Mali - Industrial Sector Development Project

Documrent of The World Bank FILE COPY FOR OFFICIAL USE ONLY RqW No. P-2701-MLI REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR AN INDUSTRIAL SECTOR DEVELOPMENT PROJECT February 6, 1980 This deammest ha a regkieed 4WI.kbWle and may be nee by lelInuol .the eufeimne of their eSe *he. It seatemir m ay ne eewue beeei withet WendBeak udule _  CURRENCY EQUIVALENTS Currency Unit - Malian Franc (MF) MF 1 million - US$2,273 US$1 N HF 440 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS BCM - Banque Centrale de Mali BDM - Banque de Developpement du Mali BIAO - Banque Internationale pour l'Afrique Occidentale BMCD - Banque Malienne de Credits et de Depots CEAO - Communaute Economique de l'Afrique de l'Ouest CEPI - Cente d'Etude et de Promotion Industrielles ECOWAS - Economic Community of West African States EEC - European Economic Community FED - Fonds Europeen de Development ILO - International Labor Office - IPGP - Institut de Productivite et de Gestion Previsionnelle SCAER - Service des Credits Agricoles et des Equipements Ruraux ULB - Union Laitiere de Bamako UNDP - United Nations Development Programme UNICEF - United Nations Children's Fund UNIDO - United Nations Industrial Development Organization  FOR OFFICIAL USE ONLY MALI INDUSTRIAL SECTOR DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: The Republic of Mali Amount: US$8.0 million Terms: Standard Relending Government would onlend US$5.6 million as follows: (i) a Terms: US$3.5 million line of credit to the Central Bank at an interest rate of 2.0 percent p.a. plus a 0.5 percent fee for exchange risk. The Central Bank would onlend the funds to Mali's three commercial banks under a rediscount system with amortization schedules determined on a project-by-project basis and an 8 percent interest rate plus the fee for exchange risk. The commercial banks would onlend the funds to the final borrower at a 12 percent interest rate including the fee for exchange risk, plus a commitment fee of one percent. The terms of the subloans would vary between thirty months and fifteen years; (ii) US$2.1 million would be onlent through the Central Bank and the banking system to Union Laitiere de Bamako on the same terms as the line of credit, including a 12 percent final lending rate plus commitment fee. The loan would have a term of twelve years including four years of grace. The remaining US$2.4 million represents the cost of training and technical assistance which would be retained by Government. Project The project would establish the first comprehensi-ve program Description: of financial and technical assistance for Mali's private entrepreneurs and artisans and would undertake a pilot rehabilitation project in the state enterprise sector. It would consist of: (a) a US$3.5 million line of credit and a comprehensive technical assistance and institution building program for the Malian private industrial and traditional sector, and (b) the rehabilitation and expansion of Union Laitiere de Bamako (ULB). Project Risk: There are no significant project risks, although hesitation on the part of modern institutions to assist the traditional artisan community could affect project performance. However, assistance to artisans has been designed to minimize the possibility that available assistance might not reach that community. | This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contenst may not otherwise be disclosed without World Bank authorization.  - ii Estimated Costs: Local Foreign Taxes Total --------------US$ million-------------- Line of Credit 1.1 3.3 0.2 4.6 Credit to ULB 1.2 1.4 0.2 2.8 Supplies, Equipment, Vehicles 0.1 0.2 0.0 0.3 Technical Assistance and Training 0.5 1.4 0.1 2.0 Export Craft Development Fund 0.1 - - 0.1 Operating Costs 1.2 - - 1.2 Assistance to Institutions - 0.1 - 0.1 Total Project Costs 4.2 6.4 0.5 11.1 Financing Plan: The US$8.0 million IDA credit would cover all foreign exchange costs except for US$185,000 that constitute ULB working capital requirements in foreign exchange. It would cover US$1.7 million or 40 percent of local costs: US$240,000 for the line of credit, US$990,000 for construction, equipment and technical assistance to ULB and US$500,000 for technical assistance and institution-building. Government, ULB, CEPI, the commercial banks, entrepeneurs and other local sources wgould provide the balance. Other Local Sources CEPI GOVERN- and Participation IDA ULB MENT Entrepreneurs Fund Banks Total ---------------------(US$ million)------------------- Line of Credit 3.5 - - 1.1 - - 4.6 Credit ULB 2.1 0.1 0.4 - 0.2 2.8 Supplies, equipment, vehicles 0.3 - 0.0 - - 0.3 Technical Assistance and training 1.9 0.0 0.1 - - 0.0 2.0 Export Craft Development 0.1 - - - 0.0 - 0.1 Fund Operating Costs - - 0.8 - - 0.4 1.2 Contingencies 0.1 - - - - - -0.1 Total 8.0 0.1 1.3 1.1 0.0 0.6 11.1  - iii - EstiWated Disbursements: Fiscal Year Annual Cumulative US$ million 1981 2.24 2.24 1982 2.63 4.87 1983 2.28 7.15 1984 0.75 8.00 Economic R8te A rate of return has been calculated on the ULB of Rjigra:' rehabilitation and expansion component, and it exceeds 33 percent. ARprai.a1. e,Reort: No. 2466a - MLI   INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IDA TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE REPUBLIC OF MALI FOR AN INDUSTRIAL SECTOR DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed credit for the equivalent of US$8 million on standard IDA terms to the Republic of Mali to help finance a proposed industrial sector