Mali - Industrial Sector Development Project

Document of_ The World Bank FILE C(py FOR OFFICIAL USE ONLY Report No. 2466b-MLI STAFF APPRAISAL REPORT MALI INDUSTRIAL SECTOR DEVELOPMENT PROJECT January 3, 1980 Western Africa Projects Department Industrial Development and Finance Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS US$1 = MF 440 ABBREVIATIONS BCEAO Banque Centrale des Etats de l'Afrique de l'Quest BCM Banque Centrale de Mali BDM Banque de Developpement du Miali BIAO Banque Internationale pour l'Afrique Occidentale BM1CD Banque Malienne de Credits et de Depots BRM Banque de la Republique du Mali CEAO Communaute Economique de l'Afrique de l'Ouest CEPI Centre d'Etude et de Promotion Industrielles ECOWAS Economic Community of West African States EEC European Economic Community EMAB Entreprise Malienne du Bois FED Fonds Europeen de Developpement ILO International Labor Office IPGP Institut de Productivite et de Gestion Professionnelle KfW Kreditanstalt fur Wiederaufbau PPF Project Preparation Facility SCAER Service des Credits Agricoles et des Equipements Ruraux SEBRIHA Societe Briqueterie du Mali SSE Small Scale Enterprise ULB Union Laitiere de Bamako UMOA Union Monetaire ouest Africaine UNDP United Nations Development Programme UNICEF United Nations Children's Fund UNIDO United Nations Industrial Development Organization WFP World Food Programme FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MALI INDUSTRIAL SECTOR DEVELOPMENT PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE SETTING ................................................. 1 Industrial and Financial Sector Development ................. 2 II. INSTITUTIONS .................................... ............ 10 The Banking System ...... ....................... .. .......... 10 Banque Centrale du Mali ................ ................. . 10 Banque de Developpement du Mali .................... ..... 11 Banque Malienne de Credits et de Depots ................. 13 Banque Internationale de l'Afrique Occidentale .......... 14 Centre d'Etudes et de Promotion Industrielle .............. .. 15 Union Laitiere de Bamako ... . . . . . ....... . ...... ... . ................. . 19 III. THE PROJECT ....... ............ ...... . .... ..................... 22 Main Features .............................. .......... 22 Project Description ............................................ 22 Project Coordination ....... ...................... ........ 22 Support to Private Industrial and Traditional Sectors .... 23 Institution-building Program ........... .................. 26 Pilot Rehabilitation Project in State Sector .............. 28 Project Monitoring . .................... .. .................. 30 IV. PROJECT COSTS AND BENEFITS .................................. 30 Project Costs and Financing ................................. 30 Project Benefits and Justification ........... ............... 34 Risks .......................................................... 0..... 35 V. RECOMMENDATIONS . ......................... ................. ... 35 This report is based on the findings of an appraisal mission conducted in December 1978 by Barbara Insel, Bahadurali Jetha and Patrick de Liedekerke. 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.   LIST OF ANNEXES ANNEX 1 Overall Credit Allocations, 1974-77 ANNEX 2 Term Financing Portfolio of Mali's Commercial Banks ANNEX 3 Comparative Financial Statements of the Commercial Banks ANNEX 4 CEPI: Pipeline of Projects ANNEX 5 ULB: Recent and Forecast Financial Statements and Assumptions ANNEX 6 ULB: Investment Program and List of Existing and Proposed Equipment ANNEX 7 ULB: Internal Financial and Economic Rates of Return ANNEX 8 Project Coordinator: Terms of Reference ANNEX 9 Artisan Extension Service: Proposed Terms of Reference ANNEX 10 Selected Documents and Data Available in Project File ANNEX 11 Estimated Disbursement Schedule   MALI I. THE SETTING 1.01 A landlocked Sahelian country of 6.3 million persons, with an average population growth rate of 2.5%, Mali had a per capita GNP of $114 in 1977. The site of four major African empires, Mali has for centuries been the crossroads of Arab, European and black African trade and culture. The legacy of this heritage is an efficient traditional society, a vital entrepreneurial and artisanal class and a remarkable ability to adapt and profit in adverse circumstances. With good rainfed agricultural conditions, the Niger River delta, and some mineral deposits, Mali has reasonable growth prospects. Modern Mali has been slow to translate these assets into economic benefits, focussing its early development efforts on capital-intensive projects under an expanding state sector, at the expense of private productive investment. As a result, in the fifteen years following independence, economic growth barely kept pace with population and actually declined during the 1971-75 Sahelian drought. Since 1975, the economy has experienced a significant recovery, mainly due to the revival of primary sector activity and secondary sector development. Real GNP grew by 12% in 1975, 9% in 1976 and 7.4% in 1977, although return of drought-like conditions in 1978 may reduce real growth to negligible levels. 1.02 Excessive dependence on imports, reliance on the export of a few primary products, an expanding public payroll, a poorly managed parastatal sector and an inelastic tax base have produced continuing budgetary deficits and chronic balance of payments difficulties since independence in 1960. Accelerated international inflation since 1973 and the Sahelian drought aggravated these basic weaknesses. Since 1974, some progress has been achieved toward increasing government revenues, reducing public subsidies and encouraging production in the primary sector. However, these actions were coupled with a rigid price control system, poor management and inadequate financing that forced into deficit many public enterprises, increasing the demands on the public treasury and the credit system. Partly as a result of the drought, the relative contribution of the primary sector to Mali's GDP declined from 41% in 1972 to 37% in 1977, while the contribution of the secondary sector, including power, construction, manufacturing and public works, rose from 15% to over 20%, of which industry accounted for about half. 1.03 Employment. Mali's working population, estimated at about 2.8 million, is overwhelmingly involved in primary sector activities. The indus- trial sector accounts for up to 10% of total employment, primarily in the traditional activities, with no more than 15,000 persons in the modern sector. In addition, much of the agricultural population is seasonally employed in artisanal production. Most of the salaried work force is employed by the public sector. Although unemployment statistics are not compiled in Mali, urban unemployment is clearly a growing problem. Expanded employment oppor- tunities in the secondary sector will be required to absorb the growing urban labor force and to avoid further growth in the public payroll.  - 2 - Industrial and Financial Sector Development 1.04 Financial Sector. At independence in 1960, Mali decided not to join the French-assisted West African Monetary Community, but instead established its own currency, the Malian Franc, and its own central bank, Banque de la Republique du Mali (BRM). Subsequent acute economic, financial and balance of payment problems brought the financial system to the brink of collapse, compelling Mali to negotiate a special monetary agreement with France in 1967. Under the terms of this agreement the Malian franc was devalued by 50% and through an Operations Account with the French Treasury, convertibility into French francs at a parity of 1FF to 100 MF was guaranteed by France. BRM was dissolved, a new Central Bank, the Banque Centrale du Mali (BCM), was established and Mali agreed to adhere to all the financial regulations and discipline which govern the West African Monetary Union (UMOA), with the ultimate goal of joining UMOA by 1982. 1.05 With the dissolution of BRM, a new Government-owned Bank was estab- lished, the Banque de Developpement du Mali (BDM), a commercial and develop- ment bank, to assume BRM's public sector portfolio. Mali has two other commercial banks, 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, however, is Mali's single largest financial institution, controlling 88% of local banking activity. 1.06 The Industrial Sector. Mali's industrial sector is characterized by the dichotomy, typical of West Africa, of a small modern sector, composed 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 large public enterprises, which account for two thirds of modern sector sales revenues, process local raw materials while the small private modern sector engages in miscellaneous import substitution activities. Food processing and textiles together represent 60% of modern sector sales. Artisanal production represents two thirds of manufacturing output by amount. 1.07 Development Issues. Mali's physical resources, trading mastery and talented population provide a sound basis for reasonable industrial expansion. Among the primary areas of potential industrial development are processing of agricultural and livestock products (food products, cotton wool, leather and skins, dairy and cotton seed products), production of agricultural tools and small equipment for the expanding rural development projects, mechanical tools, spare parts and hardware, clay products including building materials, pottery and tiles, wood products, metal products and metal recycling, light consumer goods, light chemicals and the transport and con- struction industry. Several of these products have reasonable export poten- tial as well. Mali's unique textile and decorative crafts should have good export prospects if appropriate assistance is provided. Growth of regional groupings and markets such as; CEAO and ECOWAS to which Mali belongs should also contribute to industrial growth.  - 3 - 1.08 Efficient development of both industrial and financial sectors has been distorted by the demands and priorities accorded to the State sector, depriving productive non-public sector investors of needed support. These pressures have resulted in poor institutional development in these sectors and even deterioration of existing entities, particularly in the banking system, as described below. Thus, a priority in the proposed IDA project will be institution building and expansion of assistance to the until recently neglected private entrepreneur. 1.09 The State Enterprise Sector. Mali's post-independence industrial policies favored almost exclusively the development of large state-owned enterprises which today employ over 12,500 persons. Due to poor management, undercapitalization, low productivity, inefficient project design, uneconomic regulatory policies and political interference, the performance of these enterprises has been disastrous, producing massive deficits. Although the global net losses of these enterprises declined from MF 14.5 billion in 1974 to MF 2.5 billion in 1976, and improvement continued in 1977, 1978 showed renewed deterioration. These variations reflect primarily changes in cotton export earnings by the state trading company, rather than structural change in the system. By 1976, despite the overall improvement in the sector, eight of these enterprises were determined to be legally bankrupt. 