Barbados - Industrial Development and Export Promotion Project

Document of The World Bank FILE COPY FOR OFFICIAL USE ONLY Report No. P-2723-BAR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BARBADOS FOR AN INDUSTRIAL DEVELOPMENT AND EXPORT PROMOTION PROJECT February 29, 1980 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit Barbados Dollar (BDS$) US$1 BDS$2 BDS$1 US$0.50 FISCAL YEAR April 1 - March 31 ABBREVIATIONS BDB - Barbados Development Bank BIDC - Barbados Industrial Development Corporation BIMAP - Barbados Institute for Management and Productivity BMFC - Barbados Mortgage Finance Company BNB - Barbados National Bank CARICOM - Caribbean Common Market CDB - Caribbean Development Bank CDF - Caribbean Development Facility CET - Common External Tariff CIDA - Canadian International Development Agency EEC - European Economic Community EIB - European Investment Bank EPA - Export Promotion Agency EPC - Export Promotion Corporation IDB - Inter-American Development Bank NTB - National Training Board  FOR OFFICIAL USE ONLY BARBADOS INDUSTRIAL DEVELOPMENT AND EXPORT PROMOTION PROJECT LOAN AND PROJECT SUMMARY Borrower: Barbados Beneficiaries: Barbados Development Bank (BDB) Barbados Industrial Development Corporation (BIDC) Barbados Institute for Management and Productivity (BIMAP) Export Promotion Corporation (EPC) National Training Board (NTB) Amount: US$10.0 million Terms: Payable in 15 years, including three years of grace at 8.25% interest per annum Relending Terms: The Government will relend US$6.0 million equivalent of the loan to BIDC for 15 years including 3 years grace at 10% interest for the construction of industrial estates and an investment promotion program. It will also relend US$3.2 million equivalent to BDB on terms similar to the terms charged by the Bank to the Government, for the financing of industrial projects. BDB will relend the Bank's resources at terms of up to 15 years, including three years' grace at no less than 11% interest. The Government would bear the risk on foreign exchange on the relent portions of the Bank loan. Project Description: The project's objectives are to generate foreign exchange and to increase employment by expanding industrial output and exports and would consist of: (a) an investment promotion program and the construc- tion of industrial estates through the BIDC; (b) industrial lending for fixed assets and permanent working capital through the BDB; (c) promotion of manufactured exports, training and marketing assistance to domestic exporters through the EPC; (d) management and vocational training for industry through BIMAP and the NTB. The project will not be subject to any extraordinary risk. BIDC's proposed policy for increased rental rates of factory space, to enable it to generate a positive rate of return, may reduce the demand for space in Barbados. This reduction, however, is not expected to be large as the rentals will still be in line with those charged by BIDC's competitors in the Caribbean. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - ii - Estimated Cost: (US$ million equivalent) Local Foreign Total I. Industrial Estates and Investment Promotion a) Industrial Estates Infrastructure .40 .40 .80 Factory Construction 4.40 4.60 9.00 Subtotal 4.80 5.00 9.80 Physical Contingency .50 .50 1.00 Price Contingency 1.85 1.85 3.70 Land Acquisition .20 - .20 Subtotal - Industrial Estates 7.35 7.35 14.70 b) Overseas Promotion - .60 .60 c) Technical Assistance and Staff Training - .40 .40 Subtotal - Industrial Estates & Industrial Promotion 7.35 8.35 15.70 II. Industrial Lending Lending 1.00 3.00 4.00 Technical Assistance - .20 .20 Subtotal Industrial Lending 1.00 3.20 4.20 III. Manufactured Exports Promotion .70 .30 1.00 IV. Vocational Training .25 .25 .50 V. Management Training .25 .25 .50 Total Cost of Project (includes taxes of $0.6 million) 9.55 12.35 21.90 Financing Plan: (US$ million equivalent) Local Foreign Total Bank - 10.00 10.00 CDB - 2.35 2.35 Government 9.55 - 9.55 Total 9.55 12.35 21.90 Estimated Disbursements: (US$ million equivalent) Bank FY 1981 1982 1983 1984 Annual 2.0 3.8 3.1 1.1 Cumulative 2.0 5.8 8.9 10.0 Staff Appraisal Report No. 2797-BAR, dated February 29, 1980.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BARBADOS FOR AN INDUSTRIAL DEVELOPMENT AND EXPORT PROMOTION PROJECT 1. I submit the following report and recommendation on a proposed loan for the equivalent of US$10.0 million to Barbados for an industrial development and export promotion project. The loan would have a term of 15 years, including three years of grace, with interest at 8.25% per annum. The Caribbean Development Bank (CDB) is expected to cofinance the project with a loan of US$2.35 million equivalent. The CDB loan would have terms approximately similar to the terms of the Bank loan. US$6.0 million of the Bank loan will be relent to the Barbados Industrial Corporation (BIDC) for 15 years with three years' grace at an interest rate of 10% per annum. US$3.2 million of the Bank loan will be relent to Barbados Development Bank (BDB) on terms similar to the terms of the World Bank loan to the Government. BDB will relend the Bank's resources at terms of up to 15 years, including three years grace at no less than 11% interest. The Government will bear the foreign exchange risk on the relent portions of the Bank loan. PART 1 - THE ECONOMY 2. An economic report (Economic Memorandum on Barbados, Report No. 2506-BAR, dated May 7, 1979) was distributed to the Executive Directors on May 14, 1979. Annex 1 contains the basic country data. Background 3. Barbados is among the most densely populated countries in the world, with a total area of 166 square miles and a population of 252,000. A relatively high per capita income (US$1,940 in 1978), small size, and geographical isolation have contributed to the building of a homogeneous, close-knit society, with a relatively equitable income distribution and a long history of constitutional government. Beautiful beaches and mild weather presently attract almost 400,000 tourists annually, providing the single most important contribution to GDP. A well-educated and competi- tiveLy priced labor force has served as the base for the rapid development of export-oriented manufacturing in the last decade. Soil, topography and rainfall patterns are well suited for growing sugarcane, which once dominated the economy and continues to be the main agricultural product. 4. Barbados has a relatively well developed economic infrastructure, with a good road system, jet-accommodating airport, deepwater harbor and public utilities which are run fairly efficiently. At present, pockets of petroleum and natural gas supply about 20% of domestic energy consump- tion. Education and health facilities are relatively good; a serious short- age of adequate housing, however, affects the lower income groups. Population growlh has traditionally been lower than 1% per annum because of a successful family planning program and a high emigration rate.  -2- 5. Barbados' economy has undergone a structural transformation in the last twenty years. Sugar experienced a secular decline, caused largely by weak international prices and the scarcity and rising cost of agricultural labor. Nonsugar agriculture also stagnated or declined in the 1970s, although some gains in poultry and vegetables have taken place in the last few years. In contrast to the weakening of agriculture, in the 1960's and early 1970s tourism became the leading growth sector. Sustained high levels of private investment in tourist accommodation resulted in a quadrupling in the number of tourist beds in the 1960s and steady growth in the number of visitor arrivals. A favorable climate for both foreign and domestic investment, supported by the promotional efforts of the Barbados Industrial Development Corporation, also resulted in the rapid growth of the manufacturing sector in the 1970s, particularly electronic assembly, garment and other consumer good industries producing for export. As a result of the dynamism of tourism and manufacturing, Barbados was able to achieve average annual real growth of 5% during 1966-1979, despite the overall poor performance of agriculture. At the same time, the share of tourism and related services increased from 11% of GDP in 1966 to almost one-third in 1979, while the share of agriculture dropped from 25% to 11% over the same period. 