Liberia - Second and Third Development Finance Company Projects

Document of Tlhe World Bank FOR OMCIAL USE ONLY Report No. 5694-LBR PROJECT COMPLETION REPORT LIBERIA LIBERIA4N BANK FOR DEVELOPMENT AND INVESTMENT (LOANS 1055-LBR AND 1323-LBR) June 5, 1985 Western Africa Projects Department Industrial Development and Finance Division This document has a restied distibutin and may be used by recipients only in the performnce of their official duties. its conteon may not othewise be discosed without World Bank authorization.  FOR OFFICAL USE ONLY PROJECT COMPLETION REPORT LIBERIA LIBERIAN BANK FOR DEVELUDMENT AND INVESTMENT (Loans 1055-LBR and 1323-LBR) TABLE OF CONTENTS Page PREFACE ..-- ------------------------------------------------- BASIC DATA SHEET . ii HIGHLIGHTS ................................................... iv I. INTRODUCTION . 1 II. THE ECONOMIC AND FINANCIAL ENVIRONMENT. 2 III. DESIGN OF THE PROJECTS. 5 IV. LBDI's ORGANIZATION AND POLICIES. 6 V. LENDING OPERATIONS. 9 VI. FINANCIAL PERFORMANCE OF LBDI .14 VII. INSTITUTIONAL OBJECTIVES .18 VIII. CONCLUSIONS .20 LIST OF CHARTS Chart 1. Distribution of LBDI Loans by Purpose of Investment, 1977-83 .10 Chart 2. Distribution of LBDI Loans by Economic Activity, 1977-83 .10 Chart 3. Characteristics of Subprojects Approved Under Loans 1055-LBR and 1323-LBR ......................... 12 Chart 4. Estimated vs. Actual Disbursement of Bank Funds .... 12 Chart 5. Financial Performance of LBDI, 1972-83 .15 Chart 6. Growth and Quality of LBDI Loan Portfolio, 1972-83 ............ 15 IThis document has a restricted distribution and may be used by recipients only in the performanec of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  LIST OF TABLES Page Table 1. Projected and Actual Income Statements, 1977-1983 .23 Table 2. Projected and Actual Balance Sheets, 1977-1983 .24 Table 3. Projected and Actual Financial Ratios, 1977-1983 .25 Table 4. Analysis of Loans in Arrears, 1977-1983 .26 Table 5. Projected vs. Actual Lending Operations, 1977-1983 .27 Table 6. Characteristics of Loans Approved, 1977-1983 .28 Table 7. Resource Mobilization, 1977-1983 .29 Table 8. Loan 1055-LBR: Schedule of Estimated vs. Actual Disbursements ........... .................................. 30 Table 9. Loan 1323-LBR: Schedule of Estimated vs. Actual Disbursements ........... .................................. 31 Table 10. Loan 1055-LBR: Characteristics of Approved Subprojects .... 32 Table 11. Loan 1323-LBR: Listing of Subprojects Financed under the Loan ........ 33 Table 12. Loan 1055-LBR: Characteristics of Approved Subprojects ... 34 Table 13. Loan 1323-LBR: Characteristics of Approved Subprojects ... 35 Table 14. Loans 1055 and 1323-LBR: Characteristics of Approved Subprojects ............. 36 Table 15. Loan 1055-LBR: Repayment Performance of Approved Subprojects ............................................... 37 Table 16. Selected Indicators of Economic Impact of LBDI Financed Projects .......... .. 38 Table 17. Loans 1055-LBR and 1323-LBR: Financial Performance of Subprojects ... ....-.----.-.-- .. . 39  PROJECT CONMPLETION REPORT LIBERIA LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (Loans 1055-LBR and 1323-LBR) PREFACE This is a Project Completion Report (PCR) for IBRD Loans 1055-LBR and 1323-LBR to the Liberian Bank for Development and Invest- ment (LBDI). The projects were approved in December 1974 and September 1976 and became effective in January 1975 and December 1976 respectively. The Loan 1055-LBR was closed on December 31, 1980 and the Loan 1323-LBR on Decemiber 31, 1984. This PCR, prepared by the Western Africa Projects Department, is based on the findings of a mission to Liberia in July 1984. Copies have been sent to the Borrower. No comments were received. This project has not been audited by the Operations Evaluation Department.  ii - PROJECT COMPLETION REPORT LIBERIA LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (Loans 1055-LBR and 1323-LBR) BASIC DATA SHEET Key Project Data Actual or Current Estimate Item Loan 1055-LBR Loan 1323-LBR US $ Million Loan Amount-/ 4.00 7.00 Disbursed 3.97 6.88 Cancelled 0.03 Repaid (as of March 31, 1985 ) 2.47 2.47 Outstanding (as of March 31, 1985) 1.50 4.41 Other Project Data (Actual or Current Estimate) Negotiations 9/23/74 - 9/27/74 7/1/76 - 7/7/76 Board Approval 12/3/74 9/7/76 Agreement Date a/ 12/4/74 10(7/76 Effectiveness Date - 13/75 12/17/76 Closing Date - 12/31/80 12/31/84 - Borrower Liberian Bank for Development and Investment Fiscal Year of Borrower January 1 to December 31 Follow-on Project Name Third Loan None Loan Number 1323-LBR Amount (US$ million) 7.0 Loan Agreement Date October 7, 1976 a The total project cost and economic rate of return were not estimated during appraisal as is usual for Bank loans to DFC. Dates in the Loan Agreement were 3/4/75 and 1/8/77 for Loans 1055-LBR and 1323-LBR respectively. No extensions were necessary. -/ Original Closing Dates specified in the Loan Agreement were 6/30/79 and 12/31/81. Two extensions of the original Closing Date were granted for Loan 1055-LBR and three for the Loan 1323-LBR. Note: The US Dollar is the legal tender in Liberia.  - iii - PROJECT COMPLETION REPORT LIBERIA LIBERIAN BANK FOR DEVELOPMEXT AND INVESTMENT (Loans 1055-LBR and 1323-LBR) MISSION DATA No. of No. of No. of Date of Month,Year Days Persons Man-Gays Report Appraisal (LBDI II) April-May, 1974 12 2 24 10/31/1974 Supervision I June, 1975 13 2 26 10120/1975 Appraisal (LBDI III) Feb, 1976 11 2 22 8/20/1976 Supervision II-/ Nov, 1977 18 2 36 1131/1978 Supervision III May, 1979 7 2 14 6/1511979 Supervision IV June, 1980 4 1 4 7/0111980 Supervision V April, 1981 3 1 3 5/2011981 Supervision VI- July, 1982 8 1 8 9/3011982 Supervision VII February 1983 5 2 10 d/ Supervision VIII-/ Feb, 1984 5 2 10 4/24/1984 Supervision VIX--c/ July, 1984 7 1 7 7/26/1984 a/ Including Project Completion Report work for Loan 839-LBR. b/ Loan 1323-LBR (Third LBDI Project) only. c/ Including work on the Project Completion Report for Loans 1055-LBR and 1323-LBR. d/ Supervision work done in conjunction with the project preparation for a proposed LBDI IV project, which later was dropped from the lending program due to country lending program constraints. No formal supervision report (Form 590) was issued though analytical papers were prepared.  - iv - PROJECT COMPLETION REPORT LIBERIA LIBERIAN BANK FOR DEVELOPMENT AND INVESTMENT (Loans 1055-LBR and 1323-LBR) HIGHLIGHTS The two loans under review were made against the background of two decades of rapid economic growth, satisfactory operational and financial performance of LBDI under the first project (Loan 839-LBR), and an investment environment favorable to private-domestic and for- eign--sector. The main focus of the loans was on institution building of LBDI and providing finance to productive enterprises (paras 3-01-3.02) LBDI developed into a mature institution and responded to difficult economic conditions with competence and flexibility. LBDI also successfully made a transition from a mixed expatriate/Liberian management to a fully Liberian management (para 4.02). Considerable progress was made in achieving the institution building objectives of the projects, although there is still need for further improvement. The country environment under which the projects were imple- mented changed drastically during the period 1979-83 and Liberia experi- enced a period of unprecedented economic, financial and political turmoil. The changed environment (a) reduced the demand for investments which delayed project implementation, (b) forced a number of enterprises to go out of business and (c) led to declining profitability of the corporate sector reducing its capacity to service debt (para 2.04). All of these developments had an adverse impact on the financial condition and performance of LBDI and the economic benefits from the project investments. In this respect the experience under this project underscores the general malaise of DFCs whereby the corporate distress due to prolonged recession since 1980 caused a significant deterioration in the quality of the loan portfolio and financial position of a large number of DFCs. Other points of interest are: - LBDI's flexibility in providing loans for rehabilitation and working capital in response to a changed economic environment (paras 4.04 and 4.05); - LBDI's successful efforts at raising foreign currency funds on international markets (para. 6.06); - the sharp deterioration in the quality of LBDI's loan portfolio and financial condition as a result of exogenous factors (paras 5.08, 5.09, 6.02-6.04); - the inadequacy of LBDI's loan supervision, and investment promotion efforts (paras 7.02-7.05).  PROJECT COMPLETION REPORT LIBERIA LIBERIAN BASK FOR DEVELOPMENT AND INVESTMENT (LOANS 1055-LBR AND 1323-LBR) I. INTRODUCTION 1.01 The Liberian Bank for Development and Investment (LBDI) was established in 1965 with the assistance of the International Finance Corporation which subscribed to 25 percent of the original US$ 1 million share capital. The Government, IFC and private Liberian investors (Class A shareholders) hold 51 percent of LBDI's share capital. Other financial institutions, the Firestone Plantation Company and two mining companies (Class B shareholders) account for the balance of 49 percent. A representative of the IFC has been a member of LBDI's Board of Direc- tors since inception.- 1.02 Although LBDI was initially set up to promote industry and agro-business, over the years it has become a multi-sectoral institution with a diversified loan portfolio covering agriculture, forestry, wood processing, fishing, manufacturing, hotels, tourism and services. LBDI continues to be the prime source of term loans in the country. A large proportion of the projects it finances have been for Liberian entrepre- neurs. 1.03 This report covers the second and the third loans which the Bank made to LBDI in December 1974 and September, 1976 respectively. The first loan (Loan 839-LBR), in an amount of US$ 1 million was fully committed by April 1974 and closed in December 1976, with a total disbursement of US$995,000. A Project Completion Report (PCR) for Loan 839-LBR was issued by the Western Africa IDF Project Division on March 18, 1978 and a Project Performance Audit Memorandum (PPAM) was issued by the Operaticus Evaluation Department on June 30, 1978 (Report No. 2133). The second loan (No. 1055-LBR) of $4 million was closed in December 1980 with a total disbursement of US$3.97 million; the balance US$0.03 million was cancelled. The third loan (No.1323-LBR) is fully committed and 92% disbursed as of August 30, 1984. It is expected to be closed by December 31, 1984. At present there are no plans for a follow-up (fourth) loan for LBDI, due largely to a shortage of IDA resources.  - 2 - II. THE ECONOMIC AND FINANCIAL ENVIRONMENT (1975-1983) Economic Environment 2.01 Liberia has a population of about 1.9 million, and an annual per capita income of US$510. I/ The majority of the population is engaged in subsistence farming. Liberia enjoyed rapid rates of economic growth in the sixties (over 6.0 per annum) and early seventies (over 4.0Z per annum) due to increases in value-added and output in the iron ore and rubber sectors and the improvement in the terms of trade. The growth was heavily dependent on the performance of the foreign-owned enclave sector consisting mainly of: (a) iron ore mines, (b) rubber plantations, and (c) forestry concessions. The foreign sector plays a major role in other parts of the economic life in Liberia. They own most major manufacturing industries, dominate the banking sector, and control most of the trade and distribution sectors. 2.02 In 1975-76, the Government formulated its first Development Plan (1976-1980) which gave priority to economic diversification outside the foreign enclaves and greater Liberian participation in all economic activities. Because of the limited scope for further development of import substitution industries due to the small size of the local market, greater emphasis was placed on area based integrated agricul- tural development programs and agro-based enterprises with export potential. The Government also aimed at reducing economic dominance by the enclave sector by promoting schemes aimed at increasing Liberian participation, while at the same time preserving the "open door" policy to foreign business. The Plan goals were to be achieved through a combination of public and private investment. Public expenditures were mostly devoted to building of physical infrastructure and upgrading manpower skills. Private, mainly foreign, investment was seen to play an important role in agriculture, manufacturing and services. The LBDI undertook to nrovide medium- and long-term loans (in many instances with the Government guarantee) for investment projects involving the Liberian public and private investors in large foreign-sponsored timber and agro- industrial schemes. 2.03 The Plan envisaged an average annual growth rate of 6.8 percent in real GDP. However, because of delays in the implementation of expected investment in iron ore mining, slackening of demand for the country's main exports, and diversion of plan allocations towards non-productive projects, real growth during the 1976-80 period averaged only about 1.3% per annum. Tne public sector finances worsened during the plan period due to (i) a large import bill following the unprece- dented rise in energy prices, (ii) decline in export earnings, (iii) resource drain caused by inefficient public sector enterprises and (iv) large debt accumulation in connection with OAU Conference at 1/ GNP per capita L982 using World Bank Atlas Methodology.  - 3 - Monrovia in 1979. The overall budget deficit which in FY1975 was only US$4.3 million increased to US$163.8 million in FY1979 or 81 percent of government revenue, and 16 percent of GDP. 2.04 Against the background of stagnant economic growth and ex- tremely poc-. state of public finances and prompted by prevailing social inequities, the Civilian government in Liberia was replaced in April 1980 by a Military government. The Military Government's medium and long term plans are articulated in its four-year (July 1981 to June 1985) National Socio-Economic Development Plan. The PLan aims at arresting and reversing the declining trend in the economy, diversifying the economy, increasing the participation of Liberians in the country's economy and improving the distribution of income through agricultural and rural development, promotion of small scale industry and improve- ments in transport and communication. The plan's performance during the period 1981-83 has been disappointing. There has been a decline in GDP each year since 1980. The decline in economy is mainly attributable to the continuing weak performance of exports. Other major factors for decline include continued lack of confidence in the private sector, large budget and balance of payment deficits, and continuing capital flight. Financial En-;`unment 2.05 Associated with the poor performance of the economy was the decline in the total domestic savings rate, drying up of foreign invest- ment, and a decline in private as well as public sector investment. The gross domestic investment as a percent of GDP showed a steady decline from 342 in 1975 to 17% in 1982. During the period 1980-83 the finan- cial environment rapidly deteriorated as a result of the failure of a major bank, large budget deficits, accelerated private capital flight due to a continuing crisis of confidence, serious liquidity problems experienced by financial institutions, and inability of the Government to honor its financial obligations and pay its employees on time. The liquidity crisis in the economy precluded any serious resource mobi- lization effort and led to frequent dishonoring of financial obligations in all sectors of the economy - private, government and banking. 