1.10 All 23 fully Government-owned enterprises and five mixed enterprises are under the supervision of the Ministry of State Enterprises, established in 1974. The Minister is the board chairman of each of these enterprises. The Ministry's Bureau of Budgets and Accounts establishes and monitors uniform accounting standards for all enterprises. A planning section, under which enterprises are grouped on a sectoral basis, reviews financial and production plans for the enterprises annually. The projections in these plans are seldom realized and appear designed to justify budget contribution targets. Person- nel policies as well as some procurement activities of the enterprises are managed centrally by the Ministry's Administration and Financial Unit. Termination or reassignment for cause is practically impossible at the enter- prise level. Pay scales are fixed centrally, with no performance incentives. 1.11 Statute requires that 85% of all profits of each enterprise go directly to the Government, half to the Operating Budget and half to the Investment Budget. Ten percent of the remaining profit is allocated by statute to company reserves and 5% to a social services fund for employees. Moreover, the State itself is substantially in arrears to most enterprises for products purchased. Furthermore, many of the enterprise managers are civil servants inexperienced in business. Finally, price controls on the output of State Enterprises have not kept pace with the cost of inputs and market conditions, tending to be based on social criteria thus permitting few of even the efficient operations to realize profits. The State Enterprise sector has therefore found it necessary to turn to the banking system to finance working capital requirements and operating losses. Even then, few of the companies  -4- have adequate funds to maintain equipment, to build inventories or to purchase inputs in bulk or in advance. Financial charges have become a serious burden to many state companies. Nevertheless, by diverting the earnings of the profit making companies to the State Treasury and requiring the unsuccessful companies to finance their deficits through the banking system, the Government has been able to obtain substantial resources from this sec:ir: in 1976, State Enterprises contributed one third of all State Treasury receipts. 1.12 Credit Policies. State Enterprises are the major borrower in the credit system. In 1977, State Enterprises claimed MF 89 billion, or 44%, of total credit outstanding (including state enterprise debts shifted to the government account). The Government was the second largest borrower, with debts of MF 81 million (402 of the total), as shown in Annex 1. Although rediscount facilities are in principle available to both the public and private sector, 98.5% of the facilities not allocated to the Government's own account were absorbed by state and mixed enterprises, effectively precluding much of the private sector from access to the Central Bank rediscount. Most of these rediscounted credits pass through BDM, which is the sole financier of State Enterprises. Few of these credits to State enterprises carry Government guarantees; BDM therefore retains the full commercial risk. Most of these credits are regularly rolled-over, as the enterprises are unable to repay the debts. 1.13 Stringent credit controls were introduced in 1976, in connection with the special agreement with France, to control inflation and reduce the deficits on balance of payments and the corresponding Operations Account. As shown in Annex 1, the growth rate of total credit outstanding dropped from 31.5% in 1974-75, to 15.5% in 1975-76 and 4.5% in 1976-77. The impact of these constraints was felt primarily by the private sector, as its share of total credit outstanding dropped from 18.8% at the end 1976 to 16.4% at the of 1977, or from MF 36.7 billion to MF 31.4 billion in absolute terms. Rediscounting from the Central Bank for the government's own account increased substantially from 1976 to 1977, but the amount of rediscount made available to State Enterprises and private borrowers actually declined by 9%. 1.14 Credit has generally been allocated to satisfy the economy's short- term credit requirements. Excluding the Government's borrowings for its own needs, short-term credit represented almost 94% of total outstanding credit as of December 31, 1977 and 98.6% of rediscounted credit (see Annex 1). Most of the term investment requirements of the Government and state enterprises are provided from donor funds or the state investment budget. The private sector, more dependent on the banking system, has received little term financing assistance. Of the FM 6.6 billion, term credits outstanding on December 31, 1977, the only amount directed to non-public industrial enterprises was FM 1 billion provided by KfW in three lines of credit channelled through BDM for 13 investment projects since 1974. The balance of the total outstanding term credits, whether financed through rediscount (FM 0.8 billion) or from the banks' own resources, was directed to consumer and housing credit (FM 4.8 billion) or to public enterprises (FM 1.0 billion).  - 5 - 1.15 Interest Rates. Although Mali has no formal interest rate regula- tions, the following pattern is generally observed: Table 1 Structure of Lending Rates Public Mixed Private Enterprises Enterprises Sector Short-term 9.5 11.5 11.5 - 15.0 Medium and Long-Term 9.0 11.0 7.5 / Final On-Lending Rate of Rediscounted credits (all terms) 7.5 7.5 7.5 /1 On-lending rate for KfW lines of credit to the private sector. Rates charged on future KfW lines will be consistent with the IDA project. In January 1977, the rediscount rate paid by the banks was increased from 3.5% to 6% on all credits. The same rediscount rate is charged for all types of credits. Interest rates paid on deposits are generally low; from 0.25% to 1.0% for sight deposits, 4% for savings deposits and 4% to 6% for term deposits of more than three months. 1.16 Inflation rates in Mali averaged about 6% until 1975, rose to 17% in 1975, dropped back to 6% in 1976 but have increased again in 1977 and 1978. The Central Bank has estimated that the effective inflation rate averaged about 10% in 1978. Stringent credit policies are expected to keep inflation down to no more than 10% per annum over the next three years. Thus, while short-term lending rates to the private and mixed sectors have been relatively realistic, lending to the public sector, all rediscounted financing and some term financing has been subsidized. The interest rate preferences shown to the public sector are but one example of the policy preferences shown to state entreprises and have been the subject of discussion with the Associa- tion. Given the dependence of these enterprises on the banking system and consequently the heavy burden of financial charges on these enterprises, it is unlikely that these interest rate preferences will be entirely eliminated before a more general reform of the public enterprise system is instituted. Under the forthcoming IDA project, a proposed 12% interest rate will be charged for all term loans. As these IDA resources are likely to be the only new term lending resources available in Mali, the higher interest charge is expected to have an upward influence on Mali's term interest rate structure. Although these rates may be considered only modestly adequate in the present international financial climate, they represent a major upward shift in Malian term interest rates. 1.17 Impact. This system has restricted bank credit for private pro- ductive investment so as to satisfy the cash requirements of state enterprises.  - 6 - In many cases, however, the banking system is merely replacing funds drawn from the state enterprises either directly by Government action (Government control of profits, reserves, etc., Government arrears) or indirectly by uneconomic regulatory policies (price control, employment policies). Thus, in a very real sense, the state enterprise system has become only a conduit for expanded bank financing of the Government deficit. The problem of the State enterprise sector is therefore ultimately inseparable from Mali's macroeconomic difficulties and it is unfortunately the banking system, specifically BDM, which carries the major risk in this arrangement. BDM's exposure to the State enterprise sector as of December 31, 1977 totalled MF 78 billion, or six times its net worth. Given the precarious financial position of most of these enterprises, and the absence of a Government guarantee for these loans, BDM would almost certainly be insolvent if repayment were required on its portfolio of rediscounted credits to state enterprises and restitution of its financial position would require a recapitalization of a scale clearly beyond available Malian resources. 1.18 Three avenues of eventual resolution appear possible. First, in an implicit acknowledgment of BDM's situation, the Government is considering proposals for reorganization of the banking system, and has already authorized expanded activities, including branch banking, by the other commercial banks. Secondly, in the medium-term,. the incorporation of Mali into the West African Monetary Union, expected by 1982, should result in some reform of the present banking system situation. Finally, for the state enterprise sector itself, the Government has been considering various proposals for reform on a case-by-case basis, although it was only in 1978 that the first concrete action was undertaken on such proposals with the sale of the deficit-ridden state brickmaking company to a private investor. In exchange for new investment funds needed to reorganize this company, the Government will absorb substantial losses on this sale. More general rationalization of the sector cannot be expected in the near-term given the high political and financial costs attendant on such program. 1.19 The Association has been discussing the need for rationalization of the State enterprise system and Government financial policies with Malian authorities since 1974 in the context of our continuing concern for the over- all economic situation. As part of the preparation for this project, IDA's Project Preparation Facility financed independent consultant studies of the feasibility of rehabilitating or reorganizing two State enterprises: a woodworking company and a milk processing company. These enterprises were selected for study as the most promising for rehabilitation after review of a large number of candidate firms. These studies, reviewed and accepted by the Government and IDA, recommend that the woodworking company be reorganized and converted into a privately controlled mixed-enterprise and confine its business activities to its more profitable products. The Government is seek- ing such a private investor and, if successful in this search, will consider absorbing the substantial losses resulting from such conversion. Following such conversion, the Company will be eligible for consideration for financing under the proposed IDA project. The milk company is a very different case. As explained in paras 2.39-2.50, the Union Laitiere de Bamako (ULB) is one of  -7- the few steadily profitable public companies, is reasonably well managed, and has sound business prospects, all largely because it has succeeded in main- taining relative autonomy and commercial integrity within the State system. Moreover, as Mali's only milk pasteurization company, ULB's public ownership appears socially justifiable and a rehabilitation investment meets both economic and basic needs criteria. For all of these reasons, it is expected that with IDA's support, ULB can become a model of sound State enterprise management and an important success in the Government's case-by-case reform program. 