development project. US$3.5 million of the proceeds of the credit would be relent through the Central Bank and the banking system to private extrepeneurs at a minimum 12 percent interest rate plus a commitment fee of one percent. The terms would vary from thirty months to fifteen years. A further US$2.1 million would be onlent, also through the Central Bank, to Union Laitiere de Bamako on similar conditions, but with a term of twelve years, including four years of grace. The remaining US$2.4 million would help Government finance the cost of technical assistance. PART I - THE ECONOMY 2. A report entitled an "Economic Memorandum on Mali" (1134a-MLI) was distributed to the Executive Directors on January 5, 1978. The following paragraphs are based on that report and the findings of subsequent staff visits. Country data are contained in Annex I. 3. With a population of about 6.3 million and a per capita GNP of US$120 in 1978 Mali is one of the poorest countries of Africa and among the 29 least developed countries identified by the United Nations. It is handicapped by serious obstacles to development. The extreme variability of rainfall causes sharp fluctuations in crop and livestock production. Access to foreign markets is made difficult by its landlocked position and the long distances - more than 1000 km - to the nearest seaports, Abidjan and Dakar. Development is also constrained by the substantial internal distances (the country covers an area of 1.24 million km2), the shortage of skilled manpower and the narrow domestic market for industrial products. About 90 percent of the popu- lation depends for a livelihood on crop farming, animal husbandry, forestry and fishing. Exports consist almost entirely of agricultural commodities and livestock. 4. Over the fifteen years following independence, economic growth has kept ahead of the growth of population. Between 1960-76, per capita GDP in real terms increased at an average annual rate of 1.5 percent, even though droughts caused declines in real income in 1969 and 1973-74, as well as in 1978. This growth has occurred despite the further aggravation of Mali's problems in the early 1970s by international inflation, excessive credit expansion and growing budget and balance of payments deficits. The Government has initiated action to redress major financial imbalances through  - 2 - credit restraint, through some reduction of the subsidy element in the prices of essential consumer goods, fertilizers and agricultural equipment, and through improved tax collection. Good crop seasons in 1975, 1976 and 1977 facilitated the implementation of these measures and contributed to an average annual growth rate for the 1972-78 period of 4 percent per year, even with a decline of .aimost 3 percent in 1978 resulting from a return of drought condi- tions. Real growth in 1979 is again expected to be relatively modest. The Drought Years: 1972-1974 5. All economic sectors were affected in varying degrees by the drought of 1972-1974, and the recovery of these sectors has followed different pat- terns. The loss of human life resulting from the drought is not fully known, but it was particularly severe among nomadic groups and especially the young and elderly. The cattle herd, estimated 5.5 million head in 1971, was reduced by 15 to 20 percent. 6. In an effort to assure access by consumers to essential commodities, the Government resorted to large imports of cereals when domestic output fell and to consumer subsidies in the face of rising costs of imported and locally manufactured goods. Cereal imports -- only partly financed by external aid -- shot up from 64,000 tons in 1972 to 235,000 tons in 1974, and the resource gap widened to nearly one-third of GDP in 1974. To finance losses incurred by state enterprises in charge of imports and sales of subsidized goods, growing amounts of bank credit were used. The GDP deflator, reflecting subsidization through officially controlled prices, increased at an annual rate of only 5-6 percent between 1970 and 1974, although prices in the open market rose twice as fast after the onset of the drought. Mali's foreign exchange position worsened during these years. Because supplies of exports were restricted by the drought, export receipts did not increase as much as export prices. Efforts to suppress domestic price rises, particularly of foodstuffs, probably depressed agricultural production and exacerbated the need for further cereal imports. Public deficits created by consumer subsidies were also translated into large external deficits. These years not only imposed great human suffering on much of the Malian population, but they also left a legacy of debt for Mali's public finances. Uneven Recovery 7. Normal rainfall resumed in 1975, and real GDP increased by 12.7, 9.0 and 7.4 percent respectively for the following three years. The resource gap was reduced from one-third of GDP in 1974 to 18 percent of GDP in 1978, although over the same period, net foreign assets declined from minus MF 89.7 billion to minus MF 100.8 billion (US$223 million). This increase in foreign liabilities, largely to the French treasury on operations account, was caused by continuing budgetary deficits, albeit on a diminishing basis. The Govern- ment's wage bill increased because of cost of living adjustments and the policy of Government to serve as employer of last resort of nationals who complete secondary or higher education. On the other hand, current revenues did increase significantly as a result of efforts to improve tax collection, and the consolidated budget deficit decreased from MF 10.2 billion in 1975 to MF 6.6 billion in 1977, or about 14 percent of total Government revenues. In  - 3 - 1978, however, expenditures grew twice as fast as revenue, and the deficit for the consolidated budget amounted to MF 8.8 billion, or 17 percent of revenues. In 1979, the budget deficit may again reach MF 10 billion (about 18 percent of revenues), largely as a result of campaign expenditures financed by Government. 