Malawi - Investment and Development Bank Project

Ducmoks ad The World Bank FOR OMCIAL USE ONLY Report No. 6334 PROJECT COMPLETION REPORT MALAWI INVESTMENT AND DEVELOPMENT BANK (INDEBANK) (LOAN 1610-MAI) June 27, 1986 Industrial Development and Finance Division Eastern and Southern Africa Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit - Malawi Kwacha (MK) US$1.00 - MK 1.60 MK 1.00 - US$.62 GLOSSARY OF ABBREVIATIONS ADB - African Development Bank ADMARC - Agricultural Development and Harketing Corporation CDC - Commonwealth Development Corporation DEG - Deutsche Eutnickhungsgesellschaft (German Finance Company for Investments in Developing Countries) EEC - European Economic Country EIB - European Investment Bank FMO - Nederlandse Financierings Maatschappi Voor - UutwicKeling Sladen (Netherlands Finance Company for Developing Countries) IFC - International Finance Corporation INDEBANK - Investment and Development Bank of Malawi Limited MIC - Malawi Development Corporation SSE - Small Scale Enterprises Fiscal Year Government of Malawi : April 1 - March 31 INDEBANK : January 1 - December 31  p. FOR OFFCIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. OVidC nd Diiwc-.CowalI June 27, 1986 MEMORANDLUM TO TE.E EXECUTIVE DIRECTORS AND THE PRESIDENT St'BJECT: Project Completion Report: Malawi - Investment and Development Bank (INrDEBANK) (Loan 1610-MAI) Attached, fo- information, is a copy of a report entitled "Project Completion ReDort: M'alawi - Investment and Development Bank (INDEBA1K) (Loan 1610-MAI)" prepared bv the Eastern and Southern Africa Regional Office. Under the modified system for proj ct performance auditing further evaluation of this project by the Operations Evaluation Department has not been made. .p This document has a restricted distnrbution and may be used by recipients only in the performance of their offic:ai duties. Its contents may not otherwise be disclosed without World Bank authorization.  FOR OFML4IL US ONLY PROJECT COMPLETION REPORT MALAWI - INVESTMENT AND DEVELOPMENT BANK (INDEBANK) (LOAN 1610-MAI) TABLE OF CONTENTS Page No. PREFACE ..................................................... ........... BASIC DATA SHEET .................. ................. ............. ii HIGHLIGHTS ................................................................. i I. INTRODUCTION . .....................1........ , Background ........ ............................. ................ 1 Project Objectives and World Bank Group Role . .............. 3 II. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES .................. 3 III. THE INSTITUTION .......................6 IV. ALLOCATION OF THE LOAN ..... ......................................... 11 V. OPERATIONAL AND FINANCIAL PERFORMANCE ............................... 12 VI. CONCLUSIONS ................................................................ 15 Annexes 1. List of Subrrojects Financed under Loan 1610-MAI .17 2. Economic Characteristics of Subprojects Financed under Loan 1610-MAI 18 3. Financial Characteristics of Subprojects Financed under Loaa 1610-MAI 19 4. Analysis of Loan Approvals as of June 30, 1983 . 20 5. Comparison of Projected and Actual Operations 1978-1982 .21 6. Analysis of Equity Portfolio as of December 31, 1983 .22 7. Summary Description and Present Status of Subprojects Financed under Loan 1610-MAI ......23 8. Projected and Actual Income Statements (1978-1982) .26 9. Projected and Actual Balance Sheets (1978-1982) .27 0. Projected and Actual Sources and Uses of Funds (1978-1982) .28 Projected and Actua'l Financial Ratios (1976-1982) .29 2. Schedule of Estimated vs. Actual Disbursements . .30 3. Coments Received from Borrower .............................. - ...... . 31 This document has a restricted distribution and may be used by recipients only in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.  PROJECT COMPLETION REPORT MALAWI: INVESTMENT AND DEVELOPMENT BANK (LOAN 1610-MAI) PREFACE This report presents an evaluation of Loan 1610-MAI tc the Investment and Development Bank of Malawi (INDEBANK). The loan was approved in July 1978, declared effective in November 1978. Disbursemex.ts were closed in December 1983. The Bank's Eastern and Southern Africa Regional office has prepared this report on the basis of information gathered during missions to Malawi in 1984. The report presents a factual review of INDEBANK's use of the loan proceeds and of its institutional developments over the past six years. In accord,.nce with the revised project performance reporting procedures this report has been read in the Operations Evaluation Depart- ment (OED) but the project was not audited by OED staff. The draft Completion Report was sent to the Borrower for comments. The Borrower's comments have been taken into account in finalizing the report and are reproduced as Annex 13.  - i.i - PROJECT COMPLETION REPORT INVESTMENT AND DEVELOPMENT BANK OF MAU-WI (INDEBANK) Loan 1610-MAI BASIC DATA SHEET (Amounts ii' US $ Million) As of January 31, 1986 Original Disbuised Cancelled Repaid Outstanding Loan No.1610-MAI 3.0 2.76 .24 1.39 1.37 Cumulative Disbursements 1979 1980 1981 1982 1983 1984 Fiscal Year Ti) Estimated .18 .45 2.78 3.0 3.0 3.0 (ii) Actual 0 0 .93 1.37 2.72 2.76 (iii) (ii) as X of (i) 0 0 33 46 91 92 Project Data Original Loan Dates Actual/Revised Board Apora.al 07/06/78 07/06/78 Loan Agreement 07/07/78 07/07/78 Effectiveness 11/01/78 11/01/78 Completion of Commitments 12/31/81 04/05/82 Loan Closing 07/01/83 07/01/83 Mission Data No. of No. of Staff Month/Year Weeks Pe-sons Weeks Date of Report Appraisal 11/77 2.5 2 5.0 05/03/78 Supervision 1 12/78 .5 1 0.5 01/22/79 Supervision 2 07/79 1.5 2 3.0 09/06/79 Supervision 3 03/80 1.0 2 2.0 04/09/80 Supervision 4 09/80 1.7 1 1.7 10/02/80 Supervision 5 04/81 1.0 1 1.0 04/28/81 Appraisal 1/ 03/82 1.7 3 5.1 07/07/82 Supervisio7n 6 10/83 1.0 1 1.0 10/26/83 1/ 'NDEBANK was appraised for a second Bank loan in March 1982; processing of the loan was, however, dropped on the Government of Malawi's request (para. 1.06).  - iii - PROJECT COMPLiTION REPORT MALAWI: INVESTMENT AND DEVELOPMENT BANK (INDEBANK) Loan 1610-MAI HIGHLIGHTS The Investment and Development Bank (INDEBANK) was appraised for the first Bank loan in November 1977, and a line of credit in the amount of US$3.0 million was approved in July 1978. The line of credit provided INDEBANK with foreign exchange resources to finance part of its investments in medium and large scale projects in the industrial, agricultural and tourism sectors. The Bank had proposed to include in the loan to INDEBANK a component of US$1.0 million for financing small scale enterprises (SSEs). The component was dropped from the project after negotiations on request of the Malawi Government (para. 1.03). At the time of appraisal INDEBANK had several weaknesses: its professional staff lacked experience, it had not established appropriate operational procedures, the quality of its appraisals needed to be improved, and project supervision was uncoordinated and weak. INDEBANK made good progress in correcting most of these weaknesses during the period of project implementation. It has st.reamlined its policies; the overall quality of project appraisals has improved; through staff recruitment and training, INDEBANK has developed a cadre of well trained, Malawian professional staff that is increasingly gaining experience and has substantially reduced the need for expatriate staff assistance. However, INDEBANK still has to overcome weaknesses in two main areas--a weak project promotion capability and inadequate evaluation of the economic impact of the projects it finances (paras. 3.08-3.09 and 6.03). INDEBANK's levels of operations during the project implementation period were about 20% below levels estimated at appraisal primarily due to sluggish growth in the Malawian economy and a decline in investment activities of Press Holdings Limited, Malawi Development Corporation (MDC) and the Agricultural Development and Marketing Corporation (ADMARC), which until three years ago invested in most projects in cooperation with INDEBANK. Its overall financial performance closely matches appraisal forecasts. INDEBANK's financial performance and the quality of its portfolio remain very good despite a generally deteriorating industrial sector environment (paras. 5.08-5.09). Other points of interest are: - Trends in the Malawian economy and in the industrial sector (paras. 2.01-2.06) - INDEBANK's Small Scale Enterp ise Lending Operations (para, 5.04) - Implementation Performance under the Bank ioan (para. 3.08) - Performance of projects financed under the loan (Annex 6)  PROJECT COMPLETION REPORT MALAWI - INVESTMENT AND DEVELOPMENT BANK (INDEBANK) (LOAN 1610-MAI) I. INTRODUCTION Background 1.01 The Inv 4ment and Development Bank of Malawi Limited (INDEBANK) was established .. December 1972 as a private limited liability company under Malawi's Companies Act. It is owned 22.25X each by the Agricultural Development and Marketing Corporation (ADMARC), the Commonwealth Development Corporation (CDC), the German Finance Company for Inivestments in Developing Countries (DEG), the Netherlands Finance Company for Developing Countries (FMO), and .1% by the International Finance Corporation (IFC). Its basic objective is to promote the economic development of Malawi by providing finance and other services to viable projects in the productive sectot. of the economy. 1.02 The World Bank Group's involvement wich INDEBANK began in 1976 when INDEBANK management asked IFC to make an equity investment in INDEBANK and about ttie same time requested a World Bank line of credit. An IFC mission visited Malawi in October 1976 to assess possibilities of participation in INDEBANK's equity and in December 1976 a Bank mission discussed with Malawian authorities INDEBANK's potential role in the industrial sector and its financial requirements. Following an exchange of letters between the Bank and INDEBANK management, the Bank agreed to send a mission to review INDEBANK's organization, role and resource needs. 1.03 A Bank mission appraised INDEBANK in November 1977 (Appraisal Report No.1914a-MAI) and recommended a line of credit of US$4.5 million to INDEBANK consisting of: (i) US$4.C million for financing part of its investments in medium and large scale industrial, agro-iniustrial and tourism projects and, (ii) a component of US$0.5 million for financing small scale enterprise (SSE) projects. During loan negotiations, INDEBANK indicated that it expected to obtain a second line of credit from the European Investment Bank (EIB), and as the terms of the EIB loan were expected to be more attractive than those of the proposed Bank loan, the amount of the loan earmarked for medium and large scale enterprises was reduced at INDEBANK's request from US$4.0 million to US$3.0 million while the amount for small-scale enterprises was, at that time doubled to S1.0 million. 