Somalia - Development Bank Project

Report No. 1341a-SO FILE COPY Somalia: Appraisal of the Somali Development Bank (SDB) March 31, 1977 Industrial Development and Finance Division FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT So. Sh 6.295 = US$1 ABBREVIATIONS AFESD Arab Fund for Economic and Social Development CBS Central Bank of Somalia DLS Development Loan Section, Credito Somalo ECA Economic Commission for Africa GOS Government of Somalia NCB National Commercial Bank SDB Somali Development Bank SIDAM Somali. Institute of Development Administration and Management SICOS State Insurance Company of Somalia SRC Supreme Revolutionary Council UNDP United Nations Development Program FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY SOMALI DEVELOPMENT BANK Table of Contents Page No. BASIC DATA .............................. i - ii SUMMARY AND CONCLUSIONS ................. ....................... iii-vi I. INTRODUCTION ..................................... . ....... .........1 II. ENVIRONMENT ................................ 1 The Economy ........... .......................................... 1e Major Sectors ....................................... ........... .. 2 Industrial Sector ......... . . . . . . .................... ...... . 3 Financial Sector ................................... 6 III. SDB's ROLE .................... ................. 9 Volume and Characteristics of Financing ............ 9 Promotional Activities ............................. 10 Management of the Development Loan Section (DLS) ... 11 IV. THE INSTITUTION ...........................* ........................... 11 (.harter ......................................................... 11 Capital ............................................ 11 Board ................. ........ .......................... *1 Management .............. ........................................ 12 Organization and Staff ......................... .... 13 Staff Development and Technical Assistance ......... 13 Procedures ... ................................ .. . ... .. ..... 14 Policies ................................... 0 ............. 0...... 15 V. PORTFOLIO, FINANCIAL CONDITION AND RESOURCES ............ 18 Portfolio Evaluation .. ...................... .. .. . . - 18 Financial Position ...... ........................... 18 Financial Results ...... ...................... ...... 19 Resources .......................................... 19 This report was prepared by Messrs. Zia Ahmed and Ismail Dalla on the basis of their mission to Somalia in August 1976. This document has a tets d dtribution and may be USW by hcipients only In the performance od their offciW duts. Its cotents maY not otherwbe be dbclosed without Wodd Sknk authoruzation.  -2- Pase No. VI. PROSPECTS ................................................. 20 Business Outlook . .... ... ...... ......... ........ .. . . ... 20 Strategy ...................................... 000.... 20 Forecast of Operations .... ......................... 21 Resource Requirements . ..... ........ . . . . . . . . . . . . . . . . 21 IDA Credit ... o ..........- ......................... -*oe ... .o .ooo.. 22 Projected Financial Position .......... .. .......... 23 Projected Financial Results -.o- ..... ......... 23 VII. RECOMMENDATIONS .o.. . . .. . . .. . . . ....... . ...... *...24 List of Annexes Somalia 1. An Overview of the Industrial Sector in 1973 2. Outstanding Loans of the Commercial Bank by sectors 3. Interest Rates Structure 4. Mogadiscio Consumer Price Index (December 1971-February 1976) SDB 5. Summary of Operations (1968-1976) 6. Loan Approvals by sector (1968-1976) 7. Board of Directors 8. Proposed Organization Chart 9. Draft Statement of Operating Policies 10. List of Equity Investments Outstanding as of December 31, 1976 11. Balance Sheets (1972-1976) 12. Income Statements (1972-1976) 13. Pipeline of Projects as of December 31, 1976 14. Assumptions for Operations and Financial Projections 15. Forecast of Operations (1977-1981) 16. Projected Balance Sheets (1977-1981) 17. Projected Income Statements (1977-1981) 18. Projected Cash Flow (1977-1981) 19. Actual and Projected Financial Ratios (1973-1981) 20. Estimated Disbursement Schedule for Proposed Credit  (i) SCMALI DEVELOPMENT BANK BASIC DATA Exchange Rate: US$1 a So. Sh 6.295 Date of Establishment: May 1968 Ownership (as of December 31, 1976; amounts in Sh million) Authorized Paid-in Capital % Capital % Government 120.0 60.0 87.3 87.5 Central Bank of Somalia 60.0 30.0 21.6 12.2 National Commercial Bank 15.0 7.5 3.2 0.3 Somali Insurance obmpany 5.0 2.5 1.2 Total 200.0 100.0 113.3 100.0 Resource Pbsition (as of December 31, 1976; amount in Sh million) Uses Net Fixed Assets 2.0 Equity Investments 17.1 Loans - Disbursed & Catstanding 120.0 Undisbursed Commitments 7.8 Total Uses 147. Sources Share capital 113.3 Retained earnings & reserves 3.3 Long & Medium term loans: IRAQ 4.5 USAID 0.3 Central Bank 2.9 Somali Government 26.1 33.8 Total long & medium term sources 150.4 Cooperative fund 1.0 Total sources 151.4 Available for new commitments 4.3  (ii) Cperations (Sh million) Year ending December 31 LOANS Equity Approvals Commitments Disbursements 1973 49.4 49.4 34.1 3.7 1974 35.8 35.8 36.7 2.8 1975 39.5 39.5 45.9 5.2 1976 13.3 13.3 9.6 3.0 Cperating Results (Sh million) 1974 1975 1976 (Provisional) Profit before taxes 1.8 3.9 1.4 Prifit after taxes (PAT) 1.3 0.4 0.8 PAT as % of average networth 2.0 0.4 0.7 Financial Position (Sh million) Net Worth 79.3 101.5 116.0 Long-term debt 12.9 10.3 33.8 Total Assets 98.0 140.3 161.1 Long-term debt/equity 0.2 0.1 0.3 Provisions as % of total portfolio 0.1 1.5 1.2 Administrative expenses as % of average total assets 1.6 1.1 2.0 Interest Rates and Other Charges Interest Rates Agriculture/ Industry & Others Handicraft Mining Medium-term (2-6 years) 5.5, 6.0% 6.5% Long-term (7-20 years) 6.o% 6.5% 7.5% Charges Commitment fee: 1% of undisbursed loan balances Loan investigation fee: 0.5% of the loan amount Late Payment fee: 2% on amount overdue for 30 days or more IDA/ EAPID February 28, 1977  - iii - SUMMARY AND CONCLUSIONS (i) The Somali Development Bank was established in 1968 as a publicly owned institution to take over the long-term loan portfolio of Credito Somalo, a Government-owned bank which was being wound up, and to provide financial assistance to productive enterprises in various sectors within the framework of the country's development programs and priorities. (ii) Since 1969, when the revolutionary government took over power, Somalia has adhered to "scientific socialism". Despite its poverty, it has performed creditably in recent years in its attempts to achieve economic growth which will benefit the bulk of its people. Except in 1974 and 1975 when sizeable resources had to be diverted to drought rehabilitation, Somalia has contributed substantial amounts to financing development expenditure. Livestock, agriculture, industry and fisheries constitute the major sectors of the Somali economy. (iii) The Somali manufacturing sector, which contributes approximately 9% to GDP, consists of a few relatively large-scale publicly owned enterprises and a large number of privately owned small scale enterprises, mainly engaged in producing consumer goods out of local raw materials for the domestic mar- ket. The only export-oriented industries are two factories producing meat and meat products and five factories engaged in fish processing. The main problems affecting the growth of the manufacturing sector are scarcity of natural resources, smallness of the domestic market, lack of skilled man- power and ability to prepare and execute projects. The private sector has only a limited role and future industrial investments will predominantly be in the public sector. (iv) Parastatal enterprises have constraints of skilled manpower, man- agement and financial discipline. Most of them are not very efficient. There is also a multiplicity of public sector agencies, including SDB and the Ministry of Industry, each carrying out a number of functions starting with project identification to ownership and management of industrial enter- prises. The Government needs to rationalize these functions. A Bank para- statal mission, which visited Somalia in April 1976, is presently studying various policy alternatives for initiating discussions with the Government to improve the overall situation. (v) The Somali economy is largely non-monetized and Somalia's only four financial institutions, all publicly owned, are the Central Bank, a commercial bank, a development bank, and an insurance company. Somalia's financial authorities tend to discount the role of interest rate in mobilization and allocation of resources. An upward revision in private deposit rates in January 1975 did not lead to any increase in the rate of growth of private savings and time deposits. The authorities propose to mobilize private savings through opening commercial bank branches in rural areas and through the postal savings system. Resource allocation is made on criteria of import substitution, availability of raw materials, foreign exchange earnings and employment potential and the opportunity cost of capital has little relevance in this context. The interest rate structure in Somalia reflects  - iv - the Government's emphasis on the various sectors of its development program. Commercial bank rates on short-term loans are the lowest for public entities, higher for the private domestic borrowers and highest for the foreign borrow- ers. SDB's long-term rates are lower than the commercial bank's short-term rates and the SDB rates for loans to agriculture and handicrafts are lower than those to industry. The Somali financial authorities justify these differentials on grounds of higher profitability of commercial operations than that of industrial enterprises and the need to give incentives for increasing production in agriculture and handicraft sectors. (vi) Somalia has had a low inflation rate until 1973. The Consumer Price Index (CPI) increased by 1.4% in 1971 and decreased by 1% in 1972. However, as a result of the drought in 1973 and 1974 and the world wide inflation, the CPI rose by 17.8% and 19.4% respectively. In 1975, CPI increased by only 8%. The Somali authorities estimate that under normal conditions inflation will not exceed 5-6% per year. If this estimate is borne out by experience, real interest rates in Somalia would be marginally positive. At the negotiations the Somalis agreed to increase their interest rates on mediumm-term and long-term loans to industrial sector from 6% and 6.5% respectively to a uniform 7.5%, while maintaining the existing rates on loans to agriculture and handicraft sectors. (vii) Despite its limited professional and management capabilities, SDB's performance so far has been creditable. It is the single most important source for medium and long-term funds in Somalia. Its disbursements in recent years have increased sharply from the Sh 8 million annual average prior to 1973 to Sh 46 million in 1975 accounting for 13% of total investments in Somalia and 27% of industrial investment. As of December 31,1976, SDB's cumu- lative approvals (net of cancellations) amounted to Sh 180 million of which Sh 17 million were equity investments. The main reason for SDB's large increase in operations since 1973 is its investment of Sh 70 million in subsidiaries two of which were promoted by it. SDB's financing has concen- trated in industrial and agricultural (crop-production) sectors. SDB is keen to diversify its portfolio further and in particular is paying greater atten- tion to the fisheries sector. Most SDB clients are private Somalis parti- cularly in the agricultural sector. The average size of agricultural loans was Sh 76,000 compared with an overall average size of SDB loans of Sh 353,000. Most industrial loans are large and are to the public enterprises as well as to SDB's directly promoted projects. Due to problems of infrastructure most SDB loans are concentrated in three major urban areas, namely, Mogadiscio, Kismayu, and Berbera. (viii) SDB is managing on behalf of the Government the long-term portfolio of Credito Somalo, known as the Development Loan Section (DLS), transferred to SDB on the former's dissolution. This section has a paid-in capital of Sh I million and accumulated losses of Sh 11 million. The Somali Government has accepted responsibility for all portfolio losses of the DLS. (ix) During 1976 SDB's paid-in capital was raised from Sh 99.8 million to Sh 113.3 million. It is further proposed to raise it to Sh 200 million by 1980.  - v - The Government and the Central Bank will take up 90% of the capital whereas the commercial bank and the insurance company will subscribe the remaining 10%. (x) SDB's management is dynamic and influential but SDB lacks profes- sional staff with competence in project appraisal and financial management. It has agreed to recruit a few more Somali professionals and undertake an extensive staff development program including recruitment of four experts for an initial period of two years each and deputing staff to overseas institu- tions for training. IDA will help SDB organize this program. The Arab Fund for Economic and Social Development (AFESD) has agreed to provide a technical assistance grant of about $340,000 to SDB. The overall cost of the technical assistance program agreed by SDB with IDA is $600,000 of which $260,000 will be provided out of the proposed IDA Credit. (xi) The overall quality of SDB's loan portfolio is satisfactory. As of June 30, 1976, SDB's loan portfolio (including loans to its subsidiaries) consisted of 356 loans amounting to Sh 117 million, of which Sh 23 million were affected by arrears of over three months. Some of these arrears have since been cleared and only loans totalling Sh 15 million were affected by arrears as of August 15, 1976; these include three loans aggregating Sh 11 million to parastatal enterprises guaranteed by the Government. Of the 6 equity investments amounting to Sh 17 million, outstanding as of December 31, 1976, four involving Sh 16 million were in SDB's subsidiaries. SDB's equity investments in projects in serious difficulties amounted to Sh 7 million. As of December 31, 1976, SDB's unaudited accounts show provisions against loans amounting to Sh 1.7 million, which appear to be inadequate. No provisions have yet been made against SDB's investments in its subsidiaries, but SDB has informed us that it will make adequate provisions there in its 1977 accounts. (xii) SDB's financial position is quite good due to its relatively large equity base, and very small long-term debt. SDB's long-term debt/equity ratio of 0.3:1, as of December 31, 1976, was much less than 4:1 allowed by its law. Although SDB's provision of Sh 1.7 million is not adequate, its equity base is large enough to take care of possible portfolio losses without affecting SDB's creditworthiness. (xiii) Somalia is currently implementing an investment program of Sh 3.9 billion for the period 1974-78, of which agriculture and industry account for Sh 1.1 billion and Sh 0.6 billion respectively. In the industrial sec- tor the emphasis is on modernization and balancing of existing enterprises, which is in the right direction. (xiv) SDB has a reasonable pipeline of projects and good prospects of increasing its business. It is considered to be a suitable institution for an IDA credit of $5 million. Our association will enable SDB to improve its appraisal capability and help better allocation of resources in Somalia. Also, it will give IDA an opportunity to discuss industrial policies with the Government. (xv) Given the need for SDB to have a reasonable spread on its borrowed funds and considering the interest rate situation in Somalia, IDA funds  -vi - will be on-lent to SDB by the Somali Government at 5%. SDB needs to have a spread of about 3% on its borrowed funds during the next two years to enable it to meet its administrative expenses, to make adequate provisions against a rapidly increasing portfolio, and to build up some reserves. The Somali representatives informed the Association at the credit negotiations that the Government will charge an interest rate of 2.5% on its loan of Sh 26 million to SDB to enable SDB to maintain the average cost of its bor- rowed funds at about 4% p.a. during the next two years. With the average yield on its future loans during this period at 7%, SDB will be able to have a 3% spread on its borrowings. (xvi) A $5 million IDA credit is recommended, of which an amount up to $260,000 will be available for financing the services of an Investment Advisor and an Agricultural Economist and for meeting a part of the costs of the staff development program. The balance amount of $4.74 million will be available for meeting the foreign exchange cost of sub-projects financed by SDB. SDB will have a free limit of $50,000 for approval of a sub-project and an aggre- gate free limit of $1.5 million. Foreign exchange risk on SDB subloans will be borne by the Central Bank of Somalia. SDB should have a fixed amortiza- tion schedule of 15 years with five years of grace for the sake of adminis- trative simplicity and convenience.  I. INTRODUCTION 1.01 The Somali Development Bank was established in 1968 as a publicly owned institution to take over the long-term loan portfolio of Credito Somalo, 1/ a Government-owned bank which was being wound up, and to provide financial assistance to productive enterprises in various sectors. The World Bank's involvement with SDB commenced in 1969 when at the request of the Somali Government a Bank mission visited Mogadiscio to examine the investment outlook and SDB's prospective role, but no lending resulted from the mission. The Bank renewed contacts with SDB in 1975. A Reconnaissance Mission visited SDB in January - February 1976 and found SDB to be a suitable institution for channeling credit to productive enterprises in Somalia and recommended its appraisal for an IDA Credit. This report appraises SDB for an IDA Credit of $5 million. 1.02 Objectives. IDA's main objectives in approving the proposed credit should be: (a) to supply SDB with foreign resources to enable it to provide medium and long-term financing to productive enterprises in various sectors within the framework of Somalia's development programs and priorities. This is important since SDB is the only financial institution providing such assistance; (b) to build up SDB into a strong institution with ade- quate capability to promote, appraise and supervise projects and to pursue sound investment policies; and (c) to provide an opportunity for the Bank to engage into a dialogue with the Government on its industrial policies. II. ENVIRONMENT 2/ The Economy 2.01 Somalia is one of the poorest developing countries; its per capita GDP is only about US$100 (1975). The bulk of the population (3.2 million), 1/ Credito Somalo, a Government-owned bank established in 1959, had obtained from USAID (through the Somali Government) a loan of US$2 million for investment in development projects. Most loans turned out to be bad and uncollectible. Consequently, the Government dissolved Credito Somalo in 1968 and transferred its Development Loan Section (DLS) that is, its long-term loan portfolio, to SDB to be managed as a separate fund. 2/ For a detailed analysis of Somalia's economy, see IBRD report no. 702-SO dated 8/20/75 "Somalia: Recent Economic Developments and Current Prospects" in 2 volumes, and the Economic Updating memoran- dum dated November 12, 1976.  - 2 - 35-40% of whom are nomads, is very poor with a simple and largely non- monetized economy depending on subsistence from livestock and agriculture. While there are no national income accounts in Somalia, GDP estimates, pre- pared by the Economic Commission of Africa, at constant factor cost during the period 1970-74, indicate an average growth rate of 5.3% per annum. How- ever, indications are that overall domestic output declined in both 1973 and 1974 due to drought but recovered slightly in 1975, with the return of better weather conditions. The main sectors of the economy are livestock, agricul- ture and industry. Major Sectors 2.02 Livestock. Livestock is the principal source of livelihood of about two-thirds of the country's population. Livestock exports have traditionally constituted over 50% of Somalia's total exports. Despite the tremendous losses of livestock during the drought the value of live- stock exports was kept high due to higher prices and a 25% increase in volume. Export earnings increased from Sh 223 million in 1974 to Sh 360 million in 1975. The processing of meat in Somalia has improved recently and prospects for meat and leather industries are good. 2.03 Agriculture. Next in importance to livestock is the agricultural sector. Bananas represent the second most important export item after live- stock and in 1974 accounted for 20% of export earnings. Total production during 1971-74 averaged about 150,000 metric tons per year but declined to 130,000 metric tons in 1975 due to persistence of drought in the early part of the year. The National Banana Board (NBB), is planning to increase the production to 200,000 tons by 1979. Although banana exports, which have traditionally been of the order of about 100,000 metric tons, declined to 82,000 tons in 1975, their value increased from Sh 80 million in 1974 to Sh 87 million in 1975 due to a sharp increase in export prices. 2.04 Fisheries. Considering Somalia's long coastline and continental shelf, the fisheries sector has remained relatively underdeveloped. A 1974 FAO fishing survey estimated that exploitable marine resources in Somalia range from 200,000 to 2 million tons annually. An initial target to in- crease national production to 125,000 tons from the current catch of 5,000 tons has been recommended. Somalia's 1974-78 development plan has given high priority to development of this sector and the planned outlay is about Sh 48 million. Presently there are five fish processing plants, including three canneries and two freezing and storage facilities. The industry has been operating far below capacity due to insufficient catch. The Government is planning to increase the capacity of the fishing fleet, establish three fish harbors, and set up boat construction, repair and maintenance facili- ties. Fishing cooperatives are also being formed to operate the national coastal fleet. About 80% of the total output is exported, the main export being canned tuna. The value of fish exports has increased from Sh 2.9 mil- lion in 1969 to about Sh 15 million in 1974. It is believed that the volume of exports in 1975 was twice that in 1974.  -3- Industrial Sector 2.05 Although the industrial sector in Somalia is rather small, its importance is increasing. The only comprehensive study on the industrial sector was carried out by UNIDO in 1973. The contribution of the manufac- turing sector to GDP was estimated to be 9% in 1973 and the number of work- ers employed was about 7,000. However, the share of the sector in GDP is estimated to have increased in 1974 and 1975 when significant increase in capital expenditures in the sector took place. During 1971-73 investments in the sector averaged Sh 26.0 million per year. In 1975, Sh 130.5 million, or 38% of estimated total annual investment, were invested in 19 industrial projects including Sh 73 million for the expansion of a textile factory. Annex 1 provides an overview of the Somali industrial sector. The sector consists of a few relatively large-scale publicly owned enterprises and a large number of privately owned small enterprises. In 1973, there were 273 manufacturing establishments employing five or more workers, of which 241 were in the private sector and 32 in the public sector. Most industries are agro-based, depending on local raw materials from agriculture, livestock and fisheries sectors and produce consumer goods. There are, however, seven export-oriented enterprises engaged in production of meat and meat products (2) and canned fish (5). Of the 273 manufacturing units, 77 are engaged in the manufacture of food products, 41 in wearing apparel, 37 in structural clay products'and 30 in furniture. The gross value of output has grown steadily from Sh 81.4 million in 1968 to Sh 246 million in 1973, at an aver- age annual rate of 25%. Value added in industry increased from Sh 51 mil- lion in 1968 to Sh 125 million in 1973 at an annual rate of 16%. Public sector enterprises accounted for about 65% of industrial employment, 74% of value of gross output and 85% of value added. Mogadiscio and the sur- rounding area are the main commercial centers and account for 75% of total industrial establishments and 80% of the industrial output. 2.06 Objectives. Although the Government's objectives in the industrial sector are not explicitly stated, they appear to be the following: (a) reach- ing self-sufficiency in some essential goods such as sugar; (b) encouraging agro-based industries primarily for local consumption; (c) promoting important import substitution industries particularly consumer goods; (d) creating jobs sufficiently to absorb all university and high school graduates; and (e) in- creasing exports. These objectives are reflected in actual investments during last two years and in planned investments for 1976. Out of Sh 154 million earmarked for industry in 1976, 58% is to be invested in modernization and expansion of existing enterprises like the sugar, textile, meat and fish factories. It appears that the Government has not placed enough emphasis on export oriented industries, particularly livestock, where Somalia has a relative competitive advantage. Because of the very early stage of industrial development in Somalia, and the scarcity of skilled manpower, the Government is moving rather slowly in developing export oriented industries. 2.07 Strategy. In line with its political ideology, the Government has selected public enterprises as a major vehicle to accomplish its objectives  - 4 - in the industrial sector. The main elements of Somalia's "industrial strat- egy" are: (a) improving the efficiency and profitability of existing pub- lic sector enterprises; (b) setting up new enterprises vital to the econ- omy in the public sector; (c) consolidating small units into cooperatives; (d) permitting foreign investors to set up joint ventures with public enter- prises. 2.08 Role of the Public and Private Sectors. The Government has not so far clearly spelt out the areas for public and private sector participa- tion. But it is clear that major new enterprises will be set up in the pub- lic sector in line with the Government's socialist orientation, although foreign investors particularly from Arab countries may be allowed to par- ticipate in equity in minority positions. The private sector's role is relatively small and likely to be further reduced; the current plan in- cludes only nine small projects in the private sector, of which eight have already been implemented. 