Liberia - Development Finance Company Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 2133 PROJECT PERFORMANCE AUDIT REPORT LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) June 30, 1978 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT LIBERIA - LIEERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) TABLE OF CONTENTS Page No. Preface Basic Data Sheet Highlights PROJECT PERFORMANCE AUDIT MEMORANDUM I. Introduction 1 II. The Environment 1 Economic Structure and Production 1 - 2 Government Industrial Policies 2 - 3 The Financial Sector 3 - 4 III. Design of the Loan 4 - 5 IV. LBDI's Operations, Profitability and Resources 5 Use of Bank Funds 5 - 6 Overall Operations 6 - 7 Pace of Commitment under the Loan 7 Profitability 7 - 8 Resources 8 - 9 V. LBDI's Policies and Role of the Board 9 LBDI's Policies - 9 Role of the Board 9 - 10 VI. Institution-building Objectives 10 Project Appraisal 10 Supervision 11 Industrial Promotion 11 - 12 Resource Mobilization 12 - 13 VII. Conclusions 13 - 14 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 -2- Page No. Annexes: I. Balance Sheets II. Summarized Income Statements III. Equity Investment Portfolio IV. Estimated and Actual Schedule of Disbursements Attachment A: Comments Received from the Government Attachment B: Comments Received from the Borrower B.1 - B.4 Attachment C: Project Completion Report I. Introduction C.1 II. The Macro-economic and Sectorial Environment C.1 - C.3 III. The Liberian Bank for Development and Investment (LBDI) C.3 - C.4 The Bank's First Loan C.4 - C.6 IV. Resource Allocation C.6 - C.8 V. LBDI's Operational Performance C.8 - C.9 VI. Financial Performance C.9 - C.10 Financial Profitability C.10 Resource Mobilization C.10 - C.11 VII. Conclusions C.11 Annexes: A. Utilization of Credit 839-LBR C.12 B. Economic Performance of Subprojects Financed Under Loan 839-LBR C.13 C. Financial Performance of Subprojects Financed Under Loan 839-LBR C.14 D. Current Status of Sub-projects Financed Under Loan 839-LBR C.15 E-1 Evolution of Operations: Approvals, Commitments, Disbursements, 1972-76 C.16 E-2 Evolution of Operations: Characteristics of Loan Portfolio Outstanding C.17 F. Summarized Income Statements 1972-76 C.18 G. Summarized Balance Sheets 1972-1976 C.19 H. Forecast and Actual Financial Ratios C.20 PROJECT PERFORMANCE AUDIT REPORT LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) PREFACE This report presents an audit of performance under the first Bank loan to the Liberian Bank for Development and Investment (LBDI) (Loan 839-LBR). This loan, in an amount of US$1 million, was approved in June 1972 and closed, disbursed at 99.5%, by December 1976. A field mission to Liberia was made by OED staff in March 1978 in connection with the preparation of the audit memorandum. During this mission, discussions were held with LBDI's management as well as officials of the Government, the National Bank of Liberia, and representatives of a number of LBDI's private shareholders. Assistance received during the mission is gratefully acknowledged. A Project Completion Report (PCR) was prepared by the Bank's Western Africa Regional Office and is attached. The audit memorandum is based on the findings of the mission as well as on the PCR, file review and discussions with Bank staff, and focuses on sectorial issues related to the Bank's lending to LBDI, including that of industrial promotion. Discussions wexe held with the Government and the Borrower on the draft audit report during a brief mission to the country in June 1978. The Borrower also discussed the audit report on the occasion of a visit to the Bank. Written comments were received subsequently from the Government and the Borrower; these have been reproduced as attachments to the memo- randum. t PROJECT PERFORMANCE AUDIT REPORT LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) BASIC DATA SHEET Amounts (in US$ million) As of 4/30/78 Original Disbursed Cancelled Repaid Outstanding Loan 839-LBR 1.0 .995 .005 .3 .7 Project Data Estimated Actual Board Approval 6/13/72 Loan Agreement 6/26/72 Effectiveness 11/10/72 Commitment Date 12/31/73 3/31/74 Loan Closing 12/31/76 12/31/76 Mission Data Month, No. of No. of Year Weeks Persons Manweeks Date of Report Appraisal 12/71 3 2 6 5/26/72 Supervision I 11/72 2 2 4 2/02/73 Supervision II 1 12/73 3 2 6 - Supervision III 6/75 2 2 4 10/20/75 Supervision IV 1 2/76 3 2 6 - Supervision V 10/77 2.5 2 5 1/31/78 Follow-on Projects Loan 1055-LBR of US$4.0 million, signed Dec. 4, 1974 for Second LBDI Project. Loan 1323-LBR of US$7.0 million, signed Oct. 7, 1976 for Third LBDI Project. 1/ Appraisal mission for the Second Loan to LBDI. 2/ Appraisal mission for the Third Loan to LBDI.  PROJECT PERFORMANCE AUDIT REPORT LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) HIGHLIGHTS Loan 839-LBR was the first of three loans which the Bank has made to the Liberian Bank for Development and Investment (LBDI) since 1972. Since then LBDI has emerged as a profitable and effective lend- :ng institution with a sound financial structure, indicating that the flank's objective to assist LBDI's development was largely achieved. The Bank, however, was far less successful in making progress towards the achievement of wider sectorial objectives which it had associated with the first loan. In particular, an active policy of industrial promo- tion was deemed, at the time of appraisal of the loan, to be essential to the development of the manufacturing sector in the country; however, little was done during the period of the loan (1972-1976) by either LBDI or public agencies .responsible for industrial promotion towards initiating new productive projects (vide paras. 3.04 and 6.04 to 6.06 of the PPAM, para. 13 of the PCR). Other points of particular interest are: - the lack of success in ensuring the implementation by the Government of essential sectorial measures agreed upon at the time of appraisal (vide para. 6.08 of the PPAM, paras. 7 and 32 of the PCR); - the little attention devoted to the deficiencies of the financial sector which made it difficult for LBDI to raise long-term domestic resources (vide paras. 3.03, 6.09 and 6.10 of the PPAM, para. 28 of the PCR); and - the managerial difficulties experienced by sub-projects (vide para. 4.06 of the PPAM and para. 17 of the PCR).  PERFORMANCE PERFORMANCE AUDIT MEMORANDUM LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) I. Introduction 1.01 The Liberian Bank for Industrial Development and Investment (LBDI) was established in 1965 with the assistance of the International Finance Corporation (IFC) which subscribed to 25% of the original US$1 million share capital. In 1974, the name of the institution was changed to the Liberian Bank for Development and Investment (LBDI) to underscore its multi-sectorial orientation. The Liberian Government, IFC and a number of private Liberians jointly own 50.4% of LBDI's common shares; the remaining 49.6% is held by a number of private foreign companies and financial institutions. A representative of the IFC has been a member of LBDI's Board of Directors since inception. 1.02 This report refers to the first loan which the Bank made to LBDI in June 1972. This loan (Loan 839-LBR), in an amount of US$1 million, was fully committed by April 1974 and closed in December 1976, with a total disbursement of US$995,000. It was followed by two repeater loans in 1974 and 1976 (Loans 1055-LBR and 1323-LBR, respectively), for a total amount of US$11 million. II. The Environment Economic Structure and Production 2.01 The dual structure of the Liberian economy has been little modi- fied during the 1972-1976 period covered by the loan. It is still characterized by the almost total lack of interaction between the money economy which is dominated by foreign-owned enclave concessions and generates about 85% of GDP and the traditional economy comprising 60% of the total population engaged in subsistence agriculture. Moreover, within the money economy, very few linkages exist between the foreign-owned concessions and the other sectors, except linkages with a few services mostly foreign-controlled and managed. 2.02 Most of the growth in GDP during the last decade (4.0% on average between 1967 and 1976) has originated in the enclave sector which consists predominantly of iron-ore mines, rubber plantations and logging enterprises. However, the benefits of foreign concessions to the economy have been limited by the repatriation abroad of a large proportion of their value added as factor payments which have been estimated to account for about 25% of GDP. - 2 - 2.03 The growth of the manufacturing sector has been constrained by the small size of the domestic market, lack of adequate infrastructure, scarcity of technical and managerial skills, compounded by an unselective system of fiscal incentives; in 1976, manufacturing accounted for only 4.4% of GDP. Ownership of large enterprises is predominantly foreign, although there is a small group of Liberian investors participating in a number of - usually foreign-sponsored - manufacturing units. Overall, how- ever, the constraint on development outside the enclaves has not been so much a shortage of resources as the difficulty of identifying viable projects and lack of Liberian entrepreneurs. Government Industrial Policies 2.04 Until the last few years, the Liberian Government did not play a very active role in the management of the economy. Its main policy was to support private (mostly foreign) investment by granting liberal tariff and tax incentives either under the Investment Incentive Code for projects below US$2 million or after negotiating so-called concession agreements for larger ventures. 2.05 While its basic policy of fostering foreign investment has not changed, the Government has taken steps since 1973 to make its incentive system more selective and effective. A number of concession agreements have been renegotiated to improve the benefits of foreign investment to Liberia. The Investment Incentive Code has been revised to eliminate excessive advantages and encourage production for exports; it still, how- ever, provides little incentive to small businesses. 2.06 Another sign of the Government's increasing involvement in economic matters can be found in the recent formulation of a first five- year (Socio-economic) Development Plan covering the years 1976-1980. The plan identifies as its major objective the diversification of economic activity by channelling more resources into non-enclave ventures and promoting Liberian participation in the development process. In particular, the plan envisages a much enlarged public investment program. 2.07 In addition to LBDI which has been providing long-term finance to manufacturing, agriculture and services, two specialized institutions, both fully government-owned, were established recently to foster Liberian- owned investment. These are the National Housing and Savings Bank (NHSB), established in 1976 with the objective of providing finance to private housing and urban infrastructure projects, and the Agricultural and Cooperative Development Bank, established in 1977 and responsible for credit to small farmers and cooperatives. 2.08 Although the Government has traditionally left industrial development to the initiative of the private sector, it has laid down its basic industrial policies through the Ministry of Commerce, Industries and Transportation (MCIT), emphasizing, in recent years, production for exports, - 3 - increased processing of local raw materials and participation of Liberian interests in productive investments. Several public institutions have been involved in the implementation of these policies, most notably the Liberian Development Corporation (LDC) and the Concession and Investment Commission (CIC). 2.09 LDC was created in 1961 as an autonomous public corporation with main functions of identifying and promoting industrial projects, reviewing applications for incentives, providing guarantees on bank loans, making equity investments and managing the Government's equity portfolio. For a number of reasons, its effectiveness as a promotion agency and impact on industrial development have been very limited. Moreover, the guarantee scheme it was supposed to implement has never become effective for lack of adequate funding. In 1973, the Bureau of Industrial and Resource Development (BIRD) of MCIT which had responsibility for promoting industrial investment was merged with LDC which thus became the primary institution in Liberia responsible for industrial promotion. Moreover, LDC's function of evaluating applications for investment incentives was passed on to CIC which was created subsequently as an autonomous body. The Financial Sector 2.10 The US dollar is used as both legal tender and reserve asset and the Government therefore does not have control over the money supply which is determined by the balance of payments. Moreover, until a few years ago, the country did not have a central monetary authority. Follow- ing recommendations made by a Banking Commission under the aegis of the IMF, the National Bank of Liberia (NBL) was created in 1973 with a view to regulating and supervising the banking system. However, because of the absence of controls on capital movements and the ability of the banking system to raise resources on international markets, the National Bank of Liberia has not been in a position to influence interest rates effectively and the policy of the Govenment in this respect has been confined to the imposition of a 10% ceiling on lending rates (usury law)1Y. As a result, the interest rate structure is related to the rates prevailing on the Euro- dollar market and the maximum lending rate and does not reflect the scarcity of financial savings in the economy. 