1.04 Following loan negotiations, however, INDEBANK's foreign shareholders and the Government of Malawi expressed doubts on the suitability of INDEBANK as a channel for financing SSEs. The Government requested that the SSE component be deleted from the project and that a separate, possibly nation-wide SSE project be considered for financial assistance laterl/. The Bank agreed to these changes and a line of credit of US$3 million was approved on July 6, 1978, signed on July 7, 1978 and 1/ In 1981 the Government of Malawi, with assistance from the European Economic Community (EEC), established the Small Scale Enterprise Development Organization of Malawi (SEDOM) to provide financial and technical assistance to SSEs (para. 2.06).  - 2 - became effective less than four months later on November 1, 1978. Concurrent to approval of the Bank loan, the Board of Directors of the Corporation approved an IFC investment in 500,000 INDEBANK shares woith US$562,000 equivalent and IFC took a seat on the Board of Directors. The Bank loan was made to INDEBANK at an interest rate of 7-1/2% p.a. and would be repayable in accordance with a schedule conforming substantially to the aggregate of the amortization schedules applicable to the subloans. The maximum repayment period was set at 17 years. INDEBANK agreed to on-lend the proceeds of the loan at interest rates varying between 10-1/2% and 11% p.a. The foreign exchange risk wouli be borne by the subborrowers. Other important features of the loan includad an individual subproject free limit of US$100,000 with an aggregate free limit of $750,000. To ensure that the proceeds of the loan would be utilized to finance as many projects as possible the maximum size of subloan to a single subproject to be financed under the Bank line of credit was set at MK600,000 (about US$770,000). INDEBANK agreed to maintain a consolidated debt to equity ratio not xceeding 4:1. The recruitment of expat iates for the positions of Controller of Project Investigations and Project Investigation Manager and five Malaw-.an nationals to be trained for positions in INDEBANK's technical, monitoring and accounting departments were set as conditions of effectiveness of the loan. 1.05 Due to availability of resources from other sources 2/, the pace of utilization of the Bank loan was initially slower than anticipated at appraisal. By December 1980, about two years after loan effectiveness, commitments amounted to US$1.3 million and disbursements to US$0.9 million--50% of both commitment and disbursement levels estimated at appraisal, Subsequerntly however, commitments and disbursements picked up and by the subproject submission deadline--of December 31, 1981 about 84% of the loan amount had been committed; 91% of the amount had been disbursed by the closing date of July 30, 1983. Due to delays in the implementation of a project approved for financing under the loan, and as a result of some subprojects having been implemented in full at less cost than estimated at appraisal, a toLal of US$235,000 remained undisbursed and was eventually cancelled (para. 3.08). In March 1982, following a request from both INDEBANK and Government, the Bank appraised INDEBANK for a second line of credit. During the course of appraisal however, INDEBANK indicated it was seeking a loan from the African Development Bank (ADB); the ADB loan was expected to be on more favorable terms than those of the proposed loan. On request from INDEBANK and the Government of Malawi, the Bank stopped processing of the loan. In 1984, INDEBANK requested a follow-up line of credit. A second World Bank loan to INDEBANK was appraised in February/March 1985 and is under processing. 2/ INDEBANK had a credit from the European Investment Bank (EIB). Due to a relatively short period (2+ years) over which the line of credit had to be disbursed, INDEBANK gave priority to the utilization of EIB resources.  -3- Project objectives and World Bank Group Role 1.06 The main objectives o. the loan were to: (i) provide the Bank Group the opportunity to participate actively in the development of Malawi's industrial sector by providing INDEBANK with resources for fi:tancing part of its investments in industries, agro-industrial, agricultural, tourism and other productive projects; and (ii) build INDEBANK into an effective and efficient institution through helping it to: (a) improve its operational policies and financial strategy, (b) reinforce its strategy to be a more aggressive and promotionally oriented institution, (c) recruit and train Malawian professional staff and, (d) rationalize and consolidate its appraisal and supervision procedures. The main objectives of the project have substantially been met (para. 6.0). 