Document of J The World Bank FOR OFFICIAL USE ONLY Report No. 2719- BEN STAFF APPRAISAL REPORT BENIN INDUSTRIAL DEVELOPMENT PROJECT February 26, 1980 Industrial Development and Finance Division Western Africa Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT Currency Unit CFA Franc (CFAF) US$1 CFAF 210 CFAF 1 million = US$4,762 The CFA Franc is pegged to the French Franc at the fixed rate of CFAF1 FFO,02 and floats vis-a-vis the US dollar. FISCAL YEAR Government: January 1 - December 31 BBD October 1 - September 30 ABBREVIATIONS BBD Banque Beninoise pour le Developpement BCB Banque Commerciale de Benin BCEAO Banque Centrale des Etats de l'Afrique de l'Ouest CCCE Caisse Centrale de Cooperation Economique CCI Chambre de Commerce et d'Industrie du Benin CCP Comptes cheques postaux CNCA Caisse Nationale de Credit Agricole CNE Caisse Nationale d'Epargne CNPA Centre National de Promotion Artisanale CPPE Centre de Perfectionnement du Personnel d'Entreprise IBETEX Industrie Beninoise des Textiles IDA Association Internationale pour le Developpement ILO International Labor Organization ONATHO Office National du Tourisme et de l'Hotellerie OPEC Organization of Petroleum Exporting Countries SOBEPALH Societe Beninoise du Palmier a Huile SOBETEX Societe Beninoise des Textiles SONACOTRAP Societe Nationale de Construction SONAGIM Societe Nationale de Gestion Immobiliere SONICOG Societe Nationale de l'Indlustrie des Corps Gras UNDP United Nations Development Program UNIDO United Nations Industrial Development Agency FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT INDUSTRIAL DEVELOPMENT PROJECT BENIN Table of Contents Page No. I. THE SETTING ............................................ 1 A. The Economy ....................................... 1 B. The Artisanal and Industrial Sector . ........... 3 C. The Financial Sector ........................... 7 II. BANQUE BENINOISE POUR LE DEVELOPMENT .... ............... 9 A. The Institution ....... ............... 9 B. Operations and Finance ............ 11 C. Prospects and Issues ............ .. ................ 14 III. THE PROJECT ............................................ 15 A. Project Conception and Objectives ................. 15 B. Project Description .............. .. ............... 16 C. Project Costs and Financing ..... .................. 19 D. Project Implementation ............................ 22 E. Benefits and Justification ........... .. ........... 22 IV. RECOMMENDATIONS ........................................ 23 This report is based on the findings of a mission to Cotonou by Patrice J. Dufour and Bahadur A. Jetha in April 1979. Thlis docufnent has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discobsed without World lBank authorization. 'I I BENIN BANQUE BENINOISE POUR LE DEVELOPPEMff Basic Data Exchange Rate US$1 . CFAF 210 CFAF 1000 - US$4.76 Date of Establishment: 1954 Ownership: Amount Subscribed and Paid up CFAF million . Government of Benin 1,000 100 Term Resource Position (as of September 1978) Sources Uses CFAF billion CFAF billion Equity 1.5 Fixed and other assets 2.1 Long-term borrowings 1.6 Long-term loans 3.7 Medium-term borrowings (rediscount) 6.3 Medium-term loans 4.9 9.4 10.7 Uncommitted resources 1.0 Less provisions (0.6) Central bank (additional) 2.4 10.1 12.8 Commitments outstanding 5.7 Approvals outstanding 1.3 Term resource gap 4.3 17.1 CFAF millions Operations 1974 1975 1976 1977 1978 1979 (6 months) A. Term distribution of loan approvals Short term 1,666 2,322 2,165 1,446 1,214 686 Medium term 766 919 1,564 2,226 4,803 759 Long term 86 - 512 2,802 - - Total 2,518 3,241 4,241 6,474 6,017 1,445 B. Sector distribution of loan approvals Equipment 573 678 1,702 4,608 3,827 478 Commerce 1,591 1,589 799 948 1,443 104 Housing 327 402 584 722 612 288 Vehicles 12 369 980 149 10 - Others 15 203 176 47 125 575 Total 2,518 3,241 4,241 6,474 6,017 1,445 Earning Record (12 months) (projected) Net profit (CFAF million) 27.1 41.9 44.2 80.4 120.3 Profit as % of average assets 0.6 0.6 0.5 0.6 0.8 Profit as % of average equity 4.3 7.3 4.3 5.4 7.5 Financial Position (CFAF million) Equity 526 632 1,444 1,540 1,660 Total assets 5,216 8,416 10,784 14,403 15,913 Total debt/equity ratio 8.9:1 12.3:1 6.5:1 8.4:1 8.6:1 Term debt/equity ratio 2.7:1 7.6:1 3.6:1 5.1:1 4.9:1 Interest Rates Discount Rate Final Rate Preferential borrowers 5.50% 6.50 - 8.50;, All other loans 8.00% 9.00- 13.00% I A LIST OF ANNEXES A. The Environment Annex 1 - Benin: GDP by Sector of Origin (1974-1978) Annex 2 - Benin: Modern Industrial Sector a. Value Added by Branch (1972-1976) b. Selected Production Indicators (1975) Annex 3 - Benin: Artisan Sector Survey Annex 4 - Benin: Distribution of Credit to the Economy Annex 5 - Benin: Interest Rate Structure B. Banque Beninoise pour le Developpement Annex 6 - BBD: Term and Sectoral Distribution of Credit Approvals Annex 7 - BBD: List of Projects under Consideration Annex 8 - BBD: Forecast of Loan and Equity Approvals Annex 9 - BBD: Projected Cash-flow Statements Annex 10 - BBD: Actual and Projected Income Statements Annex 11 - BBD: Actual and Projected Balance Sheets Annex 12 - BBD: Past and Projected Financial Ratios Annex 13 - BBD: Proposed Amendments to BBD's Reglement Interieur C. Project Annex 14: Credit Disbursement Schedule Annex 15: Selected Documents in Project File BENIN STAFF APPRAISAL REPORT INDUSTRIAL DEVELOPMENT PROJECT I. THE SETTING 1.01 Benin is a 670 km-long and 80 km-wide corridor between Togo and Nigeria; it is one of the world's poorest countries with an income of US$230 per capita. Its 3.3 million population, which grows at a rate of 2.8% a year, is mostly rural (86%) and concentrated in the more humid south. A long history of regional imbalance, ethnic diversity and aggressive kingdoms, although smothered under fifty years of foreign rule, resulted after indepen- dence in a tripartite power struggle. After twelve years of factional rivalry and political unrest, the present military government of Lieutenant-Colonel M. Kerekou seized power in 1972. Benin has now enjoyed a comparatively long period of political stability under which a blend of pragmatic nationalism and socialist philosophy has emerged. A civilian government was recently installed following the adoption of a new constitution and the election of a National Assembly in November 1979. A. The Economy 1/ 1.02 The new government inherited an economy typical of many sub-Sahara countries with the primary sector--mainly foodcrops and a few cash crops-- contributing 43% to Benin's CFAF 72 billion GDP (at factor costs), industry and construction accounting for a meager 12% and services for the balance. Today the picture has not changed much; two-thirds of the total agricultural output consist of low-value subsistence root crops while palm oil, cotton and groundnuts remain the country's major export crops. With 33% of GDP, transport and commerce have become the second most important activities and illustrate Benin's key transit role with the Port of Cotonou serving both landlocked Niger and Western Nigeria. The country's embryonic industrial sector (vege- table oil processing and a few import-substitution industries) has grown more rapidly in recent years and, with the active construction sector, now accounts for roughly 14% of a CFAF 148 billion GDP. 1.03 Employment figures reflect the rural orientation of the economy. Of the total active population (1.6 million) only 3.5 percent, or 56,000 are urban wage earners; the rest is engaged in farming, trade or crafts. In 1977, formal employment was distributed as follows: 1/ For a more complete description of Benin's economy, please refer to World Bank report No. 2079-BEN entitled "The Economy of Benin", published May 31, 1979 and the International Monetary Fund staff report entitled "Benin, Recent Economic Developments", issued May 25, 1979. -2- Number % Agriculture 2,830 5.1 Manufacturing 5,810 10.4 Utilities 470 0.8 Construction 3,910 7.0 Transport 6,100 10.9 Commerce 6,670 11.9 Services (mostly banking) 3,460 6.2 Government and public services 26,650 47.7 55,900 100.0 Poor qualifications and low salaries characterize the Beninese workforce which shows a persistent tendency to emigrate. Vocational training is now a priority: an IDA and UNDP financed vocational training center, the Centre de Perfectionnement du Personnel d'Entreprises (CPPE) has begun training foremen, skilled workers, administrative personnel, accountants, secretaries and clerks. Urban unemployment might be less of a problem in Benin than in many other African countries because of the narrower gap between urban and rural incomes and opportunities. Nevertheless, the urban unemployment rate was estimated at roughly 18% in 1977. 1.04 Economic management has been drastically altered under the new regime. Anxious to achieve Beninese control over the economy, the new Govern- ment stepped up state involvement in agriculture and nationalized major industries and services. Major institutional reforms and poor rainfall initially resulted in a severe disruption of economic activity and a stagna- tion of agricultural output and, from 1972 to 1975, real GDP remained constant. But since 1976, a recovery in agricultural production, a better performance in the industrial sector and a buoyant activity in trade and construction have fueled a real growth in GDP of roughly 5% per annum which should continue in 1979 and 1980. 1.05 Since 1972, the Government has also successfully pursued conservative financial policies. Fed mostly by increasing import tax receipts, its revenues have grown much faster than the tightly controlled current expenditures and, despite growing investment spending, each budget since 1975 has generated an overall surplus of several CFAF billion. Despite a large trade deficit (CFAF 40 billion in 1978), the Government has managed to keep external borrowings to a minimum: at the end of 1978, the total external debt (including undisbursed commitments) was estimated at US$260 million and, owing to its concessionary terms, the debt-service ratio stood at a low 5-6% of exports. 1.06 Prices have also been kept under control and the overall rate of in- flation (on an implicit GDP deflator basis) has declined from 11% in 1976 to 8.5% in 1977 and 5% in 1978.1/ Thus, inflation in Benin continues to be con- siderably lower than in neighboring countries, owing to the commercial sector's vitality and the Government's policies of wage restraint and limited spending. Should import prices continue to rise and domestic food shortages occur again, inflation might however be expected to pick up slightly to 6-7% in 1979 1/ IMF staff estimates. and 1980. The increased economic activity induced by the implementation of new investments is likely to maintain this trend in the following years and inflation is forecasted at 8-9% for 1981 and 1982. 1.07 Development Strategy. Benin's strict economic policies reflect the strategy implicitly pursued by the Government which wanted to set the stage for a substantial investment effort in the late 1970's.l/ In 1977, Benin adopted its first State Economic and Social Development Plan covering three years, starting in October 1977. The plan's objectives are: (i) to foster growth by adopting a sizeable investment program heavily concentrated on agro-industrial, import substitution, and transport projects; (ii) to ensure independent national direction of the economy through state control of major enterprises, processing of local production and development of the local market, and (iii) to involve the people in the formulation and implemen- tation of national policies. The plan targets an annual growth rate of 18% (at current prices) and net total investments of CFAF 244 billion. This investment program, heavily concentrated on capital-intensive industrial (46%) and transport (22%) projects is overly ambitious. Owing to implemen- tation delays and administrative bottlenecks, only CFAF 21 billion have been invested during the Plan's first tranche (1978). Despite an improved perform- ance in 1979, the Plan's objectives will have to be scaled down. Given the current limitations on the country's absorptive capacity, investments in all sectors should be accompanied by a strong institution building effort. B. The Artisan and Industrial Sectors 1.08 Description.2/ A limited survey (Annex 3) completed in January 1979 identifies 10,000 master-artisans; as elsewhere in Africa, tailoring (23%), metal working (16%) and woodworking (13%) are the most important crafts. These figures are uncertain since earlier data mention 19,000 artisan enterprises employing about 50,000 workers. An ongoing national population census should result in better estimates. Data on Benin's manufacturing industry are more reliable: a 1976 census by the Ministry of Industry identifies 75 industrial enterprises 3/. Sixty-three of these firms are located in Cotonou, Porto-Novo and Parakou 4/. Only eight enterprises are state owned; they are heavily geared IL Benin's development strategy and prospects are fully described in the Bank's economic report (op. cit. p. 33 to 47). 