Mauritania - Industrial and Artisan Development Project

Document of The World Bank FOR OMCIAL USE ONLY C 6? /5kW -4S Repoit No. 5359-MAU STAFF APPRAISAL REPORT MAU RITANIA INDUSTRIAL AND ARTISAN DEVELOPMENT PROJECT March 1, 1985 Western Africa Projects Department Industrial Development and Finance Division This documnwt has a restricted distribution and may be used by recipients only in the performnce of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Mauritanian Ouguiya (UM) US$1 = UK 80 UMi = US$0.0125 US$1 = SDRs 1.0256 SDR 1 = US$0.9749 MEASURES 1m2 = 10.76 sq ft lkm 0.62 mile Ikm2 = 0.38 sq. miles ABBREVIATIONS AND ACRONYMS BCM - Central Bank of Mauritania ("Banque Centrale de Yauritanie") BMDC - Mauritanian Bank for Development and Commerce ("Banque Mauritanienne pour le D6veloppement et le Commerce") CEPI - Center for Studies and Industrial Promotion("Centre d'Etudes et de Promotion Industrielle") CIFPE - International Center for Training in Banking ("Centre Internatioral de Formation a la Profession Bancaire") CFPP - Training and Professional Improvement Center ("Centre de Formation et de Perfectionnement Professionels") CGEI4 - Confederation of Mauritanian Employers ("Confederation G6n6rale des Employeurs Mauritaniens") CNI - National Investment Commission ("Commission Kationale des Investisserents") FND - National Development Fund ("Fonds National de DEveloppement") MIE - Mauritanian Companv for Industry and Equipment ("Mauritanienne des Industries et Equipements") 0T1r - Mauritanian Carpet Bureau ("Office du Tapis Mauritanien") SOGOGIM - Company for Apartment Building Construction and M1anagement ("Societe de Construction et de Gestion Immobiliere") STB - Tunisian Banking Company ("Socift6 Tunisienne de Banque") UMOA - West Afri can Monetary U'nion ("Union Monetaire Ouest Africainet') FISCAL YFAR Jaruary 1 - December 31  FOR OMCIAL USE ONLY MAURITANIA INDUSTRIAL AND ARTISAN DEVELOPMENT PROJECT TABLE OF CONTENTS Page DOCUMENTS CONTAINED IN PROJECT FILE ......................... CREDIT ANlD PROJECT SUMHKARY .......................... ii-iv I. BACKGROUND ............ ............................... 1 II. THE ENVIRONMENT ......... ............................. 1 A. The Economy ............................ 1 B. The Industrial Sector ...... ...................... 2 C. The Artisanal Sector .................. 5 D. The Financial Sector .................. 6 II-. ThE PROJECT ...................,.-.-...... 8 A. The Previous Project . . 8 B. The Project Institutions . . 9 1. BMDC .. 9 2. OTK .......................................... 13 3. CFPP ............................. 15 C. Project Description and Objectives ...15 D. Project Costs and Financing ................... ... 18 E. Project Implementation ...... .................... 18 F. Benefits and Risks ....... ........................ 19 IV. AGREEMENTS REACHED AND RECOMMENDATION .... ............ 20 This report is based on the findings of an appraisal mission that visited Mauritania from February 24 to March 14, 1984. The mission members were Messrs. C. Azi (mission leader), U. M'Banefo (senior financial analyst), M. Wormser (operations officer) and M. Babron (consultant/banker). Miss Lily Tsang assisted with the preparation of the report. This document has a restriced distnbution and may be used by recipients only in the performance of thea official duties Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) ANNEXES 2-1 Gross Domestic Product by Sector of Origin (1979-1983) 2-2 Distribution of Manufacturing Enterprises, Employment and Investment by A.;ivity as of end 1983 2-3 Central Bank Regulations on Rediscountable Credit and Interest Rates 2-4 Distribution of Credit to the Economy by Sector 3-1 BMDC's IDA-financed Subprojects - Summary Data 3-2 B1DC's Organization and Policies 3-3 BMDC's Income Statements and Balance Sheets (1979 - 1983) 3-4 B21DC's Arrears as of end 1983 (Amount and Age) 3-5 BMDC's Action Program for the 1985 - 1989 period 3-6 BMDC's Financial Projections (1985 - 1989) 3-7 Distribution of Subprojects in BMDC's Pipeline by Sector 3-8 OTM's Balance Sheet as of December 31, 1983 3-9 OT!'s Projected Income Statements (1985 - 1989) 3-10 Project Costs and Financing 3-11 Project Implementation Schedule 3-12 Projected Quarterly Disbursements of IDA Credit MAP IBRD No. 18714: Mauritania  MAURITANIA INDUSTRIAL AND ARTISAN DEVELOPMENT PROJECT DOCUMENTS CONTAINED IN THE PROJECT FILE File Code Doc. No. A. General A.1 Plan de dtveloppement 1981-1985, 32702 Mauritania-130 Ministry of Plan, December 1981 A.2 Agregats de comptabilite nationale et 221-827 (A2) indicateurs &conomiques, Central Bank, 1982 A.3 Rapports annuels, Central Bank, Mauritania-174, 1980 through 1983 1980-83 A.4 Bulletin triimestriel de statistiques, Mauritania-174, 1984 Central Bank, March 1984 A.5 Rapport pr4liminaire d'activite au 221-827 (A5) 31 decembre, 1983, Ministry of Industry A.6 Enquete industrielle, Ministry of 221-827 (A6) Industry, December 1981 A.7 Rapport sur l'Artisanat, National 221-827 (A7) Development Fund, 1982 A.8 Mauritania Accounting and Auditing WA-LEAP Studies - Profile, World Bank, 1982 Accounting Procedures, April 9, 1982 B. Documents relating to the project B.1 BMDC. By-laws, policy statement, BMDC - Yearly procedures, training program Audit Report 1985 - 1989, annual reports and audited BMDC - Yearly accounts, pipeline of projects, Report progress reports 221-827 (BI) B.2 OTM. Financial statements, audited 221-827 (B2) accounts 1980, Proposition de redressement et de d6veloppement(1982 -1987), progress reports. B.3 CFPP. Courses scheduled for 1984, 221-827 (B3) description and contents of the proposed training or 25 accountants.  - ii - MAURITANIA INDUSTRIAL AND ARTISAN DEVELOPMENT PROJECT CREDIT AND PROJECT SUMMARY Borrower: Government of the Islamic Republic of Mauritania Beneficiary Agencies: Mauritanian Bank for Development and Commerce (BMDC) Mauritanian Carpet Bureau (0TM), and Training and Professional Improvement Center (CFPP) Ministry of Industry Amount: SDR 5.4 million (US$5.25 million) Terms: Standard Onlending Terms: 1. US$3.8 million of the credit would be relent by the Government to BMDC for 20 years, including 5 years of grace, at 7% interest per annum. The standard IDA commitment fee of 0.5X would apply to BMIC. BMDC would onlend to final borrowers at an interest rate of 11% per annum. The Government would bear the foreign exchange risk against a 1% per annum fee paid by the final borrowers in addition to the interest rate. 2. Of the balance of US$1.45 million, US$1.2 million would be passed on by the Government as grants to (i) BMDC (US$430,000) for financing technical assistance and training; (ii) 0TM (US$460,000) for support to artisan carpet weavers; (iii) CFPP (US$310,000) for accounting training. The remaining US$250,000 would be used by the Ministry of Industry to finance an industrial sector review. Project Description: The project would comprise five components: (a) A line of credit to finance private small and medium enterprises through BMDC. (b) Technical assistance to further strengtben BMDC's institutional capacity.  - iii - (c) Assistance to OTM to train and equip 300 additional artisan carpet weavers and to provide them with technical advice and marketing assistance. (d) Assistance to CFPP to train accountants working for the corporate sector. (e) Assistance to the Ministry of Industry to carry out a review of the industrial sector relating to both policy and institutional issues. Benefits and Risks: The benefits of the project would be (i) at the enterprise level to help create or expand about 20 small- and medium-scale enterprises which would employ about 750 additional workers and to create about 50 carpet weaving workshops for 300 additional artisans; and (ii) at the institutional level to further strengthen BMDC as a financial intermediary for industrial financing and to build up OTM's capability to develop and support artisan carpet weaving as well as to improve the accounting standards of the corporate sector. In addition, the project would assist the Government in carrying out a review of the policies and institutional set-up affecting the industrial sector. The main risk arising from the organizational weakness of some project institutions (e.g. OTN, CFPP), would be minimized by technical assistance included in the project and by regular IDA supervision. Project Cost Local Foreign Total uS$ OOO0s --- -- Line of Credit 1,900 7,600 9,500 Technical Assistance and Training to BMDC 210 320 530 Technical Assistance, Training and Equipment to OTM 145 315 460 Training of Accountants 172 268 440 Assistance to the Ministry of Industry - 250 250 Total 22_427 84723 11A180 Financing Plan IDA 297 4,953 5,250 FND 3,400 3,400 Subproject sponsors 1,900 400 2,300 BHDC 100 - 100 CFPP 130 - 130 Total 2_427 8.753 11.180  -iv - Estimated Disbursements FY86 FY87 FY88 FY89 FY90 FY91 ~~~--us 000 8 -- M---- Annual 1,240 1,400 1,400 610 400 200 Cumulative 1,240 2,640 4,040 4,650 5,050 5,250 Economic Rate of Return: NA Map: IBRD 18714  MAURITANIA INDUSTRIAL AND ARTISAN DEVELOPME'ttT PROJECT STAFF APPRAISAL REPORT I. BACKGROUND 1.01 The Government of the Islamic Republic of Mauritania has requested IDA's assistance to finance a small enterprise and artisan development project in continuation of the support provided by the previous "Urban and Rural Development Project" (Credit 888-MAU, signed in April 1979). The proposed IDA credit of US$5.25 million would follow-up on the previous project by providing (i) a line of credit for financing private small and medium enterprises through the Mauritanian Bank for Development and Commerce ("Banque Mauritanienne pour le Developpement et le Commerce" - BMDC); (ii) technical assistance to further strengthen BNDC's institutional capabilities; and (iii) assistance to the Mauritanian Carpet Bureau ("Office du Tapis Mauritanien" - OTM) to train and equip additional artisan carpet weavers. In addition, the project will finance a pilot accounting training program to help meet a specific need felt by both the corporate and public sectors in Mauritania. Finally, the project will assist the Government in carrying out a study on the policies and the institutional set-up affecting the industrial sector. II. THE ENVIRONMENT A. The Economy. 