1.07 In addition to providing INDEBANK with resources through an IFC equity investment (para. 1.04) and a line of credit, the World Bank Group played a significant role in strengthening INDEBANK's institutional capabilities. In line with World Bank recommendations, INDEBANK strengthened its capabilities by recruiting expatriate, Malawian professional staff and by increasing its staff training efforts. Through the rcview of project proposals submitted to the Bank for financing under the line of credit, the Bank assisted INDEBANK in improving its project appraisal capabilities, although further improvement in this area is still required (para. 3.07 (ii)). The IFC repre3entative on the INDEBANK Board of Directors has played an important role in helping Whe institution develop suitable investment policies and improve its financial performance. II. MACROECONOMIC, INDUSTRIAL AND FINANCIAL OBJECTIVES Introduction 2.01 Malawi is a small, densely populated country with moderately fertile soils, good water resources and climate favorable to crop production. At the time of independence in 1964, its economy was characterized by surplus labor, a lack of capital, technology, skilled labor and managerial talent. Being landlocked, Malawi depends on other countries for access to the sea. Since independence, Malawi has pursued a set of objectives aimed at achieving sustained economic development. These objectives, set out in the Statement of Development Policies in 1977 includa: (i) increasing agricultural productivity to improve rural living standards, provide employment opportunities and earn foreign exchange, (ii) encouraging growth of industrial activity based on local resources, (iii) achieving a better geographical balance in economic de-velopment within the country, (iv) increasing local participation in skilled employment, management and ownership of enterprise and, (v) elimination of dependence on foreign finance to cover government recurrent budget expenditures. 2.02 As a strategy for pursuing these objectives, the Government of Malawi has opted for an open market, export-oriented growth based on agriculture and agro-based manufacturing. This strategy is reflected in the Government's policies toward the agricultural and manufacturing sectors as well as i-' the treatment of domestic and foreign investment. In order to attract foreign capital, Government policy has encouraged the  -4- establishment of an open, market-oriented economy with the private sector as the primary engine of economic growth. The role of public enterprises has been that of investment partners with private sector entities and has been focussed on few key sectors. Public investment, particularly through the MDC and ADMARC, has been intended primarily to support private initiatives in the productive sectors through provision of essential infrastructure, public utilities and supporting services, Relatively low tariffs and judicious use of quantitative restrictions on imports have prevented the emergence of inefficient local import substituting industries so characteristic of many other developing countries. The Government has also deliberately kept wages at market-determined levels, thus encouraging the establishment of labor-intensive manufacturing firms and agricultural estates. 2.03 The Malawi Government has, in the last 20 years, demonstrated determination in pursuit of its development objectives and has had an impressive record of success. Real GDP and per capita income grew at an average rate of 5.5% p.a. and 3.0% p.a. respectively, during the period 1967-79. Despite this impressive growth rate, the Malawian economy, increasingly dependent on three primary commodity exports--tobacco, tea and sugar--remains highly vulnerable to international price fluctuations. The country has experienced periodic balance of payments disequilibria since 1974 due to: (a) cyclical swings in export prices of tobacco, tea and sugar, (b) rapid escalation in import prices, especially of fuel, intermediate and capital goods and (c) increasing costs of trnasport for both exports and imports due to rising freight charges, port congestion in Mozambique, and disruptions of the overland route. Balance of payments problems became severe between 1978 and 1981. Due to reduced agricultural export volumes and large imports of food stuffs following a drought in the early 1980s; and due to an increase in the petroleum import bill, Malawi's trade balance deteriorated rapidly and overall growth of the economy declined. GDP growth which had averaged 5.5% p.a. up to 1979 fell to 2.0% in 1980 and to -0.3% in 1981. GDP gtowth resumed at 2.6% in 1982 and moved to 4.3% in 1983. 