2/ The Ministry of Industry distinguishes between artisan enterprises (em- ploying fewer than 10 workers) and industrial enterprises employing 10 workers or more. 3/ A thorough description of the industrial sector is provided in the Bank's Bank's economic report (op. cit. Annex B). 4/ Parakou is the main business center in northern Benin. - 4 - towards import-substitution and agricultural processing (textiles, beverages and vegetable oil processing) and account for three quarters of the value added in the modern industrial sector. Other (mostly private) industries include food processing (flour and noodles), paint, perfume, vehicle assembly, wood and metal working, foam manufacturing, mechanical workshops and cashew nut processing. Despite an annual growth rate of 11% in recent years and a sizeable investment effort, this sector remains embryonic; it contributes less than 10% to GDP and employs no more than 6,000 workers. Benin's transit role to Niger and Nigeria has led to a rapid growth of the road transport industry which carries 70% of all freight and 90% of all domestic passenger traffic. Although Government nationalized the two main (foreign) transporters, and created a national trucking firm (Trans-Benin with 180 trucks) as well as regional transport companies, 350 small operators (with fewer than four trucks each) still handle the bulk of the traffic. Altogether, the transport industry accounts for more than 7% of GDP. Benin's construction industry (building and civil works) had a turnover of CFAF 5.6 billion in 1978 up from CFAF 2.0 billion in 1970-75; its contribution to GD:P is roughly 4%. Foreign contractors handle most civil works but construction is in the hands of local firms whose capacity is constrained by the lack of equ:ipment and capital. Government established two public construction companies, Societe Nationale de Construc- tion et de Travaux Publics (SONACOTRAP) in 1976, and Societe Nationale de Gestion Immobiliere (SONAGItI) in 1978. Assistance, Promotion and Training 1.09 Under Benin's "loi fondamentale", artisans are invited to form cooperatives on a voluntary basis, but little has been done to assist them. Except for some marketing assistance offered by Office National du Tourisme et de l'Hotellerie (ONATHO) and financial assistance obtained directly from Banque Beninoise pour le Developpement (BBI)), the artisans have received no organized support. For some years, DirectiLon de l'Artisanat (a two-man office) has been advocating the creation of- an overambitious Centre National de Promotion Artisanale (CNPA) to deliver technical and marketing assis- tance as well as credit in kind and guarantees to artisans, but there is no consensus yet in the Government on the nature and functions of the proposed CNPA. 1.10 The various government agencies dealing with industrial develop- ment, are poorly equipped to promote small and medium enterprises: "Bureau Central des Projects", a planning ministry agency in charge of industrial assistance focuses mostly on large-scale, Government-sponsored projects included in the plan. The "Direction de l'Industrie et de l'Artisanat" which has only a regulatory and statistical function, monitors Investment Code benefits. "Centre de Perfectionnement du Personnel des Entreprises" (CPPE) provides low level clerical and vocational training (para. 1.03). Another training center, CEFAP, is training Government and parastatal employees. - 5 - 1.11 Two institutions have so far responded to the needs of entrepreneurs and managers of small- or medium-scale enterprises, although on a limited scale: the Benin Chamber of Commerce and Industry (CCI) and Banque Beninoise pour le Developpement (BBD). The Chamber of Commerce, chaired by BBD's general manager, is a lively forum for Benin's business community. With the ad hoc assistance of foreign training institu- tions, it has recently organized several basic management training sessions for its members as well as public enterprise managers. It gives informa- tion on the Beninese environment to potential investors and, through its recently established "Assistance Technique au Commerce" service, provides businessmen with basic accounting and managerial assistance. In an effort to attract businessmen towards industrial activities, the Chamber of Commerce has also plans to organize an industrial extension service (Assistance a l'Industrie). It has obtained UNIDO technical assistance to draw the mandate and the organization of this service. BBD's Department des Etudes et de la Promotion (DEP) works closely with CCI and is currently the only active in- dustrial promotional agency; it coordinates with the Ministry of Plan, conducts sector work, identifies investment opportunities and assists existing clients. Nevertheless, it seriously lacks engineering and managerial expertise which would be provided under the proposed project. 1.12 Industrial Policy. The industrialization of Benin is considered essential to its development and the Three Year Plan foresees an industrial growth rate much higher than that for the whole economy. Government has assigned three objectives to industry: (i) satisfy the immediate needs of the population, (ii) produce agricultural inputs and (iii) process agricultural products. To affirm public leadership over the sector, the State has taken over eight major firms which account for three-fourth of industrial sector sales, mostly in the cement, textile, oil processing and beverage industries. Judging from a sample of financial statements 1/, public industrial enter- prises have fared much better than state agricultural enterprises or commercial monopolies, with the exception of IBETEX, an ambitious integrated textile factory which has faced serious management, production, and marketing problems. The state has been encouraging cooperatives for small-scale enterprises, but it keeps a pragmatic and positive attitude towards private enterprises in an effort to direct the strong business community from commerce to industry. The liberal investment code of 1972 is still effective and provides substantial incentives to enterprises investing more than CFAF 25 million, including exemption from import duties on equipment and machinery, reduction of up to 75% in import taxes on raw materials, exemption from the domestic turnover tax, etc. Incentivers are tailored according to each projetct's merits and requirements.Aspecial system (Regime D) benefits small Beninese entrepreneurs investing at least CFAF 10 million and employing more than 10 employees; these pay no duties on imported equipment and raw materials as well as no turnover tax for five years. The investment code is not likely to be amended until the Second Development Plan is adopted (1981); improvements then to be sought 1/ Sobepalh, Sonapeche, Sonicog, La Beninoise, Sobetex. -6- include the abolishment of all export taxes, the elimination of the minimum investment requirement of CFAF 10 million,, and the listing of all industrial activities reserved to private initiative. At negotiations, the Beninese delegation indicated that BBD would keep I[DA informed of proposed changes. Issues and Prospects 1.13 Obstacles to a better performance of the industrial and artisanal sectors remain substantial: (a) Operating problems. Artisanal and industrial enterprises suffer from various operational constraints such as low ca- pacity utilization, irregular supply of equipment and raw materials, shortage of skilled labor and poor managerial practices and administrative constraints. (b) Exports markets. Even though Government emphasis has been on the development of the local market, most of Benin's industrial growth in recent: years can be attributed to exports, as a large share of Benin's industrial output probably finds its way into Nigeria. This dependence on one market may be risky in light of Nigeria's attempt to curtail imports. The creation of ECOWAS (the Economic Community of West African States), a regional common market which includes both Benin and Nigeria, is the ultimate solution; meanwhile, the authorities have associated Nigeria to Beninese large- scale export-oriented projects such as the Onigbolo cement plant or the Save sugar complex. They have also left maximum flexibility to industry, which, after a temporary inventory build-up, has increased its marketing efforts and overcome its difficulties. (c) Investment climate. The easrly nationalization carried out by the new regime had a deterring effect on private foreign and Beninese investments despite an adequate and timely compensation. Presently, Government attitude towards industrial entrepreneurship is far more tolerant than the official reference to Marxism-Leninism would suggest. There is no guarantee that this pragmatic attitude will prevail in the long run, but recent economic and political developments indicate the regime is becoming more liberal. 1.14 Prospects. Benin's favorable location on several transit routes, its proximity to the large Nigerian market and its low wage structure offer reasonable prospects for industrial development. Given the limited domestic market and shortage of trained personnel, future large-scale projects 1/ will need to be export-oriented and require substantial foreign technical assistance. Small-scale industries could be active in import 1/ Such as the Onigbolo cement plant, the Save sugar complex, the extension of the Ibetex textile mill, and the Seme oil field. - 7 - substitution of simple consumer goods and eauipment such as furniture making, metal working, housing construction, food processing, equipment assembly, repair and maintenance, etc. The rate of growth for the sector is projected at 12% (in real terms) by the Bank and the sector's contribu- tion to GDP is expected to reach 16% in 1985. Such a performance is however subject to the availability of term credit through the banking system, provision of support services and adequate entreprei.turship for small and medium-industrial investments. The proposed project would in part address these prerequisites to industrial development. Despite forecasted slow growth 1/, the artisan sector's contribution to the economy will remain important in terms of urban employment. The Government has yet to adopt a policy regarding the role of the artisan sector, and to decide which channels should be used to deliver assistance to artisans. The proposals under consideration are still vague, unsubstantiated and apparently not viable. It would, therefore, be premature at this point to finance a full-fledged program of assistance to artisans, but useful technical assistance would be given under the proposed project through BBD to Direc- tion de l'Artisanat for the formulation of an overall policy framework and the design of an artisan component which could eventually be financed under a follow-up project. In the meantime, all existing artisan subprojects (including worker-owned cooperatives) would be eligible for BBD assistance and IDA refinancing under this project. C. The Financial Sector 1.15 As a member of the West African Monetary Union (UMOA), Benin shares a common currency (CFAF), Central Bank (BCEAO) and credit and monetary policies with Ivory Coast, Niger, Senegal, Togo and Upper Volta. Through its regional offices, BCEAO supervises all financial institutions within the Union. Under its operating guidelines, it controls money supply and credit expansion by setting country credit ceilings and global refinan- cing allocations. It provides liquidity to the Banking system by rediscount- ing short- and medium-term loans of up to ten years and reviews all bank loan applications above CFAF 30 million under its prior approval mechanism. (At present, an estimated 85-90% of credit to the economy in Benin is subject to prior approval). Since 1976, the Central Bank has also decided to apply, in all member countries a formalized sectoral credit policy directing funds towards priority sectors, which has yet to be fully implemented. Finally, to improve the use of liquid funds within each country and the Union, BCEAO operates a money market for daily operations between the commercial banks and the Central Bank. 1.16 The Banking System. Entirely state-owned, the banking system comprises three highly specialized banks. Banque Commerciale du Benin (BCB), specialized in commercial banking operations, resulted from the merger of three previously French-owned commercial banks. With total assets of CFAF 58 billion (1977), 15 branches, 80% of total loans and 75% 1/ Bank Economic Report op. cit. p. 92. - 8 - of total deposits, it is Benin's biggest bank. Caisse Nationale de Credit Agricole (CNCA) was established by the Government in 1976 as the apex organization for regional and local agricultural savings and loans institu- tions: as of 1977, it had total assets of CFAF 2.9 billion. CNCA partici- pates with the other two banks in seasonal crop financing, and invests in rural development projects. Banque Beninoise pour le Developpement (BBD) is the country's main term-lending iinstitution. As of 1978, it had total assets of CFAF 15 billion. Other financial intermediaries that perform some banking functions include the Treasury, the postal checking system (CCP) and the Caisse Nationale d'Epargne (CNE). 