8. In 1976 and 1977, improvement in GDP growth continued, largely as a result of a good harvests but also because of continued growth in the secondary sector. Growth was abruptly halted in 1978, with a 3 percent decline in real GDP, but regained the level of previous years in 1979. 9. Credit expansion in 1976 was reduced sharply from 1975 levels, with an overall increase in outstanding indebtedness of the economy to deposit banks amounting to about 20 percent, as compared with 47 percent growth rate in 1975. However, much of what is included under "credit to the economy" in effect finances operating losses of public enterprises. (When substantial improvements in indebtedness have taken place, such as in 1976/77, they have largely been attributable to the export earnings of SOMIEX, the state export monopoly.) During 1978, credit to the economy grew by nearly 25 percent, mainly because of a sharp increase in seasonal credit to finance the larger 1978/79 crop, and also because of the substantial rise in non-seasonal credit to the commercial and industrial sectors, the former largely for increased import financing, and the latter to the state enterprise sector, often to finance operating losses. 10. At the beginning of 1977 the Central Bank discount rate was raised from 3.5 to 6.0 percent with corresponding increases in the whole set of borrowing and lending rates of deposit banks. A new monetary agreement was signed with France in mid-1977, which aims at bringing about the conditions requisite for Mali's membership in the West Africa Monetary Union by 1982. It imposes a very restrictive credit policy on the operations of the Central Bank, notably in establishing more stringent conditions on rediscount faci- lities, thereby restricting the financing of operating losses of state enter- prises, one of the most persistent drains on Mali's economy. A new banking law provides for legal minimum cash reserve and liquidity ratios for com- mercial banks. 11. The 1978 current account balance -- excluding private investment and grants -- registered a substantial decline compared to 1977, moving from a deficit of US$34.1 million to one of US$129.0 million. In large part this huge deficit resulted from spurts in imports of cereals, non-food consumer goods, petroleum and capital goods, and from a 25 percent drop in the value of cotton exports -- due mainly to a fall in world cotton prices. On the capital account, net long-term capital flows increased by US$28 million in 1978, to a level of US$68.6 million, or almost six-fold since 1975, so that the overall deficit was only US$9.3 million, as compared with US$51.6 million in 1975. Most of the deficit was financed by increases in the operations account with the French Treasury, bringing it to a balance of MF 90.2 billion by September 1979. Foreign capital and debt 12. Public investment is mainly financed by foreign aid. During most of the sixties the USSR and the People's Republic of China were the most important aid donors. At the end of 1975, they held in roughly equal pro- portions nearly 57 percent of Mali's external public debt disbursed and  outstanding. Gross disbursements (grants and loans) from DAC sources in- creased from US$24 million in 1969 to US$127 million in 1974. Roughly 60 percent came from bilateral sources (mainly France, United States, Germany and Canada). Since the early seventies the amount of public aid received by Mali has increased very rapidly, rising from about US$5 per capita in 1971 to roughly US$27 per capita in 1978. 13. Mali's external public debt outstanding at the end of 1978 (exclud- ing drawings on the operations account with the French treasury) was US$570.5 million, including an undisbursed amount of US$234.4 million. IDA's share in the total amount disbursed and outstanding was 19.5 percent. Repayments of principal and interest due in 1978 would have claimed more than a quarter of foreign exchange earnings, but actual debt service payments have been small, about 1 percent in 1978 owing to the rescheduling or de facto suspension since 1970 of Chinese, Russian and some other debts. However, projections indicate that the actual debt service ratio may go up to about 19 percent by 1980 unless some further rescheduling of debt takes place,which is probable. 1/ In transactions with the IMF, Mali drew SDR 5.0 million under the 1974 oil facility and obtained another credit of SDR 3.99 million (in March 1976) under the 1975 oil facility. In addition, Mali borrowed US$4.6 million from the IMF trust fund facility in January 1978. Development prospects 14. The return of more normal weather conditions in 1975 strengthened the economy's short run position, at least through 1977. However, the poor harvest of 1977/78 represented a set-back in Mali's development prospects and, together with weaknesses in the export crop sector, may have retarded some necessary improvements in Mali's economic management. In any event, over the medium and long term Government must address two sets of interrelated objec- tives. The first is to correct the severe financial imbalances that have developed over the years, especially since the early seventies; the second is to accelerate the pace of economic growth. 