2.04 While Malawi's economic difficulties in the past six years were primarily caused by the drought, the deterioration in the country's balance of trade and transport bottlenecks, the crisis also revealed structural weaknesses in the economy, notably: (i) the heavy reliance on three agricultural commodities produced by large estates, (ii) the slow growth of smallholder production for export, and (iii) the modern sector's dependence on costly imported oil, and the progressive depletion of domestic fuelwood resources; (iii) the deteriorating financial position of public enterprise; (iv) a growing imbalance between government recurrent and capital expenditures and (v) rigidities in the system of administered prices and wages. In order to tackle these problems, the Government, in consultation with the Bank and the IMF, formulated a medium-term program covering the period 1981-1986. The Government's major objectives during this period include: (i.) a real GDP growth rate of 4.8%; (ii) diversifi- cation of foreign exchange earnings by developing new smallholder and estate crops, accelerating growth of smallholder export crop, livestock and forestry I dustries, (iii) expanding industries based on local resources especially agro-processing; and (iii) improvement in the financial  - 5 - performance of the Government and public enterprises to reduce dependence on external resources and domestic borrowings. The policies for achieving these objectives were incorporated in a comprehensive structural adjustment program supported by IMF stand-by arranger4ents in 1979, late 1980 and 1982 an EFF in 1983, and two IBRD Structural Adjustment lending operations approved in 1981 and 1983. The Manufacturing Sector 2.05 Trends in Malawi's manufacturing sector in the past two decades are largely similar to those in the whole economy. From independence in 1964 through the late 1970s manufacturing activity in Malawi was buoyant. Starting from a very low level, manufacturing activity grew rapidly at an average rate of over 10% p.a. or twice the rate of GEP growth during 1970-78, bringing the sector's GDP share to around 12%. Initially, food, beverages, and the processing of tea and tobacco crops accounted for the bulk of manufacturing operations, but over the years the range of goods produced expanded to include textiles, footwear, packaging materials. pharmaceuticals, and wood and metal products. The general setback in the Malawian economy that started after 1978 reversed the trend of growth in the sector. Growth of manufacturing activity which averaged 10% p.a. during the 1970s, declined to an average rate of 6.7% p.a. during the period 1979-1983. Employment in manufacturing hab shown a similar reverLal of the trend. The growth of employment in industry, which averaged about 6% p.a. through 1980, started to decline after 1981. As a a result, the sector's share in total wage employment dropped from about 12% in 1980 to about 9% in 1982. The decline in manufacturing sector growth is attributed to the same factors that have caused a general setback in the whole economy--deterioration in balance of trade, transportation bottlenecks, droughts and structural weaknesses in the economy that continue to hinder recovery. The Government's main objectives in the industrial sector are to: (i) encourage and promote private investment, (ii) accelerate growth of an c.xport-oriented industrial base as opportunities for import-substitution diminish, and (iii) develop indigenous Malawian entrepreneurship. 2.06 In response to the economic crisis, the Government, has in the past few years taken some policy decisions such as price control, tightened foreign exchange control and increases in company tax and import tariffs which could slow down recovery in industrial activity. Overall, however, Malawi's industrial policies remain relatively sound. Measures for addressing some of the policy weakness are being handled in the conte:t of the Bank's SAL Operations in Malawi. The Financial Sector 2.07 Malawi's financial sector consists of: (i) the Reserve Bank of Malawi which plays the usual role o' a central bank, (ii) two commercial banks - The National Bank of Malawi (NBM) and the Commercial Bank of Malawi (CBM), (iii) a development bank, INDEBANK, (iv) a housing finance company - th3 New Building Society (NBS), (v) two insurance companies - the National Insurance Corporation (NIC) and Old Mutual, (vi) the Post Office Savings Bank (POSB), and (vii) Mercantile Credit Limited, a small private institution predominantly engaged in hire purchase financing. Two  . -6- statutory bodies, MDC and ADMARC and the quasi-public corporatioi--Press Holdings-- make equity investments in a broad range of economic activities. The financial institutions, especially the commercial banks have played a major role in resource mobilization. Domestic saving rose from 4% of GDP in 1967 to 17% in 1979, increasing the share of investment financed from domestic resources to about 60%. 2.08 Interest rates in Malawi have been revised upwards fairly regularly over the past five years to take into account trends in the rate of inflation and to regulate credit. The Central bank discount rate was raised from 8% to 10% p.a. in 1980 but has remained unchanged since then. Lending and deposit rates on the other hand were revised in 1979, 1980 and more recently in May 1983. Commercial bank lending rates range from a minimum of 11-1/2% p.a. on loans to the agricultural sector to a maximum of 16-1/2 p.a. for loans to other sectors. Minimum rates charged by the New Building Society vary from 13.75% for residential housing mortgages to 17.75% p.a. on mortgages for commercial properties. INDEBANK charges a minimum of 12% on medium and long term loan to agricultural enterprises and on loans denominated in foreign currencies, and up to a maximum of 16-1/2% p.a. on local currency loans for various other activities with an inflation rate of around 10%, interest rates in Malawi were positive