1.20 The Non-Public Industrial Sector. A noteworthy feature of the current Malian reform efforts is the Government's increasing pragmatism about private investment, as it comes to perceive private, especially local, capital as the last untapped resource available for the new investment so needed for Mali's continued development. Until very recently, however, the role of private enterprise and investment in Mali has been clouded. 1.21 Data on private enterprise in Mali is scarce, but available infor- mation suggests that modern productive enterprises number at least 100 and together these enterprises employ well over 2,000 persons. In the past, most of the private modern sector firms tended to be foreign-owned but the reluc- tance of foreign companies to invest in Mali during recent economic difficul- ties has increased the relative importance of private Malian enterprises. Of the 20 enterprises receiving investment code benefits for new investment since 1974, 18 were privately owned, predominantly Malian. Most are medium- to small-scale and their lines of business vary widely, ranging from textiles to foundries to bakeries. Financial performance has generally been better than that of the public sector firms. Most of the smaller Malian-owned firms would benefit from technical and management assistance, but little such assis- tance has been available. With financial assistance scarce, some new enter- prises have been financed entirely from family resources or supplier's credits. Given the environment and lack of available assistance, this sec- tor's growth is impressive and due mainly to the dynamism and entrepreneurship of Mali's businessmen. To help relieve the credit shortage for this sector, the proposed IDA project will provide a line of credit through the banking system for sound productive private investment projects. Assistance will also be offered to help improve the development financing capabilities and proce- dures of local banks. 1.22 Traditional Sector. Mali's artisan sector has shown vitality and resilience. Producing lower-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 woodworking subsectors have grown rapidly. 1.23 A substantial expansion in the productivity and employment in the utilitarian crafts (metalwork, woodworking, building trades, machinists) is  -8- possible, if they are 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 are assured better access to credit. Although local banks have expressed interest in helping the artisans, it is not cost effec- tive for them to extend or monitor such small credits to individual artisans. Nor is it practical to deliver the needed technical assitan_- on a one-to-one basis. Moreover, Mali's artisans are suspicious of formal institutions and modern educational systems and, unlike in neighboring countries such as Niger or Upper Volta, no local official training institution has as yet gained their confidence. Given these constraints, the best arrangement for helping the craftsmen is proving to be a system of village-based training, supply and credit cooperatives working closely with a practical field extension service. This system's main advantage is its easy acceptance and adaptation in the Malian context, as it builds on the essentially communal nature of Mali's traditional society. A highly successful model of such cooperative assis- tance is being undertaken by CMDT, Mali's cotton company. Fifty-three local blacksmiths have been helped at an average capital cost of US$600 per work- shop (each workshop employing one to four persons) to adapt modern technical methods to the production and maintenance of small agricultural implements. Several similar cooperatives are in the process of formation in Mali's smaller cities and villages. The main obstacles to the implementation of an artisan development program of this model are the absence of a field-level technical service to work with these cooperatives and the lack of lending resources by the local banks. The artisans will be eligible for financial assistance under the IDA line of credit and will also be served by a field extension service of skilled technicians to help improve their practices and products. 1.24 The traditional textile and decorative crafts face somewhat different prospects. Although the artisanal products are generally recognized in the local market to be less expensive and often of better quality than competi- tive manufactured goods, the growth potential for the domestic market is limited. Traditional production methods are quite efficient, contradicting the conventional wisdom that introduction of more modern equipment would improve productivity. Exploitation of the export market will be an important factor in achieving improved incomes and employment in this largest group of artisans. A fund would be established under the project to explore and to undertake pilot projects to test alternative mechanisms to improve these products and expand exports. 1.25 Assistance to Industry. The establishment in 1971, with UNDP/ILO assistance, of the Institut de Productivite et de Gestion Professionnelle (IPGP), as Mali's first management training institute, 1/ was followed in 1975 by the creation with UNDP/UNIDO assistance of the Centre d'Etudes et de Promotion Industrielle (CEPI), Mali's first industrial promotion agency. 1/ IPGP is discussed in greater detail in the Appraisal of a Second Education and Training Project in Mali. Report No. 1379a-MLI - of June 24, 1977. CEPI is described in paras. 2.27-2.38 below.  - 9 - Nevertheless, technical, promotion and management assistance available to private Malian entrepreneurs has remained seriously inadequate, as the initial efforts of both of these agencies have focussed on services to the State sector. CEPI, long underfunded and understaffed, has however recently under- taken new programs to serve private entrepreneurs and artisans. The proposed project will encourage and assist CEPI to substantially broaden this indus- trial promotion role and to oversee a comprehensive technical assistance pro- gram. Similarly, IPGP, which is also redirecting its services toward local enterprises and practical assistance, will undertake, under this project, its first basic skills training program for small entrepreneurs, in coordination with CEPI. This program should go far towards meeting local entrepreneurial demand for technical assistance. 1.26 Investment Policies. The Malian Government introduced its first investment code in 1969, revised in 1976. This Investment Code offered import duty exemptions and tax concessions to investors according to three categories of investment size and a variety of other vaguely defined criteria (e.g. local value-added, counting however the high local excise tax rate, training offered for Malian nationals, sector of activity, perceived benefit of the investment). Until recently, the benefits actually provided under the code did not compare favorably in either value or duration with those of neighbor- ing countries. By offering greater advantages to larger investments and by reducing the costs of capital goods imports, the code, as is typical in the region, encouraged relatively capital intensive investments. Investments of less than MF20 million had been excluded from all benefits. It was practi- cally impossible for potential investors to reliably predict the benefits for which they would be judged eligible or on which specific criteria they would be evaluated. In addition, approval procedures have been complicated and processing time lengthy. Thus, the overall system has become highly subjective and discretionary, often more a disincentive than an incentive to good investment projects. 1.27 The Association has been discussing these policies and procedures with the Government which, with the help of a PPF-financed consultant, has already modified substantial portions of the present law to introduce employ- ment creation and other efficiency criteria, to clarify and standardize benefits and eligibility criteria and to simplify procedures. Unfortunately, at the same time, the minimum size of eligible projects was increased from MF20 million to MF30 million, a situation which is unacceptable to the Asso- ciation. However, the Government has now agreed that projects below MF30 million will be eligible for investment code benefits under the same economies criteria applied to larger projects. In addition, discussions on permanent investment code revisions will be re-opened in eighteen months. An acceptable permanent modification of the law should be a firm condition of any follow- on project.  - 10 - 1.28 If Mali is now to take full advantage of its private sector resources, both the investment climate and the assistance available to this sector need much improvement. The proposed project seeks to encourage and assist the Malian Government to undertake these improvements. With this assistance program, prospects for a significant expansion in productive investment in this sector are attractive. II. INSTITUTIONS 2.01 The key institutions in the proposed project will be the banking system, CEPI and ULB. The Banking System 2.02 Within the banking system, the Association's key intermediary will be the Central Bank, which will in turn monitor the on-lending activities of the three local commercial banks, BDM, BMCD and BIAO. Banque Centrale du Mali (BCM) 2.03 Established in 1968 within the framework of a special agreement with France, Banque Centrale du Mali is a State enterprise with financial autonomy and a fully paid-in share capital of MF1.5 billion. As a central bank, BCM issues currency, handles external transfers, performs Government treasury functions, supervises the banking sector, compiles financial and balance of payments data and provides extensive rediscount and advance facilities for the Government and the local banks. BCM is administered by a Board of Directors consisting of five Malian and five French representatives, nominated by their Governments. The President of the Board is appointed from among these rep- resentatives upon proposal from the Malian Government. The Director of the Cabinet of the Chief of State is at present holding this position. The General Manager, appointed on proposal from the French Government, is seconded from the Bank of France. He is assisted by a Malian deputy. 2.04 Organization. BCM has a total staff of 180 organized into five departments: credit, financial operations, cashiers, administration and studies. The Financial Operations Department maintains BCM's accounts. The recently-enlarged studies department issues all BCM publications including annual reports and a monthly statistical bulletin. The credit department processes all rediscount and advance applications and monitors all rediscount credits. It is staffed with 10 persons, 4 of whom are credit analysts, plus a technical advisor seconded from the Banque de France. The chief of the credit department is an ex-EDI fellow, who also has received training at the Caisse Centrale banking facilities in France. BCM's staff is competent.  - 11 - 2.05 Procedures and Credit Policies. BCM's statutes and policy state- ments clearly define BCM's lending and rediscount policies. BCM's lending to the Treasury, including rediscounting of treasury bills, is in principle limited to 10% of fiscal receipts of the previous year. Rediscounting facili- ties offered to the commercial banks, determined every six months on the basis of their forecasted lending and their available resources, is in principle limited to a maximum of 50% of the total projected lendings by each bank. However, actual rediscount allocations are inconsistent with these principles, as the Central Bank rediscounts the major share of BDM's lending. Rediscount of medium-term loans (2-7 years) is only accepted for local currency costs of productive investments in priority sectors or for the construction costs of housing projects. Rediscounting of loans to individual projects is generally limited to 50% of the total project cost, but may finance up to 65% of total costs for industrial and agricultural development projects. Promoter's contributions in such subprojects has to cover at least 20% of the project cost, with the balance to be financed through suppliers' credits or other external sources or nonrediscountable borrowings. The proposed project is being undertaken under the Central Bank's general authority to assist and advise the Government in various financial programs. 2.06 Appraisals. The credit appraisal of term rediscount applications essentially focuses on financial, marketing and credit worthiness aspects of the project. Economic and technical aspects of appraisals need to be strengthened. Banque de Developpement du Mali (BDM) 2.07 Established in 1968 as a State Bank to take over the commercial department and the public enterprise portfolio of BRM, Banque de Developpe- ment du Mali has since then considerably enlarged and diversified its activities. Its present share capital totals MF 5 billion. It is the only bank in Mali with regional branches, 8 in all, dispersed throughout the country, although branch banking by the other banks has recently been authorized. Although it carries the name of a development bank and does perform limited development financing services, BDM is essentially a commer- cial bank involved in a full range of commercial operations. BDM also ad- ministers, on behalf of the Government, a certain number of bilateral aid programs by maintaining clearing accounts in its books. 2.08 Management. BDM's nine-member Board is chaired by the Minister of Finance and includes seven cabinet directors of various ministries as well as a representative of BDM's personnel. The Board meets only once a year, basically to approve the annual accounts, and does not appear to be actively involved in BDM's operations, more so because all credit granting powers have been delegated to BDM's General Manager. In addition, since BDM's policy statement is totally silent on any exposure limits, the General Manager has the sole authority to approve unlimited amounts of credits to any customer.  - 12 - In practice, however, the Government strongly influences BDM's policy and credit decisions. In addition, an internal credit committee decides on all loans above MF 10 million. Loans below this amount are approved by the credit manager or the managers of regional branches. 2.09 Staff. BDM's total staff numbers 729 of which 422 -work at the Central Office in Bamako. Although the headquarters staff is relatively weak, the branch office staff includes some quite competent bankers. 2.10 Organization. BDM is organized into 10 departments along functional lines including finance, studies, administration, external services, internal control, data-processing and recoveries units and a separate department overseeing all regional branches. BDM has two credit departments, one of which handles all credits financed with domestically-obtained funds, including rediscounting, while the other, the International Finance Relations Department (SRIFI) recently established and much smaller in size, deals exclusively with credits which are totally financed by external resources. Such credits to date have included only the KfW credit line and the Department has primarily occupied itself with the administration of some bilateral financings for government projects. 2.11 Procedures. The existence of two separate departments processing credit applications results in two separate appraisal criteria and procedures. The appraisals carried out in the domestic resources credit department follow the usual commercial banking approach, focusing essentially on the credit worthiness, security and financial aspects of the applicants, except for appl'cations from public sector enterprises where political aspects carry a considerable weight. Appraisals of projects by the International Finance Relations Department on the other hand are more thorough. These appraisals are generally prepared with the assistance of a German technical advisor, the only expatriate in BDM. Recently, however, KfW has proposed that most appraisals for its projects be referred to CEPI. Neither department has any regular procedures for project supervision. 2.12 Operations. As of December 31, 1977 credits to public or mixed enterprises totaled MF83 billion and constituted 84% of BDM's outstanding portfolio, most of which is rediscounted. Short-term credits represented 89% of this portfolio. It is BDM's and the Government's policy to almost automatically roll-over rediscounted loans to public enterprises, to relieve them of the burden of repayment. In most cases, the enterprises could not repay these loans, if so required. 2.13 Term loans represented 7% of BDM's total portfolio as of December, 1977. The major share of these loans financed housing (MF3.3 billion), automobile credits (MFO.6 billion) and consumer credits (MFO.6 billion). MF 2 billion represented loans to industry and hotels. BDM's term-lending approvals to the industry and hotels since 1973 to end 1977 numbered 29 for about FM 4 billion (see Annex 2). Of these, FM 2.4 billion in credits were approved for 22 private projects, FM 1.0 billion for 4 mixed-ownership projects and MF 0.6 billion for 3 public sector projects. BDM's equity investments to date number only five, all of them taken at Government's  - 13 - request, and amount to MF 823 million, including three investments in mixed enterprises, one in CEPI and in the government's contribution to the Islamic Development Bank. 2.14 Resources. As of December 31, 1977, Central Bank rediscounting provided 61% of BDM's total tesources, while deposits, primarily short- term, accounted for 26% of total resources, foreign borrowings, excluding clearing accounts for bilateral aid programs, provided 1% and BDM's own equity, 12%. 85% of BDM's total resources were short-term in nature. KfW credit lines, totalling DM 12 million, have provided 7% of BDM's term resources and have financed all of BDM's term loans to private enterprises. KfW lines of credit have 50-year maturities, including 10 years of grace, and carry an interest rate of 4.5%. These loans have been on-lent at 7.5%. Foreign exchange risk on these lines is entirely borne by Government. 2.15 Financial Position. BDM's balance sheets and income statements for the years 1975 through 1977 are summarized in Annex 3. BDM systematically debits financial charges to all projects, including projects in arrears - an unusual banking practice. BDM's profits have remained at a comfortable level, amounting to MF 2.2 billion, or 1.9% of average assets and 17.5% of average equity, in 1977. BDM's overall debt equity ratio as of December 31, 1977, including BDM's rediscounted borrowings, stood at 7:1 as against 9.6:1 a year previously. The ratio of term debt equity for the same period, reflecting BDM's very low level of term borrowings, was only 0.5:1, practically unchanged from the previous year. Specific provisions totalling MF 2.56 billion for bad and doubtful debts represented 2.6% of the total portfolio (including rediscounted credits). These provisions added to free reserves and retained earnings covered almost 8% of the total portfolio. Reported arrears amounted to MF 6.5 billion, up from MF 5.9 billion in 1976, of which MF 3.9 billion were stated to be on public sector loans. BCM has refused, on credit- worthiness grounds, to rediscount several BDM public enterprise loans. All of these loans are in arrears and make up the bulk of the above amount. 2.16 As noted earlier, BDM's financial position is inextricably linked to that of the state sector. If repayment were required on BDM's portfolio of rediscounted credits to State enterprises, actual arrears would be substan- tially higher than presently reported and would substantially exceed BDM's capital. BDM would face insolvency. Therefore it cannot be considered an acceptable direct intermediary for an IDA Project--or at least until a substantial reform of the public enterprise system is instituted, with adequate guarantees for BDM. Banque Malienne de Credits et de Depots (BMCD) 2.17 Previously a regional branch of Credit Lyonnais, BMCD was incor- porated under Malian laws soon after independence with the Government holding 50.1% of the shares and Credit Lyonnais the balance. With a share capital of FM 500 million, BMCD is at present the second largest bank in Mali. Though essentially a commercial bank dealing primarily with the private sector, BMCD has nonetheless taken the lead in term-financing of several private indus- tries and is also participating with BDM in a seasonal credit to one mixed  - 14 - enterprise. BMCD is administered by a Board of six directors, of whom three are appointed by the Malian Government, including the president. The Board meets at least four times a year and appears to play an effective and active role in the administration of the bank. 2.18 Crganization. BMCD's total staff of 102, including 4 expatriates is organized into four basic departments (operations, controllers, recoveries and credit). The operations department, by far the largest with a staff of 70, includes all operationa:L units including cashiers, exchange, portfolio and accounts. It is headed jointly by an expatriate from Credit Lyonnais and a Malian. The credit department, which is also headed by an expatriate and staffed with 5 analysts, processes all credit applications and administers outstanding credits. The professional staff numbering 10 is generally of good quality and fairly seasoned with several years of in-house experience and training carried out at other similar banks in West Africa. 2.19 Procedures. All credit applications including those for term- financing of industrial projects are processed by the credit department. Project appraisals focus primarily on financial, market, security and manage- ment analysis, needing improvement on technical and economic aspects. As the general manager's authority for credit approval is limited to MF 15 million, most term-credits are submitted to the Board for approval. 2.20 Operations. BMCD's term-lending operations are essentially limited to medium-term rediscounted financing of some private industrial projects. Since 1974, BMCD has financed with the other local banks, a total of six such projects with aggregate investment of FM 2.5 billion of which BMCD's financing represented MF 0.4 billion (see Annex 2). All these projects are located in Bamako, four of them are owned in majority by private Malian entrepreneurs. 2.21 Financial Position. BMCD balance sheets and income statements which are summarized in Annex 3 show that BMCD's financial performance has been satisfactory and profits have grown steadily. BMCD's financial position appears adequate. 2.22 Extensive short-term lending to the private commercial sector has enabled BMCD to sustain a high rate of growth. Total assets increased from FM 6.8 billion in 1975 to FM 13.3 billion in 1977. Reserves, paid-in share capital and retained earnings increased from FM 0.6 billion to FM 1.0 billion, yielding a debt/equity ratio, not including contingent liabilities, of 12:1 (up from 10.1 in 1975) and 14.7:1 including these liabilities. The term debt to equity ratio is, however, only 0.2:1. Banque Internationale D'Afrique Occidentale (BIAO) 2.23 BIAO, a local branch of an international institution of the same name, is the only 100% foreign owned bank in Mali. 1/ It is managed by a French expatriate with a Malian assistant. BIAO is organized into four basic departments (operations, portfolio, credit and administration) which are directly supervised by the Malian Deputy General Manager and an ad-hoc regional control unit headed by an expatriate which reports directly to the General 1/ Majority shareholder in the consortium is Banque Nationale de Paris.  - 15 - Manager. BIAO's total staff numbers 106 of whom 10 are professionals. The majority of the officers of the bank have been with BIAO for several years and through in-house experience and training of sister banks in other countries have developed a good degree of competence. 2.24 Procedures. BIAO's regional manager is authorized to approve credits up to FM 50 million. Above this figure, authorization from BIAO Paris is required. The head office also sends out a team of inspectors once or twice a year. As with BMCD, BIAO's project appraisal capacity, which is essentially limited to financial and security considerations, needs improve- ment on the economic aspects. 2.25 Operations. BIAO's operations in Mali are largely limited to financing of general commerce and, to a lesser extent, consumer loans, trans- port and housing. Unlike BMCD, however, BIAO has been quite successful in mobilizing local savings which have enabled it to give some long-term credits for housing construction. BIAO's industrial term financing has been limited to co-financing with BMCD of only two projects, both of them committed in 1978. As a result all outstanding term loans amounted to only FM 325 million (3.7% of total portfolio) at end December 1977, representing primarily the financing of housing or commercial buildings. 2.26 Financial Position. BIAO's balance sheets and income statements, summarized in Annex 3 show satisfactory financial performance. Total assets in 1977 amounted to MF 10.5 billion up from MF 7.6 billion in 1976. Profits after tax increased to FM 269 million in 1977 from FM 189 million a year earlier, representing 2.9% of the average assets and almost 45% of the average equity. Credits under litigation were reported to amount to FM 58 million at end December 1977 or 0.7% of the outstanding portfolio against which provisions totalled FM 44 million. BIAO's equity, including retained earnings for 1977, amounted to FM 714 million, yielding a debt/equity ratio of 13.7:1 not including contingent liabilities and to 20:1 including these off-balance sheet items. BIAO's financial position is sound. Centre d'Etudes et de Promotion Industrielle (CEPI) 2.27 CEPI was established in March 1976 as an autonomous public commer- cial establishment under the supervision of the Ministry of Industrial Devel- opment and Tourism. To achieve its objective of industrial promotion, CEPI was authorized by statute to - advise the Government on industrial policies and perform related studies. - provide technical assistance and training and possibly investment capital to Malian entrepreneurs and to help prepare bankable investment projects; and - to inform and advise possible foreign investors in Mali.  - 16 - 2.28 Past Operations. With UNDP encouragement and under pressure from its Ministry, CEPI's activities in its initial two years focussed on advisory services to the Government, studies of public enterprises and staff work to the Investment Commission which awards industrial incentives. The industrial promotion and technical assistance role was largely neglected, in the hope that CEPI would play a presumably more important policy-mak-. g role. As a result, CEPI remains relatively unknown in Mali, although its Director has established good relations with many entrepreneurs, and it has as yet only a limited working relationship with Mali's financial institutions or business organizations. CEPI's primary output in this period were some 30 economic studies and 15 preliminary proposals for large capital intensive projects. Review of these proposals found the financial and market analysis minimal and consideration of economic, management and training aspects absent. None of these projects have been presented for financing, although seven have been approved by the investment commission. Assistance to existing industries was generally directed to public sector enterprises while small and medium-scale enterprises were almost entirely excluded. This operating pattern produced financial problems for CEPI, as fees from services rendered to entrepreneurs were expected to be a major source of the agency's income. 2.29 Recent Activities. With new encouragement from the Government, IDA and UNDP, CEPI's management reviewed and revised its priorities in September 1978, deciding to focus CEPt's operations more directly on industrial promo- tion and technical assistance. Although economic studies and promotion of large industrial projects will continue to be a part of its activities, CEPI has already initiated a strong nationwide program to make itself known to Malian entrepreneurs and to expand its technical assistance services through its new department of assistance to enterprises. In September 1978, CEPI's Director also organized the Temporary Committee for the Promotion of Artisans, composed of representatives of all relevant public agencies, to gain support for an expanded program of assistance to Mali's artisans. 2.30 CEPI undertook its first national promotion campaign in November 1978 and plans to repeat these efforts periodically. This campaign has yielded a pipeline of 25 projects proposed by local promoters and offering reasonable prospects for implementation (Annex 4). Project size ranges from FM 2 milion to FM 700 million with an average cost per job of MF 5.4 million or US$12,000. Preparation work on these proposals is beginning and additional promoters are now coming forward with other proposals for CEPI's assistance. CEPI's service charge income from small enterprise clients has also substan- tially increased in the last twelve months, reflecting these new contacts. 2.31 Management. CEPI's 11-member board is chaired by the Minister of Industrial Development. Other members include 7 representatives of various ministries, 1 representative from the President's Office, the General Manager of BDM and the President of the Chamber of Commerce and Industries. CEPI's General Manager is required by CEPI's statutes to participate in the meetings in a non-voting capacity. The board meets only once a year and does not appear to take a very active interest in CEPI's activities, although the Minister is closely involved in daily operations. Initially staffed by UNDP-financed UNIDO technical advisors, CEPI had no full-time local Director until June 1977, when the then Director of Industries in the Ministry of  - 17 Industrial Development was appointed CEPI's first general manager. The General Manager is able and has the necessary background and experience to competently direct CEPI. His previous post put him in contact with most of Mali's entrepreneurs and provided him a thorough knowledge of the workings of the industrial regulation system. 2.32 Staff. CEPI's staff, as of December 1978, totalled 31 of which 28 were Malians and 3 expatriate advisors. Malian professional staff, which numbered 13, is capable but needs additional training. Under a UNDP grant, initial training sessions for 6 Malian staff at ECC's Industrial Development Center in Brussels have been organized. Further training for which UNDP financing has been obtained here 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, have been also controlled by the Ministry. Assurances have been received that these arrangements will be modified to permit CEPI to hire its own staff and offer more competitive salaries. Eventually, with private bank partici- pation in its capital, CEPI will be reclassified as a mixed-enterprise to free it from various civil service operating restrictions and permit it to better compete for staff with private financial and business organizations. 2.33 Organization. CEPI has been organized into two departments--project promotion and studies, and administration and accounts. The promotion and studies department, in which all technical advisors are located, is organized into sectoral sub-groups responsible for the identification and promotion of new investment projects and for studies for the Government and public enterprises. In order to better meet its industrial promotion objectives, CEPI is establishing a third department, Assistance to Enterprises, to promote and provide technical assistance to local entrepreneurs as well as to manage its Guarantee and Equity Participation Funds. 2.34 Technical Assistance. CEPI has UNDP financing for five UNIDO technical advisors, two of these positions are filled (an engineer and an economist), the other three, primarily engineers, being recently vacated. The present advisors do not have adequate capability to prepare projects for financing, nor interest in small enterprise projects or field promotion activities and better staff is being sought. UNDP financing is assured through 1982. In addition, FED has provided a textile engineer, whose financing ends in July 1979. In addition, CEPI has been assured financing by FED of up to one man-year of consultancy on agro-industries. The proposed IDA project will finance an additional position (para 3.17 below), advisor to the new Department for Assistance to Enterprises. 2.35 Financial Management. CEPI's administrative unit is small and activities are of a basic bookkeeping nature. Presently, CEPI's books are audited by a local Commissioner of Accounts whose reviews are not adequate  - 18 - for IDA's requirements. As a condition of this project, annual audits of CEPI's accounts by a firm of independent auditors acceptable to the Association are required. 2.36 Financial Position. CEPI's authorized capital of FM 500 million was subscribed by the 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 the Government and FM 20 million by BDM. FM 100 million of the Government's payment was ear- marked for the construction of an office building for CEPI and FM 20 million for essential equipment. A schedule of payment of the balance of the Govern- ment share, as well as those of BDM and the Chamber of Commerce, in 1980 and 1981, has been agreed. The first payments under this schedule have already been received. Although neither BMCD nor BIAO is on CEPI's Board, Board seats will be allotted to them as soon as they contribute the requested share capital to CEPI. 2.37 Although financially autonomous by statute, CEPI has since inception received annual subsidies from the Government covering office rent and the salaries of its Malian staff. These funds have not been paid directly to CEPI from the State budget, as would normally be the case with autonomous institu- tions, but rather through the intermediation of. the Ministry of Industrial Development. This intermediation arrangement has been ended at the request of CEPI's Board to encourage CEPI's operational independence. Assurances have been received that these subsidies will continue through at least 1983. 