2.11 Enjoying easy access to the Eurodollar market to supplement their domestic resources, commercial banks have had little incentive to mobilize domestic resources; they have tended, for reasons of profitability, to limit themselves to large accounts (in particular, most of them imposing a $100 minimum deposit requirement on savings accounts) and have not attempted to cater to the needs of rural areas. It is estimated that more than half of all demand and time deposits in commercial banks is owned by large companies or expatriates. 1/ The legal maximum lending rate was raised from 10% to 25% between March 1975 and November 1976 and has since then remained at 10%; this led naturally to higher interest rates during the March 1975- November 1976 period, but did not bring about any significant increase in the volume of deposits. 2.12 During the liquidity squeeze in 1974 and 1975 which resulted from higher import prices and depressed iron ore and other export earnings due to the international recession, commercial banks resorted to sub- stantial foreign borrowing. Since then, the situation has reversed itself and commercial banks are now net creditors with the foreign sector, indicating an outflow of domestic resources. 2.13 The Government has not taken specific measures to encourage active mobilization of domestic savings. So far, it has not issued any financial instruments and has resorted increasingly to foreign borrowings to finance its expanding development plan. In 1976, foreign loans net of amortization amounted to 80% of the development budget which had more than doubled between 1974 and 1976. However, the Government has recently been considering a number of measures, including issuing Government securities and requiring insurance funds to be partly invested in Liberia, to foster domestic resource mobilization. III. Design of the Loan 3.01 When the first Bank loan was made to LBDI in 1972, the economic framework was hardly conducive to development. Little productive invest- ment was taking place in the country with the exception of that from foreign investors in large concessions; moreover, industrial promotion institutions had until then lacked the effectiveness necessary to accelerate private investment in manufacturing. Within this framework, the Bank was dealing with an institution which, at the time, was suffering from internal weakness; LBDI had been in operation since 1965, with IFC holding 25% of its share equity, but mostly because of weak management, it had failed until 1970 to develop into an effective lending institution and its volume of operations had remained very low; moreover, by 1970, as much as 40% of its loan portfolio was affected by arrears. About that time, LBDI management was strengthened and its procedures tightened, generating an improvement in the status of arrears. This led the Bank to believe that LBDI's operations would increase and that it would be able to achieve the US$1 million annual business which, though forecast at the time of its establishment in 1965, had never been reached. 3.02 While the Bank realized that LBDI's long-term success in pro- moting industrial development depended on the availability of investment projects, the focus of the loan under review was on the institution itself, emphasizing, in particular, staff improvement, necessary changes in lending terms, and establishment of an effective follow-up system; under the two subsequent loans, the emphasis of the Bank remained on the institution rather than on the economic environment. In its dealings with LBDI under the first loan, the Bank demonstrated its flexibility, in particular, by charging commitment fees on only that portion of the loan committed by LBDI, in view of the latter's poor financial results in the past; the Bank also agreed that the loan amount could be used to cover the import content - 5 - of locally produced commodities. The main objective of the loan was to cover two-thirds of TBDI's foreign exchange requirements during a two-year period (1972-1973).2:! These requirements were expected to emerge following an increase in LBDI's volume of business which, in turn, was to result from a more aggressive search for business by its management, less rigid lendinp terms, and increased coordination with LDC and other public agencies respon- sible for industrial promotion (para. 3.01 of the Appraisal Report, DB-92a). 3.03 Domestic resource mobilization, contrary to the Bank's normal practice in its DFC operations, was not made an objective of the loan as, indeed, there was little LBDI could do in this respect within the existing financial system. 3.04 Given the small size of the manufacturing sector in Liberia, an active policy of industrial promotion was deemed, at the time of appraisal, to be essential to the development of the economy and of LBDI whose business potential in manufacturing had been constrained by limited investment opportunities and lack of project sponsors. When the loan was made, it was thought that this function could be adequately fulfilled by the existing public industrial promotion institutions - in the first place, the Liberian Development Corporation (LDC) (para. 2.09) which was expected to provide LBDI with a pipeline of new projects. Moreover, the need to establish an effective business extension service and a loan guarantee scheme so as to improve the environment for industrial development was stressed during the first loan negotiations, and agreement was reached that these issues would be reviewed by the Government and the Bank to prepare a set of recommenda- tions for their implementation. IV. LBDI's Operations, Profitability and Resources Use of Bank Funds 4.01 The Bank loan was used to finance 12 sub-loans, five of which were above the free limit set by the Bank at $50,000. Estimated total cost of the sub-projects was $3.1 million, with LBDI's total contribution (including $180,000 in the form of participations in the equity of three sub-projects) amounting to $1.3 million, that is, 43% of total cost. The proportion of sub-project cost covered by LBDI was as high as 85%, if one excludes a large (80% foreign-owned) timber processing sub-project (P.P.P. Timber). LBDI's sub-loans to the other 11 smaller sub-projects (of average cost $86,000) were usually covered by collateral on the owners' personal assets in those cases where the project did not provide sufficient coverage. 4.02 Half of the loan amount went to the timber processing enclave project; LBDI's financing of the project was looked upon as facilitating an equity investment by Deutsche Gesellschaft fuer Wirtschaftliche Zusammenarbeit (DEG); LBDI considered its own investment as ensuring a 1/ Complementary financing was expected to be obtained from the African Development Bank (ADB). - 6 - local presence in the project, as balancing its portfolio and as providing it with a marketable security. The Bank approved this sub-project on the ground that it would contribute to increasing value added from logging exploitation; however, given both the relatively large portion of Bank funds involved and the project's limited economic return to the country, it is not evident that the Bank was justified in giving its approval to the project. The project provided employment to about 143 workers at an average investment cost of $15,000 per job (successive extensions raised that employment to 305 workers). Its end contribution to the domestic economy, though in line with appraisal expectations, has so far been limited; a recent increase in export duties and stumpage fees on logging production should lead to an increase in its "return value" to the country. 4.03 Other projects, with the exception of the two rubber farms, produce for the local market. Their employment creation (179) was sub- stantial, given the small total investment (less than $1 million). Investment cost for them was $5,300 per job created. 4.04 Three out of the five sub-projects above the free limit and a number of smaller ones have been experiencing some type of marketing or management difficulties. These are reviewed in the PCR (paras 16 and 17). Poor management led to poor project design, as in the case of Caesar Beach Hotel, or lack of operational control, as in the case of Corniffe Art Printing, National Enterprises, and Milton Supermarket. One sub-loan to a rubber farm was rescheduled because of managerial problems. Overall, it seems that LBDI did not assess adequately the organizational and manage- ment aspects of sub-projects, particularly in the light of the special difficulties inherent in the Liberian environment; two of the three pro- jects to whose share equity LBDI subscribed faced such difficulties. LBDI had to extend further loans to a number of sub-projects experiencing difficulties. Also, two sub-loans had to be rescheduled; two more re- schedulings are under consideration. Overall Operations 4.05 The volume of LBDI's operations remained low during 1972; during the year, LBDI approved 22 loans for a total amount of $544,000, which was substantially short of its $1 million target. As a result, commitment of the Bank loan got off to a slow start. However, in subsequent years, the volume of LBDI's approvals increased rapidly, far exceeding projections. Loan approvals grew more than sevenfold between 1972 and 1976. Starting from a lower base, loan commitments increased even faster (see Table 1). Share equity investment grew in proportion with loan operations. Table 1 LBDI's Total Loan Commitments ($'000) 1972 1973 1974 1975 1976 Projected 958 1,090 1,199 1,319 1,451 Actual 263 885 3,120 3,726 3,970 - 7 - 4.06 Approval of a few large sub-loans contributed to this increase -in the volume of business; since 1974, LBDI has made five loans in excess of $500,000, including one for $6.2 million in 1977 (committed in 1978) ito an oil palm project sponsored by the Government. Overall, however, the average size of sub-loans did not increase between 1972 and 1976. 4.07 This impressive upturn in the volume of commitments is largely the result of an active search for business conducted by LBDI's new ,president appointed in 1973, and achieved, to a large extent, through an increased activity in agriculture and services. LBDI's more active involve- ment in sectors other than industry demonstrated its responsiveness to the country's evolving needs. By 1976, 28% of LBDI's loan portfolio was in manufacturing, compared to 59% in 1971 (see paras 19 and 20 of the PCR). Pace of Commitment under the Loan 4.08 *The disbursement schedule for the loan, which was closed in December 1976 as anticipated, compared to estimated figures, can be found in Annex IV. Because of the initial slow pace of bisiness, the Bank loan was fully committed by March 1974 instead of December 1973. This was partly due to the concession on commitment charge extended by the Bank to LBDI (para. 3.02)(standard commitment fees were applied on the two sub- sequent Bank loans), which led LBDI to draw at a faster rate (almost three times that on the Bank lcan) on a loan it obtained from the African Development Bank (ADB) shortly after the Bank's and which, in addition, provided for a lower rate. The matter was taken up with LBDI during the first supervision mission, and LBDI agreed to draw from the two loans on an approximate pari passu basis. Profitability 1..09 Until 1974, LBDI's profitability was seriously affected by losses occasioned by the revaluation of the German mark in terms of the US dollar. LBDI had provided, in its agreements with its sub-borrowers, for a clause to cover itself, in respect of a loan for US$1 million equivalent from Kreditanstalt fUr Wiederaufbau (KfW). However, on a technical interpreta- tion it was found that the clause was not adequately protecting LBDI. As a result, LBDI incurred, between 1969 and 1974, losses which aggregated to 37% of its average net worth (Table 2). Although the Bank emphasized in the loan appraisal report (1972) -the magnitude of the losses which had resulted from LBDI's.carrying an exchange risk, it had not insisted under the first loan that.LBDI eliminate its foreign exchange exposure. By the time of the negotiations for the second Bank loan, LBDI had amended the legal technicalities in it-s loan agreements. Moreover, during negotiations it gave assurances for the proper handling of the foreign exchange risk exposure.on its older sub-loans; LBDI was able to do this by passing it on to its sub-borrowers. 4.10 1 The sharp expansion in the volume of LBDI"s operations (total assets grew almost fivefold between 1972 and 1976) was accompanied by a noticeable improvement in LBDI's financial profitability, as shown in the following table. - 8 - Table 2 Net Income, 1971-1977 ($'000) 1971 1972 1973 1974 1975 1976 1977 Operating profit 20 2 166 162 302 407 535 Extraordinary losses 155 13 159 81 - - - Net profit (135) (11) 7 81 302 407 535 (as % of average equity) - - 0.6 7.0 23.4 18.7 15.9 From 1973 through 1976, LBDI moved from a net loss position to a profit- ability rate equal to that of the most profitable DFCs supported by the Bank; net profit as a percentage of average total assets reached 3.0% in 1976, while net profit as a percentage of average net worth had improved to an attractive 18.7%. Enhanced profitability was accompanied by an impressive drop in the level of arrears. As of September 30, 1977, the percentage of portfolio affected by arrears above three months was 8%. These developments permitted LBDI to start distributing dividends in 1974 and to undertake a fivefold increase in its share capital in 1976; by the end of 1977, this increase had been subscribed to the extent of 55% (see para. 4.13). 