Bolivia - Mining Credit Project

RETURN TO Cf REPORTS DESK WITHIN FIL COPY ONE WEEKFIL DOC E OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 276a-BO APPRAISAL OF A MINING CREDIT PROJECT BOLIVIA December 28, 1973 Latin America and the Caribbean Projects Department Tiis report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Fquivalents 1 Bolivian peso ($b) US$0.o5 US$1.00 * 20.0 Bolivian pesos($b) 1 million Bolivian pesos ($b) US$50,000 Weights and Measures Unless otherwise specified all weights and measures are in the metric system. 1 Metric Ton = 1.102 Short Tons 1 Metric Ton 2204 Pounds 1 Metric Tcn = 1000 Kilcgram.s Abbreviations and Acronyms AID - United StateE Agency for International Development BAMIN - Banco Minero (Mini;ng Bank) BISA - Banco Industrial, S.A. (Industrial Bank) CBF - Corpcracion Boliviana de Foriento (Bolivian Developm.ent Corporaticn) C01JBOL - Corporacion Minera de Bolivia (Bolivian Mining Corporation) ENA. - ampresa Nacional de Fundiciones (Naticnal Smelting 3ompa.ny) GE.OBOL - Servicic Geclogicc de Bolivia (Boliviarn Geclcgical Service) IDB - Interamerican Developrent Bank IIMM - Irs-iu+tc de Investigacicnes Minero-Meetalurgicas (InTstitute for ,Xining ana Metalluzrg-cal Research) KfW - Kredi-vanstalt fur Wiederau.fbau  BOLIVIA APPRAISAL OF A MINING CREDIT PROJECT Table of Conter.ts Page No. SUMMARY AND CONCLUSIONS ...................................... -J-lui-ii I. INTRODUCTION. 1 II. MINING SECTOR. 2 A. Background .. 2 B. Sectoral Structure .. 3 C. Performance ............... .. 4 D. Government Policies .. 4 E. Financing of Mining .. 7 III. THE PROJECT. 8 A. General ........... . 8 B. Credit for Medium-Size Miners .......................... 11 General Features ....................................... 1i Financial Intermediary--Banco Industrial S.A. (BISA).. 13 C. National Survey of Small Mines ........................ 16 D. Technical Assistance Program .......................... 18 IV. BENEFITS AND MARKETS ........................................ 19 V. AGREEMENTS REACHED AND RECOMMENDATIONS ..................... 20 This report is based on the findings of an appraisal mission, composed of Messrs. B. Rassmuson, M. Alland and P. Reich (DFC Projects Division, COP) and R. Bosson (Industrial Projects Departaent), which visited Bolivia in June 1 973.  Table o f Contents (Continued) List of Annexes 1. Banco Industrial S.A. (BISA) A. Organization B. Resources C. Operations D. Financial Results E. Prospects 12 Tables 2. Servicio Geologico de Bolivia (GEOBOL) A. Legal Status B. Objectives and Functions C. Organization and Staffing D. Operations E. Budget 4 Tables 3. Mineral Export Tonnages and Values, 1959-72 (Actual), and 1973 (Projected) 4. Medium-Size Miners and their Projects A. Potential Credit Beneficiaries B. Operations and Financial Position C. Demand for Funds D. Subprojects E. Effect of the Proposed Credit 5. The National Survey of Small Mines A. Project Concept B. Background and Justification C. Objectives D. Plan of Work E. Administration and Staff F. Project Costs G. Procurement H. Financing  Table of Contents (Cofitinued) 6. The Technical Assistance Program A. Introduction B. Technical Assistance to the Ministry of Mining and Metallurgy C. An Examination of the System for Taxing the Mineral Sector D. Preparatory Work for the Proposed Exploration Fund E. Summary of Total Costs and Financing of the Technical Assistance Program 7. The Market A. Introduction B. Antimony--A Brief Market Review C. Tin--A Brief Market Review D. Tungsten--A Brief Market Review 8. Estimated Disbursement Schedule MAP Bolivia December 19, 1973   SUMMARY AND CONCLUSIONS i. This report appraises a project to support the development and ex- pansion of private medium-size mines, a national survey of small mines and technical assistance for the mining sector. A credit of US$6.2 million to the Government is proposed, of which US$5 million would be used for financing term loans for mining projects; US$850,000 for the national survey of small mines; and US$350,000 for technical assistance. ii. Mining exerts a dominant influence on Bolivia's economic life. It is the major source of export income, earning US$173 million of total 1972 exports of US$243 million; tin alone accounted for US$113 million. About 60,000 workers are directly employed by the mining companies and hundreds of thousands depend on mining for their livelihood. However, resulting primarily from the lack of financing and hence insufficient investment, the mining sector's share in GDP decreased from 16% in the early fifties to 11% in the early seventies. Bolivia has not been able to generate internally the flow of capital required for expansion and modernization of mining facilities and has had to depend on external investment funds--which have often been woefully inadequate--t_ prevent a decline in its mineral production. iii. Apart from lack of financing, there have been three other main con- straints to mining development in Bolivia. First, resulting from frequent shifts in Government policies between support of the private sector and a reliance on public ownership, the role of private investment has been unclear. However, the present Government, pursuing a balanced public-private approach to mining development, has made significant progress in improving the climate for an orderly expansion of private sector investments. Second, the lack of exploration and the consequent establishment of reserves--only 5% of the country's territory has been systematically explored--has severely limited Bolivia's capacity to prepare projects and obtain financing for them. Third, the deficiencies of the public agencies serving the mining sector are also a serious constraint. The Ministry of Mining and Metallurgy, which should be the central directing and coordinating unit, lacks qualified staff, adequate procedures and up-to-date data about the sector to be able to carry out an integrated mining policy. This is reflected in the obscurities and apparent inconsistencies in existing mining legislation. iv. The project would be an initial step by which the Bank Group could help Bolivia overcome these problems. Total cost of the project is estimated at US$9.27 million equivalent, with foreign exchange costs of US$6.2 million to be covered by IDA. v. Of the three project components, the credit program is estimated to cost US$7.70 million, of which IDA would contribute US$5 million, Banco Indus- trial S.A. (BISA) US$0.77 million and the subborrowers US$1.93 million. By providing term financing for expansion and modernization ofmining projects, IDA would help Bolivia--at present the highest-cost producer of tin in the world--become more competitive.  - ii - vi. The national survey of small mines is estimated to cost US$1.12 million, of which IDA would finance US$0.85 million and the Government US$0.27 million. IDA would help prepare the way for development assistance to the small mining sector by identifying and preparing small mining projects. Servicio Geologico de Bolivia (GEOBOL), a semi-autonomous Government agency, would conduct the survey with the assistance of outside experts. The Government would pass on the US$0.85 million of the IDA credit to GEOBOL as a grant. Vii. The technical assistance program is estimated to cost US$0.45 million, of which IDA would finance US$0.35 million and the Government USSO.10 million. It would aim at strengthening the Ministry of Mining and Metallurgy, impro- ving the structure of taxation of the mining sector and preparing for a sys- tematic exploration effort. This program would be carried out with the help of outside experts. viii. BISA would receive the IDA funds for the credit program at not less than 7-1/4% p.a. and relend to miners at not less than 11-1/4% p.a. in foreign exchange, retaining a spread of 4%. Subloans would have a maximum term of 15 years, including a grace period not expected to exceed 3 years, with the subborrowers bearing the foreign exchange risk. BISA would repay its share of the IDA credit to the Government in approximate conformity with the repayments received from subborrowers. The limit for projects not re- quiring IDA's prior approval (the "free limit") would be US$250,000; the first three projects would, regardless of their amounts, have to be approved by IDA. The aggregate free limit would be US$2 million. ix. Established in 1963 as a private development bank, BISA has been the major source of term financing to the private industrial sector in Bolivia. It has made almost 700 loans and has helped clients to improve their appraisal and financial practices. BISA has competent and experienced management. Its staff would be strengthened to provide the company with sufficient capability to appraise and supervise mining projects. With the proposed strengthening of its organization, BISA is suitable to serve as the intermediary under the credit program. The company's prospects are good; it expects to increase lending operations substantially while maintaining a sound financial position. Its liquidity would continue to be good, while profitability would remain modest. BISA would need to mobilize considerable amounts of fresh capital which should be possible given the indications of interest by several existing and potential shareholders. x. Subborrowers would come from a group of about 40 private medium- size mining companies (largely Bolivian-owned) which, on the whole, are capable of preparing and executing investment projects. The potential subborrowers are generally financially sound and creditworthy. The credit would help finance about 25 subprojects. They include underground mine development and modernization, construction and modernization of beneficiation plants, electri- fication and installation of camp infrastructure and surface mine development.  - iii - xi. The financial rates of return of the subprojects would range from 15% to 40%. The economic rates of return would be significantly higher. The credit program would increase Bolivia's exports of antimony, tungsten and tin substantially and of other minerals to a lesser extent, resulting in additional annual net export earnings of about US$7 million a year. It would also help improve health and safety conditions in the mines and the plants and living conditions in some camps through electrification, erection of housing and other social facilities. xii. The project is suitable for an IDA credit of USA6.2 million to Bolivia on terms and conditions customary for IDA credits.   BOLIVIA APPRAISAL OF A MINING CREDIT PROJECT I. INTRODUCTION 1.01 The Government of Bolivia has asked the Association for a credit of US$6.2 million to help finance a mining credit project. The project will con- sist of the development and/or expansion of private mines, the execution of a national survey of small mines and a technical assistance program for the mining sector. It is part of a program for development of the mining sector in Bolivia which was recommended by a Bank Group sector survey mission that visited Bolivia in 1971. 1/ The survey identified the major problems confront- ing the sector, among which were lack of credit, deficient credit institutions, inadequate exploration and institutional deficiencies in the public sector. The proposed project would be a first step for the Bank Group to help Bolivia overcome these problems. 1.02 A credit program for the mining sector must encompass various lend- ing techniques and intermediaries to serve the 40 or so medium-size companies, and the 2,000-3,000 smaller mining units. The difference in their financial strength, technical ability, and administrative capacity clearly separates these two groups regarding their capability of preparing and executing pro- jects, and the forms of assistance they need. The proposed credit project has been designed to help finance the first category, the medium-size mines. 1.03 A credit program for small mines could be effective only if it is supported by a substantial amount of technical assistance. This requires considerable effort and time in building up appropriate institutional arrange- ments. From the large number of small miners, those with the best potential for development and expansion would have to be selected and upgraded into efficient and creditworthy operations. Technical teams are required to help these small miners to prove up reserves, prepare projects, and improve work and administrative practices. The national survey of small mines, for which IDA financing is proposed, would help accomplish this (paras. 3.34-3.36). 2/ 1.04 The principal objectives of the proposed project are to: (a) provide term financing for the development and/or expansion of medium-size private mines; (b) help strengthen Banco Industrial S.A. (BISA), in particular by building up its capability to appraise and supervise mining projects; 1/ A report entitled "Bolivia - The Mining and Metallurgical Sector" (PI-14a) was distributed to the Executive Directors on December 29, 1972. 2/ UNDP was approached to finance the survey, but it was unable to assist.  -2- kc) assist in the development of the small mining sector through the national survey of small mines by which the small mines with best potential would be identified and provided with technical and exploration assistance; (d) prepare a small miners' credit project and a mineral exploration fund project; and (e) help improve efficiency of public institutions in the sector, in particular the Ministry of Mining and Metallurgy. 1.05 This report is based on the findings of an appraisal mission, com- posed of Messrs. Rassmuson, Alland, Bosson, and Reich, which visited Bolivia in June 1973. II. MINING SECTOR A. Background 2.01 Bolivia, with a land area of about one million sq. km and a popula- tion of five million, is the least developed country in South America with a per capita income of about US$180. 1/ Its geography has been a serious handi- cap to development in a large measure negating the potential benefits of its rich mineral endowment. Isolated from major markets by long distances and some of the most difficult terrain in the world, Bolivia faces high freight costs, resulting in high cost of imported capital goods and low net receipts on exports. Therefore, Bolivia's development strategy in the mining sector should emphasize increased production efficiency, mineral concentration, and whenever economically feasible, smelting and refining as well as forward linked industries producing finished products. 2.02 The mining sector provides jobs for some 60,000 full-time and part- time workers, equivalent to 3% of the working population. Its share in GDP decreased from 16% in the early fifties to 11% in the early seventies. Despite this declining trend, the mining sector exerts a significant influence on the economic and political life of the nation. It is the major foreign exchange earner, traditionally providing over 80% of export income. Minerals earned US$173 million of total 1972 exports of US$243 million; tin alone accounted for US$113 million (Annex 4). 2/ 2.03 Mining workers are well organized in powerful labor unions, a sig- nificant political force in the nation. The unions have succeeded in attain- ing high wages by Bolivian standards and relatively generous social benefits. 1/ A discussion of general economic conditions and outlook is contained in the most recent economic report on Bolivia, No. WH213(a), dated November 9, 1972. 2/ All mineral production is exported. The major minerals in order of impor- tance are tin, zinc, tungsten, antimony, copper, silver and lead.  -3- Despite these improvements, however, general conditions affecting the miners' well-being are not comparable with the standards of more advanced nations. 2.04 The current administration has prepared a Mineral Sector Development Plan for the 1972-76 period which is basically a list of projects. The Plan emphasizes public sector investments, although recognizing the need for private sector development. The Plan's targets for public sector investments are very ambitious and not likely to be achieved. The Government has now started preparing a more comprehensive and realistic development program for the min- ing sector. B. Sectoral Structure 2.05 Bolivia's mining sector is divided into three principal subsectors: (1) Large mining subsector, consisting entirely of the Corporacion Minera de Bolivia (COMIBOL), a Government corporation which was created in 1952 when the three major private mining companies were nationalized. COMIBOL operates 14 major mines, of which 9 are primarily tin mines, and leases others to cooperatives and mining firms. Most of the mines are operated at low profitability levels due to high production costs resulting from weak adminis- tration, lack of investment in exploration, obsolete technology, and excess labor. The large mining subsector employs about 23,000 workers and generates about one-half of the total mineral produc- tion. (2) Medium mining subsector, consisting of 20 private companies (6 foreign) belonging to Associacion de Mineros Medianos (Association of Medium Miners), which is the most influential group in the private mining sector. It employs about 7,000 workers and accounts for about one-quarter of the total mineral production. (3) Small mining subsector, 1/ consisting of up to 3,000 private operating units, ranging from one-man operations to companies comparable in size and output with smaller mines of the medium mining subsector. The working force of this subsector is about 30,000, full and part-time. Although operations are generally marginal, over 100,000 persons depend on small mines for their livelihood. 2.06 The small mines are generally operated on a primitive basis, char- acterized by poor health and safety standards, almost no exploration, little or no working capital, and low productivity. The average small miner has neither the capital nor the technical competence to explore, properly map and 1/ The proposed credit project has been designed to serve medium-size pri- vate mining companies, including the 20 companies from the medium mining subsector and about 20 mines from the small mining subsector.  -4- axp.ic't his ore reserves, and needs a substantial amount of technical assist- ance. The problems are compounded by the physical dispersion of operations over the difficult terrain of Bolivia's altiplano. C. Performance 2.07 The private mining sector was more dynamic than the public sector during the 1960's. The value of its exports at constant prices grew at an average yearly rate of 7.11% as compared to 4.8% for the public mining sector. However, in 1970-71 private investment in mining practically ceased as a re- sult of the political conditions. Any growth in production and exports during this period was the result of investments made during the 1960's. Since 1972, a recovery of the investors' confidence is clearly evident; many firms are seeking financing for their projects, while others are preparing new projects. Increased availability of credit would greatly stimulate the recovery. 2.08 The value of mineral exports declined in 1971 by about 15% after two years of rapid growth. Among the factors responsible for this downturn were labor unrest and a decline in world market prices of some minerals. Although the value of exports increased slightly for tin and zinc--the two most important export items--it was down substantially for all other major minerals, including tungsten, antimony, copper, silver, and lead (Annex 3). 2.09 In 1972, mineral exports remained at the low 1971 level. For 1973, however, the value of exports is expected to increase by about 13%, although not yet reaching the high 1970 level. The increasing exports reflect an expansion of almost 5% in COMIBOL's output after the introduction of new mineral recovery processes and technological improvements and increases in the world market prices of tin and zinc. On the other hand, the price of antimony, principally produced by mines from the medium mining subsector, is still far below the 1970 level. D. Government Policies 2.10 Background. The basic historical issue faced by the Bolivian Gov- ernment in the mining sector is the relative roles to be assigned to the pub- lic and private sectors. Total dependence on Government operating agencies appears unrealistic since it is unlikely that the public sector could provide the necessary capital (through public savings and/or external loans) or at- tract the expertise required for an efficient development of the mining sector. It would be equally unrealistic to expect a full swing to total dependence on the private sector. Therefore a balanced development of public and private sectors holds the best promise; this seems to be emerging at present. 2.11 The Government of President Torres which came to power in October 1970 accelerated an earlier trend to public sector ownership and management of the nation's mineral resources. The legislation was modified in favor of  -5- public ownership and several foreign controlled mining ventures were national- ized. President Banzer, who came to power -n 1971, reversed this trend making the conditions more conducive to private investment. The Government, conscious of the need to attract foreign private capital into the sector, settled out- standing nationalization disputes. In December 1971, a new Investment Law was passed, providing incentives to approved new investments, public and private, domestic and foreign, in industry, mining and other sectors. It reserves the metallurgical and steel industries to state enterprises, but also provides for private participation in these sectors under certain conditions convenient to national interests. Despite the significant progress made by the Government in improving the climate for an orderly expansion of private sector investment, there are still problem areas, such as: - institutional deficiencies of public sector; - inadequate exploration; - deficient mining code; - inequitable tax regime; and most importantly. - lack of credit. 2.12 Institutional deficiencies of public sector. The deficiencies of the numerous specialized agencies and institutions serving the mining sector are a severe constraint to the successful development of the sector. Their activities often overlap and this, together with the problems of insufficient funds, political interference, unstable policy, high management turnover and scarcity of qualified staff, have prevented effective long-range planning and a rational coordination of efforts. Any efforts to improve the institutional performance in the public sector, apart from COMIBOL, would need to be centered on the Ministry of Mining and Metallurgy (paras. 3.43-3.44). 2.13 The Ministry should be responsible for: - the formulation of mineral development policy and the prepara- tion of back-up studies; - administration of the mining code and appropriate revisions; - statistical compilation and record keeping of mining activity; - planning and monitoring sector development; and - control and inspection of safety and soundness of mining practices. So far, the work in these fields has not been effective and adequate. The basic problems center around an inadequate budget and hence poor staffing and poor management. The Ministry, recognizing these shortcomings, has taken some initial steps to strengthen its staff and administration. To continue the work of upgrading the Ministry, technical assistance is required which is included in the proposed IDA credit (para. 3.40). 1/ 1/ Annex 6 presents the proposed technical assistance program.  -6- 2.i4 Inadequate exploration. Lack of risk capital has hampered the ex- pioration activity resulting in that only one-quarter of the country's terri- tory has been mapped geologically and less than 5% has been systematically ex- plored. Exploration of reserves in existing mines--particularly in the public and the small mining subsectors--has been neglected with the result that most m-nes are operating with little knowledge of reserves. This prevents adequate mine planning which leads to poor recovery of ore reserves, higher mining costs, and lower production. The lack of proven reserves also severely limits the abiiity of mines to prepare expansion projects and obtain financing for them. 2.15 Risk capital for exploration is not available in Bolivia. Most of it would have to come from abroad, either as private foreign venture capital or as support to the Government. As it is not realistic to expect any signi- ficant quantities of private mining venture capital to enter Bolivia in the immediate future, the only viable alternative would be to set up an exploration fund, which would make available to public and private mining companies a sub- stantial part of the funds needed for their exploration programs (Annex 6-D). An exploration fund would also provide a mechanism for coordination of the exploration efforts within the country. The proposed IDA credit would heip finance preparatory work for setting up such an exploration fund (para. 3.42). 2.16 Mining code. Activity in the mining sector is regulated by the 1965 Mining Code, subsequently modified by several decrees. The existing legisla- tion suffers from several shortcomings which hamper an efficient development of the sector. The terms for obtaining exploration concessions are ill-defined and ambiguous, thereby obstructing investment in exploration. Large, poten- tially rich areas are either excluded from exploitation or the terms for exploiting them are unclear. Conversely, concessions can be readily obtained for exploitation of other areas without any strict requirements for production. This results in large "frozen" areas. Standards for workers' safety and wel- fare and ecological effects of operations are not adequately controlled by legislation. To overcome these shortcomings and to provide a basis for effi- cient development of the sector, a commission was appointed by the Government to revise the mining code. A new mining code has not yet been issued, although it has been under review for more than a year. A revised mining code is im- portant for an orderly sector development; during negotiations, the Government agreed to promulgate the revised Mining Code by June 30, 1974. 