1.17 Credit Distribution. As of June 1978, registered loans 1/ (excluding direct external bilateral loans) represented 80% of total credit outstanding in the economy (CFAF 43 billion) as follows: Loans: Short-Term Medium-Term Long-Term Total CFAF CFAIP CFAF CFAF billion % billi'on % billion % billion % Agriculture 5.1 19.2 0.7 10.5 0.3 30.0 6.1 17.8 Industry 6.0 22.6 2.5 37.3 0.1 10.0 8.6 25.1 Construction 1.3 4.9 0.1 1.5 - 1.4 4.1 Transport 1.6 6.0 1.5 22.4 0.6 60.0 3.7 10.8 Commerce 11.6 43.6 0.8 11.9 - 12.4 36.1 Services 1.0 3.7 1.1 16.4 - 2.1 6.1 Total 26.6 100.0 6.7 100.0 1.0 100.0 34.3 100.0 of which public sector 16.0 60.1 4.3 64.2 1.0 100.0 21.3 62.1 Share of total 77.6 19.5 2.9 100.0 Commerce and services were holding half of' short-term credit; industry was using only 23% of short-term credit but it received 37% of all medium-term loans. At the same time, Central Bank refinancing of term loans amounted to more than 75% as against 18% of short-term loans, reflecting a high level of sight deposits and a scarcity of alternative term resources. Credits to the private sector represented 36% of medium-term loans and almost 40% of total lending. 1.18 Interest Rates. Benin has, until now, practiced a policy of low interest rates. Thus, preferential loans (government, housing, crop financing and small-scale enterprises 2/) command an average interest rate of 7% whereas BCEAO authorizes a maximum of 8.5% based on a preferential discount rate of 5.5%. Other loans command an average rate of 9.5% whereas BCEAO authorizes a 1/ All loans above CFAF 5 million, have to be registered with BCEAO (Annex IV). 2/ Defined as a majority-owned national enterprise with outstanding loans of less than CFAF 30 million. - 9 - maximum of 13% based on a normal discount rate of 8%. Under the proposed project, BBD has agreed to increase its interest rate to small-scale enter- prises to 8.5% and to other enterprises to 11%, a 1.5% increase over its existing interest rate structure (Annex 5). 1.19 Issues. The banking system has overcome most difficulties result- ing from the 1974 nationalization and reorganization. BCB has not fully resolved its data processing and accounting difficulties; CNCA is developing its agricultural lending and actively training personnel to staff its local offices; and BBD has swiftly changed its role from that of a social bank 1/ to that of a full-fledged development bank. The banking system is nevertheless likely to face a term resource constraint: at present, loans by the banking system to the economy are almost entirely covered by Central Bank refinancing (29%), Government surpluses (12%) and public or private deposits (57%). As the country is now embarking on a substantial development program led by the public sector, Government surpluses and parastatal deposits will in part be withdrawn to finance new investments and purchase equipment abroad. Furthermore, if the Government draws on the Central Bank up to its statutory limit (20% of the preceding year's tax revenues), the amount of refinancing available within BCEAO guidelines to the banking system will be curtailed. To alleviate the shortage of resources banks are likely to experience, the following actions need to be envisaged: (i) the equity of financial institu- tions should be substantially strengthened and (ii) the banks should actively search for alternative term resources to compensate for tighter access to Central Bank refinancing. This is especially critical for BBD, Benin's bank specialized in term lending. The proposed line of credit for small- and medium-industrial projects would provide BBD an alternative source for the funds it needs to fulfill its developmental role. II. BANQUE BENINOISE POUR LE DEVELOPPEMENT A. The Institution 2.01 Description. Following three intervening name changes and mandate amendments since its establishment in 1954, BBD finally became, in 1975, Benin's specialized term-financing bank for all economic and social development projects. It has a share capital of CFAF I billion, 100% state owned. BBD mostly grants medium- and long-term loans, occasionally with equity participation, to all sectors of the economy whether public or private. It also participates in seasonal crop financing and maintains checking accounts for its term clients whom it also assists in short-term lending. BBD's short-term lending to the purely commercial sector is limited to assisting small traders in amounts below CFAF 2 million. BBD receives deposits (mainly short-term) from its clients and constructs low-cost housing both for sale and rental. 2.02 Board and Management. BBD's fifteen-member board is chaired by the Minister of Finance. In addition, it includes six directors represent- ing other government ministries, five representing BBD's personnel, the head of BCEAO's national branch, a representative of the National Revo- lutionary Council and a state inspector (Commissaire du Gouvernement). 1/ A multipurpose bank providing mostly housing loans, consumer credit and small trade loans. - 10 *- BBD's general manager holds several key positions within the Government and the party including that of financial advisor to the President of the Republic; as President of the Benin Chamber of Commerce and Industry, he is in close contact with the business community. Under his leadership, BBD has shown an impressive growth and stands out as a weLl-managed, well-staffed and fairly profitable institution. The General Manager has obtained a broad delegation of authority from the Board, including credit approval of up to CFAF 100 million for industrial loans and 50 million for commercial and SSE loans. 2.03 Organization and Staffing. Under BBD's manager and his deputy, five departments look over project promotiLon and supervision (Departement des Etudes et de la Promotion--DEP), credit dossiers (Departement du Credit et des Investissements--DCI), accounting and finance (Departement des Opera- tions Financieres et Comptables--DOFIC), administration (Departement Admini- stratif) and legal matters (Departement Juridique--DJ). BBD has a staff of 113 of which 18 hold supervisory positions: all supervisors are university graduates and eight also followed CCCE's dLevelopment banking course. All issues ranging from credit approvals to strategy making are discussed internal- ly before decisions are taken. Communication between the various departments is good, although somewhat cumbersome. 2.04 There are nevertheless some organizational weaknesses: BBD's Department des Etudes et de la Promotion (DEP), which is in charge of implementing BBD's perceived role of promcoting and assisting industries, though headed by a highly motivated and able Beninese, is clearly under- staffed. DEP badly needs the services of an experienced industrial engineer with managerial experience to assist in identifying, promoting and supervising industrial investment projects. To fulfill its promotional role vis-a-vis Beninese entrepreneurs, DEP--in liaison with the Chamber of Commerce and Industry--would also require expertise in preparing and implementing training and promotion programs in favor of Beninese businessmen and artisans interested in setting up SMEs. Due to the unavailability of local personnel experienced in these fields, outside technical assistance will be provided under the project. In addition, BBD has been encountering some difficulties keeping its accounts up to date and optimizing its liquidity management. Its financial department (DOFIC), although staffed with dedicated and competent personnel, needs to be upgraded. A review by a firm of experienced external consultants of this department's functions and procedures and implementation of warranted improvements will be performed under the project. Specifically, this review would include (i) defining guidelines regarding the bank's financial structure (sources and uses of funds); (ii) improving BBD's financial reporting system, (iii) establishing a financial forecasting system; (iv) strengthening the organization and procedures of the section in charge of liquidity management, and (v) reviewing the interface with the Government's computer processing BBD's accounts. 2.05 Policies. A "reglement interieur" carefully defines BBD's policies and operating guidelines. To fulfill its development mandate, BBD is authorized to grant loans (essentially long-and medium-term), take equity participations, offer its guarantee, collect deposits and manage - 11 - special funds. Retroactive financing requires a special decision of the credit committee. Each equity participation is limited to 25% of a company's share capital and their total cannot exceed BBD's unimpaired capital and reserves. BBD's exposure is limited to 90% of total project cost for Beninese SMEs, 65% for industrial enterprises and 50% for other projects. There is however, no limit placed on individual loans in relation to bAD's equity. BBD has now agreed to limit its exposure in any loan and/or equity investment to 25% of its capital and unimpaired reserves. Although its reglement interieur is quite thorough, IDA has suggested several amendments, which have been agreed at negotiations (Annex 13). Interest rates are in line with BCEAO guidelines: on short- and medium-term loans, they now range from 6.5 to 8.0% for indigenous SSEs (with an average of 7%), from 9.0 to 11.0% for other industries(with an average of 9.5%) and from 9.5 to 12.0% for trade and services. Deposit rates range from 2.5 to 6.5% 1/ depending on the term and amount of deposit. 2.06 Procedures. BBD's procedures are generally efficient: a sample of project files was reviewed and found satisfactory. Appraisals cover most aspects of project evaluation and, following the Bank's identification mission of November 1978, now include economic rates of return calculations and monitoring of employment creation. More attention should however be given to market analysis. Supervision of problem projects is good but it should be generalized to all projects. Loan collection procedures are well established and efficient. 2.07 Auditing. BBD's accounts are currently reviewed by a commissaire aux comptes whose investigations, consistent with the practice in the region, are only superficial. Although competent, the commissaire aux comptes is not familiar with the long form audit as required by IDA. Under this project, BBD's audits would be carried out by independent auditors acceptable to IDA. 2.08 Foreign Exchange Risk. BBD has in the past, carried the foreign exchange risk on foreign borrowings. So far, the exposure has been minimal since half of the CFAF two billion borrowed is denominated in French Francs (which has a fixed parity vis-a-vis the CFAP) and the other half in US$ (which has depreciated vis-a-vis the CFAF). Although the large spread obtained on these borrowings (6 to 8%) should be adequate to protect BBD against exchange risks, BBD agreed at negotiations to set aside, each year, 2% of the outstand- ing amount on these borrowings as a special provision for exchange losses. In addition BBD would avoid assuming any exchange risk on its future borrowings. B. Operations and Finance 2.09 Portfolio. Sustained by a spectacular increase in its term lending, BBD's total portfolio has almost tripled over the last three years from CFAF 4.1 billion in 1974/75 to CFAF 11.8 billion in 1977/78. It is broken down as follows: 1/ These are minimum rates. Large depositors can negotiate higher rates. - 12 -- By Purpose CFAF Billion % By Term CFAF Billion % Equipment 6.7 57 Long- and medium-term 8.8 75 Commerce 2.2 19 (of which doubtful) (0.3) (3) Housing 2.0 17 Short-term 3.0 25 Others 0.9 7 (of which doubtful) (1.1) (9) 11.8 100 11.8 100 BBD's term portfolio of CFAF 8.8 billion as of September 30, 1978 includes 148 equipment loans 1/ (CFAF 6.5 billion), 1,442 housing loans (CFAF 1.9 billion), about 30 agricultural loans (CFA.F 0.1 billion) and some doubtful loans (CFAF 0.3 billion or 3.6% of the term portfolio). Its short-term portfolio of CFAF 3 billion--including doubtful loans of CFAF 1.1 billion 2/ -- consists of roughly 800 commercial loans (CFAF 2.0 billion) and more than 1,000 miscellaneous vehicle and social loans for the balance. Approxi- mately 80% of BBD's outstanding loans (short-and long-term) are to public or mixed enterprises and regional or local authorities and therefore guaranteed by the Government. 