15. Government began in 1975 to tackle some of its financial problems and has been relatively successful in readjusting some key prices to more realistic levels. Thus, incentives to agricultural production are stronger, consumer prices more closely reflect economic costs, the burden of subsidies has been somewhat alleviated and credit expansion has slowed since official prices to producers and consumers have failed to keep pace with rising costs. Reform of public enterprises is being undertaken gradually, but much remains to be done, particularly in the area of cereals marketing. The budget is still basically unbalanced, but Government is now seriously reconsidering its employment policy with a view to making it more selective so as to check the growth of current expenditure. 16. Prospects for real long-term growth are probably better than in most other Sahelian countries. Agriculture has considerable potential for expansion both in the south where rainfall is highest and in the vast inland 1/ In late 1978, the Federal Republic of Germany and Canoda converted US$92.9 million of outstanding loans into grants.  - 5 - delta of the Niger river. The river also offers much potential for power development. Planned investment in new capacity for cotton seed oil extrac- tion, cotton textiles for export, and in sugar production, together with increasing crop and livestock production, will eventually strengthen the balance of payments. Mineral resources (iron ore, phosphates) remain at present unexploited, but may offer interesting longer term development possibilities. 17. The Five-Year Social and Economic Development Plan (1974-1978) gave priority to agriculture, water and power development, industries processing agricultural materials, and road transport. The overall size of the invest- ment program is estimated at MF 543 billion (about US$1.2 billion). Altogether MF 427 billion of this total was expected to be realized during the plan period; in mid-1979, total investments realized amounted to MF 254 billion. The problem is more one of implementation than financing with continuing delays being encountered in project preparation and execution, particularly at startup. Project financing, on the other hand, is reasonably well advanced, with MF 456 billion having been received or firmly committed, of which 92 percent comes from foreign sources. Following revisions to the plan in 1976 and 1977, the period for implementation was extended and priority is currently being given to food crops, animal husbandry, minor irrigation works and more efficient manufacturing activities. 18. Despite the fact that economic performance since the drought has been largely good, sustained and viable growth in the longer run depends crucially on investments and policy measures that will strengthen the eco- nomy's export base, particularly in cash crops. Mali's capacity to finance new investment, however, is severely constrained by the limited savings potential resulting from the extremely low per capita income level, a situa- tion reflected in the Government's budgetary deficits and further complicated by serious financial difficulties particularly in the public enterprise sector. Borrowing on conventional terms would add considerably to the burden of servicing an already sizeable external debt. External aid, accordingly, should be on soft terms and should finance, besides foreign exchange outlays, a significant proportion of local currency costs. PART II - WORLD BANK GROUP OPERATIONS IN MALI 19. The proposed credit would be the Association's nineteenth operation in Mali, which would bring total commitments of IDA funds to US$173.2 million. US$96.4 million had been disbursed as of November 30, 1979. Of the eighteen credits already approved, six have been for transport, eight for agriculture, two for education, one for telecommunications and one for urban development. Agriculture represents the largest share (48 percent) of past commitments followed by transportation (41 percent). Experience with ongoing operations has in general been satisfactory, although delays in startup often affect early disbursement on projects. However, with the increasing use of the Project Preparation Facility, we expect the situation to gradually improve as project startup is accelerated. Notes on the execution of ongoing projects are set out in Annex II.  -6- 20. The Bank Group's strategy in Mali is governed by (i) the extreme poverty, poor health and low level of basic skills of a largely rural popula- tion, (ii) a harsh natural environment with large fluctuations in the avail- ability of basic food supplies, and (iii) a landlocked position with long distances and difficult access to foreign markets. Thus major objectives of Bank lending would focus on: (a) increasing agricultural production and stability fluctuations in it; (b) meeting the needs of the rural population in terms of health, literacy and rural infrastructure; and (c) providing an adequate transport and communications network. The Bank Group will also continue the ongoing dialogue with Government on economic policy issues and options in the framework of economic and sector work. 21. Major agricultural and rural development projects that the Bank Group has undertaken cover most of the country's cultivable area and benefit the majority of farm families, who constitute 90 percent of Mali's population. Operations in the sector have assisted Mali in developing rice production on the Niger flood plains for domestic consumption, groundnuts, cotton, kenaf, rainfed cereals and livestock production. Integrated with the agricultural aims are improvements in human health conditions, farmers' education and training of young farmers and rural artisans. In addition, three of the six projects financed in the transportation sector are directly related to the rural sector. 