4.11 This indicates that the Bank's objective to help LBDI build up its portfolio and develop into a creditworthy and effective institution was largely achieved. However, improvement in LBDI's profitability was, to some extent, the result of an effort at curbing administrative expenses which dropped from 4.1% in 1972 to 2.5% in 1976 as a percentage of average total assets; also, while LBDI has made an effort to recruit additional staff and made budgetary allocations for it, it has remained under- staffed, resulting in detriment to its project appraisal and supervision performance (paras 6.01 to 6.03). Resources 4.12 The successive Bank loans contributed substantially to LBDI's increases in business; by the end of 1976, the outstanding portion of these loans accounted for approximately one-third of LBDI's net portfolio. Apart from Bank loans, LBDI has obtained its long-term resources from the Government, KfW and ADB. In the case of the Government, two subordinated loans totalling $3 million were provided in the form of redeemable prom- issory notes, part of which LBDI has redeemed or discounted with foreign banks. LBDI has also intensified its collaboration with commercial banks from which it obtained part of its short-term resources (see para. 28 of the PCR). Since 1976, LBDI has started to diversify its sources of foreign exchange with some European public institutions to meet its increasing resource requirements (see para. 30 of the PCR). 4.13 In 1976, LBDI's Board of Directors authorized an increase in share capital from $1 million to $5 million (para. 4.10). As of the end of 1977, paid-in capital totalled $3.2 million. Liberian and international - 9 - (IFC) shareholders have maintained their holding of a majority of the shares, although the percentage of shares held by private Liberians dropped from 1.2% to .75%, despite LBDI's sound financial position, mainly because of lack of liquidity or the possibility of obtaining higher returns on investment in real estate and foreign financial instruments. V. LEDI's Policies and Role of the Board LBDI's Policies 5.01 When the Bank appraised LBDI for the loan in 1972, LBDI's lend- ing practices were considered to be excessively inflexible and cautious with respect to maturities, grace periods and collateral requirements. While LBDI is now more flexible regarding the maturity of its sub-loans and provision of grace periods, its collateral requirements have remained fairly strict and could be as high as 200% of the loan amount; this implies that a first mortgage is taken of borrowers' fixed assets. This often meant that personal assets of the sponsors of sub-projects were pledged to LBDI as many of the sub-projects were organized as proprietory concerns and the extent of LBDI financing in their total cost ranged up to 85%. Strict lending terms are also warranted by the necessity to ensure the stronger commitment of sponsors to the sub-projects and legal difficulties in enforcing foreclosure procedures in Liberia; as a result, however, LBDI has been cautious in financing those projects whose sponsors lacked sufficient financial back-up. Strict lending terms were one of the factors which prevented LBDI from expanding its operations in the indus- trial sector at the pace that was expected at appraisal of the first loan. However, in response to the needs of the economy LBDI was able to expand its portfolio by increasing its operations in agriculture and services to which it had in the past devoted a small portion of its resources. 5.02 The provision of short-term agricultural credit represents another aspect of LBDI's increasing involvement in agriculture. LBDI has recently been entrusted with the management of a revolving fund set up under the Lofa County Agricultural Development Project (which received USAID and IDA financial assistance) to provide credit to small farmers through cooperatives; LBDI has, in this context, established a wholly- owned subsidiary in Lofa County. The Government, however, now favors the newly-created Agricultural and Cooperative Development Bank (ACDB) to specialize in agriculturalcredit through cooperatives and be responsible for mobilizing rural savings while LBDI would keep lending to commercial farmers;'within the framework of this policy, the Government also proposes to transfer LBDI's Lofa County subsidiary to ACDB. Role of the Board 5.03 Since the loan was made in 1972, the role of the Board with respect to LBDI's operations has evolved very favorably. It has helped to maLntain LBDI's independence from the Government, a noticeable improvement - 10 - from the time when interference was common. On the other hand, its impact on LBDI's policies and orientation has been limited; it has been responsive to management proposals but has not, in the past, provided LBDI with the guidance and orientation necessary to push it towards more imaginative operations. 5.04 The Bank has endorsed LBDI's strict lending conditions on the grounds that pitfalls of the Liberian business environment could jeopardize the growth and development of a small intermediation institution if less cautious financial policies were followed. As a result, LBDI has emerged as a well-established institution with a sound financial structure and sub- stantial profits, but it has precluded LBDI from becoming an imaginative and enterprising institution which could have assisted in the creation of new Liberian-owned industrial projects and supported new entrepreneurs, for which some measure of risk taking was necessary. The Bank staff, on the other hand, feels that LBDI had to follow a prudent course in conducting its operations, particularly in its initial stages. VI. Institution-building Objectives Project Appraisal 6.01 The Bank's influence has been particularly fruitful in inducing LBDI to introduce economic criteria in its appraisal procedures. In particular, LBDI has started to compute ERRs for large projects and has rejected several textile projects on the basis of insufficient economic rates of return. However, LBDI's appraisal, as evidenced by problems encountered in the implementation of a number of projects, still suffers from deficiencies in more basic aspects of project evaluation - such as market forecasting and project management which, within the context of the Liberian environment, are difficult to assess. 6.02 These deficiencies in the appraisal are partly due to the fact that LBDI, despite efforts, has not been able to recruit adequate staff to cope with its increasing and broadening operations. To date, LBDI does not have any engineers or agricultural professionals, although it has sought to meet this gap by resorting to outside help. Moreover, it has proved difficult to assess correctly market prospects for particular products, given the almost total absence of reliable data. Lack of technical expertise has limited LBDI's contribution to the design of pro- jects at the appraisal stage. An understanding was reached during the first loan negotiations that support on technical matters would be pro- vided to LBDI by LDC; this, however, has not been implemented. In 1976, LBDI requested that $150,000 be made available (under the third Bank loan) to cover the cost of technical assistance and funding for staff develop- ment; the Bank agreed to provide these funds which LBDI used partly to send some of its staff to the United States for training in business administration. Furthermore, at LBDI's initiative, the Bank recently organized an in-house seminar on appraisal techniques. - 11 - Supervision 6.03 While appraisal procedures were considered acceptable when the loan was made in 1972, project supervision was stressed as needing particu- lar attention. However, in part because of lack of manpower, very little progress has been achieved on this front. Financial monitoring of projects has been intensified with LBDI occasionally rescheduling a loan or providing a working capital loan to a borrower, but limited attempt has been made to identify potential problem projects and contribute to the solution of their difficulties; this mainly was due to LBDI's lack of technical exper- tise and inadequate organization of follow-up activities, which made it difficult for it to draw maximum benefit from field visits. A special follow-up cell was established in 1977 in the Project Department, and LBDI proposes to recruit additional staff for supervision. Furthermore, it is also compiling an Operational Manual covering appraisal, follow-up and other activities. Industrial Promotion 6.04 It was thought when the loan was made that the industrial pro- motion function could be adequately fulfilled by LDC which was expected to provide LBDI with a pipeline of new industrial projects. This, how- ever, has not taken ilace, in spite of substantial technical assistance provided by UNIDO to LDC, suggesting that the Bank's assessment of LDC's capability at the time of appraisal was not accurate. 6.05 Until 1974, there were very few contacts between LBDI and LDC, in spite of the fact that LBDI's president was a director of LDC and the latter was a shareholder of LBDI. The idea of merging LDC and LBDI was entertained shortly after the loan was made, when LDC's management was particularly weak; the Bank, however, did not favor this proposal because it would eliminate the necessary separation between financing decisions and evaluation of investment incentive applications. Yet, when by 1973 the CIC had been established (paras 2.08 and 2.09) to take over the function of evaluating applications for incentives previously carried out by LDC, the idea of merging the remaining promotional function of LDC with LBDI was pursued again by LBDI's management, but to no avail. In retro- spect, it appears that merging the two institutions would have led LBDI to become the essentially promotional agency needed in the country, bring- ing about a more efficient utilization of LDC's staff and providing LBDI with the technical skills which it has been lacking. 6.06 LBDI has demonstrated its willingness to consider financing any viable project presented to it, but has not had the capacity to carry out industrial promotion. This was due initially to its low profitability which left little room for costly - although not necessarily venturesome - promotional efforts, lack of trained staff, and the existance of LDC as a specialized promotion. institution in the country. Later on, LBDI was able to expand its portfolio by diversifying its operations from the manufacturing sector to agriculture and services, and it did not get involved in promoting new industrial ventures from the conception stage, although such prospects clearly existed, particularly in agro-industries (processed wood, rubber and food products for export). - 12 - 6.07 Given the environment in Liberia, LBDI had little scope on its own for equity Investment of a promotional nature, thus limiting its oppor- tunities for equity investment, although it took share participations in respect of some problem projects to provide for adequate capital structure. However, its share portfolio (Annex III) is not negligible in comparison with its own equity (increasing from 16% to 46% of the latter between 1972 and 1976). Share investments (mostly preference shares) appear to have been made in most of the cases with the intention of particiting in the profits of good projects, especially if they were foreign-owned. LBDI usually requests that part of the share capital be earmarked for Liberian investors before agreeing to finance foreign-sponsored projects; LBDI's practice in this regard is in keeping with the Government's policy of increasing Liberian participation in the equity of foreign-owned enterprises. At times, LBDI's participation was requested by foreign-hel companies which wished, for reasons of practicality, to increase Liberian holdings in their own equity. 6.08 During negotiations for the first Bank loan, the Bank had reached an agreement with the Government on the need to establish a loan guarantee scheme and an effective business extension service if inexperienced entre- preneurs lacking sufficient financial back-up were to be assisted. These measures, however, were never acted upon, although the need for them was repeatedly stressed on the occasion of successive appraisal and supervision reports. The issue was raised again recently, as the Bank is proposing to launch an SSI scheme as part of its next loan to LBDI; however, even in the event that this does go through, the lack of promotion of medium-sized projects will prevent a more rapid and soundly-based industrial development in Liberia. Resource Mobilization 6.09 LBDI's performance in raising funds locally has been constrained by bhe inadequacy of the leeal and ins_titutional framework (paras. 2.11 - 2.13). The mobilization of private savings which is left entirely to the commercial banks has been inadequate in terms of both the amount and the form of financial assets in which savings are held. The absence of long-term debt instruments has made it impossible for LBDI to raise long-term resources other than its share equity. Very little progress was achieved on this front since the loan was made- with the exception of the establishment in 1976 of the National Housing and Savings Bank - although detailed discussions on necessary reforms have taken place between the Bank and the Government on the occasion of the successive economic missions. 