2.10 Operations. The structure of BBD's portfolio--a few large equipment loans next to a multitude of small social loans--is a reflection of the transition BBD has undergone since 1975, from a multipurpose social bank to a full-fledged development bank. Prior to the 1975 specialization of the banking system, two thirds of BBD's lending consisted of short- and medium-term credits for commercial and social purposes; development lending was limited except in agriculture. Changes have been substantial: first, total approvals increased from CFAF 2.5 billion in 1974 to CFAF 6.5 billion in 1977. Approvals declined somewhat in 1978 to CFAF 6.0 billion and are likely to decline again in 1979, but BBD explains this drop by processing delays on some pending large-scale projects. Second, the share of commer- cial lending declined markedly to 24% of approvals in 1977, while the share of equipment lending increased from 23% in 1974 to 71% in 1977 and 64% in 1978. Third, the term structure also changed, and whereas term loans represented only 34% of total approvals in 1974, they accounted for 80% of total approvals in 1978. Fourth, following the establishment of CNCA, agricultural credits decreased rapidly except for syndicated crop financing. Fifth, after it took over a French-owned vehicle finance company in 1973, BBD expanded its car and truck financing operations to reach CFAF 980 million in 1976. Lack of experience in the financing of second-hand vehicles led to severe collection difficulties and BBD has now suspended this type of operation. Finally, BBD has so far taken few equity participa- tions; its portfolio of CFAF 132 million represent minority participations in nine enterprises including two banks, two state enterprises and five private businesses. 1/ BBD's equipment loans generally finance fixed assets for the manu- facturing, transport and agro-industrial sectors. 2/ Most of which to the IBETEX textile complex, and the balance for truck and car loans. - 13 - 2.11 Arrears. Reported arrears on BBD's portfolio amount to about CFAF 1.0 billion, approximately half of which are in arrears of over one year. The portfolio affected by arrears of close to CFAF 5 billion repre- sents almost 43% of the total portfolio; most of these are however technical arrears resulting from implementation delays of larger projects which do not ultimately a-fect BBD's clients' ability to repay. Since a large part of the affected portfolio is for state-owned and guaranteed projects which have been repaying BBD, although with some delays, BBD's estimate of doubtful loans (CFAF 1.4 billion or 12% of BBD's total portfolio) is considered adequate. Actual losses which BBD could eventually suffer on its doubtful portfolio would in practice be much lower since special laws enacted in favor of BBD gives it the same collection privileges as the state. Provisions for bad and doubtful loans amount to CFAF 0.6 billion or about 5% of BBD's port- folio and 60% of the actual amount of arrears. In view of BBD's collection privileges and the securities on its loans, the level of provisions appears adequate. There is nevertheless room to improve BBD's monitoring of arrears and a plan to reduce arrears to 25% of the outstanding portfolio before year-end 1981 has been agreed at negotiations. 2.12 Financial Position. As of September 1978, BBD's balance sheet (Annex 11) totalled CFAF 15 billion.l/ Term sources and uses of funds were as follows: SOURCES (CFAF billion) USES (CFAF billion) Equity 1.5 Fixed and other assets 2.1 Long-term borrowings 1.6 Long-term loans & Investments 3.7 Medium-term loans 4.9 Medium-term borrowings & Less Provisions (0.6) term deposits 6.3 10.1 9.4 Commitments outstanding 5.7 Uncommitted resources 1.0 Approvals outstanding 1.3 Central Bank (additional) 2.4 17.1 12.8 Term resource gap 4.3 BBD's term borrowings have not kept pace with the rapid growth of its lending activity. As a result, BBD's term resources of CFAF 9.4 billion (including equity) barely cover BBD's total fixed assets, term loans and doubtful debts (CFAF 10.1 billion). With outstanding commitments and approvals of CFAF 7.0 billion, BBD's resource position is bound to deteriorate further. The difficulty would not come from the Central Bank regulation limiting its refinancing to 35% of BBD's portfolio, since most outstanding commitments are in favor of state-guaranteed projects which are not included in the 35% ceiling. It would rather come from the countrywide target for 1/ In 1978, BBD's cost of fund stood at 4% of total average assets. - 14 - Central Bank refinance 1/. BBD is therefore trying to decrease its depen- dence on BCEAO and locate alternative sources of term finance. It has already succeeded in mobilizing new deposits of approximately CFAF 1.5 billion and obtaining a CFAF 0.9 billion loan from the OPEC special fund2/. Another step in the right direction would be for BBD to increase its capital by at least CFAF 500 million before December 31, 1980. This was agreed to during negotiations. To further strengthen its financial structure, BBD has agreed, under this project, to amend its "reglement interieur" to include (i) an exposure limit relating its exposure in any single enterprise to 25% of its equity, and (ii) a debt/equity ratio cf 5:1 relating its term debt obliga- tions to its unimpaired capital and reserve; more generally, it will attempt to better match the maturity of its resources with that of its lending. Since the application of an exposure limit would prove difficult to implement in practice as BBD is the sole term financier of all industrial projects, this limitation would not apply to large-scale projects guaranteed by the Govern- ment or international/regional fund of good standing. 2.13 Performance. BBD's income statement (Annex 10) shows that its financial performance to date has been satisfactory with earnings before taxes rising steadily from CFAF 63 million in 1975 to CFAF 147 million in 1978. Administrative expenses have been maintained at a reasonable level and their share of average total assets has declined from 2.0% to 1.2% in 1978. As BBD increases its onlending rates closer to the maximum allowed by BCEAO, it will increase its profitability. This would give BBD the resources it needs to strengthen its development functions (training, SME promotion and assistance, engineering expertise, funding and management of a possible participation and guarantee mechanism, etc.). C. Prospects and Issues 2.14 Prospects. BBD's strategy for the future is not only to continue its current role as the main source of term financing for all clients, public and private, outside the agriculture sector, but also to intensify its promotional, appraisal and supervisory services to small- and medium- scale industries. BBD currently has a pipeline of CFAF 7 billion for the next three years. Projects under consideration include bakeries, ice-making, packaging, textile, food processing, charcoal making, transport, metal work- ing, etc. BBD's pipeline, lending program and past performance show that its financing of small and medium industrial projects could easily reach US$15 million over the next four years if its project preparation capability is rapidly upgraded. 1/ "Maximum d'intervention de la Banque Centrale". 2/ The OPEC loan of US$4.5 million is on-lent by the Government to BBD for 16 years (including 4 years of grace) at a rate of 2%. Twenty percent of the interest received from subloans accrue to BBD and the remaining spread is credited to a special account to finance SME-related technical assistance, promotion and studies. Intended beneficiaries include artisans and SME, and conditions to final borrowers will be similar to those under the IDA credit. The OPEC loan will be adminis- tered by IDA in conjunction with this project. - 15 - 2.15 Financial Requirements. The financial forecasts for the years 1979 to 1984 (Annexes 8 to 12) are based on conservative estimates of BBD's prospects for expanding its equiipment lending (60% of total approvals) and the likely growth of commercial lending (including syndicated crop financing), housing finance and others (40% of total approvals). Under these conditions, BBD would need an estimated CFAF 12.8 billion during the period 1979-1984. These requirements would be met as follows: CFAF billions Cash flow from operations 1.2 Capital increase 0.5 Increase in deposits 1/ 5.2 Lines of credit - existing 2/ 1.0 - IDA 1.8 2.8 Other borrowings 3/ 3.1 12.8 1/ Sight and term deposits increased by 45% in the first half of 1979. They are projected to grow at 15% p.a. thereafter. 2/ Caisse Centrale, Algerian Development Bank and Conseil de l'Entente (USAID). 3/ Including Central Bank Rediscount and OPEC loan. This table shows that BBD would be in a position to mobilize enough resources to finance its activities. Should the projected increase in deposits not be as large as projected, BBD would need to increase its recourse to other borrowings. BBD's projected financial ratios show that the bank's financial position would remain sound throughout the period; the term-debt/equity ratio would remain below 5:1 and the total debt/equity ratio would stay around 8:1 which is adequate. Profitability would remain stable relative to net worth because the forecasted increase in average interest rate from 8.2% in 1978 to 9.5% in 1981 would be gradually matched by increasing administrative and financial expenses. III. THE PROJECT A. Project Conception and Objectives 3.01 On March 10, 1978, the Minister of Plan officially requested Bank Group support for BBD. An identification mission visited Benin from October 31 to November 8, 1978; it concluded (i) that there was a need in Benin for alternative sources of long-term foreign exchange resources to finance productive investments in the SME sector, and (ii) that, subject to - 16 - improvements in its financial management and promotional role, BBD could become an excellent channel of Bank Group assistance to Benin. The project was appraised in the field from April 8 to 20, 1979. 3.02 The contribution of industry to economic growth is still minimal. Yet, under the current plan, a major investment effort is underway, in which BBD is playing a major role. Timely IDA support to this institution would benefit the whole economy. The proposed project would therefore pursue the following objectives: a. Initiate a dialogue with the Government and the borrower on major industrial and financial sector issues and policies (export strategy, employment creation, artisans' role, investment code,etc.) b. Strengthen BBD's financial structure by providing it the term foreign exchange resources it needs to finance SME projects up to 1983. c. Improve Benin's capacity to identify, promote and assist small- and medium-size industrial ventures. d. Upgrade BBD's financial management and reporting system as well as its subproject promotion and monitoring capability. To achieve these objectives, the project will be supported by a US$10 million IDA credit to provide (i) a line of credit (US$8.6 million) to BBD for the financing of small- and medium-scale industrial projects and (ii) technical assistance to BBD, the Chamber of Commerce and the Direction de l'Artisanat (US$1.4 million). B. Project Description 3.03 The Line of Credit. US$8.6 million of the IDA credit proceeds would be onlent to BBD as a line of credit to finance economically and financially sound investments in the following areas: a. Small-Scale and Labor Intensive Investments. At least US$2.6 million of the line of credit (30%) would benefit small-scale investments defined as projects costing less than CFAF 50 million. BBD would be authorized to finance 90% of the investment cost (CFAF 45 million) of such projects; IDA would refinance 100% of BBD's loans which cover the estimated cost net of taxes of such projects. BBD would be expected to finance about 25 to 30 investments in the typical areas of wood and metal working, food processing, road transport, fisheries, tailoring, repair and maintenance activities. Artisanal enterprises would also be eligible for financing under this component. Moreover, as an incentive for employment generation in medium-scale industry, any industrial project creating employment at a cost per job inferior to US$10,000 would be eligible for a loan (and IDA refinanc- ing) at conditions similar to those in favor of small-scale enterprises. b. Medium-scale Investments. Up to US$6.0 million of the line of credit would benefit medium-scale investments defined as projects costing between CFAF 50 and 500 million. BBD would be expected to finance up to 65% of the investment cost of such projects (CFAF 325 million). IDA would 15 - 2.15 Financial Requirements. The financial forecasts for the years 1979 to 1984 (Annexes 8 to 12) are based on conservative estimates of BBD's prospects for expanding its equipment lending (60% of total approvals) and the likely growth of commercial lending (including syndicated crop financing), housing finance and others (40% of total approvals). Under these conditions, BBD would need an estimated CFAF 12.8 billion during the period 1979-1984. These requirements would be met as follows: CFAF billions Cash flow from operations 1.2 Capital increase 0.5 Increase in deposits 1/ 5.2 Lines of credit - existing 2/ 1.0 - IDA 1.8 2.8 Other borrowings 3/ 3.1 12.8 1/ Sight and term deposits increased by 45% in the first half of 1979. They are projected to grow at 15% p.a. thereafter. 