2.38 In 1977, CEPI incurred a net operating deficit of MF 9 million, with outlays totalling MF 12.4 million, fee income MF 0.8 million and govern- ment subsidies MF 2.6 million. In 1978 an operating deficit of MF 17.2 million was expected, on outlays of MF 42.6 million with fee income of MF 1.6 million and government subsidies of MF 23.8 million. Therefore by the end of 1978, CEPI had a resource gap of MF 6.2 million. CEPI's operating outlays in the 1979-82 project period are expected to total MF 390 million, half of which (MF 195 million) are expected to be covered by government subsidies. Fee income originally not expected to total more than MF 25 million through 1982, is now expected to exceed MF100 million in this period based on 1979 performance. In 1982, CEPI would have a net operating deficit of MF95 million and its total resource gap would exceed MF120 million. Payment of CEPI's outstanding capital should cover its resource gap and, together with continued improvement in service charge income, as its expands its services to enterprises, should stabilize CEPI's financial position by the end of the project period. CEPI's financial position will be monitored closely during project implementation and arrange- ments reviewed as needed. 2.39 Equity Participation and Guarantee Funds. In order to assist small Malian entrepreneurs to establish an adequate equity base for their industrial projects and to facilitate their access to bank credits, CEPI has established an Equity Participation Fun,i and a Loan Guarantee Fund. These Funds will be  - 19 - managed by CEPI under the supervision of a management committee chaired by the Minister of Industrial Development (or representative) and will include the Minister of Finance (or representative), the General Manager of CEPI, the General Manager of BDM, a representative of the local bank delivering the credit and representatives of institutions participating in the financing of these Funds. It has been agreed that the Central Bank will be responsible for the administration of all accounts and financial transactions. The Participation Fund's intervention in a project will always be on a minority basis and will be limited in absolute amount to 5% of the total resources of the Funds per project. The Guarantee Fund will be authorized to guarantee up to 50% of the outstanding loan on a project and exposure per project will be limited in absolute terms to 20% of the Funds total resources. The Fund's total guarantees are initially limited to two times its paid-in resources but could eventually increase to five times the paid-in resources. 2.40 The resources to be allocated to these funds have tentatively been fixed at MF 400 million for the Equity Fund and MF 600 million for the Guar- antee Fund. UNDP has agreed to allocate US$50,000 a year over the next five years towards these targets. In addition, the Government will authorize that resources generated by the interest differential between the cost of the IDA credit line to the Central Bank and the Central Bank on-lending rate be applied to support these funds (see para. 3.13 below). Union Laitiere de Bamako 2.41 Under this project, Union Laitiere de Bamako will be assisted to expand its plant, to strengthen its management and to assure its financial and operating autonomy within the State enterprise system. This program is intended to guarantee the enterprise's long-term efficiency and viability and thereby set a precedent for operation of state-owned businesses. ULB was chosen for this role because of its attractive business and management potential. It happens to be Mali's only milk processing company and there- fore satisfies a basic nutritional need in Mali. 2.42 ULB was established, with technical assistance from FAO and a grant from UNICEF, in 1967 as a wholly government-owned enterprise, primarily to insure a regular supply of pasteurized milk and milk products to the hos- pitals and schools in Bamako. ULB started operations in 1969 and soon faced difficulties due to large amounts of arrears from these institutions. ULB therefor.e stopped selling milk to these institutions and directed its sales to the private sector. Due to the insufficient quantity of raw milk avail- able at reasonable prices from local sources, ULB also started utilizing larger quantities of imported milk powder in its processing. Raw milk represented only 1.6% of ULB's raw material inputs in 1977, down from 11% in 1975 and 6% in 1976. 2.43 The Market. ULB remains Mali's sole producer of pasteurized milk products. Milk, when available, is an important element in the Malian diet.  - 20 Fresh milk products are preferred to powdered milk products. ULB's market area is the city of Bamako, where annual milk consumption totalled 9.1 million liters in 1977, or 20 liters per capita. By comparison with the minimum average per capita consumption of 33.3 liters per annum in rural areas, and the Government's target of 42 liters per capita by 1985, Bamako's milk requirements are far from being satisfied. ULB presently pmovides 45% of the milk consumed in Bamako, with the balance provided by imports (3.0 million liters) and local unprocessed raw milk (2 million liters). 2.44 Raw Materials Supply. Mali has no specialized milk producing cattle breeds. Raw milk production is small and is largely consumed at the farm or at least within the northern cattle region. Relatively little fresh milk is therefore available in the Southern urban areas, such as Bamako. The Government, which has proposed an increase in raw milk production from 203 million liters in 1977 to 288 million liters in 1985, has initiated a number of pilot schemes and studies for the development of dairy cattle. The develop- ment of a central coordinating agency, such as a milk policy board, to monitor a coherent milk production and distribution program would facilitate the achievement of these objectives. Given the unfavorable economics of Sahelian dairy development, the low world price for milk powder, and Mali's substantial livestock sector problems, it must be accepted that imported concentrated milk and milk produced locally from imported powder will have to supplement the supply of locally-produced raw milk, especially in urban areas, for the reasonable future. 2.45 The World Food Programme (WFP) provided ULB's requirements for milk powder and butter oil through 1977 under a program in which ULB was required to contribute to a local bank account the CIF value of the inputs. Funds in this account, which now exceed US$200,000 equivalent, are to support the development of local milk production. Since 1977, milk powder and butter oil have been provided under an EEC grant program. A new WFP five-year program is being negotiated on similar terms as the previous arrangement. 2.46 Prices. The prices of milk and milk products are not regulated in Mali- except for ULB's inputs and products. The selling price of ULB's pasteurized milk is currently set at FM160 per liter. Raw milk from tradi- tional sources sells at prices varying between FM200 and FM300 per liter. While this price differential gives a comparative advantage to sales of ULB products, it makes it very difficult for ULB to procure raw milk for its processing operations. Such a program is being considered to meet specific local demands. 2.47 Production. ULB was established with an inital capacity of 5,000 liters per day which was later expanded to 10,000 liters/day. The company has, however, been operating at a rate of 15,000 liters per day since 1977 to meet demand. ULB's outputL presently represents 65% pasteurized milk, 30% cultured milk products, including yogurt, and 5% fresh butter. Details on ULB's operations are provided in Annex 5.  - 21 - 2.48 Distribution. ULB supplies milk to a limited number of shops in town and to its single sales depot in the outskirts of Bamako. The major share of ULB's current production is however sold at the factory. ULB's distribution system will be expanded under the proposed project, to permit refrigerated delivery to a wider clientele. 2.49 Managment and Organization. ULB's Director is a qualified nutri- tionist who has managed the company in a competent and dynamic manner since 1972. The company's management staff is experienced and competent but needs strengthening; subordinate staff would perform better with technical training. ULB's staff of 77 is organized into two departments: technical operations and finance and administration. Separate departments for commercial activi- ties and for equipment management and maintenance will be established to permit improved operations in these two areas. 2.50 Equipment. A list of present equipment is included in Annex 6. Operation at above capacity levels for an extended period has led to deteriora- tion in ULB's machinery and equipment, such deterioration being accelerated by inadequate preventive maintenance. As a result, several key equipment items need repair or replacement on an emergency basis, to prevent collapse of the entire operation. Retroactive IDA financing of repair and replacement of this equipment is recommended. 2.51 Performance. ULB's performance has been quite satisfactory, as described in Annex 5, but the continuity of its operations is jeopardized by outworn equipment. Production has increased at an average annual rate of 21% per annum during the last five years. Profitability has been good, although actual profits declined from MF 25 million in 1976 to MF 15 million in 1977, or 3% of sales. The decline resulted from the increase in the price ULB was authorized to pay for raw collected milk. In December 1978, the Government approved a 34% rise in ULB's selling prices, the first increase since 1974. Assurances have been received that price modifications will be granted whenever necessary to assure ULB will continue to have an adequate return on its operations. 2.52 Financial Position. ULB's financial statements are included in Annex 5. ULB's total assets at end 1977 amounted to MF 569 million, of which MF 380 million represented its equity. ULB's debt equity ratio thus remains quite low (0.5:1), indicating a substantial borrowing capacity for the company. The overall financial position of the company is satisfactory as is its liquidity position. The company is one of the few state enterprises which have managed to maintain financial autonomy, primarily because of the strong personality of its Director. ULB has retained its profits and banks its own reserves, depreciation and other cash balances. The Government has recently agreed to transfer ULB to the Ministry of Rural Development, exempting it from the law requiring contribution of 85% of its profits to the Government and otherwise guaranteeing it full financial and operational autonomy, including retention of its reserves and profits. In addition, assurances have been received that ULB will be granted those investment code benefits and other fiscal advantages to which it is eligible and which are necessary to assure sound execution of its expansion project.  - 22 - III. THE PROJECT A. Main Features 3.01 T'h-is project has two parallel objectives. It will make a start towards improving the investment environment and incentive system in Mali to encourage private productive inestments. Furthermore, the project will establish the first comprehensive program of financial and technical assistance for Mali's long-neglected private entrepreneurs and artisans. In another direction, a pilot rehabilitation project would be undertaken in the state enterprise sector to demonstrate that financial and economic viability may be achieved for certain state enterprises when efficient management is allowed to operate under commercial conditions. 3.02 An IDA credit of US$8.0 million is recommended for this project which would be implemented over a 2-1/2 year period, 1980 through 1982. The proposed project would consist of two components: (i) US$5.2 million for support to the Malian private indus- trial and traditional sector, including a line of credit of US$3.5 million and US$1.7 million for a comprehensive institution-building program. (ii) US$2.375 million for the rehabilitation and expansion of Union Laitiere de Bamako (ULB), of which US$275,000 would finance consultant services and staff training. In addition, the credit would provide US$65,000 for a project coordination unit and reimburse three advances on the Project Preparation Facility total- ling US$360,000. 