6. Despite Barbados' recent economic gains, a high unemployment rate (15% in 1979) continues to be a serious problem. The persistence of the unemployment problem reflects a number of difficulties. Opportunities for emigration, which in the past acted as an outlet for job seekers, have declined. In the last few years, increasing participation rates, particularly of women, have also played a role. A reluctance on the part of new entrants to the labor force to work in the agricultural sector, where labor is scarce, persists. Finally, the educational system has been inappropriate in some respects to Barbados' development needs, although recently the Government, in conjunction with a Bank education loan, has been attempting to place greater emphasis on vocational training at the primary and secondary levels. As a result, the expectations and skills of many school leavers are not in keeping with available jobs, with the consequence that unemployment exists concurrently with serious shortages of key skills. Economic Developments, 1973-1979 7. Given its open economy, narrow resource base, and export-oriented development strategy, Barbados is highly susceptible to swings in interna- tional prices and demand. As a consequence, the 1973 rise in oil prices and ensuing international developments had a major impact on the economy. In 1974, real GDP growth 1/ slowed to 2% as growth in visitor arrivals slackened and manufacturing output contracted. Rising sugar prices helped compensate for the impact of low growth of export volume and increased prices for petro- leum and other imports on the balance of payments. High levels of international inflation, however, together with the depreciation of sterling (to which the Barbados dollar was tied), were reflected in a 40% increase in the Consumer Price Index (CPI). The increased cost of living resulted in upward pressure on wages, and consequent higher public outlays for wages and salaries led to a deterioration in public sector savings. In 1975, international recession dampened demand for tourism and some manufactured goods in Barbados' major markets, 1/ GDP growth rates are at factor cost.  resulting in a contraction in export volume and a consequent decline in gross domestic output that year. A serious weakening of the balance of payments and the public finances, however, was temporarily averted by the continued rise in sugar prices in the first half of the year. Persis- tent high levels of international prices led to a 20% increase in the CPI, and continued upward pressure on wages. 8. With the improvement of the world economy in 1976, Barbados was able to resume economic growth and to begin to reduce its high levels of unemployment. Real GDP increased by almost 5% as tourism recovered and manufacturing responded to stepped up promotional activities. A pre- cipitous drop in sugar prices, however, led to a record balance of payments current account deficit, amounting to about 11% of GDP. Net external capital inflows were inadequate to finance the gap, and net foreign exchange reserves dropped to less than one month of imports. The weakening in the balance of payments was paralleled in the public finances, where the loss of extra- ordinary receipts from the sugar levy, coupled with the adjustment of civil service wages for inflation, resulted in a halving of public sector savings. The Government was forced to resort to substantial borrowing from the banking system to finance its investment program. Nevertheless, the rate of inflation decelerated considerably to 5%, reflecting a slowing in international price increases and the alignment of the Barbados dollar with the US dollar the previous year. Despite continued expansion in export volume and moderate economic growth, the balance of payments and the public finances continued to be weak in 1977. Accordingly, to finance its public investment program and to maintain foreign exchange reserve levels, the Government stepped up its external borrowing. 9. Real GDP increased by about 5.4% in 1978, as tourism arrivals increased, off-season hotel occupancy rates expanded, and the manufacturing sector boomed. At the same time, a number of corrective financial and fiscial measures initiated at the end of 1977 took effect. These included restrictions of imports of consumer durables and consumer credit, as well as increased tax rates, improvements in tax administration, an increase in the social security tax ceiling and curtailment of public sector expenditures. Together with the impact of economic expansion, these measures significantly improved both balance of payments and public finances. The current account deficit fell to less than one percent of GDP, while public sector savings increased to 6%. Increased levels of external borrowing enabled net inter- national reserves to rise to almost two months' imports. At about 9-1/2%, domestic inflation kept pace with international price movements. 10. The economic situation continued to be favorable in 1979. Record tourLst arrivals, continued expansion of export manufacturing, the recovery of sugar from reduced production levels the previous year, and a construc- tion boom resulted in economic growth of about 6.5%. Despite modest tax con- cessions and some relaxation in current expenditure control, public sector savings continued to register about 6% of GDP. Although export volume expanded by almost 8%, rising import volume and prices led to a small increase in the current account deficit, to about 3% of GDP. Net official project-related and private capital were sufficient to increase foreign exchange reserves marginally in nominal terms, although they still remained below two months of imports. Largely because of increased prices for petroleum and other imports, the inflation rose to an average annual rate of about 13%.  -4- Development Strategy 11. The Government's development strategy, as outlined in the recently published Development Plan, aims at maintaining high levels of economic growth, reducing the unemployment rate, and strengthening the balance of payments over the medium-term through the expansion and diversification of exports and the development of efficient import substitution. The private sector is to continue to play an important role in the economy, supported by a moderately expanded public investment program. 12. Tourism is expected to continue to be a leading growth sector. Although present hotel facilities reached close to full capacity in 1979 during the peak winter season, ongoing and anticipated hotel construction and expansion should permit a steady increase in arrivals over the next few years. At the same time, scope exists to continue to increase occupancy rates during the off season. Eventually, however, the island's small size and high population density will pose physical limitations to continued tourism expansion. 13. Prospects for the continued growth of the manufacturing sector appear quite favorable. Although the small domestic market limits the gains that can be made by industries manufacturing for domestic consumption, export manufacturing is expected to continue to expand rapidly. Various industrial incentives made available by the Government constitute an attrac- tive package, which, together with the country's long tradition of stable institutions and favorable investment climate, has generated strong inter- est on the part of potential investors, both foreign and domestic. The Barbados Industrial Development Corporation will continue to play a vital role in attracting new industry, and has recently expanded its opera- tions to include a European office. (A New York office is already in existence). As the number of industrial firms operating in Barbados increases, however, a system to collect adequate information about their activities will be needed. At the same time, over the long term, creative programs will be required to increase participation of Barbadian entre- preneurs and managers in the new ventures, both to assure equitable sharing of the benefits of economic growth and to reinforce the development of Barbadian entrepreneurial skills. 14. Over the next few years, the Government plans to place increasing emphasis on the agricultural sector. Through greater use of mechanization, rehabilitation of sugar factories, and improved cultivation techniques, sugar production could be able to increase by an average of at least 3% a year without expansion in the acreage devoted to the crop. At the same time, in order to promote long-term economic growth and employment generation and decrease the food import bill, the Government hopes to encourage the growth of nonsugar agriculture through the provision of appropriate incen- tives, the development of irrigation to permit year round cultivation of vegetables, and the strengthening of extension services.  