throughout the project implementation period. III. THE INSTITUTION 3.01 During the course of appraisal, loan negotiations and project implementation, the following issues were discussed with INDEBANK and Malawian authorities. Issues relating to INDEBANK procedures are discussed in para. 3.07. (i) Management and Staffing: At the time of appraisal in 1978, INDEBANK's expatriate General Manager was due to leave the following year upon expiration of his contract. To ensure that a replacement would be recruited in time so as to avoid potential management succession problems, the appraisal mission recommended that the identification of a suitable candidate to replace the departing General Manager be made a condition of Board Presentation of the project. At negotiations, the Bank was informed that INDEBANK, under Government's recommendation, had appointed a Malawian General Manager designate who would succeed the expatriate General Manager at the end of his contract. The appraisal mission had also found that although INDEBANKVs professional staff was of good quality with solid academic backgrounds, it was insufficient in number and still inexperienced. Five of the ten professional staff had been with INDEBANK for  -7- less than six months. In order to strengthen INDEBANK's professional staff capabilities, agreement was reached at negotations that INDEBANK would recruit: (a) an expatriate Controller of Project Investigations, (b) an expatriate Project Investigation Manager to assist in the identification and appraisal of projects, and (c) five suitably qualified Malawian nationals to be trained in project identification, promotion and appraisal and in accounting. The recruitment of suitably qualified people, in consultation with the Bank,was set as a condition of effectiveness of the Bank loan. (ii) Treatment of Income Notes: In addition to the subscribed share capital, INDEBANK shareholders had agreed to provide additional resources to INDEBANK in the form of income notes. Under the Finance and Cooperation Agreement between the Government and the shereholders, the income notes which were unsecured, convertible into ordinary shares at the option of the holders are to be repaid (in instalments or in a lump sum) by the year 2020. INDEBANK considered these income notes to be quasi-equity, and proposed to treat them as equity for purposes of determining an appropriate debt/equity ratio for the institution. During negotations, however, it was agreed that the income notes would be treated ap borrowings for the purposes of calculating the debt/equity ratio. (iii) Financial Covenants: The Loan Agreement between INDEBANK and the Bank included several principal financial covenants: (a) under section 4.10 INDEBANK agreed to limit its total financial assistance (in the form of loans and/or equity investments) to any one individual legal entity to a maximum of 25% of INDEBANK's unimpaired share capital plus general accumulated reserves. However, it was agreed that INDEBANK could, in consultation with the Bank exceed this limit ia the case of projects sponsored by the Government and considered to be of national importance, provided that the repayment of principal and interest of the portion of such loan in excess of the 25% limit would be fully guaranteed by the Government. During the course of project implementation INDEBANK requested an amendment to section 4.10 of the Loan Agreement to enable it to make investments in the form of loans and/or equiLy in a single project up to 30% of INDEBANK's networth. The Bank did not agree to the requested amendment because: INDEBANK did not provide any justification for it, there was no indication that the 25% exposure limit had been a constraint to INDEBANK's investment plans and an increase in the exposure limit to 30% of INDEBANK's net worth would lead to a significant and unnecessary increase in risk exposure; (b) under section 4:11 of the Loan Agreement INDEBANK agreed not to make equity investments in any enterprise if the total amount of such investments would exceed INDEBANK's unimpaired paid-in  share capital plus general accumulated reserves. In 1982 INDEBANK requested an amendment to the Loan Agreement to increase the aggregate limit for equity investments up to 120% of networth, As INDEBANK's equity portfolio was of high quality and profitable, the Bank agreed to this request and section 4.11 of the Loan Agreement was amended accordingly. The Loan Agreement included three other financial covenants to which INDEBANK agreed: (a) not to distribute dividends exceeding 75% of its after tax profit in any one year, in order to build up an adequate general reserve; (b) to make sufficient provisions to cover the risk arising out of doubtful investments; (c) maintain a consolidated debt/equity ratio not exceeding 4:1 and; (d) take the necessary measures to protect itself against foreign exchange risk on foreign currencies used in its operations. INDEBANK complied with these covenants. Developments During Project Implementation and Present Status 3.02 Management. From the time of its establishment in 1972 until mid-'379, INDEBANK was headed by Mr. G. Raynor, an expatriate General Manager provided by CDC, one of the institution's shareholders. Under his leadership, INDEBANK