Liberia - Development Finance Company Project

CIRCULATING COPY RESTRICTED TO BE RETURNED TO REORTS DESK Report No. P-1078 FILE COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quotcd or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or complcteness of the rcport. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE LIBERIAN BANK FOR INDUSTRIAL DEVELOPMENT AND INVESTMENT WITH THE GUARANTEE OF THE REPUBLIC OF LIBERIA FOR A DEVELOPMENT BANK PROJECT June 1, 1972  CURRENCY EQUIVALENT Liberia uses the US$  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE LIEERIAN BANK FOR INDUSTRIAL DEVELOPMENT AND INVESTMENT (LBIDI) WITS THE GUARANTEE OF THE REPUBLIC OF LIBERIA 1. I submit the following report and recommendation on a proposed loan to the Liberian Bank for Industrial Development and Investment (LBIDI), with the guarantee of the Republic of Liberia, for the equivalent of US$1.0 million to help finance foreign exchange coats of projects to be financed by LBIDI in 1972 and 1973. Amortization would conform substantially to the aggregate amortization schedules applicable to the specific investment pro- jects financed out of the proceeds of the loan, with a maximum period of 15 years from the approval of an investment project. The interest rate would be 7 1/4 percent per annum. PART I - THE EOONOMY 2. An economic mission was in Liberia in 1970 and its report (AW-25b) dated June 1, 1971, was distributed to the Executive Directors. Country data are given in Annex II. The next comprehensive economic mission is scheduled for early 1973. An updating mission visited Liberia last December. Its main conclusions were discussed in my Report to the Executive Directors on the First Education Credit (P-1044), dated March 14., 1972, and were sum- marized in nm report on the recent Integrated Agricultural Credit (P-1054), dated April 6, 1972. The econamic analysis in these reports remains basic- ally the same except for one important new development. The Japanese group, which was considering whether to participate in opening up a major iron ore mine at Wologisi, now appears to wish to postpone any decision. If this delays the exploitation of the mine it may someihat weaken the prospects for exports and Government revenues. The Government and the Bank are exploring the implications of this new development.  3$. While Liberiafs GNP has grown at an average annual rate of about 14 in real terw during the last decade, most of this growth originated in the large enclave sector -- primarily iron ore, but also rubber. nd logging which altogether contribute about 35% to GDP and 85% to merchandise exports. There haa been little growth, hawever, in the large underdeveloped rural econonqr. The econic situation improved markedly in 1969 and 1970, because of higher export prices for irom ore and rubber. However, in 1971, economic activity lost some of itB buoyancy, mainly because of the adverse external market. Iron ore production, wbich accounts for some 70% of the value of exports and 25% of GDP, failed to expand, largely owing to the general eco- nomic slowdown in industrial countries, and especially the reduced ELuropean demand for iron ore. The rubber industry was even more adversely affected in 1971. Pricee received by Liberia rubber producers fell sharply through- out the year. 4. The1se developments weakened the budgetary eituation. A a result, last December the Government negotiated an fl standby arrangement for 4 million SDRts. The Governmentl' letter of intent included a commitment to introduce tax reforms, to exercise greater.expenditure control-, to limit domestic bank credit and not to incur or guarantee any external debt of less than 12 years' maturity. 5. The recesosin in the iron ore market, together with the continued decline In rubber prices, clouds the imediate prospects for Liberia's growth. The unfavorable iron ore market is expected to last for at least another year. The longer term prospects are more favorable although there are some uncertainties regarding the expansion of idning. Outside the enclaves, development continues to be oonstrained by the shortage of invest- ment programs and projects, limited public savings (caused primarily by the heavy debt service burden on the budget), and by the shortage of experienced administrators and civil servants. 6. The new administration of President W. R. Tolbert took office last July. It has taken encouraging steps to piovide more effective economic leadership and to cope with the main development constrainta. In the past there was no systematic development plwaning in Liberia, but the new adminis- tration intends to prepare a development plan to begin around the.mid- seventies. Preparation of the plan will be helped by the completion lait month of the report of a comprehensive ILO mission; The mission visited Liberia in November to prepare a development strategy and polioy guidelines, with emphasis on employment. The Bank economic mission scheduled for early 1973 should also assist the Government in preparing its plan. Fwrthermore, the Government has requested the Banksa assistance to introduce an effective system of economic planning. This request io now under study.  - 3 - 7. Although there are, as yet, no formal development objectives in Liberia, public statements by the new administration have placed primary emphasis on more widespread economic development, promoting rural develop- ment and reforming the civil service, while maintaining Liberia's tradi- tional "open door policy". In his Annual Message laat December, the new President declared agriculture to be the Governmentl' first priority and stressed the importance of integrated rural development to "offer the masses the greatest degree of participation and involvement in the develop- ment effort". 8. The proposed tax reforms and budgetary restraint should help to mobilize domestic resources for development. ut' the Government also intends to obtain more revenues by improving the enforcement of the con- cession agreements and renegotiating same of them. A central administration for formulating concession policies, and enforcing concession agreements will be established shortly with UNDP assistance. To improve the capacity of public administration, the Government has established a Coumission to undertake "a complete evaluation and reorganization of the civil service". The most apparent needs are for better training of middle and upper level civil servants, and the establishmnt of uniform salary scales, a merit system for selection and promotion, and a peniion scheme. 9. Public capital expenditure in 1971 continued at the level of about $10-20 million for the fourth consecutive year, reflecting the short- age of well-prepared projects and reduced external assistance. However, if the capacity to identify and prepare projects improves, public invest- ment is expected to rise to about $17 million annually over the next several years. There were no new aid comitments for capital projects in 1971, whereas they averaged about $9 million in the previous two years. IBRD loans accounted for about 61 percent of these comitments, the U. S. for 32% and the African Development Bank (AfDB) for 7%. 10. External debt outstanding at the end of 1971 is estimated at $164 million. About 65 percent is owed to the United States (mostly loans from AID), 11 percent to Germany, 9 percent to IBRD and 14 percent to suppliers (mainly Italian). In the past two years debt service has absorbed about 13 percent of net export earnings and about 24 percent of current government revenues and these proportions are not expected to change sig- nificantly over the next several years.  PART II - BANK GROUP OPERATIONS IN LIBERIA 11. The Bank has made five loans for projects in Liberia. totalling $20 million and the. Association has made two credits totalling $8.4 million. The latter two were signed May 17, 1972 but are not yet effective. IFC, which helped establish LBIDI in 1965, has subscribed 25 percent ($250,000) of its share capital of $1 million. The Bank's loans have been for roads, port expansion and power and the credits are for education and agriculture. Project execution and loan disbursements have been generally good. Annex I contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1972, and notes on the execution of on-going projects. 12. Until recently, Bank Group lending has been almost exclusively for infrastructure.. It is now intended, however, to broaden the scope of Bank Group lending to include agriculture and education and the two credits signed on May 17, 1972 reflect this change. The agricultural project provides for carrying out pre-investment studies in two regions and preparing investment proposals for at least one rural development project in each region. The project also provides assistance for a pilot rubber scheme,for strengthening the planning effectiveness of the Ministry of. Agriculture, for assistance for rice research and for a study of the Liberian-owned rubber. industry. The Liberian-owned rubber industry which produces about one-third of Liberia's arubber output (the other two-thirds being produced by foreign concessionaires) has been suffering from low yields and more knowledge of its problems and prospects is necessary before any significant expansion plans are 'initiated. Lending for agriculture and education will continue, in conformity with the reordering of priorities by the new Liberian adminis- tration. Because of the serious scarcity of local expertise to prepare- and implement development projects in agriculture and education, techiical studies and training are important features of both the agriculture and education projects. The aforementioned studies should pravide the basis for further Bank Group lending in both sectors in the immediate future. Two important studies dealing with transportation have recently become available. The Government is anxious to act on their recommendations and a Bank mission is scheduled for August to discuss possibilities for transport financing with Government representatives, and other prospective lenders. Since Govern- ment gives high priority to highway maintenance, including equipment and technical assistance for personnel, the Bank is considering a project for this purpose which should be ready for presentation to Executive Directors in FY 1973.  