2.17 Tax regime. The mining sector operates under a tax regime which, originally established in the 1965 Mining Code, has been complicated by sub- sequent legislation. This has led to a confusing and inequitable tax system which is alleged to work, at times, as a disincentive to production, invest- ment and/or exploration. The Government has expressed interest in a study of the impact of the tax system on the mining sector, including recommendations for improvements, for which IDA financing is proposed (para. 3.41). 1/ 1 / Annex 6-C presents in more detail deficiencies of the present tax system together with the proposed study.  -7- E. Financing of Mining 2.18 Banking system. The banking system consists of the Central Bank, Banco del Estado (State Bank), owned by the Government, 14 private commercial banks, and 4 specialized banks. Banco del Estado is the largest commercial bank in Bolivia, accounting for roughly one-third of total commercial bank liabilities to the private sector. Six foreign-owned private commercial banks account for another third of the total commercial bank liabilities to the private sector, while 8 private domestic comnercial banks are responsible for the remaining one-third. 2.19 The four specialized banks include two Government-owned, Banco Minero (Mining Bank, BAMIN) and Banco Agricola (Agricultural Bank), and two private banks, Banco Industrial (Industrial Bank, BISA), and Banco Hipotecario Nacional (National Mortgage Bank). Banco Minero and Banco Agricola have been plagued by serious financial difficulties resulting from several factors, including political interference, poor management, and inefficient collection of receivables. The Government intends to rehabilitate both institutions; one step in this direction was a modest recapitalization of BAMIN, carried out in March 1973. 3ISA, the intermediary under the proposed credit program, is a sound development finance company with a proven record in industrial finance (paras. 3.17-3.33). 2.20 Sources of mining credit. BAMIN should be the natural source for investment finance to the Bolivian mining enterprises. However, as mentioned above, it has not been able to play this role. The only other institution in Bolivia with experience in mining finance is the Corporacion Boliviana de Fomento (Bolivian Development Corporation, CBF), a public entity also charged with the management of Government enterprises. However, CBF suffers from fi- nancial and administrative difficulties, particularly with its non-banking ac- tivities (management of public enterprises and works), which prevent it from acting as an effective credit institution. No improvement is expected and the Government may decide to eliminate credit operations from CBF's functions. 2.21 Most private mining companies must heavily rely on internally generated funds to meet their needs. Short-term financing is available to the large mining companies from commercial banks. These companies can also obtain short-term financing through advances received from foreign buyers against a term sale contract of minerals, which, however, is generally a costly source of funds. The smaller miners depend almost exclusively on occasional credits and advances received from BAYIF against future deliveries. However, BAMIN's assistance has been insufficient. 2.22 Scarcity of term credit. The crucial problem is term credit. Given the lack of a capital market in Bolivia, mining companies have great difficulties in raising long-term finance. At present, there is virtually no term financing for mining from local sources. Some term financing is available to the larger companies from supoliers. However, this could be quite an expensive source of funds since interest charges may be concealed  -8- in hlgner equipment prices. External agencies have provided limited term funds to the private mining sector; AID has financed small miners through BAMIN and IDB medium-size miners through CBF. However, these credit programs suf- fered from the institutional deficiencies of BAMIN and CBF (paras. 2.19 and 2.20). Since the AID and IDB funds have been used up, most miners must cover their investment costs from their own funds or from the rollover of short-term financing. In many cases, investments have been postponed or not initiated because of lack of funds. 2.23 Interest rates. Existing official ceilings limit interest rates to 10% of total cost on term loans for developmental purposes, and 13% for short- term productive credit and commercial lending. The effective cost of the latter mostly exceeds the legal ceiling of 13%, since commercial banks normal- ly charge a 1% flat commission on each loan renewal (usually after 90 or 180 days) and often require the clients to keep non-interest earning compensating balances. 2.24 The Government is currently revising the interest ceilings and has agreed that term lending to the mining sector under the proposed credit program would be made at a rate of not less than 11-1/4%. This interest rate is appro- priate, since subloans would be made in foreign exchange, the subborrowers bearing the foreign exchange risk. The most important source of long-term financing for medium miners has been IDB, whose funds have been onlent in foreign exchange at interest rates from 8% to 10%. III. THE PROJECT A. General 3.01 Brief description. The project consists of three components: (a) A credit program to help finance the development and/or ex- pansion of private medium-size mines. (b) A national survey of small mines, designed to prepare an inventory of small mines, select mines with most potential, and provide technical and exploration assistance to their owners. (c) A technical assistance program composed of: (i) technical assistance to,and equipment for, the Ministry of Mining and Metallurgy; (ii) an examination of the tax system in the mining sector; and (iii) preparation work for the proposed exploration fund.  -9- The three project components are described in paras 3.07-3.33; 3.34-3.39; and 3.40-3.44. 3.02 Cost estimates. The total cost of the project is estimated at US$9.27 million equivalent, with a foreign exchange component of US$6.2 million (66.9%). The major categories are shown in the following table: % Foreign $b million _ US$ million Exchange Category Local Foreign Total Local Foreign Total Component (a) Credit Program 54.00 100.00 154.00 2.70 5.00 7.70 65.0 (b) National Survey of Small Mines/1 6.20 16.20 22.40 0.27 0.85 1.12 75.9 (c) Technical Assistance Program/2 (i) Ministry of Mining Metal- lurgy 2.20 4.20 6.40 0.09 0.28 0.37 75.7 (ii) Exami- nation of tax system 0.40 1.60 2.00 0.01 0.05 0.06 83.3 (iii) Prepara- tion of explora- tion fund 0.00 0.40 0.40 0.00 0.02 0.02 100.00 Subtotal 2.60 6.20 8.80 0.10 0.35 0.45 77.8 Total Project Cost 62.80 122.4( 185.20 3.07 6.20 9.27 66.9 /1 Details in Annex 5 /2 Details in Annex 6.  - 10 - Financing. The total project cost of US$9.27 million would be financed by an IDA credit of US$6.2 million (66.9%); a Government contribution of US$0.37 million (4.0%); a contribution by BISA of US$0.77 million (8.3%); and subborrower contributions of US$1.93 million (20.8%). A summary of the financing plan of the project is as follows: IDA Government BISA Subborrowers % of % of x of % of Total Category US$M Total US$M Total US$Y4 Total IJS$M Total US$M (a) Credit Program 5.00 65.00 - - 0.77 10.00 1.93 25.0 7.70 (b) National Survey of Small Mines 0.85 75.9 0.27 24.1 - - - - 1.12 (c) Technical Assistance Program 0.35 77.8 0.10 22.2 - - - - 0.45 Total Project Cost 6..20 0.37 0.77 1.93 9.27 Percentage of Project Cost 66.9 4.0 8.3 20.8 During negotiations, the Government agreed to make available the above indi- cated funds (US$0.37 million equivalent). 3.04 Procurement. The mining equipment and machinery to be financed under the credit program would be procured abroad as off-the-shelf items, mostly with values of less than US$50,000. Investment items would vary from case to case and would be decided upon by the subborrowers, with the con- currence of BISA, thus following the pattern of IDA credits to development finance companies. BISA makes a practice of satisfying itself that the equipment and machinery to be financed meet the technical needs of the project and are competitive with goods of similar quality. For this purpose BISA requires that subborrowers obtain quotations from at least three suppliers. This procurement procedure is satisfactory. 3.05 In the case of the national survey of small mines, equipment would be procured on the basis of international shopping -- requiring quotations from at least three foreign countries -- owing to the large number of equipment items, except for some diamond drills and accessories valued at about US$240,000 which would be subject to international competitive bidding. Advisory services required under the survey and the technical assistance program would be obtained on a broad international basis.  - 11 - 3.06 Disbursement. The estimated schedule of disbursement is given in Annex 8. Accounts would be set up at the Central Bank for the three project components. Disbursement of IDA funds would be made for the CIF cost of equipment and machinery and a 100% of the foreign exchange cost of technical assistance and consulting services. BISA normally disburses directly to suppliers and contractors in installments, checking that each stage of the project has been completed before releasing the next installment. BISA's commitments and disbursements to the subborrowers would take about two and three years respectively. B. Credit for Medium-Size Miners General Features 3.07 Banco Industrial S.A. (BISA) would receive IDA funds from the Govern- ment at not less than 7-1/4% and lend at not less than 11-1/4% in foreign ex- change. Since BISA has not had an opportunity to build up its business to an adequate level, and it is entering for the first time the mining sector, BISA would only be charged a commitment fee of 3/4% on the portion of the credit which has been authorized by IDA for withdrawal. The company would repay the funds to the Government in approximate conformity with repayments received from subborrowers. In light of the costs and risks associated with its enter- ing the new field of mining finance and its present and projected financial position, BISA would need a spread of 4%. Since the company would incur sub- stantial costs specifically for the mining credit--e.g., BISA would have to double its operations department by employing three additional professional staff members (paras. 3.20 and 3.22)--its overall profitability would remain modest. A lower spread would reduce profitability to a level which would jeopardize BISA's capacity to raise share capital. 3.08 Subloans to the mining companies would be made on the basis of de- tailed appraisals of subprojects, following standard DFC practice. The sub- loans would (a) have a maximum term of fifteen years including a grace period not expected to exceed three years; and (b) be made in foreign exchange, the subborrower bearing the foreign exchange risk, at an interest rate of not less than 11-1/4% (para 2.24). 3.09 A free limit of US$250,000 is recommended for BISA, below which subloans would not require IDA's prior approval. The first three subloans submitted to IDA would, regardless of their amounts, have to be approved by IDA. An aggregate limit of US$2 million for subprojects below the free limit should be established. 3.10 Subborrowers. The subborrowers would come from a group of about 40 mining companies which have the capability of preparing and executing subprojects without substantial technical assistance. The group includes the 20 miners from the medium mining subsector and about 20 from the small mining subsector (para 2.05). Of this group, it is expected that about 20 companies  - 12 - wouLd present bankable projects to, and obtain financing from, BISA under the credit program. A detailed description of the medium-size companies, their operations, demand for funds and subprojects is in Annex 4. 3.11 The potential subborrowers are generally financially sound and credit- worthy. Most of the companies, which have total assets ranging from US$0.1 to US$S .0 million, operate with a low leverage; the vast majority have a debt/equity ratio of less than 1:1, which is partly a reflection of the shortage of term funds and the low level of new investments in the last three years. As a result of the complexity of Bolivian ore bodies, high transport costs and the high in- frastructure burden placed on the companies (each is obliged to build roads, so- cial facilities and to subsidize food and other goods for workers), the companies are high-cost producers relative to their competitors in the world markets, al- though they are the most efficient subsector in the Bolivian mining sector. Therefore, they are vulnerable to reductions in mineral prices, and extended periods of low prices can place many of the companies in financial difficulties. Except for this risk, these companies have a sound financial position; they could contract sizeable borrowings, still remaining within acceptable debt/ equity relationships, and generate sufficient cash flows to service loans. 3.12 The larger companies have qualified personnel capable of adminis- tering substantial investment programs; others are weak in their staffing. The practice of the more advanced companies of contracting out services to other companies can help in this respect. Also, BISA would use its subloans as lever- age for strengthening staffing and other aspects of the subborrowers' operations, particularly accounting and financial planning which are weak in many companies. 3.13 Subprojects. The credit program would finance about 25 subprojects belonging to about 20 subborrowers, some of whom would have more than one project. The subprojects, which would vary considerably in size and nature, would include underground mine development and modernization, construction and modernization of beneficiation plants, electrification and installation of camp infrastructure and surface mine development. Investment in existing or new beneficiation plants would carry a much higher equipment component than mine development. AU equipment would be of foreign origin, while civil works and mine development would use local sources except for some supplies which would have to come from abroad. 3.14 The effects of the subprojects on production, exports, export earnings and employment, as well as their expected financial and economic returns, are discussed in paras 4.01-4.06. 3.15 No ecological problems are expected as a result of the project (Annex 4, para 5.03). 3.16 Demand for funds. The medium-size mining companies have some 35-50 projects with a total cost of US$15 million to US$20 million, which would be implemented over a period of about three years, starting in the middle of 1973. Some of the projects have been studied and financed while others are still in the preliminary stage. The total investment could be broken down as follows:  - 13 - USS Million Total Cost of Projects 15.0-20.0 Less: - Alreadv Financed 1/ 3.0- 4.5 - To be Financed by Other Sources 1.5- 2.0 - Projects to be Dropped or Slipped 2/ 1.5- 2.0 Projects Expected to be Submitted to BISA 9.0-11.5 Of which Expected BISA Commitments (about 75% of the projects submitted) 7.0- 9.0 1/ Financing from BAMIN, CBF, commercial banks and companies' own funds. 2/ Because of non-viability and/or inability of company to proceed with project. Since foreign exchange costs are expected to represent 65% of the total costs of an average project, BISA's demand for foreign exchange would be between US$4.6 million and US$6 million from 1974 to early 1976. Accordingly, an allocation of US$5 million for BISA would be appropriate. Financial Intermediary--Banco Industrial S.A. (BISA) 3.17 Operations and management. BISA 1/ was established in 1963 as a pri- vate development bank with the prime objective of providing Bolivian industry with term financing. About 80% of its lending has gone to industry; the rest to transport, construction, and tourism. Its operations have been in line with the geographical distribution of manufacturing industry in Bolivia which is centered in the La Paz region. BISA's promotional work and equity investments have been of little significance and success, partly resulting from the dif- ficult business conditions in the last few years. 3.18 Despite its relatively small size (total assets of US$5 million equiv- alent), BISA has made a valuable contribution to the development of the private industrial sector of Bolivia. Within ten years of operations, BISA has made almost 700 loans. Clients have not only benefited from BISA's financial assis- tance; its appraisal work has helped to improve standards of project evaluation and, in some cases, accounting and financial planning practices. BISA has been successful in securing resources from abroad; it has obtained several credit lines for industrial development from AID, IDB and KfW, and it has attracted foreign shareholders now holding 40% of BISA's share capital. 1/ A detailed analysis of BISA is available in Annex 1.  - 14 - 3 t9 in spite of its good record as a development bank, BISA has, with some reason, beer criticized for lack of aggressiveness and for insufficient interest in the areas outside the capital of La Paz. BISA's shareholders, with the concurrence of the Government, have now decided to develop the company into a strong and independent national develonment bank serving both industry and mining. In line with this policy, the shareholders have approved new by-laws, allowing BISA to enter the field of mining finance, which have been ratified by the Government. 3.20 BISA's management, which is competent and experienced, has been reinforced by the recent employment of a capable professional as operations department manager. Its small staff, which at the end of 1972 totalled 23 including 10 professionals, is well qualified. 3.21 BISA's operational and financial policies are satisfactory, except that the company is permitted to expose itself excessively to any one client. 1/ Given the nature of BISA's operations, a reasonable exposure limit would be 35% of its equity. This limit takes into account that the equity investments (which are riskier than loans) are and will remain an insignificant part of BISA's op- erations (2% of total assets in 1972). During negotiations, BISA agreed to this limit. 3.22 Since BISA has no experience in mining finance, the company proposes to strengthen its appraisal capacity with one mining engineer and one addi- tional financial analyst. Expertise is available in Bolivia and the company has contacted suitable candidates. Together with the existing staff, the new staff members would provide BISA with a sufficient capability to appraise mining projects. The company has agreed to fill these two positions before effectiveness of the proposed credit. 3.23 BISA's follow-up work needs improvement. To remedy this deficiency, BISA has agreed to strengthen staffing and organization of its supervision activities. 3.24 BISA's procurement and disbursement procedures are adequate. The company's accounts have since 1967 been audited annually by Arthur Young and Company. While the audits generally are of good quality, BISA has agreed that future audits substantially conform to the detailed report normally required from DFC clients of the Bank Group. 3.25 Financial results and prospects. BISA's financial position is sound. Its loan portfolio ($b88.15 million at the end of 1972) is generally of good quality. In the limited cases of bad accounts, BISA has taken legal action and does not expect any significant losses. BISA's small equity portfolio ($b2.14 million at the end of 1972), representing only 2% of BISA's total assets, con- sists of two investments of poor quality made by BISA during its earlier years of existence. BISA's provisions, reserves and retained earnings would be ade- quate to cover any expected losses on its loan and equity portfolios. 1/ BISA is authorized according to its by-laws to expose itself to any one client company in the form of loans, investments or gurantees up to 20% of the aggregate amount of its paid-in share capital and loans from for- eign sources. This policy would allow BISA to comit up to about $b20 million at the end of 1973, to one client which compares to a projected equity amounting to $b15.3 million on that same date.  - 15- 3.26 Over the last years, BISA's earnings performance has fluctuated large- ly in line with Bolivian business conditions. The company's return on equity, which in 1968-70 had averaged 16%, reached a low level of 47% in 1971 and recov- ered somewhat in 1972 (8.3%). The main reason for the lower profitability in 1971-72 was, apart from the slowdown of operations in 1970-71, the gradual re- duction of BISA's interest income, accentuated in late 1972 when a Government- imposed ceiling reduced the interest rate of development loans from 12% to 10%. 3.27 BISA's profitability is expected to remain at rather modest levels over the next five years, its return on equity increasing from 8.3% in 1972 to 9.6% in 1977. The main reason for this insignificant improvement in profitability despite a substantial expansion of operations is the increasing average cost of borrowings. Since the interest-free and low-interest funds from AID and IDB are gradually becoming a smaller proportion of BISA's borrowings, being mainly replaced by higher-cost IDA funds proposed to carry a per annum charge of not less than 7-1/4%, its average borrowing costs would increase from 3.8% in 1972 to 5.2% in 1977. Provisions for portfolio losses are projected to reach 3.1% of BISA's portfolio in 1977, compared to 1.7% at the end of 1972, which seem reasonable since BISA will enter into the new activity of mining finance. BISA's administrative costs would decrease from 2.8% of average total assets in 1972 to 1.7% in 1977; a satisfactory cost level for BISA. 3.28 Although the aggregate of BISA's provisions, reserves and retained earnings are adequate for coverage of estimated portfolio losses, it would be desirable for the company to strengthen its provisions and reserves in view of its entering into the mining sector. BISA proposes to do this by increasing (a) its provisions (para. 3.27), and (b) its contingency reserve, using a portion of its foreign exchange gain for this purpose (Annex 1, para 4.06). 3.29 BISA's dividend payments have been low in recent years. After paying a dividend of 2.9% in 1971, BISA declared a 9% dividend in 1972, representing a 74.2% distribution of earnings. However, in contrast to previous years, the 1972 dividend was completely capitalized, indicating the shareholders' intention to strengthen and expand BISA's equity. The dividend policy is expected to remain conservative over the next five years. 3.30 BISA's liquidity is good, partly because of the revolving use of long-term borrowings from AID, IDB and KfW, and is Drojected to remain high; its loan collections and profits before interest payments would amply exceed its debt service payments. The company's total debt/equity ratio, which in 1968-71 never exceeded 4.7:1, increased to the rather high level of 6:6 at the end of 1972. However, BISA's leverage is expected to go down over the next few years, remaining within a range of 4.2-5.4 which appears reasonable given the risks of BISA's operations and its need to remain modestly profit- able. BISA has agreed not to exceed a total debt/equity ratio of 6:1. 3.31 BISA's loan approvals are projected to grow at an average annual rate of 28%, over the next five years. Of this increase, 65% would go to the mining sector while the remaining 35% would be for BISA's increased lending  - 16 - to inrdustry. The projected operations in mining are based on a sample of rather firmly defined subprojects. Demand for funds is expected to exceed BISA's financial capacity to serve the mining sector. BISA's projected loan approvals for industry are partly based on a pipeline of projects and since demands for funds continues strong from this sector, BISA should have no difficulties in achieving the projected lending levels. 3.32 To support the expected volume of lending operations, BISA has projected significant annual increases of its share capital. This projection is based on assurances from new and existing shareholders which should cover the capital increases up to the end of 1975. 1/ Other potential shareholderss- national and foreign--have expressed interest in making further equity par- ticipations. Although a substantial portion of the new share capital would come from foreign sources, 2/ foreign ownership is not expected to exceed its present participation of about 40%. The success of the proposed capital mobilization program will largely depend on the US$0.5 million equivalent equity contribution promised by the Medium Miners Association. Therefore, and to provide BISA with an equity base adequate to initially support the projected lending operations, BISA should, as a condition of effectiveness of the pro- posed credit, obtain additional capital subscriptions amounting to $b10 million (the equivalent of US$0.5 million), of which $b5 million would be paid in during 1974 and $b5 million during 1975. 3.33 Suimmary. BISA is creditworthy and, subject to the proposed strength- ening of its organization, suitable as intermediary under the credit program. The company's prospects are good; it expects to increase lending operations sub- stantially while maintaining a sound financial situation. Profitability would remain at a rather modest level, while liquidity would continue to be good. To maintain a satisfactory financial structure, BISA would need to mobilize consid- erable amounts of fresh share capital which should be possible given the serious indications of interest expressed by several existing and potential shareholders. C. National Survey of Small Mines 3/ 3.34 Objectives. The general objective of the survey is to help improve the knowledge of Bolivia's mining sector and mineral resources, with special emphasis on small mining. It would aim at alleviating the basic problems of the small mining sector (para 2.06) and of inadequate exploration (para 2.14). The survey would be a necessary and important forerunner for (a) a credit program for small miners (para. 2.24); (b) the establishment of an exploration fund (para 2.15); and (c) determining the optimal location for regional concentra- tors. 1/ The Association of Medium Miners has indicated its firm intention to make an equity investment of US$0.5 million equivalent and ADELA Investment Company, which is the largest shareholder in BISA, would maintain its pre- sent equity participation of about 25% over the next few years. 