6.10 Thus, largely because of circumstances specific to the economic setting in Liberia, LBDI has had little opportunity for domestic resource mobilization except for its use of some commercial bank resources for pro- ductive investment (see para. 28 of the PCR). Successive supervision reports by the Bank indicated that LBDI's local currency position was satis- factory. However, under the second loan in an amount of US$4 million made in 1974, the Bank agreed with LBDI's request that up to $500,000 of the loan would be available for local expenditure financing in view of the shortage of funds with the Government's and LBDI's inability to raise resources from alternative sources. Subsequently, LBDI has made use of this facility, indicating a shortage of local funds. - 13 - VII. Conclusions 7.01. LBDI has changed noticeably during the last five years. Owing to its management's aggressiveness in the search for business, it has been quite successful in increasing its volume of operations. LBDI has developed into an effective institution of substantial size for the Liberian economy, enjoying a sound financial structure, ample profits and a relatively good loan and equity portfolio. Moreover, LBDI has demonstrated its capability to raise additional capital from the Government and a number of institu- tional investors, as well as short-term funds from commercial banks; its creditworthiness also led it to pursue alternative sources of foreign exchange at an earlier stage of development than most other DFCs supported by the Bank. 7.02 Rigid collateral ,requirements, coupled with the inactivity of the public institutions responsible for industrial promotion and the scarcity of entrepreneurial talent in Liberia, prevented it from substan- tially expanding its operations in the manufacturing sector. LBDI's collateral and security requirements have remained strict so that its operations appear conservative rather than development-oriented. This is understandable in view of the security norms prevailing in Liberia in respect of general lending practices, and the need to build up, in the first phase, the institution as a sound financial intermediary. LBDI's increase in business was realized to a large extent in agriculture and services. Expansion in the volume of operations has also been achieved to the detriment of the quality of project appraisal and follow-up procedures. Improvement in these fields is now overdue. 7.03 Because of the lack of a proper economic environment in relation to industrial promotion and resource mobilizationY' (as described in paras. 6.08 and 6.09), wider Institutional objectives which are usually associated with DFC lending could not possibly be achieved in the case of LBDI., Thus, the latter's performance in the fields of local resource mobilization and industrial promotion has to be viewed in the context of the Bank's low expectations in these respects. This leads to the conclusion that the Bank's focus was somewhat too narrow, concentrating on the institution but neglecting essential sectorial aspects which have prevented the effective channelling of domestic resources towards productive investment. The lack of a framework conducive to development at the time the loan was made should have induced the Bank to adopt an alternative approach in its lending to LBDI, encompassing discussions with the Government on the need for a reform of the financial sector with a view to initiating effective mobilization of private savings. While the Bank was aware of these issues as shown by the fact that they were raised at the time of appraisal, and while some measures were suggested, little was done to press the Government to frame the proper sectorial policies. For example, the Bank should have insisted on the setting-up of a loan guarantee scheme to support projects which the 1/ The Government has express . disagreement with this view (see Attachment A, para. 4). - 14 - Government would consider in line with its industrial strategy as well as a business advisory service to palliate the lack of management skills among Liberian entrepreneurs. Finally, much was expected from LDC to provide LBDI with a pipeline of new projects; while LBDI succeeded in overcoming LDC's deficiencies by diversifying its portfolio towards sectors other than industry, more attention should have been devoted to the industrial promo- tion function, an essential task in a country where the constraint on economic growth lies in the limited absorptive capacity of both the public and private sectors, rather than a shortage of available resources. Operations Evaluation Department June 30, 1978 PROJECT PERFORMANCE AUDIT REPORT ANNEX I LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) BALANCE SHEETS 1972-1976-1977 (US$ 000) 1972 1976 1977 Assets Cash and Time depesits 272 3,203 10,900 Accrued income from loans and Notes 76 476 721 Investment in notes and bills 206 11 12 Other current assets 14 114 267 Total 568 3,804 11,900 Loans and advances 1,670 9,729 10,363 Equity investments 159 571 666 Less: Provisions ( 195) ( 272) ( 422) Net Portfolio 1,634 10,028 10,607 Fixed Assets 24 461 570 Discounted Government notes 900 1,000 1,000 TOTAL ASSETS 3,126 15,292 24,077 Liabilities and Equity Accounts payable 6 1,239 8,443 Proposed dividend - 83 240 Current Liabilities 6 1,322 8,683 Government loans 1,000 4,385 4,385 KFW loans 935 1,058 1,073 IBRD loans 14 3,244 3,931 ADB loans - 2,341 2,220 Other long-term debt 50 - - Total long-tern Debt 1,999 11,028 11,610 Share Capital 1,000 1,250 3,200 Reserves and surplus 121 1,692 583 Total Equity 1,121 2,942 3,783 TOTAL LIAILITIES AND EQUITY 3,126 15,292 24,077 PROJECT PERFORMANCE AUDIT REPORT ANNEX II LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) SUMMARIZED INCOME STATEMENTS 1972-1976-19 77 (US$ 000) 1972 1976 1977 Income Interest and charges on loans 136 845 972 Dividend income - 74 89 Interest on deposits 201 544 Other income (commission under- writing and guarantees, 110 discount notes, rent) 330 425 Gross Income 246 1,450 2.030 Expenses Financial expenses 48 604 920 Salaries and Administration 124 317 396 Depreciation 4 22 28 Provision 81 100 150 Total Expenses 257 1,043 1,494 NET INCOME ( 11) 407 535 PROJECT PERFORMANCE AUDIT REPORT ANNEX III LIBERIA - HIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) EQUITY INVESTMENT PORTFOLIO AT DECEMBER 31, 1977 ($ '000) Amount Percentage of at cost capital held Companies operating profitably 1/ Corniffe Art Printing 24.9 20.0 Liberia Port Storage Co. 118.0 43.9 P. P. P. Timber Ind. 1/ 130.0 7.8 Maryland Wood Processing 140.0 20.0 Companies not yet operating profitably West African Agricultural Corp. 49.3 2.8 Liberia Meat Processing Co. 29.2 27.1 Caesar Beach Enterprises Inc. 24.9 14.1 Companies in development stage Maryland Veneer Industries 150 n.a. TOTAL 666.3 1/ Cumulative preference shares (10% or 11 1/2%) PROJECT PERFORMANCE AUDIT REPORT ANNEX IV LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) ESTIMATED AND ACTUAL SCHEDULE OF DISBURSEMENTS ($ 'O0O) Cumulative Disbursements Estimated Actual 1972 III 15.0 - IV 45.0 14.4 1973 I 90.0 14.4 II 150.0 14.4 III 230.0 24.5 IV 335.0 79.7 1974 I 450.0 183.0 II 570.0 817.0 III 685.0 817.0 IV 785.0 889.7 1975 I 865.0 921.5 II 925.0 936.9 III 960.0 994.4 IV 975.0 994.5 1976 I 990.0 994.5 II 1,000.0 994.5 Cancellations (Oct. 1976) 5.5 PROJECT PERFORMANCE AUDIT REPORT ATTACHMENT A LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 839-LBR) COMMENTS RECEIVED FROM THE GOVERNMENT 1. [The] Government has no substantive objections to report [OED Performance Audit Report) and we welcome [the] opportunity to discuss with appropriate staff or supervision mission who might be visiting LBDI in the near future. However, please note following observations: 2. Para. 2.13: Although contents [are] correct, [the] Government now has under consideration for implementation early 1978 a program involv- ing issuance of Government securities as one means of encouraging mobiliza- tion of domestic savings. 3. Para. 5.02: [The] Government has taken decision that Agricultural and Cooperative Development Bank will be responsible for commercial banking activities in rural areas. [The] matter [is] therefore closed, although LBDI may continue to lend to persons or entities located in rural areas. 4. [The Government] would like to express concern about [the] follow- ing statements: [in] para. 7.02: "This is understandable in view of the difficult environment prevailing in Liberia" and para. 7.03: "Because of the lack of a proper economic environment" [We] suggest deletion or appropriate amplification. 5. In general it is interesting to observe contrasting and sometimes conflicting views between [the] audit report and [the] completion report. Mrs. E. Johnson-Sirleaf Deputy Minister of Finance for Banking and Fiscal Affairs Monrovia, Liberia  PROJECT PERFORMANCE AUDIT REPORT ATTACHMENT B LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTIENT (LOAN 839-LBR) COMMENTS RECEIVED FROM THE BORROWER Design of Loan 1. Para. 3.01: It should be clearly stated that the institutional weaknesses referred to were those existing at time of grant of the first loan. 2. In paragraph 3.02 where reference [is] made to change in manage- ment in 1970, this should indicate the reinforcement of [the] then existing management. 3. In paragraph 3.03 please note that while focus of [the] loan under review was institution-building, as indicated by you, this would not apply to the two subsequent loans. The use of the credit line to finance import cost of locally produced commodities does not represent special concession by IBRD, as this is consistent with the intent of the loan, which was to finance foreiLgn exchange cost. LBDI Operations 4. Paragraph 4.01 - Use of Funds: The report mentions that the eleven small projects financed under [Loan] 839 were usually covered by collateral on the owners'personal assets. It would be appropriate to mention that this is applicable only in instances where the project did not have sufficient assets to secure the loan. 5. Paragraph 4.02 is unclear as to what impression or information this paragraph intends to convey. Obviously, one project such as PPP [Timber] could not have more than limited impact on the overall economy. 6. In paragraph 4.04 the report mentions that all but one of the sub-projects above the free limit under [Loan] 839 have been experiencing some type of management difficulties. This does not appear consistent with our records as neither Baker Poultry nor PPP [Timber], the combined total of which represents 76.5% of the line of credit have had any management or marketing problems. Furthermore, the report's reference to absentee manage- ment, in the case of two rubber projects, reflects a lack of familiarity with the local situation, as absentee ownership is generally the situation in small to medium Liberian-owned agricultural projects. Furthermore, the assertion that LBDI did not assess with sufficient scrutiny its sub-projects, cannot be supported with concrete evidence, such assertion being inconsistent with LBDI's reduced arrears and what the report characterizes as inadequate follow-up. In other words, if appraisal and follow-up are poor then the quality of LBDI's portfolio should have deteriorated. Please note that in one instance a sample of LBDI's appraisal report was used by IBRD to guide other small DFCs. Perhaps practical DFC field experience would have indicated that sub-projects experience difficulties and require re- scheduling, where necessary such should be effected. - B.2 - 7. Paragraph 4.07 is inaccurate in concluding that LBDI's increased activities and profitability were due substantially to diversification into agriculture, as agriculture has always been a part of LBDI's opera- tions. 8. Paragraph 4.08 is inaccurate in concluding that the slow pace of commitment of the first line was because no commitment fee was being charged, and this cannot be substantiated. The initially slow pace of commitment was due to other reasons. 9. Paragraph 4.09: In reference to predecessor, and as a matter of accuracy, it should be noted that LBDI's past exchange losses on KFW loan were not from failure to protect itself, but instead due to legal technicalities in the sub-project agreements discovered later. Needless to say, the Bank now fully protects itself from foreign exchange exposure on all of these sub-projects. 10. Paragraph 4.11 makes the disturbingly unfounded assertion that LBDI's profitability was, in part, due to management's acknowledged under- staffing to the detriment of its project appraisal and supervision. Meaningful control of administrative cost is an effort that every competent management attempts to realize, and while it is true that LBDI's staffing goals for its Project Department were not attained, this resulted from difficulties in finding qualified Liberian recruits. Notwithstanding, the quality of LBDI's appraisal is on par with other DFCs, granted supervision needs improvement and efforts continue to be made to attract qualified staff. Please note our strong exception to the inaccuracy of this para- graph as regards staffing. LBDI's Policies and Role of the Board 11. Paragraph 5.01 fails to clarify that the appraisal of LBDI referred to was in 1972 for the first line. Furthermore, with respect to the collateral requirement and policies, the report neglects to note the many changes introducing flexibility in both operations and policy recom- mended by LBDI's present management and approved by its Board. Please refer to DFC records and copy of LBDI's Board Minutes for example, for such changes which include re-financing operations, working capital financing among others. Normally DFC requirements which LBDI has been criticized by previous missions for not adhering to, limit our assistance to 50% of the total project cost. Realizing that many Liberians cannot afford 50% of the project cost, and given our desire for greater flexibility, LBDI has taken greater exposure in providing a much higher proportion of the project financing cost. Though legal foreclosure difficulties referred to in the report are accurate, LBDI has not avoided financing projects whose sponsors lacked sufficient financial backup; instead we have exercised greater caution dictated by financial prudence, and there is not one industrial project which LBDI has rejected because of inability to meet our lending terms. LBDI's operations in agricultural and industrial sectors since 1973 as well as all other operations of the bank [LBDI] have indeed exceeded all expectations of the first appraisal mission. - B.3 - 12. Paragraph 5.03: The report is inaccurate in suggesting that the impact of LBDI's Board on its overall policies and orientation has been limited to primary consideration of the adequacy of security arrangements. To the contrary, LBDI's Board, over the last 4 years, and more so in the last two years, has been very active in seriously addressing matters of policy and direction of the bank [LBDI], with dual concern for the develop- ment role of LBDI aad the need for institutional viability. 