2.01 Mauritania's 1.6 million people inhabit an area of 1.2 million square kilometers (more than twice the size of France), of which only one quarter, in the Senegal River Basin, is suitable for crops or grazing while the remainder is desert. About one-third of the population lives in towns. Despite a relatively high GNP per capita (US$460 in 1983), most key social indicators point to a low quality of life. Life expectancy at birth is estimated at 45 years, infant mortality at 132 per 1,000, and less than 20% of the population is literate in either Arabic or French. 2.02 The Mauritanian economy has traditionally depended mainly on agriculture and mining. The rate of growth, which had averaged 8% per annum in the 1960s, fell sharply in the 1970s because of severe and repeated droughts and reduced world demand for iron ore, compounded by the costly Western Sahara war (1976 - 1979). Mauritania's withdrawal from the Saharan conflict (mid 1979) and good weather which led to a sharp rise in cereal crops and in numbers of livestock enabled GDP at factor cost to grow in real terms at 3.9% per annum during the period 1979 - 1981 (Annex 2-1). In 1982, however, as a result of a protracted  -2- and intense drought combined with a steady decline of iron ore exports and prices, GDP declined in real terms by 3.7% and although it rose in 1983 by 5.4% is expected to stagnate in 1984. Mauritania, whose external disbursed debt reached about 60% of GDP in 1983, is therefore facing a difficult economic and financial situation marked by balance of payments deficits and exceptional dependence on foreign aid. 2.03 Mauritania's long-term development strategy is therefore to exploit its renewable sources of growth particularly irrigated agriculture, fishing and livestock and to maximize employment opportunities for its rapidly growing urban population through the development of light industry and artisanal activities. The first IDA project took an important step in this direction by helping to create new small industrial enterprises and develop artisanal carpet weaving, and the proposed second IDA project would build upon the results achieved in these areas. B. The Industrial Sector 1. Structure 2.04 The industrial sector (artisanal activities excluded), whose share of the country's GDP in real terms was 20.8% in 1983, is dominated by mining operacions. In 1983, the mainly government-owned National Company for Mining Industries which produces iron ore employed 34% of the industrial sector's labor force of about 18,000 and contributed to 50% of its output (Annex 2-1). The same year, the construction industry, consisting of one government- owned company and 31 private enterprises, mostly small, whose total fixed assets amounted to about UM 290 million, accounted for 27% of output and 54% of employment in the industrial sector. 2.05 Manufacturing is still embryonic. Although the sector received 35% of investment in the industrial sector in 1983, its 30 enterprises accounted for only 12% of its labor force and for 23% of its output. Of the 30 manufacturing enterprises in operation that year, two - a sugar refinery and a steel mill - were government-owned. Six of the 28 private firms received financing under the first IDA line of credit to BMDC (Cr. 888-MAU). The production of food and beverages, household chemicals (insecticid-s, cosmetics, detergents) and construction materials accounted for about 80% of total private investment and 83% of the employment that it generated (Annex 2-2). 2. Performance 2.06 Mining output which has declined from 1980 to 1983 before returning in 1984 to the 1980 level is not expected to increase significantly in the next several years. The manufacturing sector is in its infancy and handicapped by several factors, in particular, the  -3- inadequacy of infrastructure and human skills. Available information would indicate a low capacity utilization of below 50Z in 1983. However, some improvement in these respects is in sight. In the Nouakchott area a new port is pr2sently under construction; a new power plant is expected to start operations in 1988 and the rehabilitation of power and water utilities, to be financed under the IDA Public Enterprises Rehabilitation Project, is