2.06 To contain the economic and financial crisis the Government undertook stabilization programs, with IMF assistance beginning mid 1980, focused on expenditure control, strengthening the external posi- tion of the National Bank of Liberia, reducing external payments arrears and improving external debt management. Improvements have been regis- tered in these areas but the crisis is far from over as export prospects for iron ore, the leading export, are uncertain, public cor-fidence remains low, private investment remains sluggish, and the debt burden remains awesome. The Government is at present discussing a major effort to begin restructuring the economy with IDA.  -4- Industrial Sector 2.07 The Liberian industrial sector is smnll and centered on import substitution activities mainly production of light consumer goods. Other activities include food, beverage and tobacco. The industrial sector relies heavily on foreign capital and management. Liberians are involved in sm.-11 and medium enterprises and service industries. The non-Liberians 1,wn and operate most of the large manufacturing industries and distribution centers. The performance of the industri.al sector during the period 1975-1983 deteriorated like the rest of the economy. Capacity utilization fell and labor productivity was low. The political events of 1980 and their aftermath seriously undermined the private sector confidence for about two years. After the coup several busi- nesses were confiscated and many businessmen fled the country. Only recently the process of returning the confiscated properties to owners has begun. 2.08 The 1976-80 Plan gave priority, within the industrial sector, to an increase in the processing of local raw materials such as timber, rubber and agricultural products and to production and assembly indus- tries especially for exports. These priorities were reaffirmed by the new Government in 1980. The "open door'" policy to attract foreign investment was also continued though increased emphasis was to be placed on involvement of Liberians in the industrial development. The Govern- ment pursued these objectives through Liberia's Investment Code of 1966, amended in 1973. which provides liberal investment incentives, including duty exemption on imported machinery, equipment, and inputs; tax ex- emptions; rebates on export duties, income and excise taxes on man- ufactured exports; and other miscellaneous benefits such as accelerated depreciation. However, the foreign investors were wary of the uncertain pojitical environment that prevailed immediately after the coup, and foreign investment in the economy remained low compared to the 1970s. Agriculture Sector 2.09 Agriculture is the largest sector in the economy contributing about 32% to GDP. The farm systems are characterized by rubber con- cessions and oil palm plantations, Liberian owned commercial farms producing rubber, poultry, and sugar cane, and traditional small subsis- tence farms. During the period 1974-79 the agricultural sector attained a growth rate of 3.9% per annum but, like the rest of the economy, its performance deteriorated since then and the production actually declined in 1981. Investment Promotion 2.10 The Government's primary instrument for promoting private businesses, until 1979, was the Liberian Development Corporation (LDC). LDC was set up in 1961 as an autonomous public corporation with the responsibility for identifying, promoting and establishing viable business enterprises in Liberia. However, due to financial and staff  constraints LDC's effectiveness was limited. In Septevtber 1979, the Government established the National Investment Commiss1on (NIC) with the goal of (a) eliminating or reducing the obstacles whicl are perceived as having discouraged private investment in Liberia in recent years and (b) administering the incentives provided under the Investrient Code. NIC absorbed the LDC as well as the Concessions Secretariat from cue Minis- try of Finance. NIC was retained by the Government which took power in 1980 and its mandate remained basically unchanged. Hcwever, the effec- tiveness of NIC in achieving its goals was severely hampered by the overall economic downturn in tue economy, the depressed domestic and foreign private sector confidence, and the exodus of tTained manpower. 