13. Similarly paragraph 5.04 is incorrect in suggesting that LBDI's lending terms have precluded it from assisting new Liberian-owned productive projects. Example of such instance would be necessary to substantiate this assertion. Institution-building Objectives 14. In paragraph 6.01 the report suggests that IBRD's influence has been responsible for the introduction of quantitative analysis in LBDI's appraisal. Though it is true that several weaknesses in appraisal were identified and guidance provided at time of the first appraisal, the calculation of ERR (including shadow pricing), IRR and other analytical techniques were introduced by the present management. Furthermore, the statement in the report that LBDI's appraisal still suffers deficiencies in basic aspects of project evaluation, e.g., market assessment, is inaccurate and proves a lack of understanding and appreciation of the difficulties in obtaining reliable statistical data in many developing countries. Essentially because of such uncertainties as to accuracy of available statistics LBDI has included sensitivity analysis in its project evaluation. LBDI's management recognizes that there is always room for operational improvement as is also true of other institutions, including IBRD. No doubt you will agree that the inclusion of specific examples in this report would be useful in substantiating the findings and providing some guidance. To use 5 or 6 projects out of a portfolio of approximately 170 presently on our books as a representative sample raises serious questions. 15. Paragraph 6.02 further indicates the tendency of this report to render hasty conclusions without an obvious appreciation for either the institutional environment or the goals and objectives of the management. To suggest that the absence of trained engineers and agriculturists on LBDI's project staff reflects weaknesses in the staff and thus the quality of the appraisal reports, is questionable. 16. LBDI's management, while recognizing the need for technical inputs in its evaluation, prefers to draw, when necessary, on outside specialized technical assistance while at the present building-up a sound staff or well- rounded financially trained investment officers. 17. For an institution in which large complicated agricultural and/or industrial projects are infrequent, we feel that the inclusion of specialized officers on our staff, in addition to the difficulty in recruiting them, would be a luxury which we cannot afford at the present. The records reveal that at [the] time of the first loan it was expected that LDC would have provided LBDI with technical information but not technical support as LDC - B.4 - itself at the time lacked necessary qualified staff. Furthermore, the $150,000 made available to LBDI under the third Bank loan for staff development and technical assistance, was in response to LBDI's request, recognizing the need to improve its operational staff. Please note further that the in-house seminar on Appraisal Techniques was initiated by LBDI through contacts with Arthur D. Little and subsequently the Bank, the latter agreeing to LBDI's request to provide available individuals to assist in the seminar. The topics covered in the seminar were determined mainly by LBDI's management recognizing the areas needing improvements, and demand forecasting and operating cost analysis were not in fact the main focus of the seminar as the report indicates. It is on the initiative of LBDI's management that the services of a consultant (a former DFC staff) have been contracted to evaluate and update LBDI's operational manual beginning early July. 18. The report has been equally inaccurate in stating that LBDI has played virtually no promotional role and that its equity investments have only been made with the view towards profitable returns from primarily foreign-owned projects. The records, if properly examined, will reveal that LBDI has made a number of equity investments in primarily Liberian- owned projects, in most instances with the view towards bridging the financing gap and permitting project implementation. However, these decisions have, and always will be guided by sound banking judgment, and will always, in part, be based upon the prospects for earnings. 19. In general, the report is extremely negative and fails to recognize the many achievements in institutional direction and policies which the Bank has adopted in response to the local needs. Where note is occasionally made of any achievements by LBDI, the report gives the impression that these were done either at the instance of IBRD or some other external factors. In other words, it gives the impression that LBDI has improved in spite of itself, which I find to be totally unwarranted. I feel that the extremely negative character of the report detracts from its possible usefulness as a vehicle for feedback and future guidance. I would suggest that many of the facts be re-examined for the sake of accuracy. Also that the report clearly distinguishes between points in time, i.e., situation existing at the time of first appraisal and present situation. It is unclear in this regard. Mr. Elie E. Saleeby President Liberian Bank for Development and Investment Monrovia, Liberia PROJECT COMPLETION REPORT LIBERIA - LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (LOAN 830-LBR) I. Introduction 1. The Liberian Bank for Industrial Development and Investment (LBDI), legally created in 1961, was formally established and became operational in November 1965 with the assistance of the International Finance Corporation. LBDI has been the only source of long term financing in Liberia and was established as a joint public/private enterprise. Although formed initially to finance industry and agri-business, in fact it has been, and is, a multi- sectorial institution with a highly diversified portfolio. The bank's name was officially changed in 1974 to the Liberian Bank for Development and Investment (LBDI) to reflect its diversity, but in particular to denote an increasing commitment: to agriculture. 2. The LBDI has received three loans from the Bank totalling US$12 million and equity financing from IFC currently amounting to US$666,600 (20.8% of share capital). The loan currently under review, No. 839-LBR, was the first line of credit to LBDI and amounted to US$1 million. The loan (combined with a US$0.6 million loan from the African Development Bank) was expected to cover LBDI's import financing requirements to mid-1974. Its main characteristics were a free limit of US$50,000 and aggregate free limit of US$200,000. The repayment schedule conforms substantially to the aggregate of the amortization schedules applicable to the investment financed, with a maximum of 15 years. The project helped finance twelve sub-projects,all of which were for Liberian owned enterprises, except for one large logging and timber processing scheme which was a joint foreign-Liberian venture. The loan, based on an appraisal report dated May 26, 1972 (No. DB-92a) was approved on June 13, 1972 and became effective on November 10, 1972. The loan was fully disbursed on December 18, 1975. II. The Maero-economic and Sectorial Environment 3. In 1970 the Government had no development plan nor did it sponsor any major development programs aimed at encouraging the flow of resouces into priority areas. The economy was dominated by large foreign-owned enclave operations accounting for most of the mines, the rubber plantations and timber enterprises which,combined, consituted about 40% of GDP and 90% of exports, but employed about 11% of the work force. Companies comprising the enclave sector enjoyed liberal, loosely-monitored incentives and concessions. These concession arrangements had failed to generate expected revenue for the Government and a number of agreements were renegotiated. Steps were also taken to eliminate excessive incentives and to introddce greater export orientation. A Concessions and Incentives Commission (and Secretariat) was created in 1971 to promote stricter adherence by foreign firms to contractual obligations. 4. Alongside the enclave sector was the large underdeveloped and stagnating traditional economy consisting of urban poor and subsistence farming -/ which, combined, accounted for 90% of the population and had an average per capita income of under US$50 per annum compared to the per capita GDP figure of US$233 in 1970. The remaining 10% of the population, mostly urban (Government workers, military, business workers and tradesmen, pro- fessionals) was fully engaged in the monetary sector along with a smaller number of foreign tradesmen, merchants and professionals. To the extent that linkages had developed within the economy to provide services to the enclave operations and the rest of the economy, they were controlled and managed by this latter group of foreigners. 5. During the period 1967-71, Liberia experienced a real growth rate in GDP of around 4%, mainly attributed to the enclave sector. However, growth in GDP slowed considerably due to a decline in world prices of iron ore and rubber in 1971. Despite a 12% annual growth rate over the five years ending in 1971, the manufacturing sector in Liberia, representing only 5% of GDP, was too small to offset the impact of reduced output by the major enclave exporters. Thus the December 1971 appraisal took place during the period of an economic downturn due to global economic conditions. It was also a stage at which Government felt the need to stimulate and expand investment in the economy. 6. About half of the fifty industrial enterprises operating in the country were predominantly Liberian-owned. Many of the firms produced for the limited local market and included a cement factory, small mechanical workshops, textiles, footware, chemicals and an oil refinery. The few export industries consisted of several sawmills, fish processing and explosives for mines. Less than half of industrial investment went to Liberian companies, most of which were of medium size (US$50,000 - US$500,000). Industrial sector information was limited and in 1971 Government was only able to compile the gross value of production of 24 firms (US$34 million) of which almost half was contributed by the refinery. 7. At the time of the Bank's appraisal mission, investment in manufacturing, particularly in smaller enterprises had been erratic due to the constraints of credit, market size and indigenous skills. Similarly there were no local tradi- tions, such as handicrafts, on which to base new enterprises. The challenge for policy-making was to achieve the objectives of economic diversification and greater Liberian participation in the economy, while maintaining a traditional open door policy to foreign businesses. In this context, the potential for manufacturing development was considered by Government to be in agro-industries based on local raw materials and other activities associated with agriculture such as hand tools and agricultural implements. Despite the establishment of two promotional agencies (Liberian Development Corporation and Bureau of Industrial and Resource Development) and the issuance of an Incentive Code in 1966 providing an array of tax and tariff incentives, the Bank, during appraisal and negotiations,expressed the need for more comprehensive efforts to stimulate the manufacturing sector. The main focus of the Bank's sectorial proposals included an analysis of the impact of tariffs on industrial efficiency, 1/ Both groups account for about 80% of the labor force. - C.3 - an examination of the benefits of current incentives, a reorganization of the promotional agencies, establishment of business extension services and loan guarantees for small-scale enterprises and preparation of a sectorial invest- ment strategy. III. The Liberian Bank for Development and Investment (LBDI) 8. The structure of LBDI's ownership had not changed between inception in 1965 and the appraisal mission in December 1971. Of LBDI's capital of US$1 million, the Government of Liberia and IFC each held 25%, and private Liberian investors 1%. These represented class A shares restricted to Liberian and international institutions which, by law, had to constitute the majority of shareholdings. The remaining 49% were foreign-owned (class B) shares, controlled by financial institutions, Firestone Plantations and two mining companies. This composition had given and continues to give, LBDI's Board and management a strong private sector orientation. 9. LBDI's influence on the Liberian economy had been marginal up to 1971 due to its low volume of operations. When IFC had agreed to participate in LBDI's share capital in 1965, an annual level of approvals of US$1 million was envisaged for the coming years. In fact, the level of approvals reached a peak of US$860,000 in 1969 but fell to US$82,000 in 1970, and was US$266,000 in 1971. Total volume of approvals as of December 31, 1971 had been US$2.1 million or an average of US$400,000 per year since inception. Manufacturing received 59% of investments followed by agribusiness and livestock (28%) and the remaining 13% went to tourism, transport and services. In contrast to LBDI's level of activity, total private investment during the five years to 1971 had averaged US$50 - 60 million annually, mostly in foreign-owned mines, and public investment,mostly in infrastructurelaveraged US$10 million per annum. LBDI's loans outstanding at the end of 1971 represented about 8% of total commercial bank loans to industry, agriculture and commerce. 