2/ ADELA Investment Company; and possibly Deutsche Entwicklungsgesellschaft of Germany; Continental Bank of Chicago, Irving Trust of New York, and Manufacturers Hanover Trust. 3/ Details of the survey in Annex 5.  - 17- 3.35 Description. The survey would include collecting and analyzing all data on the small mining operations currently available in the various public and private agencies, supplementing these by field inspections. The mines with the best potential for expansion and the mineral deposits warranting fur- ther exploration would be identified. An integral and important part of the survey would be the provision of technical and direct exploration assistance to selected small miners, with the objectives of preparing them for a credit program by (a) identifying the small miners with best expansion potentials and assisting them in the preparation of bankable projects; (b) assisting them to prove up sufficient reserves and to improve operational, managerial and finan- cial control sufficiently so as to become creditworthy; and (c) training them in modern and efficient work methods. 3.36 The survey would be conducted by Servicio Geologico de Bolivia (GEOBOL)1/ , coordinating with other agencies operating in the mining sector. Four foreign advisors -- an economic geologist, an expert in mine organization and administration, a geophysicist and a drilling suDervisor -- would assist GEOBOL. The survey requires the formation of a new deDartment within GEOBOL with a staff of about 120 people of which 25 would be professionals; 20 technicians and the remainder semi-skilled or unskilled laborers. 2/ The survey is scheduled to be completed by mid-1975. The Government would pass on the IDA funds to GEOBOL as a grant. 3.37 Executing agency. GEOBOL was established in 1960 with the assist- ance of the U.S. Geological Survey with the major objectives of contributing to and coordinating geological investigation of Bolivia, compiling geological data, preparing geological maps, prospecting and exploring mineral resources, and providing technical advice to private and public operations. GEOBOL has a permanent staff of approximately 250 of which about 120 are professionals. In general, the staff is reasonably well qualified but young and with little experience. However, under its dynamic director GEOBOL's performance has been satisfactory in the past two years, although there is considerable room for improvement. The foreign advisors, who would be provided under the national survey of small mines, would help to further strengthen GEOBOL. 3.38 Although recent progress has been made in geological mapping, only slightly more than 25% of the country has been geologically mapped. Basical- ly resulting from budget constraints, work on mapping has dropped off sig- nificantly over the past five years with more emphasis being placed upon contract exploration. This is unfortunate since the fundamental role of GEOBOL should be to greatly accelerate the pace of basic geologic mapping and regional economic geology studies rather than to conduct detailed exploration work for ore deposits. However, with the start of the national survey of small mines, ,a considerable part of CEOBOL's efforts would be redirected to the important field of "infrastructure" geology. 1/ Details of GEOBOL in Annex 2. 2/ Most of the professionals and techniciaris would be drawn from within GEOBOL; no problems are expected in recruiting the remainder.  - 18 - GEOBOL's operations are financed from three major sources: Govern- ment appropriations; foreign assistance; and revenue from contract exploration work. The proposed future work program excluding the survey implies a major increase in budget requirements, most of which is expected to come from funds earrned from contract work. This appears optimistic and clearly indicates the need to obtain assurances from the Government that sufficient local funds would be made available (para 3.03). D. Technical Assistance Program 1/ 3.40 Description. The proposed technical assistance program includes three components. The first would be technical assistance to, and equipment for, the MMinistry of Mining and Metallurgy with the objective of strengthening the Ministry (para 2.13). Expertise would be made available to the Ministry to establish a documentation center and institute a system for mining sector data gathering and control. Major emphasis would be placed upon strengthening the existing project evaluation and planning unit. In addition, an expert would assist in a thorough review of the existing marketing policies and channels and give advice on improvements. This program would be completed in two years and would require six manyears of experts. 3.41 The second component would be an examination of the system of tax- ing the mining sector (para 2.17). The study would determine: (a) the extent of inequities in the existing system; (b) the relative tax burden carried by the mining sector vis-a-vis other sectors in Bolivia, and vis-a-vis mining in other countries; (c) the practicality of instituting alternative systems; and, if deemed required, (d) a program for implementing changes in the system. This study, which would call for two experts working in the field for five/ six months, could be completed with the recommendations ready for implement- ation by early 1975. 3.42 The third component would be preparatory work for a proposed explora- tion fund (para 2.15). This entails having an expert review with the Govern- ment the agency most suited to supervise the exploration fund. The expert would help to establish the necessary institutional framework, the administra- tive procedures, the staffing requirements, criteria for project selection, 1/ Details of this program in Annex 6.  - 19 - operating rules, financial requirements, and the expected results of the pro- gram. This would in effect result in the preparation of a feasibility report, which could then be used to establish and finance the exploration fund. This work would only require three/four months and should be completed by late 1974. 3.43 Institution involved. The Ministry of Mining and Metallurgy woUld co- ordinate the technical assistance program. (It would liaise with the Ministry of Finance in the case of the tax study.) Established in 1936 and reorganized several times, the Ministry was set up in Zts present form in 1970. The Minis- ter is president of the public agencies renorting to his Ministry. 1/ 3.44 The central office of the Ministry in La Paz includes all statistical and analytical functions. Branch offices are located in Oruro, Cochabamba, Potosi, Sucre, Tupiza, and Santa Cruz, to administer mining land and enforce the mining code. The Ministry has a staff of about 150 people of which about 35 are professionals, and operates on an annual budget of about US$0.5 million equivalent. IV. BENEFITS AND MARKETS 4.01 Because of the nature, variety and different stages of preparation of the subprojects, it is difficult to estimate the impact of the credit pro- gram on the Bolivian economy. The most profitable subprojects would be those entailing expansion of existing facilities, which would allow economies of scale by a more efficient use of overhead and infrastructure. On the other hand, subprojects designed to extract and recover lower grade ore, previously left in the mine, would result in only slight increases in oroduction with possibly higher extraction costs. The financial internal rate of return of the former subprojects would range from 15% to (in exceptional cases) 40%, while in the case of the latter subprojects it would be in the order of 10-15%. The adjustments that would have to be made to convert the financial data into economic terms would basically consist of taxes and wages since the sub- borrowers earn all income and incur most of the costs in foreign exchange. Because of the relatively high tax burden on the mining sector, the economic rate of return would be significantly higher than the above indicated finan- cial rates of return. 4.02 The credit program is expected to increase Bolivia's annual production, in about three/four years, of antimony by 10-15%, tungsten 7-10%, tin 6-7% and lesser amounts for other minerals, like bismuth, copper, lead, silver, zinc and gold. 1/ Comision Boliviana de Energia Nuclear (Bolivian Nuclear Energy Commiission, COBOEN); Empresa Nacional de Fundiciones (National Smelting Company, ENAF); Instituto de Investigaciones Minero-Metallurgicas (Institute for Mining and Metallurgical Research, IIMM); COMIBOL; GEOBOL; and BAMIN.  - 20 - 4.03 For antimony, tin, and tungsten, 1/ a slowly expanding market is ex- pected to prevail through the seventies, with the possibility of small supply surpluses, particularly for tin, anl hence pressure to maintain Prices at their existing levels. The project would help make Bolivia--at present the highest cost producer of tin in the world--more competitive. The world's antimony and tungsten supply depends to a very large extent upon China and because of the unpredictability of this source there could possibly be periods of supply defi- cits and inflated prices. These, however, should be short-lived. The large surpluses of tungsten in the US stockpile will continue to play an important role, but, if handled as has been done over the past four years, they should create no major disturbance of the market. 4.04 Since all production would be exported, the impact on the balance of payments would be significant; gross export earnings would increase by about US$9 million a year at full production or, deducting the foreign exchange in- puts required by the subprojects (about US$2 million), should result in net export earnings of about US$7 million a year. Increased Government revenue from taxes is expected to be about US$3 million a year. 2/ 4.05 Employment benefits would be minor; some 200-300 additional jobs would be created. An important benefit of the subprojects would be the modern- ization of both the mines and plants, which should in some cases very signifi- cantly improve the health and safety conditions. In addition, the modernization would help to upgrade the skill levels of the work force. Improvements in the living conditions would be effected in some camps through electrification, erection of housing and other social facilities. 4.06 The direct benefits from the national survey of small mines and the technical assistance program would be realized mainly in the form of improved efficiency, increased technical competence and the acquisition of a better knowledge of the sector. The Ministry of Mining and Metallurgy and GEOBOL would become more effective institutions and better equipped to serve the needs of the sector. Hence, overall sector performance would improve. V. AGREEMENTS REACHED AND RECOTMENDATIONS 5.01 During negotiations, (a) the Government agreed to: (i) promulgate the revised Mining Code by June 30, 1974 (para 2.16); 1/ Brief market reviews of each of these commodities are presented in Annex 7. 2/ This includes taxes on mineral exports (US$1.4 million), the foreign ex- change tax (US$1.5 million) and other taxes (US$0.1 million).  - 21 - (ii) make available sufficient local funds for the national survey of small mines and the technical assistance program (para 3.03); (iii) relend US$5 million to BISA on terms and conditions acceptable to IDA in support of the credit program for medium-size miners (paras 3.07-3.08); (b) BISA agreed to: (i) the terms and conditions of the credit program for medium-size miners (paras 3.07-3.09); (ii) limit its total exposure to any one client to 35% of its equity (para 3.21); (iii) strengthen its follow-up work (para 3.23); (iv) have its audit reports improved (para 3.24>; (v) have a total debt/equity limit of 6:1 (para 3.30). 5.02 Before effectiveness of the credit, BISA should: (a) employ one experienced mining engineer and one additional financial analyst (para 3.22); and (b) obtain additional capital subscriptions amounting to at least $b1O million, of which $b5 million would be paid in during 1974 and $b5 million during 1975 (para 3.32). 5.03 The proposed project is a suitable basis for an IDA credit for US$6.2 million to Bolivia.   ANNEX 1 BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. TABLE OF CONTENTS A. Organization Establishment and Objectives Ownership Board of Directors Policies Management and Staff Appraisal Supervision Procurement and Disbursement Procedures Audit B. Resources C. Operations Lending Operations Equity Investments and Promotion Other Operations D. Financial Results Quality of Portfolio Financial Structure Profitability Reserves and Provisions Dividend Policy Foreign Exchange Risk E. Prospects Operations Sources of Funds Financial Structure and Results   ANNEX 1 LIST OF TABLES Table 1. List of Major Shareholders Table 2. List of Board Members Table 3. Organization Chart Table 4. Long-term Borrowings Table 5. Analysis of Loans Approved 1970-1972 Table 6. Status of Equity Investments Table 7. Past (1968-1972) and Projected (1973-1977) Balance Sheets as of December 31 Table 8. Past (1968-1972) and Projecced (1973-1977) Profit and Loss Statements for Periods ending December 31 Table 9. Projected Operations 1973-1977 Table 10. Projected Sources and Application of Funds 1973-1977 Table 11. Past (1968-1972) and Prolected (1973-1977) Financial Ratios Table 12. Summary of BISA's Policies   ANNEX I Page 1 BANCO INDUSTRIAL S.A. A. Organization Establishment and Objectives 1.01 BISA was established in 1963 in La Paz as a private financial insti- tution, following an initiative of the National Chamber of Industries and USAID. Its objectives as defined in its statutes are (a) to provide financial and technical assistance to private enterprises primarily in the industrial field; (b) to encourage the substitution of imported goods and to promote Bolivian exports; (c) to stimulate local and foreign investment in productive enterprises with a view to creating new jobs and increasing the standard of living of the Bolivian population. 1.02 In March 1973, BISA's shareholders approved new by-laws, authorizing the company to enter the mining field, which have been approved by the Govern- ment. The new by-laws have not yet become effective. Ownership 1.03 A list of BISA's shareholders (Table 1) shows that at the end of 1972, Bolivian shareholders held 60% and foreign shareholders 40% of the share capital. Among the Bolivian shareholders six private banks (Class A share- holders) 1/ held 29% of the share capital and 133 mostly manufacturing companies (Class B shareholders) the remaining 31%. The foreign ownership of 40% (Class C shareholders) consisted principally of investments made by ADELA Investment Company, a multinational development finance company for Latin America, and Banco Popular del Peru, holding 26% and 10% respectively of BISA's share capital. 1.04 All shareholders have equal rights to vote and to participate in dividend distributions. No single shareholder could exert a dominant influence in BISA, since voting rights are restricted to a maximum of 10% of total out- standing shares per shareholder. Board of Directors 1.05 The Board of Directors is composed of eight directors (Table 2), three representing private Bolivian banks (Class A shareholders), three other private Bolivian shareholders (Class B), and two foreign shareholders (Class C). The new Board, as incorporated in the new by-laws, includes a fourth category of shareholders, private Bolivian miners (Class D); each category is represented by two directors. The Board meets weekly. it decides policy 1/ Each class of shareholders could elect three Board members (Annex 1, para. 1.05).  ANNEX 1 Page 2 matters, appoints the managing director and deputy manager, and approves loans above US$20,000 equivalent. Board decisions are taken by simple majority, each director having one vote; the Board's chairman decides in case of draw. The Board, whose members take an active interest in BISA's operations, is of high quality and includes some of Bolivia's leading bank- ers and industrialists. Policies 1.06 BISA's operational and financial policies are laid down in the statutes and in a formal policy statement (Table 12). In anticipation of entering into the mining sector, BISA has revised its policies which are satis- factory except for the fact that the company is permitted to expose itself ex- cessively to one client; it could commit more than its entire equity in favor of one client, which is not a financially sound practice. 1/ It would seem more reasonable for BISA to limit its total exposure to any one client to 35% of its equity. This limitation takes into account that the equity investments-- which are riskier than loans--are and will remain insignificant in the company's operations (2% of total assets at the end of 1972). The proposed limitation would limit BISA's participation in some of the larger subprojects. During negotiations, BISA agreed to limit its total exposure to any one client to 35% of its equity. Management and Staff 1.07 Mr. Jorge Lopez Pacheco, responsible for day-to-day operations, has been BISA's managing director since 1969. He has provided BISA with competent leadership during a period of difficult business conditions. He is efficiently assisted by two managers, in charge of operations and adminis- tration (Table 3). The newly created position of operations department manager was filled in August 1973 by a capable professional (Enrique Garcia), who has had extensive experience in development finance. 1.08 At the end of 1972, BISA's staff totalled 23, including 10 profes- sionals. The staff is competent and experienced in its work; 16 of the 23 em- ployees have worked more than five years in BISA. Much importance is attached to staff training and several staff members have been sent abroad for training. All staff members are at present stationed at the head office in La Paz, except for one representative in Santa Cruz. 1/ BISA is authorized according to its by-laws to expose itself to any one client company in the form of loans, investments or guarantees up to 20% of the aggregate amount of its paid-in share capital and loans from foreign sources. This policy would allow BISA to commit up to about $b20 million at the end of 1973, which compares to a projected equity amounting to $b15.3 million on that same date.  ANNEX 'i Page 3 Appraisal 1.09 Appraisal reports are prepared by a team consisting of an engineer, a financial analyst/economist and a loan officer; in cases of more complicated projects BISA seeks advice from outside consultants. The quality of BISA's appraisal work is on the whole satisfactory, although economic analysis has yet to be introduced and engineering evaluation improved. Quality and pre- sentation of reports is also uneven, with some reports being too superficial. BISA's management is well aware of these deficiencies and is taking steps to improve appraisal work. Economic analysis, improved engineering analysis and a uniform methodology for all appraisal work will be introduced under the guidance of BISA's new manager of operations, who is thoroughly familiar with all aspects of appraisal work. 1.10 Since BISA has no experience in the appraisal of mining projects, it would have to build up a new professional capacity in this field. In addi- tion to the new manager of operations, BISA proposes to hire one mining engin- eer and one additional financial analyst. The two main candidates for these job are competent professionals with many years of experience in the appraisal of mining projects. Together with the existing staff members, they would pro- vide BISA with an adequate appraisal capability in this field. BISA has agreed to fill these two positions before the effectiveness of the proposed IDA credit. Supervision 1.11 BISA requires its clients to report regularly on their activities. In cases of larger operations, BISA requires its clients to have their finan- cial statements audited independently. Supervision visits are made normally when the project reaches its operating stage, but not on a regular and system- atic basis. Because of staff shortages, supervision work has almost exclu- sively concentrated on problem projects. 1.12 BISA's follow-up work needs improvement, both in regard to quality and number of visits. To remedy this deficiency, follow-up activities have under the new organization been incorporated under the operations department (see organization chart, Table 3). This should provide the basis for better supervision, since staff members doing appraisal work would also participate in follow-up work, which was not the case earlier. The proposed staff addi- tions, together with the introduction of a more systematic approach to super- vision, should allow BISA to do a satisfactory supervision job. Procurement and Disbursement Procedures 1.13 Procurement and disbursement procedures are adequate. BISA tries to ensure that its clients procure equipment from the most competitive sources by requiring submission of quotations from at least three suppliers. Disburse- ments are usually made in installments, often directly to the suppliers, and BISA ensures that it does not disburse in excess of the value of assets actually acquired.  ANNEX 1 Page 4 Audit 1.14 BISA has been audited annually since 1967 by Arthur Young and Com- pany. As a financial institution BISA is also subject to a public inspection which is carried out by the Department of Inspection of the Central Bank (previously the Superintendency of Banks). As the scope of the independent audit requires some improvement, BISA has agreed to have its auditor follow the standard format normally used by DFC clients of the Bank Group. In par- ticular, the auditor would be requested to (a) segregate current assets; (b) give an assessment of the provisions necessary to cover possible losses on loans and equity investments; and (c) include a statement regarding foreign exchange exposure. BISA's auditor indicated to the appraisal mission that the proposed changes would not-be difficult to introduce. B. Resources 2.01 Resources outstanding at the end of 1972 are summarized below: Amount % of In $b million Total Equity 9.66 9.5 Quasi-equity 3.60 3.6 Long-term Borrowings (i) AID 45.88 45.3 (ii) IDB 15.02 14.8 (iii) KfW 3.88 3.8 (iv) Central Bank 8.63 8.5 73.41 72.4 Miscellaneous 14.64 14.5 Total Liabilities and Equity 101.31 100.0 The uncommitted balance of long-term borrowings amounted to the sizeable amount of $b57.6 million at the end of 1972, corresponding to borrowings not yet drawn down from IDB ($b30.0 million) and KfW ($b27.6 million) for indus- trial lending. BISA also had short-term credit lines amounting to about $b1O million with foreign commercial banks, which were unused at the end of 1972. 2.02 Quasi Equity. When BISA was set up in 1963, it received an interest- free loan from AID in the amount of $b3.6 million. Since this loan is subordi- nated to all other debt and ranks pari-passu with share capital in case of liquidation, it is considered quasi-equity (Table 4).  ANNEX l Page 5 2.03 Long-term Borrowings. BISA has been successful in obtaining long- term resources from external agencies (Table 4). In fact, external agencies have been BISA's only source of long-term borrowings since its inception. The Central Bank rediscount lines, which are derived from AID funds, are available to the whole banking system mainly for industrial and agricultural lending. Although BISA is empowered to issue bonds, it has not been able to do so. There is no capital market in Bolivia and the company would not be in a position to offer a coupon rate acceptable to the investors, given the interest ceiling on its lending of 10%. C. Operations Lending Operations 3.01 An analysis of BISA's loan approvals during the last three years and since inception is given in Table 5. BISA basically provides term finan- cing of fixed assets to industry. During its ten years of existence, the company made 656 loans totalling $b185.5 million of which 25.0% were for food products, 17% for textiles and the remainder distributed over a large number of mainly manufacturing subsectors. The geographical distribution has been in favour of the department of La Paz which in 1972 received 69.1% of the total. Although the distribution of BISA's lending has approximately been in line with the regional distribution of manufacturing industry in Bolivia, BISA's policy is now to achieve a more widespread distribution and eventually become a truly national development finance company. In line with this policy, BISA has decided to set up a regional office in Santa Cruz, which would mainly serve the expanding agro-industry in that area. 3.02 Terms and Conditions of Lending. The interest rate to subborrowers is 10% which is the ceiling established by the Government for development loans (prior to October 1972 it was 12%). 1/ Most subloans are repayable in foreign currency or contain a dollar clause; at the end of 1972 only 13.3% of the total loan portfolio was repayable in local currency without a dollar clause. As a result of low-cost borrowings, BISA had an average spread of 6.2% in 1972. BISA normally charges a commission of 3% on its guarantee operations, The terms of subloans usually vary between 3 years for working capital to 8 years for fixed assets operations, including a grace period of up to 2 years. Reflecting its conservative lending policy, BISA requires securities from two to three times in excess of the loan amount depending on the type of collateral. In line with BISA's intention to become more devel- opment-oriented, the company would need to take a more flexible approach to secruity requirements, compensating this by paying more attention to the viability of subprojects. Equity Investments and Promotion 3.03 During its first years of existence BISA did some promotional work, setting up of a steel rolling mill (IBHASA) and a marble quarry (EMARCASA), in both of which it took minority equity participations. Other projects studied 1/ The Government has agreed that IDA funds would be onlend at a rate of not less than 11-1/4%.  