expected to increase the water supply by about 5OZ by 1987. Since the late 1970's, the government's Training and Professional Improvement Center ("Centre de Formation et de Perfectionnement Professionel" - CFPP) has been providing training to public and private sector employees, especially in accounting (paras 3.20 and 3.2l', but it does not have the means to address the overall needs of the country and of the industrial sector in particular. Furthermore, in the spec;fic area of accounting, the ILO assistance to CFPP, financed by the IDA Second Education project (Cr. 1214-HAU), was phased out in March 1983. In order to support Government's efforts to improve the management of existing enterprises, the training of accountants already employed In private and public enterprises will be financed under the proposed project (para 3.26). 3. Industrial Policy 2.07 The growth of industrial activities (mining excluded) on which the Government largely relies to diversify the economy is constrained by the limited resource base of the country and by the small domestic market which is fragmented over a vast territory. However there is potential for further development, in particular, for the pgvduction of goods whose high transport costs favor the domestic producer (e.g. building materials), or which provide inputs to, or process outputs, of fishing and agriculture. In addition, the influx of refugees into the towns has provided a source of labor which, with some encouragement and training, could be used in light industry. The Government's policy for the industrial sector, outlined in the 1981 - 1985 Fourth Development Plan, therefore emphasizes the promotion of small- and medium-scale industrial enterprises. Recognizing, however, the need to reform its own enterprises first, the Government is confining its role to the rehabilitation of public enterprises, leaving the development of light industry to private initiative. 4. Policy Instruments and Promotional Institutions 2.08 Investment Code. Although the 1979 version of the Investment Code was improved on IDA's recommendations during the first project, it is still biased in favor of large-scale investment. Only investments over UM 10 million (or about US$125,000) are eligible for such benefits as exemption from import duties and income tax and other advantages. The Government has accordingly agreed to IDA's suggestion that the UM '0 million minimum be abolished, a step that would reduce the bias against small industrial investments and instead, encourage them. This measure has been approved by the Council of Ministers and its enactment  - 4 - by the Mil-2tary Council will be a condition of effectiveness of the proposed project. 2.09 Protection and Pricing. Mauritania which belongs to the West African Economic Community and to the Economic Community of West African States, cannot, according to the rules of these institutions restrict imports from fellow member countries. Neither does it officially limit imports from other countries. However, besides a high tariff protection which ranges between 56% and 104% for industrial products, the Government has since 1982 discouraged imports which could threaten existing industries by not granting relevant requests for import licences. With respect to pricing, the Government administers a system of controls which allows free marketing of a few luxury products, sets specified margins over costs for other products, and sets the prices of about 30 primary products. 2.10 The Government has agreed to IDA's view, shared also by a UNIDO-financed studv of the industrial secto! completed in October 1984, that excessive protection coupled with price control may further increase price distortions and misallocation of resources besides weakening the efficiency of existing enterprises. In order to help the Government remedy this situation, the proposed project would finance cechnical assistance to the Ministry of Industry which would carry out an industrial sector review with a view to establishing an adequate industrial data base, and identifying the necessary changes in the incentives system (para 3.28). 