2.09 Institutions for Industrial Development. There are a number of ministries and other Government authorities (Ministry of Industry, Ministry of Fisheries and Marine Transport, municipalities and SDB) involved in the establishment, supervision, and management of manufacturing enterprises. Of these, the Ministry of Industry and SDB are the most important. They have been involved in some projects from the identification stage. Neither of them possesses adequate expertise in preparation of feasibility studies, project implementation or industrial management; they were compelled to assume responsibility in these areas in the absence of alternative insti- tutional arrangements. In doing so they had to overstretch their limited staff capability and since they were unable to recruit good managers, the management quality of most enterprises is poor. The future role of these agencies in industrial development has not been clearly defined. However, this does not appear to be a problem at this time due to the fact that the concerned agencies are represented in all decision making committees and there is frequent consultation among them concerning the selection and imple- mentation of projects. 2.10 A UNIDO expert recently submitted a proposal to the Government for setting up of an Industrial Holding Agency which would establish new enterprises, make equity investments in and loans to industrial enterprises and supervise and monitor the progress of projects; the prospects of the acceptance of the proposal in this form by the Government are slim because the new institution would duplicate in certain respects, the functions for which SDB was created. However, some of the functions currently executed by SDB, are not typical functions of a development finance company, and could perhaps more appropriately be discharged by another agency. This is a problem which should be reviewed, and a suitable forum could be the discussions on the report of the Bank mission which has reviewed the parastatal sector in Somalia. SDB could carry out its development financing functions better if it concentrated  -5- on providing an independent check on its projects through its financing. It could also promote projects without assuming responsibility for their control and management. 2.11 Performance of Public Enterprises. Most public enterprises are not efficient due to various reasons including shortage of natural resources, exacerbated by the recent drought, smallness of the domestic market, lack of financial expertise and poor management. A number of them did not have adequate long-term funds and used short-term commercial bank funds to finance fixed assets, large inventories and inter-enterprise debt during the last few years. Primarily for this reason, commercial bank advances to trade and industry jumped from Sh 330 million in 1972 to Sh 865 million in September 1975 (see Annex 2), which led to a liquidity crisis compelling the central bank to advance huge sums to the commercial bank. To rectify the situation a law was passed in October 1975 empowering the Central Bank to reorganize the financial structure of parastatals. The main objective of the legislation is to settle inter-enterprise debt in order to have a clear picture of each entity's financial situation. The Central Bank has undertaken an exercise to take over from the commercial bank such portion of the outstanding short- term loans as had been used by the parastatal enterprises to finance fixed assets and to convert them into long-term debt of about 10 years maturity at 2.5%. This exercise is still underway and should contribute to a healthier financial picture of the parastatals. 2.12 The Somali authorities have recently initiated a few other pro- grams to develop the accounting and financial skills of the staff working in parastatal enterprises. Firstly, the central bank has intensified its train- ing program in the areas of accounting and financial control for the benefit of the junior and intermediate level staff of parastatals in addition to the training facilities available in SIDAM. Secondly, the Government has recently invited a leading British firm of chartered accountants to make an offer as to costs, time, etc., for strengthening auditing capability in Somalia and for finding solutions to the present financial situation of a number of parastatal agencies. Thirdly, a UNIDO expert has been commissioned by the Government to draw up a "National Unified Accounting System" for the parastatal enterprises. Also a Bank mission recently visited Somalia to look at the parastatal sector and to suggest measures for improving its performance. Its study is under- way. These are steps in the right direction and should contribute to the evolution of an environment wherein parastatal enterprises could operate more efficiently. 2.13 Small-Scale Industries and Industrial Cooperatives. There is a large number of small scale enterprises in Somalia. Sixty-eight percent of the total or 151 such establishments employed 5-9 workers and 84% employed 5-19 workers. 1/ Small family units or proprietary concerns employing less 1/ Source: "Small Scale Industry Development: Proposal and Programs for its achievement in Somalia". UNIDO, July 1974.  -6- than five workers were estimated in UNIDO's 1973 Survey Report at about 3,700, employing over 4,700 workers. In view of the limited role of the private sector in meeting industrial investment targets under the Plan, an investment of only Sh 1.5 million is expected to be made in 1976 in small-scale indus- tries and handicrafts. The bulk of this amount is earmarked for development of cooperatives. The Ministry of Industry, has so far organized 16 coopera- tives with a total membership of 1,164 and more are expected in the near future. Those already established include six cooperatives of hand loomers and two each of iron workers and basketery producers. These cooperatives employ nearly 1,200 workers. The Ministry has so far spent Sh 3.75 million in providing worksheds to the cooperatives and is planning to spend more on mechanizing some of the units. Financial Sector 2.14 Somalia has only four financial institutions, all publicly owned: the central bank (CBS), a commercial bank (NCB), a development bank (SDB) and an insurance company (SICOS). NCB was established in 1975 by merging the then existing two commercial banks (the Somali Commercial Bank and Somali Savings and Credit Bank). NCB has a paid-in capital of Sh 15 million contributed equally by the Somali Government and CBS and reserves (as of December 31, 1975) of Sh 9.5 million. It has a network of twenty-five branches of which six are located in Mogadiscio. NCB normally provides only short-term loans 1/ and charges interest rates ranging from 7-12%. As of December 31, 1975, NCB's total assets amounted to Sh 1,270 million; its deposits totalled Sh 564 million of which Sh 179 million were in savings and time deposits. 2.15 Commercial credit to the private sector and public enterprises, which had increased by about 69% in 1973, rose at substantially reduced rates of 49% and 4% in 1974 and 1975 respectively. The bulk of the credit expansion is related to trade and industry, although in recent years agriculture has received a markedly higher percentage (see Annex 2). The credit expansion is due not only to rising world prices of Somali imports of food grains, oil etc, but also to the dependence of many public enterprises on the banking system for their capital requirements. The absence of inventory control and per- sistence of inter-agency indebtedness among Government entities have also contributed to pressures on bank credit (see para 2.11). 2.16 SICOS was set up in 1969, with a paid-in capital of Sh 1 million to be the sole insurer in Somalia to undertake fire, accident, marine, avi- ation and motor insurance. It invests its surplus funds in fixed deposits with NCB. SICOS is also contemplating to set up a reinsurance corporation as a joint venture with an Italian insurance company. 1/ A few parastatal enterprises have in the past used short-term funds from the commercial bank for capital expenditures.  -7- 2.17 Despite an upward revision of interest rates on private deposits in January 1975, savings and time deposits rose by 16% in 1975 compared to an annual average rate of about 36% in the preceding three years. This slow-down in the rate of increase is partly attributable to a reduction of idle commer- cial bank deposits of public enterprises following increasingly strict credit policies pursued since 1974. The slower growth in deposits in 1975 also appears to be due to a decline in the savings potential of the employees in the monetized sectors where adjustments in salaries and wages have not kept pace with the rising cost of living. The Government is now placing greater emphasis on encouraging savings habits among farmers and nomads through the postal system. 2.18 The Interest Rate Structure The main characteristics of the interest rate structure shown in Annex 3 are as follows: (a) Historically, Somalia has followed a low interest rate regime. While the Central Bank has recently revised upwards the commercial bank's interest rates on deposits from and short-term commercial loans to the private sector, interet rates on short- term loans to parastatals and medium- and long-term development loans have remained unchanged for some years. (b) The differential rates for both deposits and loans for the public and private sectors charged by the commercial bank and for loans to various sub-sectors of economic activity by SDB reflect Government's priorities: (i) the medium- and long-term rates on loans charged by SDB (5.5% to 7.5%) are lower than the short- term commercial bank rates (7% to 12%); and (ii) the medium- and long-term rates charged by SDB on loans for agriculture and handicraft (5.5-6%) are lower than those for industry (6.0-6.5%). 2.19 At the present time, Somalia does not seem to have a well devel- oped policy on the role of interest rates. The Somali authorities defend the existing interest rate structure as follows: (a) in view of the low level of monetization of the economy and of the level of disposable incomes, interest rates do not currently play a significant role in mobilizing resources. The Government plans to step up efforts to mobilize private savings by the establishing a number of branches of the commer- cial bank in rural and semi-urban areas and through  -8- the postal saving system. The level of interest rates might then play an increasing role in genera- ting private savings through these means; (b) interest rate plays very little role in resource allocation in Somalia. New private investment in the future is likely to be minimal. Investment decisions in the public sector are taken by Gov- ernment agencies and the criteria for project selection generally are import substitution, avail- ability of raw materials, foreign exchange earn- ings, and employment and training of local staff. The concept of opportunity cost of capital is also nebulous in the Somali context. The commer- cial bank and SDB are the only sources of funds in Somalia and their interest rates "represent" the cost of capital available in the country. Foreign resources available to Somalia in recent years have all been at concessional rates of in- terest; (c) interest rates on short-term commercial loans are higher than on medium and long-term development loans because of higher profitability of the com- mercial operations which have long experience. Somalia's experience in managing and running industrial enterprises is limited. In view of the acute shortage of skilled manpower to operate and manage industrial enterprises the Somalis do not wish to "burden" such enterprises with high financial costs; (d) low rates on loans for agriculture and handi- crafts are designed to increase production and to attract a larger number of nomads to settled occupations. 2.20 While the allocative and mobilization role of interest rates in Somalia might not be irrelevant, it is not of critical importance. However, the Somali Authorities have agreed with the Association to carry out a study of the level and structure of interest rates during the implementation of the proposed project to determine their adequacy (para 4.18). Somalia has had a low inflation rate until 1973 as shown by the Mogadiscio Consumer Price Index (CPI) in Annex 4. The CPI increased by 1.4% in 1971 and decreased by 1% in 1972. As a result of the drought in 1973 and 1974, and the world wide inflation, the CPI rose by 17.8% and 19.4% respectively. This was mainly due to an average increase of 25% in food prices. The inflation rate declined to 7.9% in 1975. The Somali authorities estimate that under normal conditions inflation will not exceed 5 to 6% p.a. If this estimate is borne out by experience, real interest rates in Somalia would be marginally positive.  - 9 - III. SDB'S ROLE 3.01 SDB was established to promote, assist and develop productive enterprises in agricultural, industrial, mining, tourist, fisheries and live- stock sectors. Despite the various handicaps under which it has operated so far, namely limited professional and management capacities and lack of support from international institutions, SDB's performance has been quite creditable. Due to lack of entrepreneurship in Somalia and the predominant role earmarked for the public sector, SDB took the initiative in promoting a number of proj- ects in the industrial and agro-industrial sectors and even provided manage- ment, where necessary. In doing so, while it has stretched its capability to the extreme, it has demonstrated great dynamism in accomplishing its tasks and is, therefore, regarded as an important development agent in the country, enjoying the support of the highest Government authorities. Volume and Characteristics of Financing 3.02 Volume of Operations. SDB is the single most important source for medium and long-term funds in Somalia. In 1975, SDB's disbursements of Sh 51 million accounted for 14% of total investments in Somalia and 27% of indus- trial investment. SDB's operations since its inception in 1968 are summarized in Annex 5. As of December 31, 1976, SDB's cumulative approvals (net of cancellations) amounted to Sh 180 million of which Sh 17 million were equity investments. Except for about Sh 8 million, all SDB's loan commitments as of December 31, 1976, were disbursed. SDB operations recorded a sharp increase from 1973 onwards, mainly because of its investments amounting to Sh 69.6 million in subsidiaries, including projects promoted by it (see para 3.07). Prior to 1973, SDB's annual approvals averaged only Sh 8 million. 