ANNEX 1 Page 6 by BISA did not meet with much interest among private industrial partners. BISA's two equity participations turned out to be poor investments (Annex 1, para. 4.03). Therefore, BISA has decided to take a very cautious attitude towards new equity investments. This is an understandable policy in the short- term but if the business climate improves sufficiently, BISA should be encour- aged to become more promotion-minded again. Other Operations 3.04 BISA's "other" operations are rather insignificant. Guarantees are given infrequently. However, at the end of 1972 guarantees outstanding amounted to $b8 million, which was mainly the result of a sizeable short-term operation of $b6.5 million in favour of one client, Compania Minera del Sur S.A., one of the largest and best managed mining companies in Bolivia. At the end of 1972, BISA had also letters of credit outstanding amounting to $b6.73 million with foreign banks, of which amount almost one-half corresponded to one opera- tion for a plastic manufacturing company, Plasmar S.A., in which IFC has an equity investment. BISA also administers as a trustee for AID a fund of soft- term loans to industrial enterprises in need of rehabilitation. D. Financial Results Quality of Portfolio 4.01 At the end of 1972, BISA had a loan portfolio of $b88.15 million of which 47.7% corresponded to foreign exchange loans, 39.0% to local currency loans with a dollar clause, and 13.3% to local currency loans without a dollar clause. The total balance outstanding affected by principal and interest over- due for more than one year was $bl3.62 million, 1/ or 15.4% of the total loan portfolio, as can be seen in the following table: Amount in $b % of No. of Loans million Total Loans not due 227 74.53 84.6 Total balance outstanding of loans in arrears for more than one year (including interest) 42 13.62 15.4 269 88.15 100.0 Of the total balance of loans in arrears, $b10.O million represent loans out- standing to four clients. BISA has taken legal action to recover its loans in most of the problem cases and does not expect any significant losses; the company estimates that about 85% of the loans in arrears can be recovered with 1/ The total balance outstanding of loans in arrears for more than three months is only insignificantly higher.  ANNEX 1 Page 7 guarantees. Overall, the loan portfolio is sound, and provisions, reserves and 2retained earnings would be adequate to cover possible losses on loans which in BISA's opinion would not exceed $b2.0 million (Annex 1, para. 4.06). 4.02 BISA is now reorganizing the accounting of its loan portfolio to show a more detailed aging of the principal outstanding of loans in arrears (e.g. in arrears for more than three months) and to determine the amounts of principal in arrears as opposed to the total balance outstanding to these clients. The company would by the end of 1973 be able to give this inforna- tion. 4.03 The market value of BISA's two equity investments, which were acquired at a cost of $b2.43 million, is estimated at zero (Table 6). The failure of these two investments was mainly due to bad business conditions in 1970-71 and inadequate management. BISA's total exposure in these two companies is $b7.30 million, including loans of $b4.87 million, but the com- pany should be able to recover at least 80% of the loans because of existing guarantees (Annex 1, para. 4.01). Here again, provisions, reserves and re- tained earnings would be sufficient to cover the expected loss of $b2.43 million on the equity portfolio (Annex 1, para. 4.06). 1/ Financial Structure 4.04 Balance sheets of BISA are given in Table 7. BISA's total assets increased sharply (65%) in 1972, mainly due to the upward adjustment of foreign currency loans following the devaluation. (Without the devaluation, the growth would have been 15%). BTSA's total debt/equity ratio, which in 1968-71 never exceeded 4.7:1 increased to a high 6.6:1 at the end of 1972 (Table 11). BISA's short-term liquidity situation is excellent; short-term assets and the normal cash flow cover short-term liabilities comfortably. Profitability 4.05 BISA's earnings performance which had been very good in 1968-69 (net earnings on equity of 17.0% and 16.5%) started to deteriorate in 1970 (14.0%), bottomed out in 1971 (4.0%) and recovered somewhat in 1972 (8.3%). The drop in earnings was partly due to unfavorable business conditions in 1970-71 which led to a lower volume of lending operations and a larger portion of loans in arrears. Furthermore, BISA has over the last few years experienced a sub- stantial reduction in its gross spread, which went down from 8.2% in 1968 to 5.8% in 1972. This mainly resulted from a gradual reduction of BISA's interest income, a trend which was accentuated in 1972 when the Government reduced the official interest ceiling on development loans from 12% to 10%. Administrative expenses have increased at a much slower rate than assets 1/ A provision of $bO.88 million has been made against the cost of the equity portfolio amounting to $b2.43 million; the balance of $b1.55 million is covered by reserves and retained earnings.  ANNEX 1 Page 8 over the last few years, resulting in a decrease of administrative expenses as a proportion of total average assets from 3.8% in 1968 to 2.8% in 1972. This ratio, which is still on the high side, could be explained by BISA's relatively low volume of operations and small size of average subloan (US$37,700 equivalent). Reserves and Provisions 4.06 BISA's provisions, reserves and retained earnings amounted to $b4.7 million at the end of 1972, representing 5.1% of total loan and equity port- folio. 1/ Of this amount, $bl.2 million is included in a contingency reserve for possible portfolio losses which has been separated from equity. BISA is considering to increase this reserve by about $b4.5 million in 1973, using a portion of its exchange gain for this purpose. 2/ This would strengthen BISA's reserves considerably and remove any doubt as to their adequacy. Over- all, the aggregate of BISA's provisions, reserves and retained earnings appear adequate given the present quality of its portfolio, but as the company grows it should increase its provisions. In this respect, starting with the 1973 financial statements, the company intends to charge annually against the period's income an amount expected to be the loss on its portfolio instead of its past practice of very slowly building up provisions by charging only 20% annually of irrecuperable loans, 3/ as permitted by Bolivian tax legisla- tion. Dividend Policy 4.07 BISA paid annual dividends of about 11.5% in 1968-70, representing approximately 60% distribution of earnings (Table 11). As a result of deter- iorating earnings, the dividend was sharply reduced to 2.9% in 1971. Out of 1972 earnings, BISA declared a 9% dividend, representing a 74.2% distribution of earnings. However, in contrast to previous years, the 1972 dividend was completely capitalized indicating the shareholders' intention to build up the 1/ This amount would cover the estimated possible losses of $b2.0 million on the loan portfolio (Annex 1, para. 4.01) and of $b2.43 million on the equity portfolio (Annex 1, para. 4.03). However, since only $bl.56 million had been charged against BISA's income as a provision at the end of 1972, the company's equity is overstated on that same date by $b2.87 million ($b4.43 million less $b1.56 million). 2/ As a result of the 1972 devaluation of the Bolivian peso, BISA made a foreign exchange gain of $b11.3 million which was mainly due to the fact that many of BISA's subloans in foreign exchange are financed with funds borrowed in local currency. 3/ Loans would normally be considered as irrecuperable by Bolivian legis- lation when the company has been declared in bankruptcy.  ANNEX 1 Page 9 company into a strong and expanded development finance company. Under a loan agreement dated February 20, 1973 with IDB for industrial development BISA has agreed to limit the payment of future dividends in cash to 50% of the dividends declared. 4.08 A few of BISA's shares have changed hands in private transactions. The book value of its shares has remained relatively stable over the last few years, amounting to 126.0% at the end of 1972. Foreign Exchange Risk 4.09 All operations reviewed by the appraisal mission indicate that BISA is not exposed to any foreign exchange risk in its operations as long as the Bolivian peso is not revalued primarily in relation to the dollar, which is highly improbable. E. Prospects Operations 5.01 BISA expects its total approvals to grow at an annual rate of 28% over the next five years (Table 9). Foreign currency approvals under credit lines financed by AID, IDA, IDB, and KfW would represent the bulk of operations, equivalent to 83% of total approvals in 1977. Approvals of local currency loans are projected to grow at a slower annual rate (10.2%), since BISA is now repaying the AID funds used for local currency loans. As has been the case over the last few years, equity investments would continue to play an in- significant role in BISA's operations. 5.02 BISA's projections are reasonable. Starting in 1975 and through 1977, about half of the operations in terms of value would be in mining and the other half principally in the industrial sector. However, in terms of number of loans, industrial lending would continue to be the most important activity, since the size of an average subloan for mining would be much larger than one for industry. BISA is not expected to have any difficulties in approving loans for industry at the projected annual growth rate of 9.5%, which is partly based on a pipeline of projects, since demand for funds continues to be strong in the industrial sector. The demand for funds from private medium- size mining companies, which is based on rather firmly defined subprojects (para 3.16), is expected to exceed BISA's present capacity to serve the sector, both in terms of financial and appraisal capacity. Sources of Funds 5.03 The projected increases in resources assume substantial support from IDA, minor fresh funds from other long-term lenders and relatively important increases in BISA's share capital (Annex I, para. 5.05). On the basis of the projected loan commitments for mining, BISA's foreign exchange needs for lend- ing to this sector would in 1974-1977 amount to $b167 million (US$8.4 million). The proposed IDA credit of US$5 million would cover the projected commitments up to mid-1976.  ANNEX 1 Page 10 5.04 Existing foreign exchange resources for lending to non-mining activi- ties (mainly industry) are adequate to allow commitments well into 1976. The uncommitted portion of foreign exchange borrowings amounted to the sizeable figure of $b57.6 million at the end of 1972, which compared to a total out- standing long-term debt of $b63.3 million of that same date. Since the long- term borrowings from AID, IDB, and KfW are repayable over periods ranging from twelve to forty years and subloans with these funds are made at terms averaging five years, BISA has an important source of funds in the revolving use of these credit lines. Financial Structure and Results 5.05 On the basis of the projected volume of business, BISA's total as- sets would grow at an annual rate of 28.7%, from $b101.3 million in 1972 to $b357.4 million in 1977. To support the proposed lending volume and maintain an adequate financial structure, BISA proposes to raise its paid-in-capital as follows: (in $b million) Actual Projected Share capital 1972 1973 1974 1975 1976 1977 At the beginning of the year 7.6 7.7 12.9 18.3 28.7 36.4 Additions: /1 New Capital 0.1 4.5 - 5.0 10.0 7.0 10.0 Capitalized dividends - 0.7 0.4 0.4 0.7 1.0 7.7 12.9 18.3 28.7 36.4 47.4 /1 Derived from part of the foreign exchange gain (Annex 1, para. 4.06). The capital increase of $b5 million in 1974 and another $b5 million in 1975 would come from the Association of Medium Miners, the members of which would be among the beneficiaries of the proposed credit program. The additional amount of new capital in 1975-77 would come from several new and existing shareholders (foreign and national), who have expressed interest in making equity participations. ADELA has indicated its intention to maintain its present equity participation in BISA of 25.7%. The following foreign share- holders have expressed interest in equity participations: DEG, Germany ($b6.0 million), Continental Bank of Chicago ($b6.0 million), Irving Trust, New York ($b3.0 million) and Manufactures Hanover Trust ($b3.0 million). BISA also expects to raise share capital from existing and new Bolivian shareholders, in particular from the agro-industrial sector in Santa Cruz. Although several of the new potential shareholders are foreign, foreign ownership in BISA is not expected to exceed its present participation of about 40%. Finally, the projections assume, in accordance with IDB loan agreement, that 50% of dividends declared would be capitalized (Annex 1, para. 4.07).  ANNEX 1 Page 11 5.06 The projected capital resources is considered realistic. Since the proposed increase of $b1O million in 1974 and 1975 from the Association of Medium Miners is decisive for the capital mobilization program, BISA should, before effectiveness of the proposed IDA project, obtain a firm commitment to the effect that $b5 million would be paid during 1974 and an additional _b5 million during 1975. 5.07 With the projected capital increase, the financial structure, as measured by the debt/equity ratios, would develop as follows: Actual Projected December 31 1972 1973 1974 1975 1976 1977 Total debt/equity ratio /1 6.6 5.4 5.3 4.8 5.3 5.3 Term debt/equity ratio /1 5.3 5.0 4.9 4.4 4.9 4.9 /1 An AID loan of $b3.6 million (US$180,000) which is subordinated to other debt and ranks pari-passu with the share capital, is considered as quasi equity and has consequently been included in the equity base; cash divi- dends have been excluded from equity. 5.08 BISA is currently not subject to any contractural debt limitation apart from a rather liberal government-imposed total debt/equity ratio of 10:1. This is too high. In judging the appropriateness of BISA's financial leverage, IDA's interest as a creditor would have to be reconciled with the needs of BISA to be a reasonably profitable operation, which is a necessary prerequisite for the proposed program of capital mobilization (Annex 1, para. 5.05). Considering that BISA has a proven record of project lending, a sound loan portfolio, a good liquidity and adequate appraisal capability, a total debt/equity limit of 6:1 would be appropriate. Therefore, BISA should agree not to exceed a total debt/equity ratio of 6:1. 5.09 BISA's rate of return on average equity is expected to go up only slightly, from 8.3% in 1972 to 9.6% in 1977 (Table 11). The main reason for this modest improvement in profitability, despite a substantial expansion of operations, is the increasing costs of borrowings. Since the interest-free or low-interest funds from AID and IDB are gradually becoming a smaller propor- tion of BISA's total borrowings, its average cost of borrowings would increase from 3.8% in 1972 to 5.2% in 1977. Provis-ons for possible losses -- which at the end of 1972 amounted to $b1.5 million or 1.7% oL BISA's total portfolio -- would by the end of 1972 reach $b10.8 million or 3.2% of the total portfolio. Administrative expenses are expected to decrease from 2.8% of average total assets in 1972 to 1.7% in 1977 which would be a reasonable level.  ANNEX I Page 12 5.O Dividends are projected to remain modest (Table 11). After dropping from 9% of par in 1972 to 4.4% in 1974, as a result of the expected capital increases, dividends would gradually increase to reach 6.1% of par at the end of 1977. A dividend pay-out ratio of 60% has been projected but since BISA, in accordance with a covenant agreed upon with IDB, cannot declare more than 50% of its dividends in cash, the real dividend pay-out would not exceed 30%. Reserves and retained earnings (excluding provisions) would increase from $b3.2 million or 3.4% of the total portfolio in 1972 to $b14.3 million or 4.3% of the total portfolio in 1977.  ANNEX I Table _ BOLIVIA - A MINING CREDIT PROJECT BANJCO INDUSTRIAL S.A. List of Major Shareholders as,of December 31, 1972 Number o. Shares % of $blO par value Total I Class "Al l Private Bolivian Banks I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 1. Banco Hipotecario Nacional 7,220 9.h1 2. Banco Boliviano-Americano 4,870 6.35 3. Banco Nacional de Bolivia 4,752 6.19 4. 3anco sMer3antil 4,223 5.51 5. Banco de Credito Oruro 794 1.04 6. Banco Ir.dustrial y Ganadero del Beni S.A. 300 0.39 Sub-total 22,159 28.89 II Class "B" - Cther ?rivate Bolivian Sharenolders 1. Marrufacturera de Algodon Said S.A. 7,265 9.47 2. Indastrias Bolivianas Unidas S.A. "'Iousa"' 1,367 1.78 3. Hansa Ltda. 1,250 1.63 4. Sociedad Nacional Textil Sonatex S.A. 924 1.21 5. Manufactureras Textiles Forno S.A. 883 1.15 6. Cerveceria Boliviana Nacional S.A. 775 1.01 7. Gasser y C;a. Ind. "La B6lgica" S.A. 718 0.94 8. Castellanos Ortiz Hugo 700 0.91 9. Fabrica de Tejidos Jacquard S.A. "Fateja" 609 0.79 10. Volcan S.A. 507 0.66 11. Sears Archibald F.J. 449 0.59 12. Manufacturera Boliviana S.A. "Manaco" 401 0.52 121 Private Bolivian Shareholders with Fewer than 300 Shares each 8,182 10.67 Sub-total 24,030 31.33 III Class "IC" - Foreign Snareholders 1. ADELA Investment Company 19,726 25.72 2. Banco Popular del Peru 7,700 10.04 3. Banco de la Nacicn Argentina 2,183 2.85 4. Bank of America 895 1.17 Sub-total 30,504 39.78 GR?4D TOTAL 76,693 100.00 LCPDF aLy 23, 1973  ANNEX 1 Table 2 BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Board Members as of December 31, 1972 Principals Description Enrique Urioste Calvo General Manager, Nanufacturas de Algod6n (Chairman) "SAIDtT S.A.; represents shareholders of Class "B" Eduardo Saenz Garcia President of Board of Directors, Banco (Vice-Chainnan) Mercantil; represents shareholders of Class "A"l Javier Arce lillalba Director, Banco Boliviano Americano; General Manager, Fabrica Nacional de F6sforos S.A.M.; represents shareholders of Class Edward A. Home Executive President, Banco Hipotecario Nacional; represents shareholders of Class "A"I Hans Elsner Schweitzer Managing Director, Fabrica de Tejidos Jacquard S.A. "FATEJA"; represents share- holders of Class "B" Rene Ballivian Calder6n EXecutive President, Empresa de M6rmol y Cal S.A. "EMARCASA"; represents share- holders of Class "B" Miguel Fabri Cohn General Manager, Banco Porular del Pert-i; represents shareholders of Class "C" Tor L. Lindbaek Manager, ADELA Investment Company 3.S.; represents shareholders of Class "C" Alternates Description Hugo Castellanos Ortiz General Manager, Camara Nacional de Indus- trias; represents shareholders of Class Hugo Gambarte Pantoja General Manager, Cerveceria Boliviana Nacional S.A.; represents shareholders of Class "B" Carlos Calvo Galindo Manager, First National City Bank (La Paz) (until 11/30/72); Executive President, Exportaciones Bolivianas "EXPOBOL" S.A.; represents shareholders of Class "C" LCPDF May 23, 1973  BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Organization Chart Shareholders Assembly Board of | Directors Managing Director (Jorge Lo ez) Manager o Operations (Enrique Garcia) Deputy Manager D of Operations of Administration Iust iMining lProject I Super- IInter- I Account-. Loans Loans vision lnatnal in 1g1  BOLIVIA - a MINING CR3IT PROJECT BANCO INDUSI9TIAL S. A. Long-term Borrowings as of December 31, 1972 Revolving use Lender Date Amount Cost of Borrowing Repayment Guarantor pcssible? USAID/Bolivia 2/11/63 $b 3.6 million freE (o.75% p.a. 15 annual Bolivian 51i-24-920-388 commission) installments Govt. Yes from 2/10/79 USAID/Bolivia 8/2 /63 US$ 2.14 million 5.75% p.a. 25 half-yearly Bolivian AID/WI4E 511-L-016 (3% until 1968) inst. from Govt. Yes 4/29/72 USAID/Bolivia 4/14/66 $b 6 million 4.5% p.a. 20 half-yearly Bolivian 5ll-Li-92O-h96 inst. from Govt. Yes 1/1972 USAID/Bolivia 511-LCI-lOC5A 12/15/66 $b3,153,716 4.5% p.a. 12 half-yearly Bolivian inFt. from Govt. Yes 3/28/71 USAID/Bolivia 5ll-LCL-1019 3/6/68 $b 4.8 million 6% p.a. 20 half-yearly Bolivian inst. from Govt. Yes 3/1973 Interamerican Deve- lopment Bank 7/29/66 US$ 1 million 4% p.a. 20 half-yearly Central 100-'F-BC inst. from Bank Yes 1/29/72 Kredi tanstal t fur Wiederraufbau 9/28/70 DI! 5 million 5.5 p.a. 44 half-yeaily Bolivian A.I.L.C. 202-72 inst. froml Govt. Yes 6/30/79 GentrAl Bank ne- - Amounts of 5% p.a. Terms of the Ui,F-curt, Lines sub-loans are sub-loans - No (tlring U'ATD ref inanced funds) Interamnericen Deve- 2/20/73 US$1.5 millicn 5% p.- 60 half-yearly Brlivian h-pmcn. bEnk inst. frcm G-vt. Yes July 1973  ANNEX 1 Table 5 BOLIVIL - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Analysis of Loans Approved (in $b million) 1970 1971 1972 Total since Inception No. Amount % No. Amount , No. ,mount 4 No. Amount 9 I. By Size Up to 200,000 33 2.98 35.2 31 2.86 12.8 27 2.33 6.4 478 43.19 23.3 200,001 - Soo,ooo 3 0.75 8.8 13 4.45 19.8 10 3.08 8.5 88 28.03 15.1 500,001 - 1,000,000 3 2.33 27.5 4 2.94 13.1 5 3.92 10.8 43 31.37 16.9 1,000,001 and above 2 2.41 28.5 7 12.20 54.3 12 27.03 74.3 47 82.88 44.7 Total 41 8.47 100.0 55 2100.0100.0 54 36.36 100.o 656 185.47 100.0 IT. By ltonomic Activity Food products 7 1.61 18.9 15 9.60 42.8 11 5.73 15.8 167 46.19 25.0 Beverages 2 0.12 1.4 2 o.67 3.0 1 0.05 0.1 26 3.62 1.9 Textiles 4 1.84 21.7 3 2.22 9.9 2 2.27 6.2 58 31.44 17.0 Footwear and Garment 3 0.29 3.4 5 0.44 2.0 4 1.37 3.8 49 5.63 3.0 Wood products 2 0.32 3.8 4 o.60 2.7 2 0.20 o.6 49 8.83 i6.8 Furniture 1 0.05 o.6 2 0.53 2.3 1 0.12 0.3 18 1.51 0.8 Paper and Printing 2 0.07 0.9 1 0.12 o.5 - - - 24 6.26 3.4 Leather goods 5 0.49 5.7 3 0.25 1.1 1 0.33 0.9 33 2.97 1.6 Ribber goods - - - - - - - - - 3 0.4 0.2 Chemical products 4 1.78 21.0 3 1.90 8.5 7 4.25 11.7 37 14.15 7.6 Construction materials 1 0.07 0.8 2 0.11 0.5 2 o.62 1.7 32 5.33 2.9 Buildings 3 0.50 6.0 - - - 2 1.98 5.4 17 13.53 7.3 Metal products - - - 1 0.08 0.3 5 1.26 3.5 54 10.49 5.6 Plastic goods - - - - - - 3 7.43 20.4 3 7.63 4.0 Turism and Hotels - - - - - - 3 2.25 6.2 3 2.26 1.2 Others 7 1.33 15.8 14 5.93 26.4 10 8.50 23.4 83 25.39 13.7 Total IJ1 8.47 100.0 55 22.45 1oo.0 3O.36 1oo0. 656 185.47 100.0 III. -By Duration 1 to 2 years 18 3.80 44.8 15 5.o6 22.5 17 6.71 18.5 251 29.61 16.0 2 to 5 years 22 4.01 47.3 37 12.86 57.3 35 22.84 62.8 374 121.94 65.7 More than 5 years 1 o.66 7.9 3 4.53 20.2 2 6.81 18.7 31 33.92 18.3 Total 61 8.47 100.0 55 22.45 100.0 54 36.36 1OO.0 656 185.47 100.0 IV. By Location La Paz 31 6.46 76.3 40 12.05 53.6 37 25.13 69.1 421 121.96 65.8 Santa Cruz 2 0.15 1.8 3 3.22 1)4.3 6 6.40 17.6 77 30.45 15.4 Cochabamba 5 1.62 19.1 9 6.30 28.1 7 4.67 12.8 93 25.11 13.5 Oruro - - - - - - 1 0.01 0.1 13 2.30 1.2 Beni 1 0.08 0.9 - - - - - - 15 1.84 1.0 Chuquisaca 1 0.04 0.5 1 0.o6 0.3 2 0.10 0.3 22 2.07 1.2 Tarija - lotosi 1 0.12 1.4 2 0.82 3.7 1 o.05 0.1 15 1.74 0.9 Total hi 8.47 1o0.0 55 22.65 100.o 54 36.36 100.0 656 185.47 100.0 V. By Sad Use Fixed capital 4.24 50.0 13.48 60.0 25.80 71.0 112.69 60.8 Working capital 4_ .23 50.0 8.97 40.0 _ 10.56 29.0 72.78 39.2 Total 41* 8.47 100.0 55* 22.615 100.0 5* 36.36 0oo.O 656* 185.67 100.0 VI. By Type of Projects New enterprises 3 0.36 4.3 5 4.93 21.9. 7 5.42 14.9 46 39.38 21.2 Existing enterprises 38 8.11 95.7 50 17.52 78.1 47 30.94 85.1 610 146.09 78.8 Total 41 8.47 o0O.0 55 22.45 100.0 54 36.36 300.0 656 185.47 100.0 VII. By Source of Funds Own funds 20 1.64 19.4 19 4.90 21.6 22 7.36 20.2 261 34.15 18.4 AID 15 5.83 68.7 28 11.96 53.3 19 11.42 31.4 335 111.72 60.3 IDB 2 1.00 11.9 5 1.29 5.7 4 4.47 12.3 40 19.87 10.7 Central Bank of Bolivia - - - 1 2.o8 9.3 5 5.65 15.6 13 10.04 5.6 KfW _ _ - 2 2.22 5.9 4 7.46 20.5 6 9.69 5.2 Total 41 E.67 100.0 55 22.45 1(0.0 54 36.36 100.0 656 185.47 100.0 (*) Most loans finance both fixed assets and working capital needs. LCPDF .Aay 23, 1973  BOLIVIA - A MINING CREDIT PRnJECT BANCO INDUSTRIAL S.A. Status of Equity Investments, December 31, 1972 (in Bol$ million) Dividends Share- Esti- Received Provision Year of holding mated in made for % Total Investment Company Industry Status (at cost) Value 1972 Losses Owned Loans Guarantees Exposure 1967 Industria Boli- Steel In liqui- 2.13 0 - o.85 23.4 3.76 - 5.89 viana de Hierro rolling dation y Acero S.A. mill (IBHASA) 1968 D lotadora de Marble Operating 0.30 0 - 0.03 27.3 1.11 - 1.41 Marmol y Cal quarry at a loss S.A. (EMARCASA) LCPDF July 1973  BOLIVIA - M INING CREDIT PROJECT RANCQ INDUSTR,IAL S.A. Past and Proiected Balance Sheets as of December 31 (in Bol$ million) Past Pro lce 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 ASSETS Banks - local 2.75 1.81. 2.45 3.02 1.90 1.6 3.5 3.4 4.8 6.1 Banks - abroad 1.92 2.37 4.24 2.35 4,37 3.9 8.4 8.0 11.5 14.5 Total Banks 4.67 4.18 6.69 5.37 6.27 5.5 11.9 11.4 16.3 20.6 Miscellaneous receivables 2.58 2.94 2.98 2.68 3.11 3.7 4.8 6.3 8.2 10.3 Loans outstanding 44.24 50.84 48.47 49.09 88.83 108.9 135.9 184.8 251.6 327.2 Less provision - - - (0.26) (0.68) (0.8) (1.3) (2,6) (5.1) (8.2) Investments 2.79 2,88 3.29 2.96 3.02 3.1 4.1 5.3 6.7 8.0 Less provision _ _ (0.39) (0.30) (0.88) __. 