2.11 Promotional Institutions. Two institutions and two commissions have responsibilities in connection with industrial development. The Center for Studies and Industrial Promotion ("Centre d'Etudes et de Promotion Industrielle"- CEPI), within the Ministry of Industry, is intended to provide assistance to new entrepreneurs at all stages of the project cycle, to carry out feasibility studies, appraise new projects, and process applications for benefits under the Investment Code. A private institution, the Confederation of Mauritanian Employers ("Confederation Generale des Employeurs" - CGEM) assists new private investors. The aim of the National Commission for Industry chaired by the Minister of Industry, is to improve the environment for industries and thus to encourage industrial development. The National Investment Commission ("Commission Nationale des Investissements" - CNI), chaired by the Mininster of Plan, meets periodically to decide whether projects presented by new investors, are eligible for benefits under the Investment Code. 2.12 Although on IDA's recommendation the role of CEPI and of the CNI has been redefined in order to shorten the review of projects seeking the benefits of the Investment Code, this process is still cumbersome. In addition, the promotional institutions have so far achieved verv little in promoting industrial development because of the scarcity of suitably qualified administrative and technical staff, and  -5- more importantly, the lack of a clear definition of their roles that would avoid duplication and make the best use of the available staff. At the Government's request, the assistance noted in para 2.10 would also help (i) design an adequate institutional set up for industrial promotion, define the respective roles of CEPI, CGEM, CNI and of the two development banks (para 2.18) and propose institutional cooperation arrangements between them; (ii) formulate an action plan for the reorganization of CEPI including a possible participation of private entrepreneurs in CEPI's ownership and management and define its needs for technical assistance and training; and (iii) standardize project appraisal procedures for all institutions involved in industrial promotion. Draft terms of reference of this technical assistance have been agreed upon. The recommendations resulting from the technical assistance studies would be reviewed by IDA with a view of making appropriate suggestions. C. The Artisanal Sector 1. Background 2.13 According to Government estimates about 49,000 artisans are engaged in the production of ordinary consumer goods and art objects. The number of male artisans has remained constant for many years. In the meantime, increasing numbers of women have entered this field of production, and there are now about 33,000 women art-sans. Although artisans form between 8 and 10% of the working population, their contribution is estimated to be only about 0.2% of GDP and about 2X of industrial activity, other than mining (Annex 2-1). 2. Government Policies and Institutions 2.14 In 1967, the Government took the first step towards expanding the artisanal sector by creating "precooperatives". It envisaged to supply them with raw materials and assist them in the organization and in the marketing of their production, to enable them to become independent cooperatives. Since then, all development plans have included financial support for artisans. The fourth development plan (1981 - 1985) earmarks about US$8 million for creating an artisan village in each of the 12 Mauritanian administrative regions to help artisans market their products. 2.15 Three institutions have been set up to administer this government assistance. Within the Ministry of Industry, the Artisan Promotion Department helps to staff the 33 "precooperatives" that it has created since 1967. OTM, also under the Ministry of Industry, promotes hand knotted carpet productiou with financial and technical assistance, provided under the first IDA project, to improve the quality and quantity of carpet production and to train weavers (paras 3.15 through 3.19). Within the Ministry of Health and Social Affairs, the Department  -6- of Social Affairs has created about 31 women's cooperatives engaged in weaving, embroidery and dressmaking. 3. Achievements and Prospects 2.16 The development of artisan activities in Mauritania is favored by the pool of cheap refugee labor and by a long tradition of handicrafts. Nevertheless, although the Government has repeatedly stated its objective of developing this sector, artisans have received very little help. To date, none of the "precooperatives" has become an independent cooperative and only one of the 12 artisan villages envisaged under the fourth development plan has been created in Nouakchott. In any event these artisan villages no longer appear warranted because of the low level of artisanal production. The promotional institutions are inadequately staffed and have received very little of the funds earmarked for them in the development plans. The development of the sector requires financial resources and skilled personnel beyond Mauritania's present capacity. With the exception of the carpet weaving activity, the prospects for the expansion of the sector appear therefore limited. C. The Financial Sector 1. Institutional Setting 2.17 In mid-1973, Mauritania withdrew from the West African Monetary Union ("Union Monetaire Ouest Africaine" - UMOA), created a Central Bank ("Banque Centrale de Mauritanie" - BCM) and introduced a new currency, the Ouguiya (UM). Besides BCK and the Government Post Office System ("Compte Cheques Postaux") there are five co ercial banks. All the banks are jointly owned by the Government and foreign shareholders. In all of them the Government holds, either directly or through the Central Bank, a majority interest except for the Arab-Lybian Bank of Mauritania in which it owns only 49% of the share capital. 