3.03 Sectoral Distribution. SDB's financing has concentrated mainly on two sectors; industry and agriculture. An analysis of SDB's loan approvals by sector is provided in Annex 6. SDB made 51 loans to manufacturing amount- ing to Sh 119 million, or 65% of total approvals. The second most important sector, agriculture, received Sh 30 million or 17% of approvals. Other sectors receiving loans from SDB and their relative proportions were: transport (7%); tourism (2%); livestock (2%); construction and housing (2%); fisheries (1%); and others (4%). Although the manufacturing sector was the main beneficiary of the loans, the agricultural sector was the most important in terms of number of operations; during 1968-1976 SDB approved 443 loans, or 77% of the total, to the agricultural sector mostly for small banana plantations. SDB is keen to diversify its portfolio further and is paying greater attention to the fisheries sector in particular. 3.04 Client Characteristics. Most SDB clients are private Somalis particularly in the agricultural, livestock and fisheries sectors. Thirty percent of loans to agriculture were for amounts up to Sh 18,000; the average size of agricultural loan was Sh 76,000 compared with an overall average size of SDB loan of Sh 353,000. In the industrial sector, the average size of SDB loan was Sh 2 million. Most industrial loans are to the public enterprises  - 10 - as well as to SDB's directly promoted projects. However, SDB's industrial clientele also includes 12 private borrowers, three of whom have recently set up a soap factory, a paint factory and a tile factory. The private projects are reportedly operating profitably. In line with the Government's policy SDB embarked on a program to actively assist cooperatives in 1973. As of December 31, 1976, SDB had made loans to 37 cooperatives amounting to over Sh 5 million. Cooperatives receiving loans from SDB were in the folllowing categories: Fisheries (16 loans); agriculture (10 loans); handicrafts (7 loans); chalk (2 loans); and salt (2 loans). SDB is planning to increase its lending substantially to cooperatives particularly in agriculture and handi- crafts sectors. 3.05 Geographical Distribution. Most SDB loans are concentrated in 3 major urban areas: Mogadiscio, Kismayu and Berbera. This is due to the pat- tern of infrastructure development in Somalia; Benadir, the region where Mogadiscio is situated, has 75% of total number of establishments and accounts for 80% of industrial output. To expand its activity in other regions of the country, SDB recently opened a branch in Hargeisa in the northern region and has plans to open two more branches, one in the south and the other in the midlands (see para 4.06). 3.06 Economic Impact. SDB's activities have made substantial economic impact by encouraging development of agro-industry and providing employment to Somalis in both rural and urban areas. SDB has not kept statistics on employment creation from all its projects but a rough estimate from a few large industrial projects shows that investment cost per job ranged from Sh 87,500 - Sh206,000 ($13,900 - $32,000); this appears rather high but it is based on a very small sample. There are no data on investment cost per job in the agricultural sector but they are believed to be much lower. Promotional Activities 3.07 Due to lack of a Government investment promotion agency, SDB has shouldered the responsibility of promoting projects in the industrial sec- tor. In recent years SDB has promoted a number of projects, including 6 grain mills, a fruit processing factory (ITOP), and a flour and pasta mill. SDB has primarily provided 100% loan funds to these enterprises and directly managed these enterprises by seconding its senior and qualified staff. This has strained SDB's scarce manpower resources and has somewhat weakened SDB's ability to perform its primary function of financing productive enterprises. While SDB should continue its promotional activities, it should avoid, as far as possible, assuming management responsibilities for these projects and should try to find independent management for them. SDB's management is agreeable to such a suggestion, but feels that in the absence of an institu- tional framework for implementation and management of industrial enterprises, it may have to undertake these functions on a temporary basis in exceptional cases in the future also. The Bank's parastatal sector mission is still studying appropriate recommendations in this area (see para 2.10) and will discuss them in due course with the Somali authorities. Meanwhile the tech- nical assistance arrangements which are an integral part of this project  - 11 - should help improve SDB's project promotion capabilities (paras 4.09 and 4.10). Management of the Development Loan Section (DLS) 3.08 On SDB's establishment in 1968, the Government transferred to it the management of DLS as a portfolio to be kept separate from SDB accounts. DLS has a paid-in capial of Sh 1 million funded wholly by the Somali Gov- ernment, and a long-term USAID loan of Sh 9.5 million, originally on-lent to the defunct Credito Somalo by the Somali Government. As of December 31, 1975, DLS's accumulated losses amounted to Sh 11.2 million. SDB realized from the DLS in 1975 a management fee, at the rate of 25% of SDB's admini- strative expenses for that year, for looking after the operations of DLS. SDB shareholders have since decided to discontinue this fee. The Minister of Finance has confirmed to the Association that SDB has no financial respon- sibility in respect of DLS. IV. THE INSTITUTION Charter 4.01 SDB was originally established under a Presidential Decree Law in 1968 and its Charter was issued on April 30, 1970. Since the enactment of the Charter, Somalia's policy environment has undergone substantial changes, the revolutionary Government having announced adherence to "scientific socialism," and SDB has outgrown its original dimensions. SDB's original objective was to assist productive enterprises in various sectors and to take any other initiative aimed at the economic development of the country, with particular reference to encouraging the development of the private sector and within the framework of development programs and priorities established by the Govern- ment. In view of the revised priorities set in the country after the estab- lishment of the revolutionary government, SDB's main role is actually in the public sector with the exception of assistance to small farmers and to a few small private industrial projects. Capital 4.02 SDB's authorized capital has recently been increased from Sh 100 million to Sh 200 million. No shareholder other than the Government of Somalia (GOS) and the Central Bank of Somalia (CBS) is allowed to own more than one-fourth of SDB's subscribed equity capital. SDB's paid-in capital as of December 31, 1976, was Sh 113.3 million and is being increased to Sh 200 million by 1980 in almost equal four annual tranches. Board 4.03 Annex 7 contains a list of the Board members as of August 15, 1976. According to the by-laws, SDB's Board is required to have a minimum  - 12 - of five and a maximum of eleven members. SDB's Board presently consists of Dr. Mohamud Jama Ahmed, Chairman (who is also the President), two represen- tatives of the Ministry of Finance, two nominees of the Central Bank of Somalia and a representative of INCAS. 1/ SDB's Board meets about four times a year and appears to be independent in making investment decisions. With the proposed new structure of SDB's equity, the Board would also probably be restructured to accommodate representatives of NCB and SICOS. In order to expedite the approval of routine agricultural loans, SDB Board has delegated powers to the President to approve loans up to Sh 200,000 in any one case without an aggregate limit. Management 4.04 Dr. Mohamud Jama Ahmed, an ex-civil servant and a former Minister of Information and National Guidance, is the President of the Bank. He is very dynamic and influential. He is ably assisted by Mr. Mohamud Mohamed Noor, General Manager since 1970. Mr. Noor joined Credito Somalo in 1964 after serving the Eastern Bank Ltd., Aden, for 13 years. He is responsible for the day-to-day management of SDB's affairs. Organization and Staff 4.05 Organization. SDB is presently organized into five departments: Loan, Finance, Technical, Secretariat and Personnel. In addition it has a separate unit for Internal Audit. The Loan Department receives all loan applications, appraises agricultural loan applications up to Sh 200,000, and does documentation, disbursement and follow-up work. The Finance Department maintains books of accounts, statistics and loan records. The Technical Department is responsible for project identification and promotion, technical, financial and economic appraisal of projects and implementation of projects. The Secretariat and Personnel Departments carry out routine service and per- sonnel functions. In view of the small number of professional staff and the need to use it productively, IDA suggested to SDB to consider reducing the number of departments by having all appraisal and follow-up work done in one department, to be called the Operations Department, and to carry out the dis- bursement and treasury functions in the Finance Department. Similarly, the Personnel and Secretariat Departments could be combined in one Administration Department. IDA also suggested that SDB should have separate units for legal work and SDB's subsidiaries. Annex 8 contains the proposed organization chart, which is being implemented by SDB. 4.06 In order to expedite the processing of small agricultural loans, SDB established a branch office in 1975 at Hergeisa in the northern region of the country. It is managed by the former Chief Accountant of SDB who has been delegated the authority to approve and disburse routine agricultural loans up to Sh 60,000 in any one case without any aggregate limit. Other branch offices at Kismayu in the south and at Baidoa in the midlands are planned for 1977. 1/ A joint venture manufacturing corrugated board cartons for bananas.  - 13 - 4.07 Staff. SDB employs 61 staff members, of whom 16 are professionals; of the latter, three have been seconded to management positions in SDB's sub- sidiaries. Included among the professionals is Mr. D.L. Prasad, an Indian chartered accountant who, until February 1976, was on secondment from the National Industrial Development Corporation (India) and is presently under a UNDP-financed UNIDO assignment up to June 1977. He is doing a fine job and SDB will need a man of his experience for the next 3-4 years. SDB intends to retain him under the proposed financing arrangements for the technical assistance program (para 4.10). 4.08 SDB currently needs to recruit five new Somali professional staff to carry out its existing operations adequately and also to cope with the increasing volume of work in the foreseeable future: (a) two with under- graduate degrees in Economics 1/ to help appraise financial and economic aspects of projects, (b) one with a degree in Agriculture or Agricultural Economics to assist appraisal of projects in agricultural sector, (c) one engineer to appraise technical aspects of projects, and (d) a legal advisor to take charge of the legal aspects of SDB's work. SDB has agreed to recruit most of the new staff before the effectiveness of IDA credit. Staff Development and Technical Assistance 4.09 The general level of skills of SDB professional staff is rather low and needs to be upgraded. While SDB has in the past sent some of its staff to training courses in Italy and to the EDI's project appraisal courses, 2/ the training needs are still substantial. SDB has agreed with IDA to undertake an extensive staff development program as early as possible, on the lines indicated in the following paragraphs. (i) Recruitment of the following experts for a minimum period of two years: (a) Financial Advisor to assist in financial planning and control; (b) Investment Advisor to assist SDB in introducing appropriate appraisal and follow-up techniques; (c) an Industrial Engineer to assist in technical appraisal of indus- trial projects; and (d) an Agricultural Advisor, with some experience in organizing cooperatives, to assist in appraisal of applications for financial assistance from the farmers and agricultural cooper- atives and in organizing cooperatives on sound lines. Somali counterparts will be attached to the experts who will be required to give on-the-job training to the other professional staff members as well in the concerned areas. 1/ Degrees in Business Administration, Commerce or Accounting are not awarded by the Somali National University. 2/ Two staff members have attended EDI's Agro-industrial Project courses in Washington and Kuwait and a third has attended the Industrial Proj- ects Course in Washington.  - 14 - (ii) Training of 4-5 SDB staff in institutions special- izing in project appraisals. This will be a long- term program extending over 4-5 years. (iii) Training of 2 professionals in financial control and management in experienced DFCs for a period of 6 months each. (iv) Training of at least one suitable staff member with some financial/accounting background to work for an accountancy qualification (ACA or ACCA). 