5 (2.1) (2_.6 (2.6) (6) Total Portfolio 47.03 53,72 51.37 51.49 90.29 109.7 136.6 184.9 250.6 324.4 Fixed and other assets 1.45 1.40 1.71 1.70 1.64 2.6 2.5 2.4 2.3 2.2 Total Assets 55.73 62.24 62.75 61.24 101.31 121.5 155.8 205.0 277.3 357.4 LIABILITIES AND EQUITY Accounts payable and other current liabilities 1.87 2.01 1.47 0.87 1.39 4.1 3.2 2.2 2.2 2.2 Current portion of long-term debt 1.84 2.61 3.20 3.94 10.11 8.9 12.6 13.9 25 .o Total Current Liabilities 3.71 4.62 47.67 4.81 11.50 13.0 15.8 16.1 22.0 USAID 34.19 33.71 33.13 32.74 41.48 IDB 4.60 9.43 9.96 8.60 13.35 KfW - - - - 3.88 83.4 108.7 145.7 202.2 262.3 Central Bank 1.40 1.70 1.04 0.36 4.59 IDA L - - - - Other ___--_22_ Total Long-term Debt 40.19 44.84 44.13 41.70 63.30 83.4 108.7 145.7 202.2 262.3 Other liabilities 0.87 0.98 1.77 2.10 13.25 6.2 6.4 6.6 6.8 7.0 AID loan (quasi-equity) 3,60 3.60 3.60 3.60 3.60 3.6 3.6 3.6 3.6 3.6 Paid-in share capital 5.83 6,21 6.61 7.61 7.67 12.9 18.3 28.7 36.4 47.4 Legal reserve 0.40 0.54 0.67 0.71 0,81 0.9 1.1 1.3 1.7 2.2 Reserves for AID loan 0.12 0.26 0.39 0.44 0.54 0.6 0.8 1.0 1.4 1.9 Retained earnings 1.01 1.19 0.91 0.27 0.64 0.9 1.1 2.0 3.2 5.0 Equity 7.36 8.20 8.58 9.03 9.66 15.3 21.3 33.0 42.7 56.5 Total Liabilities and Equity 55.73 62,24 62.75 61.24 101.31 121.5 155.8 205.0 277.3 357.4 Contingent liabilities L/C opened with foreign banlcs 3.18 0.73 0.24 0.22 6.73 4.0 5.8 9.2 10.7 12.2 Bills endorsed 2.84 2.46 3.03 1.30 8.00 2.8 3.1 5.0 7.0 10.0 LCPDF July 1973  BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Past and Projected Profit and Loss Statements for Periods ending December 31 (in Bol$ million) Past Projected 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 INCOME Interest on loans 4.68 6.17 5.73 5.15 6.45 8.9 11.6 15.3 20.8 27.5 Commissions 0.83 0.67 0.47 0.16 0.41 0.7 1.1 1.5 1.8 2.1 Other 0.11 0.05 0.13 0.55 0.31 0.4 0.4 0.5 0.7 0.9 Total Income 5.62 6.89 6.33 5.86 7.17 10.0 13.1 17.3 23.3 30.5 EXPENSES Charges on borrowings 1.56 2.70 2.24 2.01 2.41 3.5 4.5 6.2 9.3 13.4 Salaries and other personnel expenses 1.34 1.36 1.34 1.55 1.55 2.0 2.8 3.1 3.3 3.5 Administrative expenses 0.53 0.52 0.50 0.66 0.74 0.9 1.5 1.7 1.8 1.9 Contributions 0.10 0.12 0.12 0.12 0.15 0.2 0.2 0.3 0.4 0.4 Depreciation 0.09 0.09 0.11 0.10 0.10 0.1 0.1 0.1 0.1 0.1 Provision for portfolio losses - - 0.56 0.60 0.7 1.1 1.8 2.5 3.1 Other 0.35 0.21 0.28 0.33 0.42 0.8 0.9 1.0 1.0 1.0 Total Expenses 3.97 5.00 4.59 5.33 5.97 8.2 11.1 14.2 18.4 23.4 Net income before taxes 1.65 1.89 1.74 0.53 1.20 1.8 2.0 3.1 4.9 7.1 Provision for taxes 0.41 0.47 0.44 0.14 0.32 0.5 0.5 0.8 1.2 1.8 Contribution to employee fund 0.13 0.14 0.13 0.04 0.10 0.1 0.2 0.2 0.4 0.5 Net Income after Taxes 1.11 1.28 1.17 0.35 0.78 1.2 1.3 2.1 3.3 4.8 APPROPRIATIONS Dividends 0.67 0.72 0.77 0.22 0.69 0.7 0.8 1.3 2.0 2.9 Legal reserve 0.12 0.14 0.13 0.04 0.10 0.1 0.2 0.2 0.4 0.5 Reserve for AID loan 0.12 0.14 0.13 0.05 0.10 0.1 0.2 0.2 0.4 0.5 Unappropriated surplus 0.20 0.28 0.14 0.04 0.04 0.3 0.1 0.4 0.5 0.9 1.11 1.28 1.17 0.35 0.93 l/ 1.2 1.3 2.1 3.3 4.8 1/ Adjustment made after closing of books LCPDF July 1973  ANNEX 1 Table 9 BOLIVIA - A MININM CREDIT PROJECT BANCO INDUSTRIAL S.A. Projections of Operations (in Bol$ million) 1972 1973 1974 1975 1976 1977 (Actual) Approvals Local currency loan s 12.50 13.8 15.2 16.7 18.4 20.3 Foreign currency loans 23.92 26.1 42.8 75.5 88.5 102.0 Equity investments - 0.1 1.0 1.2 1.3 1.3 Total 36.42 40.0 59.0 93.4 108.2 123.6 Commitments Local currency loansv 14.76 12.5 15.0 16.4 18.0 19.9 Foreign currency loans 24;18 25.3 40.2 69.1 85.9 99.3 Equity investments - 0.1 1.0 1.2 1.3 1.3 Total 38.94 37.9 56.2 86.7 105,2 120.5 Disbursements Local currency loans?/ 13.81 9.0 14.6 17.0 18.6 20.4 Foreign currency loansy 11.00 29.3 34.2 57.6 79.1 94.0 Equity investments - 0.1 1.0 1.2 1.3 1.3 Total 24.81 38.4 49.8 75.8 99.0 115.7 j Of which IDA - - 7.2 28.2 47.4 59.0 g/ Some of these loans carry a dollar maintenance of value clause. LCPDF July 1973  ANNEX I Table 10 BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Pro3ected Sources and Application of Funds for Periods ending December 31 (in Bol$ million) _1973 1974 1975 1976 1Z77 SOURCES let income 1.8 2.0 3.1 4.9 7.1 Depreciation 0.1 0.1 0.1 0.1 0.1 Provisions for portfolio losses 0.7 1.1 1.8 2.5 3.1 Cash generation 2.6 3.2 5.0 7.5 10.3 Current liabilities 1.5 2.8 0.3 %.9 6.o Increase other liabilities 4.2 0.2 0.2 0.2 0.2 Draw-down of -long-term borrowings 30.9 35.6 5.S 71ih4 83.2 Paid-in share capital 5.2 5.4 5.4 7.7 11.0 Loan repayment 18.2 21.8 25.7 29.9 34.0 TOTAL 62.6 69.4 92.1 t.6 144-7 APPLICATIONS Loan disbursements 38.3 48.8 74.6 96.7 109.6 Disbursements for existing investments 0.1 1.0 1.2 1.3 1.3 Taxes and contributions to employe's fund 0.6 0.7 1.0 1.6 2.3 Dividends paid 0.7 0.7 0.8 1.3 2.0 Increase, miscellaneous raceivables 0.6 1.1 1.5 1.9 2.1 Increase in fixed assets 1.1 _- - Decrease deferred ineowg 11.2 , _ Repayment of borro 03 13.5 17.9 :23. 63.4 62.6 92.6 180.7 lho.4 Cash at beginning of period 6.3 5.5 11.9 11.4 16.3 Change in cash during period (0.8) 6.4 (0.5) 4.9 4.3 Cash at end of period 5.5 11.9 11.4 16.3 20.6 LCPDF July 1973  ANNX 1 Table 11 BOLIVIA - A MINING CREDIT PROJEZT BANCO INDUSTRIAL S.A. Past and Projected Financial Ratios Past ProJected =9 )9b9 1970 1971 1972 1973 1974 1975 1976 1977 Total income as % of average total assets 11.3 11.7 10.1 9.5 8.8 9.0 9.4 9.6 9.7 9.6 Financial expenses as % of average total assets 3.1 4.6 3.6 3.2 3.0 3.1 3.2 3.4 3.8 4.2 Gross spread as % of average total assets 8.2 T.1 6.5 6.3 5.8 5.9 6.2 6.2 5.9 5.4 Administrative expenses as % of average total assets 3.8 3.2 2.9 3.6 2.8 2.6 3.1 2.6 2.1 1.7 Interest income as % of average loan portfolio 13.7 114.4 12.5 10.9 lo. 9.1 9.6 9.7 9.7 9.7 Financial expen-es as % of average total borrowings 3.9 . 5.6 4.4 4.0 3.8 4.0 4.1 4.4 4.8 5.2 Net income after taxes as % of average - share capital 20.2 21.3 18.3 4.9 10.2 11.6 8.3 8.o 10.1 11.4 equity, 17.0 16.5 14.o 4.0 8.3 9.6 7.1 7.0 8.7 9.6 Total debt/equity 4.7 4.4 4.4 3.8 6.6 5.4 5.3 4.8 5.3 5.3 Tenr debt/equity 4.1 4.1 4.1 3.7 5.3 5.o 4.9 14.4 4.9 4.9 Dividend as % of year-end capital 11.4 11.6 11.7 2.9 9.0 5.4 4.4 4.5 5.4 6.i Dividend as % of net profit (pay-out) 60.4 56.3 65.8 62.9 74.2 60.0 60.0 60.0 60.0 60.0 Cash dividend (in Bol$ million) 0.67 0.30 0.77 0.22 - 0.35 o.4 o.65 1.0 1.45 Cash dividend as % of dividend declared 100 42 100 100 0 50 50 50 50 50 Book value as % of par value 126.2 132.1 129.8 118.7 126.0 118.6 116.4 114.9 117.3 119.1 Average annual return to share- holders as , 11.5 4.8 11.6 2.9 - 2.7 2.2 2.3 2.7 3.1 1/ Excepticnally high resulting from the devaluation of the Bolivian peso in October 1972. LCPDF July 1973   An1~EX1 Table 12 BOLIVIA - A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. Summary of 3ISA's Policies _. In order to minimize risks in its financing, BISA shall adhere to the following policies: (a) BISA shall not commit to any single enterprise the equi- valent of more than 35% of its own equity in any form, including loans, equity investments and guarantees. For the purposes of this calculation, the outstanding amount of AID loan No. 511-24-920-388 (loan amount: $b3.6 million), which is considered quasi-equity, would be in- cluded in the equity. (b) BISA shall normally not assume managerial responsibilities in enterprises it assists and shall limit its share participations to 25% of the voting shares of any given enterprise. (c) The aggregate of BISA's equity investments shall not exceed the sum of its own equity. 2. BISA shall follow a prudent dividend policy that will permit it to build up suitable reserves while providing an adequate return to the shareholders. 3. BISA shall take such steps as shall be necessary to protect itself against risk of loss resulting from changes in any rate of ex- change between the currencies used in its operations. LCPDF December 14, 1973   AN-NEX 2 BOLIVIA - A MINING CREDIT PROJECT SERVICIO GEOLOGICO DE BOLIVIA (GEOBOL) TABLE OF CONTENTS A. Legal Status B. Objectives and Functions C. Organization and Staffing D. Operations E. Budget Table 1 Technical Staff Table 2 Source and Use of Funds Statement Excluding the Survey of Small Mines Table 3 Source and Use of Funds Statement Including the Survey of Small Mines Table 4 Organization Chart   ANNTEX 2 Page 1 BOLIVIA - A MINING CREDIT PROJECT SERVICTLO GEOLOGICO DE BOLIVIA (GEOBOL) A. Legal Status 1.01 Stemming from the recommendations of the Ford, Bacon and Davis report made in 1956, the International Cooperation Administration (fore- runner of USAID) assisted in the establishment in 1959 of the Division of Desarrollo de Yacimientos Minerales in the then Ministry of Mines and Petroleum Resources. By Supreme Decree No. 05590, of September 1960, this was changed to Departame.nto Nacional de Geologia (DENAGEO). Subsequently, under Supreme Decree No. 07212 of June 11, 1965, the Department was estab- lisned as a semi-autonomous body, renamed Servicio Geologico de Bolivia (GEOBOL), with its Director reporting to the Ministry of Mines and Petroleum Resources (now the Ministry of Mines and Metallurgy). 1.02 Under the Supreme Decree GEOBOL is held responsible for geological exploration, Drospecting and mapping of mineral resources in Bolivia. This covers all minerals with the exception of petroleum which is the responsi- bility of the State Petroleum Organization (YPFB) and radio-active minerals which are the responsibility of the Bolivian Nuclear Energy Commission COBOEN). B. Objectives and Functions 2.01 The objectives and functions of GEOBOL can be summarized in the seven following points: (a) contribute to the geological investigation of Bolivia and effect improvements in the knowledge, development and use of the national geological reserves, including metallic and non- metallic minerals plus hydrocarbons and water; (b) prospect and explore mineral resources; (c) inventorv mineral properties to determine their mineral potential; (d) coordinate the geological investigations with other public and nrivate entities, to avoid duplication of effort; (e) prcvide technical advice to private and public operations; (f) compile geological data, organize a national geological data bank (library), prepare geological maps, metallogenic maps, and maps indicating water resources, etc. (g) prepare and publish works on the geology of Bolivia.  ANNEX 2 Page 2 2.02 To complement its functions GEOBOL maintains permanent contact with national and foreign institutions and entities that work in the field of geological investigation, mapping and exploration. C. Organization and Staffing 3.01 GEOBOL's organization consists of three functional levels: decisions, advice, and operations. 3.02 Decision Level. GXOBOL is governed by an Administrative Council (Consejo Administrativo) which defines the general policies and is ultimately responsible for overall activities of GEOBOL. The council is made up as follows: President Director of GEOBOL Vice-President Representative of the Ministry of Mining and Metallurgy Members Representative of COMIBOL Representative of YPFB Representative of Corpacion Boliviana de Fomento (CBF) Representative of Camara Nacional de Mineria 3.03 Because of their importance to the mineral sector, the absence of representatives from the Medium Miners' Asociation, IIMM and BAMIN raises some questions as to the effectiveness of the Council. 3.04 The Chief Executive Office of GEOBOL is the Director (since 1970, Jose Guillermo Torres), who is also President of the Administrative Council. 3.05 Advisory Level. This is comprised of 3 groups: Technical Council, Economic Advisor and Legal Advisor. The Technical Council, made up of several mining and geological engineers, establishes policies, technical norms, work methods, work programs and schedules. The economic and legal advisors provide professional assistance to the overall operation of GEOBOL, as needed. 3.06 Operations Level. At this level the organization is divided into 5 departments, each headed by a director. The major responsibilities of these departments are as follows: (i) Department for Technical Coordination is responsible for coordi- ating the work within GEOBOL, determining present and future inves- tigation required, evaluating, classifying, clarifying and dis- tributing all technical and scientific information for general use and for centralized documentation. (ii) Department of Economic Geology is responsible for measuring and studying the extent and composition of mineral reserves in the  ANNTEX 2 Page 3 country. The denartment conducts exploration and is staffed by engineers in geophysics, geochemistry, drilling, and mine geology; (iii) Department of Regional Geologv is responsible for collating all geological data on a regional basis, and preparing national and regional geological maps, and tectonic and strati- graphic maps. (iv) Department of Applied Geology is responsible for investigating water resources (surface and underground); and investigating the geological characteristics of civil works sites. (v) Laboratory Department is responsible for analyzing, development and interpretation on mineral and rock samples collected by field crews, and sent in by other entities. Includes, microscopic, chemical and instrumental analyses. Service Administrative Department is responsible for ensuring efficient operation of GEOBOL, coordinating department needs, administrating purchases, warehousing, personnel and equipment allocation. Special Programs 3.07 GEOBOL has recently been assigned the responsibility for conducting 2 special programs: (i) a program for utilization of underground water re- sources in the altiplano, and investigation and prospecting of underground water in the country (a U.N.D.P. program); and (ii) a program for coordinating and evaluating the results of the Earth Resources Technology Satellite (ERTS) program, as the counterpart agency to NASA. 3.08 Two special departments have been set-up to administer these pro- grams. The department responsible for the ERTS program coordinates the program between all agencies involved, namely: CONEPLAN, COMIBOL, and the Ministries of Agriculture, of Transport and Communications, of Defense, of Energy and Hydrocarbons, and of Mining and Metallurgy. Administration of the Survey of Small Mines 3.09 The Survey of Small Mines would be administered by setting up a new department, at the same level as those established for the other two special programs. (For further details of the structure of the new depart- ment, see Annex 5.) An additional division would be established in the Department for Technical Coordination to coordinate the activities of the new department, with those of the other departments within GEOBOL and with those of other agencies cooperating with GEOBOI for the survey. The Staff 3.10 GROBOI currentlv has more than 250 employees of which some 120 are professionals. Table 1 indicates the reasonably diverse nature of the  ANNEX 2 Page 4 expertise required and available within GEOBOL. In general, the staff is reasonably well qualified although young and with little experience. In the past 2 years both the quantity and quality of their work has been satis- factory, although there is considerable room for improvement. The Director recognizes the benefits to be gained from foreign experts attached to the organization (a limited number are now employed as part of the water program) and plans to arrange for overseas training. D. Operations 4.01 Basic mapping of the country on a scale of 1:50,000 commenced in 1962, and to date slightly more than 25% of the country has been covered. However, only 60-65 map sheets have been published covering about 15% of the country. In the past when USAID was providing support to the forerunner of GEOBOL, a significant proportion of the manpower was allocated to basic mapping. This has, however, dropped off significantly and mapping activities reached a very low level in 1969-70, increasing slightly in 1972. In addition, GEOBOL has published more than 30 reports, bulletins and circulars on the geology of Bolivia plus a geological map of Bolivia (scale 1:250,000) and has under pre- paration a tectonic and mineralogic map. 4.02 Up to 1968 GEOBOL had been providing technical assistance to small miners seeking BAfIN credit and executed more than 700 technical assistance and property evaluation projects. Virtually no work of this nature is now performed. 4.03 In recent years GEOBOL's activities have more heavily concentrated on geophysical and geochemical prospection along with the compilation of 1:10,000 maps for mining exploration work, and detailed mapping on scales of 1:2,000, 1:1,000 and 1:500. Also, it has increasinglv channelled its efforts into doing exploration work on a contract basis for both the small miners and COMIBOL. This is unfortunate since the fundamental role of GEOBOL should be to accelerate the pace of basic geological mapping and regional economic geology studies instead of conducting detailed exploration work for ore deposits. This is basically a result of the budget restraints. Never- theless, it is expected that with the start of the Survey of Small Mines, a considerable part of GEOBOL's effort will be redirected more to "infra- structure" geology so that full use can be made of the data collected to update existing and prepare new maps and reports. E. Budget 5.01 GEOBOL's operations are financed by 3 major sources: Government appropriations, foreign assistance, and revenue from contract exploration work. GEOBOL's budget over the period 1965-68 averaged US$285,000 annually. Since 1967, with the phasing out of AID assistance GEOBOL has become entirely dependent on Government funds and its own revenues from technical assistance,  ANTEX 2 Page 5 contract exploration, assays, sale of maps and publications. In 1972 the self-generated income of over $b 1 million was matched by the Government contribution of $b 2.8 million. 5.02 A summary source and use of funds statement is presented as Table 2 for the years 1969 to 1975. This indicates a major increase in peso expendi- tures for 1973 onwards but it represents only a small increase in dollar terms, taking into account the November 1972 devaluation. Most of the increased expenditure can be attributed to the construction of a new building to house GEOBOL which is now under construction. Other important increases are noted in the cost of personnel services and overhead, implying both an increase in staff and an increase in salaries. To meet these increased costs GEOBOL has projected moderate increases in Government allocation and a major increase (250Z) from contract work earnings. The latter appears optimistic and GEOBOL may have to reduce the planned program of future activities. 5.03 Table 3 presents the source and use of funds statement for GEOBOL including the Survey of Small Mines.   ANNEX 2 Table 1 BOLIVIA - A MINING CREDIT PROJECT TECHNICAL STAFF Y Department Specialty 1 2 3 4 5 6 7 Total Geologist Specializing in Economic Geology 1 1 2 Geochemistry 1 1 Geophysics 2 1 1 1 5 Geomorphology 2 2 Petrology 1 1 Volcanics 1 1 Mine Geology 9 9 Paleontology 3 12/ 4 Stratigraphy 5 5 Tectonics 2 2 Field Geology 4 8 7 6 25 Photo geology 3 3 Hydrogeology 4 7Z/ 2 13 Sedimentology 1 1 Petrography 5 5 Minerography 1 1 Agronomics 2 2 Mine and Metallurgical Engineer 3 1 1 2 7 Chemists 4 1_/ 5 HydrometerologLst 1 1 Civil Engineer 1 1 Forestry Engineer 1 1 Not Specified 5 5 Total 6 23 21 5 14 19 17 105 1. Department for. Technical Coordination 2. Department of Economic Geology 3. Department of Regional Geology 4. Department of Applied Geology 5. Laboratory Department 6. Department for Investigation of Water Resources 7. Department for ERTS Program Does not include secretarial, clerical and semi-skilled or unskilled personnel. This includes foreign experts provided under the auspices of the iN program. LCPDF July 1973  BOLIVIA - A MINING CREDIT PROJECT GEOBOL: SOURCE AND USE OF FUNDS STATEMENT (1969-75) (Current Wbrk Program) Actual ProJected 169 II 1970 1/ 1971 1/ 1972 1/ 1973 17 1974 I/ 1975 1/ $b IOO"S$OOO7$b '0 TUS$0007$b' OMUS$OOO7$bI '7US$ $b' If6S$n0O b 12 f$Ob o0-007b's$ooo ) Source of Funds Government Appropriations 2s,648 (223) 2,569 (216) 2,583 (217) 2,767 (233) 3,044 (152) 4,070 (204) 5,078 (254) Self -Generated Funds 612 5L) 1 967 (165) 1907 (160) 1,692 (142) 5,943 (297) 5 006 (250) 4,260 (213) Total 3 mI) 1t (:31Y E (l5 ()77) (99338 (67) Use of Funds Personnel Services 2,650 (223) 3,160 (265) 3,119 (262) 3,382 (285) 4,329 (216) 4*389 (219) 4,295 (215) Overhead 462 ( 39) 1,014 ( 85) 738 ( 62) 818 ( 69) 1,415 ( 71) 1,609 ( 80) 1,844 Materials and Supplies 120 ( 10) 291 ( 24) 372 ( 31) 349 ( 29) 833 ( 42) 905 ( 48) 1,338 ( 67) Fixed Assets and Financing Charges 15 (1 40 ( 3) 86 ( 75 6 2 410 (120) 2 128 (106) 1 861 () Total -7 ( 213) 5 3=3J ( 5 95) h)9>)3T (457) Allocation of Funds 2/ Economic Geology 3,087 (154) 3,150 (158) 3,342 (167) Regional Geology 2,531 (217) 2,460 (123) 2,589 (129) Applied Geology n.a. n,a. n.a. n.a. 1,201 ( 60) 1,050 ( 53) 1,234 ( 62) Laboratory 1,806 ( 90) 1,825 ( 91) 1,852 ( 93) ERTS Project 294 ( 15) 240 ( 12) 304 ( 15) Survey of Small Mines 68 ( 13) 350 ( 17) 17 ( 1) Total .7 (44) ,0O76 (13) 7 (; 7) 1/ Using the current exchange rates: i.e. 1US$ - 11.88 $b prior to November 1972, and - 20.0 $b thereon. 7/ These projections include as a cost only those parts of the special program: ERTS; U.N. Water Survey and Survey of Small Mines; that are financed directly by GEOBOL. Source: GEOBOL. LCPDF July 1973  ANNEX 2 Table 3 BOLIVIA - A MINING CREDIT PROJECT GEOBOL: SOURCE AND USE OF FUNDS STATEMENT INCLUDING SURVEY OF SMALL MINES 1973 1974 1975 $bOOO (GSi&OOO) $bOOO (us$000) $bOOO (USsoo0) Use of Funds For current work program 8,919 (446) 8,726 (436) 9,321 (466) For Survey of Snall Mines 278 (14) 19,360 (968) 2,782 (139) Total 9,197 (460) 28,086 (1404) 12,103 (605) Source of Funds Government Appropriations - For Current Work Program 3,044 (152) 4,070 (204) 5,078 (254) - For Survey 210 (10) 3,429 (171) 1,344 (67) Sub-total 3,254 (162) 7,499 (375) 6,422 (321) GEOBOL 5,943 (297) 5,O06 (250) 41,260 (213) IDA Credit - 15,580 (779) 1,420 (71) TOTAL 9,197 (460) 28,086 (12404) 12,103 (605) Source: GEOBOL., Annex 6, Mission Estimates. LCPDF July 1973  BOLIVIA - A MINING CREDIT PROJECT GEOBOL: ORGANIZATION CHART Adninistrative Coancil Level of Decision Director _____ L~~~~~~~~~~~e g al Advi~so Level of Technical Advice Council { 1 ~~~~~~~~~tEc~j o:no:m:icAdv~isod Level of DeparDepa n Department Technical for of of Laboratory Operations Technical Economic Regional Coordinatiorn Geology Geology Level of Special r ERTS U.N. Water Survey of Programs Program Small Mines Level Department of of Administrative Support Services LCPDF July 1973  BOLIVTA - A MINING CREDIT PROJECT Mineral Wcport Tonnages and Values, 1959-72 (Actual) and 1973 (Projected) Tin Silver Tungsten Copper Antimony Lead Zinc Bismuth (tons) (tons) (thousand metric tons of metal content unless otherwise specified) 1959 24.2 140 1.4 2.2 5.5 22.0 3.4 221 1960 19.7 152 1.3 2.3 5.3 21.4 4.o 183 1961 20.7 121 1.7 2.1 6.7 20.3 5.3 211 1962 21.8 117 1.5 2.4 6.6 18.6 3.6 296 1963 23.1 151 1.4 3.0 7.6 20.1 4.6 280 1964 24.4 150 1.2 4.7 9.6 17.7 9.8 274 1965 24.2 128 1.1 4.7 8.8 17.5 13.7 297 1966 26.2 159 1.6 5.7 10.7 21.3 16.7 373 1967 27.4 140 1.9 6.3 11.5 20.3 16.7 531 1968 29.4 161 2.3 6.9 11.1 22.3 11.8 575 1969 29.9 107 2.3 8.0 13.1 25.2 26.6 669 1970 27.8 186 2.4 8.9 11.6 25.8 46.5 623 1971 30.3 179 2.6 7.8 11.7 23.3 45.4 677 1972 30.L 146 2.7 8.4 13.1 18.8 39,7 480 1973 (ProJ.) 31.2 150 2.9 8.9 13.6 20.3 43.7 (million U.S. dollars) Tin Silver Tungsten Copper Antimony Lead Zinc Bismuth Total!/ 1959 52.8 4.1 1.3 1.4 1.5 4.9 0.9 o.6 68.7 1960 42.8 4.5 1.5 1.5 1.4 4.8 1,2 0.5 60.0 1961 50-3 3.6 2.3 1.3 2.2 4.1 1.3 o.6 68.4 1962 54.0 3.9 1.7 1.5 2.4 3.5 0.9 0.9 71.2 1963 57.3 5.9 1.2 1.8 2.5 4.2 1.2 0.8 79.3 1964 80.- 6.2 1.4 3.2 5.5 4.9 3.1 0.9 110.6 1965 93-0 5.3 2.2 3.5 5.9 5.7 4.2 1.4 124.7 1966 93.3 6.6 5.1 6.2 5.3 6.4 5.0 1.4 133.4 1967 90.q 6.7 8.0 6.4 6.4 4.9 4.4 1.8 132.8 1968 92.5 11.2 9.7 7.7 6.o 5.1 3.0 2.0 141.1 1969 102.5 10.8 11.1 10.9 11.0 6.8 7.8 2.8 167.2 1970 102.3 10.5 17.6 12.5 31.0 7.8 14.3 8.0 205.1 1971 105.9 8.3 13.6 8.3 9.0 5.9 15.3 5.8 173.3 1972 112.6 7.5 10.3 8.8 9.1 5.7 15.4 n.a. 173.1 1973 (Proj.) 124.5 8.7 12.4 9.8 9.9 6.5 18.3 - 196.1 L/ Includes gold and other minerals source: Derived from data provided by Ministry of Mining and Metallurgy, La laz   ANNEX 4 BOLIVIA - A MINING CREDIT PROJECT MEDIUM SIZE MINERS AND THEIR PROJECTS TABLE OF CONTENTS A. Potential Credit Beneficiaries B. Operations and Financial Results Production and Exports Technology Employment and Working conditions Management and Staffing Financial Position C. Demand for Funds D. Subprojects Projects Pipeline Types of Projects Equipment Cost Estimates Execution E. Effects of the Proposed Credit Production and Exports Employment Ecology Expected Financial and Economic Returns Foreign Exchange Benefits Table. Exports by the members of the Medium Miners Association in 1972.   ANNEX 4 Page 1 BOLIVIA - A MINING CREDIT PROJECT MEDIUM SIZE MINERS AND THEIR PROJECTS A. Potential Credit Beneficiaries 1.01 The credit program has been designed to serve a group of about 40 medium-size mining companies (hereinafter called the subborrowers) which are capable of preparing and executing subprojects without any substantial tech- nical assistance. The group includes the 20 members of the Association of Medium Miners and some 20 miners from the small mining subsector. Of this group, it is expected that about 20 companies would present bankable projects to, and obtain financing from, BISA under the proposed IDA credit. B. Operations and Financial Results 2.01 Production and Exports. Lack of complete data makes a full analysis of the subborrowers difficult, particularly of those who are not members of the Medium Miners Association. On the basis of the existing data, the group of private companies potentially eligible under the credit program account for more than 35% of the value of production of the Bolivian mineral sector but only 25% of the export value. As indicated below they play a major role in the production of antimony, copper, lead, tin and tungsten, but an almost negligible role in the production of bismuth, silver and zinc. Antimony 80-85% Bismuth 2-3 % Copper 45-50% Lead 25-30% Silver 7-10% Tin 22-25% Tungsten 55-60% Zinc 2-3 % 2.02 Medium-size miners have been by far the most dynamic group in the mineral sector, accounting in 1960's for the total increase in the produc- tion of antimony and zinc (the largest zinc mine has since been nationalized), and the major part of the increases in copper, tin and tungsten. The growth tapered off between 1968 and 1972 in the face of increased political uncer- tainties, but is recovering. 2.03 The companies' share in the mineral exports vary considerably. Ten companies have annual sales in excess of US$1 million, including one company whose sales exceed USSIO million. About 5 companies sell annually between US$1/2 and 1 million and 5 others have sales between US$100,000 - 200,000. The annual sales of some 20 remaining medium-size mining enterprises are less than US$100,000 per year. The total export sales of 20 associated mining enterprises are shown on Table 1 of this Annex.  