2.11 The promotion of small and medium enterprises (SME) was given a high priority by the Government under the first Plan and a separate SME department was established within NIC. The Government also sought IDA assistance for a SME development project and an IDA Credit (1076-LBR) was approved in 1980. In 1981. the LBDI in ccnsultation with the IFC, FMO, the Bank and the Government sponsored a private, autono- mous development organization for the promotion and financing of small business enterprises. This organization, named the Small Enterprises Financing Organization (SEFO), was established in August 1981 and is in operation since then. III. DESIGN OF THE PROJECTS 3.01 The second Bank loan to LEDI, in 1974, was made against a background of two decades of impressive growth of economy, satisfactory operational and financial performance of LBDI under the first project (Loan 839-LBR), liberal government policies and incentives for invest- ments, and a healthy pipeline of investment projects seeking LBDI assistance. In the area of sectoral policies, interest rates and investment promotion were identified as the main areas for improvement, but no specific proposals were made to address them, as it was thought that an increase in interest rates would follow repeal of the usury law (which was under consideration of the Government and was later repealed) and the newly reorganized LDC would be able to improve the investment promotion effort. The focus of the project was, thus, on (a) institu- tional development of LBDI, through proposals aimed at improvement of project appraisal and supervision and better financial planning; and (b) financing of productive investments in Liberia. 3.02 The third Bank loan to LBDI was appraised in February 1976, about 14 months after the approval of the second project. At that time the first loan was fully committed and the second loan was expected to be fully committed by end 1976. The economic conditions were good, inflation was declining, and the investment climate was assessed to be better than the one prevailing in the early 1970's. LBDI loan commit- ments were increasing rapidly, far exceeding projections. During a short period of 1973 to 1976, LBDI had moved from a net loss position to a profitable DFC which started distributing dividends to shareholders and successfully undertGok a twofold increase in its share capital. The project's main objectives were: (a) to provide LBDI with foreign  -6- exchange resources for medium and long-term loans to productive enter- prises in Liberia; (b) to encourage, through dialogue with the Govern- ment and LBDI improvements in credit and technical assistance facilities tor Liberian enterprises; and (c) to provide assistance for the training and development of LBDI's Liberian staff and for further strengthening of LBDI's project appraisal and supervision capacity. 3.03 During appraisal of the third project. several weaknesses in financial and industrial sector policies as well as in LBDI's policies were recognized and proposals made to address them. These included: greater autonomy to LDC to improve effectiveness; a study of credit guarantee and technical assistance schemes for small scale enterprises; annual review of LBDI's lending interest rate according to criteria acceptable to the Bank; a program of staff development and training for LBDI staff; modification of LBDI appraisal guidelines to include pro- curement, environmental impact and sensitivity analysis; and improved quality of follow-up work and client assistance through staff training. The financial policy constraints on domestic resources mobilization as well as limited opportunities for LBDI to mobilize domestic resources were noted, but no specific measures were proposed under the project to address them, since it was realized that there was little LBDI could do in this area within the existing financial systems. The main focus of the Bank's sectoral policy proposals included strengthening of invest- ment promotion activities and development of small scale enterprises through credit guarantee and extension services. IV. LBDI'S ORGANIZATION AND POLICIES Capital, Management, and Organization 4.01 During the period under review (1977-83) 7/ the ownership structure of LBDI did not change significantly. It continued to be an autonomous corporation whose shareholders comprise the Government, Liberian citizens and corporations, and IFC (Class A shareholders) and foreign institutions (Class B shareholders). In terms of LBDI charter Class A shareholders will always represent a majority of the total voting capital. At end 1983, the Class A shareholders controlled 52.81Z of capital compared to 50% share at end 1976. The authorized share capital of LBDI was increased in 1976 from $1 million to $5 million and was further increased in January 1979 to $10 million. The paid-in share capital increased from $250,000 at end 1975 to $4.6 million at end 1983. The share holdings of LBDI continued to be international in character with IFC and foreign financial institutions, such as Citibank, Caisse Centrale, European Investment Bank, owning nearly two-thirds of the LBDI stock. 2/ The PCR for the first loan covered the period 1972-76 (para. 1.03).  - 7 - 4.02 The LBDI managem'nt underwent a change after the coup in 1980, following a seven-year (1973-1980) period of stable and dynamic leader- ship. The new government proposed and LBDI Board approved the appoint- ment of a Liberian (an ex-Minister of Finance) to the post of Presi- dent. However, the newly appointed President left after about 9 months and in Mar' a 1981 the incumbent General Manager was promoted as the President of LBDI. The incumbent comptroller was also promoted as the General Manager and, for the first time since LBDI's inception in 1965. the top mnnagement became fully Liberianized. The new LBDI management provided a strong element of continuity in policies and procedures, performed competently in the face of difficult economic conditions, and succeeded, with the help of the international composition of the Board, in keeping the Government interference to a minimum. 4.03 During the period 1977-1983 there were no significant changes in LBDI's organizational structure though in late 1980 a proposal to merge LBDI and Agriculture and Cooperative Bank was seriously con- sidered. The justification for the werger was to unify development tinancing within one institution and to provide LBDI access to deposit resources. The proposal was opposed both by the Bank and the IFC on the grounds that it would financially and organizationally weaken LBDI and would not enhance efficiency of development financing. The Government agreed not to pursue the matter further. Operational Policies and Procedures 4.04 The following significant policy and procedural changes were introduced during the period 1977-83: (i) refinancing operations and working capital loans were permitted according to the guidelines ap- proved by the Board; (ii) charter was amended to allow LBDI to finance public sector projects up to an amount equal to 45Z of total cumulative commitments; (iii) loan granting power of the management and the Execu- tive Committee were doubled; (iv) a soft-loan fund (authorized amount of $1 millicn) was set up to finance small scale enterprises; (v) Promo- tional Expenses Fund of $50,000 was set up to promote viable businesses; (vi) detailed criteria for determining provisions against doubtful loans were adopted, and (viii) a Project Implementation and Supervision Department was created and given the responsibility for follow-up and loan recovery. 4.05 The above changes illustrate tne responsiveness of LBDI to the changing economic and business environment and the evolving problems in its operations. However, no signiticant change was made in LBDI's policy on collateral requirements, which was noted and criticized for its strictness in the PPAR for the first project (Loan 839-LBR). LBDI continued to justify the strict policy on requiring first mortgage on fixed assets of significant value in light of the uncertainties of business environment in Liberia and to ensure borrowerts commitment to the project. The experiences since 1980, where LBDI, in some cases, has been able to recover its loans from sale or lease of fixed assets of borrowers seems to vindicate LBDI's position on collaterals. However the experience since 1980 also has revealed the difficulties and high  -8- cost of liquidating fixed assets to recover loans. The mixed experience has pushed LBDI to give renewed and stronger emphasis to seek potential- ly viable investment projects through intensive industrial promotion efforts and the strengthening of loan supervision and follow-up work. Both of these aspects were insufficiently pursued through the period under review, in spite of persistent pressure by the Bank supervision missions. 4.06 At the time the second Bank loan was made to LBDI, its inter- est rate on loans was 10Z plus a 1.5% service charge. It also charged a commitment fee of 1% on undravn balances. During the negotiations of the third loan it was agreed (recorded in the Minutes) that LBDI would undertake annual studies of its lending rate and would consult the Bank on the criteria to be used in reviewing the rate. In September 1976 LBDI revised its interest rate structure and introduced a two-tier structure of interest rates: 10% per annum on loans of less than 3-year maturity and 112 on loans of 3-year and longer maturity: the service and commitment charges remained unchanged. During supervision missions the on-lending interest rates charged by LBDI were discussed but no upward adjustment was considered necessary since the inflation rate declined from 202 in 1976 to 8-9% during 1978-79 and LBDI obtained adequate spread between its borrowing costs and lending rates to cover costs. However, the situation changed in 1980 and inflation edged up and the cost of resources available to LBDI also increased substantial- ly. In 1981, LBDI reviewed its interest rates and other charges and increased them from 10-11z to 13-15% per annum on term loans and 19% per annum on working capital loans, plus a service charge of 1.5% and commitment fee of 1.5% on undisbursed amounts. 4.07 There have been no further changes in interest rates on loans since 1981. During the period 1981-83 the average cost of long-term borrowings of LBDI ranged from 6.8 to 7.2Z whereas the average yield on loan portfolio ranged from 10.3 to 11.4%. Tne spread available ranged from 3.3 to 4.6% and was barely sufficient to cover the administrative expenses which ranged from 3.7 to 4.0% of average total assets. 