10. The Bank's 1971 appraisal mission concluded that the following factors were responsible for LBDI's low level of operations :- (i) a. lack of agressive management in matters of project promotion; (ii) Inflexible collateral and security requirements; (iii) short loan maturities and grace periods being maintained despite the bank's term lending mandate; (iv) a failure of coordination with government promotional agencies; and (v) by 1971, a lack of resources. Given the absence of a Government investment program for the private sector, LBDI despite its weaknesses, represented the best potential institution for financing the Liberian private sector. Thus,a major objective of the Bank's loan was to strengthen LBDI's institutional capacity and operations so that it - C.4 - might influence positively the pattern of resource allocation in the country. 11. Seven commercial banks were operating in Liberia, of which six were subsidiaries of foreign banks. Attempts at setting up an Agricultural Credit Corporation failed in 1970. There was no Central Bank and the locally-owned Bank of Monrovia assumed the basic tasks of a monetary authority, including clearing facilities for the other banks, ensuring an adequate supply of currency notes and coins and providing overdraft facilities to Government. U.S. dollar was the official unit of exchange. There were no banking regula- tions and each bank established its own reserve requirements and general guidelines. While commercial banks provided medium-term financing to a few preferred clients (generally large foreign corporations), in fact, LBDI was the only institution in the country prepared to consider term financing to a wide range of investors, including Liberian entrepreneurs. Thus, effects of Bank assistance under this project should be viewed in the context of LBDI's increased level of operations, its role within the economy and, in particular, its contribution to improvements in the investment climate. The Bank's First Loan 12. The Bank Group had maintained a close association with LBDI through the IFC's board membership. It only remained for the Bank to decide if and when loan assistance would be warranted. At the end of 1971 LBDI had reached the end of its available resources. LBDI had a pipeline of 22 projects requiring invest- ments of about US$1 million. Total commitments for 1972-1976 were then estimated at US$6.3 million. Import financing for 1972 and 1973 was estimated at US$1.6 million. Applications for loans were made to the Bank and ADB to cover this resource gap. The Bank felt that the time was appropriate to permit it to exert a positive influence on institutional and sectorial matters. Bank financing could help LBDI realize its potential as the main source of term lending through institutional improvements, including (a) establishment of an effective follow up system and a timetable for supervision visits; (b) measures to strengthen LBDI's staff and management, including the prompt appointment of a new Project Manager and at least two other professionals through mid-1973; (c) increased use of economic analysis by LBDI in project appraisals; (d) efforts to develop closer relationships with Government agencies involved in investment promotion; (e) more active involvement of the General Manager in operations; and (f) more flexible lending terms. Accordingly, LBDI agreed at negotiations to introduce these modifications. 13. The following summarizes the follow-up on these recommendations during the disbursement period of the first Bank loan: (a) Project Supervision LBDI's follow-up procedures had been technically and organiza- tionally weak, with no system to identify potential problem projects. The 1971 Bank mission had noted that LBDI's appraisal and follow-up work placed emphasis on only financing schemes considered economically safe and viable at the time of application; and that the LBDI had done little to improve project design or operations of poorly presented, but potentially sound projects. While LBDI's major improvements took place in its financial monitoring of projects, much still remains to be accomplished in terms of organizing supervision to identify and focus on specific problem projects, conducting more analytical investigations of problem projects, developing - C.5 - technical expertise in sectors of heavy lending, and providing assistance to smaller Liberian clients. The delays in implementing the necessary improve- ments were partially a result of insufficiently trained staff, and partially due to a lack of management commitment. Only now, under the third Bank loan to LBDI, are specific training and organizational programs being designed. (b) LBDI Management and Staff The major turning point in LBDI's operations and performance came in September 1973 when the Government decided that action was needed to vitalize LBDI and, together with IFC, began looking for a new President for LBDI. The candidate, selected on the recommendation of IFC, was a Liberian who had worked in the Bank's Development Finance Companies Department as an operations officer.(Since then IFC has been active in LBDI's affairs and has supported the President in operational, planning and policy matters). He has been able to provide LBDI with firm and active leadership needed to envigorate the level of operations. Approvals from 1974 onward increased dramatically over the 1971/1972 levels and 1/ Government interference in LBDI's business was significantly minimized thereafter. However, a number of basic staff problems remained and several staff left LBDI because of incompatibility while others found better jobs. A new Project Manager, compatible with the new President, was only recruited in 1977 and the Projects Department remains understaffed and inadequately organized. In the years following the Bank's first Appraisal, staff support was received from the Peace Corps and through overseas training in business schools. The post of General Manager, held by an expatriate since 1969 will be Liberianized as soon as a suitable candidate can be found. There has been some staff turnover over the years but on balance LBDI has managed to attract capable staff. (c) General Manager The purpose of the Bank's initial recommendation to involve the General Manager in LBDI's operations was to offset the deficiencies of the previous manage- ment, This proposal was overtaken by the appointment of the current President. (d) Econoric Analysis The Bank's recurrent efforts since the first loan to strengthen the economic aspects of project analysis have resulted in considerable progress, but not yet in definitive improvement. In 1977 LBDI moved more decisively towards this objective. Currently, a proposal by Arthur D. Little for in-house training in appraisal and follow-up techniques is under consideration by LBDI, in consulta- tion with the Bank. LBDI management is actively exploring other sources of training and will decide shortly on the most suitable arrangements. (e) Relations with Government Investment Promotion Agencies The most important such agency has been the Liberian Development Corpora- tion (LDC) which, despite UNDP assistance, has not been sufficiently active or innova- tive to fully assume a role as investment promoter for either large or small-scale entecprises. LBDI was forced to undertake its own promotional activities with some degree of success as witnessed thu dramatic increase in approvals in 1974. Only in 1975, when new management took over LDC, did the prospects emerge for useful coordina- tion. The President of LBDI is now a member of LDC's Board and there is considerable contact between the two institutions. (f) Lending Terms Loan maturities which in 1971 had averaged five years, including grace, have since been lengthened as necessary. Collateral and security requirements 1/ Loan Portfolio outstanding as of 12/31/73 was US$2.1 million compared to US$9.7 million as of 12/31/76. - C.6 - were strict at the time of the Bank's appraisal with inflexible conditions being uniformly applied regardless of the past repayment performance of borrowers. This policy which tended to send the better clients to commercial banks, has been made more flexible. Notwithstanding LBDI still generally insists on collateral of at least 150% of a loan and in many cases has obtained 200% collateral. A first mortgage is normally taken on a borrower's fixed assets. LBDI argues with some justification that this level of security ensures the sponsors' commitment to the project and is necessary as a screening mechanism since many borrowers consider LBDI as a Government agency which need not be repaid. Yet the policy effectively excludes the financing of many new small-scale enterprises. The alternative is the Government providing guarantees for small-scale Liberian enterprises in priority sectors. The subject had been raised by the Bank on numerous occasions without results. However, the Bank, after recent discussions with the Government, has compiled information for both Government and LBDI on the formulation of SSE policies, including a credit guarantee program. In addition, the Bank has agreed to advance an SSE sector mission to FY78 if a suitable consultant can be found. The purpose of the mission will be to assist in developing policies and to identify an actual SSE program which can be supported under the Bank's next loan to LBDI. IV. Resource Allocation 14. As shown in Annexes A to D, the proceeds of Bank loan 839-LBR were used to finance 12 subprojects, five of which were above the free limit and 7 below. Except for one large timber and wood processing scheme, the sub- loans went to wholly Liberian-owned enterprises. LBDI made minority equity investments as well as loans on three of the subprojects, two of which were wholly Liberian-owned enterprises. LBDI's total investment varied between 100% of project costs involving expansions of very small Liberian-owned enterprises, to 18% for a large foreign majority owned operation. Overall, LBDI financed 43% of the total investment of approximately US$3.1 million. The Bank loan financed about 75% of the LBDI's contribution to investments and accounted for 32% of total investments. One relatively large timber project represented 40% of LBDI's investment and 50% of the Bank loan. Three other relatively large Liberian schemes combined constituted another 42% of LBDI's investment and 37% of the Bank's line of credit. These consis- ted of a poultry farm, a beach hotel and a printing company. Of the twelve projects, ten were expansion projects and two were new. The entire Bank supported program created about 322 new jobs. The average investment cost per job on these projects varied from about US$625 in a small printing shop to US$15,000 for the large timber operation, with an average cost per job of about US$9,600 which is relatively low for a conventional African development bank without a specific program for small-scale local enterprises. 15. Of the five projects above the free limit, only one involved foreign sponsors from Germany and Denmark (initially 75% of the project). They were associated with Liberian businessmen and LBDI holding the minority positions. The Bank's first line of credit initiated a pattern of financing Liberian and jointly owned firms, which was to prevail throughout LBDI's overall lending operations. The jointly sponsored project, PPP Timber Ltd, claimed half of the Bank's line of credit. It had been reviewed carefully by the Bank in 1972 and judged to be an appropriate investment for LBDI because of its export potential and its effect of opening new regions of the country to economic activity. The estimated Economic Rate of Return was 28% and the Financial Rate of Return was projected at 20%. Ex ante economic rates of return were also calculated on Caesar's Beach Hotel project which showed a 50% return and Baker Poultry Farm for which a - C.7 - 54% return to the economy was projected. Financial rates of returns, shown in Annex C, and prepared on sub-loans above the free limit, ranged from 40% estimated for National Enterprises, a transport scheme,to 15% on Baker Poultry Farm. The methodology for financial analysis of projects was generally satisfactory, while economic analysis was weak. All LBDI loans carried an interest rate of 9%, a service charge of 1% and a commitment fee of 0.5%. 16. The data collected in the annexes on operational performance of the subprojects are far from comprehensive. Because of a change in top management and a heavy staff turnover particularly of projects staff, supervision and follow-up records are incomplete. Furthermore, much of the information now required was simply not included in the initial project evaluation exercise. By the beginning of 1977 only two successful small-scale Liberian enterprises : Liberian Embossograph and B & E Bakery had been fully repaid. PPP Timber, Baker Poultry and Sofie's Ice Cream Inc. were operating more or less on schedule, while Corniffe Printery and Caesar Beach Hotel were only just becoming fully operational. Except for PPP Timber which experienced production delays because of difficult terrain, most other problems were caused by weak management and inadequate market analysis, despite the fact that most clients were already operating successfully prior to the LBDI's loans. Annex C shows that the profitability forecasts appeared optimistic in most cases for the start: up period. The most profitable ventures were the Poultry Farm, the Ice Cream Company, an Embossograph company and B & E Bakery, all Liberian-owned and operated and all, except the Poultry Company, below the free limit. In all except two cases, subproject appraisals have been optimistic in the assessment of lead times necessary for the commencement of full operations. 