4.10 The Arab Fund for Economic and Social Development (AFESD) has approved a technical assistance grant of Kuwaiti Dinars 100,000 (about US$340,000) for financing over the next two years the costs of (a) a Finan- cial Advisor and an Industrial Engineer for a period of two years each and (b) a major portion of the staff development program for the Somali staff spelled out above (para 4.09 (ii) to (iv)). The effectiveness of this grant will be a condition of effectiveness of the IDA credit. For financing the costs of an Investment Advisor, an Agricultural Economist and part of the staff development program, it was agreed at the negotiations to set aside a sum of $260,000 out of the proceeds of the IDA credit. Procedures 4.11 Appraisals. The quality of SDB's appraisals (which are carried out in the Somali language) is somewhat mixed. While appraisal of routine agri- cultural loan applications up to Sh 200,000, which constitute the majority of applications appraised by SDB, is done in a standard format and is adequate, other appraisals are weak. For example, (i) contingencies and pre-operating expenses are not included in the cost of project; (ii) summarized financial projections are prepared for only three years without indicating the main assumptions; (iii) internal rate of return calculations are not carried out; and (iv) management capabilities of the sponsors and technical training arrangements are not adequately assessed. SDB plans to carry out internal financial and economic rates of return calculations in its project appraisals in order to determine the financial viability and the economic soundness of projects. SDB also informed us that, before making commitments in the future, it will ensure that the beneficiaries of its assistance are legal entities. In the case of a few projects it promoted in the past, SDB first set up the projects and then went about giving them a legal status. In order to involve the heads of Technical, Finance and Loan Departments in the decision making process to a greater degree than in the past, SDB is planning to set up a Loan Committee, consisting of these officials and presided over by the General Manager, to review all appraisals before they are put up to the President for approval or clearance for presentation to the Board.  - 15 - 4.12 Follow-up. Although SDB's internal procedures include basic fol- low-up of projects, these are not regularly implemented because of lack of adequately trained staff. However, in respect of projects experiencing difficulties, the management takes personal interest in investigating the situation and in resolving their problems. Some of the major projects ex- periencing difficulties are SDB's own subsidiaries, located near Mogadiscio and managed by SDB's own staff; in such cases there is frequent consultation and reporting of operational position. The expatriate accountant also helps in improving the quality of accounting in these projects and in evaluating those experiencing difficulties. 4.13 SDB's procurement and disbursement procedures are adequate. In case of imported goods and equipment, SDB insists as far as possible, on competitive quotations, and disbursements are normally made to suppliers of goods and equipment. SDB's standard loan contract appears adequate but it will have to be amended to include the usual covenants regarding IDA's rights to visit projects financed out of IDA Credit, etc. SDB has not in the past prepared amortization schedules of projects at the signing of the loan agree- ments but has now agreed to do so in the future. Also, SDB plans to obtain adequate insurance cover on project assets mortgaged to it. 4.14 Audit. SDB's accounts are audited by Messrs. Pannell Bellhouse Mwangi and Co., a Nairobi-based associate of the British firm of Pannell Fitzpatrick and Co. The auditors' certificate to SDB's 1975 accounts had two important qualifications: a) the auditors were unable to ascertain the value of SDB investments; and b) SDB had exceeded in some cases the exposure limits laid down in its by-laws. The reasons for the first qualification were that some of SDB's "subsidiaries" had not been given a legal status, they did not maintain proper accounts and no information regarding their oper- ations was available to the auditors. Out of four subsidiaries three have since been given legal status and the drafting of the legislation in respect of the fourth is in progress. Audited accounts of three subsidiaries, as of December 31, 1975, and of the fourth as of June 30, 1976, have been submitted to IDA. For the future also SDB will have its subsidiaries' accounts audited at the same time as its own accounts by the same auditors. The position in respect of the second qualification has since been regularized by amendment of SDB by-laws. The auditors and SDB have confirmed to IDA that future audit of SDB accounts will be carried out along the lines indicated in the Bank Group's "Illustrative Form of Audit Reports for DFCs". Policies 4.15 SDB's statement of policies is incorporated in its law and by-laws. With a view to consolidating these policies in one place, SDB agreed at the negotiations to adopt an operational policy statement as per Annex 9, before the effectiveness of the proposed IDA credit. This statement spells out SDB's operational policies, investment criteria, exposure limits, loan conditions, financial policies etc. SDB is precluded from:  - 16 - (a) borrowing more than four times its net worth; (b) lending for less than one year and more than 20 years; (c) lending more than 75% of the total capital requirement of any individual project; (d) providing financing (including guarantees) to an enter- prise in excess of 20% of SDB's net worth and making equity investments in an enterprise exceeding 5% of SDB's net worth; (e) participating in excess of 49% in the equity of an enterprise; (f) making equity investments in excess of 50% of SDB's own net worth; and (g) managing an enterprise except as a temporary or transitional measure. 4.16 Investment Policies. Because major investment activities in Somalia are earmarked for the public sector and SDB is the only institution established to promote or finance development projects, SDB in the past assumed the role of an entrepreneur, a promoter and a financier. In the process it exceeded its exposure limit in financing a few enterprises pro- moted by it or salvaged by it out of the portfolio of the defunct Credits Somalo. Some of these are still SDB subsidiaries while some others have been handed over to local bodies or other agencies of the Government after completion. The Somali representatives at the credit negotiations clarified that it is not SDB's intention to carry out a holding company function on a permanent basis even in respect of its existing subsidiaries (3) and that in the near future SDB proposes to divest itself of its equity investments in these enterprises and to assist them in recruiting independent management. However, the Somalis stated that in the absence of any alternative institu- tional arrangements in Somalia at present for setting up (and managing) pub- lic sector industrial enterprises, SDB may be called upon in certain cases to undertake these functions, in addition to its normal functions of promoting and financing projects, as a temporary measure. To enable it to do so without infringing any provision of its by-laws, the latter have recently been amended to authorize SDB to exceed its exposure limits in case of Government-sponsored projects, provided (a) such projects are first approved by SDB shareholders; and (b) credit risk in such cases is assumed by the Government. These amend- ments should provide adequate protection to SDB from undue direct exposure in Government-sponsored projects. 4.17 SDB's Autonomy. Many authorities and agencies are usually involved in the investment decision making process in Somalia. Very often the project ideas are generated in the Ministries of Industry, Agriculture or Planning.  - 17 - Once these ideas are passed on to SDB for further examination and implementa- tion, SDB makes its own independent appraisal of the project (often with the help of outside consultants); it can suggest changes in the design of the project and even reject it outright. 4.18 Interest Rate. SDB charges interest from 5.5% to 7.5% on its loans, with the lowest rate applicable to medium-term loans for agriculture, livestock, and handicrafts (see Annex 3). Considering the fact that these rates would only be marginally positive, (should the long-term Somali fore- casts of inflation at 5-6% p.a. be borne out by experience), IDA suggested to the Somali delegation at the negotiations that SDB charge a uniform 9% on all its loans. The Somalis stated that any rate beyond 7.5% would repre- sent a major depature from the present level and structure of interest rates in Somalia and would require a careful study and examination. The Government has agreed to undertake such a study which will form the basis for continuing the dialogue on interest rates between Somalia and IDA during the implementa- tion of this project. Further, the Somalis were keen on maintaining the existing rates for loans to agriculture, and handicraft sectors. An agree- ment was reached during negotiations that SDB will in the future charge 5.5% and 6% on its medium- and long-term loans respectively to agricultural and handicraft sectors and a uniform 7.5% on all loans to industrial and other sectors. Pending the outcome of the proposed interest rate study, the main criterion for agreeing to the aforementioned rates was to ensure that SDB would have a spread of about 3% on its borrowed funds during the next two years to enable it to cover its operating expenses, make adequate pro- visions against doubtful investments, and build up some reserves. It was also agreed that the Somali Government would on-lend IDA credit to SDB at 5% p.a. and that the Government would charge 2.5% p.a. on the present Government loan of Sh 26 million to SDB. Since this loan and the proceeds of the IDA credit would constitute the major portion of SDB's borrowed funds for the next two years or so, the average cost of borrowed funds for SDB during this period would be around 4%. With loans to industrial enter- prises constituting about 80% of the operations, SDB's average yield on new loans during the next two years would be about 7%. 4.19 Foreign Exchange Risk. Until recently SDB was assuming exchange risk on its foreign currency loans (USAID and Iraqi loans), which in the past resulted in some exchange losses. As the outstanding amount of these foreign exchange loans is only Sh 4.8 million ($800,000) and SDB also has a revaluation reserve of Sh 78,887, its future exposure to exchange fluc- tuations is limited. SDB has recently amended its By-laws to the effect that it will not assume such risks in the future. The Somali delegation at the negotation stated that such risks in the future will be assumed by the Central Bank of Somalia. The Somali Government is against collection of any fee from the ultimate borrowers of the IDA credit for the assump- tion of this risk by the Central Bank for the reason that this would amount to increasing the cost of foreign currency sub-loans. It however, agreed to study this question also when carrying out the interest rate study (see para 4.18).  - 18 - V. PORTFOLIO, FINANCIAL CONDITION AND RESOURCES Portfolio Evaluation 5.01 Loan Portfolio. As of June 30, 1976 SDB's loan portfolio (in- cluding loans to its subsidiaries but excluding DLS) consisted of 356 loans amounting to Sh 117 million. Loans to the industrial sector amounted to Sh 85 million (or 72% of the total loan portfolio), of which Sh 46 million accounts for loans to SDB's own subsidiaries. However, in terms of number of loans, agriculture accounted for 80% of total number of loans outstand- ing. SDB's loan portfolio also included 22 loans amounting to Sh 2 million to cooperatives, most of which were engaged in fishing and crop production. 5.02 The overall quality of SDB's loan portfolio is satisfactory. As of June 30, 1976, out of 356 loans totalling Sh 117 million, 103 loans amount- ing to Sh 23 million, or 20% of SDB's loan portfolio, were in arrears of over three months. Some of these projects have since cleared their arrears and only Sh 15 million of the loan portfolio was affected by arrears as of August 15, 1976. The major defaulters were three parastatal enterprises accounting for Sh 11 million of the portfolio; loans to these borrowers are guaranteed by the Government and SDB is pursuing the recovery of the defaulted amounts from the Government. The remaining arrear-affected portfolio of Sh 4 million con- sisted of 93 small loans to farmers, most of which SDB believes are collect- able. 5.03 Equity Investments. Annex 10 provides details of SDB's six equity investments as of December 31, 1976 amounting to Sh 17 million. Four equity investments aggregating Sh 16 million were in SDB's subsidiaries; two subsidi- aries are problem-free, while the other two involving equity investments of Sh 7 million are facing difficulties. Of the remaining two equity invest- ments, only one investment in INCAS, a producer of corrugated banana boxes and polyethylene bags, was in serious difficulties. SDB decided towards the end of 1976 to write off Sh 1.048 million out of this investment in three equal annual installments commencing December 1976. 