2/ Caisse Centrale, Algerian Development Bank and Conseil de l'Entente (USAID). 3/ Including Central Bank Rediscount and OPEC loan. This table shows that BBD would be in a position to mobilize enough resources to finance its activities. Should the projected increase in deposits not be as large as projected, BBD would need to increase its recourse to other borrowings. BBD's projected financial ratios show that the bank's financial position would remain sound throughout the period; the term-debt/equity ratio would remain below 5:1 and the total debt/equity ratio would stay around 8:1 which is adequate. Profitability would remain stable relative to net worth because the forecasted increase in average interest rate from 8.2% in 1978 to 9.5% in 1981 would be gradually matched by increasing administrative and financial expenses. III. THE PROJECT A. Project Conception and Objectives 3.01 On March 10, 1978, the Minister of Plan officially requested Bank Group support for BBD. An identification mission visited Benin from October 31 to November 8, 1978; it concluded (i) that there was a need in Benin for alternative sources of long-term foreign exchange resources to finance productive investments in the SME sector, and (ii) that, subject to - 16 - improvements in its financial management and promotional role, BBD could become an excellent channel of Bank Group assistance to Benin. The project was appraised in the field from April 8 to 20, 1979. 3.02 The contribution of industry to economic growth is still minimal. Yet, under the current plan, a major investment effort is underway, in which BBD is playing a major role. Timely IDA support to this institution would benefit the whole economy. The proposed project would therefore pursue the following objectives: a. Initiate a dialogue with the Government and the borrower on major industrial and financial sector issues and policies (export strategy, employment creation, artisans' role, investment code,etc.) b. Strengthen BBD's financial structure by providing it the term foreign exchange resources it needs to finance SME projects up to 1983. c. Improve Benin's capacity to identify, promote and assist small- and medium-size industrial ventures. d. Upgrade BBD's financial management and reporting system as well as its subproject promotion and monitoring capability. To achieve these objectives, the project will be supported by a US$10 million IDA credit to provide (i) a line of credit: (US$8.6 million) to BBD for the financing of small- and medium-scale industrial projects and (ii) technical assistance to BBD, the Chamber of Commerce and the Direction de l'Artisanat (US$1.4 million). B. Project Description 3.03 The Line of Credit. US$8.6 million of the IDA credit proceeds would be onlent to BBD as a line of credit to finance economically and financially sound investments in the following areas: a. Small-Scale and Labor Intensive Investments. At least US$2.6 million of the line of credit (30%) would benefit small-scale investments defined as projects costing less than CFAF 50 million. BBD would be authorized to finance 90% of the investment cost (CFAF 45 million) of such projects; IDA would refinance 100% of BBD's loans which cover the estimated cost net of taxes of such projects. BBD would be expected to finance about 25 to 30 investments in the typical areas of wood and metal working, food processing, road transport, fisheries, tailoring, repair and maintenance activities. Artisanal enterprises would also be eligible for financing under this component. Moreover, as an incentive for employment generation in medium-scale industry, any industrial project creating employment at a cost per job inferior to US$10,000 would be eligible for a loan (and IDA refinanc- ing) at conditions similar to those in favor of small-scale enterprises. b. Medium-scale Investments. Up to US$6.0 million of the line of credit would benefit medium-scale investments defined as projects costing between CFAF 50 and 500 million. BBD would be expected to finance up to 65% of the investment cost of such projects (CFAF 325 million). IDA would - 17 - refinance 100% of BBD's subloans which cover the estimated foreign exchange cost of such projects. Under this component, BBD would finance 10 to 15 projects in a wide range of activities such as manufacturing of agricultural tools and implements, vehicle assembly, small hotel projects, production of consumer goods, construction companies, etc. 3.04 On-lending terms: The line of credit would be onlent by the Government to BBD at 8% for eighteen years including five years of grace. BBD would be charged a commitment fee of 0.75% on the undisbursed balance and repayment would be on a fixed amortization schedule of equal, semi-annual payments of principal and interest. A fixed amortization schedule is justi- fied to provide BBD with increased local resources (roll-over of funds) and to ease the administrative burden of frequent schedule readjustments. Because small and medium-scale subborrowers are not in a position to deal effectively with the foreign exchange risk, it would be borne by the Government without an additional fee. 3.05 Terms and Conditions proposed for all subloans financed under the line of credit are as follows: a. Maturities would range from 2 to 15 years. Averages are expected to be about five years for SSE investments and nine years for medium-scale investments. The grace period on principal repayment could reach up to five years, but would rarely exceed three years. b. The interest rate on medium-scale subloans would be 11% per annum. This rate represents a 1.5% increase above BBD's current average rate. It would yield a positive return given the low inflation rate (para. 1.05) and would give BBD an adequate spread to cover its overheads. Subborrowers would also be charged a commitment fee (0.75% of the undisbursed balance). The rate charged on small-scale and labor-intensive subprojects would be 8.5% per annum, in line with BCEAO's preferential rate (para. 1.19). To ensure BBD an adequate and consistent spread, the Government has agreed on an interest subsidy equal to the interest lost by BBD on its small-scale and labor- intensive lending (2.5%). c. A free limit of US$150,000 for individual subloans and an aggregate free limit of US$2,000,000 would be established. However, since this is IDA's first operation with BBD, the first three subprojects below the free limit would be reviewed by IDA. d. BBD would limit its term borrowings to five times its unimpaired capital and reserves. Its exposure in a single project would be limited to 25% of its equity. e. For all subprojects, BBD would calculate the investment cost per job, the internal financial rate of return and the the economic rate of return. During negotiations, BBD agreed that all subprojects financed under the line of credit would (i) have, in principle, a minimum Economic Rate of Return of 10%; (ii) encourage employment creation; and (iii) give due consideration to the use of appropriate technology. - 18 -- 3.06 Development Impact. With the proceeds of this line of credit, BBD is expected to assist 45 industrial investments over the next three years. Permanent employment created could reach 900, at an average cost of US$7,100 per job for the small-scale/labor intensive component and US$19,500 for the medium-scale component. The following table shows the financing plan which could be expected for subprojects based on BBD's past experience, its present pipeline and proposed lending patterns. Subproject FirLancing Plan Small-Scale and labor- intensive investments Medium-scale Investments CFAF US$ CFAF US$ (million) (thousand) % (million) (thousand) % Average total investment 21.7 103.2 100 114.0 543.0 100 Average BBD (IDA) financing 19.5 92.9 90 74.1 353.0 65 Owners contribution 2.2 10.3 10 39.9 190.0 35 Number of subprojects 28 17 Total cost of subproject 606.5 2,888 1,938.5 9,231 of which IDA (2,600) (6,000) Number of jobs created 407 474 Average cost/job 7.1 19.5 3.07 Technical Assistance Program. Institution building is a major aspect of this first IDF project in Benin which includes a US$1.4 million technical assistance component (14% of the total IDA credit)l/. This compo- nent aims at improving BBD's financial management and strengthen its project identification, promotion and supervision capabilities. It includes the following: a. Eighteen man-months of consultant services specialized in bank organization to help BBD's Department des Operations Financieres et Comptables (DOFIC) resolve accounting delays, organize its data processing capability, and improve financial reporting and management (para 2.04). A diagnosis of DOFIC's functions has already been performed with external assistance. b. Three man-years of an industrial engineer experienced in business administration to strengthen the project identification, promotion and supervision capabilities of BBD's Departement des Etudes et de Promotion (DEP). BBD, one of the rare sources of business expertise in Benin, has often been approached by Beninese businessmen willing to invest in small or medium industrial project. DEP, which is torn between its numerous and varied tasks cannot at this point offer more than a list of investment opportunities. It needs the assistance of an industrial engineer to identify investment opportunities, shape ul) investment proposals, review 1/ Including a PPF advance of US$320,000 (see para. 3.08) 19 - external feasibilitv studies and technically assist promoters during the different phases of their projects' conception and implementation. The candidate to be recruited should be both technically competent and business oriented. BBD is in the process of recruiting a qualified Beninese engineer as a counterpart to the advisor. An allocation of US$130,000 would complement this techni.cal assistance by the provision of engineering and feasibility studies for projects promoted by BBD, c. Two man-years of a training and extension services specialist with a good background in economics and previous field experience to design and conduct a training program for SME entrepreneurs, organize BBD's in-house etension service and carry out sector studies. Although placed under BBD, he would work closely with the Chamber of Commerce which is in close contact with the business community. In addition, BBD would carry out--jointly with the Chamber of Commerce--training programs for SME entrepreneurs. US$145,000 would finance the cost of 4-5 training sessions to be conducted from 1980 to 1982. d. The provision of ten man-months of technical assistance to Direction de I'Artisanat to shape up a realistic policy of artisan promotion in liaison with BBD's DEP. To simplify project implementation, this component would also be administered by BBD. The purpose of this assistance would be in a first phase to acquire sector knowledge, in a second phase to advise on policies related to artisans, and in a third or final phase, to design a limited, practical and cost-effective artisan project component proposal. This assist- ance would be spread over two to three years. e. An allocation of US$115,000 for the training of BBD's staff to finance the cost of in-house seminars organized by external training insti- tutions, or of tuition and expenditures for training sessions abroad (courses and internships), IDA would review the curriculum of such courses. 