17. Employment estimates on the projects have been accurately met and export forecasts, while relevant mainly to the large timber scheme, remained more or less on target. One project, Caesar's Beach Hotel had encountered periodic delays due to market and management problems, and after a rescheduling,its repayments have been on time. Four projects experienced arrears of over three months as of December 31, 1976. - Corniffe Printing had been unable to service debt due to competition from imports and problems of distribution. Recent Government contracts for school supplies, concessionary tax treatment (as a Liberian company) and accounting improvements have recently resulted in significant profits. - A chronic accident rate and pilferage by employees forced National Enterprises, a rural trucking firm4to cease operation. The LBDI loan to be rescheduled is being repaid through profits from the sponsor's other operations. - Insufficient market information and heavy competition have compelled Milton Supermarket to restructure operations and reschedule its loan. - The owner-operator of David Gibson Bakery died and insurance will repay the LBDI in fulf. A more complete assessment of the impact of loan 839-LBR would require the collection of operational data when all projects are fully on stream. - C.8 - 18. In general, the quality of appraisals undertaken by LBDI were adequate. The degree of impact of a US$1 million loan is limited, even when viewed in the context of a modest institution in small country. However, the loan did finance a number of attractive investment opportunities, advance the development of many Liberian entrepreneurs and managers, and it launched a dramatic improvement in the quality and level of LBDI's operations. There was some tendency, which has since been corrected, to accept projects without rigorous evaluation. In all cases the Bank had to request additional information on markets, technical aspects and the economic justification. As a result of the interaction between LBDI and the Bank Group, appraisals became more quantitative and analytical and LBDI management became more promotionally oriented and sensitized to the particular requirements of Liberian investors. V. LBDI's Operational Performance 19. LBDI's volume of operations from approval in 1972 to full disbursement of loan 839-LBR in 1976 was significantly superior to that forecast at the time of the appraisal (Annex E). The remarkable improvement may be traced to the Bank's involvement and to new LBDI management. Loans under US$10,000 to smaller local enterprises represented between 4% and 6% (by amount) of portfolio outstanding between 1971 and 1976, but constituted from 50-65% of the actual number of loans during the same period. This impressive proportion of LBDI's lending operations channelled to small-scale clients is particularly noteworthy when one considers that it was carried out on the institution's own initiative. Loans of more than US$100,000 increased from 66% of loans by amount in 1971 to 75% in 1976. The rapid growth in LBDI's operations due in part to new management in 1973, was made possible by diverse and relatively heavy external borrowing. 20. LBDI developed a highly diversified portfolio since 1971. As the only major source of term financing in Liberia, the composition of LBDI's portfolio began to change significantly during 1972. Manufacturing which accounted for 59% of the amount of LBDI's loans as of December 1971 had declined to 28% in December 1976. However, agribusiness (including agriculture) rose from 27% in 1971 to 45% of portfolio outstanding in 1976. During the same period services including hotels and tourism increased from 14% to 27% of portfolio. The relative decline in indus- trial lending and the increase in other sectors reflect the limited scope for manu- facturing in Liberia, and conversely the potential offered by agro-industry and demand for services by the large expatriate community. Predominantly foreign-owned projects received 12% of LBDI's loans and 31% of the loan amount in 1971. This proportion remained the same through 1976. Joint Liberian/foreign ventures decreased from 56% in 1971 to 27% of loans in 1976, while loan financing to wholly owned Liberian firms increased from 13% to 42% of portfolio during that period. There is no evidence to demonstrate that Government policy influenced this trend. Indeed there was an almost complete lack of positive guidance from Government. Influence was rather exerted at the project level through the Minister of Finance as Chairman of LBDI's Board. The first appraisal had suggested closer coordination with Government promotional agencies. However, these agencies never emerged as viable promoters of business and LBDI proceeded on its own to identify new investment prospects with relative success. While a development plan did not emerge until 1977, Government had viewed greater investment in agriculture and agriculturally based industry as an important objective. To this end LBDI hasprovided the base for Liberian involvement - C.. 9 - in four large timber and wood processing projects and capital for the first Liberian owned rubber farms, twenty smaller farms and two large plantations. 21. An initial problem in LBDI's operations was a slow rate of dis- bursement. The inactivity during the first years after loan effectiveness was due mainly to a lack of management initiative. However, by 1974 disburse- rents had picked up significantly and were double the amount forecast. Addi- tional staff were recruited and staff time was arranged in a more efficient manner in 1973 and 1974. As a consequence, disbursements increased rapidly, reaching US$3.8 million in 1976 up from US$500,000 in 1973. The appraisal capability of LBDI was built-up over these years, although there is still scope for improving economic analysis and supervision procedures. Never- theless, in recognition of the many improvements, the free limit under subsequent Bank loans was raised threefold to US$150,000 from US$50,000 under the first loan. LBDI Board and management have operated independently but in cooperation with the Ministry of Finance. Staff salaries have been competitive and qualified professionals have been attracted. There has been some staff turnover but it would now appear that the nucleus of long-term LBDI cadre has been fo:nned. 22. Despite the need to improve the quality and organization of super- vision discussed earlier, LBDI's level of arrears have not been a problem. Fortfolio outstanding affected by arrears as of December 31, 1976 was 9.2%. Comparative exposure rates for 1973 and 1974 were 11.3% and 5.0% respectively. Factors in maintaining these relatively low rates have been : the forceful intervention of LBDI's management, LBDI's security requirements, late pay- ment penalties and conservative client selection procedures. VI. Financial Performance 23. The forecast and actual Income Statements, Balance Sheets and Financial Ratios are shown in Annexes F, G and H. 24. Financial Position. In 1972 and 1973, the loan portfolio out- standing did not meet the forecasts of the 1971 appraisal mission. However, between 1974 and 1976 there was a rapid growth in loan portfolio following the installment of new more dynamic management and staff. Provisions as a percentage of loan and equity portfolio declined from 5.9% in 1972 to 2.5% in 1976. However, this decline particularly after 1974 was proportional and due to the sharp increase in portfolio outstanding rather than to a reduction in absolute amounts. LBDI's losses through bad debts have been minimal due to conservative collateral and security arrangements. Moreover, absolute &nounts in arrears of more than three months have been covered by provisions. Provisions have been considered adequate by the Bank to cover probable losses on the portfolio. Consequently, there has been little need to increase pro- visions beyond current levels in order to maintain a generally healthy loan portfolio and LBDI has remained sound and creditworthy throughout the disburse- ment period. The LBDI has followed the practice since inception of trans- ferring 25% of yearly net income to legal reserve. 25. The growth in the portfolio in the early and mid-seventies initially financed by the first Bank loan (US$1 million) and a loan from ADB (US$0.6 million) in 1972 was sustained by second and third Bank loans (US$11 million) - C.10 - two more ADB loans (US$4.1 million) and a loan from KfW (Germany) of US$1 million. The overall success with which LBDI was able to obtain resources particularly from international institutions may be attributed to the new management and the expansion of the institution's operations. The Government had continued to provide both long and short-term loans to meet local currency requirements. In 1973, the Govern- ment agreed to provide LBDI with US$1 million in medium term funds and in 1972 US$2 million were provided in the form of a long-term loan subordinated to share capital. LBDI's charter limits its long-term debt to three times net worth plus quasi-equity. This ratio stood at 1.2:1 in 1974, 1.7:1 in 1975, and 1.4:1 in 1976. The debt equity ratio which was at its highest in 1975 at 6.2:1, declined to 4.1:1 in 1976 as a result of a substantial increase in equity. Financial Profitability 26. During the disbursement period of the Bank's first loan LBDI had con- tracted a deutsche mark loan from KfW (about $1 million) on which it had failed to pass on the exchange risk to its sub-borrowers. As a result, LBDI had suffered significant losses due to exchange adjustments (amounting to 30% of its net worth in 1973). At the insistence of the Bank Group LBDI moved in 1974 to eliminate all of its DM exposure by suspending repayments until 1986 and then by passing on the exchange risk to sub-borrowers, or in some cases, negotiating coverage by the Government. 27. In 1972 and 1973 LBDI's revenue lagged'behind forecasts because of the previous low level of activity, and a rise in administrative costs. From 1974 onwards interest earned on a rapidly expanding loan portfolio resulted in a significant rise in revenue and net income. Net income in 1975 and 1976 was more than double the projected figures. By 1976 net profit as a percentage of total assets had reached 3% and the net profit as a percentage of average net worth was an attractive 18.7%. Administrative expenses as a percentage of total assets were reduced in 1975 and 1976 to 2.5% (compared to 4.1% and 3.2% in 1973 and 1974 respectively). Resource Mobilization 28. Since LBDI received all of its long-term local resources directly through Government loans, it has not had the opportunity to play a major role in developing the process of resource mobilization in the country. However, since 1974 LBDI management has established many contacts and linkages with local banks (and their foreign home offices). The unexpectedly rapid increase in LBDI's level of business in 1974 led to a liquidity shortage which had LBDI seeking funds from the liquid local and foreign commercial banks. Chase of Liberia agreed to an overdraft facility at an interest rate of 1% above LIBOR. LBDI also discounted US$500,000 of Government promissory notes with the First Curaqao International Bank in New York. LBDI continues to obtain its short-term resources through deposits made by commercial banks which receive between 6-7.5%; LBDI either reinvests these funds at higher interest or on-lends at 10% to clients as working capital. In this manner, LBDI has been able to achieve a satisfactory degree of term matching. The most important implication is LBDI's role in stimulating the process of financial intermediation in Liberia through more effective use of commercial bank resources in development projects. 29. Since the first appraisal mission, the Bank has expressed interest in LBDI introducing commercial banking operations, limited to its term borrowers, in order to (a) allow LBDI to mobilize its short-term resources; - C.11 - (b) improve the level of financial information on LBDI clients' financial positions; and (c) allow term matching of resources by LBDI. LBDI was never able to act on this proposal because of opposition of commercial banks, many of which are LBDI's shareholders, and recently because of opposition from the newly-created monetary authority. 30. Since 1973, LBDI has actively pursued alternative sources of foreign exchange funds, well ahead of the Bank's usual advice to move in that direction. Besides the past loans from the Bank and the other sources outlined in para. 25, LBDI has recently negotiated a US$3 million loan and US$350,000 equity partici- pation from the European Investment Bank. Discussions are continuing with two German agencies, the FMO (Netherlands) and the Arab Development Bank (ABEDIA) for additional financing, VII. Conclusions 31. The specific project objectives and the broadly defined sectorial goals of this first loan were reasonable and well conceived at the time of appraisal. However, the lead-time necessary for their achievement was underestimated. While many improvements in appraisal and follow-up procedures were introduced, there were still some aspects of these procedures requiring additional attention four years after the loan effectiveness. On the other hand, management and staff performance in most other aspects improved dramatically, resulting in an impressive upsurge in loan approvals and disbursements. More flexible lending terms were introduced, but terms could not be sufficiently relaxed to allow greater emphasis on small-scale enterprises or potential investors without security. A lack of Government policy or guarantee scheme during the disbursement period of the loan precluded LBDI's formulating a comprehensive lending program for SSE's. Never- theless, even within the limited scope of this small loan, LBDI demonstrated a willingness and a capacity to successfully assist smaller Liberian enterprises. In general it may be said that the main achievement of the Bank's loan was that it sUccessfully provided institution building. Many of the constraints faced by LBDI were beyond the control of its management and Board. 