13. Prospective development projects in Liberia would require Bank Group lending of about $5 million annually over the next few years. This would provide less than half of estimated external capital requirements of some $12 million. The United States and Germany are expected to provide the remainder. On the basis of the present forecaat of project preparation, public investment is expected to rise to an average of about $17 million a year. Liberia qualifies for a blend of Bank/IDA financing. On the one hand, further IDA assistance appears justified in view of the new adminis- tration's efforts substantially to improve economic policies; the wide- spread poverty (60 to 70 percent of the population are engaged in eubsistence agriculture, have derived little benefit from the development of the enclaves and have an average per capita income of lese than $50, compared to the GNP per capita of $235) and the time required before the budgetary constraints on debt servicing capacity will be overcome. On the other hand, Liberia's rich resources, being developed by foreign private capital, provide the base for long-term economic growth and should make an increasing contribution to the resources available for development of the backward areas of the country, provided there are improved yields from renegotiated concession agreements. Moreover, since the overall level of Liberia's external indebtedness is still relatively moderate -- despite the current debt servicing pressures -- the country is in a position to assume some lending on Bank terms. PART III - THE INDUSTRIAL AND FINANCIAL SECTOR 14. Liberia is in the very early stages of industrialization. Manufacturing accounts for about 5% of GDP and involves less than 8% of employment in the monetized sector. Most Liberian industries are engaged in import substitution with only a few (fisheries, logging, explosives) exporting on a commercial scale. The most important enterprises are an oil refinery, a cement factory, and firms producing food and beverages, wood and furniture, textiles and shoes. Industrial development has been constrained by the size of the market and shortages of skilled and aemi- skilled workers. These shortages provided the reason for including a technical training component in the recently approved education project. 15. The Government took several actions in the 1960. to encourage investment and employment in Liberian enterprises. It established the Liberian Development Corporation (LDC) in 1961 and sponsored the creation of LBIDJI in 1965; an Investment Incentive Code was adopted in 1966. 16. The Liberian Development Corporation (LDC) was established to conduct feasibility studies, help prepare and assess investment proposals and provide technical assistance to local enterprises. Its functions also include reviewing applications for investment incentives and guaranteeing  -6- commercial bank loans. After over 10 years of operations, however, LDC has not fulfilled its expectations. Its guarantees are ineffective because of legal complications and have been limited by a shortage of funds. LDC has little capacity for project preparation and has suffered from a serious shortage of competent staff. There has been little co-ordination with Government departments or with LBIDI. These deficiencies are recognized by the new administration. A government investigation is now underway, aided by UNIDO, to determine whether LDC as presently set up can be strengthened, whether its operations should be merged with the existing Bureau of Industrial Development in the Ministry of Commerce and Industry or whether an entirely new mechanism should be created. The UNIDO study will also prepare a program of assistance to small firms and help establish an industrial estate in Monrovia. The Bank will follow the studies closely and help Government formulate a program to promote industrial entrepreneur- ship and the climate for industrial development. 17. The Investment Code, introduced in 1966, is consistent with the traditional "Open Door" policy of attracting foreign investors. It affords import duty exemption for capital goods and raw materials ranging from one to seven years; income tax exemption for one to ten years for approved projects; and protection frcm competing imports. Forty-four projects have been approved for such incentives with a total capital investment of $8.1 million. There has been growing Liberian dissatisfaction with the Code on the grounds that the incentives are too generous. Government officials consider that, compared with the benefits to the investors and the number of jobs created for Liberians, the loss of government revenues has been excessive. President Tolbert has called for a review of the Code, as well as for more effective machinery for its implementation. This review is now being conducted by a team in the Ministry of Commerce. and modifications in the Code are expected to be proposed shortly. 