farms 24,242 18,181 75 Yes Not eligible Mathew Nkansar T/A Bride Tidings 48,484 36,364 75 No A. A. Dambala Farms 51,515 38,636 75 No Furmado Enterprise 151,515 113,636 75 No Subtotal 525,756 369,317l Ghana Yadco Enterprises 450,000 292,522 65 No Conmnercial Oda Sawmills Limited 157,500 118,125 75 No rank Colour Chart Limited 100,000 65,005 65 No Combined Farmers Ltd. 341,454 125,000 37 Nol Johnson Farms Complex Limited 50,000 32,500 65 No Doswak Ltd. 126,000 81,900 65 No Elmako EntP 15,625 10,157 65 No Atakora Brothers 17,650 11,473 65 No Yadxo Enterprise Ltd. 300,000 225,000 75 No Oda Veneer & Plywood 200,000 130,010 65 No Subtotal 1,758,229 1,091,691 Merchant Astek Fruit Processing 300,000 195,014 65 No e Bank (GH) Cream Timber Mouldings 100,000 75,000 75 No e itd. Western Hardwood 100,000 75,000 75 No N Ras Wood Products 150,000 112,500 75 No Standard WoodTProcessing 50,000 37,500 75 No Maxwell Owusu Timbers 400,000 300,000 75 No Fabi Timbers 150,000 112,500 75 No Subtotal 1,250,000 907,514 PNational Equinox Tradehouse Ltd. 500,000 325,000 65 Yes Guarantee expired Investment Concordia Ventures 60,000 45,000 75 Yes Guarantee expired Bank Transport & Commodity Gen Ltd. 267,295 200,471 75 Nol Paddican Ltd. 200,000 80,000 40 Yes Not eligiblel Vidacom Ltd. 50,000 37,500 75 No Samartex Timber & Plywood 500,000 500,000 50 Nol Ghaadadaagan Dese Co Ltd. 500,000 500,000 50 No Gelina Tropical Products Ltd. 500,000 375,000 75 No Subtotal 2,577,295 2,062,971 Prudential Yahwe Salom Farms Ltd. 100,000 19,000 75 No Bank Fio Enterprises 20,000 37,500 75 No Subtotal 150,000 112,500 Standard Magdanielli Designs 60,000 45,000 75 No Chartered Bank Food Distributors International 200,000 150,000 75 No [ ~~~~~Subtotal 260,000 195,000 |Trust Bank Dwumfuoh Mensah 30,000 19,500 65 No | ~~~~Marimpex Enterprise 20,000 13,000 65 No Subtotal 50,000 32,500l TOTAL 6,935,380 5,033,017  IBRD 247 3- 2- 'o -2- BURKINA FASO K,I 1 * }mir _m io GHANA N/pd" A: 'PRIVATE ENTERPRISE AND EXPORT tdv7 OHon<EAST i: S 0Xa ybDEVELOPMENT PROJECT \ \ ~UPPER - 4 Wm { \ \ WEST 9t urt: PRIMARY ROADS Y.I. \ J O : /< gNa i. '>> t SECONDARY ROADS RAILWAYS > C,bR-Soboba i ) REGION HEADQUARTERS RTHIR NATIONAL CAPITAL REGION BOUNDARIES .b I - \\ 2 > i 5INTERNATIONAL BOUNDARIES _~~~~~~~~9. Y '1. t NX5 COTE D'IVOIRE } k-g } C.,bi~~~~~~~~~~~~~~~~~~~~~~~7 / - { / BRONG AHkMO 1993 />- 2* ' ~~~~~~~~~~~~~~~~~~~~~~0 ( o K4 a S:O -leEtS j =Ts SLJNAN9I J KLJ#SIL 0 ! .UNA TOGO EBioN-ij n % TERN o f .. . AZo \ /I Nt 0 _ ,nyinom F vl L *'VOLTA :~~~~~ kkb K~~~~~~~~~~~~~~~~~~~~~~hC I(993