22. In other sectors, education projects focus on providing appropriate basic and secondary education and vocational training. A recent urban project provides low-cost replicable urban services for a growing population in Bamako. In industry, the Bank Group aims at supporting Government efforts to develop the modern industrial and traditional sectors by providing needed financial and technical assistance; and supports efforts aimed at improving performance of public enterprises. PART III - THE INDUSTRIAL SECTOR 23. Mali's industrial sector, which accounts for 10 percent of GDP, consists of a small modern sector of some 28 large public enterprises and numerous medium- to small-scale private enterprises, alongside an active traditional sector of more than two hundred thousand artisans. The public enterprises, which account for two-thirds of modern sector sales revenues, process local raw materials, while the small modern private sector engages in miscellaneous import substitution activities. Food processing and textiles together represent 60 percent of modern sector sales. Artisanal production represents two thirds of manufacturing output by amount. 24. Mali has reasonable potential for industrial expansion. Among the primary areas of potential industrial development are processing of agricul- tural and livestock products, production of agricultural tools and small equipment, mechanical tools, spare parts and hardware, clay products including building materials, pottery and tiles, wood products, metal products and metal  - 7 - recycling, light consumer goods, light chemicals, transport and construction. Mali's unique textile and decorative crafts can be expected to have export potential if appropriate assistance is provided. Growth of regional groupings and markets such as CEAO and ECOWAS to which Mali belongs will contribute to industrial growth. 25. The State Enterprise Sector. Industrial policies have favored the development of large state-owned enterprises, which today employ over 12,000 people. They are under the supervision of the Ministry of State Enterprises, which annually reviews financial and production plans. Uniform accounting standards apply, personnel policies and some procurement activities are centrally managed. Pay scales are fixed centrally. 85 percent of profits of each enterprise go directly to Government. Ten percent of the remaining profit is allocated to company reserves and five percent to a social services fund for employees. The performance of the enterprises has generally been poor: as a result of often inexperienced managers, general and financial management has been weak and project design poor; employment and pricing policies based on social criteria have made it difficult to realize profits and, in fact, the great majority of state enterprises have regularly produced large deficits and have found it necessary to turn to the banking system to finance working capital requirements and operating losses. Even then, few of the enterprises have had adequate funds to maintain equipment or build inventories. The system has served to restrict bank credit for private productive investment, as banks have concentrated on satisfying the cash requirements of state enterprises and, ultimately, on replacing funds drawn from these enterprises either directly by Government action (control of profits, reserves) or indirectly by non-economic regulatory policies (price controls, employment policies). However, Government has increasingly focused on the need to shore up the finances of the state enterprises and, although social factors continue to guide decision-making, losses have gradually been reduced, declining from MF 14.5 billion in 1974 to MF 2.5 billion in 1976. All of this decline is not, however, only due to structural factors, but also reflects cyclical phenomena, in particular increases in cotton export earnings by the state trading company. The Bank has been discussing the need for rationalization of the state enterprise sector and general financial policies with the authorities for some time in the context of our overall economic dialogue: the rehabilitation and expansion of the Union Laitiere de Bamako under the proposed project is a first practical effort to achieve financial and economic viability in a state enterprise by allowing efficient management to operate under commercial conditions. 26. The Private Sector. Private modern productive enterprises number at least one hundred and employ well over 2,000 persons. Their lines of business vary widely, ranging from textiles to foundries to bakeries. In the past, most of the private modern sector firms tended to be foreign-owned, but the relative importance of Malian-owned private enterprises has been increasing. At the same time, Government interest in the private sector has increased, as Government has come to perceive private, especially local, capital as a source of new investment. Financial performance in the private sector has generally been better than in the public sector, although most of the smaller Malian-owned firms would benefit from technical and management  - 8 - assistance. However, the sector has suffered from a lack of technical and management assistance, as well as from credit, which has mainly been directed to state enterprises (para. 25). The proposed project would help relieve these bottlenecks by providing a line of credit and technical assistance to private entrepreneurs. 