18. While these various investigations are essential, their objectives are limited and Government has sought Bank Group assistance to review and supplement these efforts with suggestions for a broader study that would include specific recommendations for improving the climate for industrial development. (See para. 19). PART IV - THE PROJECT Introduction 19. A central objective of this project is to help the Government expand and improve Liberia's industrial sector. LBIDI can make an important contribution towards the needed improvements but its success will be greatly  - 7 - dependent on better Liberian Government policies and an improved milieu for industrial development. The proposed loan was negotiate on the basia of understandings aimed at prcmoting these objectives. At the requeat of Government, a Bank mission is being considered for the near future, which will, among other things, review Government proposals to modify the Investment Code and review the work of the three-man UINIDO team (see para. 16). The mission would conaider how these inquiriea could be implemented by a. wider study that would produce specific recommendations for improving the industrial environment. The Bank would be prepared to asaist the Government in formulating such a study and help the Govement obtain financing, if necessary. Background 20. An appraisal report (No. DB-92a dated Nay 26, 1972, is being distributed separately. LBIDI, a Liberian statutory corporation, was established in 1965 with the help of IFC, whieh subscribed 25 percent of LBIDI's share capital of $1 million. Tle Goveremet, IEC and private Liberian investors (class A shareholders) together hold 51% of LBIDI's share capital. At the time of LBIDIta inception, Government provided 8 $1 million loan which is subordinated to other debt as well as to share capital. This loan is interest free end is to be repaid by LBITI over 10 years beginning in 1985. Financial institutions, Firestone plantations and two mining companies (clasa B shareholders) own the remaining 69%. In 1965, LDDI obtained a loan of DM 1 0 millicn from the Kreditstandtalt fur Wiederaufbau (KfW). This loan axceeded LBIDI' s noeds at the tine, parti- cularly since LBIDI found it more advantageous to conit,, at no cost, its own equity funds than to use the 4 1/2 percent [W loan. LBmI was thus unable to comnit the whole KW line of credit before it expired. 21. nI December 31, 1971,p LBIDI's positimn was as follows: U3$ 000 Equity 1,t33 Government loan (repayable 1985-94) 1 ,00 KfW loan at 14 1/2% 103_ 3 Total resources 3,166 Lesat Net Portfolio 1,640 Undisbursed commitmenta 8 Government notes (redeemable 1972-81) 1,000 Net fixed assets 26 Total commitments 2,674 Resources available for comitment 492  - 8 - 22. Substantially the wh'ole of the resources available at the end of 1971 have now been committed.LBUt'has therefore applied for loans to the African Development Bank (ADB) and to the World Bank. A Bank appraisal mission, accompanied by a representativerof the ADB, visited Liberia in December 1971. Negotiations for the proposed loan were held May 15 and 16. The Liberian delegation consisted of Mrs. Ellen Johnson-Sirleaft, Assistant Minister of Finance for Fiscal Affairs, and Mr. Clarence Parker, president of LBIDI. The African Development Bank is now considering a loan of $500,000.- If the ADB approves this loan proposal, the Bank loan and the ADB loan together would provide LBIDI with sufficient funds to meet its expected commitments over the next two years. Objectives and Role of LBIDI 23. LBIDI was established to promote private enterprise through loans, equity participations, guarantees and underuiritings. It is the only Government-supported institution for. financing industrialisation and the sole source of long-term capital in Liberia. 'LBIDI's influence on the Liberian economy has been disappointingly small, however, owing to the small scale of its operations. When IFC participated in LBIDI's share capi- tal in 1965, annual operations of $1 million were envisaged but have never been'achieved. Since its operations began in 1967, LBIDI has invested or lent $2 million, an average of $4I00,000 per year. A peak was reached in 1969, when investments and loans reached $860,000. In 1971, LBIDI approved eleven investments or loans totalling $266,000. The simill-scale Of opera- tions has been due to several factors: a. an insufficiently aggressive search for business; b. unduly rigid collateral and security requirements (which resulted in cancellations of six projects for $260,000 in 1971) and maturities and grace periods not much longer than those of commercial banki, from which poten- tial LBIDI clients were able to obtain medium-term loans; c. lack of coordination with LDC and other public agencies. 