5.04 Provisions. SDB has generally followed a resonable policy for making provisions in respect of its loans and equity investments except its loans to or equity investments in its subsidiaries in respect of which no provisions in the past were made. As of December 31, 1976, as per SDB's pro- visional accounts, total provisions against loans amounted to Sh 1.7 million which appear to be adequate only in respect of SDB loans to enterprises other than its subsidiaries. SDB's two wholly-owned subsidiaries (involving equity investments of Sh 7 million), which are in difficulties, had cumula- tive losses, aggregating over Sh 10 million, as of December 31, 1975. Under- standings were reached at the negotiations that SDB will make adequate pro- visions against them in its 1977 accounts. Financial Position 5.05 SDB's financial position is sound due to its large equity base, and very low long-term debt. SDB's audited balance sheets covering 1972-1975 and  - 19 - provisional balance sheet as of December 31, 1976, are summarized in Annex 11. SDB's assets have increased fivefold from Sh 33 million in 1972 to Sh 161 million in 1976. Such a rapid increse was mainly due to SDB's promotional efforts and financing of a few large projects such as the flour and pasta mill and the fruit processing factory. The increase in portfolio was primarily financed by SDB's paid-in capital which increased from Sh 21 million in 1972 to Sh 113 million in 1976. As of December 31, 1976 SDB's total assets were Sh 161 million consisting of loans (75%), equity investments (10%) fixed assets (2%) and current assets (13%). SDB's long-term debt/ equity ratio of 0.3:1 was much less than 4:1 allowed by its law. Although SDB's provision of Sh 1.7 million is not adequate (see para 5.04), SDB's equity base is so large that even if it were necessary to write off the entire amount of doubtful debts and accumulated losses of its subsidiaries, SDB would still be credit- worthy. Financial Results 5.06 Since its inception SDB has been able to consistently generate a modest profit. Annex 12 provides SDB's audited income statements for 1972- 1975 and provisional accounts for 1976. SDB's net profit after taxes de- creased from Sh 1.3 million in 1974 to Sh 0.4 million in 1975, or 0.4% of average equity, due to provisions for bad debts of Sh 1.7 million and losses on investments amounting to Sh 0.4 million written off. According to the provisional 1976 accounts SDB's profits for the year are likely to be about Sh 0.8 million of 0.8% of average equity. SDB's administrative expenses which were 1.1% of its average total assets in 1975 increased to 2% in 1976 due to recruitment of a number of new staff members, shifting of SDB Head office to more spacious premises and establishment of a Branch office in Hargeisa. SDB's profitability is marginal due mainly to its interest rate structure which allows it a very modest spread and to a very low leverage. SDB paid a dividend of Sh 16 per share of Sh 1000 in 1976 for 1974. This distribution of unappropriated profits was done in view of the likelihood of the Libyan Arab Foreign Bank participating in SDB's equity to the extent of 40% of the proposed Sh 200 million paid-in capital. However, the Libyan participation did not come through. Otherwise, SDB's shareholders do not have dividend expectations from their investments in SDB's equity. Resources 5.07 As of December 31, 1976, SDB had resources of Sh 4 million for future commitments; it had committed Sh 147 million as against its total resources of Sh 151 million. SDB's local resources consisted mainly of its paid-in capital (Sh 113 million), retained earnings (Sh 3 million), and a medium-term loan of Sh 3 million from the Central Bank. SDB also received a loan of Sh 26.1 million from the Government, regarding which understandings were reached at the negotiations that it would have a maturity of 10 years with interest at 2.5% p.a. SDB's foreign resources include a Sh 4.5 million loan from Iraq and a small loan of $50,000 from USAID. SDB's resource posi- tion became tight in mid-1976 because the earlier proposal of an equity in- vestment of about Sh 80 million from Libya did not materialize. To rectify  - 20 - this situation the Government approved an increase in SDB's equity from Sh 100 million to Sh 200 million in five equal annual tranches starting October 1976. However, during 1976 SDB received only Sh 13.5 million out of the first tranche of Sh 20 million; the unpaid Sh 6.5 million is likely to be received in 1977 in addition to the second tranche of Sh 20 million. VI. PROSPECTS Business Outlook 6.01 SDB's business prospects for the next few years appear to be good. The Five Year Development Program (1974-1978) envisages an investment of Sh 3,863 million. The shares of the major sectors are as follows: agriculture Sh 1,124 million; transport Sh 945 million; and industry Sh 588 million. The Annual Development Plan for 1976 involved an investment of Sh 813 million, including Sh 154 million for industry, Sh 151 million for agriculture, Sh 38 million for livestock and Sh 12 million for fisheries. Out of Sh 154 million earmarked for industry, 58% was to be invested in modernization and expansion of existing enterprises like the textile, sugar, fish and meat factories. While data on actual investments in these projects in 1976 are not yet avail- able, it is known that their modernization programs were underway in 1976. Some of the new projects to be implemented in the near future include another sugar factory, a cement factory, a fibreglass boat factory, an oil refinery, a hide and skins development center, a fishing gear factory, and salt works. SDB, being the only Somali institution providing term finance for development, is expected to finance a sizeable portion of the projected investments. Strategy 6.02 SDB perceives the following as areas of most immediate concern to it in the near-term: (i) recruitment of professionally qualified Somali staff and their training; (ii) obtaining technical assistance in the areas of financial, economic and technical appraisal, follow-up and financial control; (iii) organizing independent corporate set-up for wholly-owned projects and maintenance of adequate independent accounts; (iv) locating independent management for subsid- iaries and wholly-owned projects; and (v) reaching out to the small farmers by estab- lishing branch offices in agricultural development areas.  - 21 - Forecast of Operations 6.03 While SDB's annual net approvals averaged Sh 42 million per year during 1973-1975, they declined to Sh 16 million in 1976 primarily due to lack of resources. With the proposed foreign resources from IDA and appropriate staff development and technical assistance programs to improve SDB's capacity to appraise projects, SDB should be able to start operating at a much higher levelin the near future. SDB expects to commit Sh 142 million (US$22.5 million) over the period January 1, 1977 - June 30, 1979 in loans and equity investments. Given SDB's past record of financing about 15%-20% of the planned investment in the industrial sector and its pipeline of projects as of December 31, 1976, the forecast of operations is attainable. Annex 13 provides SDB's pipeline of projects which consisted of 92 projects needing financial assistance of over Sh 46 million. These projects are in addition to the projects being identified by SDB for promotion and those specified in the Five Year Development Program (see para 6.01). SDB also expects to provide Sh 8 million in loans to 80 agricultural cooperatives. Resource Requirements 6.04 SDB's forecast of operations during the next five years (1977-1981) and the underlying assumptions are provided in Annex 14 and 15. SDB's fore- cast level of commitments during January 1977 - June 1979, and the projected resources position are likely to be as follows: Resources 1977 1978 1979 TOTAL (Sh in million) (June 30) Resources (gap) at the beginning of the year 4 (3) (31) SDB Capital increase 27 20 10 57 Algerian Development Bank loan 6 - - 6 Internally generated funds 14 15 12 41 51 32 ( 9) 104 Uses Loan commitments 45 52 30 127 Equity investments 6 6 3 15 Debt repayments 3 5 2 10 54 63 35 152 Surplus (gap) (3) (31) (44) 6.05 SDB needs Sh 152 million (US$24 million) to cover its projected commitments and debt repayments up to June 30, 1979. SDB expects to finance this by new equity of Sh 57 million, internally generated funds (loan collec- tions, depreciation, earnings and provisions) of Sh 41 million, a loan of  - 22 - Sh 6 million from the Algerian Development Bank and SDB's uncommitted resources of Sh 4 million as of December 31, 1976. This will leave a gap of about Sh 44 million ($7 million), of which IDA will provide Sh 31 million ($5 million, that is, 22% of SDB's projected commitments for the period). SDB's other sources of long-term foreign exchange funds in the near future are likely to be the European Investment Bank, which has re- cently shown interest in SDB's operations, and the AFESD. Furthermore, SDB has an understanding with the Government that should SDB need addi- tional resources earlier than the present projections indicate, the Govern- ment and the Central Bank would accelerate payment of their shares of SDB's increased paid-in capital. IDA Credit 6.06 The proposed IDA credit of $5 million would be on-lent by the Somali Government to SDB at 5% p.a. SDB would be able to use up to $260,000 of the credit for financing part of the technical assistance program involv- ing an expenditure of about $600,000, of which $340,000 is being provided by AFESD (see para. 4.10). The balance amount of $4.74 million would finance the foreign exchange cost of goods and services of sub-projects approved by SDB. Foreign exchange risk on the sub-loans would be borne by the Central Bank of Somalia. 6.07 Amortization schedule. For the sake of administrative simplicity and convenience a fixed amortization schedule of 15 years with five years grace has been proposed. SDB sub-loan terms are likely to range between four to ten years, with an average life of seven years. Principal grace periods will vary between one to three years. About 80% of SDB borrowers by number, accounting for about 20% of SDB sub-loans, are likey to be small agricultur- alists with loans having maturities of about four years. About 80% of the amount would be lent by SDB to parastatals, which are so intimately linked to the Government, and the latter to SDB, that a composite repayment schedule appears inappropriate. The fixed amortization schedule would involve roll- over of IDA funds by SDB. This is intended to improve SDB's resource position during the coming years when IDA will be one of SDB's main external sources of funds. Secondly, this should give SDB greater autonomy in planning and managing its cash flow, by reducing the need to go back to Government so fre- quently for resources. 6.08 Free Limit. IDA should require prior approval of each sub-project using more than $50,000 of the proceeds of the credit. This limit will enable SDB to approve the vast majority of its sub-loans, which are individually for amounts below the free limit. An appropriate aggregate free limit would be $1.5 million which would ensure that at least 70% of the amount of the credit would come to IDA for approval.  - 23 - 6.09 Disbursements. The proceeds of the proposed credit would finance 100% of the CIF cost of direct imports, and appropriate percentages, to be agreed with SDB, of invoice price of goods previously imported into Somalia or of those manufactured locally and of construction costs, representing in all cases the import component of such costs. Projected Financial Position 6.10 Projected balance sheets for 1977-1981 (see Annex 16) show that SDB will continue to be a sound financial institution. SDB's assets are projected to increase from Sh 161 million in 1976 to Sh 373 million in 1981, an annual growth rate of 18%. This appears attainable. The increase in assets will be primarily financed by equity increase (Sh 87 million), bor- rowed funds (Sh 100 million), and internally generated funds (Sh 25 million). SDB's long-term debt/equity ratio is expected to remain below 0.7 throughout the projection period reflecting substantial additional borrowing capacity; SDB's authorized debt/equity limit is 4:1. SDB's debt service coverage for interest and principal payments is projected to increase from 2.5 in 1976 to 5.5 in 1981, leaving ample cushion for any unforeseen shortfalls in loan collections. Provisions are projected to increase from 1.2% of loan and equity portfolio in 1976 to 4.1% in 1980. This is reasonable. Projected Financial Results 6.11 SDB's projected income statements and cash flows are shown in Annexes 17 and 18. Annex 19 shows relevant financial ratios. Projections show that SDB's profit after tax is estimated to increase from Sh I million in 1977 to Sh 5 million in 1981. The figures allow for provisions to be maintained at 3% of year-end loan portfolio and 5% of year end equity invest- ments which are considered adequate. Net profit after tax as percentage of average total assets is estimated to gradually increase from 0.5% in 1976 to 1.4% in 1981. Given SDB's large equity base and its low interest rates, returns on its equity are projected to average only 1.7%. This is a very low return. Since SDB's shareholders have no dividend expectations from SDB, this can be considered acceptable. Returns from SDB's loan portfolio are estimated to increase gradually from about 3.7% in 1976 to 6.6% in 1978 and to 7% in 1981 while the cost of borrowed funds is estimated to increase from 2.4% in 1976 to 3.4% in 1978 and 4.6% in 1981. During the next two years the average spread will be over 3%, but it will gradually decrease to 2.4% in 1981; this appears to be satisfactory. SDB's administrative expenses at 2% of the average total assets in 1976 were rather high due to expenses asso- ciated with SDB's expansion but are estimated to gradually decline to 1.5% by 1981 with the projected increase in SDB's operations. 