ANNEX 4 Page 2 2.04 Technology. Most of the mines exploit small to medium-size under- ground lode and vein type deposits which need rather small scale operations and in many cases preclude the use of modern mechanized underground methods. Given the nature of the ore bodies, Bolivia's land-locked location, and the high infrastructure burden placed on the companies (each is obliged to build roads, social facilities, and, in addition, subsidize food and other goods for workers), the operations are high cost compared to competitors in other countries. This requires continuing innovation on the part of the miners, if they are to remain competitive. Nevertheless, it is this group that has largely brought to, or developed in, Bolivia advanced mining and mineral pro- cessing technology. For instance, during the 1960's, the group installed four dredges for working placer deposits, a tin flotation process, and started a major modern underground mine. Its production efficiency has shown consis- tent and in some cases marked improvement. 2.05 While further improvements are still necessary in the mining tech- nology, it is in processing where the major future progress is required. The Bolivian ores are typically complex which complicates processing, and requires a very close process control. The latter field is not yet well developed by the miners, although significant steps have been taken in this direction, as is evident from the increased recovery ratios and the installation of facili- ties to recover the mineral content of existing tailings dumps. 2.06 Employment and Working Conditions. The companies jointly employ between 8 to 10 thousand people, ranging from about 1,100 employees in the largest company to 20 to 30 in the smaller ones; at least 10 companies employ more than 300 people. Skill levels of the labor force vary significantly. Some of the larger and/or more efficient mines have, with concerted train:Lng efforts, developed a rather efficient work force, experienced in the use of modern mining methods and equipment; others have not been so successful. There is a pressing need to upgrade the skill levels of the employees, in order to increase their productivity, hence real wages and the standard of living. Most mining areas are characterized by high levels of unemployment and there is an abundant supply of general labor for the mines. 2.07 Throughout the Bolivian mining sector safety practices, social hygiene, health services and sanitation and housing conditions have been neg- lected. Although this is somewhat less apparent in the operations of the medium-size mines, improvements are necessary. This requires, however, direc- tion and control by the Government. Mining companies can improve the situa- tion by adopting the use of protective clothing, disciplining bad work prac- tices and, most importantly, providing training for safe work procedures. 2.08 Management and Staffing. Many of Bolivia's better managers as well as geological, mining and metallurgical engineers are working for medium-size mining companies. There is, however, a shortage of senior engineers with administrative experience. As a result, engineering designs and production planning are not given the emphasis they deserve and in some cases are entirely neglected.  ANNEX 4 Page 3 2.09 Except for a few companies, accounting and financial planning re- quires improvement. Good accountants and financial managers are scarce and corporate planning is often overlooked. It is important, however, to recog- nize that the political uncertainties prevailing within Bolivia often lead management to concentrate on short-term objectives rather than long-term. The members of the Medium Miners' Association are required by law to keep proper accounts and do, overall, have adequate records. On the other hand, companies not members of the Association are not required to, and in many cases do not, keep proper accounts. Potential sub-borrowers are expected to have accounts of adequate quality, and if not, would be required to upgrade their accounting system. 2.10 The larger companies have qualified personnel capable of administer- ing substantial investment programs. Others have gaps in the staffing; some lack good administrators, engineers or financial staff. In all cases, the subloans would be used as leverage for strengthening professional staff and, if necessary, should be denied pending recruitment of qualified personnel. There is also a shortage of suitably qualified consultants--technical and financial--who could help some of the miners, but the practice of the more sophisticated companies of contracting out services to other companies can help fill the gap. 2.11 Financial Position. The medium-size miners are generally finan- cially sound and creditworthy. The largest company has fixed assets of more than US$10 million equivalent with 1 or 2 others approaching this level; 2-3 others have assets valued at more than USS1 million but the remainder have assets less than US$1 million but more than US$100,000. Most of the companies have a low debt burden; many have no debt, the vast majority have a debt/equity ratio of less than 1:1, leaving only a few with a higher ratio. This is partly a reflection of the shortage of term funds and of the slowdown in investment over the last 3 years. As a result of poor planning, one or two of the companies have liquidity difficulties. Overall, these companies could contract sizeable borrowings, still remaining within prudent debt/equity relationships, and generate sufficient cash flows to service the subloans. 2.12 The level of profitability varies greatly among the companies and between time periods, ranging from an after tax return on sales of more than 25% in some cases to occassional losses in others. Although being the most efficient group of the Bolivian mining sector, the medium-size miners are still high-cost producers relative to their foreign comDetitors. Their finan- cial viability is therefore, highly susceptible to price fluctuations on the world mineral market. 2.13 Profitabilitv. Profitability varies significantly between the com- panies, ranging from an after tax return on sales of more than 25% in a few cases to occasional losses in others. With taxes based upon export value, not profit, it was noted in several cases that taxes were higher than profits. Overall, the companies would generate sufficient cash flows to service the proposed subloans. Nevertheless, even though being the most efficient sub- sector of the Bolivian mining industry, the companies are high cost producers relative to their foreign competitors.  ANNEX 4 Page 4 C. Demand for Funds 3.01 The investment demand of the subborrowers cannot be exactly deter- mined. Tentative estimates indicate that some 35-50 projects, varying in size from US$2 million to USS30-40,000 are either being executed or are in pre- liminary or engineering stages. The total value of their investment needs would be between US$15 million and US$20 million from mid-1973 to early 1976. While the projects which are in the execution stage would not qualify for the proposed IDA credit, it is reasonably certain that some other projects will be prepared, as soon as it becomes evident that the credit is available. 3.02 The estimated total of US$15-20 million is broken down below. It shows that subprojects valued between US$7-9 million would need BISA's financing. US$ Million Total investment through 1975 15-20 Less: (a) Projects already financed BAMIN 1 - 1-1/2 CBF 1 - 1-1/2 PiDeline 1 - 1-1/2 3 - 4-172- (b) To be financed by other sources 1-1/2 - 2 (c) Projects dropped or slipped due to indicated non- viability and/or the applicant's inability (technical and financial) to proceed with project 1-1/2 - 2 Projects expected to be submitted to BISA 9 - 11-1/2 Of which expected to be approved by BISA (75% of applications) 7 - 9 3.03 It is expected that the foreign exchange component would make up 65% of the project's total cost; thus the demand for foreign funds through BISA should be between US$4-1/2 million and US$6 million from 1974 to early 1976. Accordingly, the allocation of US$5 million from the proposed IDA credit is reasonable.  ANNEX 4 Page 5 D. Subprojects 4.01 Project Pipeline. It is expected that about 25 projects would be financed under the IDA credit with an average total project cost of US$300,000. The distribution of project size is expected to follow the pai:tern presented below: No. of Projects Size of Projects Total. Investment 6-7 Us$500,000 plus US$3.5 - 4 million 8-10 US$200-500 thousand US$2.5 - 3.5 million 8-10 USS50-200 thousand USSi - 1.5 million 22-27 US$7 - 9 million 4.02 Tynes of projects. The subprojects would vary considerably in type and character. Underground development, modernization and equipping of work places, and haulage systems would be included as a part or the whole of about three-fourths of all the subprojects. Many of these projects would also in- clude components for modernization and expansion and even construction of new beneficiation -lants. Some projects would include electrification of the mine and camp area, primarily by the installation of diesel generating units, erec- tion of housing and other social facilities as well as development of surface mining and/or relocation of dredging facilities. A profile of the expected content of subprojects is presented below. Percentage of subprojects Component with the indicated component UJnderground Mine Development and Modernization 60 - 70 Surface Mine Development (placer) 12 - 20 Beneficiation Plant--Modernization and Expansion 30 - 40 Benefication Plant--New Plant 30 - 40 Installation of Camp Infrastructure 12 - 20 Electrification of Mine and Plant 12 - 20 4.03 Equipment. The major single emphasis of the subprojects, apart from expansion, is the equipping and modernization of operations, both in tfhe mine and plant. In the mine this equipment will include jackleg drilling machines, slushing equipment, possibly some load-haul-dumn equinment and drilling jumbos, etc. The plant equipment would include crushing and grinding equipment, screens, conveyors, gravity separation equipment, flotation cells, pumps piDing, filtering and drying enuThment, etc. In acdition, surface materials handling machinery, diesel generators, building supplies, workshop facilities, etc., would be required. Most of this equipment represents items with values less than US$ 50,000. Some of the equipment items would have values in excess of US$100,000 and in several cases equipment packages can be Dut together for values above US$100,000. All equipment would have to be procured abroad, and due to the geographic location of Bolivia, it will be necessary to procure, as part of the original purchase, a full complement of spare parts.  ANNEX 4 Page 6 4.04 Cost Estimates. An estimated cost breakdown of the mining credit project is presented below: US$ Million % of Item Local Foreign Total Total Mine Development 1.2-1.5 0.2-0.3 1.4-1.8 20% Machinery, Equipment and Material - 4.2-5.4 4.2-5.4 60% Civil Works 1.0-1.1 0.1-0.3 1.1-1.4 15% Engineering and Supervision .3- .4 - .3- .4 5% Total 2.5-3.0 4.5-6.0 7.0-9.0 100% (percentages) (35) (65) (100) 4.05 The above estimate is necessarily tentative and would vary with the mix of projects financed through BISA. Investment in expansion of the benefi- ciating plants or in new plants has a much higher equipment component than mine development; however, a substantial part of the allocation for equipment is for mining equipment for modernization of underground operations. Civil works and mine development would mostly be done by local contractors. 4.06 Execution. In most cases the subborrowers are suitably qualified to engineer, schedule and supervise the subprojects. A few would, however, have to obtain the services of consultants in the preparation or execution of their projects. Also, while all mine development can be carried out by the company's employees, some assistance from local contractors may be needed for plant con- struction and erection. These aspects would require a thorough review of BISA during its appraisal of each project. E. Effects of the Proposed Credit 5.01 Production and exports. Of the projected 25 subprojects more than half are expected to be tin projects; antimony, lead and tungsten together will make up most of the remainder. The expected incremental production of the subprojects financed by the credit is indicated below.  ANNEX 4 Page 7 Production Increases- (1973-76) Increase by BISA financed Increase as % of Total Mineral subprojects Bolivian Output In metric tons % increase Antimony 1,500-2,000 10-15 10-15 Copper 0- 200 0- 6 0- 2 Lead 100- 200 2- 4 1/2- 1 Tin 1,800-2,200 15-20 6- 7 Tungsten 200- 300 15-20 7-10 Zinc 200- 300 4- 5 1/2-3/4 /1 In terms of metal content. In addition, negligible increases in bismuth, gold and silver output may be realized. Although no gold projects have been identified it is possible that, given -;he current high prices, several gold projects may be formulated and presented to BISA. The above estimates, although very tentative, indi- cate the mining credit should have a malor impact upon the exports of three minerals: antimony, tin and tungsten. 5.02 Employment. The subprojects would generate 200 to 300 additional jobs. This is a rather modest number, but the major objective of this min- ing credit is modernization and efficiency of production. It would also contribute to the improvement of safety and health conditions in the private mines. An important side benefit of the subprojects would be the need to train and upgrade the skills of the workers to cope with the new methods and equipment. 5.03 Ecology. Our knowledge of individual subprojects is not adequate to ascertain any specific ecological problem which may arise. However, since most operations are located on the altiplano which is almost devoid of vegeta- tion, and since the subprojects are predominantly related to an underground mining and simple gravity and flotation processing, the disposal of the tail- ings would be the only problem. In some cases, the tailings are being reused underground as sand-fill, in others, they are dumped on the surface or into streams. The tailings are generally devoid of chemicals; hence, dumping into streams (a practice rather than exception to the rule) merely results in the silting up of the river basin. The major disadvantage is the loss of the op- portunity of possible recovery of the mineral content retained in the tail- ings, but no ecological problem is created. 5.04 Expected financial and economic returns. Because of the nature, variety and different stages of preparation of the subprojects, it is difficult to estimate the impact of the credit program on the Bolivian economy. The most profitable subprojects would be those entailing expansion of existing facili- ties, which would allow economics of scale by a more efficient use of overhead and infrastructure. On the other hand, subprojects designed to extract and re-  ANNEX 4 Page 8 cover lower grade ore, previously left in the mine, would result in only slight increases in production with possibly higher extraction costs. The financial internal rate of return of the former subprojects would range from 15% and (in exceptional cases) to 40%, while the latter subprojects would be in the order of 10-15%. The adjustments that would have to be made to convert the financial data into economic terms would basically consist of taxes and wages since the subborrowers earn all income and incur most of the costs in foreign exchange. Because of the relatively high tax burden on the mining sector and the considerable unemployment in the altiplano, the economic rate of return would be significantly higher than the above indicated financial rates of return. 5.05 Foreign exchange benefits. Since all production would be exported, the effects on the balance of payments would be significant; gross export earnings would increase by about US$9 million a year at full production or, deducting the foreign exchange inputs required by the subprojects (about US$2 million), resulting in net export earnings of about US$7 million a year.  BOLIVIA - A MINING CREDIT PROJECT EWPORTS BY THE MEMBES OF THE MEDIUM MNERS ASSOCIATION IN 1972 Company Antimony Copper Lead Silver Tin Tungsten Zinc - ------(in metric tons of contained metal)_-__---__ International Mining 922 1,277 Hormet 1,495 Emusa 5453 31 Comsur 95 28 B27 2 Nitto Mining 3,423 Estaisa 665 Fabulosa 269 Pucro 437 Ato roma 350 Cerro Grande 304 Pabon 16 196 Totoral 177 Berenguela 171 Pedro San Juan 23 Churguini 671 San Jose de Berque 324 0.1 70 Santa Isabel 26 Bernal Huas 94 Casado 205 0.2 Total 7,057 3,439 580 0.3 5,844 1,373 2,540 Source: Ministry of aining and Metallurgy I- M (D > LCPOF July 1 973   ANNEX 5 BOLIVIA - A MINING CREDIT PROJECT THE NATIONAL SURVEY OF SMALL MINES TABLE OF CONTENTS A. Project Concept B. Background and Justification C. Objectives of the Project Long-Term Objectives Short-Term Objectives D. Plan of Work E. Administration and Staff Institutional Set-up Administrative Procedures Staffing F. Project Costs G. Procurement H. Financing   XNNEX 5 Page 1 BOLIVIA - A MINING CREDIT PROJECT THE NATIONAL SURVEY OF SMALL MINES A. Project Concept 1.01 The project aims at improving the knowledge of Bolivia's mining sector and resource base with special reference to the "Small Mining Sector". It will include collecting and collating all the data on the small mining operations that is available in the various puiblic and private agencies, supplementing this by field inspections with the objectives of identifying those mines with the best potential for expansion and those mineral deposits with good potential and warranting further exploration. An integral part of the project is the provision of technical and direct exploration assistance to selected small miners. B. Background and Justification 2.01 The small mining sector is made up of some 3,000 mines, and at any given time, except in periods of extremely depressed mineral prices, more than 1,000 of these will be in operation. These operating units range from 1 man or 1 family mines to companies which compare in size and output to the smaller medium sector companies. The small mines are generally operated on a primitive basis characterized by poor health and inadequate safety standards, little exploration, little working capital, antiquated technology, lack of equipment and low productivity. Although many of the mineral deposits could support medium or large scale extraction, they are mined on a small scale only because the high grade of ore makes such operation relatively economic. This leads, however, to the tendency to "high grade" orebodies. There is little doubt that some deposits could make a significant contribution to the development of Bolivia, but the average small miner has neither the capital nor the technical comDetence to explore and properly exploit his ore reserves. This has in the past placed a severe constraint on the development of the sector. 2.02 Considerable technical and financial assistance will be indispen- sable if Bolivia is not only to improve the exploration effort and the effi- ciency of exploiting reserves but also to raise the living conditions of the small miner. The mining enterprises do not have the necessary funds to make significant changes; consequently Government cooperation is essential. To this end, the project is directed toward obtaining consistent information and providing a solid foundation that will make the small mining sector eligible for support from national and foreign credit agencies. C. Objectives of the Project Long-Term Objectives 3.01 The objective is to produce the information required to raise the relative importance of the small mining sector by introducing considerations  ANNEX 5 Page 2 of efficiency into its operations, diversifying production and increasing the output and income of the subsector. The project will be a start to coordina- tion of preinvestment activities and the programming of exploration work. 3.02 The project will be a very important forerunner for: (a) the provision of credit to the small miners; (b) establishing an exploration fund; and (c) locating regional concentrators. S_ort-Term Objectives 3.03 The more immediate objectives of the project are: (a) to compile all possible information on geoloRical and technical operations relating to the Bolivian mining industry, with special emphasis on the small mining sector: (b) to analyze that information systematically, summarize it and determine gaps in knowledge on mining enterprises and specific areas and identify mines offering high potential for expansion; (c) to assign priorities on the basis of (b) above for the provision of technical and exploration assistance to the small mining sector; (d) provide such technical and exploration assistance to selected small mines, in order to improve the efficiency of their operations, identify and prepare new and expan- sion projects, prepare feasibility studies of these projects, and generally upgrade these operations to make them creditworthy and acceptable for Bank financing; (e) to train miners and operators in modern exploration and exploitation techniques, through practical demonstrations and seminars; these tasks will not involve expenditures under the project since the miners will participate at their own expense; (f) to prepare a plan for continued technical assistance to other small mines with expansion potential; (g) to identifv areas of superior mineral potential, establish exploration requirements and prepare a detailed plan for exploration; this will importantly assist in establishing priorities for work to be conducted under the Exploration Fund;  ANNEX 5 Page 3 (h) to contribute to national geological research and to improve knowledge of the location, development and exploita- tion of mineral resources in Bolivia: this should help identify the metallogenic provinces of Bolivia; and (i) strengthen GrOBOL with experts to conduct the program and improve its capacity for ore body evaluation and exploration assistance; the necessary equipment will be provided. D. Plan of Work 4.01 The Government has commissioned Servicio Geologico de Bolivia (GEOBOL) to execute this project and to coordinate with other agencies such as BAMIN (Banco Minero-Mining Bank), COIIBOL (Corporacion Minera de Bolivia- Bolivian Mining Corporation), 1MM (Instituto de Investigaciones Minero- Metalurgical-Institute for Mining and Metallurgical Research), COBOEN (Comison Boliviana de Energia Nuclear-Bolivian Nuclear Energy Commission), Camara NFacional y Departamental de Mineria (National and Departmental Chamber of Mines), Asociacion de Mineros Medianos (Association of Medium Miners), etc. The plan of woi:k will be as set forth below: Descri2tion of Phases Period Scheduled I. Planning and Organization of the Survey February - June 1973 II. Compilation of Data July - September 1973 III. Tabulation of Data October - December 1973 IV. Analysis and Evaluation of Data November 1973 - March 1974 V. Recruitment of Experts and Preparation and Issuing of Purchase Documents for Equipment September 1973 - May 1974 VI. Arrival of Economic Geologist and Expert in Organization and Mining Administration February - April 1974 VII. Arrival of Equipment and Machinery February - June 1974 VIII. Planning the Field Work for the Selected Mines and Programs February - April 1974 IX. Arrival of Expert in Geophysics March - May 1974  ANNEX 5 Page 4 Description of Phases Period Scheduled X. Geological and Technical Examination of Selected Mines. Identification of Expansion Projects, Preparation of Development Plans for the Selected Mines, Exploration of the Selected Mines, including Diamond Drilling, Drift Sampling and Geophysics. Preparation of Geological Maps and Ore Reserve Calculations April - December 1974 XI. Arrival of Diamond Drilling Expert May - July 1974 XII. Preparation of Preliminary Technical July 1974 - Reports for Each Mine Selected January 1975 XIII. Preparation of Pre-feasibility Studies for the Individual Projects January - May 1975 XIV. Final Report: Conclusions and Recommendations March - May 1975. 4.02 As indicated above, and supported in Chart I the program involves first collecting and collating all data available on the sector and from this identifying those small mines with the best potential for development and those areas with the best geological potential. Teams consisting of mining engineers and geologists will then be made available to the selected mines to assist in upgrading work practices, identifying expansion projects and deter- mining the exploration requirements of each mine. This will be backed up as needed by surface and underground drilling and sampling in order to prove up sufficient ore reserves to make the miner creditworthy. The team will assist the miner prepare a feasibility study of his expansion project, which may then be used for obtaining finance. An expert will also be available to help the miners improve managerial procedures and establish a reporting and account- ing system. A final report will be prepared summarizing the work done by the survey and listing the projects that have been prepared. The report will also make specific recommendations for future exploration considered of high prior- ity in areas with high mineral potential. E. Administration and Staffing Institutional Set-Up 5.01 The funds, both foreign and domestic, will be channelled through the Central Bank which will keep accounts for the project.  ANNEX 5 Page 5 5.02 GEOBOL will have primary responsibility for carrying out the survey and will for this purpose establish a new department. (See Annex 2 for details on GEOBOL's organization.) The internal structure of the new depart- ment (see Chart II) is designed to reflect an integrated action; a very necessary part of the survey. The department will be divided into 3 opera- tional divisions: Exploration, Geophysics and Drilling. 5.03 The Exploration Division will be responsible for: (a) investigating and delimiting already known deposits; (b) evaluating the deposits being worked; (c) evaluating work methods being used by the miners and recommending improvements; (d) identifying expansion pro4ects and assisting the miners to plan and prepare such projects; (e) determining exploration work required, including geophysical and drilling. The division will be made up of 8 teams; with a gradual build up reaching the full complement at the beginning of Step VIII. Each team will be made up of a mining engineer, a geologist, a medium-level technician and unskilled workers. This division will be resnonsible for underground drift sampling, trenching and pitting on the surface, and preparation of the geological maps for each of the selected mines. 