24. LBIDI has served mostly small-scale firms; only five of 46 loans exceeded $100,000 (amounting to 75% of its loan portfolio) and 29 loans were for less than $10,000. Most of the small loans have been made to rubber farmers. Others have financed small coffee or cocoa farms. In the sectoral distribution of LBIDI's operations, industry leads (59% of amounts approved), followed by agribusiness and livestock (28%) and by tourism, transport and other services (13%). Industrial loans have been predominantly for food processing, wood and furniture-, while agricultural projects financed include palm oil, tobacco, poultry and rubber.  - 9 - 25. While its performance to date has not been wholly satisfactory, LEIDI has made a positive contribution in several wys. Mtre than two- thirds of its financing has been for locally owned companies, which con- trasts favorably with other African development banks. Most investments have gone to projects involving a high proportion of domestic value added. Most projects, furthermore, have been labor intensive and export oriented. Board of Directors and Management 26. The Board of Directors consists of eight members, four of whom represent class B shareholders and four representing class A shareholders. The Government has two seats in the Board, while IFO and private Liberian shareholders have me each. Mr. P. M. Mathew, the IF& representative, was elected to the Board on December 15, 1971. Mr. Stephen Tolbert, the Minister of Finance and a dynamic businessman, haa recently been appointed Chairman of LBIDI's Board. Most Board members take a strong interest in LBIDI's affairs. The Board, which meets twice a tear, has delegated author- ity to an executive committee to approve investments up to $100,000 and to exercise moat of the Boardts other powers when it is not in session. 27. Mr. Clarence Parker, who has been with LBTDI since its inception, was appointed president in May 1970. He previously had been acting chief executive. The general manager is Mr. R. Chellappah, a Ceylonese who was recruited with the help of the Bank Group and appointed in May 1970. There have been significant improvements in the past year, particularly in manage- ment, record keeping, operating procedures, project appraisal and loan reccveries. LBIDI is taking advantage of Mr. ChQllappah'B presence to hire and train qualified liberian staff who can provide continuity of manage- ment upon Mr. Chellappah'a departure1 sometimo in 1974. To that end, it has recently hired a project director, who will coordinate appraisal and follow- up work and a new project appraisal manager. Lending Operations 28. LBIDI s staff, which has been strengthened considerably in recent months, now totals 17, of whom nine are professional. The staff is suf- ficient in number and quality to cope with increasing activities. LBIDI'a appraisals are good, particularly on market, organizational and financial aspects. Until recently, economic analysis was weak. To ensure that pro- jects financed will be economically as well as financially viable, LBIDI has started to calculate the economic rate of return an projects as part of its appraisal procedure. LBIDI agreed during negotiations to undertake this calculation for all investments of over $50,000. LBIDI has also agreed to establish an effective follow-up system to give management advance notice on problem cases and to obtain information for investment operations. LBIDI's books are now better kept, and past errors have been corrected. Ccotrol of disbursements has improved recently.  - 10 - 29. LBIDI's Policy Statement precludes it from financing enterprises in the public sector, and sets the following exposure limits: (a) a maxi- mum of 10% of LBIDI's resources may be invested in a single enterprise; (b) a maximum of 10% of LBIDI's equity may be invested in the share capital of a single enterprise, and (c) total equity investments are limited to 100% of LBIDI's own equity. The Policy Statement allows LBIDI to consider agricultural projects associated with or contributing to manufacturing enterprises. 