3.03 Background. Initial Bank Group interest in Mali's industrial sector focussed on improving the efficiency of the State enterprises, as an element of the general dialogue on Mali's economic strategy. A broader interest in strengthening the overall industrial sector was first proposed by a project reconnaissance mission in May 1977. A preparatory consultant study of the artisan sector, consultant feasibility studies of the rehabilitation of selected public enterprises, a review of the industrial regulation policy, start-up costs of technical assistance and pre-investment work on several components were financed under three advances from the Project Preparation Facility. This report sets out the findings of the appraisal mission which visited Mali in December 1978. B. Project Description Project Coordination 3.04 The project is complex, involving a variety of institutions and services and several ministries. To assure well-managed and integrated project implementation, a full-time, professional project coordinator will be located in the office of the Minister of Plan to whom the Government has given supervisory responsibility for this project. The Coordinator  - 23 - whose terms of reference are included in Annex 8, will be responsible for coordinating project start-up and execution and for assuring regular reports from participating institutions. The Coordinator will also undertake or contract for various studies needed to improve project execution, to assist local institutions or to plan for follow-up assistance (i.e. studies of local production costs, follow-up on training courses, profiles of small enterprises). For these several purposes, the project coordinating unit will be allocated US$65,000 under the project, for some operating expenses, office equipment, a vehicle and studies. IPGP is expected to be the major source of study assistance. The Government will assume the costs of local personnel and related expenses. 3.05 Under this umbrella, CEPI will be responsible for coordinating all technical assistance to the non-public sector (except the Banking System), the Central Bank will be responsible for supervising all credit activities and ULB will be responsible for the pilot public sector rehabili- tation component. All credits provided within the project will pass through the Central Bank and the banking system on exactly the same terms and interest rate, whether the beneficiaries represent the public or private sector, irrespective of size of enterprise. Support to Private Industrial and Traditional Sectors Line of Credit 3.06 The US$3.5 million line of credit would be on-lent to the Central Bank of Mali for eventual use by Mali's three commercial banks under a system similar to rediscount. All three banks would be eligible to submit projects for financing under this line of credit. The Central Bank would review all submissions to assure adequacy of data and presentation before forwarding subprojects to IDA for consideration. Given the limited local experience in term lending, there will be no free limit. Both modern and artisanal enter- prises including cooperatives would be eligible for assistance under the line of credit if their ownership is majority private. The program would be coordinated by the Director of Credit of the Central Bank, who has assigned to a capable deputy the full-time responsibility for managing this line of credit. 3.07 A minimum of 35% (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 a cost per job (fixed investment per job created) of MF 3 million (US$7,000) or less, to be called category I projects. This category would be reserved to majority Malian-owned projects. Simplified loan application and review procedures are being established, with the help of a PPF-financed consultant (see para. 3.17), to facilitate these lending operations. These loans would also be eligible for coverage by CEPI's Loan Guarantee Fund, to encourage their consideration by the banking institutions.  - 24 - 3-08 The balance of the line of credit would finance medium-scale projects - category II projects. Projects which may not be either highly labor-intensive or small-scale will be assisted in this category because there is a justifiable need for assistance for viable larger projects and there is no other source of funds but this credit to meet this need. All subprojects in either category would be required to demonstrate economic and financial viability. Several projects have been identified which appear appropriate for financing under the credit line, ranging from a blacksmith cooperative to a hardware factory (see Annex 4). Preparation of these projects is proceeding, with technical assistance financed under the third PPF, to permit subproject submission as soon as the credit is effective. 3.09 IDA would reimburse the full amount of the subloans under both categories I and II, as long as such reimbursement does not exceed 90% of total project cost for category I projects and 75% of total project cost for category II projects, the latter coefficient estimated to be the total direct and indirect foreign exchange costs of such projects. Local costs will therefore be reimbursed for Category I projects. 3.10 Based on the present pipeline and proposed lending patterns, the line of credit should assist at least 31 projects, as shown in Table 2 below:  - 25 - Table 2 Subproject Financing Plan Medium-Scale % Small-Scale and Artisans % MF US$ MF US$ (million) (thousand) (million) (thousand) Average total 154 351 100 27.7 63.6 100 Investment Average bank (IDA) 111 252 72 24.2 55.6 87 Investment Contribution of 43 99 28 3.5 12 13 entrepreneurs and other sources Number of Subproject 9 22 Expected Total Cost of 1,390 3,160 615 1,400 Subprojects of which IDA 1,000 (2,275) (539) (1,225) 3.11 Terms of Transfer of Funds. The US$3.5 million line of credit would be made available to the Central Bank by the Government at an interest rate of 2.0% p.a. plus a fee of 0.5% for Government assumption of the exchange risk, such fee to be passed on to the investment projects. The Central Bank would repay the Government according to the IDA amortization schedule. The Central Bank would pass on these funds to the three commercial banks for refinancing of investment project under amortization schedules determined on a project-by-project basis and an 8% interest rate plus the Government fee for exchange risk. The commercial banks would then in turn lend these funds to investment projects borrower at a 12% interest rate, including the fee for exchange risk, with a commitment fee of 1.0%. The commercial banks would therefore receive a reasonable margin of 3.5% on these funds. The terms of these loans will be flexible with a maximum of fifteen years and a minimum of thirty months. Terms are expected to average seven years with eighteen months grace. 3.12 Interest Differential. Out of the 8.5% interest rate the Central Bank receives from the cmmercial banks, the Central Bank will take a 1% per annum fee for its administrative expenses on this project and will pay the Government 2.5% per annum. The net interest differential (5.0%) resulting from these transactions would be deposited into a special Central Bank account on the Government's behalf to support CEPI's Guarantee and Partici- pation Funds for SEE and artisans.  - 26 - 3.13 Funds repayed on the initial loans made under this line of credit would be directed to the Central Bank's term rediscount system, revolving in this system over fifty years, subject to the IDA amortization schedule. The majority of these resources are expected to be reserved to term loans for sound private investment projects. 3.14 Conditions. A Project Agreement specifying the above conditions would be signed between IDA and the Central Bank. Signing of a Subsidiary Agreement between the Central Bank and the Government specifying these conditions for transfer of resources would be a condition of effectiveness of this credit. The Central Bank would also issue refinancing instructions, explaining the conditions of this line of credit; issuance of these instruc- tions, satisfactory to IDA, would be a condition of credit effectiveness. Despite the current restrictions on short-term credit expansion, the Central Bank has confirmed that every effort will be made to assure sufficient short-term working capital credits through rediscount to approved subprojects to complement the term financing provided under the line of credit so as to permit the sound operation of these enterprises. The Government has agreed that the availability of this financing, and associated technical assistance, will be actively publicized throughout the country. Institution-building Program 3.15 US$1.7 million would finance a comprehensive institution building program for the private modern and traditional industrial sector. This allocation includes US$200,000 in contingencies. All assistance under this component will be managed by CEPI, with the exception of the assistance to the banking system, which would be managed by the Central Bank. 3.16 Assistance to Banking System - US$100,000. Twelve man-months of consulting assistance would be made available over a two-year period through an allocation of US$100,000 from the credit to help the credit managers of the three local banks and to the Central Bank to develop common acceptable standards for subproject preparation, appraisal and supervision and to become familiar with IDA project authorization and disbursement procedures. The assistance would be provided on an as-needed basis by the staff of other francophone development banks experienced in World Bank industrial projects. The consultants would work under the supervision of the Central Bank. 3.17 Strengthening CEPI -- US$350,000. The development of CEPI into a responsive business-oriented promotion and technical assistance agency is a primary objective of this project. Toward this end the Association will finance with an allocation of US$275,000, the salary and expenses of a full- time advisor to the Service tco Enterprises section for a 2.5 year period. This section is responsible for (i) promoting new investment proposals and encouraging local businessmen to undertake productive projects; (ii) coordinat- ing and channelling management and technical assistance to local entrepreneurs during subproject preparation and implementation; (iii) helping entrepreneurs prepare applications for banking assistance or for the investment code; (iv) supervising the Equity and Guarantee Funds, in coordination with the banks; and (v) overseeing the extension service and the promotion program to artisans  - 27 - and small entrepreneurs. The IDA-financed advisor would help organize the section, supervise project preparation and appraisal, help manage the Equity and Guarantee Funds and coordinate the other technical assistance programs financed by IDA under this project. The advisor would report to CEPI's Director. In addition, the Association will provide US$75,000 for vehicles, equipment and supplies for the new section and to help CEPI establish its first regional offices. 