27. The Traditional Sector. Mali's artisan sector has shown vitality and resilience. Producing low-price goods from local materials with labor- intensive methods, Mali's artisans provide considerable benefits to the local population. Textile weavers and spinners represent the major group of artisans, although the metalwork, machinist, building trades and wood- working subsectors have grown rapidly. A substantial expansion in produc- tivity and employment in utilitarian crafts (metalwork, woodworking, building trade, machinists) should be possible, if they were helped to improve the organization of their work and to adapt their techniques to the fabrication and repair of new types of equipment as well as to better access to credit. The traditional textile and decorative crafts face somewhat different pros- pects. Although the artisanal products are generally recognized in the local market to be less expensive and often of better quality than competitive manufactured goods, the domestic market is largely saturated. Improved incomes and employment in this largest group of artisans will depend on exploitation of the export market. Export development will require provi- sion of technical assistance to ensure stable supplies of consistently high quality goods and to organize craft collection and shipment, as well as working capital, credits and marketing assistance. Modified product designs will have to be developed with lower unit product costs for these goods to compete on international markets. 28. The Financial System. At present, Mali is not a member of the West African Monetary Union, although it has agreed to adhere to the financial regulations and discipline of the Union, with the ultimate goal of joining it by 1982. Instead, Mali has its own currency, the Malian Franc, convertible into French Francs at a parity of 1 FF to 100 MF through an operations account with the French Treasury. It has its own central bank, the Banque Centrale du Mali (BCM) and three commercial banks operating under the central bank: Banque de Developpement du Mali (BDM), Banque Malienne de Credits et Depots (BMCD) and Banque Internationale de l'Afrique Occidentale (BIAO); a Postal Savings Bank and an agricultural credit institution, Societe du Credit Agricole et des Equipements Ruraux (SCAER). BDM is Mali's single largest financial institution, controlling 88 percent of local banking activity. 29. Although Mali has no formal interest rate regulations, the following pattern is generally observed: short-term lending rates are 9.5 percent for state enterprises and vary between 11.5 and 15 percent for private enter- prises. The equivalent term lending rates are 9 percent and 7.5 percent, the latter being the interest rate applied to FM 1 billion of KfW lending which started in 1974 and which represents the only available direct term lending for non-public enterprises and is now fully committed. Credit has generally been allocated to satisfy the economy's short term credit requirements, and state enterprises have been the major borrowers in the credit system. In 1977, they claimed 44 percent of total credit outstanding; Government's share  was 40 percenL. Term credit has been modest, representing only 6 percent of total outstanding credit in 1977. Most of the term investment requirements of Government and state enterprises have been met from donor funds or the state investment budget. The private sector, more dependent on the banking system, has received little term financing assistance: the proposed project would, in fact, provide the bulk of new term lending resources available to private Malian entrepeneurs. 30. Assistance to Industry. In 1971, Government, with UNDP/ILO assis- tance, established Mali's first management training institute, the Institut de Productivite et de Gestion Professionelle (IPGP), and then, in 1975, with UNDP/UNIDO help, created Mali's first industrial promotion agency, the Centre d'Etudes et de Promotion Industrielle (CEPI). Nevertheless, technical, promotional and management assistance to private Malian entrepreneurs has remained inadequate, as the initial efforts of both of these agencies have focussed on services to the state sector. However, CEPI has recently under- taken new programs to serve private entrepreneurs and artisans (para. 34), and the proposed project will encourage and assist CEPI to substantially broaden its industrial promotion role. Similarly, IPGP is also redirecting its services towards local enterprises and practical assistance, and it will undertake, in the context of this project, its first basic skills training program for small entrepreneurs in coordination with CEPI (para. 43). 31. Investment Policies. Government introduced its first investment code in 1961, revised in 1976. However, eligibility and benefit criteria have been vague, making the system highly subjective and discretionary. It has been difficult for potential investors to reliably predict the benefits for which they will be judged eligible or on which specific criteria they will be evaluated. In addition, approval procedures have been complicated and pro- cessing times lengthy. Benefits actually provided under the code have not compared favorably with those of neighboring countries. By offering greater advantages to larger investments and by reducing the cost of capital goods imports, the code has encouraged relatively capital intensive investments. Investments of less than MF20 million have been excluded from all benefits. 