2.18 Development Banking. Of the five commercial banks, only BM1DC (para 3.04 to 3.14) has an important development banking role. In this field it works closely with the fully government-owned National Development Fund ("Fonds National de Developpement" - FND,) established in 1980 to finance projects in the agriculture and fishing sectors Which received little help from commercial banks. However, FND became also engaged in industrial financing. In order to avoid duplication in this field, F1D and BMDC acting upon IDA's recommendation, concluded an institutional cooperation agreement effective since .August 1984, by which they will cofinance all industrial projects, with BMDC asssuming the lead role for projects costing less than UM 60 million (or about US$750,000), and FND for projects above this limit.  -7- 2. Banking Policies and Interest Rates 2.19 BC! is the Government's instrument for enforcing banking policies. To this end, BCM (i) reviews all credit applications over UK 2 million for local resources to be financed by the Nauritanian banks; (ii) sets a ceiling each year on short- and medium-term rediscountable facilities available to each individual bank; (iii) regulates the terms and conditions of all bank credits to be financed by local resources; and (iv) sets financial ratios that the banks must observe. BCM's detailed regulations are described in Annex 2-3. 2.20 BCM does not rediscount credits whose terms exceed 8 years. Lending rates to final borrowers range from 6% to 13% for rediscountable credits and 10% to 15% for non-rediscountable credits, the lower rates applying in both cases to agriculture and livestock. While interest rates charged on nona rediscountable credit are quite adequate, those charged on rediscountable credits (to the productive sectors) are low compared to the international markets and to the annual inflation rate expected to run at about 10% in the next five years. BCM's rediscount rate is 4.5% for credits to agriculture and livestock and 6.5% for loans to all other sectors. The spread allowed to the banks on rediscounted credit is higher on short-term (1.5% to 3.5%) than on medium-term credit (1% to 3%), which may constitute a disincentive for term lending. BCM also regulates interests paid to deposits. These range from 5 to 9% according to their amount and term. The structure of interest rates is such, however, that for the same amount term deposits are paid at most 0.5% more than short term (up to one year) deposits. As part of the conditions of the second IMF stand-by arrangement, expected to be effective later in 1985, the Government has agreed to raise in March 1985 all interests rates by 2%. In addition, BCM will undertake a review of the level and structure of interest rates to be completed by June 1985. 3. Issues 2.21 The banking system is unable to mobilize adequate local resources to finance the growth of credit to the economy. Although during the 1979-1983 period total deposits received by the banks grew at about 20% per annum from UM 3.3 billion to about UM 7 billion, they represented only 50% of total lending in 1983. Because of continued restrictive credit policies aiming at reducing credit for imported consumer goods and improving the country's balance of payments, the share of BCM financing in total credit decreased from 21% in 1979 to 16% in 1983. In the meantime, the banking system borrowed heavily abroad in order to sustain the growth of its lending (Annex 2-4), thereby aggravating the country's foreign reserve situation. Moreover, the banking system lacks adequate term resources for development financing. Although the interest rates charged on non rediscountable term credits are not low in relation to foreign credits, the country's high indebtedness discourages potential foreign term lenders. The structure of interest paid to deposits does not encourage term deposits relative  -8- to demand deposits. Still another problem - not uncommon in developing countries - is that the Mauritanian banks have to contend with very high portfolio arrears resulting from the economic slowdown which started in 1982 as well as from their own weak wanazement and iniadequate experience. 