achieved a solid reputation and a strong financial base. At the end of Mr. Raynor's contract in September 1979, Mr. Lawrence Anthony, a Malawian national previously General Manager of the Reserve Bank of Malaw;. was appointed INDEBANK's General Manager. The change in management was accomplished without any major disruption in INDEBANK's organization and operations. In a relatively short time, the new General Manager provided effective leadership and expanded INDEBANK's role. In addition to placing greater emphasis on INDEBANK's role in developing projects of national importance jointly with several other Malawian investment groups, Mr. Anthony played the key role in the establishment of INDEFUND--an INDEBANK subsidiary set up in 1981 to promote the development of Malawian owned small scale enterprises (para.5.04). 3.03 In recognition of his abilities, Mr. Anthony was appointed General Manager of the much larger ADMARC and left INDEBANK in November 1982. Efforts to recruit a suitable Malawian national as his replacement were unsuccessful and Mr. Jack Thompson, an expatriate who had joined INDEBANK as Coordinator of Project Investigations was appointed General Manager. His contract is due to expire in June 1986. 3.04 During the period of project implementation, INDEBANK also experienced several changes in its middle level management. In line with measures agreed with the Bank for strengthening its institutional capabilities, INDEBANK recruited three senior expatriates to fill key positions--the Coordinator of Project Investigations, the Supervision Manager provided by FMO and the Agricultural Projects Investigation Manager provided through German Technical Assistance. The Coordinator of Project Investigations and the Supervision M-.rager left INDEBANK at the end of their contracts in 1981. Although INDEBANK recognized the key role played by these expatriates, it was slow in recruiting suitable replacements to fill these positions. This was one of the most important issues that  -9- emerged during implementation of the loan. The position of Coordinator of Project Investigations 'ias been recently filled with an expatriate from the Irish Development Agency, and the positions of Supervision Manager and Agriculturai Projects Investigation Manager have been filled with senior Malawian staff who has been with INDEBANK for several years. 3.05 Organization. INDEBANK's organization is simple and has remained unchanged since inception in 1972. It comprises of three divisions: (i) the Project Investigation Division which deals with the identification, promotion and appraisal of projects; (ii) the Project Monitoring Division which handles the implementation and supervision of projects and, (iii) the Company Secretary's/Financial Controllers' Division which is responsible for accounting, financial management, administrative and legal matters. INDEBANK's organization is appropriate for its objectives and operations. 3.06 Staffing. INDEBANK's professional staff has increased from 10 in 1977 to 24 at present including two expatriates. Three of the professional staff are seconded to INDETRUST, and five to INDEFUND--INDEBANK's two managed subsidiary companies. Overall, the staff is of good quality. The majority of the staff have solid academic backgrounds. Thirteen of the 24 professional staff are university graduates with qualifications mostly in either Economics, or Business Administration. The rest of the staff possess junior college diplomas in banking and business studies and several have obtained or are studying for professional qualifications in accountancy. Although the majority of the staff have been with INDEBANK for a relatively short period of four to five years, they have gained considerable experience in their jobs and are highly productive. In order to meet effectively the manpower requirements of its managed subsidiaries, especially INDEFUND, as well as develop adequate professional staff to manage its own operations, INDEBANK has recently hired a legal officer and plans to recruit four additional project officers. 3.07 Staff Training. INDEBANK became active in providing training to its staff following the appointment of a Malawian General Manager in 1979. Based on its operations forecasts INDEBANK prepares, each year, a comprehensive three year staff recruitment and training plan. Staff training ia INDEBANK has been relatively easy due to the solid academic background possessed by the majority of the professional staff. As such, emphasis is placed on on-the-job training. In addition, however, INDEBANK sends its staff to selected overseas training programs. In the past five years, four staff have been sent on post-graduate courses in financial management and business admiriotration and four other staff have attended short-term courses in project promotion and appraisal in the UK and USA. INDEBANK provides financial support to its staff who are taking correspondence courses for further qualifications in accountancy and banking. 