32. IDA has been discussing these policies with Government, and substan- tial modifications have already been made. Employment creation and other efficiency criteria have been introduced, benefits and eligibility criteria have been clarified, and procedures have been simplified. At the same time the minimum size of eligible projects has increased from MIF20 million to MF30 million in view of the substantial administrative difficulties involved in properly monitoring small investments. However, during negotiations Government agreed that projects below MF 30 million nevertheless will be eligible for investment code benefits under the same economic criteria that will be applied to larger projects. Government will review this experience with IDA in eighteen months with a view to introducing a permanent revision of the investment code with regard to the size of eligible projects (Section 3.10 and 3.11 Credit Agreement).  - 10 - Centre d'Etudes et de Promotion Industrielle (CEPI) 33. CEPI was established in 1976 as an autonomous public commercial establishment under the supervision of the Ministry of Industrial Development and Tourism. To achieve its objective of industrial promotion, CEPI was to: (i) advise Gov-rnment on industrial policies and perform related studies; (ii) provide technical assistance and training and possibly investment capital to Malian entrepreneurs and to help prepare bankable investment projects; and (iii) to inform and advise possible foreign investors in Mali. 34. Operations. CEPI's activities in its first two years focussed on advisory services to Government and studies of public enterprises, while the industrial promotion and technical assistance role was largely neglected. To the extent it took place it was generally directed to public sector enter- prises. This operating pattern produced financial problems for CEPI, as fees from services rendered to private entrepreneurs were planned to be a major source of the agency's income. With new encouragement from Government, IDA and UNDP, CEPI's management reviewed and revised its priorities in September 1978, placing the focus of CEPI's operations more directly on industrial promotion and technical assistance among small- and medium-scale private enterprises. Although economic studies and promotion of large industrial projects will continue to be part of its activities, CEPI has now initiated a strong nationwide program to make itself known to Malian entrepreneurs and to expand its technical assistance services through a new department of assistance to enterprises. CEPI has also organized a'Temporary Committee for the Promotion of Artisans, composed of representatives of all relevent public agencies, to gain support for an expanded program of assistance to Mali's artisans. 35. Management. CEPI's Board is chaired by the Minister of Industrial Development. The Board, which also includes representatives from various ministries and the President's office, the General Manager of BDM and the Head of the Chamber of Commerce, meets only once a year and does not appear to take a very active interest in CEPI's activities. In June 1977, the then Director of Industries in the Ministry of Industrial Development was appointed CEPI's first general manager. He is able and has the necessary background and experience to competently direct CEPI. The General Manager participates in Board meetings in a non-voting capacity. CEPI's staff, as of December 1978, totalled 31 of which 28 were Malians and 3 expatriate advisors. MIalian professional staff, which numbered 13, is capable but needs additional train- ing. Under a UNDP grant, initial training sessions for 6 Malian staff at EEC's Industrial Development Center in Brussels have been organized. Further training, for which UNDP financing has been obtained, are to be scheduled over for the next three years. All CEPI's staff have been considered employees of the Ministry of Industrial Development rather than direct employees of CEPI. Recruitment, hiring and pay scales, which are extremely low, also have been controlled by the Ministry. These arrangements will be modified to permit CEPI to hire its own staff and offer more competitive salaries (Section 3.06 of the Credit Agreement).  - 11 - 36. Organization. At present, CEPI has two departments--project pro- motion and studies, and administration and accounts. In order to better meet its industrial promotion objectives, CEPI would establish a third department, Assistance to Enterprises, to promote and provide technical assistance to local entrepreneurs, as well as to manage its Guarantee and Equity Participa- tion Funds (see para. 38 below). The proposed project would provide technical assistance to help establish the department (see para. 43(b) below). Presently, CEPI's accounts are audited by a local Commissioner of Accounts whose reviews do not meet IDA requirements. Annual external audits of CEPI's accounts by an independent auditing firm acceptable to IDA have been agreed upon (Section 4.01 of Credit Agreement). 