3.18 Management Training - US$150,000. Under the project IPGP would, in coordination with CEPI, establish and execute a basic management training program for local entrepreneurs. An IDA allocation of US$100,000 would finance the salary and expenses for twelve months of one full-time foreign advisor to IPGP to develop a detailed course plan for the program and to supervise its initial execution. An addition US$50,000 will be allocated to finance necessary materials and equipment. The curriculum for this program has been developed by an expert under the IDA-financed Mali Education Project in cooperation with CEPI and the Chamber of Commerce. The courses, to be given part-time for 4-6 week periods, will be taught in local languages and will emphasize visual techniques and basic skills. The actual training will be provided and the program will be managed by the Malian staff of IPGP. After the initial startup period, the program will be financed through charges to participants. Participants will be referred to the program by CEPI and the Banks. 3.19 Extension Service for Artisans and Small Entrepreneurs - US$850,000. A technical extension service would be established to offer practical skill assistance in the field to Mali's artisans and small entrepreneurs. The initial staff of the service would be a corps of foreign master artisans representing several major technical trades, including woodworking, metalwork/ blacksmithing, light building trades and machine maintenance and repair, who would train local counterparts to carry on this function. Under this project, US$700,000 would be provided for the salaries and expenses of a minimum of seven full-time man-years of such assistance over a two and one half year period. Local costs would be included in this financing. A detailed terms of reference for this program is included in Annex 9. The extension service would help to organize artisan and entrepreneur associations, to improve the technical and business skills of the members of these associations, to develop common services programs (e.g. raw materials supply) and appropriate technologies for these groups and to assist them in preparing credit requests to local financial institutions. As there are few precedents for this type of service in the non-rural sector, this program must be considered a pilot, experimental effort and approached with appropriate flexibility. The long-term objective of this assistance would be the establishment of a permanent and relatively autonomous entrepreneur- and artisan-based network of associations for apprenticeship credit and common services autonomous of existing official institutions. However, for this project, the service would report to the Director of CEPI and his Temporary Committee for Artisan Promotion. Therefore, training of local artisans to eventually assume extension service responsibili- ties is a crucial element of this component.  3.20 Fund for Export Craft Development. Under this project, US$50,000 would be allocated to CEPI for a Fund to promote and develop Malian Craft exports. A matching sum, from UNDP, would be allocated by CEPI to the Fund. The Fund would finance studies and pilot projects to improve local crafts production and expand export markets. Projects and studies costing more than US$10,000 each would require prior approval of the Associatior. 3.21 Qualified counterparts for all advisors will be appointed within three months of the recruitment of the advisors. The Government will be responsible for the maintenance, operation and replacement of all equipment provided. Pilot Rehabilitation Project in State Sector 3.22 An IDA credit of US$2.375 million for the rehabilitation and expansion program for ULB, including technical assistance, is included in the project. Retroactive financing as of March 1, 1979 for US$200,000 for emergency replacement of key equipment (see para 2.50) is included in the above financing. 3.23 Investment Program. The total cost of the proposed investment program, including material, price and foreign exchange contingencies, is MF 1.2 billion, or US$2.8 million equivalent (including taxes, of MF 165 million), of which US$2.2 million represents fixed investment and US$600,000 is permanent working capital. This program would increase ULB's production capacity from 10,000 liters/day to 50,000 liters/day (13 million liters per year) in 1985. Installation of the new plant would be completed by 1982; production with the expanded installed capacity would increase gradually from 1982 to 1985. The fixed investment cost would finance a new factory building, production and auxiliary equipment, an expanded laboratory, an equipment maintenance workshop, furnishing, fixtures and vehicles, as detailed in the investment program and equipment list in Annex 6. Cost estimates are based on preliminary quotations obtained by consultants. Working capital requirements would cover six months' stock of imported inputs, three months' stock of spare parts, 1.5 days of finished goods inventory, 1.5 days' stock of work in progress, 2.5 days of packaging materials, one month of receivables and cash equal to one months' personnel expenditures. With the proposed factory and collection system, ULB could process up to 4,000/liters per day of raw milk if available, representing 8% of its expanded output. Alternatively, powdered milk could supply the entire plant if necessary. 3.24 IDA Financing - US$2.1 million - The IDA financing would cover 100% of the fixed investment costs of the program, up to US$2.1 million, net of taxes and including both local and foreign costs. The IDA financing would cover 75% of the total program; ULB would finance 7.5% of the total program, or US$215,000 equivalent, from cash generated from operations, and 7.5% with a term loan from its bank, BDM. The remaining 10% would be provided by the Government as an equity contribution to ULB. A detailed financing plan and financial and operational forecasts are included in Annex 5.  - 29 - 3.25 Economic and Financial Benefits. The calculation of financial and economic rates of return over a fifteen-year horizon (1979-1994) is described in Annex 7. As ULB could not continue operations without the new investment, total benefits obtained after considering the residual value of existing equipment, were assumed to accrue to the new investment. Present net worth was assumed to represent the value of existing assets transferred to the new investment. Investment code benefits would exonerate ULB from income taxes from 1981-1985 (normal benefits for this type of investment). 1985 production levels would be maintained thereafter. New machinery would not need to be replaced (except for spare parts) during the period but vehicles would be replaced every three years. The residual value of ULB's assets was assumed equal to their book value at the end of the period. Of these assumptions, the proposed investment in ULB yielded an internal financial rate of return of 33.5%. The economic rate of return would be equal to or higher than the financial rate of return since all of ULB's inputs are in fact purchased at world market prices (except for raw milk which is above world prices) and, given the high unemployment rate in Mali, the shadow price for unskilled labor should be substantially below its financial cost. In the absence of an international price for liquified milk, a border price cannot be calculated for MLB's final products. A shadow price based on available alternatives and willingness to pay would be the present, scarcity price for raw milk products, use of which would grossly inflate the estimate economic benefit for this project. 3.26 The company's debt/equity ratio never exceeds 1.5:1 during the forecast period; debt service coverage is acceptable throughout, as is liquidity. Profitability is good and increasing. Net profit represents 9.1% of sales in 1979 and 0.3% in 1980 (the beginning of the installation period), rising to 5.0% in 1981, increasing steadily thereafter. Return on assets and equity is satisfactory. The company's financial position would remain sound. 3.27 Technical Assistance - US$275,000. The Association will also finance up to 15 months of consultant assistance to ULB for the implementation of this program and 5 man-months of technical assistance by I.P.G.P., up to an amount of US$250,000, including contingencies. The consultants will provide 5 months assistance in investment preparation (preparation of spe- cifications, review of tenders and bids) and equipment installation, five months assistance in dairy management and four months assistance in staff development. The I.P.G.P. assistance will focus on improvement of internal management practices. US$25,000 is also provided to finance training programs for ULB staff. 3.28 Terms and Conditions. The IDA funds for this investment would be on-lent through the Central Bank and banking system on the same terms as the line of credit for private enterprise, including the 12% final lending rate plus commitment fee. The loan would have a term of twelve years includ- ing four years of grace. The Government will assume the exchange risk. ULB will be given normal investment code benefits for its new investment program. ULB will agree to undergo an annual independent audit of its accounts by qualified auditors acceptable to IDA.  - 30 - Project Monitoring 3.29 IJith the oversight of the Project Coordination Unit, all project institutions will be required to submit regular semi-annual operational and financial reports. The Central Bank would report periodically on all oper- ations undeL the line of credit. CEPI would submit detailed financial, organizational and operational data, focussing on its promotion, technical assistance and training services as well as details on the operations of the guarantee and equity funds. CEPI would also be responsible for regular reports on the Crafts Development Fund. I.P.G.P. would submit regular oper- ational reports on its training programs and finances. ULB and its IDA- financed consultants would submit periodic progress reports on the investment program in addition to ULB's financial statements. The Association would also receive copies of all independent audit reports. IV. PROJECT COSTS AND BENEFITS Project Costs and Financing 4.01 Total project costs are estimated to be US$11.1 million, includ- ing US$500,000 in taxes. The foreign exchange component would be US$6.4 million, or 60% of net project costs. Project costs and the proposed financing plan are summarized in Tables 3 and 3a. The Bank Group's share in project financing would be US$8.0 million or 76% of net project costs, covering US$6.3 million of the foreign cost component as well as US$1.7 million towards local costs. The Bank Group's contribution covers all foreign exchange costs of th eproject except for the foreign exchange component of ULB's working capital requirements for the rehabilitation project. These funds, totalling US$185,000, would be provided as needed over time by ULB's self-generated funds. IDA's contribution to local costs is composed as follows: (US$'000) Credits to Small and Artisan Enterprises 240 ULB equipment and Construction 910 ULB technical assistance 80 Institution Building Program of which: 435 Export Craft Fund (20) Management Training (40) Extension Service (160) CEPI (90) Assistance to Banking System (25) Project Coordinator 30 PPF Reimbursement 40 1,735  - 31 - MALI Table 3: Project Costs MF Millions US$ Thousands Taxes Local Foreign Total Taxes Local Foreign Total Line of Credit Small-Scale & Artisans 26 155 435 615 60 355 985 1,400 Medium-Scale Projects 70 320 1,000 1,390 160 725 2,275 3,160 96 475 1,435 2,005 220/1 1,080 3,260 4,560 Credit ULB Construction 17 216 92 325 40 490 210 740 Equipment 25 184 432 642 60 420 980 1,460 Working Capital 30 154 81 265 65 350 185 600 72 554 605 1,232 165/1 1,260 1,375 2,800 Supplies, Equipment, Vehicles Coordinator 2 2 9 13 5 5 20 30 Management Training 2 9 13 24