3.08 Project Preparation Facility (PPF). A PPF advance of US$320,000 has been granted on December 11, 1979 to ensure an early start of the technical assistance program. It covers (i) the initial consulting services identified under para 3.07 (a) above, (ii) the recruitment, settlement, and salary for the first six months of the industrial engineer and the training expert and (:ii) the cost of ad hoc feasibility and engineering studies. C, Project Costs and Financing 3,09 The project will cost US$12.3 million net of taxes of which US$9.1 million in foreign exchange. Taxes are estimated at US$1.3 million. The proposed !DA credit of US$10 million would therefore represent 81% of total project cost net of taxes. It would finance 100% of total foreign expendi- b.ures, In addition, it would cover US$0.9 million of local expenditures (7% of total project cost net of taxes) under the small-scale/labor-intensive and technical assistance components, in line with IDA's policy of promoting SME entrepreneurship. 3.10 Project costs and the proposed financing plan are summarized in the following tables: BENIN Industrial Development Project Cost Estimates (CFAF Million) (US$ Thousand) A. Industrial Investments Taxes Local Foreign Total Taxes Local Foreign Total 1. Small-scale and labor intensive 60.5 151.6 394.4 606.5 288 722 1,878 2,888 investments 2. Medium-scale investments 193.8 484.7 1,260.0 1,938.5 923 2,308 6,000 9,231 Total Investments 254.3 636.3 1,654.4 2,545.0 1,211 3,030 7,878 12,119 B. Technical Assistance to BBD 1. DOFIC Financial systems reorganization 2.1 8.4 31.5 42.0 10 40 150 200 2. DEP 0 Industrial engineer (3 years) 3.2 10.5 69.3 83.0 15 50 330 395 Feasibility and engineering studies 1.0 6.3 21.0 28.3 5 30 100 135 Extension/training specialist 2.1 6.3 39.9 48.3 10 30 190 230 (2 years) Training programs 1/ 1.1 3.1 27.3 31.5 5 15 130 150 Artisan specialist 2/(10 man/month) 1.0 4.2 21.0 26.2 5 20 100 125 Total DEP 8.4 30.4 178.5 217.3 40 145 850 1,035 3. BBD staff training 1.0 3.2 21.0 25.2 5 15 100 120 4. Contingencies 21.0 21.0 - - 100 100 Total Technical Assistance 11.5 42.0 252.0 305.5 55 200 1,200 1,455 Grand Total 265.9 678.3 1,906.4 2,850.5 1,266 3,230 9,078 13,574 1/ In liaison with the Chamber of Commerce and Industry. 2/ In liaison with Direction de l'Artisanat. BENIN Industrial Development Project Proposed Financing Plan (US$ Thousand) A. Industrial Investments IDA BBD Entreprises Total 1. Small-scale and labor intensive 2,600 - 288 2,888 investments 2. Medium-scale investments 6,000 - 3,231 9,231 Total Investments 8,600 - 3,519 12,119 B. Technical Assistance to BBD 1. DOFIC Financial systems reorganization 190 10 - 200 2. DEP Industrial engineer (3 years) 380 15 - 395 Feasibility and engineering studies 130 5 - 135 Extension/training specialist (2 years) 220 10 - 230 Training programs 1/ 145 - 5 150 Artisan specialist 2/(10 man/month) 120 5 - 125 Total DBP 995 35 5 1,035 3. BBD staff training 115 5 - 120 4. Contingencies 100 - - 100 Total Technical Assistance 1,400 50 3,524 1,455 Grand Total 50 3,524 13 574 1/ In liaison with the Chamber of Commerce and Industry. 2/ In liaison with Direction of l'Artisanat. - 22 - D. Project Implementation 3.11 The project will be carried out by Banque Beninoise pour le Deve- loppement which will also liaise with the Chamber of Commerce (to train entrepreneurs) and Direction de l'Artisanat (to formulate an artisan policy). 3.12 Monitoring. BBD would be required to submit to IDA semi-annual operational and financial reports covering, usual DFC information. These include financial statements, arrears and resource positions, operations (approval, commitments, disbursements), an,nual reports and audits. In addition, BBD would furnish information on staff training, and its coordina- tion with other project related organizations (Ministry of Industry, BCP and the Chamber of Commerce). Data on the economic characteristics of firms financed under the project will be collected by BBD during subproject apprai- sal and follow-up. They will be used to keep the Subproject Data System up to date. 3.13 Consultants. IDA will approve the qualifications, terms and condi- tions of advisors and short-term consultants financed under the project. Provision has been made to finance five man-years of advisors and 22 man- months of short-term consultant estimated at an average foreign exchange cost of US$8,750 per man-month, plus US$1,600 (net of taxes) per man-month for local expenditures and subsistence. 3.14 Procurement. BBD is expected to follow usual DFC procurement proce- dures which would be adequate to ensure that goods and services are suitable and reasonably priced. 3.15 Disbursement. Disbursement would be made on the following basis: (1) Line of credit: 100% of BBD's subloans; (2) Technical assistance, consulting services, and training expenses: 100% of expenditures; Disbursements under all categories would be fully documented. However, for subloans below the free-limit, IDA could, if satisfied with BBD's perfor- mance following normal disbursement procedures, allow disbursements against certificates of expenditure, the documentation of which to be retained by BBD and inspected during supervision missions. Annex 14 gives the estimated disbursement schedule for the project. E. Benefits and Justification 3.16 The project is expected to generate the following benefits to Benin: a. Productive Investments. The project will result in the implementa- tion of about 45 financially and economically viable subprojects, representing an investment of US$12.1 million in industrial invest- ments. By supporting investments in diverse activities, the project will contribute to the reduction of the country's dependence on agricultural production. b. Employment Creation. The line of credit is expected to create about 900 permanent jobs at an average cost per job of US$7,200 for SSE/labor-intensive investments and US$19,500 for medium- scale industrial investments. C. Institution Building. The institutional improvements in BBD to be achieved under the project such as better trained staff, improved organization and control, better financial management, as well as active promotion and supervision of projects will increase BBD's overall efficiency and the quality of its invest- ments. d. SME Assistance. By making credit and technical assistance available to SME, the project will provide the first organized attempt in Benin to upgrade local artisans and entrepreneurs thereby contributing to increased productivity and improved technical and management skills. 3.17 Risks. The small size of the Beninese economy, the uncertainties surrounding the Nigerian market, the centralized management of the economy and the lack of skilled labor may not be conducive to investment and there is the risk that investments may not materialize as quickly as expected. Nevertheless, there are enough indications that formally or informally, the Nigerian market will continue to absorb Beninese products, that state enterprises will undertake substantial investments and that the Government will keep its pragmatic attitudes towards small- and medium-scale private investments. Under this project, the lack of expertise in designing and implementing investment proposals will be addressed by the early provision of a substantial technical assistance package. The project, being centered around an efficient and dynamic intermediary, should therefore be implemented smoothly. IV. RECOMMENDATIONS 4.01 This report recommends an IDA Credit of US$10 million to the Government of Benin. BBD would receive US$8.6 million as a line of credit on-lent by the Government to finance medium- and long-term loans to small- and medium-scale industrial investments. The Government would grant the remaining US$1.4 million to BBD to finance the program of technical assis- tance. 4.02 During negotiations, agreement has been reached on the following matters: - 24 - a. The Government has agreed to: (i) on-lending terms and condit:ions (paras. 3.04 and 3.05); (ii) increase BBD's capital by at: least CFAF 500 million no later than December 31, 1980 (para 2.12); (iii) provide BBD an interest subsidy equal to the interest lost by BBD on its sub-loans to small scale and labor intensive projects (para 3.05 b). b. BBD has agreed to (i) accept lending terms and conditions to sub-borrowers (para 3.04 and 3.05); (ii) appoint the counterparts to technical assistants (para. 3.07); (iii) adopt, before effectiveness, amendments to its Reglement Interieur including the definition of an exposure limit of 25% and a debt-equity ratio of 5:1 (para 2.12). (iv) build-up provisions to cover the foreign exchange risk on its past borrowings and take measures satisfactory to IDA to protect itself from the exchange risk on its future borrowings (para 2.08). (v) reduce its arrears to 25% of its outstanding portfolios before December 1981 (para. 2.11). BENIN Industrial Development Project GDP by Sector of Origin at Current Prices (1974-1978) Estimated 1974 1975 1976 1977 1978 CFAF Billion Percent CFAFB Percent CFAFB Percent CFAFB Percent CFAFB Percent Primary sector 37.7 38.3 39.0 37.8 47.7 40.0 54.9 41.1 60.2 40.7 Agriculture 29.0 29.5 29.2 28.4 36.7 30.8 42.3 31.7 45.7 30.9 Livestock 4.8 4.9 5.4 5.2 6.0 5.0 6.8 5.1 7.8 5.3 Forestry 2.0 2.0 2.2 2.1 2.5 2.1 - 2.8 2.1 3.2 2.2 Fishing 1.9 1.9 2.2 2.1 2.5 2.1 3.0 2.2 3.5 2.3 Secondary sector 15.4 15.7 15.2 14.7 16.4 13.8 17.7 13.2 19.3 13.0 Mining 0.3 0.3 0.2 0.2 0.2 0.2 0.3 0.2 0.3 0.2 Manufacturing 1/ 9.9 10.1 10.3 10.0 11.4 9.6 12.3 9.2 13.4 9.0 Construction and public works 5.2 5.3 4.7 4.5 4.8 4.0 5.1 3.8 5.6 3.8 Tertiary sector 45.2 46.0 49.,0 47.5 55.1 37.2 61.1 45.7 68.5 46.3 Commerce 24.6 25.0 26.2 25.4 30.7 25.8 34.0 25.4 37.4 25.3 Transport and communications 7.0 7.1 7.9 7.6 9.0 7.5 9.9 7.4 11.4 7.7 Other services 3.9 4.0 3.9 3.8 4.1 3.4 4.4 3.3 4.7 3.2 Public administration 9.7 9.9 11.0 10.7 11.3 9.5 12.8 9.6 15.0 10.1 GDP at factor cost 98.3 100.0 103.2 100.0 119.2 100.0 133.7 100.0 148.0 100.0 Indirect taxes (net) 9.3 9.6 11.0 12.5 13.6 GDP at market prices 107.6 112.8 130.2 146.2 161.6 Percentage change from previous year 4.8 15.4 12.3 10.6 Sources: Ministere du Plan, de la Statistique et de la Cooperation Technique, Institut National de la Statistique et de l'Analyse Economique; and IMF staff estimates. 1/ Including water and electricity. -26- ANNEX 2 BENIN Industrial Development Project Modern Industrial Sector a. Value Added by Branch, 1972-76 (Current CFAF Millions) 1972-76 Branch 1972 1973 1974 1975 1976 Growth Rate % p.a. Vegetable Oil Processing 501 1,287 1,347 875 1,168 23.6 Textiles, Garments, Shoes 576 526 511 1,256 2,467 45.2 Food Processing 81 182 143 290 400 49.0 Clinker Grinding, Ceramics 278 304 196 123 200 -8.6 Beverages 803 903 934 815 1,300 12.8 Water, Gas, Electricity 327 379 446 553 662 19.3 Mechanical/Metal Fabrication 60 45 77 164 200 35.1 Printing 21 30 21 27 27 6.5 Wood, Furniture 30 30 30 30 30 0.0 Others 24 32 60 80 100 42.8 Total 2,701 3,718 3,765 4,213 6,554 25.0 b. Selected Production Indicators, 1975 Million CFAF Employ- Sales V.A. Profit Branch Value ment per as % as % Sales Taxes Profit Added Persons Worker of Sales of Sales Textiles a/ 3,403 27 618 1,267 395 8.6 37.2 18.2 Vegetable Oil 5,636 157 504 875 1,054 5.3 15.5 8.9 Food Processing 2,256 36 1 290 631 3.6 12.9 0.0 Clinker Grinding 2,211 194 -207 123 48 46.1 5.6 -9.4 Electricity, Water 1,324 4 72 553 313 4.2 41.8 5.4 Beverages 1,597 472 58 815 322 5.0 51.0 3.6 Metal Fabrication 967 24 -18 164 297 3.3 17.0 -1.9 Printing 67 4 -7 27 45 1.5 40.3 -10.4 Wood, Furniture 35 2 1 30 79 0.4 85.7 2.9 Total 17,496 920 1,022 4,144 3,184 5.5 23.7 5.8 a/ Does not include IBETEX. Source: Ministry of Industry, L'Industrie Beninoise, May 1977, and economic mission estimates. -27- ANNEX 3 BENIN Industrial Development Project Results of Artisan Survey October 1978 - Jan Category Atlan. Mono Zou Ouem6 Atacora Borgou Total % Prcduction Artisans Metal working/iron 113 96 34 162 114 343 912 13 Metai working/copper 78 78 1 Metal working/tin 12 12 16 18 58 0.8 Gunsmith 3 6 1 10 0.1 Vood working 315 281 220 279 31 197 1,323 18.4 Carpentry 80 50 56 186 2.5 Masonry 148 166 110 249 17 127 819 11.3 Shoemaking 22 8 5 4 42 81 1.1 Pottery 31 37 18 34 20 89 225 3.1 Weavlng 6 4 43 30 97 320 500 7 Tailoring 755 270 368 642 102 298 2,435 33.9 Knitting 13 11 24 0.3 Mattress-making 19 20 39 0.5 Basket Weaving 248 6 43 93 37 68 495 7 1,765 928 972 1,577 423 1,518 7,183 100.0 Service Artisans Blacksmith (traditional) 43 73 75 154 95 217 668 40.2 Gunsmith 3 6 9 0.5 Mechanic (general) 55 30 7 50 13 50 205 12.3 Auto mechanic 130 15 25 8 20 198 12.0 Bicycle mechanic 30 25 5 14 20 4 5.6 Lathe mechanic 3 2 3 8 0.S Volcanizing 3 3 0.1 Soddering sheet metal 7 4 13 2 5 31 1.8 Soddering 7 1 10 30 1 15 64 3.8 Radio Repair 13 3 26 42 2.5 Watch Repair 22 8 30 1.4 Electrician 23 16 39 2.3 Painting (buildings) 23 12 20 32 3 15 105 6.2 Plumbing 5 1 12 18 1.0 Metal working 12 12 16 18 58 3.4 Tile laying 4 4 8 0.5 Hairdressing 17 30 30 47 2.8 Laundery 5 1 15 14 35 2.1 413 187 116 405 138 403 1,662 100,0 Artistic Artisans Jewelry 17 8 16 45 9 26 121 7.3 Calabash Decorating 6 13 12 16 2 49 3.0 Sculpting 52 15 25 53 18 26 189 11.4 Art