6.12 SDB's projected financial results are based, among other things, on the critical assumptions that (a) SDB would charge an average 7% on all its new loans; (b) it would pay 5% on IDA credit and other future foreign credits; (c) it would pay 2.5% on the Government loan of Sh 26 million; and (d) it would have no other domestic currency borrowings. On these assumptions, SDB would have an average spread of 2.8% during the next five years on all its borrowed funds. While the average cost of all long-term resources to SDB will be much lower due to the projected increase in its equity, SDB would need a spread of  - 24 - the magnitude indicated above on borrowed funds to be able to meet is admin- istrative expenses, make adequate provisions on a rapidly expanding port- folio, and create some reserves. Any increase in the interest rate on future foreign borrowings would adversely affect SDB's profitability; this underscores the need for the Somali authorities to complete their interest rate study (para 4.18) as soon as possible and for SDB to review its interest rate structure periodically. VII. RECOMMENDATIONS 7.01 It is recommended that an IDA credit of $5 million be approved for on-lending by the Somali Government to SDB on the following terms and condi- tions. In view of the need to allow SDB a reasonable spread on the IDA credit, it is recommended that the credit be on-lent by the Somali Government to SDB at 5% per annum. The foreign exchange risk on the sub-loans would be assumed by the Central Bank of Somalia. For the sake of administrative simplicity and convenience the credit should have a fixed amortization schedule of 15 years with a five year grace period. The proposed term of IDA credit would allow a rollover of funds by SDB which would help improve SDB's resource position. IDA should require prior approval of each sub-project using more than $50,000 of the proceeds of the credit. An appropriate aggregate free limit would be $1.5 million, which would ensure that at least 70X of the amount of the credit would come to IDA for approval. SDB will be required to maintain a debt/equity ratio of 4:1. 7.02 The following are recommended as conditions of effectiveness of the above credit:- (a) that SDB has appointed an Agricultural Economist, an Engineer, a Legal Advisor and two graduates in Eco- nomics (para 4.08); (b) that the AFESD Technical Assistance grant has become effective (para 4.10); and (c) that SDB's Board of Directors has adopted the State- ment of Operating Policies, as at Annex 9 (para 4.15).  ANNEX 1 SOMALIA An Overview of the Industrial Sector in 1973 Public Private Total Manufacturing establishments 32 241 273 Employment 4.,482 2,377 6,859 Wages & salaries (Sh million) 2500 7.2 32.2 Value of Gross Output (Sh million) 181.9 64.1 246.0 Value added (Sh million) 106.8 18.7 125.5 Gross fixed capital formation 18.7 4.7 23.4 (Sh million) Source: Industrial Sector Review,, UNIDO - DP/SOM/72/007, January 1976 IDA/EAPID February 28, 1977  ANNEX 2 SOMALIA Outstanding Loans of the Commercial Bank by Sectors / (in Sh. million) Sectors 1971 1972 1973 1974 Hpt . Agriculture 18.3 46.1 64.9 184.1 207.2 19.0 Industry and Handicrafts 69.0 48.2 75.9 159.2 217.4 20.0 Trade 181.2 281.6 470.6 616.5 647.6 59.5 Other loans 28.8 27.2 61.8 6.8 16.7 1.5 Total 297.3 403.1 67302 966.6 1,088.9 100.0 1/ Including loans of public enterprises. Source: Central Bank of Somalia IDA!EAPID February 28, 1977  ANNEX 3 SOMALIA Interest Rates Structure (as of Aug. 1,1976) Central Bank of Somalia (CBS) Discount rate ------------ 3.5% Government Credits ------------ 2.5% National Commercial Bank (NCB) Deposits Private Public Domestic Foreign Savings (ordinary) 2.0 2.0 1.0 Fixed Deposits 3 months 4.o 4.0 2.5 6 months 4.5 4h5 3.0 12 months 5.0 5.0 4.0 24 months 6.o 6.0 4.5 Over 24 months 6.5 6-5 5.0 Lending rates - overdrafts and advances 9.0 12.0 7.0 Somali Development Bank (SDB) Agriculture/ Industry/ Handicraft Mining Others Medium Term-tZ-6 years) 5.5% 6.o% 6.5% Long-term (7-20 years) 6.o% 6.5% 7.5% Source: Central Bank of Somalia IDA/FAPID February 28, 1977  ANNEX 4 SOMALIA Consumer Price Index December 1971-February 1976- (1970=100) Rent & Fuel & General Annual Period Food Water Clothin Lighting Miscellaneous Index Charge Weight m (13) (4) (16) (100) 1971 December 97.2 141.2 102.8 101.5 97.9 101.4 1.4% 1972 December 101.0 110.5 107.8 6665 98.5 100.4 (1.0%) 1973 December 123.8 121.0 115.2 80.4 107.9 118.3 17.8% 1974 December 152.1 117.2 137.4 84.0 128.2 141.2 19.4% 1975 March 154.9 117.6 138.6 83.9 145.1 146.1 June 163.8 120.1 1145.9 91.0 148.3 153.0 Sept. 158.7 125.0 151.4 79.3 148.7 150.5 Dec. 160.8 125.3 158.4 79.3 149.1 152.4 709% 1976 Jan. 167.8 125.1 160.1 79.3 152.9 157.6 Feb. 166.8 126.5 162.0 79.3 156.9 157.9 General Index: average annual increase (1970-75) = 9.1% Food average annual increase (1970-75) = 10.4% 1/ Based on Mogadiscio surveys. Source: Central Bank of Somalia IDA/EAPID February 28, 1977  ANNEX 5 SOMALI DEVELOPMENT BANK Summaa of Operations (1968-1976) (Amount in ShIOOO) Year Ending December 31 LOANS EQUITY TOTAL No. Amount No. Amount Amount 1968-1972 Approvals 184 35,429 4 2,454 37,883 Commitments 184 35,429 4 2,454 37,883 Disbursements n.a. 27,670 4 2,454 30,124 1973 Approvals 90 49,357 4 3,679 53,036 Commitments 90 49,357 4 3,679 53,036 Disbursements n.a. 34,138 4 3,679 37,817 1974 Approvals 75 35,820 3 2,824 38,644 Commitments 75 35,820 3 2,824 38,644 Disbursements n.a. 36,716 3 2,824 39,540 1975 Approvals 91 39,460 3 5,210 44,670 Commitments 91 39,460 3 5,210 44,670 Disbursements n.a. 45,915 3 5,210 51,125 Cancellations n.a. (10,105) 1J - - (10,105) 1976 Approvals 136 22,784 2 9,5o8 32,292 Commitments 136 22,784 2 9,508 32,292 Disbursements n.a. 9,618 2 9,508 19,126 Cancellations 2 (9,500) 2/ 4 (6,573)3/ (16,073) Cumulative (1968-1976) Approvals 576 182,850 6 23,675 206,5Z5 Commitments 576 182,850 6 23;675 206,525 Disbursements n.a. 155,478 6 23,675 179,153 Cancellations n.a. (19,605) - (6,573) (26,178) 1/ Including a transfer of Sh. 4.5 million loan to ITOP's equity and cancellations of undisbursed portion of some small loans. 2/ Transfer of a Sh. 7.5 million loan to the equity of Flour and Pasta Factory and a Shs. 2.0 million loan to the equity of the Brick Factory. a/ Includes investments sold or written off. IDA/EAPID February 28, 1977  ANNEX 6 SOMALI DEVELOPMENT BANK Loan Approvals by Sector (1968-1976) (Amounts in Sh'OOO) SECTOR Up to 1975 1976 1968-1976 % No. Amount No. Amount No. Amount No. Amount Industry 48 107,950 3 11,264 51 119,214 9 65 Agriculture 327 25,069 116 4,892 443 29,961 77 17 Livestock 7 3,494 1 300 8 3,794 2 2 Fisheries 29 1,778 3 229 32 2,007 5 1 Transport 13 8,899 3 3,493 16 12,392 3 7 Water Development 4 2,517 - - 4 2,517 1 1 Construction and Housing 2 2,800 1 811 3 3,611 - 2 Tourism 2 4,201 - - 2 4,201 - 2 Others 8 3,358 9 1,795 17 5.153 3 3 Total 440 160,066 136 22,784 576 182,850 100 100 IDA/EAPID February 28, 1977  ANNEX 7 SOMALI DEbELOPMENT BANK Board of Directors (As of Aug. 15, 1976) Board Member Position Appointed By Dr. Mohamud Jama Ahmed!/ Chairman & President President Mr. Sherif Abubaker M'ed Deputy General Manager Central Bank of Somalia Mr. Ali Mohamed Ibrahim Senior Officer Central Bank of Somalia Mr. Omar Haji Said Senior Officer, Ministry Government of Finance Mr. Ahmed M. Nur2/ Director of Budget, Government Ministry of Finance Mr. Adam Abdi Hussen Director, INCAS Government 1/ Alternate Governor of the World Bank 2/ Alternate Governor of the International Monetary Fund. IDA/EAPID February 28, 1977  SOMALI DEVELOPMENT BANK PROPOSED ORGANIZATION CHART (As of August 15, 1976) HOARD OF DIRECTORS I PRESIDENT Mohamud Jansa Ahmned Advi,sor GENERAL MANAGER | Investment Advisor Mohamrud Mohatned NoDo (vacant) BRANCHES Fiwancial Advisor S_BRANCHE5 (D.L. Prasad) Industrial Engineer (vacant) LOAN Agricultural Economist C TTE (vacawt) SUBSIDIARIES INTERNAL AUDIT OPERATIONS FINANCE ADMINISTRAFION LEGAL vacant Mohamned Shaikh llmi vacant Hassan Nur Osman vacant 3 p..tessionals I Professional PROJECT DIVISION LOANS DIVISION PERSONNEL SECRETARIAT Hussen Mobhaniud Siad Mohamed Dirie Khayre Ahmed Abdi Isse Onmar Idosir Shaik 1 professional 2 professionals Positions Filled Vacant Professionals at l .'dqar tars 18 12 6 Professninals dt Subsidisrses 4 3 1 Non .roIvssis 45 45 - C.patriates Atisms 4 1 S T,,tal 71 61 10 World Bank 16454 IDA/ EAP ID February 28, 1977  ANNEX 9 Page 1 of 3 SOMALI DEVELOPMENT BANK DRAFT STATEMENT OF OPERATING POLICIES OBJECTIVES 1. The objectives of the Bank shall be to promote, assist and develop or modernize any productive enterprise in the agricultural, industrial, mining, tourist, fisheries and livestock sectors and, in general, to take any other initiative aimed at the economic development of the country, within the framework of development programmes and priorities established by the State. OPERATIONS 2. The Bank will promote the agricultural and industrial development of Somalia through one or a combination of the several of the following methods: (a) Provision of medium and long-term loans (b) Direct equity investments (c) Provision of guarantees for loans from other sources (d) Underwriting security issues, shares, stocks and similar obligations (e) Preparation of feasibility studies 3. The Bank shall seek to diversify its investments by location, size and economic sectors. 4. The Bank shall give special consideration to projects utilizing con- siderable local raw material and emphasizing the use of national labor resources and to export oriented projects. 5. The Bank shall not normally refinance the existing indebtedness of enterprises. INVESTMENT CRITERIA 6. The Bank operations shall be guided by sound banking principles. Its investment decisions shall be based on sound appraisal methods and will partic- ularly take into account the total financial requirements of the project and the soundness of the resulting financial structure for the enterprise. 7. The Bank shall finance only economically sound, financially viable, technically feasible projects and those which have or will have competent management; in determining the soundness and viability of the projects it proposed to finance, the Bank will normally carry out internal rates of return calculations. It will also take into account the other economic benefits of projects, such as employment potential and investment cost per job created, foreign exchange savings or earnings, transfer of technology etc.  ANNEX 9 Page 2 of 3 CRITERIA FOR DIVERSIFICATION OF RISK 8. The Bank shall not extend loans exceeding three fourths of the total capital requirements of any individual project and shall further require that at least one-fourth of the total capital requirements of the project be actually paid in by the sponsor before the loan funds are released. 9. The Bank's total financing including guarantees to any individual enterprise shall not exceed 20% of the Bank's paid in capital and reserves. 10. The Bank's equity participation in any individual enterprise shall not exceed 5% of the Bank's paid-in capital and reserves and 49% of the company's paid-in capital. 11. The Bank's total equity participations shall not exceed 50% of the Bank's paid-in capital and reserves. 12. In exceptional circumstances where the Bank is required to provide financing to large Government-sponsored projects, in excess of the limits laid down in the preceding paragraphs (8-10), the Bank shall do so provided the credit risk on the concerned projects is assumed by the Government. LOAN CONDITIONS 13. The Bank shall not make loans for a period longer than 20 years or shorter than one year. 14. The Bank's Board of Directors shall determine from time to time the rates for interest, commission, fees and other charges for the Bank's funds or services. The charges will, as far as possible, be in line with the pre- vailing market rates for similar funds and services and will be at levels which will enable the Bank to cover its administrative and financial expenses, make adequate provisions against possible bad debts and provide a reasonable return on the paid-in capital. 15. The Bank shall at all times seek to protect itself against exchange risks of foreign borrowings. 16. The Bank shall take such security for its loans and guarantees as its Board shall determine. SUPERVISION OF PROJECTS 17. The Bank shall supervise its investments to protect its interests and to enable it to assist its projects to the maximum extent possible.  ANNEX 9 Page 3 of 3 PROHIBITION OF BUSINESS 18. The Bank shall not accept from the public any deposits for periods of less than twenty-four months. 19. The Bank shall not directly manage or administer any enterprise except as a temporary or transitional measure. FINANCIAL POLICIES 20. The Bank's total borrowings shall not at any time exceed four times its paid-in capital and ordinary reserve funds. 21. At the close of each financial year, the Bank shall carry out a thorough review of the quality of its portfolio and on the basis of this review make adequate provisions for possible bad debts and equity invest- ments out of its income for the year. 22. At the close of each financial year the Bank shall prepare the Profit and Loss Statements and the Balance Sheets of its own operations as well as those of its subsidiaries and have them audited by independent auditors appointed by the Bank's shareholders. 23. Before the close of business each year the Bank shall prepare its budget for the next financial year, showing the estimated receipts and expenditures of the Bank. 24. Before the close of business each year, the Bank shall prepare the forecast of its operations and resource requirements for the next two years. 