15. In order to reduce reliance on imported petroleum, the Plan also places great emphasis on the exploration of possible offshore petroleum and natural gas deposits, and the development of alternative energy sources (solar, bagasse and alcohol). These efforts will need to be supported by the development and execution of country-wide energy conservation measures. Public Sector Investment and Financing 16. The composition of the public investment program closely reflects the Government's development priorities. Over the medium-term, the authori- ties plan to increase the emphasis of public investment on the directly productive sectors, while continuing efforts toward the improvement of economic and social infrastructure. In this regard, the Government has given priority to a number of projects in the agricultural sector. In addition to ongoing efforts to improve the quality and availability of extension services and credit, several rural development projects, with substantial land tenure reform and irrigation components, have been included in the program. They aim at promoting more efficient land use, expanding and diversifying agricultural output and providing greater economic security to small farmers. With regard to industrial development, the investment program provides for the construction of industrial estates which, coupled with appropriate incentives, should encourage continued private sector investment. At the same time, the Government is contemplating or under- taking pilot studies of agro and other industries which are anticipated to have strong backward and forward linkages. In the area of tourism, Barbados is proceeding with the Bank-financed Holiday Village project, which aims to increase hotel capacity and promote the participation of local entre- preneurs in the tourism industry. The program also provides for other tourist-related investments, and for modest improvements in existing trans- portation, education, health and housing facilities. 17. In order to finance the public investment program, which is expected to average about 8% of GDP over the next five years, the Govern- ment will need to maintain continued high levels of public savings. At present, however, measures to relieve the income tax burden are required, as income tax brackets have remained substantially unchanged for the past 11 years. (The marginal income tax rate on a salary equivalent to US$15,000 is now 70%.) Nevertheless, even assuming some adjustment of the income tax structure for the inroads of inflation, if the Government continues to control the growth of public consumption, it should be able to maintain public sector savings at a level over 5% of GDP, sufficient to finance approximately two-thirds of the public sector investment program. Net project-related capital inflows are expected to be adequate to finance another 25%. The remainder of the financing can be mobilized from domestic financial insti- tutions.  - 6 - Balance of Payments and External Creditworthiness 18. Short-term balance of payments prospects for Barbados are dependent on the evolution of the world economy in the immediate future. A slowdown in the growth of industrialized countries could lead to some dampening in the growth of export volume over the next two years. Over the medium-term, however, given the continuation of overall prudent economic management and the present development strategy, Barbados' prospects for continued high levels of economic growth and a strengthened balance of payments are favorable. With a public external debt service ratio of 2.8% in 1979 and debt outstanding and disbursed amounting to US$60.9 million (less than 10% of GDP) at the end of 1979, Barbados has relatively modest external public indebtedness. In the light of its economic performance in recent years, Barbados should be expected to remain creditworthy in the foreseeable future for loans on conventional terms. PART II - BANK GROUP OPERATIONS 19. Barbados became a Bank member in 1974. The proposed project would be the Bank's third lending operation. The first Bank loan to Barbados, for an education project, was approved by the Executive Directors on December 19, 1978. The second Bank loan, for a tourism development project, was approved on April 10, 1979. In addition, Barbados has benefited from the Bank's lend- ing to the Caribbean Development Bank (CDB). So far, a loan of $2.6 million from IBRD resources was made by the CDB to Barbados in September 1978 for an industrial development project. 20. The Bank has maintained a continuing dialogue with the Government on its economic policies and development priorities. The Bank organized a subgroup under the auspices of the Caribbean Group for Cooperation in Economic Development to coordinate financial and technical aid to Barbados. At the first two meetings of the subgroup in June 1978 and June 1979, multi- lateral and bilateral donors expressed substantial interest in financing specific priority projects and in providing technical assistance to Barbados. In addition, in light of Barbados' balance of payments difficulties, the country received in 1978-79 special assistance through the Caribbean Develop- ment Facility (CDF) 1/ from the UK, the US, Canada and the OPEC Development Fund for $1.65 million, $3.0 million, $1.5 million and $1.5 million respec- tively. The Bank is planning to organize a similar subgroup for Barbados during the Third Meeting of the Caribbean Group scheduled for June 1980. 1/ The CDF was established during the First Meeting of the Caribbean Group for Cooperation in Economic Development, held at Bank headquarters, in June 19-24, 1978. It is a transitional emergency financing facility to cover local costs and cost overruns of development projects in Caribbean countries, including Barbados. It is planned to be phased out over a maximum period of five years. As a result of the first meeting of the Caribbean Group $115.0 million of CDF-type assistance was pledged by donors for FY79. Commitments in the second meeting reached $280.0 million for FY80. The major contributors are the US, UK, Canada, the OPEC Special Fund, and the EEC.  -7 - 21. In the future, Bank's lending to Barbados, either directly or through the CDB will be mainly in the agriculture and power sectors. This is in line with the Government's strategy to sustain adequate rates of economic growth, to reduce the mounting import food bill while satisfying the needs of the local population and the tourism sector, and to increase the present power-generating capacity of the country in order to meet increasing demand requirements. 22. It is estimated that by 1983 the Bank's share in Barbados' public external debt outstanding and disbursed will be about 14%. The Bank's share in the external public debt service will be about 15%. PART III - THE MANUFACTURING AND FINANCIAL SECTORS The Manufacturing Sector - Structure and Growth 23. Manufacturing has grown at about 6% per annum on average since 1970, considerably above the average for the whole economy. Nevertheless, in 1978 manufacturing still provided only 11.3% of GDP and about 16% of total employ- ment. While industrial growth leveled off in 1977, there are indications of strong recovery in 1978/79. 24. The manufacturing sector is dominated by foreign-owned enterprises, some of which operate as enclaves with limited links to the local economy. One half of the 184 manufacturing enterprises surveyed in 1977 were fully foreign owned or had major foreign participation. There are 25 enclave firms producing mainly electronic components and garments and exporting mainly to the U.S. under provisions 8.06 and 8.07 of the U.S. Customs Tariff Law. Foreign owned non-enclave industrial enterprises are represented in a large number of product groups, particularly food, beverages, textiles, and garments. Locally owned manufacturing enterprises operate in all major industrial sectors, with the exception of assembly of electronic components. Foreign owned enterprises are on average larger than locally owned firms; they provide 70% of employment in manufacturing and generate about 80% of industrial exports. Manufactured Exports 25. While export oriented sugar agriculture has been declining, manu- factured exports (excluding re-exports) rose from US$12.8 million in 1970 to US$65.5 million in 1978. Garments and electronic components were the leading sub-sectors during this period, increasing their total share in manufactured exports from 40% in 1970 to 60% in 1978. Meanwhile traditional manufactured exports of processed food, rum and other beverages achieved little growth in real terms. The share of exports in total industrial sales (excluding oil refining) was 46% in 1977 and probably exceeded 50% in 1978. The production of textiles, apparel, machinery and electronic components is largely export- orientated, while foods, beverages, furniture and non-metallic mineral products are manufactured mainly for the local market.  - 8 - 26. In 1978, about one half of manufactured exports went to the US, Canada and the United Kingdom. CARICOM countries, particularly Trinidad and Tobago, represent also important markets, accounting for about 40% of the total. Other European and Latin American markets have so far only absorbed marginal quantities of Barbadian manufactured exports. The establishment of the Export Promotion Corporation (EPC) in 1979 which would be strengthened by the proposed project, will help to expand manufactured exports and will assist exporters, particularly local manufacturers, to establish new markets outside the CARICOM. Employment 27. The manufacturing sector has been generating about one-third of the 10,000 additional jobs created between 1970 and 1979. Three-quarters of all jobs created in recent years in manufacturing were in clothing and electronic components enterprises operating in the industrial estates established by the Barbados Industrial Development Corporation (BIDC). The proposed project would assist BIDC in expanding its industrial estate and factory construction program. This would help generate about 3,000 to 4,000 jobs during the three- year project implementation period at an average cost of about $3,500 to $4,900 per job. Industrial Incentive Policies 28. Policies for the promotion of industrial development in Barbados were initiated with the Pioneer Industries Act of 1958 and the Industrial Incentives Act of 1963. Benefits under the latter still apply to 73 industrial enterprises. An Industrial Development Act was enacted in 1969 granting tax exemption and duty free imports of production inputs to enterprises exporting 100% of production; 8 enclave industries currently operate under this provision. The Fiscal Incentives Act of 1974 was passed to implement the agreement between the CARICOM members to harmonize national tax and duty incentives in industry. So far 25 firms have been approved under the Fiscal Incentives Act. Thus, 106 industrial firms, out of a total of 180 benefit from varying levels of import duty and tax concessions under one of the four Acts. This group of enterprises provides about 80% of employment and value added in manufacturing and close to 100% of industrial exports. The majority of the remaining smaller and mostly locally owned manufacturing enterprises which are not "approved" under the incentive laws, are benefitting from duty free imports of raw materials and machinery in accordance with individual decisions by the Trade Incentives Committee. Therefore, with the exception of a few small scale firms, indus- trial enterprises in the island can import and export duty free and without restrictions, operating virtually under conditions equivalent to those of a free trade zone. 29. Tightening of criteria and procedures for granting duty free imports of raw materials and machinery to enterprises that are not approved under the Fiscal Incentives Act may be necessary. Currently, a minimum volume of employment of 20 workers in the garment industry and of 6 workers in most of the other industries is required to obtain the duty free import privilege, mainly for control of imports by the customs office. The development of  - 9 - competitive small-scale industry would require a reconsideration of the procedures for granting exemption from import duties for non-approved indus- trial enterprises. Funding will be provided by the proposed loan to review the export incentives currently available to Barbadian manufacturers and to identify the necessary changes required. Emphasis will be given to the problems of small firms and to the incentives required for "extraregional" exports. Tariff Policy 30. Tariff protection in Barbados which had been traditionally low, increased when the country joined CARICOM in 1973, as tariff levels had to be increased to conform with the CARICOM Common External Tariff (CET). Nominal protection afforded by the CET varies from 0% to 60%. Owing mainly to the duty exemptions referred to in para. 28 above, total customs collection in Barbados is only about 10% of CIF import value. Effective protection to industry provided by the CET, however, is substantially higher, owing to the small share of domestic value added in industrial sales (25% on average) and to the duty free import of most production inputs. Industrial Estates 31. Construction of factory buildings in industrial estates by BIDC has proved to be an important incentive to industrialization in Barbados. BIDC has constructed over one million sq. ft. of factory space in nine industrial estates, and all enclave enterprises, most of the foreign owned firms and a large number of locally owned enterprises are located in them. Rents and purchase prices of factory space in the industrial estates are below the market level and industrial firms have been subsidized through low rents, particularly the small-scale local manufacturers. The proposed project will assist BIDC to expand its construction program and to introduce a new rental and pricing policy which would adequately reflect its costs of construction. Industrial Sector Outlook 32. Barbados' overall economic policy and industrial incentives are generally well conceived and administered, as indicated by the considerable industrial growth achieved in the last two decades and they should also contribute, with relatively minor adjustments, to the achievement of the goals set in the country's 1978-82 development plan. The plan focuses on continued rapid creation of employment and on increased manufactured production and exports. Employment in manufacturing is expected to increase by about 1,250 jobs per year on the average, reaching a total of 19,000 in 1982, about 18.6% of total projected employment in that year. Manufactured production and exports are planned to grow at 8% per year in real terms. These goals are compatible with achievements during the period 1970-1978 and, if appropriate policies are maintained, the proposed project would play an important role in this respect, by providing factory space and term financing for industry, as well as technical assistance for export promotion, vocational and management training, and the adjustments that may be required in the incentives policy of the country.  - 10 - The Financial Sector - Main Financial Institutions 33. The Central Bank, established in May 1972, is responsible for the country's monetary and financial management including the determination of interest rate policy. In addition to the Central Bank, Barbados' major financial institutions include eight foreign-owned private commercial banks, the government-owned Barbados National Bank (BNB) and Barbados Development Bank (BDB), and several mortgage banks (Trust Companies). The National Insurance Board and the insurance companies also channel substantial volumes of financial resources to the mortgage market, as well as to the public sector through their substantial purchase of Treasury Bills and Debentures. 34. Commercial Banks. The foreign-owned private commercial banks have traditionally been the most significant group of financial institutions in Barbados, providing about 80% of total private sector credit and serving as the main vehicle for the mobilization of domestic financial resources. Personal loans and lending to trading firms are the main components of commercial bank lending to the private sector (47% of the total in 1978). The three subsectors receiving most of the remaining commercial bank lending are tourism, industry and construction. The share of lending going to industry increased from 8.5% in 1973 to about 12.5% in June 1979, when the total amount outstanding reached BDS$52 million. While most of commercial bank lending to industry, and to other sectors is for short-term, it also includes some medium-term lending, mostly for less than five years but sometimes reaching up to ten years. 35. The Barbados National Bank (BNB). The enactment of the Barbados National Bank Act in 1978 created the first domestic commercial bank in Barbados, the fully government-owned BNB. The intention was to initiate the process of "localizing" the commercial banking system and to rationalize the structure of public sector financial institutions by merging the Sugar Industry Agricultural Bank, the Agricultural Credit Bank and the agricultural portfolio of the BDB into BNB's Agricultural Division, the Barbados Savings Bank and the local branch of the Bank of America into its Commercial Division, and the Barbados Mortgage Finance Company (BMFC), into a majority-owned subsidiary. The Act included also a provision for incorporating the remaining portfolio of BDB (industry and tourism) to BNB but the Government decided later to maintain BDB as a separate institution for the promotion of industrial and tourism development. 36. The Barbados Development Bank (BDB), started its operations in 1969, and concentrated in providing medium- and long-term resources mainly to the tourism sector, and, to lesser extent, to industry and agriculture. During the last two years the pattern of lending has changed substantially as lending for tourism remained stable, the agricultural portfolio was transferred to BNB and lending to industry has continued to increase steadily. While tourism still accounts for nearly two thirds of the total portfolio, lending for industry, accounted for about 50% of total lending in 1978. BDB has now become the main source of medium- and long-term resources to small and medium scale industrial firms in Barbados. The proposed project would assist BDB in expanding its industrial lending program and would help strengthen its project identification and appraisal capabilities, as well as its loan administration.  - 11 - Financial Policy 37. In recent years, the Central Bank has taken a number of measures to influence the terms and volume of domestic credit, including the establishment of interest rate guidelines and rediscount lines for sugar industry, non-sugar agriculture, industry, tourism and small retail trade. Of thes rediscount lines only the sugar industry line was extensively used. The main reason for the limited use of rediscounting was the relatively high liquidity situation of the commercial banks and the small spreads allowed in the rediscount operations. 