30. LBIDI charges interest rates of 10% on loans outstanding plus a commitment charge of 1/2% and an administration fee of 1% of the amount of the loan. Since 1971, it has been adding a 1% penalty charge for loans in arrears of over three months. LBIDI's charges on loans and its security requirements are comparable to or somewhat higher than those charged by com- mercial banks. Maturities, which have averaged about five years, and grace periods have occasionally not been long enough to allow borrowers to service their debt comfortably. On balance, LEIDI appears to be rather inflexible and very cautious in its lending practicea with respect to maturities', grace periods and collateral requirements. While some caution is under- standable in view of the poor repayment record of several of LBIDI's borrow- ers, it also means that borrowers often prefer to deal with comiercial bankz for medium term loans and come to. LBIDI only when they need a particularly long-term loan which LBIDI is willing to grant to more established sponsors. LBIDI's management is now aware of this problem and has 'proposed more flexi- ble terms for loans submitted to its Board. Portfolio 31 In the past two years arrears in LBIDI's loan portfolio have risen substantially. As of June 1971, some payments were in arrears on 40% of the total loan portfolio. However, a strong effort by LBIDI since last September to improve the situation has succeeded. Only 13 loan with an amount out- standing of $79,200 (4.7% of LBIDI's loan portfolio) were in arrears by more than three months at the end of 1971. LBIDI's serious risks in its port- folio include two relatively large loans for $126,000 of which LBiDI might lose as much as 50%, and eight small loans for $19,1:00 which oould be entirely lost. Potential losses are amply covered by provisions of $190,000 and reserves of $133,000. Profitability and Financial Position 32. After very modest profits in previous years (not more than 3% on equity), LBIDI suffered a net loss of $135,000 in 1971 due to extra- ordinary losses of $155,000 as a consequence of the reviluation of the German Mark. However, with the expected future growth in operations, profitability is expected to increase 8-10 percent in the next three years.  Leverage is very low, since long-term debt equals only 32% of equity plus the subordinated Government loan. LBIDI has a strong liquidity position and a sound financial position with reserves and provisions equivalent to 17% of its outstanding portfolio. Projected Operations 33. LBIDI has business prospects sufficient to justify the proposed loans from the World Bank and the African Development Bank. There is further scope for import substitution in such induatries as flour milling, meat processing, beverages, textiles, footwear, and furniture. The processing of local raw materials offers some possibilities for pulp and glass manu- facturing, vegetable canning and rubber produots. There is scope for the development of agribusiness projects in oil palm, coffee, cocoa and rice. LBIDI's project pipeline at the end of, 1971 included 22 projects requiring investments of $800,000. Four projects for $400,000 were ready for Board action, 11 for about $300,000 were at an advanced stage of appraisal and seven more for $100,000 were at a preliminary stage. In addition, four projects with a total capital cost of $750,000 have been studied by LDC and will be referred to LBIDI for financing in 1972. They are in agribusiness, pharmaceutical products, tiles and cosmetics. LBIDI has based its forecast of operations on loan approvals of $1 million for 1972, increasing by 10% annually. Although it is difficult to quantify the company's business prospects, LBIDI 's experience in 1969, when comitments were near $1 million, its substantially improved management team, its darnamic new Board chairman, its improved operational outlook and loans being processed -- all indicate that LBIDI's goals are attainable. Resource Requirements 34. LBIDI's commitments for 1972 and 1973 are expected to reach $2.15 million of which $1.45 million (67%) would be used to purchase imports and $0.70 million (33%) would be for local procurement. The proposed World Bank and African Bank loans would meet the foreign exchange needs. The local currency requirements will be available from the pale of equity investments and net loan collections ($0.48 million), profits and depreciation ($0.20 million), and the $0.2 million of Government notes to be redeemed in 1972 and 1973. After 1973, LBDI will need additional' foreign borrowing to finance its foreign exchange requirements. The domestic content of its commitments will continue to be met from internal cash generation and from the redemption of the Government' promissory notes.  - 12 - The Proposed Loan 35. The proposed loan would be on normal DFC terms - i.e. amortization to conform substantially to the aggregate amortization schedules applicable to the specific investment projects financed out of the loan proceeds. However, since LBIDI has not had the opportunity to build up its operations, i.e. amortiza- tion schedule, to an adequate level, it is recommended that LBIDI receive con- cessional treatment regarding commitment charges. Accordingly, the normal commitment fee would not be charged until specific projects are authorized for withdrawal. Each project requiring $50,000 or more of the proceeds of the proposed loan would require the prior approval of the Bank. The proposed aggregate free limit of $200,000 would ensure that at least 80% of the amount of the loan would be subject to Bank approval. 