pottery 16 4 8 6 5 39 2.0 Ceramics 22 2 15 9 6 54 3.2 Embroidery 175 18 37 47 16 14 307 18.5 Decorating (Tapistry,dying) 19 4 129 12 20 184 11.1 Mural and art painting 25 12 20 32 3 92 5.5 Phetography 31 11 2 15 4 14 77 0.5 Folklore 39 87 312 42 28 36 544 33.0 Sub total 402 161 577 273 125 118 1,656 100.0 Total 2,580 1,276 1,665 2,255 686 2,039 10,501 BENIN Industrial Development Project Distribution of Credit to the Economy - (as of June 30, 1978) Loans Short-term Medium-term Long-term Total CFAF Billion Percent CFAFB Percent CFAFB Percent CFAFB Percent Agriculture 5.1 19.2 0.7 10.5 0.3 30.0 6.1 17.8 Industry 6.0 22.6 2.5 37.3 0.1 10.0 8.6 25.1 Construction 1.3 4.9 0.1 1.5 - - 1.4 4.1 Transport 1.6 6.0 1.5 22.4 0.6 60.0 3.7 10.8 Commerce 11.6 43.6 0.8 11.9 - - 12.4 36.1 Services 1.0 3.7 1.1 16.4 _ - 2.1 6.1 Total 26.6 100.0 6.7 100.0 1.0 100.0 34.3 100.0 X of which public sector 16.0 60.1 4.3 64.2 1.0 100.0 21.3 62.1 Share of total 77.6 19.5 2.9 100.0 Source: BCEAO 1/ This table takes into account loans above CFAF 5 million which are all declared to the "Centrale des risques" of BCEAO. These creditarepresent 80% of total loans outstanding. N -29- BENIN ANNEX 5 Industrial Development Project Interest Rate Structure I. Refinancing by the Central Bank Short-and medium-term rediscount rate: - normal - 8.00% - preferential - 5.50% Treasury overdraft - 5.50% Advances against Government or private paper = 8.00% Deposits Advances Call money market Overnight 6,125 6,375 One month 6,250 6,500 Three month 6,500 6,750 II. Interest RatesApplicable to Credits by Banks Crop financing and agricultural export financing 6.50-7.50 Credit to preferential borrowers (including national SSE and housing) 6.50-8.50 All other loaus 9.50-13.00 (depending on ownership, term and sector) III. Interest Rates on Selected Deposits Public deposits determined by agreement Other deposits (minimum rates) 2.50-6.50 1/ As of April 1, 1979 2/ Depending on the amount, nature and term BENIN Banque Beninoise de D6veloppement Term and Sectorial Distribution of Credit Approvals (in percentages) FY ST MT LT Equipment Agriculture Commerce Housing Vehicles Misc.. Total 1974 66.2 30.4 3.4 22.8 0.2 63.2 13.0 0.5 0.5 100 1975 71.7 28.3 - 20.9 2.3 49.0 12.4 11.4 4.0 100 1976 51.1 36.9 12.0 40.1 1.5 18.8 13.8 23.1- 2.6 IG0 1977 22.3 34.4 43.3 71.2 - 14.6 11.2 2.3 0.7 100 1978 20.2 79.8 - 63.6 _ 24.0 10.1 0.2 2.1 100 1979 47.5 52.5 - 33.1 _ 7.2 20.0 - 39.7 100 (6 months) 0 Term and Sectorial Distribution of Credit Approvals (in CFAF million) FY ST MT LT Equipment Agriculture Commerce Housing Vehicles Misc. Total 1974 1,666 766 86 573 4 1,591 327 12 11 2,518-, 1975 2,322 919 - 678 73 1,589 402 369 130 3 . 24]. 1976 2,165 1,564 512 1,702 64 799 584 980 112 4,241 1977 1,446 2,226 2,802 4,608 1 948 722 149 46 6,474 1978 1,214 4,803 - 3,827 - 1,443 612 10 125 6,017 1979 686 759 - 478 - 104* 288 - 575 1,445 (6 months) * Does not include seasonal crop financing 0', ANNEX 7 BENIN Bangue Beninoise Pour Le DBve1oppement B/ PROJETS A FINANCER AU COURS DES 2 FROC_AINS EXERCICES Industrial Pro0ects Under Construction (As of March 31, 1979) 1. Complexe de manioc (Atlantique) 100 65 2. Emballage en carton 250 160 CFAF million 3. Emballage m6tallique 360 235 4. Emballage plastique 300 1.95 5. Glace alimentaire (Zou) 60 39 6. Glace alimnentaire (Mono) 60 39 I. PROJETS APPROUVES COUT CREDIT B.B.D. 7. Scierie industrielle 350 175 1. C.C.B. 841 300 8. Flocons d'igname 75 49 2. A.B.M. 101.5 57 9. Petit materiel electrique 155 101 3. Boulangerie Patisserie Kilimadjaro 60 36 10. Boulangerie Banikoara et Djougou 40 32 4. Biscuiterie l'Etoile 49 31 11. Boulangerie Oueme 50 32.5 5. Coop. Polyvalente de Panification 12. Carbonisation du bois 100 65 du Zou 12 13. Construction mecanique (usinage et fraisage) 350 228 T 0 T A L 1051.5 436 14. S.B.E.E. 1200 600 15. SO NA COP 600 300 II. PROJETS A FINANCER 16. Magasins gen6raux 3000 750 1. GlycEmie (SONICOG) 100 65 17. SONATRAC 366 235 2. Brasserie - (Beninoise Parakou) 3000 900 18. Progremme National de Construction de logements 1400 700 3. 0 N P (comprimn et solute injectable) 350 200 19. Usine formulation pesticides - 195 4. Glace alimentaire (Oueme) 180 100 20. Usine tuyaux plastiques 58 5. Boulangerie Natitingou 20 12 21. Raffinerie huile alimentaire - 180 6. Bouchons-couronnes (credit comple- 22. Fabrication produits pharmaceutiques 200 100 mentaire) - 30 23. Fabrication papier hygienique - 10 7. IBETEX 110 71.5 24. Brasserie PARAKOU (addition) - 300 8. Formulation d'engrais 818 500 25. Infrastructure SONAE - 50 26. Reservoirs Fuel-Port - 100 T 0 T A L 4578.0 1878.5 27. Amelioration Manutention-Port - 137 28. Magazine Stockage Cotonou - 16 T O T A L 4446.5 -32- ANNEX 8 BENIN Banque Beninoise de Developpement Forecast of Loan and Equity Approvals Approvals 1. Total loan approvals after experiencing dramatic growth from 1973 through 1977 (average annual growth +46%) declined in 1978. From a peak of CFA francs 6.5 billion in 1977 approvals decreased to CFA francs 6 billion in 1978 and are expected to amount to no more than CFAF 5 billion in 1979. BBD feels that this is a temporary slow-down resulting from processing delays on some large-scale projects and that the growth rate should increase substan- tially as from next year with approvals reaching close to CFA francs 8 billion in FY79-80. While this might be so, as BBD is the sole term-financier for development financing in the country, BBD's overall level of approvals, which is highly sensitive to financing of large-scale projects will,nonetheless, demonstrate sharp fluctuations over a period of time. Consequently, for projection purposes, it would be more realistic to assume a growth rate of 10% from a base of CFAF 5 billion in FY79. 2. Since the specialization of the banking system in Benin, BBD's share of commercial financing has substantially decreased and now essentially consists of consortial financing with BCB of seasonal crops. The relative share of equipment loans has in the meantime increased accordingly, from a low of 23% in 1974 to a high of 64% in 1978 with a peak of 71% in 1977. 3. Reflecting these developments and consistent with BBD's current lending operations, it is assumed that 60% of the total financing will be approved for equipment loans; 20% for commercial lending including consortial seasonal crop financing; 10% for housing finance and 10% for miscellaneous loans. Based on BBD's past operations, it is assumed that term loans would finance equipment and housing plus 50% of miscellaneous loans. 4. Equity approvals, consistent with BBD's current policy, are expected to average no more than CFAF30 million annually. Commitments and Disbursements 5. BBD does not keep statistics on commitments in relation to approvals. However, it has a very efficient legal department and in a very short period after the approvals, almost all of these are committed. It is however assumed that while all short-term approvals and equity investments will be committed in the same year, only 75% of term-approvals will be committed in the year of approval and the balance the following year. Data provided on disbursements show wide fluctuations from one year to the other with a low of 41% of approvals to a high of 82%. For the purpose of projections however, it is assumed that: i) 75% of short-term commitments will be disbursed in the first year and 25% the following year; -33- ANNEX 8 ii) 20% of term commitments will be disbursed the first year, 40% the second and 40% the third; iii) 100% of equity commitments will be disbursed the first year. On the basis of the above, projected approvals, commitments and disbursements should be as follows: 6. Approvals 1979 1980 1981 1982 1983 1984 Equipment Loans (60%) 3,000 3,300 3,630 3,993 4,392 4,830 Housing Loans((10%) 500 550 605 665 732 805 Commercial Loans (20%) 1,000 1,100 1,210 1,332 1,464 1,610 Miscellaneious Loans (10%) 1,000 550 605 665 732 805 Total Loans (100%) 5,000 5,500 6,050 6,655 7,320 8,050 Equity Investments 30 30 30 30 30 30 Total Approvals 5,030 5,530 6,080 6,685 7,350 8,080 of which Long-and medium-term(65%) 3,250 3,575 3,933 4,326 4,738 5,233 Short-term (35%) 1,750 1,925 2,117 2,329 2,562 2,817 Equity 30 30 30 30 30 30 5,030 5,530 6,080 6,685 7,350 8,080 7. Commitments Long-and medium-term loans 3,766i 3,494 3,844 4,227 4,650 5,115 Short-term loans 2,041'- 1,925 2,117 2,329 2,562 2,817 Equity investments 30 30 30 30 30 30 5,837 5,449 5,991 6,586 7,242 7,962 1/ Includes CFAF 1,329 billion of uncommitted approvals from the previous year 2/ Includes CFAF 291 million uncommited approvils from the previous year. 8. Disbursements Long-and medium-term loans 3,579L3 5,032/3 3,673 3,779 4,159 4,574 Short-term loans 1,802'- 1,882 2,069 2,276 2,503 2,7a54 Equity investments 30 30 30 30 30 30 5,411 6,944 5,772 6,085 6,692 7,358 3/ Includes CFAF 5,653 billion of undisbursed commitments from the pre*ious year, 4/ Includes CFAF 490 million of undisbursed commitments from the previous year. 9. Term. Term loans are expected to average 9 years with 2 yearsof grace. Short-term loans are expected to average one year. It is also assumed that 60% of term loans will be medium-term and 40% long-term. - 34 - ANNEX 8 10. Collection. The average life of existing term loans is estimated to be six years. Consequently it is assuned that one-sixth of the outstanding term portfolio at the year end will be repaid the following year. It is also assumed that 10% of new loans will fall in arrears and will thus represent doubtful loans. It is further assumed that 50% of doubtful loans outstanding will be repaid the following year. No sa:Les on equity participations are anticipated during the projection period. Repayments will evolve as follows: 1979 1980 1981 1982 1983 1984 Short-term credits 1,893 1,622 1,694 1,862 2,048 2,253 Term loans (old) 1,459 1,459 1,459 1,459 1,459 1,459 Term loans (new) - - 230 783 1,343 1,822 Doubtful loans 721 630 660 617 612 639 4,073 3,711 4,043 4,721 5,462 6,173 11. Portfolio Build-up. On the basis of the above assumptions, BBD's portfolio build up will be as follows: (outstanding end of the year) 1978 1979 1980 1981 1982 1983 1984 Short-term credits 1,893 1,622 1,694 1,862 2,048 2,253 2,479 Term loans 8,456 10,218 13,288 14,905 16,064. 17,005 17,841 Doubtful loans 1,442 1,259 1,320 1,234 1,223 1,277 1,370 Equity investments 124 154 184 214 244 274 304 11,915 13,253 16,486 18,215 19,579 20,809 21,994 12. Fixed Assets. It is assumed that BBD's net investments in housing will continue to increase at the rate of 20% annually. In addition BBD will spend CFAF 15 million annually on its own buildings, furniture and fixtures. Even though BBD's recent policy has been to sell off its housing investments as soon as the houses are constructed, uncertainties surrounding completion dates of on-going programs, future sales policies and prices, etc. do not allow for any meaningful projection base for such sales. Consequently such sales are not assumed to take place during the projection period. 13. Current Assets and Current Liabilities. BBD's current assets and liabilities are assumed to remain at their level as of end year 1977/78. 14. Resources. After a 45% increase already witnessed in 1979, BBD's deposits are expected to grow at a rate of 15% per annum as from FY80. Borrowings from the Central Bank are expected to cover the major share (75%) of BBD's short-term lending representing seasonal credits plus approximately 35% of BBD's term loans. Refinancing on the proposed IDA line for eligible subprojects is assumed to amount to approximately CFAF 400 million in 1980 and CFAF 700 million in each of the following two years. The balance of BBD's resource needs are assumed to be covered by its own funds and other borrowings. A 50% increase in BBD's share-capital is projected for 1980 to maintain BBD's term-debt equity ratio below 5:1. - 3 >' - ANiNEX 8 15. Revenues. Interest received orn loans is expected to increase from the current average of 8.3% to 8.5% in 1979; 9% in 1980 and 9.5% from 1980 onwards, reflecting higher rates BBD has been charging on recent loans as well as the higher on-lending rates which the proposed IDA project intends to propose to BBD. Income from housing investments is assum&d to increase at the rate of 20% per annum. Income from commissions and miscellaneous is expected to remain constant at its level in 1978. 16. Repayment of External Borrowings. Existing external borrowings ate to be repaid as per specific schedules summarized in para 20. 17. Financial Charges. Sight and term deposits are assumed to cost an average of 4% as in the recent past. Financial charges on the Central Bank borrowings are to represent an average cost of 7.5% reflecting a large share of rediscounting at normal rate. External borrowings w.ll be served the actual rates which average for CCCE 4.25%; African Development Bank 2%; USAID 3.5%; and IDA 8%. Interest on unidentified borrowings has been calculated at the rate of 5% in view of BBD's past experience with external lines. 