38. The Central Bank also established in 1978 two parallel schemes designed to encourage commercial bank financing of export activities. The Export Credit Insurance Scheme provides protection to exporters against non-payment by overseas buyers and against other losses beyond the control of the exporter. The Export Finance Guarantee Scheme is designed to help exporters to obtain pre-shipment financing from commercial banks. In September 1979, the Central Bank also established a Small Business Credit Guarantee Scheme. The scheme would apply to small firms in practically all sectors of the economy and would be combined with the provision of technical assistance from the Barbados Institute of Management and Productivity (BIMAP). 39. Interest Rates. After a long period of monetary stability and world market-related rates, lending rates in Barbados became negative in real terms in 1973-75 turning positive again in 1976. After 1977, credit controls estab- lished by the Central Bank -- primarily for restricting consumer credit -- generated a situation of excess liquidity in the commercial banks that kept the market prime rate below the 8-1/2% ceiling imposed by the Central Bank (the ceiling on the average loan rate for each commercial bank was set at 10%). While some banks raised their prime rate from 7.5 to 8% and others from 8 to 8.5% in 1978, the average lending rate remained slightly below the 10% ceiling, with no upward pressure by the commercial banks because of their ample liquidity and low reserve requirements. The minimum rate on savings deposits rose only in mid-1978, after the Central Bank directed that commercial banks should offer no less than 3%. Time deposit rates were unchanged during 1978 and dropped slightly in early 1979. 40. The overall interest rates structure requires to be adjusted in the immediate future, particularly in view of the increasing inflation emerging from the 1979 oil price increases and of the interest rate levels prevailing in most other countries (para. 56 below). The Government is aware of this situation and has agreed to undertake a comprehensive study of this situation, with Bank assistance, to be provided through the proposed project (para. 68 below). Trends and Prospects in Industrial Lending 41. Commercial bank lending to industry has been relatively limited in the past, accounting for 10% or less of total lending to the private sector. However, with the industrial expansion of recent years, lending to industry has also increased. In 1978, commercial bank lending for manufacturing grew by 24% and during the first half of 1979, the annual rate of growth was close to 80% whereas total lending to the private sector increased by only 8% and 20% per annum during the same periods. At the same time, BDB lending to manufacturing nearly doubled in 1978 and is expected to double again in 1979.  - 12 - 42. The relatively liquid situation of commercial banks, and their growing attention to the manufacturing sector, indicate that most firms will be able to obtain the working capital resources needed to continue the rapid expansion of industrial exports and output that started in 1978. However, medium- and long-term resources to finance the establishment of new enterprises and the expansion of capacity by existing firms will be in short supply, as the commercial banks will continue focussing on short-term lending. The shortage of term financing for industrial firms is likely to be more acute among small- and medium-scale enterprises, as a result of the conservative practices of commercial banks. BDB is likely to be the only financial insti- tution providing term financing to small- and medium-scale industrial firms. PART IV - THE PROJECT 43. A report entitled "Staff Appraisal Report - Barbados Industrial Development and Export Promotion Project" (No. 2797-BAR dated February 29, 1980) is being distributed separately. Annex III contains a timetable of key events in processing the project and a description of the special conditions of the proposed loan. Negotiations for the proposed loan took place in Washington, D.C., on February 11-14, 1980. The Barbadian delegation was led by Mr. H. Williams, Permanent Secretary, Ministry of Finance and Planning. Project Objectives 44. The proposed project will be the Bank's first direct involvement in the industrial sector in Barbados. It is designed to help the Government to execute its Industrial Development Plan during the fiscal years 1980-82, and to establish a sound basis for continuing industrial development. The major programs included in the Industrial Development Plan are (i) an investment promotion program and construction of industrial estates by BIDC; (ii) indus- trial lending for fixed assets and permanent working capital by BDB, (iii) promotion of manufactured exports, training and marketing assistance to domestic exporters by the new EPC, and (iv) increased availability of manage- ment and vocational training for industry by the Barbados Institute of Manage- ment and Productivity (BIMAP) and the National Training Board (NTB). The proposed Bank loan would complement government and other resources and would help finance the above programs during the project implementation period, covering fiscal years 1980/81 to 1983/84. It would also have a major insti- tution-building effect, by contributing to strengthen the financial basis and operating capabilities of the implementing agencies, particularly BIDC and BDB, through technical assistance and training programs for their professional staff. Overall Project Costs and Financing Plan 45. The total cost of the project is estimated at US$21.9 million equivalent, including physical contingencies of US$1.0 million and price contingencies of US$3.7 million. Physical contingencies amount to 10% of the infrastructure and factory construction costs of the project and price contin- gencies to 34%. The estimated direct and indirect foreign exchange component  - 13 - is US$12.35 million. Imported supplies and materials for the factory and infrastructure construction component would be exempt from customs duties and are costed accordingly, however, some of the materials and fuel would be acquired by contractors on the open market and would be subject to duties and taxes that are estimated at US$0.6 million. The proposed Bank loan of US$10 million will -,lp finance the foreign exchange costs of the project. Addi- tional financing to cover the remainder of the foreign exchange costs of the industrial estates component would be provided by CDB through a US$2.35 million loan. The CDB loan will provide financing toward the foreign exchange requirements of the Speighstown Industrial Park and is expected to have terms approximately similar to those of the Bank loan. It will come from resources other than the Bank's loans to CDB. The Government would provide the balance of resources required to carry out the project, a total of US$9.55 million. 46. The Bank loan will be provided to the Government, which will bear the foreign exchange risk. It will be committed over a period of three years and disbursed in four years. It will be repaid according to a fixed amortiza- tion schedule, with a maturity of 15 years, including 3 years of grace. The Government will channel the Bank resources to the executing entities as follows: (a) a US$6 million loan to BIDC, with a repayment period of 15 years, including 3 years of grace, at 10% interest; this amount will finance construction work in industrial estates (US$5.0 million), investment promotion activities (US$0.6 million), and technical assistance (US$0.4 million); (b) a US$3.2 million loan to BDB, on terms identical to those of the Bank loan, to finance industrial projects to be carried out by BDB borrowers (US$3.0 million) and technical assistance (US$0.2 million); and (c) grants of US$0.3 million to support EPC's export promotion work, and of US$0.5 million to strengthen the management and vocational training activities of BIMAP and NTB. The Government and the Bank will review progress under the project from time to time and, if necessary, would revise the above allocation. Project Implementation and Supervision 47. The project would be carried out by each implementing agency as described under each component. Rental and leasing of factory space by BIDC and subloans from BDB would be made in accordance with the operating regula- tions of the respective institutions and the specific terms and conditions described in paras. 50 and 56 below. The implementing agencies will make satisfactory arrangements for a full audit of their accounts by reputable auditors, following accounting principles acceptable to the Bank.  - 14 - The Industrial Estates and Investment Promotion Program 48. This component would aim at increasing the amount of direct foreign investment in export oriented manufacturing activities in Barbados by increas- ing overseas promotion and providing a growing volume of industrial estate sites, standard factory shells and custom-built factory space for rental and lease with option to purchase. It would be carried out by the BIDC and would have a total cost of US$15.7 million, of which US$1.0 million would be for the promotion component, including technical assistance. It would include construction of about 35 factory buildings in expansions of three of the existing industrial estates and in a new estate to be developed in Speightstown. The proposed industrial estates component consists of the construction of 530,000 sq. ft. of factory buildings to take place over a four year execution period. The total cost of the construction program will be US$14.7 million, including land, site development, and building costs, with an average cost of US$23.5 per sq. ft. of building during the first year of the program. The foreign exchange component is 50% of the total cost and would be financed by an allocation of US$5 million equivalent from the proposed Bank loan and a CDB loan of US$2.35 million equivalent. Government capital contri- bution of BDS$ 14.70 million (US$7.35 million) would cover the local costs. BIDC's promotion program for the project period would include mainly the expansion of its recently opened office in Brussels and the opening of a new office in Japan. A total amount of US$600,000 of the proposed loan would be used to finance the foreign exchange cost of BIDC's promotion program, i.e., marketing expenditures, including promotional travel, advertising and seminars, and consultants' services. The proposed project would also provide technical assistance and training to BIDC's staff in several key areas includ- ing pricing policies, lease contracts, quantity surveying and site supervision, project identification, and evaluation of applications for fiscal incentives. A total of 57 man-months of foreign consultants' services at an estimated cost of about $6,000 per man-month would be provided over a three-year period, with a total estimated cost of about US$340,000. Training of key BIDC staff at selected overseas locations (for periods of two weeks to two months) would complement the on-the-job training provided by the consultants, at an estimated cost of US$60,000. 49. BIDC is an autonomous public sector corporation established in 1965. During the past 15 years BIDC developed 9 industrial estates which are currently occupied by a total of 109 industrial firms. In 1978, BIDC had a staff of 342 people, engaged in administrative, technical, construction, and handicrafts activities. Financing for BIDC operations in the past has been mainly provided by the government. As of March 31, 1979, BIDC's total assets amounted to US$11.0 million. Government capital contributions were US$10.3 million and liabilities were only US$0.38 million. BIDC's financial statements indicate operating losses of US$11,000 in 1978, and US$169,000 in 1979. However, since Government budget contributions for administration and promotion are treated in BIDC's books under "income," the operating deficit is actually larger than it appears to be. As part of the proposed program, BIDC will modify its bookkeeping and financial reporting in accordance with generally accepted accounting principles. BIDC has ample experience in investment promotion and industrial estate construction and is capable of carrying out the proposed program.  - 15 - 50. BIDC's operating deficits are largely the result of the pricing policy for lease and rental of buildings adopted early in the development of industrial estates which included a considerable subsidy. Leases were for renewable periods of 5 years without a provision for rental escalation. As a result, firms are currently paying BDS$1.50-3.00 per sq. ft. per year, which is about half of the minimum rate required to yield a positive financial rate of return in real terms for buildings completed in the mid-1970's and considerably below the rates charged at several other Caribbean locations. Lease with option to purchase agreements, covering some 45% of the occupied space have similar problems. BIDC began to reassess its pricing policy early in 1979 and its Board recently approved a pricing policy document under which annual rental rates for the new factory buildings will be set up at 14% of construction cost for medium and large firms, 16% for lease with option to purchase and 7% for local small scale industries with gradual increases until they will become equal to regular rentals in the tenth year of occupancy (Schedule 2 of BIDC Project Agreement). The new pricing policy, would allow BIDC to improve its overall financial situation substantially, eliminating operating deficits before the end of the implementation period of the project (FY82/83), and generating a cumulative surplus that will contribute to finance possible expansions of the program beyond the fiscal year 1983/84. Over the life of the project, the expected financial rate of return of this component is 7% in real terms. 51. BIDC's Industrial Estates Division currently operates as an engineering/civil works contractor, employing normally about 200 construc- tion workers and has been awarded to date about 50% of BIDC's industrial estate construction contracts in competitive tenders supervised by an outside independent consulting firm. BIDC's management wants to consider other future institutional alternatives for the Industrial Estates Division, including its possible separation from BIDC and its establishment as an autonomous entity. It has been agreed, however, that during the implementation period of the project the Construction Division will remain in BIDC, because the larger domestic construction firms that normally bid for BIDC's construction works are expected to be mainly involved during that period in a number of large construction projects that are scheduled to start in Barbados during the next two years. BIDC will take appropriate measures, however, to encourage the participation of smaller domestic contractors which until now have been unable to enter the bidding process by preparing, where appropriate, small bid packages, by establishing less stringent prequalification requirements, and by subcontracting appropriate parcels of its own construction work to small contractors. BIDC's management agreed to prepare by September 30, 1980 a plan to increase the participation of small contractors in its construction activi- ties (Section 2.04 of BIDC Project Agreement). 52. Tendering is expected to begin in the second quarter of calendar 1980. Bid packages will cover the construction of portions of the full program planned at each site. All tenders above an estimated cost of US$1.0 million equivalent will require ICB procedures in accordance with Bank guidelines. On smaller contracts, small bid packages will be prepared and local competitive offers will be obtained. Contract awards will be subject to prior review and approval by the Government Tender's Committee. The first  - 16 - three contracts, irrespective of size, will be subject to prior review and approval by the Bank. BIDC's Construction Division will bid against private firms but, if selected, contract awards above US$350,000 will be subject to prior review and approval by the Bank (Schedule 1 of BIDC Project Agreement). The Industrial Lending Program 53. This program would aim at supporting the development of industry in Barbados by providing medium- and long-term financing through the Barbados Development Bank (BDB), and by helping BDB to strengthen its management and technical capabilities. BDB's industrial lending program would amount to about BDS$22.0 million during the three-year implementation period of which 30% would be provided from the proceeds of the proposed loan. The total cost of subprojects financed by the program is estimated to exceed BDS$30.0 million. 54. The Government intends to expand BDB's Board, giving increased participation to local manufacturers, and to increase BDB's authorized capital from BDS$10 million to BDS$25 million (Section 4.02 of Loan Agreement). Currently, BDB has a relatively small staff with a total of 14 professional positions and 11 support staff members. In order to carry out its lending program, it will be necessary to establish 3 to 5 additional professional positions in the areas of promotion, project analysis and loan administration as well as to fill its vacant positions. Filling the new and existing posi- tions with qualified staff will also require that salaries be increased to competitive levels with the private sector and other public agencies. BDB would prepare by June 30, 1980, a plan to increase BDB's staff and to revise the salary scales (Section 4.03 of Loan Agreement). In addition filling the positions of Financial Comptroller and Manager of Operations will be a condi- tion of loan disbursement (Schedule 1 of Loan Agreement). 