36. During loan negotiations understandings were reached with representatives of LBIDI and of the. Government that measures would be taken to: (a), Establish an effective system for project follow-up; (b) increase the use by LBIDI of economic analysis in project appraisal; (c) strengthen the staff and management; (d) establish greater flexibility in lending terms and (e) strengthen co-operation with government agencies. 37. The improvement and expansion of the operations of LBIDI should con- tribute significantly to more rapid, soundly-based industrial development in Liberia.' PART V - LEGAL INSTRUMENTSW-AND AUTHORITY 38. The draft Loan Agreement between the Bank and the Liberian Bank for Industrial Development and Investment (LBIDI), the draft Guarantee Agreement between,the Republic of Liberia and the Bank, the Report of the Committee- provided for in Article II, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. With the exception noted in para. 35 the draft agreements conform to the normal pattern for loens for development finance company projects. 39. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECdKKENDATI0N 40. I recommend that the Executive Direotors approve the proposed loan. Robert S. McNamara President Attachments Washington, D.C. June 1, 1972  Annex I Pajge lof 2 pages THE STATUS OF BANK GROUP OPERATIONS IN LIBERIA A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at April 30, 1972) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 368 LBR 1964 Republic of Liberia Roads 3.3 368 LBR 1965 Republic of Liberia Roads 1.0 617 LBR 1969 Republic of Liberia Ports 3.6 0.4 684 LBR 1970 Public Utilities Authority Power 7.4 5.1 778 LBR 1971 Public Utilities Authority Power 4.7 4.7 305 LBR* 1972 Republic of Liberia Education 7.2 7.2 306 LBR* 1972 Republic of Liberia Agriculture 1.2 1.2 Total 20.0 8.4 18.6 of which has been repaid 0.1 Total now outstanding 19.9 8.4 Amount sold 0.3 Total now held by Bank and IDA 19.6 8.4 Total undisbursed 10.2 8.4 18.6 * - Signed May 17, 1972 B. STATEMENT OF IFC INVESTMENTS (as at April 30, 1972) Amount in US$ million ,Year Obligor Type of Business Loan Equity Total 1966 Liberian Bank for Development 0.25 0.25 Industrial Development Finance Company and Investment Less sold 0.01 0.01 Now held 0.24 0.24 NGM=  Annex I Page 2 of 2 pages C. PROJECTS IN EXECUTION Project execution and loan disbursements have generally been satisfactory. However, late last year the Government decided to add several new functions (radio, television and tele- communications) to the existing power, water and sewerage functions of the Public Utilities Authority (PUA). This appears to conflict with assurances obtained in connection with Loans 684-LBR and 778-LBR. The Bank's basic concern is that the expansion of PUA's operations might be an excessive burden on management, and that its efficiency might suffer as a result. Government's position is that PUA's new management structure is specifically designed to accommodate the additional functions, and to do so in a manner that will make operation of the utilities more efficient. These matters were discussed in April with the Minister of Finance. A Bank mission is scheduled to visit Liberia in mid-June to pursue the matter further. The off-shore costs of both power projects have increased in terms of U. S. dollars, partly because of the devaluation of the U. S. dollar and partly because of the installation of units larger than those originally planned. A supplementary loan may be necessary but it would have to be accompanied by substantial improvement and clarification of the accounts receivable position of PUA which has shown some deterioration. PUA has taken some steps to remedy the situation.  Form No. 81.02 WORLD BANK GROUP (5-72) COUNTRY DATA COUNTRY, LIBERIA AREA: 111,370 km2 POPULATION, 1.2 million (1970) DENSITY: 13.5 per kb Me of Orowth 3.0 % (frem 1963 to 1970 ) per kA2 of arable land POPULATION CHARACTERISTICS, HEALTH1 Crude Birth Rate (per 1,000) 51 (1970) Ppalation per physician 12,000 (1970) Crud Death Rate (per 1,000) 16 (1970) Population per hAspitu1 bed 688 (1970) Infant Mbrtality (per 1,000 live births) u37 (1970) INCOME DISTRIBUTION: DISTRIBUTION OF LAND SRRE_S91P. i of national inaomer, Ioent quirtle 2 of Ilnd ow.ned by top 10i no=n r highe.t qateti % of Iced owned by n-elinaL 10 o-nere ACCESS TO POTABLE WATER (7. of paPaIltlan) ACCESS TO ELECTRICITY; (7. of pepuirit-n) Urban Orbon Rural enrol NUTRITION: GNP PER CAPIOt A, 235 (1970) EDRCATIONR Calorie intake ln 9 of reqtirerentt Adult literacy rate 107 of adult populatIon (1970) Per .apita prntein intake (gramene) Primary echool enrnl=ent (9) 502 of age group 7-12 (1970) GROSS NATIONAL PRODUCT (1970) (Monetory -con-y only) RNRUAL RATS OF GROWTH NQI.e in US n~. . 