5.04 The Geophysics Division will supplement the exploration work where the results are promising. It will use geophysical methods to continue the extension, delimitation and specification of deposits. It will be made up of 3 teams, each team consisting of a geophysicist, a medium-level technician and unskilled workers. 5.05 The Drilling Division will obtain the quantification data needed for the evaluation and exploitation of specific deposits. This will include surface and underground drilling as defined by the Exploration Division. It will be made up of 6 teams; each comprising a medium-level technician and unskilled workers. 5.06 In addition, a Central Projects Division will be established as part of the Department of Technical Coordination, charged with preventing duplication of effort and cooperating in the work programming both in the Small Mine Survey and with the other departments of GEOBOL. Administrative Procedures 5.07 The department will be headed by a Director, selected from the existing GEOBOL staff. The foreign advisors will report to the Director but  ANNEX 5 Page 6 also maintain a very close liaison with the respective divisions. The suc- cess of the project will to a large extent be dependent upon the qualifica- tions of the Director and the advisors and also importantly to the cooperation and coordination between the advisors and their respective divisions and coordination between the divisions. 5.08 The early work in collecting and evaluating data and planning the field work will be the responsibility of the Director, Advisors and engineers from the Exploration Division. This work will be documented in a plan of work which will be used as a basis for control of the field work; modified from time to time as considered necessary. In addition to the reports mentioned under the work plan, it is recommended that for control purposes, brief monthly reports be submitted by each team outlining work done, changes made to work program and presenting major findings and recommendations for the month. 5.09 To ensure coordination between GROBOL and the other agencies con- tributing to the program, coordination committees will be established where necessary, under the aegis of the Ministry of Mines and Metallurgy. Clear rules for coordination are being established and will be included as one of the basic instruments for execution of the program. Staffing 5.10 The total staffing requirement for the project is summarized below: Number of Personnel Required at End of Each Quarter 1973 1974 1975 lst 2nd 3rd 4th 1st 2nd 3rd 4th 1st Position Qtr. Qtr. Qtr. Qtr; t Qtr. Qtr. Qtr. Qtr: Director - - 1 1 1 1 1 1 1 Foreign Advisors - - - - 3 4 4 4 3 Administrator - - - - 1 1 1 1 1 Mining Engineers 3 3 3 6 8 8 8 8 8 Geologists - - - - 8 8 8 8 8 Geophysicists - - - - 3 3 3 3 3 Mid-level Technicians - - 3 3 3 8 8 8 8 Draftsmen and Topographers- - - 2 3 7 7 7 7 Secretary 1 1 1 2 2 4 4 4 4 Chief of Maintenance - - - - 1 1 1 1 1 Diamond Drillers - - - - - 6 6 6 - Chauffeurs - - - - 20 20 20 20 20 Others - - - - 2 50 50 50 2 Total 4 4 8 14 55 121 121 121 66 5.11 It is thus necessary to have a rapid buildup of staff in early 1974. No problems are expected in recruiting the chauffeurs, miscellaneous laborers, and drillers. The secretaries, mid-level technicians, draftsmen  ANNEX 5 Page 7 and topographers will be primarily drawn from within GEOBOL as will the min- ing engineers, geologists and geophysicists, although some external recruit- ing will be required to fill all the positions. The Departmental Director will be appointed from within GEOBOL. Future Work of Department 5.12 The program as presented above indicates that the project will be completed by early 1975. This does not, however, imply closing the new department, but it is fully expected that the program will be continued after the final report is completed. An integral part of the project as now defined and which may be referred to as Phase I of the department's operations, will be to prepare a program for continued operations (or Phase II). Assist- ance for this second phase is being sought from such bilateral and multi- lateral agencies as: Canadian International Development Agency, Bureau de Recherche Geologique et Miniere, Overseas Development Administration, U.S. Bureau of Mines, Inter-American Development Bank, Andean Development Corporation, etc.  ANNEX 5 Page 8 F. Project Costs 6.01 The project cost is sumnarized below: Total Cost Expenditure Schedule 1973 1974 1975 Domes- For- Domes- For- Domes- For- Domes- For- Cost Items tic eign tic ecgn tic eign tic (US$'000 equivalent) A. Foreign Advisors - 191.0 - - - 153.0 - 38.0 B. Counter- part Staff (salaries/ Social Benefits) 206.8 - 12.1 - 138.0 - 56.7 - C. Machinery and Equipment - 526.0 - - - 505.0 - 21.0 D. Field Expenses 48.5 - -4.5 - 4- E. Sub- Contracts - 20.0 - - - 20.0 F. Rent 2.7 - - - 2.7 - - - G. Materials & Supplies 15.0 20.0 - - 12.5 18.0 2.5 2.0 H. Physical & Price Con- tingencies 40.9 50.0 1.8 30.3 40.0 8.9 10.0 TOTAL 313.91 807.( 13.9 - 232.0 736.0 68.1 71.0 1120.9 13.9 968.0 139.1 6.02 These estimates are based on a carefully structured work plan and detailed equipment list and can therefore be considered representative. While sufficient allowance has been made for equipment and spare parts to ensure 3 to 4 years of survey work the provision for staffing is only sufficient for work to the first half of 1975. Continuation of work past this will require additional costs, mainly in the form of counterpart staff. 6.03 Sufficient equipment is included in the project to meet the objec- tives of the program, with the exception of laboratory equipment which GEOBOL has secured with U.K. and Japanese credits. This includes 2 atomic spectome- ters, and 3 electronic microscopes, which should give GEOBOL the facilities to analyze up to 8000 samples per month. Laboratory floor space will be pro- vided as part of a new building presently under construction. Office space is presently being planned for in the existing building. 1/ Includes US$43,000 to be disbursed in foreign currency which larpely covers the import content of the local costs.  ANNEX 5 Page 9 G. Procurement 7.01 Owing to the large number of equipment items, equipment will be largely procured on the basis of international shopping, rather than inter- national bidding. The value of all equipment packages is less than USS100,000 except for the diamond drills and accessories which have been costed at about US$240,000. These will be put out for international bid but the provision of a back-up service must be of prime consideration in bid evaluation. Advisory services would be obtained by a broad-based international recruitment. H. Financing 8.01 It is expected that the project will be financed as indicated below: Amount Source Foreign Currency Local Currency Total (US $000) GEOBOL 21.7 21.7 Bolivian Government - 249.2 249.2 I.D.A. 807.0 43.0 1/ 850.0 Total Financing 807.0 313.9 1120.9 8.02 The IDA credit would cover all direct foreign exchange costs plus the estimated import component of materials and supplies and the field expenses attributable to the foreign advisors. The local currency expenses (approximately US$270,000 equivalent) would be met by GEOBOL and Government budget allocations. 1/ This amount, which would be disbursed in foreign currency, covers largely the import component of the local costs.  BOLIVIA - A MINING CREDIT PROJECT Schedule for the Survey of Small Mines 1973 1974 1975 Steps Months J F M A M J J A E O_N D J F M A M J J A S O N D J F MA I. Planning and Organization II. Compilation of Data III. Tabulation of Data IV. Analysis Evaluation and Summary V. Recuiting Experts and Procurement of Equipment VI. Arrival of Experts in Economic Geology - Mining organization VII. Arrival of Equipment 7III. Planning of Field Work IX. Arrival of Geophysical Expert X. Field Work XI. Arrival of Diamond Drilling Expert XII. Preparation of Technical Report III. Preparation of Feasibility Reports XIV. Final Report LCPDF m Ju'ly 1973 C  BOLIVIA - A MINING CREDIT PROJECT GEOBOL: STRUCTURE OF NEW DEPARTMENT TOl BE-ESTABLISHED TO CARRY OUT THE SURVEY OF SMALL KINES Director ^ ____-________________ _. Foreign Administration 1 dvisors Exploration Geoph;ysics Diamnd and IlAnventory Division Drilling DiLvision Division 2 Jackleg Drilling Draftsmen Draftsmen Crews 8 Field Teams 3 Field Teams 6 Drilling Crews Auxiliary Auxiliary Auxiliary Personnel Personnel Personmel Flield Toams Include Field Teams Include Drilling Crews Include 1 *nig Engineer 1 Geophysicist 1 Dri.ller 1 Geologist 1 Topographer 1 Chauffeurs 1 Engineering Assistant 1 Chauffeur 2 Helpers 1 Chauffeur 2 2 3 Samplers TJ1PDF July 1973   ANNEX 6 BOLIVIA-A MINING CREDIT PROJECT THE TECHNICAL ASSISTANTCE PROGRAM TABLE OF CONTENTS A. Introduction B. Technical Assistance to the Ministry of Mining and Metallurgy Background and Justification Objectives and Scope of Technical Assistance Timing Organization and Cost of the Program Financing C. An Examination of the System for Taxing the Mineral Sector Background and Justification Objectives and Scope of the Study Timing Cost of the Study Financing of the Study D. Preparatory Work for the Proposed Exploration Fund Background and Justification Brief Description of the concept of the Exploration Fund Objectives and Scope of Preparatory Work Timing Cost of Preparatory Work Financing E. Summary of Total Costs and Financing of the Technical Assistance Program   ANNEX 6 Page 1 BOLIVIA-A MINING CREDIT PROJECT THE TECHNICAL ASSISTANCE PROGRA A. Introduction 1.01 The proposed technical assistance program is composed of 3 parts: (a) the provision of assistance to the Ministry of Mining and Metallurgy, for strengthening the planning, docu- mentation and supervision functions of the Ministry. (b) an examination of the system of taxing the mineral industry; and (c) preparation work for the proposed Exploration Fund. 1.02 Justification for, and details of each of these components are presented below. B. Technical Assistance to the Ministry of Mining and Metallurgy Background and Justification 2.01 Efficient development of the mining sector requires that a clear policy for the development and operation of the sector be formulated and closely administered by the Ministry of Mining and Metallurgy. The principal functions of the Ministry should be the formulation of mineral development policy with back-up studies and plans, administration of the mining code and related legislation, statistical compilation and record keeping of mining activity, control and inspection of safety measures and sound mining practice. However, the Ministry as it now exists is weak and the work it conducts in these fields is not very effective. The basic problems center around an in- adequate budget, low salaries and hence poor staffing, insufficient expertise and poor management. Political interference in the staffing of the Ministry also adversely affects its effectiveness. 2.02 The Ministry officials recognize these shortcomings and in early 1972 prepared a 3 phase plan to reorganize and strengthen the administration. An administrative Reorganization Law (September 1972) more clearly defined the responsibilities of the Ministry of Mining and Metallurgy and the Ministry is presently drawing up detailed regulations for all the directorates and semi-autonomous agencies under its supervision. Its staff has also been aug- mented by 11 professionals (about 20% increase in total staff) during 1972-73. Nevertheless, little improvement yet is evident, and the Ministry has re- quested technical assistance to help clarify its functions and strengthen its administration, with particular reference to its planning and documentation functions.  ANNEX 6 Page 2 Objectives and Scope of the Technical Assistance Program 2.03 The technical assistance program would include: A. Planning Office (a) strengthening the planning office within the Ministry (Oficina Sectorial de Planificacion) by engaging various specialists in mineral sector planning, project pre- paration and evaluation, financial analysis, and admin- istration and organization of public agencies; (b) making a study of the organization, staffing, adminis- tration and operations of the public agencies operating in the mineral sector; and planning and coordinating the functions of these entities; (c) training of Bolivians as counterparts of the foreign ex- perts, by the provision of scholarships to foreign uni- versities and on the job training at foreign installa- tions; (d) providing vehicles and field equipment for the necessary field work; and (e) engaging an expert in mineral commercialization to re- view the existing marketing channels and to advise on marketing procedures and policy. B. Documentation Center (a) engaging an expert in the organization and operation of a documentation center, to help establish such a center and establish a system for data collection and recording; (b) providing equipment for the documentation center such as: microfilming cameras, processors and projectors; photo- copy machines and indexing systems. Timing 2.04 This program should take place over a period of 15-18 months, start- ing with the arrival of some of the foreign experts, hopefully by the end of the first quarter of 1974. The program should be completed by mid-1975, but could extend to the end of 1975 if any difficulty is had in obtaining the necessary experts.  ANNEX 6 Page 3 Organization and Cost of the Program 2.o5 The estimated cost of the program is briefly presented below: A. Planning Office Item Co,F ts Foreign Local Total Foreign Experts US$ equivalent) 1 Expert in Planning (9 months) 1 Expert in Project Preparation and Evaluation (6 months) 1 Expert in Administration and Organization (6 months) 1 Financial Analyst (6 months) 1 Expert in Mineral Marketing (12 months) 1 Statistician (6 months) Sub-Total (45 months at US$3,000/month) 135,000 _ 135,000 Counterpart Staffing 1 Expert in Planning (14 months at US$1,000/month) - 14,000 14,000 2 Staff Members for Project Preparation and Evaluation (36 months each at US$400/month) - 28,800 28,800 1 Statistician (24 months at US$500 month) - 12,000 12,000 1 Bilingual Secretary (24 months at US$300/month) - 7,200 7,20 Sub-Total - 62,000 62,000 Subsistence for Foreign Experts (45 months at US$450/month) - 20,250 20,250 Travel for Foreign Experts (6 return trips at US$1,000) 6,000 - 6,000 Travel for Local Counterparts (14 return trips at US$600) 8,400 - 8,400 Foreign Training of Counterparts 2 Metallurgical Engineers (6 months each at US$600/month) 7,200 - 7,200 2 Mining lhgineers (6 months each at US$600/month) 7,200 - 7,200 2 Mineral Economists (10 months each at US$500/month) 10,000 - 105000 2 Project Analysts (6 months each at US$600/month) 7,200 - 7,200 2 Sector Planners (6 months each at US$600/month) 7,200 - 7,200 2 Statisticians (10 months each at US$250/month) 5,000 - 52000 Sub-Total 43,800 - 43,800  ANNEX 6 Page 4 Item Costs Foreign Local Total (US$ equivalent) Local Training of Counterparts 2 Metallurgical Engineers (6 months each at US$300/month) ^ 3,600 3,600 2 Mining Engineers (6 months each at US$300/month) - 3,600 3,600 2 Planners (6 months each at US$300/month) - 3,600 3,600 2 Project Supervisors (21 months at US$300/month) - 6,300 Sub-Total - 17,100 17,100 Field Equipment 3 Vehicles 12,000 - 12,000 Materials for Field Work 10,000 - 10.000 Sub-Total 22,000 - 22,000 Total Planning Office 215,200 99,350 314,550 B. Documentation Center 1 Foreign Expert in Management of Docu- mentation Center (6 months at US$2,000/month) 12,000 - 12,000 Counterpart Staffing - 2,000 2,000 Materials and Supplies 15,000 1,000 16,000 Travel of Foreign Expert (one return trip at US$1,000) 1,000 - 1,000 Subsistence for Foreign Expert (6 months at US$450/month) - 2?700 2,700 Microfilming and Photocopying Equipment 18,700 - 18,700 Furniture - 3,400 33,40 Total Documentation Center 46,700 9,100 55,800 TOTAL 261,900 1082450 370,350  ANNEX 6 Page 5 Financing 2.06 The costs as detailed above would be financed by the IDA Credit and by Government budgetary allocations as indicated below. Source Amount (US$ ) IDA Credit -for direct foreign exchange costs 261,900 -for subsistence payments to foreign experts 22,950 Sub-total 284,850 Bolivian Government: -contribution in kind (i.e., staff included in present budgets) 56,800 -additional costs directly attribu- table to program 28,700 Sub-total 85,500 TOTAL FINANCING 370,350 C. An Examination of the System for Taxing the Mineral Sector Background and Justification 3.01 The tax regime under which the mining sector operates, while simple as originally laid out in the 1965 Mining Code, has been complicated by subse- quent legislation. The principal tax on the mineral sector as specified in the 1965 Mining Code is the tax on mineral exports payable at the same time the mineral is exported. The rates of this tax have been established by several Supreme Decrees as indicated below: Supreme Decree Date Minerals 07360 October 18, 1965 Tin 07447 December 22, 1965 Wolfram, Antimony, Copper, Lead, Zinc, Silver, Bismuth 08499 October 3, 1968 Sulphur 09082 March 8, 1972 Copper, Tungsten, Antimony 10379 July 28, 1972 Copper 3.02 For these minerals specific royalty schedules have been developed which vary accordingly to the market quotations for the mineral. Minerals which do not have a specific royalty schedule are subject to an export royalty of 2-1/2% of their gross value. These royalty schedules based upon export value were set up on the basis of assumed production costs which have not been adequately adjusted to compensate for changes in the cost structure of the industry. Several major inequities result from this tax as indicated below:  ANNEX 6 Page 6 (a) since the tax is not tied to profit the tax burden on the high-cost producer can be quite heavy, and is in fact at times in excess of pre-tax profits; (b) on the other hand, the low-cost producers may contribute a low proportion of their profits to the state; (c) the burden of taxation on the low-grade small mines can be excessive in Bolivia and hence effectively hinder the development of these mines (deposits); (d) significantly different tax burdens are placed upon the mining entities according to the minerals produced, as indicated in the following table: Royalty By Minerals ( in U.S. currency) Mineral Price 1969 Royalty Rate Price March 1973 Royalty Rate Tin $1.70/lb 10.6% $2.00/lb 14.8% rungsten $40 per long ton unit 9.0% $55 18.1% Antimony $ 8 per long ton unit 7.5% $12 17.5% Copper 504/lb 6-8% 65i 5.0% Lead 13j/lb - 17i 2.9% Bismuth $5/lb 3.0% $ 4.5/lb 3.0% Zinc 13j/lb - 224/lb 4.4% Others 2.5% - 2.5% 3.03 Other taxes affecting the industry are: (a) a foreign exchange tax; all sales revenue must be repatriated and sold to the Central Bank at a rate of 16.80 pesos per US$. Imports and foreign debt service obligations are met by repurchasing foreign exchange at a rate of 20.0 - 20.40 pesos per US$; (b) a sales commission of 0.75% of sales value paid to BAMIN, regard- less of whether or not commercialization is done by BAMIN; (c) a charge of 0.75% of sales value paid to IIMM to support mineral and metallurgical research activities; (d) a special tax imposed by Supreme Decree 10550 as a temporary measure to obtain additional tax revenue following devaluation on October 27, 1972. This included a 20% tax on the net value (sales value less realization transport and handling costs, less royalties and other taxes and 10% of sales). The 20% tax did not apply to increases in exports, and was supposed to be released after 1 year; (e) a 5% tax on the amount of revalued assets resulting from the devaluation; (f) other minor taxes such as: employee tax, payroll tax, interest tax, and a 20% tax on re- patriated dividends are also applicable to the industry. 3.04 At present all taxes are unrelated to profitability and hence must be considered fixed costs by the mine operator. This can have the effect of:  ANNEX 6 Page 7 (a) using a higher mine cut-off grade than if tax was related to profit, hence leading to wasting of ore reserves, and high grading cf deposits; (b) making some of the more marginal orebodies uneconomic to exploit; (c) act as a disincentive to reinvest in the sector. This is readily apparent, with much of the earnings from the sector being directed into other sectors with equivalent or better returns but with lighter tax burdens. In some cases, earnings have been diverted at the expense of equipment replacement and maintenance with a resultant running down of the mining facilities. Objectives and Scope of the Study 3.05 It is quite apparent from the above that a review and a revision of the tax system is urgently needed. The purpose of the study would be to thoroughly review the existing tax structure to assess whether the development of the mining industry is actually being hindered by taxation and whether the mining industry is contributing an adequate amount of revenue to the State. The study should include: (a) identification of any inequities inherent in the present system, along the lines discussed above: (b) a determination of the amount and distribution of the tax burden and how it compares with systems employed by other miling countries and hence affects the competitive- ness of Bolivian industry; (c) an evaluatiGn of how the tax burden on the mining sector compares with other sectors, and hence the incentives or disincentives to invest in the mining sector vis-a-vis other sectors; (d) a review of the applicability of alternative tax systems: to what extent are the accounts kept by the mining companies adequate basis for taxing on a profit basis? What revisions would be required? What administrative changes would be necessary within the Government? What legislative changes would be necessary within the Government? What legislative changes would be needed? etc?  ANNEX 6 Page 8 3.06 A report would be produced recommending future taxation policies, including: (a) the tax structure and rates; (b) administrative procedures; and (c) legislative requirements. An estimate should be made of the tax revenues expected under the new system, and compared to the existing system. The report should clearly define the expected benefits under the new system, the added investment, and any anti- cipated catalytic effect. A comparison should also be made with other sectors in Bolivia; the report should also provide detailed schedules and procedures for implementing the recommendations, clearly identifying staffing needs. 3.07 Timing. It is expected that the terms of reference for the study could be drawn up and approved by the Government within 2 months after formal approval by the Government to proceed. A proposed timetable for the study is presented below: Timing 1. Preparing terms of reference for study March 1974 2. Issuing Invitation to several consultants to present proposals April 1974 3. Receipt of proposals and evaluation May 1974 4. Negotiating contract with consultant selected June 1974 5. Mobilization of consultants Late June/early July 1974 6. Survey in field and preparing report (5 months) July-November 1974 7. Submission of a draft report to the Government November 1974 8. Review of the report by the Government (2-3 months) December 1974- February 1975 9. Completion of final report incorporating Govermment's comments April 1975 3.05 Hence, by mid-1975, it should be possible for the Government to begin implementing the needed tax procedures. 3.09 Cost of the Study. Preliminary estimates for the cost of the study are presented below:  ANNEX 6 Page 9 Item Foreign Local Total ___________- US$-- Consultant Costs (2 experts at 6 months = 12 manmonths at $3,000/month) 36,000 - 36,000 Travel: international and local 6,000 500 6,500 Materials and supplies 500 500 1,000 Subsistence (12 manmonths at US$450) - 5,400 5,400 Sub-total 42,500 6,400 48,900 Counterpart Costs Professional staff: -preparing terms of reference (3 manmonths) - 2,100 2,100 -assisting consultants (12 manmonths) - 6,000 6,000 -reviewing draft report and preparing brief for Government consideration (8 manmonths) - 3,000 3,000 Miscellaneous assistants (18 manmonths) - 3,000 3,000 Materials and supplies - 500 500 Sub-total - 14,600 14,600 Total Cost of Study 42,500 21,0 63,500 Financing of Study 3.10 The costs are detailed above would be financed as follows: IDA Credit US$ 1. Consultant Costs (including subsistence) $47,900 Government Budgetary Allocations 1. Contribution in kind (re-allocations of staff on existing payrolls) 14,100 2. Additional Budget Allocations directly related to study 1,500 Total Financing 63,500  ANNEX 6 Page 10 D. Preparatory Work for the Proposed Exploration Fund Background and Justification 4.01 As noted during the Mining Sector Survey conducted for Bolivia in 1971 1/ the major single factor limiting development of the mining sector in Bolivia is the lack of funds for exploration activity. In the past 20 years "grass-roots" exploration in Bolivia has been minimal with only a few small "discoveries" resulting despite the fact that there are numerous locations where surface indications would justify exploration. Exploration for reserves in the existing mines, particularly in those of COMIBOL, and the majority of the small mining sector has been badly neglected with the result that most mines are operating with little knowledge of ore reserves. This prevents adequate mine planning which leads to poor recovery of ore reserves, higher mining costs, and possibly lower mill recoveries. It also may result in smaller scale operations than justified by the size of the orebody, hence higher cut-off grades and a restricted sector output. 