55. As of March 31, 1979, BDB had a paid-in capital of BDS$7.3 million and total assets of BDS$22.2 million. The institution's debt/equity ratio was a low 2:1, leaving BDB with considerable borrowing capacity. BDB's loan portfolio has grown from BDS$0.8 million in 1970 to about BDS$20.0 million in 1979. In the past, BDB concentrated on lending to the tourism sector. However, during the last few years, BDB lending to industry has been increas- ing constantly from about 20% in 1977 to about 50% of total commitments in 1979. BDB's accounts in arrears (including principal and interest) amount to 9.1% of total portfolio. Legal action has been taken against several clients and receivers have been appointed for most firms with large amounts in arrears. BDB's management has been aware of the problem and provisions for bad debt losses have been made. In addition, as part of the proposed project, BDB would prepare by September 30, 1980, a plan for portfolio recuperation (Section 3.06 of BDB Project Agreement). 56. BDB's Board has recently approved a policy statement which provides for the adoption of unified lending rates to be periodically revised to take into account current and projected inflation rates and changes in the cost of resources for BDB. It also increased the lending rates to be not less than 11% for tourism and industrial projects and 10% for small business and small manufacturing. The first review of the lending rates will take place in October 1980, in the framework of the study on interest rates structure referred to in para. 68 below. An evaluation fee of 1% would also be charged on all new loans, and the commitment fee would be increased from 0.5% to 1%.  - 17 - The average inflation rate in Barbados in the 1977 to 1978 period was below 10%. It averaged 13% in 1979, mainly because of oil price increases and is expected to average about 11% in the 1980 to 1982 period mainly because of the expected increase in international inflation. 57. BDB's appraisal reports, although satisfactory, could be considerably improved. Given the limited appraisal capabilities of the institution, part of the technical assistance component of the program would be directed to improve appraisal techniques, both through the provision of consulting services and training of analysts. Project supervision and loan administration are generally adequate, but are now limited by staff availability. The first five BDB subloans involving Bank resources, irrespective of size, will be subject to prior review and approval by the Bank. Subsequent subloans involving Bank resources would have a free limit of US$150,000 (Schedule 1 of Loan Agreement). An economic rate of return will be calculated on projects above the free limit (Section 2.02 of BDB Project Agreement). BDB's management uses a 12% economic rate of return as a minimum requirement for financing projects. 58. BDB's lending program for the current fiscal year ending in March 1980 includes more than 100 projects with total lending requirements of about BDS$11.2 million, of which about 50% would be for industry and small scale enterprises, 40% for tourism and the balance for other projects. The projected lending program, expected equity contributions and internally generated funds for a five year projection period indicate a resource gap of about BDS$72.2 million. BDB intends to finance about 70% of the resource gap with long-term foreign borrowings from the IDB, CDB, EIB and the proposed loan from IBRD. BDB will raise the remaining 30% through two bond issues. Finan- cial projections based on BDB's new financial policies and the above lending program and sources of finance indicate BDB would obtain an increasing return on its equity, reaching 8.8% by 1983/84. During the period, the debt/equity ratio would gradually increase from the current 2:1 ratio to about 2.6:1 and the total portfolio would reach BDS$73.6 million. 59. The proposed loan would also include a technical assistance component designed to strengthen BDB's capabilities in project identification, appraisal and supervision. An amount of US$200,000 would finance: (i) about 30 man-months of foreign consultants' services at an average of $6,000 per man-month, includ- ing one adviser to management on financial and operational matters and short- term consulting services on specific aspects of BDB's operations; and (ii) training for BDB staff, particularly project analysts and loan adminis- tration officers. The Export Promotion Program 60. This program would support the expansion of Barbadian manufactured exports, mainly from locally owned enterprises. The program would provide a wide range of services to small and medium firms interested in opening new markets, and selling new export products. The target group currently con- stitutes a relatively small but potentially important segment of the manu- facturing sector with substantial foreign exchange and employment generation capabilities. Increasing the export orientation of domestically owned firms  - 18 - is an important objective of country's industrial development program. This would help to diversify industrial output and exports and encourage the development of local managerial skills. Manufactured exports from locally owned firms accounted for 20% of total manufactured exports and about 14% of the country's total exports in 1978 and are expected to increase annually by 20 to 25% during the project implementation period, partly as a result of the proposed Export Promotion Program. 61. The Export Promotion Corporation Act passed in July 1979 estab- lished the EPC as an independent statutory body under the Ministry of Trade and Industry. In September 1979 the Minister appointed a nine-member Board of Directors. Recruitment for the Director General of the EPC is currently underway. EPC's organizational structure and salary levels seem to be appro- priate to attract suitable staff to enable it to concentrate an effective export promotional program. 62. The EPC would concentrate its initial activities on channelling technical assistance, promoting the development of new products for exports and employing agents to establish outlets in foreign markets. The most important function of the EPC would lie in arranging and employing foreign consultants to provide marketing training and management, and technical assistance to Barbadian small-scale manufacturers. This would be done in cooperation with BIDC and would focus on export marketing techniques, as well as on design and quality improvements in production and management. The marketing effort in target markets would also be performed by consultants and local agents rather than permanent EPC staff on permanent overseas offices. Six professional staff members and the corresponding support staff would be sufficient to operate a small and efficient EPC. 63. The technical assistance to be provided out of the proceeds of the proposed loan would include financing the foreign exchange costs of hiring a Director General for a three-year fixed-term contract. At the same time, a Barbadian national would be recruited for the post of Deputy Director General. In addition, a total of about 18 man-months of short-term consultancy services would be financed from the proceeds of the proposed loan. The foreign exchange cost of this component is estimated at about US$300,000 of which about US$200,000 would be used to finance the cost of the EPC Director General. The EPC will use part of the proceeds under this component to finance the foreign exchange cost of undertaking a review of the system of export incentives currently available to Barbadian manufacturers and propose any necessary changes to the government. Emphasis will be given to identifying the incen- tives required for supporting "extraregional" exports (Schedule 2 of Loan Agreement). The Vocational Training Program 64. Unemployment in Barbados has been a grave problem, constituting a drain on the country's resources and a social irritant. Young people have been particularly hard hit by unemployment and it appears that unemployment among young males in the 16-25 age group is considerably higher than the national average, thus posing a serious social problem. At the same time,  - 19 - the country has suffered from shortages in key skills which may curtail the desired rapid growth of export oriented manufacturing. The vocational training program would aim at coordinating and expanding the training and supporting activities currently being carried out by several institutions as well as by the firms themselves. The program, originally prepared and coordinated by the Ministry of Labor would be carried out by the National Train - Board (NTB), an independent statutory body recently established. The NTB will be respon- sible for job classification, testing and certification. NTB's Board comprises 12 members including representatives of the employers organizations and the trade unions, and three Government officials from the Ministries of Education, Labor and Works. The NTB is currently recruiting its technical staff and is expected to start operations shortly. 