2.22 In recognition of these shortcomings, the Government has commissioned a review of the banking system by the French International Center for Training in Banking ("Centre International de Formation a la Formation Bancaire" - CIFPB) which would include (i) an audit of all the banks; (ii) measures for increasing their operational efficiency and for improving their financial condition; (iii) measures for increasing the mobilization of local and especially term resources; and (iv) the conditions of the establishment of a financial market within which, with the exception of a prime rate determined by BCH, the commercial banks would be free to determine their lending rates. The IMF is attempting to accelerate this banking sector study in connection with its forthcoming standby arrangement with the country. In coordination with the IMF, IDA will review upon their completion BCM's study of interest rates mentioned above as well as the study of the banking system with a view to making appropriate policy inputs. III. THE PROJECT 3.01 The proposed project, to be financed by an IDA credit of US$5.25 million, would comprise five components (i) a line of credit to BI4DC for financing economically and financially viable private small- and medium-scale enterprises (US$3.8 million); (ii) technical assistance to further strengthen BMDC's procedures, organization and staff training (US$430,000); (iii) assistance to OTM to provide technical and marketing guidance to carpet weavers trained under the first project in Nouakchott and to train 300 additional carpet weavers (outside Nouakchott) and help them start commercial production (US$460,000); (iv) assistance to CFPP to train 25 accountants employed by private and public enterprises (US$310,000); and (v) technical assistance to the Ministry of Industry to carry out a study aimed at improving industrial sector policies and promotional institutions (US$250,000). The project would build on the results, described in the following paragraphs, of the previous project. A. The Previous Project. 3.02 The first industrial and artisanal operation (under Credit 888-MAU, of US$8 million of 1979) which will be completed in December 1985 consists of (i) a line of credit of US$2.55 million to BMDC to finance small- and medium-scale industry; (ii) technical assistance to BMDC (US$620,000); (iii) technical and financial assistance to help OM train about 400 artisan carpet weavers, supply  -9- them with looms and raw materials and establish extension services to support their commercial activity (US$1.66 million); and (iv) feasibility studies for an industrial estate in Nouakchott and the artisanal manufacturing of bricks made of gypsum (US$70,000). 3.03 Except for the OTH component (paras 3.16 and 3.17), the first industrial and artisanal operation was satisfactorily implemented. The line of credit to BMDC (which was increased in September 1984 from US$2.1 million to US$2.55 million) is fully committed and 95% disbursed as of February 1985. It has financed 9 subprojects creating about 260 new jobs (summary data on these subprojects in Annex 3-1). The technical assistance to BMDC helped build-up the appraisal capability of its Development Department and improve its data processing. Under the OTM component, it was originally envisaged that 400 carpet weavers should have completed their training and started commercial production by June 1985, but so far only slightly more than one half have done so. The two feasibility studies were carried out satisfactorily. Although the conclusions of the study concerning the establishment of an industrial estate in Nouakchott were positive, the implementation of such an estate should await the availability of adequate supply of water and energy to this city, expected by 1987-1988. Following the study on artisanal manufacturing gypsum bricks, the construction of buildings using this material has started on an experimental basis. However, this experiment has not yet confirmed the viability of the process. B. The Project Institutions 1. The Mauritanian Bank for Development and Commerce - BMDC 3.04 Background. BMDC, originally named Mauritanian Development Bank ("Banque Mauritanienne de Developpement") was established in 1961 as a development bank by the Government of Mauritania and the French Central Fund for Economic Cooperation ("Caisse Centrale de Cooperation Economique" - CCCE). In 1974 it was authorized to conduct the full range of banking activities, was renamed the Mauritanian Bank for Development and Commerce and received management assistance from the Tunisian Banking Company ("Societe Tunisienne de Banque" - STB) which bought the shares previously owned by CCCE. BMDC's share capital of UM 80 million is owned by the Government (76%), STB (20%) and BCM (42). An analysis of BNDC's organization and policies is given in Annex 3-2. 