32, Most of the sectorial objectives proposed by the Bank during negotia- tions in 1972 (para. 7) were never achieved and LBDI had to operate without a comprehensive policy framework. The one exception was the introduction of changes in Investment Incentive Code and tariff structures to eliminate excess incentives to foreign companies and emphasize greater export orientation. The capacity and willingness of the Government to formulate sectorial policies and introduce supporting programs were overestimated. 33. The assistance of the Bank Group combined with LBDI's new manage7ent gave LBDI the essential thrust to achieve a level of operations unanticipated by the Bank's 1971 appraisal mission. LBDI began during the first loan to fulfill its major role as a multi-sectorial term lender. In developing and proving its operational capacity, the LBDI gained access to a wide range of domestic and international financing. Through this first loan and subsequent loans, the LBDI has 6eveloped into not only an effective and capable lending institution, but one that is also financially sound and creditworthy, taking more of a lead in the development of the Liberian economy. IDF Division West Africa Region March 31, 1978 Annex A ffILIZATIc OF CREDIT 839-LBR LADI Financi - USS % cf Project Cost Pro ect letion Date of LBDI Loan Sub-project Type Pro'ect Cost Loan Eut Tota Of which LBDI IBHD Esimte2 Atua ANumber u00 st) IBRD Loan Annunt Oct. 24, 7) A-1 Caesar Beach (resort) N 252,900 124,400 25,000 149,400 90,180 .9.2 56.7 9/50/74 3/31/76 Nov. 12, 75 A-2 Corniffe Art Printery 9 180,200 155,200 25,000 180.200 126,920 86.1 70. 4 3/31/75 3/21/75 Jan. 16, 74 A-3 National Enterprises (transport) E 89,600 88,700 * 88,700 54,003 99.0 60.5 5/31/7. 3/31/75 Mo.r. 29, 7 A-4 P.P.P. Timber N 2.150,000 400,000 150,000 530,000 500,000 18.6 23.3 9/30/76 May 21, 71 A-5 Baker Homegrown Poultry a 252,800 25,600 - 25,600 150,530 92.8 59.5 9/30/75 6/50/76 Dec. 4, 72 8-1 Sophie's Ice C1;eaM a 4,000 35,000 - 35,000 1.,397 81.4 5.5 3/31/73 Jul. 5, 75 B-2 Ernest B. Dena (rubber farm) 3 58,500 55,000 - 35,000 11,875 90.9 30.8 9/30/76 ("I Aug. 29, 73 B-5 Liberian Rmbossaograph 1 5,000 5,000 - 5,000 4,7865 100.0 95.7 Sep. 21, 75 B.6 Milton Supenmarket E 52,'m 50,500 - 50,500 36.310 96.6 69.. 5/31/7. Oct. 17, 73 B-5 9 and E Bakery E 6,75 6,575 - 6,)75 - .,655 100.0 57.1 2/28/75 Oct. 25, 7) 8-6 Henrietta tolbert(rubber ferm) 5 17,600 15,500 - 1S,500 4,500 76.7 25.6 5/31/79 Dec. 20, 73 6-7 David 0. Obson (bakery) I Is,500 4,500 - 4,500 2,835 100.0 63.0 3.092,775 1,152,775 180,OO0 1,5352,775 1,000,000 H * Nev o Exhausi-r In lude . Ltal cancellation of $5,87 (Ernest Dennis - $3,270, Liberian Embossograph - $143; lenrietta Tolbert *$1,114; and David Gibson - $960). Annex B Economic Performance of Subprojects Financed under Loan 839-LBR Economic Project Investment Exports in thousand US$ (% of total sales) Rate Cost Cost ,irst Year operation Second Year operation of-lturn Number Subproject (000 US) Employment per job Estimate Actual Estimate Actual Estimate A-1 Caesar Beach (resort) 252.9 22 11,500 - - - - 507. A-2 Corniffe Art Printery 180.2 19 9,480 - - - -- A-3 N, nal Enterprises (transport) 89.6 23 3,900 - - A-4 P.P.P. Timber 2,150.0 143 15,000 1,794(60) 936(75) 1,794(60) 1,285(51) 28% A-5 Baker Homegrown Poultry 252.8 36 7,100 - - - - 54% B-1 Sophie's Ice Cream 43.0 10 4,300 - - - - 0 B-2 Ernest E. Dennis (rubber farm) 38.5 12 3,200 - - 1(100) 1(100) - . B-3 Liberian Embossograph 5.0 8 625 - - - - B-4 Hilton Supermarket 52.3 9 5,800 - - - - B-5 B. & E. Bakery 6.4 6 1,070 - - - - B-6 Henrietta Tolbert (rubber farm) 17.6 28 630 7(100) 7(100) 9(100) 9(100) - B-7 David G. Gibson (bakery) 4.5 6 750 - - - - 1 First stage only . Total cost of all stages = $3.5 million; employment = 240. Anne.a C rinancIl Perfornsoc. of SubPoPtcts Finsced Under Credit 839-LBR Net Profit <.ft.r tao) ProfIt ibkfor lnter-r e"&W FPinannial Firat Tot.l Salet. et Profit (.os) As % of Avercge Het Worth As % of AveraLe Total Assets liste of t Year of irst Yesr Operation Second Yer Operation First Yeor Operatlon Second Yer Operation t 1e. Oorp n 2,d Yesr Operation lst Yeer 2Cpersti on /nd fear perati.n Re-ur Loan ho. w- of subgr,1ect Operation Kstimeto Actual IEttitt AActua1 totimt Artu.1 £1tt-tAtctul Ettma Acte Acual fåtloftt Actuai tets Actu#I Eått~te ctuail Estimte A-1 C....r Beach (retort) 1974 B 80000 $ 80590 6127000 $ 98633 4 15000 ($16383) $ 40500 ($ 7241) 191 (101) 322 ( 5) 132 32 30M 31 22% A-2 CorttfW. Art Pnlotaryg 1973 131300 95538 155895 93287 8913 ( 11375) 24533 ( 61986) 17% ( sv) 39 ( 712) 4% 5 11 <121) 24 A-3 tas p ses 1974 33138 45790 121623 152869 6954 10668 13307 70870 252 501 322 692 92 11 212 67n 40% A-4 P.P.P. Tiber 1974 2990580 1247639 2990580 2313091 97769 (410831) 97769 46349 8 (21%) 91 3Z 112 (102) 102 27 v% A-5 Baker ~ ~agrown Po.ltry 1974 262569 218720 290488 435670 ( 21335) ( 20709) ( 4893) 10358 ( 11%) ( 8%) ( 31) 22 3 ( 71) 5% 3 s 6-1 6.pht« Ic. Crea 1973 82500 90750 90000 108000 4044 4&30 6321 10160 16% 18 202 282 132 14% 152 16% 21% B-2 zref ,. D.nis(rbb,er 1976 -0- -0- 975 1025 ( 6837) ( 7521) (12291) ( 13214) ( 132) (151) ( 262) (292) (62) ( 62) (11%) (122) - 8-3 Lib.rian Emba.graph 1/ 1973 18000 18720 19215 20106 1277 1445 1906 2023 46% 332 35 332 332 382 292 322 - I-4 Nilos S super-ark.t 1973 157175 339160 247300 634875 13139 39216 20553 15124 442 702 41% 212 201 - 312 - - D-5 b &E Old Fasirlon Bok-y1974 47320 47569 32486 49966 3435 2940 3851 3653 7n 5 62 42 62 - 52 7% - 6-6 Hrti tt Tolbert(ruNbber 1976 7200 7136 9000 9030 ( 7152) ( 7506) ( 7434) ( 7419) ( 32) (132) ( 11%) (112) <12) (9) (g2) (9) . 8-7 ~avid Gibson(bakery) 1/ 1974 48823 46928 51269 53224 2790 1653 3561 2319 81 5 7 42 312 242 301 242 . e 81I es•ist.. ~ le- r pr.per #nd/oar acceptable reporla Annex D CURRENT STATUS OF SUB-PROJECTS FINAMCED UNDER CMEDIT 839-LBR Sub-Project poeOwners L- ILDI Financing IBRD Amount Project Cost Contribution Other LEDI Equity Y Outstandi& Present Remrks Sources Loan Participation Arrears A-1 Caesar Beach (resort) 252,900 95,i 10355 124,400 25,000 90,180 - Rescheduled and under supervision by LBDI -- 155'aw 25,OW 119,54 6o v-,074 Rescheduling requested, LBDI doing follow-up review A-5 National Enterprises (transport) 89,600 900 - 88,70D - 20,003 24,575 Non-operational (entire truck fleet disabled due to accidents and pilferage) A-4 P.P.P. Timber 2,150,000 900,000 120,000 400,000 130,000 485,ooo - xperieancing difficulty (Production delays due to rough terrain and marketing problems) A-5 Baker Homegrown Poultry 262,800 18,200 - 234,600 - 98,462 - Satisfactory B-1 Sophie's Ice Cream 4.3,000 8,000 - 35,000 - 14,597 - Satisfactory 8-2 Earnest E. Dennis (rubber farm) 58,500 5,500 - 35,000 - 8,519 - Satisfactory B-5 Liberian Emboseograph 5,000 - * 5,000 - - - Satisfactory B-h Milton Supermarket 52,300 1,800 - 50,500 - 36,510 45,947 Under review for rescheduling due to managerial. problems B-5 B and E Bakery 6,375 * * 6,375 - - - Satisfactory B-6 Henrietta Tolbert (rubber farm) 17,600 4.100 - 13,500 - 5.586 - Rescheduled, managerial problems B-7 David Gibson (bakery) 4,500 - - ts,500 1,875 2,222 Mon-operational (client deceased) - - Loan being repaid by sale of collateral and insurance 3,092,775 1,029,645 730,555 1,152,775 180,000 877,822 152,618 N- dividend received on equity investments All arrears (principal and interest) over 3 months as of September 1977 Annex E-1 EVOLUTION OF OPERATIONS proyals, Commitments, Disbursements, 1972-76 1972 1973 1974 1975 1976 ApvForecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Foreign Expenditure loans 700 J544 770 594 817 3,808 952 2,285 1,075 S4,c6 Local Expenditure loans 300 ( 330 623 563 715 399 715 439 Equity Investment 50 2 50 111 5o 270 50 50 150 Total 1,050 576 1,150 1,328 1,260 4,795 1,581 3,072 1,514 4.246 Commitments Foreign Expenditure loans 688 263 763 541 839 2,518 923 2,695 1,016 Local Expenditure loans 270 327 344 360 602 396 1,031 55 3,970 Equity Investments 50 27 50 - So 270 50 30 50 150 Total 1,005 290 1,140 885 1,249 3,390 1,369 3,756 1,501 .,120 Disbursements Foreign Expenditure loans 586 710 10B 809 451 890 2,1418 979 Local Expenditure loans 223 3o4 3ffi 347 1,995 381 1,4145 419 5,122 Equity Investments 50 50 - 50 297 50 65 50 75 Total 859 141 1,064 476 .1,206 2,743 1,321 3,959 1,448 3,797 -C .17 - Annex E-2 EVOLUTION OF OPERATIONS: CHARACTERISTICS OF LOAN PORTFOLIO OUTSTANDING As of 12/31/71 As of 12/31/74 As of 12/31/76 NO % AMT(000j) Z NO AMT(000$) % N0 AT(000) Z A. Size Up to $5,000 23 47 48.0 2 67 43 216.0 2 54 33 173.4 2 $5,00() - $10,000 9 19 46.6 2 30 19 256.0 3 31 19 263.5 3 $10,000 - $50,000 5 10 164.2 8 22 14 639.0 8 41 25 991.8 10 $50,000 - $100,000 7 14 473.5 22 16 10 1,164.0 14 13 8 1,011.1 10 Over $100,000 5 10 1,372.0 66 21 14 6,123.0 73 25 15 7,289.2 75 49 100 2,109.3 100 156 100 8,392.0 100 164 100 9,729.0 100 B. Type of Prolect New 8 16 1,222.0 58 39 25 3,080.0 37 46 28 3,745.4 38 Expansion 41 84 887.3 42 117 75 5,312.0 63 118 72 5,983.6 62 49 100 2,109.3 100 156 100 8,392.0 100 164 100 9,729.0 100 C. Ownershiv Predominantly Foreign 6 12 657.0 31 18 11 2,348.0 28 17 10 2,980.1 31 Predcuinantly Liberian 9 18 1,172.2 56 14 9 2,910.0 35 12 8 2,637.9 27 1001 Liberian 34 70 279.6 13 124 80 3,134.0 37 135 82 4,111.0 42 49 100 2,109.3 100 156 100 8,392.0 100 164 100 9,729.0 100 D. Sector Manufacturing 17 35 1,237.7 59 35 22 2,557.0 30 32 20 2,724.2 28 Agribusiness 24 49 574.1 27 77 50 3,263.0 40 67 L1 I 4,378.0 45 ServLces 8 16 297.5 14 44 28 2,572.0 30 65 39 2,626.8 27 49 100 2,109.3 100 156 100 8,392.0 100 164 100 9,729.0 100 Annex F SLMARIZE) INCOME STATEMENTS 1972-76 (000 US$) 1972 1973 1974 1975 1976 Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Income Interest and charges on loans 183 136 250 161 316 296 368 658 427 845 Dividend income 3 - 3 3 - 3 62 3 74 Interest on deposits 8 4 24 4 117 4 188 4 201 Other income (commission underwriting & guarantees, 110 discount notes, rent). 89 92 75 96 83 98 120 100 330 Gross Income 283 246 349 260 419 496 473 1,028 534 1,450 00 Expenses Financial expenses 67 48 111 59 153 167 187 409 216 604 Salaries and Administration 116 124 113 125 108 162 120 229 130 317 Depreciation 4 4 10 5 10 19 10 22 Provision/Extraordinary loss 9 81 10 65 12 81 13 69 14 100 Total Expenses 196 257 242 253 293 415 330 726 370 1,043 NET INCOME 87 (11) 107 7 126 81 143 302 164 407 - C .19 - SUMMARIZED BALANCE SHEETS 1972-1976 ANNEX G (000 US $ as of December 31) 1972 1973 1974 1975 1976 Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Assets Cash and Time deposits 121 272 125 449 125 1,012 125 2,494 125 3,203 Accrued income from loans and notes 86 76 104 67 117 169 132 225 145 476 Investment in notes 1/ and bills 247 206 233 39 224 - 272 4 343 11 Other current assets 13 14 13 15 13 44 13 54 13 114 Total current assets 467 568 475 570 479 1,225 542 2,777 626 3,804 2/ 2/ Loans and advances 2,217 1,670 2,802 1,823 3,285 3,815 3,752 7,133 4,153 9,729- Equity investments 234 159 257 142 307 439 357 504 407 571 Less: provisions (93) (195) (103) (103) (115) (103) (128) (172) (142) (272) Net Portfolio 2,358 1,634 2,956 1,862 3,477 4,151 3,981 7,465 4,418 10,028 Fixed Assets 82 24 147 25 138 314 129 419 124 461 Discounted Government notes 1,000 900 1,000 800 1,000 2,200 900 1,400 800 1,000 TOTAL ASSETS 3,907 3,126 4,578 3,257 5,094 7,890 5,552 12,060 5,968 15,292 Liabilities and Equity Accounts payable 116 6 116 9 116 1,224 116 2,28131 116 1,2393/ Proposed Dividend - - - - - 38 - 65 - 83 Current Liabilities 116 6 116 9 116 (,262 116 2,346 116 1,322 Goverpment loans 1,000 1,000 1,000 1,000 1,000 3,000 1,000 3,500 1,000 4,385 KFW loans 808 935 701 968 481 1,054 261 1,056 55 1,058 IBRD loans 14 t 60 889 2 2,023 3,244 ADB loans 763 - 1,534 42 2,044 46 2,579 1,677 3.037 2,341 Other long-term debt 50 50 50 50 - Total Long-Term Debt 2,571 1.999 3,235 2,120 3,525 5,457 3,840 8,306 4,092 11,028 Share capizal 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,250 Reserves and surplus 220 121 317 128 453 171 596 408 760 1,692 Total Equity 1,220 1,121 1,317 1,128 1,453 1,171 1,596 1,408 1,760 2,942 TOTAL LIABILITIES AND EQUITY 3.907 3 4.78 3.257 5,094 7 5.552 12,060 5 15,292 1/ Short-term negotiable Government instruments 2/ Includes current maturities: 1975 - $1,408,604; 1976 - $2,897,586. 3/ Includes short-term borroving from Government and National Bank: 1975 - $2.1 million; 1976 - $1.1 million. - C .20 - FORECAST AND ACTUAL PINAN CIAL RATIOS Annex H (in percentages) 1972 1973 1974 1975 1976 Forecast Actual Forecast Actual Forecast Actual Forecast Actual Forecast Actual Income Statement Items as % ot Average Total Assets Gross Income 7.9 8.0 6.8 8.9 8.4 10.3 9.8 10.6 Less : Financial expenses 1.5 1.8 3.0 3.0 3.7 4.1 4.3 4.4 Administrative 4.1 4.0 3.2 3.0 2.6 2.5 2.5 2.5 expenses Gross Profit 2.3 2.2 0.6 2.9 2.1 3.7 3.0 3.7 Less : Provisions 2.2 (2.9) 0.4 - 1.1 0.7 0.8 0.7 Foreign Exchange Loss 0.4 4.9 - 1.5 - - - - Net Profit (0.4) 0.2 0.2 1.4 1.0 3.0 2.2 3.0 Selected Income and Cost Items Dividend Income as % of average equity portfolio - - 2.9 3.4 4.3 13.1 5.7 13.8 Income from loans as Z of average loan portfolio 8.2 8.6 10.4 10.5 11.4 12.0 11.7 12.5 Cost of debt as % of average total debt 1/ 4.5 4.8 6.4 7.3 6.3 5.9 5.9 5.0 Net Profit and Dividends Net profit as % of year-end share capital (1.1) 0.7 1.1 8.1 7.9 30.2 22.2 32.6 Net profit as % of average equity (1.0) 0.6 1.0 7.0 6.8 23.4 18.1 18.7 Structural Ratios Term Debt/Equity 1/ 1.0:1 1.2:1 2.9:1 2,8:1 5.1:1 6.3:1 6.7:1 4.1:1 Debt/Equity plus subordinated Debt 0.4;1 0.5:1 1.6:1 1.2:1- 2.8:1 1.7:1-/ 3.8:1 1.4:12/ Provisions as Z of loan and equity portfolio 5.9% 5.3% 3.0% 2.4% 3.0% 2.2% 3.0% 2.7 Debt Coverage Interest and principal coverage 1.6 2.4 5.4 4.2 3.6 2.8 2.8 2.6 1/ Debt includes guarantees or undisbursed portion of Government loans in 1974, 1975 and 1976 actual figures. 2/ First two loans from Government amounting to $3 million in 1975 are subordinated. Subordinated debt in 1976 amounted to $4.4 million. Debt includes guarantees.