65. In anticipation of the activities of the NTB, and to face the serious unemployment situation, the Ministry of Labor started in early 1979 a Skills Training Program to provide young unemployed Barbadians with skills to enable them to take advantage of economic opportunities. The program is decentralized using light equipment and the training courses are short and intensive; eight courses have been completed on plumbing, masonry, mechanics and car maintenance, carpentry and other fields. The courses were conducted in four of the community centers that exist in most villages in the island, requiring practically no overhead costs. After the NTB starts to operate, an expanded Skills Training Program would become one of the NTB's major activities. The Program would provide a larger number and variety of courses, covering eight community centers, with a rotational schedule. The NTB would also start regulating and supervising the Apprenticeship Schemes established by the Occupational Training Act of 1979, would operate a Placement Service and would start compilation of employment data through its statistical services. Financing of the NTB activities would include government allocations, proceeds from a training levy to be established, and funds from international institutions. The OAS will continue to provide a vocational training specialist whereas funds for training in the construction industry are expected to be available from USAID (through the CDB). An amount of US$250,000 of the proposed Loan would be allocated to the vocational training program to help finance the foreign exchange costs of technical assistance to the NTB, of equipment and other facilities and of designing and operating the skill training courses. The Management Training Program 66. The small size of the domestic manufacturing sector and the patterns of emigration in Barbados have generated chronic shortages of managerial skills. Such shortages limit the growth of domestic small scale industries and could discourage the establishment of foreign firms requiring locally recruited supervisors and managers. The Barbados Institute for Management and Productivity (BIMAP), the major institution in charge of developing management training activities and of providing technical assistance in management to small scale firms, is now planning to consolidate and expand its activities in the context of the proposed Project. BIMAP is a private, non-profit corporation, established in 1972 to provide management training and other professional services. The membership includes a large number of manufacturing and other firms as well as BIDC and BDB. BIMAP has a staff of nine full-time professionals, eight support staff members and several part-time professionals.  - 20 - It currently operates two training programs (Training and Management Devel- opment Program and in-plant Training Program) with a total of 650 participants in 1978. BIMAP also provides consultancy and research services and is carrying out a Small Business Development Program with funding from the Canadian International Development Agency (CIDA). A component in the Bank's recently approved Education Project Loan will contribute to strengthen BIMAP's training program. 67. Plans for future expansion of BIMAP's activities include providing management training services to other countries in the Caribbean region, par- ticularly the less developed countries of the Eastern Caribbean, and starting some new pilot courses in Barbados. BIMAP also plans to establish a Technical Advisory Unit to provide services to local companies. During the next two years, BIMAP is planning to develop and publish training manuals and related materials in the areas of general and financial management, marketing, personnel and industrial relations, management of human resources, production management and taxation. A component of the proposed project would support the development of teaching materials by providing technical assistance to BIMAP. An amount of up to US$250,000 would be used to finance the foreign exchange cost of such technical assistance and other expenses related to the development of training materials. Interest Rate Study 68. As indicated in paras. 40 and 56 above, real lending rates in Barbados have become negative in recent months, mainly as a result of the increased inflation emerging from the 1979 oil price increases. At the same time, interest rates on all types of savings deposits are strongly negative in real terms and lower than those prevailing in most other countries. The Government is aware of the potentially harmful effects of such situation on domestic savings and investment, and has agreed with the Bank to carry out a comprehensive study with a view to determining the policies that should be followed in this respect. The study will be carried out by the Government with assistance from the Bank. The terms of reference and a time schedule for the study have been prepared and are acceptable to the Bank. The study would be completed by October 1980. Its results will be reviewed by the Government and the Bank, and will be taken into account inter alia in the review of BDB's relending rates referred to in para. 56 above (Section 2.03 of BDB Project Agreement). Procurement 69. Procurement under the Industrial Estates Component would follow the procedures described in para. 52 above. Procurement for BDB subloans would be in line with standard practice for DFC-type projects under which BDB would satisfy itself that the goods and services to be purchased are suitable for the investment projects and are reasonably priced. For the technical assistance and training components, the terms of reference and the contract of consultants would be subject to prior review and approval by the Bank.  - 21 - Disbursements 70. Based on actual construction cost data from BIDC, it is estimated that the foreign exchange requirements of the Industrial Estates component are 50% of the total construction cost. The foreign exchange component of the industri. ' subprojects financed by BDB are estimated to average about 70%. Therefore, disbursement of the Bank loan would be made for 50% of disburse- ments made by BIDC under the Industrial Estates Program, 100% of disbursements made by BDB for industrial subloans but not exceeding 70% of the total cost of each subproject and 100% of foreign expenditures for promotion, technical assistance and training. Disbursement for the Industrial Estates and Investment Promotion Programs, and for industrial subloans from BDB would be made against standard documentation and disbursement for technical assistance and training expenditures would be made against fully documented foreign exchange expen- ditures. Project Benefits and Risks 71. The proposed loan would support the implementation of the main programs included in the Barbados Industrial Development Plan and would help achieve its targets by financing industrial promotion, construction of factory buildings, equipment and other fixed assets, permanent working capital, export promotion and training. The BIDC component is expected to attract foreign investments which otherwise would not take place in Barbados. The net benefits of such investment can be identified mainly with the incremental employment it would generate, and the economic rate of return for the country would be about 31%. The BIDC component would support the creation of about 3,500 to 4,000 new jobs and the BDB component, 1,500 new jobs. The project would help increase manufactured exports and would achieve substantial institution-building objectives through the provision of technical assistance to the institution's carrying out the country's industrial development. 72. The project will not be subject to any extraordinary risk. BIDC's new rental rates for factory buildings may reduce demand for space. This reduction, however, is not expected to be large, as the rentals will be in line with those charged by BIDC's competitors in the Caribbean. Also it may encourage some industrial firms to build their own factories. In such cases, the reduced demand under BIDC's component would be compensated by an increase in the demand under BDB's component to finance the construction of factories. A revision in the allocation among the project components would adequately solve this problem. The large increase expected in BDB's lending program and industrial portfolio is likely to exert strong demands on the institution's capabilities. The planned increase in staff and the technical assistance program would help BDB to respond adequately to the increased requirements.  - 22 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 73. The draft Loan Agreement between Barbados and the Bank, the draft Project Agreement between BIDC and the Bank, the draft Project Agreement between BDB and the Bank and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special conditions of the project are listed in Annex III, Section 3. 74. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 75. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments February 29, 1980  - 23- ANNEX 1 Page 1 of 5 BARADOS - SOCtAL WEtICATORS OATA SHEET BARBADOS IRZEMCI GROUPS (ADJUSTrD A AGES LAND AREA (THOUSAND SO. M-. )- N.OSS E au