18. Administrative Expenses. Salaries are assumed to grow at the rate of 15% per annum while other administrative expenses, which have been growing faster in the past, are projected to grow at the rate of 20% per annum. Depreciation charges are assumed to grow at the rate of 20%. 19. Provisions. Provisions are projected to increase each year to remain at 5% of the outstanding portfolio. 20. Borrowings (External). Taking into account available funds on existing external lines of credit, i.e. CFAF 588 million CCCE; 97 million USAID; 90 million African Development Bank and 203 million Algerian Development Bank, and assuming a line of credit of 1,800 million from IDA, the net outstanding amounts (after repayments) on these borrowings will evolve as follows: -36- ANNEX 8 Borrowings Outstanding 1978 1979 1980 1981 1982 1983 1984 CCCE Outstanding beginning of year 952 1,461 1,390 1,315 1,240 1,122 Additional withdrawals 588 - - - - - Repayments (79) (71) (75) (75) (118) (175) Outstanding year eid 952 1,461 1,390 1,315 1,240 1,122 947 African Development Bank Outstanding year beginning 189 234 279 264 233 202 Additional withdrawals 45 45 - - - - Repayments - - - (15) (31) (31) (31) Outstanding year 189 234 279 264 233 202 171 Algerian Development Bank Outstanding year beginning 120 223 323 323 323 293 Additional withdrawals 103 100 - - - - Repayments - - - - (30) (30) Outstanding year end 120 223 323 323 323 293 263 USAID Outstanding year beginning 336 430 424 418 412 400 Additional withdrawals 97 - - - - - Repayments (3) (6) (6) (6) (12) (12) Outstanding year end 336 430 424 418 412 400 388 IDA Outstanding year beginning - - - - 400 1,100 1,800 Additional withdrawals - - - 400 700 - - Repayments - - - - - (700) - Outstanding year end - - - 400 1,100 1,800 1,800 OTHER NEW BORROWINGS Outstanding year beginning - - - 800 800 600 400 Additional Withdrawals - - 800 - - - - Repayments - - - - 200 200 200 Outstanding year end _ - 800 800 600 400 200 -37- ANNEX 8 21. BBD's total resource requirements, including installment repayments on its borrowings, over 1979 through 1984 are expected to amount to CFAF 12,687 million. These are expected to be financed as follows: Requirements CFAF Million Disbursements (net of repayments) on loans and equity 10,079 Housing investments and other fixed assets 1,202 Repayments on borrowings 1 406 12,687 Financing Deposits 5,263 Central Bank rediscount 2,606 External lines of credit Existing 979 IBRD 1,800 Others 800 3,579 Capital increase 500 Cash-flow from operations 739 12,687 -38- ANNEX 9 BENIN Banque Bfninoise pour le Developpement Projected Cash - Flow Statements (CFAF million) 1979 1980 1981 1982 1983 1984 Total USES Disbursements on Portfolio 5,411 6,944 5,772 6,085 6,692 7,358 38,262 Housing Investments 112 134 162 193 232 279 1,112 Other investments in fixed assets 15 15 15 15 15 15 90 Repayments on External borrowings 82 77 96 312 391 448 1,406 5,620 7,170 6,045 6,605 7,330 8,100 40,870 RESOURCES Cash from operations 182 306 328 316 310 312 1,754 Central Bank rediscounting (595) 1,112 673 524 457 435 2,606 Existing external lines 834 145 - - - - 979 of credit Projected IDA line of credit - - 400 700 700 - 1,800 Other external - 800 - - - - 800 borrowings Collections on loans 4,073 3,711 4,043 4,721 5,462 6,173 28,183 Increase in deposits 1,235 597 687 790 909 1,045 5,263 Capital increase - 500 - - - - 500 5,729 7,171 6,131 7,051 7,833 7,965 41,885 Surplus or (Shortage) 109 11 86 446 508 (135) 1,015 Cash Position 208 209 295 741 1,249 1,114 Banque B6ninoise Pourle Dgveloppement Actual and Pr2jected Ineome Statements (CFAF million) 1NCOE A c t u a I P r o c t d 1975 1976 1977 1978 1979 1980 19831 1982 1983 1984 LiLteri:-t on loans (short-, e.d1uC= . and long-term) 264.8 446.0 6 5ia5 814.4 1,056.0 1,318.0 i,620.0 7 7i 0 .0 1,876.C WS,87 Cortlim!sko;s 8.2 9.3 6.1 4.9 5A0 5.0 5.0 5.0 5,0 3 , Tacowe from bousing investments 13.3 19.3 3.9 6.2 74 - 8.9 10,7 1?.9 15.4 18 i Other fr.7 4,0 5.1 7.1 7,0 7.0 7A 7.0 7.0 70 Total gross income from operatilous 297.0 481.5 675.6 83246 1,075.4 1,338.9 1,642-7 1,784.9 3,903.4 2,012.5 FXPENSES interest -rn borrowings: External 29.5 43.8 35.6 56.6 84,0 130.7 190 ,1 232.4 237.7 217l8 BCEA.0 30.8 106.5 272.8 354.9 380.3 400.0 466,6 511. 5 548.3 58x. 7 Deposits . othiers 29,5 60.3 45.4 93.9 134.6 171.2 196.9 226.4 260,,4 299.5 Salaries & persontiel costs 61,9 70.4 74.8 87.9 101,1 116,2 133,7 1.53, 7 176.8 203,3 Other ad*nirf stratfve expenses 24.3 e 9.0 _46.5 60.9 73.1 87.7 105,2 1I26.3 151,5 1 81c8 17670 32030 47 5,1 65 (4,42 7736,1 3 *7 3 105-8-G; 925 ,8625o 31X 172.5 27 Y,2jO,3 1,377 1,484-1 Gross operatiRp income 121.0 161.5 200.5 1.78,4 302,3 433.1 550n2 534.6 52807 528.4 Less: depreciaticin 9.6 13,2 15.8 12.S9 5.f 18 7 22.4 30M0 32.3 38 8 privisions 84.0 81.4 95.7 71.2 46.0 160,0 _0 d Q 67,0 60,0 58.0 93.6 94.6 - 12.5 84.1 61-,6 16 8,7 107,4 97.0 92T3 96.8 Gross Earnin s 27.4 66.9 89.0 94.3 240.7 254.4 442,8 437.6 436.4 431,6 Extraordinary profits (or losses)-t 36.0 14.5 9.3 52.5 - _- Gross Profit(or loss) 63.4 81.4 98.3 146.8 240 , 7 254.4 442o8 437.6 436e4 432 .6 Less incolme tax 36.3 39,5 54.1 66.4 120.3 127.2 221,4 218.8 218.2 21 5.8 Nst profit after tax 27.1 41.9 44.2 8034 120.4 127e2 221-4 218.8 218.2 215.8 1/ Recoveries on written-off loans and provision adjustment 0 - 40 I ASEEX 11 BENIN Banque Beninoise pour 1e D Actual and Projected Balance Sheets (CFAF million) Actual Projected ASSETS 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 Fixed Assets Building (BBD's) & fixtures 42.0 53.8 58.5 89.4 89 85 78 63 46 22 Housing investments 129.1 280.9 456.7 560.0 672 806 968 1,161 1,393 1,672 Others 1.7 4.0 29.7 16.6 16 16 16 16 16 _ 16 172.8 338.7 544.9 666.0 777 907 1,062 1,240 1,455 1,71C1 Portfolio Equity participations 71.8 76.8 131.5 124.2 154 184 214 244 274 304 Long-term loans 886.5 1,208.0 2,243.8 3,591.3 4,087 5,315 5,962 6,426 6,802 7,136 Medium-term loans 1,830.8 2,921.1 2,866.8 4,865.0 6,131 7,973 8,943 9,638 10,203 10,705 Sub-total 2,789.1 4,205.9 5,242.1 8,580.5 10,372 13,472 15,119 16,308 17,279 18,14i Short-term credits 1,219.3 2,506.8 2,295.6 1,893.4 1,622 1,694 1,862 2,048 2,253 2,479 Doubtful loans 183.9 215.7 624.4 1,441.8 1.259 1,320 1,234 1,223 1,277 1,370 Gross portfolio 4,192.3 6,928.4 8,162.1 11,915.7 13,253 16,486 18,215 19,579 20,809 21,994 Less provisions (445.2) (419.5) (515.7) (608.9) (655) (815) (900) (967) (1,027) (1,08' Net portfolio 3,747.1 6,508.9 7,646.4 11,306.8 12,598 15,671 17,315 18,612 19,782 20,909 Current Assets Cash & banks 497.3 200.8 227.9 98.8 208 209 295 741 1,249 1,114 Misc. debtors 755.4 1,234.6 2,001.1 1,914.3 1,914 1,914 1,914 1,914 1,914 1,914, Others 43.7 132.7 363.8 416.6 416 416 416 416 416 1,296.4 1,568.1 2,592.8 2,429.7 2,538 2,539 2,625 3,071 3,579 3,44is TOTAL 5,216.3 8,415.7 1 0,784. 14,402.5 15,913 19,117 21,002 22,9 24,816 260 LIABILITIES Equity Share capital and reserves 376.1 400.4 1,167.3 1,193.5 1,194 1,694 1,694 1,694 1,694 1,694 Retained earnings 29.0 46.6 53.0 85.8 206 333 554 773 991 1,206 Grants and Guarantee Funds 120.4 185.3 223.4 260.7 260 260 260 260 260 260 525.5 632.3 1,443.7 1,540.0 1,660 2,287 2,508 2,727 2,945 3,160 Term-borrowings External 776.4 966.2 1,013.2 1,597.6 2,348 3,216 3,520 3,908 4,208 3,765 Central banks 647.3 1,939.0 2,800.0 4,779.1 3,571 4,641 5,201 5,599 5,918 6,20(0 Term deposits - 1,947.5 1,480.1 1,571.3 2,278 2,620 3,013 3,465 3,985 4,58O 1,423.7 4,852.7 5,293.3 7,948.0 8,197 10,477 11,734 12,972 14,120 14,552' Current Liabilities Deposits 2,071.5 1,086.5 733.8 1,175.5 1,704 1,959 2,253 2,591 2,980 3,427 Central bank - - 1,298.3 589.0 1,202 1,244 1,357 1,483 1,621 1,774 Miscellaneous creditors creditors 1,195.6 1,844.2 2,015.0 3,150.0 3,150 3,150 3,150 3,150 3,150 3,150 3,267.1 2,930.7 4,047.1 4,914.5 6,056 6,353 6,760 7,224 7,751 8,351 TOTAL 5,216.3 8,415.7 10,784.1 14,402.5 15,913 19,117 21,002 22,923 24,816 26,063 BENIN Banque Beninoise pour le Developpement Actual and Projected Financial Ratios (CFAF million) Actual Projected _ Income and expenses as % of average 1975 1976 1977 1978 1979 1980 1981 1982 1983 1984 total assets Income from portfolio 6.4 6.7 6.9 6.5 7.0 7.5 &.0 7.9 7.9 7.9 Other income from operations 0.6 0.4 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Extraordinary income or (loss) 0.8 0.2 0.1 0.4 - - - - Total gross income 7.8 7.3 7.1 7.0 7.1 7.6 8.1 8.0 8.0 8.0 Financial expenses 2.1 3.1 3.7 4.0 4.0 4.0 4.2 4.3 4.4 4.4 Administrative expenses 2.0 1.6 1.3 1.2 1.1 1.2 1.2 1.3 1.4 1.5 . Provisions and depreciation 2.2 1.4 1.2 0.7 0.4 1.0 0.5 0.4 0.4 0.4 ' Taxes 0.9 0.6 0.4 0.5 0.8 0.7 1.1 1.0 0.9 0.8 Profit after taxes 0.6 0.6 0.5 0.6 0.8 0.7 1.1 1.0 0.9 0.9 Net profit as % of share capital 9.0 14.0 4.0 8.0 12.0 8.5 14.8 14.6 14.6 14.4 Net profit as % of average equity 3.2 4.1 2.9 3.9 5.2 6.6 8.6 7.0 5.9 5.1 Debt/Equity ratio Term-debt equity 2.7:1 7.6:1 3.6:1 5.1:1 4.9:1 4.6:1 4.7:1 4.8:1 4.8:1 4.6:1 Total debt equity 8.9:1 12.3:1 6.5:1 8.4:1 8.6:1 7.4:1 7.4:1 7.4:1 7.4:1 7.2:1 Interest received on loans as % of average portfolio 8.2 8.1 8.8 8.2 8.5 9.0 9.5 9.5 9.5 9.5 Financial expenses as % of average borrowings 3.4 4.5 3.8 5.9 5.8 5.6 5.8 5.9 5.9 5.8 -42- ANNEX 13 BENIN Banque Beninoise pour le DiEveloppement Proposed Amendments to BBD's Raglement Interieur Titre II, Paragraphe7 - Des Equilibres Financiers Internes de la Banque The following articles would be added: - "The Bank will strive to maintain a satisfactory balance between the maturities of its own obligations and those of the loans it grants." - "The Bank will take adequate steps to protect itself from exchange risks in respect of its borrowings repayable in foreign currencies." - "The Bank will not incur debts having an original maturity of more than one year in excess of the limits imposed by the banking regulations and its contractual obligations towards lenders." Titre III, Paragraphe 1 - Des Credits aux Entreprises Article 57 - "Sans limitation du p:Lafond" would be deleted, the following article would be introduced: "The total amount of loans granted by the company together with its participations and any other commitments of a financial nature in favor of a single enterprise will not normally exceed 25% of the company's unimpaired capital and reserve, unless the loans are guaranteed by the state or by an international or regional guarantee fund of good standing. - 43 - ANNEX 14 BENIN Industrial Development Project Estimated Schedule of Disbursements (US$000) Fiscal Year (Ending June 30) Disbursement Cumulative 1981 First Quarter 25.0 25.0 Second Quarter 76.5 101.5 Third Quarter 96.5 198.0 Fourth Quarter 452.5 650.5 1982 First Quarter 406.5 1,057.0 Second Quarter 542.5 1,599.5 Third Quarter 611.5 2,211.0 Fourth Quarter 707.5 2,918.5 1983 First Quarter 745.5 3,664.0 Second Quarter 667.5 4,331.5 Third Quarter 657.5 4,989.0 Fourth Quarter 783.5 5,772.5 1984 First Quarter 927.5 6,700.0 Second Quarter 900.0 7,600.0 Third Quarter 740.0 8,340.0 Fourth Quarter 600.0 8,940.0 1985 First Quarter 500.0 9,440.0 Second Quarter 360.0 9,800 Third Quarter 200.0 10,000 _ 44 - ANNEX 15 BENIN Industrial Development Project Selected Documents and Data Available in the Project File I. Background Information - The Beninese Revolution in 1977, Europe-Outremer, March 1977 - The Economy of Benin, The World Bank, Report No. 2079-BEN, May 31, 1979. - Benin, Recent Economic Development, the International Monetary Fund, May 25, 1979 - Indicateurs economiques beninois, Banque Centrale des Etats de l'Afrigue de l'Ouest, December 1978. - L'Industrie Beninoise, Minist6re de l'Industrie et de I'Artisanat, 1977. - Politique G&nerale sur l'Artisanat, Seminaire National sur l'Artisanat, Mars 1977. - La Promotion des Petites et Moyennes Entreprises en Republique Populaire du Benin, Chambre de Commerce et d'Industrie du B_nin, 12 decembre 1977. II. Banque Beninoise pour le Developpement (BBD) - BBD - Statuts et Reglement Interieur. - BBD - Rapports d'Activite 1971-1978. - BBD - Etats Financiers 1974-1978 - BBD - Plusieurs exemples de dossiers de credit - BBD - Organigramme des services. III. The Project - Accounting and Financial Reorganization (Terms of reference) - Industrial Engineer (Terms of Reference) - Training and Extension Serviice Specialist (Terms of reference) IBRD 13627 N I ,V,_, \. iG E R \ MAY 1978 E R <,45 I // 9 \ t<~~~~ ~ ~~~~~~ANDI p A A~~~NGU ETA ' ( )~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~G "\ AT TlN GOOde K- B..|
Группа Всемирного банка · Staff Appraisal Report
Benin - Industrial Development Project
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