4.02 The lack of reserves severely limits the ability of the operators to prepare expansion projects, and to obtain financing for projects. Not only does this restrict sector output but, as Bolivia is the highest cost tin producer in the world, it may continue to lose ground in the competitive world market, unless serious intensive efforts are made to find and exploit more economic deposits to replace many of the existing high-cost operators, and to diversify into other metallic and non-metallic minerals. Hence, top priority within the sector should be the provision of additional funds for exploration. There is insufficient risk capital available within Bolivia to have any significant effect, even given more favorable legislation and policies to attract this capital into the mineral sector. This creates the need for foreign capital either as direct investment or as support to the Government for establishing an exploration fund. In view of the Bolivian political situation it is not realistic to expect any significant quantities of mining venture capital to enter Bolivia in the immediate future, leaving the Exploration Fund as the most viable alternative. The Exploration Fund has the added advantage that it is expected to act as a catalyst to both domestic and foreign risk capital, and also to provide a mechanism for coor- dination of the exploration efforts within the country, to institute a rational apDroach to establishing exploration priorities, and to avoid the duplication of exploration efforts. Brief Description of the Concept of the Exploration Fund 4.03 The concept of an Exploration Fund entails setting up a fund to be expended on a project-by-project basis in conjunction with other sources of risk capital, public and private. The mining companies, public and private, 1/ The Mlining and Metallurgical Sector: Bolivia Report PI-4a, December 7, 1972.  ANNEX 6 Page 11 would approach the fund with requests for financial assistance for a specific exploration program. These programs would be carefully screened and priori- ties established which would help to ensure best use of the funds. If unsuc- cessful the recipient of the funds would be under a limited or no obligation to repay, but if successful the mining operations established on the proven deposits would be the source of replenishment funds. It is possible that in time the Exploration Fund could be converted into a revolving fund to main- tain an uninterrupted mineral exploration effort. Objectives and Scope of Preparatory Work 4.04 This should include recommendations regarding: (a) the institution(s) to administer the fund; (b) administrative procedures; (c) staffing requirements; (d) the type of exploration to be financed by the fund; (e) the criteria to be used for project selection: (f) the proportion of each exploration program to be financed by the fund, by type of client; (g) the types of contracts under which the exploration is carried out; (h) the repayment requirements and the criteria for determining repayment obligations; (i) the initial financing requirements of the fund for, say, a period of 3 to 4 years, costs broken down into local and foreign currency requirements; (j) the expected results of the program. 4.05 This work would be carried out by an expert with previous experi- ence in establishing and administering such funds. The expert would be supported by counterpart staff assigned from either the Ministry of Mining and Metallurgy or another agency as determined by the Government. The end result would be a report clearly identifying the institutional arrangements, administration and procedures for establishing the fund, as listed above.  ANNEX 6 Page 12 Timing 4.06 An important input into this preparatory work would be the prelimi- nary results of the survey of small mines, hence the work should start in mid- 1974 and would be expected to require approximately 3-4 months. Thus, the report which could be used as the basis for establishing the Exploration Fund would be completed by the fourth quarter of 1974. Cost of Preparatory Work 4.07 Estimated project costs are as follows: Cost Item Foreign Local Total --_ US$- Foreign expert 14,000 - 14,000 Travel 1,500 200 1,700 Subsistence - 3,500 3,500 Counterpart staff - 1,200 1,200 Materials and supplies 200 200 400 Total 15.700 5,100 20,800 Financing 4.08 The cost as detailed above would be financed as follows: Amount Source US$ IDA Credit - For direct foreign exchange cost 15,700 - For subsistence payments to foreign exDert 3,500 Sub-total 19,200 Bolivian Government - Contribution in kind (i.e., staff included in present budget) 1,200 - Additional cost directly related to program 400 Sub-total 1,600 Total Financing 20,800  ANNEX 6 Page 13 E. Summary of Total Costs and Financing of the Technical Assistance Program 5.01 As detailed in the above paragraphs, the cost are as follows: Costs Program Foreign Local Total US$ 1. Technical assistance to Ministry of Mines and Metallurgy 261,900 108,450 370,350 2. Review of mining tax structure 42,500 21,000 63,500 3. Preparation of Exploration Fund 15,700 5,100 /1 20,800 Total 320,100 134,550 454,650 5.02 Financing of the program would be as follows: Government From Existing New Budget Program Source IDA Credit Budget Allocations US$ 1. Technical assistance Ministry of Mining and Metallurgy 284,850 56,800 28,700 2. Review of mining tax structure 47,900 14,100 1,500 3. Preparation of Explo- ration Fund 19,200 1,200 400 Total 351,950 72,100 30,600 1/ Includes US$31,850 to be disbursed in foreign currency out of the IDA credit which largely covers the import component of the local costs.   ANNEX 7 BOLIVIA -- A MINING CREDIT PROJECT BANCO INDUSTRIAL S.A. TABLE OF CONTENTS The Market Part I Antimony - A Brief Market Review Part II Tin - A Brief Market Review Part III Tungsten - A Brief Market Review   ANNEX 7 BOLIVIA - A MINING CREDIT PROJECT THE MARKET A. Introduction The medium size miners importantly contribute to Bolivia's exports of antimony, copper, lead, tin and tungsten but contribute little to produc- tion of bismuth, silver, zinc, gold and other minerals. Furthermore, the subprojects to be financed under the First Mining Credit Project are expected to increase Bolivia's exports of antimony, tin and tungsten significantly but very little for the other minerals. The expected increases in terms of total world supply are as follows: Increase as a Percentage Mineral of 1972 World Supply Antimony 3% Tin 1% Tungsten 1% A brief market evaluation of each of these minerals is presented in parts 1, 2 and 3, of this Annex. For the remaining minerals the inncrease is less than 0.01% of the 1972 world supply; thus the marketing implications are of minor importance.  ANNEX 7 Page 2 PART I ANTIMONY - A BRIEF MARKET REVIEW A. Uses 1.01 The major use of antimony is as a metal as an alloying constituent for the production of antimonial lead for storage batteries, bearing metal alloys and power and communication cable covering. Other uses as a metal include: printing metal, solder and ammunition. An increasingly important usage is in the oxide form for flame proofing of textiles, and plastics, and as a pigment in paints. Antimony is also used in the manufacture of glass and ceramics. B. Supply 2.01 Antimony is produced in about 25 countries. The predominant sources are South Africa, Bolivia, Mainland China, USSR and Mexico in this order which together account for nearly 80% of total world production (Table 1). While being highly erratic the overall production has shown an average annual growth of 1.3% since 1965, with production from Mainland China showing a decrease over this period while all other producers demonstrated small increases. The sup- ply position has in the past tended to be unstable particularly with the pe- riodic withdrawal of Mainland China's production from the free market. Con- tinuing depletion of high grade ore in Mexico, Bolivia and South Africa is a problem, necessitating adjustments in smelting practices and increase in pro- duction costs, and is accentuated by the heavy dependence on the low cost out- put from Mainland China, which contains half of the known reserves of antimony ore. Nevertheless, the ore reserves are sufficient for more than 50 years of production at present growth rates and productive capacity can be increased to match steadily increasing demand requirements. 2.02 The supply of secondary antimony is a major factor in supply, ac- counting for 55-60% of U.S. consumption, but is not as important in other consumer areas. C. Demand 3.01 The average growth rate of free world consumption of primary anti- mony from 1955 to 1972 is about 1.7% annually. However, demand for antimony fluctuates widely with large increases during periods of military buildups (i.e., retardant paints and textiles, bearing metals and battery grids) and often declines with cessation of war activity. 3.02 Antimony will continue to have a specialized consumption pattern that does not necessarily conform to general economic patterns but rather to specific factors associated with the technological aspects of its use. Anti- mony has no properties that make it indispensible but it has technological  ANNEX 7 Page 3 advantages in many areas of application. Periods of short supply in the past, caused by abruptly expanded military requirements, have encouraged substitu- tion as have periods of withdrawal of Chinese antimony from the world market. The consuming industry will continue to be faced with problems of maintaining technological as well as economic advantages in applications of antimony in competition with other metals and organic synthetics. Therefore, any major long-term price increases are unlikely and increase in demand for primary antimony is expected to be restricted to between 1-1/2 to 2% per annum. D. Supply/Demand Balance and Prices 4.01 Antimony is known as a "cyclic performer" in the market because of its price behavior. The price for American R.M.N. brand 99.5 percent metal in the New York market, which had remained unchanged at 45.75 cents per pound for almost five years (1965-1969), shot up to an average of 57.57 cents in 1969 and to a peak of 178 cents in April 1970. However, consumer resistance developed quickly and by the end of 1970 the price had dropped to 98 cents per pound. Prices continued to decline in 1971 and returned to their average 1969 level of about 57 cents by late 1971. The level has been maintained since with periodic increases in late 1972/early 1973 to 60-70 cents. At the sante time the 60% ore price fell from US$13.8-US$18.7/metric tons (cif) in January to US$7-8/ton in December 1971, and remained at this level through most of 1972, then rose back to US$11-14/metric ton in June 1973. 4.02 As these developments suggest, the world demand/supply situation for antimony was greatly unbalanced at the beginning of 1970; demand exceeded supply in all major consuming countries. An unprecedented shortage of anti- mony was created when Mainland China withdrew from the market, and the GSA issued no stock releases during the year. Nevertheless, the world returned to a more normal state by the end of 1970 as consumers curtailed purchasing and reduced inventories in expectation of low prices. Some substitution by alternate materials took place, and Mainland China began again to participate in the market. The high ore price stimulated interest in low-grade antimony deposits throughout the world and thus broadened the potential supply base. 4.03 At present demand is reasonably well balanced by supply and in the absence of a major war or a withdrawal of Mainland China from the market this balance is expected to persist. E. The Bolivian Antimony Industry 5.01 Since 1960, Bolivia has shown a consistent rise in production of antimony averaging 7.7% per annum and now accounts for almost 20% of world production. The principal producer Empresa Minera Unificada SA (EMUSA) ac- counts for 35 to 40% of this with the remainder of the production being from numerous small operations, the largest of which is approximately 15% the size of EMUSA. There are estimated to be about 300 small mining groups producing  ALNNEX 7 Page 4 antimony. Antimony mineralization in Bolivia is fairly widespread and al- though economic deposits are scattered and difficult to develop, the prospects for further increases in productive capacity are encouraging. Antimony accounts for 5-6% of Bolivia's mineral export earnings. 5.02 With the exception of EMUSA and a few other relatively large pro- ducers most of the mines are worked by rudimentary methods. The grade of the ore mined is estimated to be 5-10% metal. Despite the fact that bene- ficiation methods are primitive except for the larger producers, Bolivia pro- duces a good quality of 60% concentrate with only minor amounts of objection- able impurities. These concentrates are mainly sent to US for smelting al- though sales to Japan are gaining importance. Bolivia has prepared plans for establishing an antimony shelter within the country, and has held discussions with both Czechoslovakia and Yugoslavia on such installations, but apart from a small shelter used by EMUSA, no other smelting capacity is available. Table 1 World Production of Primary Antimony (Content of Antimony contained in Ore in Metric tons) 1965 1966 1967 1968 1969 1970 1971 /1 Mine Production --------- (000 metric tons) --------------- World Total 60.6 6.14 57.8 61.5 66.4 66.4 65.7 Of which: South Africa, Rep. of 12.6 11.4 12.4 16.8 18.3 17.1 14.4 Mainland China (e) 15.0 15.0 12.0 11.8 11.8 11.8 11.9 Bolivia 8.8 10.7 11.3 11.2 13.2 11.5 12.4 U.S.S.R. (e) 6.2 6.3 6.4 6.5 6.6 6.7 6.8 Mexico /2 4.5 4.4 3.7 3.5 3.2 4.5 4.9 All Other 13.5 14.5 11.9 11.7 13.3 14.8 15.3 /1 Preliminary. /2 Content of antimonial lead. (e) Estimated.  ANNEX 7 Page 5 PART II TIN - A BRIEF MARKET REVIEW A. International Tin Agreements 1.01 Tin plays a comparatively modest role in international trade, with sales of the order of US$400 million per annum over the past decade. The in- ternational tin market differs importantly from other mineral markets in that it has a long history of producer and consumer cooperation. 1.02 The International Tin Council (ITC), with its seat in London was formed in 1956 and, representing most of the producer and consumer countries 1/, has the responsibility of administering an International Tin Agreement (ITA). The ITA is in reality a series of agreements of four-year duration (the fourth agreement was put into effect July 1, 1970). The objective of these agree- ments is to prevent excessive price fluctuations and help maintain a supply and demand balance. Under each ITA a price range is established by a con- sensus of all consumer and producer countries, and ITC through a "buffer stock" operation and "export quotas" maintains the tin price within this range. In the past this arrangement has been very successful in supporting the "floor" price in periods of oversupply but less so in maintaining the "ceiling" price in periods of shortages. B. Demand 2.01 In sharp contrast to the rapid advance of other metal markets, pro- ducers of tin have been faced with practically stagnant demand for consumption. Over the past 20 years consumption has remained virtually level in the USA and declined in the UK, but for the rest of the non-communist world has increased at a rate of about 4% per year. Japan recorded the fastest growth of tin con- sumption averaging an annual rate of about 7% over the period. While the con- sumption of tin metal grew at a much faster rate in the developing than in the developed areas, the latter still account for 90% of total world 2/ consump- tion. 2.02 Tinplate is by far the most important end use of tin, accounting for some 45% of the primary metal consumption, followed by solder with 20%, bronze and brass with 8% and white metal, babbit and antifriction metal with 7%. In each category tin has faced a serious threat of substitution and econ- omizing of tin usage, with the result that tin consumption has not increased commensurate with the growth in the demand for the end products. This situa- tion has made the future outlook for tin uncertain. 1/ The USA is the only major consumer no: a member of ITC, and Mainland China and Brazil are two important producers not members of ITC. 2/ Non-Communist world unless noted otherwise.  ANNEX 7 Page 6 2.03 Consumption of tin in tinplate is expected to decline in the USA. but to increase elsewhere so that the overall world demand will remain stable. Consumption of primary tin metal for solder, tinning, bronze and brass is ex- pected to show moderate increases throughout the seventies, while use in babbit and white metal bearings is expected to decline in the face of substitution. However, this decline should be more than countered by increased use in making organotin compounds for PVC plastics, antifouling paints, etc., and the devel- opment of new uses such as agriculture chemicals, metal alloying, and tin ad- ditions to cast iron engine blocks. Tin consumption in the non-communist world is expected to reach 180-195,000 TPY by 1980, some 7-20,000 EPY above the current consumption level of 173,000 TPY, implying an average annual rate of growth of between 0.5-1.5%. This compares with a growth rate of 1.4% over the period 1956-71, with a marked slowdown over the past five years. The Com- munist block switched from being a net exporter of tin to a net importer in the mid-sixties and has now reached a level of imports which is expected to be maintained or show marginal increases throughout the seventies, raising the demand for tin in the non-communist world to between 195,000 and 215,000 TPY by 1980. C. Sppices 3.01 After a supply shortage during 1958-67, the supply gap was closed and there were small surpluses during 1968-69 from which time a reasonable suppply-demand balance has been maintained. After a period of high prices in 1964-65, the industry's capacity expanded with supply increasing at an annual average rate of 3.7% from 1964 to 1972, with a slowdown to 1.7% for the later 3 years of this period. Supply continued to grow during 1972 while at the same time demand halted, requiring ITC to impose quotas for the first part of 1973. This has resulted in delays in plans to increase capacity but supply is expected to continue to expand throughout the seventies, particu- larly with the present high prices which will create further surpluses requir- ing continuation and periodic application of export quotas to 1980. On the other hand, taking into account the depletion of many of the traditional production areas, the cost structure of the industry and the close control exercised by ITC, it is unlikely that an excessive surplus situation will develop. 3.02 Prices increased through the late 1950's, early 1960's from US$0.95/lb in 1956 to US$1.78/lb in 1965, then declined to US$1.48/lb in 1968 following the supply surplus situation. Since then the price has rallied averaging US$1.76/lb in 1972, and rising to more than US$2.00/lb in June 1973 even in the face of a supply surplus situation. Given the expected future supply-demand situation it is expected that the price will fluctuate between the middle and lower price ranges of the ITA agreements throughout the seventies or between US$1.70 - US$2.00/lb.  ANNEX 7 Page 7 D. Bolivian Tin Production 4.01 Tin mining is crucial to the Bolivian economy, providing one-half (more than US$100 million) of the country's export earnings. Bolivia, the second most important producer of tin (after Malaysia) produces 15-16% of the free world's output. However, Bolivia's land-locked location and topo- graphy and nature of the deposits all compare unfavorably with other pro- ducers. Most workable deposits occur in underground veins of generally low grade and difficult access. The industry has been obliged to build roads, air strips, social facilities, power plants and subsidize food and other goods for the workers - costs which competitor mines in other countries have escaped. 4.02 These factors along with high recovery losses resulting from the general poor state of repair of the mining and beneficiating facilities, the lack of close process control, the complex nature of the ores, high freight charges, and low grade of the concentrates produced, have contributed to make Bolivia the highest cost producer of tin in the world. COMIBOL, which produces approximately 20,000 TPY of tin-in-concentrates (two-thirds of Bolivia's output), currently delivers tin to the market at costs only marginally less than the current floor price of the ITA. Many of COMIBOL's mines operate at heavy losses even at current prices. To improve the situation, COMIBOL has embarked upon an ambitious program to rationalize and improve the efficiency of its operations. 4.03 The private sector, made up of medium size and small mines accounting for one-third of Bolivia's output, has costs generally lower than those of C02IIBOL but high relative to other countries. Some private mines operate at little or no profit with the current prices while others show substantial margins at present. 4.04 The expected increase in Bolivia's tin exports, accounted for by the medium size miners and to be financed under the First Mining Credit, would account for 1% of the world supply (over 2 years) or one-half of the projected world increase in demand. This is expected to meet with market resistance, particularly if the export quotas remain in effect, and there may be justified replacement of some of the less efficient operations. In conclusion, there is a calculated marketing risk involved with the tin projects.  ANNEX 7 Page 8 PART III TUNGSTEN - A BRIEF MARKET REVIEW A. Uses 1.01 Carbides account for almost 50% of tungsten consumption. Carbides are used for cutting tool tips, snow tire studs, ball pen points and other wearing applications. High speed and other tool steels account for another 10%; wire for electric lamps, metal shapes for space and defense applications for 15%; and high temperature alloys and powder metallurgy processes for almost 15%. Tungsten is also used in heating elements, flame spraying and plasma coatings, and in chemicals. Other promising areas are in hot and cold forming steels. B. Demand 2.01 Annual consumption has been highly cyclic over the past 40 years with peaks during war time periods. The demand for tungsten is very closely linked to the levels of activity in the steel and machine tool industries, which is in turn closely linked to the economic state of the industrialized nations. U.S. is the major consumer in the free world accounting for 15-18%; with U.S.S.R. consuming a similar amount. Europe accounts for a further 30% with other major consumers being North Korea, Poland, and Czechoslavakia. 2.02 Statistics on the industry are incomplete and often inaccurate, hence must be treated with caution. World consumption increased from 65 million lbs in 1966 to 83 million lbs in 1970 (an average annual rate of 5%) but declined 5% in 1971 and further in 1972 with the U.S. halving its indus- trial consumption from 16 to 8 million lbs: a result of the economic slowdown. Demand has again regained its 1970 level and is expected to increase over the next decade at a rate of 5-6% particularly with the expected 10% growth rate in the use of sintered carbides. Substantial research is being conducted by the industry and tungsten carbide is reaching into new fields. The risk of substitution is low except under excessively high tungsten prices. C. Supply 3.01 World mine production increased from 63 million lbs in 1966 to 74 million lbs in 1970, but dropped to 70 million lbs in 1971 and 1972 indicating the effects of low ore price. Mainland China with more than 70% of the world's tungsten reserves produces in the order of 18 million lbs/yr, the U.S.S.R. the second largest producer 14 million lbs, and North Korea -5 million lbs. The communist countries account for more than 50% of world production. In the non-communist countries the U.S. is the ilajor producer with 8 million lbs followed by South Korea, Bolivia and Portugal. China's exports are unpredictable and vary widely. They were practically nil to  ANNEX 7 Page 9 U.S.S.R., while exports to the West fell from a peak of 19,000 tons in 1967 to 5,000 tons in 1969. The U.S. Stockpile has in the past, and will in the future, play a very important role in the market. In 1966 more than 3 years of world demand were held by it; this has recently been reduced to 128 million lbs or 1-1/2 years of world demand. A minor but increasingly important factor of supply is the recovery of tungsten scrap. D. Supply/Demand Balance and Price 4.01 For the past decade the consumption of the non-communist countries has exceeded its own supply by a significant margin. The shortfall has been met during the sixties from Mainland China and by the U.S. stockpile disposals in the early seventies. Tungsten prices are subject to short-term fluctua- tions. World prices (London) for tungsten concentrates averaged about $42.20 per short ton unit (s.t.u.) in the second half of the sixties, rose to $70 in 1970, but declined in the following two years to average about $35.40 in 1972. There are signs of recovery since mid-1973 and tungsten was selling in the region of $42.10 last October. U.S. stockpile sales decreased sharply from their high level of 38 million lbs. in 1969 to zero in 1972. It is obvious, however, that in the future, U.S. stockpile sales will have to be phased out over a long period to avoid a slump in prices. On the other hand, the future supply/demand position is difficult to predict because of unknown future ac- tions of Mainland China. Increased production from mines in the non-communist countries is not expected to be substantial. Future prices are expected to remain at the current level in the range of $42 per s.t.u. E. The Bolivian Tungsten Industry 5.01 Bolivian production of tungsten increased from 2-1/2 million lbs in 1960 to 5 million lbs (or 7% of world mine production) in 1972; an average annual growth rate of 6%. Exports of tungsten concentrates account for 7% of Bolivia's mineral export earnings. 5.02 The Chojlla mine, owned by International Mining Co., is the country's largest producer accounting for 50% of the total Bolivian output. COMIBOL also produces significant quantities of tungsten recovered as a by-product of the tin operations. Other small quantities are recovered as a by-product from the small and medium mines. 5.03 The projected increase resulting from projects under the Mining Credit Project amounting to 1% of the world supply should readily find a market with the rapidly expanding demand.   ANNEX 8 BOLIVIA - A MINING CREDIT PROJECT Estimated Disbursement Schedule IDA Fiscal Year Cumulative Disbursements and Quarter at End of Quarter June 30, 1974 100,000 1974 - 1975 Sept. 30, 1974 500,000 Dec. 31, 1974 1,100,000 March 31, 1975 1,600,000 June 30, 1975 2,100,000 1975 - 1976 Sept. 30, 1975 2,600,000 Dec. 31, 1975 3,100,000 March 31, 1976 3,600,000 June 30, 1976 h ,200,000 1976 - 1977 Sept. 30, 1976 4,800,000 Dec. 31, 1976 5,10oo,0oo March 31, 1977 5,900,000 June 30, 1977 6,200,000   IBRD-10160R 7W' - - : g- - w ! . < DECEMBER 1973 S RA BOLIVIA / Q QU~~~CN~SLA ~~OUI~~ (T~~N~5MiJTH, $~~~ ~ MAJOk PRIVATE MINES