3.05 Operations. The financial statements provided in Annex 3-3 for the 1979 - 1983 period, show that the expansion of BMDC's operations more than doubled its assets. In addition, BMDC, which incurred losses until 1979 has been profitable since 1980. BMDC's outstanding portfolio increased from UM 1.12 billion to UK 1.97 billion at an average annual rate of 15%. Short-term lending and term lending rose by about 18% and 10% respectively per year. Between 1980 and 1983 term lending to the industrial sector grew steadily at an average rate of 26% per annum,  - 10 - while credits for housing construction, public utilities and agriculture decreased. Within this sector, as of September 1984, BMDC had financed 17 enterprises (including 9 under the first IDA Credit) and held equity investments amounting to UK 23.5 million in two enterprises. 3.06 Portfolio Arrears. BMDC's arrears as of end 1982 and 1983 are given below: Evolution of BMDC's Arrears between 1982 and 1983 (in Ul[ million) December 31, 1982 December 31, 1983 A. Outstanding portfolio short-term 1,298 1,51' medium/long-term 417 572 total 1,715 2,OE4 B. Portfolio affected by arrears short-term 698 487 medium/long-term 387 461 total 1,085 948 as Z of outstanding portfolio 63 45 C. Arrears short-term 698 487 medium/long-term 215 239 total 913 726 as % of outstanding portfolio 53 35 As a result of the economic slowdown and BMDC's inadequate procedures, but mainly because of the lack of a legal tribunal with specific jurisdiction over delinquent debtors, the quality of BMDC's portfolio declined until 1982. By the end of that year, its arrears were very high, amounting to UM 913 million or 53% of total outstanding portfolio. In 1983, BMDC took advantage of new measures enacted by the government on IDA's recommendation, including the creation of a special court to deal with delinquent debtors; it referred to that court delinquent loans amounting to UM353 million (or 39% of outstanding arrears). As of end 1983, BMDC had reduced its arrears to EM 726 million or 35% of total outstanding portfolio. Details on loans related to BMDC arrears and age of arrears as of end 1983 are given in Annex (3-4). 3.07 BMDC pursued its recovery efforts and, as of September 1984, reduced its arrears to US 637 million or 28% of total outstanding portfolio. BMDC expects to further reduce arrears on short-term loan portfolio and its overall arrears position will improve more significantly with expected  - 11 - collections of six delinquent term loans to industrial enterprises (none of which was financed by the first IDA credit). Two of these two loans were made with a government guarantee, to the Mauritanian Company for Industry and Equipment ("Mauritanienne des Industries et Equipements" - MIE), a privately-owned blanket factory in which BMDC also holds an equity investment, and to the Company for Apartment Building Construction and Management ("Societe de Construction et Gestion Immobiliere" - SOCOGIK), a government-owned company. Together these loans accounted in 1983 for UM 151 million of BMDC's arrears (for which no provision was made), and represented 20X of total arrears and of 63% arrears on the term loan portfolio. 3.08 Under the first IDA credit, the government had agreed to compensate BNDC for any loss on government-guaranteed loans, in particular those made to MIE and SOCOGIM, presently under reorganization, should these enterprises be unable to repay BMDC. During negotiations a reorganization plan and repayment schedule, both acceptable by IDA, have been presented for MIE. It was agreed that (i) the submission of a satisfactory reorganization plan and repayment schedule for SOCOGIM would be a condition of effectiveness; and (ii) the government would honor its guarantees if MIE or SOCOGIM were to respect their repayment schedule. 3.09 BMDC's Capital Structure. On the basis of BMDC's unaudited balance sheets, as at end 1983, although its term debt/equity ratio was still below the 4:1 limit set under the first IDA credit agreement, its total debt/equity ratio (not covenanted under the firsc IDA project) had reached 22:1. However, if the UM 98 million additional provisions for bad loans recommended by its auditors to reflect more accurately BMDC's portfolio risks were established, this would have reduced its net worth from UK 118 million to UM 20 million, bringing its term and total debt/ equity ratios respectively to 5.8:1 and to 129:1, the latter being excessively high by normal banking standards. In 1984, at IDA's urging, BNDC's board of directors agreed to increase its share capital by UK 200 million of which US 50 million would come from a cash subscription by BCM to BMDC's share capital and about UM 150 million from the conversion, (agreed on between IDA and the government in March 1984), of the first line of credit (US$2.55 million) into government equity. The equivalent of US$1.945 million (or about UM 120 million) disbursed by BMDC, as of end 1984, has already been converted into equity and the conversion will be completed by end 1985 following the full disbursement of this first line of credit. In parallel, BM