3/ Taking the provisions made into account the interest rates charges were 3/ The administrative costs of LBDI at 4% of the average total assets during the years 1982 and 1983 were unusually high for a DFC. This, hopefully, is a temporary situation brought about by (i) doubling of public sector employee wages in 1980-81 which necessitated salary increases by LBDI to retain staff, and (ii) slower than anticipated growth in lending activities due to adverse economic conditions. LBDI has taken steps to control the administrative costs while expanding volume of business so that the administrative costs as percentage of average total assets would gradually decline to an acceptable level of 2-2.5% which was prevailing during the period 1977-79 (Table 6).  inadequate to cover all costs and were also negative ir real terms. However, due to its expanded capital resources on whicb- no dividend was declared during 1981-83 the LBDI was able to keep the 1.jss in 1981 to only $74,000 and realize profits of $322,000 and $472,(J0 in 1982 and 1983 respectively. During 1983 LBDI also raised commission rqtes on guarantees which helped improve its profits. The profit situation helped LBDI avoid the need for raising interests rates which was polit- ically difficult to do and could have adversely affected new business in the difficult investment climate in the country. V. LENDING OPERATIONS Overall Lending Operations 5.01 The volume of LBDI's total loan approvals flu.-tuated over the period 1977-1983 (Chart 1). It exceeded the projected levels during 1977 and 1978, fell short during 1979-1982 period owing to the economic and political difficulties and the liquidity crisis affecting the country, but exceeded projections during 1983 mainly due to increased amount of short-term lending. The actual amounts disbursed were signi'- icantly lower than both the amounts approved as well as the projected disbursements. The main reasons for this included unstable business environment, depressed investor confidence, and liquidity crisis which led tn withdrawal of several approved projects. In terms of size of loans, about two-thirds of total number of loans approved during 1977-83 were below $50,000 each. However, several large loans of more than $200,000 each were also made and accounted for more than 50% of the total amount of loans approved during 1977-83 period (Table 6). 5.02 The business environment in which LBDI operated during the period 1979-83 was characterized by weak investment climate, a liquidity squeeze in the financial system, the disruptions and damage to business during the 1979-80 political upheaval, and the low levels of capacity utilization in the industrial sector. LBDI responded to the changing environment by providing an increased number of short-term and mod- ernization and rehabilitation loans (Chart 1). Thus the share of new projects in total loans approved decreased from 76% in 1977 to 17% in 1983 while the modernization and working capital loans increased from 29% to 83%. In recent years (1982-83) more than 50% of number of loans approved were for working capital, representing about one-third of the total loan amounts approved. 5.03 The sectoral allocation of the total amount of loans approved shows that the loans were fairly evenly distributed among the man- ufacturing, services, agriculture and construction sectors (Chart 2) and in case of more than two-thirds of the loans the sponsorship was 100% Liberian (Table 6). The investment projects for manufacturing were typically large and involved foreign investors, while services and -;riculture investment projects were small and Liberian sponsored. Overall the LBDI was able to build a reasonably diversified loan portfo- lio.  - 10 - LIBERIA-PROJECT COMPLETION REPORT LIBERIAN BANK FOR DEVELOPMENT AND 3NVESThENT Chart 1. Distribution of Loans by Purpose of Investment, 1977-83 7,m L 8,.66M8 Td q R R . ~~~~~~I I Chart 2. Distribution of Loans by Economi.c Activity, 1977-8e B ~ ~ ~ ~ ~ ~~~~~~~OHM 8,0XB _ ~~~~~~~~ACQCtL.TURE 7B00B iST B 2.0 8 Source: Table 6  - 11 - 5.04 During the period 1977-83 LBDI approved 314 loans with a total cost of $122 million of which LBDI's share of financing was $41 million (33%) (Table 15). Most of the investments were in the private sector. LBDI did not calculate employment effect in all cases but for a limited number of projects for which the information was compiled the typical average coF per job was about $8-12,000. This would suggest that over 10,000 jobs were created during the period 1977-83. Considering that a total of 672,000 persons were employed in Liberia in 1980 the marginal impact of LBDI-assisted projects was significant and in all probability made a positive difference of 1-2% in the nation's employment, but substantially more in the private sector outside agriculture. Use of Bank Funds 5.05 The two Bank loans were used to finance a total of 129 sub- projects (Tables 10 and 11). Estimated total cost of the subprojects was $39.3 million, with LBDI's total contribution amounting to $14.5 million i.e. 37% of total cost. Bank funds were used to refinance about 75% of LBDI loans or 28% of the total cost of the subproiects. In terms of size 57Z of the sub-loans were of less than $25,000 but a significant number, 20% were of