196-EA 1965-70 .l'Jo-97q) ONP at market princes 3 100.0 4 A. Orroe IUveotsn.t 104 33.0 Gross ONti-nol Saniegs 71 22.0 - Current A'nn0unt Balanne Crporte ofcentds, IIFe 214 67.0 10.4 9.5 Imports af DCoda, NFS 150 47.0 8.6 6.7 OUTPUT, LOBED FORCR AND PROU2CT7VITY UN 1970 Value Added Labor Frrco Vrlu Added PFr rW-rker (U55 1 dillion) S rdIloT$a A (US U) S oa ntlonol average Agriculture (i... 005191 109.7 26 Unduetry crce eetorj 235.0 54 Servicesi 84.3 20 *ctal/Av.raNe 429.0 100 .550 780 PUBLIC FINANCFS IN 1971 Central Ennerenont 0 of GSP aver.no OS$ =illii.o S ar CDP 1I69 snd 1970t Current Rocetpto 67.0 14.7 Current F-renditures (incl. trnaners)ki/ 63.2 13.0 Current Surplus/Defiit () 3.8 1.6 Inuetopr-nt E.peoditoreo c/ 24.5 4.6 of obioh copitfl -np-nintur. (11.7) (2.5) ECLireol Aeeinntnce (net) .3 .5 PRICES AND CREDIT end of year: Conosuor Price Ind.n (?Nocrovia) DBnk C-i1L to Pubblic Scttr nbnk Credit to PrIv-te Sector indsi(npt.-Nov.1964-100) 7. 'ohbge cUb nillion S chon.C Dr aultoe 196d 114.3 10.9 24.1 1969 125.3 9.6 6.8 -37.6 29.4 22.0 1970 126.4 .9 7.2 5.9 35.5 20.7 Sept. 1970 127.9 6.1 38.4 SeptJ 1971 127.6 8.1 32.8 39.1 1.8 BALANCE OF PAYMENTS IN (1969-1971) 1969 1970 1971 IMERCHANDISE EXPORTS (Overage of 1969 ond 197J ) (nAillions US $ (5 ren.) 9 E.pnrts of Goode 195.9 213.7 Iran are 143.8 70.2 Imports of Gonde 114.6 149.7 Resoorne Gao (deficit - _) 81.3 66.0 . Rubber 33.4 16.3 Logs 6.3 3.1 Interest Payments (net) Coffe, PFaI kAernel and .onno 5.9 2.9 Workerse Renittencne ) -92.6 -98.5 Othor onporte 15.4 7.5 Other Factor Payments (not) Net Tranefere Bal-no cn Current Account Totei 204.8 109.0 Direct Foreign Ieve-t-et Median and Long-tern Loane (net) -.4 -2.4 -2.7 Disburemennts ( 6.4) ( 7.9) ( 8.1) EXTERNAL DEBT ON DSCEdEdR 31. 1971, Asortization ( 6.8) ( 10.3) ( IS.8 ($ ri.) Officiai Grants 9.0 7.7 7.8 Medium and Long-tern Credite, Public 164 4/ Other Capital (net) Non-Ouaranteed Private MLT - Incrense in Official Reeerves Total Outetonding and Diobureed All other iten )EDT SORVICE 1970 1971 Greas Reaervee Debt Sorel_e Ratio _/ 7.5 Net Reserves Debt Service no 7. oE enporet eieoo Eateoc pnymente abroad 13 5 vabc nerce an 7. of budUeetry r-nenuoo 23.2 24.6 a/ Cotiernee in real termra Al Including Interest and anortisottne of ontoenol public debt and IBRD/IDA Lendine. D-cerbnr 31. 1971 (US$ reIn) enolodiog trenoootice uith tb- IMP IBRD IDA ci Inoindio entre-bdg8tnry developeen.t xpeoditure- Outtndino and Dieboesed 8.9 di/ BEtoeote, An-luding undiebursed Undinbu red 10.7 e/ As % of norohbndtne enperts Otutotnding icoluding ondiebureed 19.6 Rate of Exchnge: Ltborti nos- US dollnr Date: MRy 23. 1972 se its eurrrncy DSparrteentt Western Africa Deportment   ANNIEX III arge I of 3 pages LIBERIA LOAN AND PROJECT SUMMARY Borrower: The Liberian Bank for Industrial Development and Investment (LBIDI) Guarantor: Republic of Liberia Terms and conditions: To conform with the aggregate of amortization schedules of subloans and Investments to be amortized over a maximum period of 15 years. Semiannual installments to start on July 1, 1976 and to end on January 1, 1990. Interest rate at 7-1/4 percent per annum. Commitment charge of 3/4 of one percent on undisbursed amounts of subloans and investments authorized for withdrawal. Final date for pqect submission: December 31, 1974 Free limit: $50,000 for individual sub-projects; $200,000 aggregate free limit. Debt covenant: Maximum debt-equity ratio of 3:1 (as defined in the Loan Agreement, section 4.03) Procurement: Through normal comnercial channels. Terms of loans to LBIDI's borrowers: Interest rate: 10% per annum Commitment charge: 1/2% per annum Maturity: Maximum of 15 years-  ANNEX III Page 2 of 3 pages Bank loan Years ending December 31 1972 1973 1974 1975 1976 (in US $ iriillion) Estimated coimnitments 0.4 0.5 0.1 - - Estimated disbursements 0.1 0.3 0.4 0.2 - LBIDI's Loan and Investment ComTitments Years ending December 31 1972 1973 i974 1975 1976 (in US $ million) Projected total commi-tments 1.0 1.1 1.2 1.4 1.5 Financed by: Internal cash generation 0.3 0.3 '0.3 0.4 0.4 Redemption of Government notes 0.1 0.1 0.1 0.1 0.1 Bank loans 0.4 0.5 0.5 0.6 0.6 African Development Bank loans 0.2 0.2 0.3 0.3 0.4 Balance Sheets 1972 1973 1974 1975 1976 I Projected (in US $ million) Assets Current assets, net of,current liabilities 0.3 0.3 0.3 0.4 0.5 Loan and equity portfolio 2.4 3.0 3.5 4.o 4.4 Other assets 1.0 1.2 1.1 1.0 0.9 TOTAL 3.7 4.5 4.9 5.4 5.8' Liabilities Foreign loans 1.5 2.2 2.5 2.8 3.1 Government loan 1.0 1.0 1.0 1.0 1.0 Equity 1.2 1.3 1.4 1.6 1.7 TOTAL 3.7 4.5 4.9 5.4 5.8  ANNEX I[r Page 3 of 3 pages Earnings 1972 1973 1974 1975 1976 Projected (in US $ thousands) Gross income 283 349 419 473 534 Financial expenses 67 111 153 187 216 Administrative expenses 120 121 123 130 140 Provisions 9 10 12 13 14 Net profit 87 107 126 143 164 as % of year-end share capital 8.7 10.7 12.6 14.3 16.4 as % of average net worth 7.3 8.2 8.8 2.3 9.7 Debt/equity ratio as defined in Loan Agreement 1.2 1.4 1.5 1.6 1.6