25. The Bank shall allocate not less than 25% of its net profit each year to its Reserve Fund. STAFF 26. The Bank shall recruit, as far as possible, qualified Somali staff for its operations. It shall employ foreign nationalsonly on contract for speci- fied periods for setting up adequate operational and financial procedures and for providing training to the Somali staff. The Bank shall also arrange for training of its staffin appropriate institutions inside or outside Somalia in project appraisal, supervision, and financial control and management. IDA/EAPID February 28, 1977  ANNEX 10 SOMALI DEVELOPMENT BANK List of Equity Investments (As of December 31, 1976) SD 's Share Economic Amount as % of Net Profit Dividend Name Activity Outstanding Total Equity (Loss) Received Remarks (Sh'000) (Sh '000) (Sh'000) A. Enterprises operating profitably or problem- free 1. FIMA Auto spare 1,400 100% 918 880 Subsidiary. part distri- (1975) (1975) Received SDB loan bution of Sh 200,000. Good prospects. 2. Flour & Past Flour & Past 7,500 100% 801 - Subsidiary. Plant production (6 months ended Received SDB loan June 30, 1976) of Sh22.8 million. Good prospects. B. Enterprises in implementation/ rehabilitation stage 3. Somaltex Textile 1,200 n.a. n.a. nil Recently modernized, and new management installed. Good prospects. C. Enterprises operating at a loss or in technical difficulties 4. I.T.O.P. Fruit 5,000 100% (2,144) nil Subsidiary. processing (1975) Cumalative loss as of December 31, 1975 Sh6.4 million. Prospects improving. Received SDB loan of Sh12.5 million. 5. Brick Factory Bricks and 2,0nn 100% (3,938) nil Being incorperated as tiles pro- (1975) a subsidiary. Uncertain duction prospects. Received SDB loan of ShlO.4 million. 6. INCAS Corrugated 2 n.a. (7,000) nil Being reorganized. cardboard boxes (1975) SDB wrote off its & polyethylene investment of bags production Shl,048,000. Uncertain prospects. 17,102 IDA/EAPID February 28, 1977  ANNEX 11 SOMALI DEVELOPMENT BANK Balance Sheets 1972-1976 (Amounts in Sh T000) As of December 31 1972 1973 1974 1975 19 Assets Cash, deposits & S T Inveatments 8,900 10,200 8,800 2,354 14,948 Accrued interest on loans 400 1,100 1,400 4,904 4,576 Other current assets 700 1 300 1,200 - 1 503 Total current assets = 1 2,600 71,25 , Equity investments 2,500 4,900 7,800 12,952 17,102 Loan portfolio 18,800 50,000 76,500 118,524 121,932 Less: provisions (400) (700) ( (500) (2 079) (1,687) Loan Fbrtfolio (net) 1 0 49,200 760 I 120,245 Net Fixes Assets 200 400 400 1,203 2,039 Deferred expenses 699 Total Assets -3,__0 69,10 ",0 1 2 16,1 Qaarantees as per contra 2,000 2,000 2,400 2,400 2,314 J-iabilities and Net Worth Interest suspense - 100 100 1,565 3,903 Short-term borrowings - - - 19,600 Tax payable - - - 215 592 Other current liabilities 700 2,100 3,300 3,650 5,791 Total current liabilities 700 2,200 3,400 25,030 10,286 Cooperative funds - - - 1,007 962 Z*dium and long-term liabilities Loan from the Central Bank - 7,000 5,700 4,345 2,946 Government loan - - - - 26,071 Foreign loans 9,4oo 8,300 7,200 5,994 4,842 Total medium-& long-term 9,400 15,399 12,900 10,339 33,859 loans Paid-in share capital 20,600 48,600 76,800 99,807 113,307 Reserves and surplus 400 1,000 2,200 1,425 2,698 Grant - - 300 250 - TItal Net Worth 21,00 49,6 7g,300 101 lI, Total Liabilities and Net 33 100 69,100 98,000 140,258 161,112 kbrth ..L.. -___ ___ Guarantees as per contra 2,000 2,000 2,400 2,400 2,314 P Provisional IDA/EAPID February 28, 1977  ANNEX 12 SOMALI DEVELOPMENT BANK Income Statements (1972-1976) (Amounts in Sh '000) Year BEding December 31 1972 1973 1974 1975 1976 l/ Revenue Interest on loans 763 2,143 3,279 4,359 4,245 Commitment fees 98 84 330 52 230 Tncome from equity investments - - - 6 880 Interest from short-term investments 277 57 (6) - 50 Management fees / - 227 329 - - Other Income 3 17 64 60 94 Total Revenue 1,141 2,528 3,996 4,477 5,499 Expenses Interest on borrowings 266 315 440 439 521 Commitment fees - - - - - 'rOtal financial expenses 266 315 440 439 521 Salaries and allowances 475 578 ! 785 741 2,054 Other administrative expenses 168 273 411 495 1,028 Depreciation 40 56 108 150 146 Total administrative expenses 6T3 907 774 Provisions for bad debt 94 787 69 1,648 _ Investment written off - - - 395 350 Total expenses 855 2,009 1,813 3,868 4,099 Net Profit before Tax 286 519 2,183 609 1,400 Taxes _ 187 922 215 592 Net Profit 286 332 1,261 394 808 1/ Provisional 2 Fees for managing the Development Loan Section and Cooperative Funds. IDA/EAPID February 28, 1977  ANNEX -iJ SOMALI DEVEIOPMENT SANK Pipeline of Projects as of December 31, 1976 Name of the Project SDBts Financing needed 1. Sugar Mill (Expansion) 3,000 2. Fishing 3,000 3. Oil seeds processing .4,000 4. Sponge factory 2,000 5. Plastic Industry 2,000 6. Fbundry 10,000 7. Bottling factory 4,000 8. Sisal project 9,000 9- 18. Small industries and handicrafts 1,255 19- 22. Smnll Fishing projects 262 23- 92. Small agricultural projects 7.547 46,o64 Pro.jects in Identification Stage Name of the Project Estimated Cost (Sh in million) 1. Vegetable Oil Complex 20.0 2. Banana Fibre Project 15.6 3. Alumrinum Utensils 18.0 4. Animal Feed 4.0 5. Sanitary Ware and Tableware 60.0 6. Dry Battery Cells 3.0 7. Fertilizer Blending 15.6 IDA/EAPID February 28, 1977  ANNEX 14 page 1 of 2 SOMALI DEVELOMENT BANK Assumptions for Operational and Financial Projections Approvals 1. 1977 1978 1979 1 1981 (Amounts in Sh'millionT Loans 45 52 60 69 79 Equity Investments 6 6 6 6 6 Total 51 58 66 75 85 Eighty five percent of agricultural loans are for imports compared with eighty percent of industrial loans. All equity investments are in local currency. Commitments 2. All approvals are committed in the same year. Disbursements 3. Seventy five percent of loan commitments are disbursed in the year of commitments and twenty five percent in the following year. Equity investments are disbursed in the year of commitment. Tnterest Income U. cExisting loan portfolio and : an annual average yield of 6.1% Undisbursed commitments New loan portfolio : 7.0% Dividend Income 5. For existing portfolio : an annual yield of 5.5% in 1977. Thereafter, a return of 3% per year is assumed. New portfolio : an annual yield of 3% after the third year. Other income from Loans 6. An appraisal fee of 0.5% on full amount of the loan. 7. A commitment fee of 1 percent on the average undisbursed commitments. Income from Short-term Investments 8. An annual average yield of 1.75%.  ANNEX 14 Financial Expenses Page 2 of 2 9. Amounts and terms of outstanding debts are as follows: Repayment Commitment Source Amount Interest Pi-rind Fee (Sh million) Central Bank of Somalia 2.9 3.5% 1977/1978 none Iraq 4.5 2.5% 1977/1980 none USAID 0.3 2.5% 1980/2010 none Government loans 26.1 2.5% 1978/1987 none 10. New Borrowirls IDA (1977-1979) 31.5 5% 15 years, 5 0.75% years grace Algeria (1977) 6.0 2.25% 5 years, 2 years grace Administrative Expenses 11. Salaries and allowances increase at an annual rate of 10%. 12. Other administrative expenses increase at an annual rate of 15% per year. Provisions for losses 13. Provisions are to remain at 3% of year-end loan portfolio and 5% of year-end equity investments. Taxes 14. Income tax 30% of net profit before taxes Municipal tax : 16.7% of net profit after income tax Stamp duty : 1% of net profit after income and municipal taxes Effective tax rate = 42.4% Equity Increase 15. SDB's equity is to be increased by Sh 26. 7 million in 1977 and Sh 20 million per annum during the next three years. Loan Collections 16. For existing loans, projected collections are based on actual repayment schedules. It is assumed that the new bans will have an average maturity of 7 years including 2 years grace. Receivables 17. Seventy five percent of interest income to be collected in the same year and 25 percent in the following year. Fixed Assets 18. Expenditure on fixed assets will be Sh 300,000 per year. The building is to be fully depreciated in 20 years on a straight line basis. Other assets are to be depreciated in 5 years. IDA/EAPID February 28, 1977  ANNEX 15 SOMALI DEVELOPMENT BANK Forecast of Operations (1976-1980) (Amounts in Sh million) Year Ending December 31 1977 1978 1979 1980 1981 Approvals Loans 45 52 60 69 79 Equity Investments 6 6 6 6 6 Total Approvals 51 58 66 75 85 Commitments Loans 45 52 60 69 79 Equity Investments 6 6 6 6 6 Total Commitments 51 58 66 75 85 Disbursements Loans 37 46 58 67 76 Equity Investments 6 6 6 6 6 Total Disbursements 43 52 64 73 82 Recoveries Loan collections 10 10 16 19 Sales of investments - - - - Total Recoveries 10 10 16 19 IDA/EAPID February 28, 1977  ANNEX 16 SOMALI DEVELOPMENT BANK Projected Balance Sheets (1976-1980) (Amounts in Sh '000) As of December 31 1977 1978 1979 1980 1981 ASSETS Cash, depesits and short-term invest. 23,847 16,034 18,080 17,465 6,616 Accrued income 5,128 5,747 6,489 7,284 8,075 Current maturities of loan portfolio 12,681 14,241 23,302 33,641 45,641 Other current assets 1,503 1,503 1,503 1,503 1,503 Total current assets 43,159 37,525 49,374 59,893 61,835 Loan portfolio 140,437 176,446 211,144 244,253 275,487 Less: provisions (4,070) (5,946) (7,623) (9,280)(10,773) Loan portfolio (net) 136,367 170,501 203,521 234,973 264,714 Equity investments 23,102 29,102 35,102 41,102 47,102 Less: provisions (1,140) (1,440) (1,740) (2,040) (2,340) Equity investments (net) 21,962 27,662 33,362 39,062 44,762 Net fixed and other assets 2,730 2,663 2,535 2,348 2,100 Total Assets 204,218 238,350 288,792 336,276 373,411 Guarantees as per contra 510 510 510 510 510 LIABILITIES AND NET WORTH Tax payable 740 1,814 2,354 3,098 3,635 Current maturities of term debt 5,183 5,747 5,756 4,621 5,871 Other current liabilities 9,694 9,694 9,694 9,694 9,694 Total current liabilities 15,617 17,255 17,804 17,413 19,200 Foreign Currency borrowings 20,386 33,004 62,283 88,524 121,604 Domestic borrowings 24,496 21,886 19,275 16,664 13,954 Total medium and long-term liabilities 44,882 54,890 81,558 105,188 135,558 Total Liabilities 60,499 72,145 99,362 122,601 154,758 Paid-in share capital 140,000 160,000 180,000 200,000 200,000 Reserves and surplus 3,719 6,205 9,430 13,675 18,653 Total Net Worth 143,719 166,205 189,430 213,675 218,653 Total Liabilities & Net Worth 20 2-8 2-38-350 2 88792 336 276 373N41i Guarantees as per contra 510 510 510 510 510 IDA/EAPID February 28, 1977  ANNEX 17 SOMALI DEVELOPMENT BANK Projected Income Statements (1976-1980) (Amount in Sh '000) Year Ending December 31 1977 1978 1979 1980 1981 REVENUE Interest on loans 8,540 11,016 13,984 17,164 20,327 Comimitment fees 112 131 146 173 199 ,-Jrmission 249 283 323 368 420 I:ncome from loans 8,901 11,430 14,453 17,705 20,946 Dividend income 941 512 512 693 873 Interest on short-term investments 480 569 430 477 307 Other income 50 50 50 50 50 Total Revenue 10,372 12,561 15,445 18,925 22,176 *EXPENSES Interest on borrowings 1,198 1,843 2,907 4,285 5,772 Commitment fees 148 29 259 47 75 Total financial expenses 1,346 1.822 3.166 4.332 5,847 Salaries and allowances 2,259 2,485 2,733 3,007 3,307 Other administrative expenses 1,182 1,359 1,563 1,798 2,067 Depreciation 308 368 428 488 548 Total administrative expenses 3,749 4,212 4,724 5,293 5,922 Provisions for losses: loans 2,383 1,876 1,677 1,657 1,493 equity investments 1,140 300 300 300 300 3,523 2,176 1,977 1,957 1,793 Total Expenses 8,618 8,260 9,867 11,582 13,562 Net Profit before taxes 1,754 4,301 5,578 7,343 8,614 laxes 740 1,815 2,354 3,098 3,635 -iet Profit 1,014 2,486. 3,224 4,245 4,979 IDA/EAPID February 28, 1977  ANNEX 18 SOMALI DEVELOPMENT BANK Projected Cash Flow (1976-1980) (Amounts in Sh '000) Year Ending December 31 1977 1978 1979 1980 1981 SOURCES Net profit before taxes 1,754 4,301 5,578 7,343 8,614 Depreciation 308 368 428 488 548 Provisions 3,523 2,176 1,977 1,957 1,793 Cash from operations 5,585 6,845 7,983 9,788 10,955 Incresae (decrease) in Current maturities of term debt 5,183 564 10 (1,136) 1,250 Other current liabilities - - - - Borrowings - foreign 15,544 12,618 29,280 26,240 33,080 - domestic (5,483) (2,611) (2,611) (2,611) (2,711) Paid-in share capital 26,700 20,000 20,000 20,000 - Total Sources 47,529 37,416 54,662 52,281 42,574 USES Increase (decrease) in Loan portfolio 31,186 37,569 43,759 43,448 43,234 Equity investments 6,000 6,000 6,000 6,000 6,000 Dividends - - - - - Fixed and other assets 300 300 300 300 300 Accrued income receivable 552 619 742 795 791 Payment of taxes 592 740 1,814 2,354 3,098 Total Uses 38,630 45,228 52,615 52,897 53,423 Increase (decrease) in Cash, deposit and short-term 8,899 (7,812) 2,047 (616) (10,849) investment. IDA/EAPID February 28, 1977  SOMALI DEVELOPMENT BANK Actual and Projected Financial Ratios (1973-1981) Actual Projected Year Ending December 31 1973 1974 1975 1976 1977 1978 1979 1980 1981 A. Income Statement Items as Percent of Average Total Assets Gross Income 4.9 4.8 3.2 1/ 3.6 1/ 5.7 5.7 5.9 6.0 6.2 Less: Financial Expenses 0.6 0.5 0.3 0.3 0.7 0.8 1.2 1.4 1.6 Administrative Expenses 2/ 1.8 1.6 1.1 2.0 1.9 1.7 1.6 1.5 1.5 Provisions 1.5 0.1 1.3 0.2 1.9 1.0 0.8 0.6 0.5 Net Profit after taxes 0.6 1.5 0.1 0.5 0.6 1.1 1.2 1.4 1.4 B. Net Profit and Dividends Net Profit as % of Average Net Worth 0.9 2.0 0.4 0.8 0.8 1.6 1.6 2.3 2.4 Dividend as % of Year-End Share Capital C. Selected Income and Cost Items Income from Loans as % of Average Loan Portfolio 6.5 5.7 3.6 1/ 3.7 1/ 6.5 6.6 6.8 6.9 7.0 Cost of Debt as % of Average borrowed funds 2.6 3.1 3.6 2.4 3.2 3.4 4.2 4.3 4.6 Margin 3.9 2.6 - 1.3 3.3 3.2 2.6 2.5 2.4 D. Structural Ratios Long-term Debt/Equity 0.3 0.2 0.1 0.3 0.4 0.4 0.5 0.5 0.7 Provisions as % of Year-End Loan and Equity Portfolio 1.4 0.1 1.5 1.2 3.2 3.6 3.8 4.0 4.1 E. Debt Coverage Debt Service Coverage (DSC) n.a. n.a. n.a. 2.5 4.8 3.0 2.9 3.9 5.5 1/ SDB changed its accounting policy in 1975 by not realizing income from irregular loans. 2/ Excludes depreciation. IDA/EAPID February 28, 1977  ANNEX 20 SOMALI DEVELOPMENT BANK ESTIfATEL DISBURSIMEZN' SCHEDULE FOP, PR0OPOSED CRIIIT Amount ( 'COO) FY 1978 First Quarter Second Quarter 50G 000 Third Quarter 500,000 Fourth Quarter 500,000 FY 1979 First Quarter 700,000 Sbcond Quarter 700,000 Third Quarter 700,000 Fourth Quarter 700,000 FY 1980 First Quarter 700, 000 Total 5,000,000 IDA/EAPID February 28, 1977