37. Financial Position. CEPI's authorized capital of FlI 500 million was subscribed by Government (50%), BDM (20%), BMCD (14.5%), BIAO (14.5%), and the Chamber of Commerce and Industry (1%). As of December 1978, only FM 140 million of this capital was paid-in, FM 120 million by Government and FM 20 million by BDM. FI 100 million of the Government payment was earmarked for the construction of an office building for CEPI and FM 20 million for essential equipment. A schedule of payment of the balance of Government's share, as well as those of BDM and the Chamber of Commerce, in 1980 and 1981, has been drawn up by Government. The first payments under this schedule have already been received. Neither BMCD nor BIAO are now alloted seats on CEPI's Board, but will be added as they come forward with their contributions to share capital. CEPI incurred a net operating deficit of IIF 9 million in 1977 and a net operating deficit of MF 17 million was expected for 1978. The operating deficits have been financed out of CEPI's available paid-in capital, MF 20 million. Therefore, by the end of 1978, CEPI had a resource gap of MF 6 million. CEPI's operating outlays in the 1979-82 project period are expected to total MF 390 million, half of which are expected to be covered by govern- ment subsidies. Fee income is expected to total more than NF 100 million through this period, yielding a net operating deficit of MF 95 million. CEPI's total accumulated resource gap would therefore be MF 120 million. An agreed program to complete payment of CEPI's outstanding capital should cover its resource gap and, together with continued improvement in service charge income as it expands services to enterprises, should stabilize CEPI's finan- cial position by the end of the project period. CEPI's financial position will be monitored closely during project implementation and arrangements reviewed as needed. 38. Equity Participation and Loan Guarantee Funds. In order to assist small IMalian entrepreneurs to establish an adequate equity base for their industrial projects and to facilitate their access to bank credit, CEPI has established an Equity Participation Fund and a Loan Guarantee Fund. The Equity Participation Fund's inter-,ention in a project would be on a minority basis and limited per project to 5% of the total resources of the Fund. The Loan Guarantee Fund would guarantee up to 50% of the outstanding loan on a project and exposure per project would be limited to 20% of the Fund's total resources. The Fund's total guarantees would initially be limited to two times its paid-in resources, but would eventually increase to five times the paid-in resources. The resources to be allocated to these funds have tenta- ti-vely been fixed at MF 400 million for the Equity Participation Fund and MF 600 million for the Loan Guarantee Fund. UNDP has agreed to allocate  - 12 - US$50,000 a year over the next five years towards these targets. In addition, the Government has decided to allocate to the Loan Guarantee Fund the resources generated by the interest differential between the cost of the credit line to the Central Bank and the Central Bank onlending rate for the proposed line of credit (para. 42). PART IV - THE PROJECT 39. The proposed project was identified by a May 1977 mission and was appraised in November/December 1978. Negotiations were held in Washington between November 26 and 30, 1979. The Malian delegation was led by H.E. Robert N'daw, Minister of Plan and Transport. Annex III contains supple- mentary project data. The Staff Appraisal Report No. 2466b-MLI is being circulated separately to the Executive Directors. 40. The proposed project would establish a comprehensive program of financial and technical assistance for private entrepreneurs and artisans and would undertake a pilot rehabilitation project in the state enterprise sector. It would consist of: (i) support to the Malian private industrial and traditional sector, including a US$3.5 million line of credit and a comprehensive institution-building program; (ii) the rehabilitation and expansion of Union Laitiere de Bamako (ULB). Line of Credit 41. The US$3.5 million line of credit would be made available by Govern- ment to the Central Bank for eventual use by Mali's three commercial banks under a rediscount arrangement. The banks would submit projects for financing under the line of credit, the Central Bank would review the submissions to ensure adequacy of data and presentation and then forward them to IDA for consideration. Given the limited local experience in term lending, there would be no free limit. Private modern and artisanal enterprises would be eligible for assistance under the line of credit. A minimum of 35 percent (US$1.225 million) of the credit line would be reserved for loans to artisans and to small enterprises having fixed assets of less than MF 100 million (US$230,000), or with an investment cost per job of at most MF 3 million (US$7,000). The loans would be eligible for coverage by CEPI's Loan Guarantee Fund to encourage their consideration by banking institutions. The balance of the line of credit would finance medium-scale projects - this would essen- tially meet the need for assistance for viable larger projects for which there at present are no other sources of funds (Section 2.02 of Project Agreement). All subprojects should demonstrate economic and financial viability. IDA would reimburse the full amount of the subloans, as long as such reimburse- ments do not exceed 90 percent of total project cost for artisan and small- scale projects and 75 percent of total project cost for medium-scale projects.  -13 - The -c,-cfr ,e't