more than $200,000 each for larger subprojects (Tables 12-14 ). These larger subprojects involved foreign investment in association with Liberian investors. In comparison with overall size distribution of LBDI loans, the Bank funds were used for relatively bigger projects reflecting their higher direct foreign exchange require- ments. The sub-loans were almost equally distributed among the agricul- ture, manufacturing and the service sectors (Chart 3). About two-thirds of the total number of sub-loans went to 100% Liberian-owned enterprises while the balance of one third went to majority foreign-owned enter- prises. As was the case with the overall lending of LBDI, more than halt the sub-loans were for expansion and modernization/ rehabilitation of enterprises while 37% of subloans were for new subprojects (Chart 3). Distribution of Bank funds generally followed the loan demand pattern as it emerged. An amount of $0.55m out of Bank loan proceeds was used to finance overseas training of LBDI staff ($0.15m) and construction of LBDI building ($0.4m). 5.06 The pace of commitments and disbursements under the Bank projects was slower than anticipated (Chart 4, Tables 8-9) and the closing dates had to be extended by 18 months for the second project and 36 months for the third project. The appraisal forecasts of pace of implementation were justified given LBDI's performance under the first project as well as the upbeat economic environment then prevailing. The economic and political crises of 1979-83, which was the main reason for slower than projected project implementation could not have been antic- ipated at the time of the project appraisal. An additional factor which caused delays in project implementation related to the Bank's disburse- ment practices. In mid-1978 LBDI requested the Bank to make disburse- ments in US$ instead of other hard currencies. The basis for this request was that Liberia used US$ as its currency and use of other hard currencies, which at that time were appreciating against the US$, posed a significant foreign exchange risk which the investors in Liberia  - 12 - LIBERIA - PROJECT COMPLETION REPORT THE SECOND AND THIRD LBDI PROJECTS Chart 3. CHARECTESTCS OF SUBPROJECTS APPROVED TOTAL ANrOLT OF LOAN APPRVALS L14i LLXO1N DISTRIDUTMO BY PUR- DLSTRUTION BY ECO- POSE OF LOAN MC ACTIVITY 25.eee x Source: Table 14 SECOND AND THIRD LBDI PROJECTSCLOANS I1SS AND 1323-LBR Chart 4. ESTIMATED VS. ACTUAL DISBURSEMENTS OF BANK FUNDS 12,998- j AP>PRA.ISAL ESTIITE ---- ACTUAL is. f , - 8,998-/- U S 6,8w - ,- 8 a 9 - 4,0099 1974 1976 1978 1989 1982 1984 Source: Tables 8 and 9  - 13 - were not willing to take. Due to its overall policy constraints the Bank was not able to accommodate LBDI's request. Under the circum- stances LBDI gave priority to use of its other lines of credit which had more attractive terms and some iavestors cancelled their projects rather than take the risk. This situatio. continued for about 12 months and preject implementation suffered till the Bank introduced the Gurrency Basket Scheme in 1979 and the LBDL started utilizing the Bank funds. The deteriorating economic conditions since 1979 caused further delays in the project implementation. Performance of Subprojects 5.07 The repayment performance of the sub-loans under the Second and the Third Projects mirrored the deteriorating performance of LBDI's overall loan portfolio (para. 6.03). Out of 54 sub-loans made under the Second Project, 29 (55%) had been fully repaid as of June 30, 1984, 3 were being paid on time, and 22 were in arrears. Out of the 29 fully repaid subprujects 16 firms are still in business while the reaining 13 have gone out of business. Similarly out of the 25 loans still on LBDI's books 11 have gone out of business while 14 are still in busi- ness. For 15 out of the 25 still active loans LBDI has initiated legal action to recover the loans. Under the third project out of a total of 75 loans a significant number of them were made in the last 2-3 years and it is too early to analyze their performance. Nevertheless some of the earlier loans are in arrears and for a few of them, legal action has been initiated to recover the loans. 5.08 The unsatistactory performance of subprojects raises questions about the quality of project selection, appraisal and supervision as well as the adequacy of investment promotion efforts by LBDI; these are discussed in paras 7.01 to 7.06. However, the main reasons for the unsatisfactory loan repayment performance and high rate of business failures (24 out of 54 firms assisted under the Second loan went out of business) lie in the economic and political crisis in the country since 1979. Many of the LBDI's clients lost property during the coup in 1980 and some even lost their life while some others left the country. At one stage 20X of the LBDI's loan portfolio was affected by these devel- opments. Those firms which stayed in business saw their market dwindle or disappear due to the economy's decline, capital flight and liquidity crisis. The liquidity crisis also caused many of LBDI's clients, who otherwise probably would have repaid the loans, to default and hold onto the