3.08. Procedures (i) Appraisals. At the time INDEBANK was appraised for the Bank loan, the overall quality of its appraisal was unsatisfactory and needed to be improved: project appraisals were prepared and presented in a  - 10 - summarized, sketchy form and did not provide all the information collected through the appraisal process. INDEBANK did not have capability to evaluate the projects' technical aspects and depended exclusively on outside engineering consultants or promotors' views; and it did not evaluate the economic impact of the projects it financed. The Bank recommended measures to address these weaknesses and during negoti.ations INDEBANK agreed to: (a) hire two experienced expatriate managers to strengthen project appraisal capabilities (para. 3.01) (i); (b) prepare an appraisal manual establishing appropriate appraisal procedures and, (c) carry out economic evaluation of projects it proposed to finance. The overall quality of appraisals has improved over the past seven years. INDEBANK now routinely calculates economic rates of return for all projects it finances and covers in sufficient detail important aspects such as projects' potential for creating employment and dependence on imported inputs, and hence projects' reliance on foreign exchange. (ii) Project Supervision. INDEBANK supervises the projects in its portfolio regularly. During the course of project implementation, however, Bank Supervision missions noted that INDEBANK did not have standard supervision procedures. In order to simplify the supervision function and improve the quality of supervision reports, Bank missions recommended that INDEBANK prepare a project supervision manual establishing standard supervision procedures. After a sonsiderable delay, due to manpower constraints, INDEBANK prepared a sipervision manual in 1983. INDEBANK submits reports on the performance of selected projects in the portfolio to each Board meeting and seeks its Board's guidance on measures for dealing with projects encountering problems. Overall, the supervision reports are comprehensive and of high qulity. (iii) Procurement and Disbursements. For the procurement of major machinery and equipment items, INDEBANK requires project entities to obtain at least three competitive quotations before suppliers are selected. It also takes steps to ensure that borrowers obtain machinery and equipment from the cheapest source while taking into account such factors as machinery and equipment service support and quality specifications of the project. 3.09 INDEBANK's equity and loan disbursements are made on the basis of the investment program and the costs of each approved project, upon presentation of invoices, once the sponsors' contributions have been fully paid. In the majority of cases, payment is made directly to suppliers. INDEBANK's procurement and disbursement procedures are adequate. (iv) Audit. Since its establishment, INDEBANK's annual accounts have been audited by Deloitte Haskins and Sells, a firm of international repute. The audits are timely, comprehensive and satisfactory. INDEBANK has complied with the reporting requirements agreed with the Bank: it submits its audited accounts to the Bank within three to four months alter the end of its fiscal year and also regularly submits quarterly reports on its operations, portfolio and financial situation.  - 11 - Implementation Performance Under Bank Loan 3.10 Due to availability of resources from other sources, the pace of utilization of the Bank loan was slower than anticipated at appraisal. By December 30, 1980 almost two years after loan effectiveness, commitments amounted to only US$1.3 million and disbursements to US$0.9 million--about half the commitment and disbursement levels anticipated at appraisal. Subsequently, however, INDEBANK earmarked five projects to be financed under the Bank loan and the commitments and disbursements picked up. By December 31, 1981--the terminal date for subproject submission, about 84% of the loan amount had been committed and the balance was committed four months later. The loan was 91% disbursed at the time of the closing date in July 1983 (Annex 12). It was not considered necessary to postpone the closing date as disbursements were expected to be completed within the next six months. Due to delays in the implementation of one of the projects approved for financing under the loan, and as a result of some subprojects having been completed at lower cost than estimated at appraisal, a total of US$235,004 remained undisbursed six months following the closing date and was eventually cancelled. IV. ALLOCATION OF THE LOAN 4.01 The proceeds of the Bank loan were utilized to finance a total of seven subprojects including: (i) six large and medium size subprojects, all above the free limit, and (ii) one below free limit subproject (Annex I). Another subloan was approved for a second below free limit subproject but it was eventually cancelled as a result of a long delay in project implementation. The size of the seven subloans ranged from S100,000 for a corrugated roofing sheet manufacturing project to $673,557 for A propylene bag manufacturing project. Most of the subloans carried an interest rate of 12% p.a. for a term of ten years including a two-year grace period. The foreign exchange risk is borne by the sub-borrowers. The present status of these subprojects is described in Annex 7. 4.02 Economic and financial characteristics of the projects financed under the Bank loan are summarized in Annexes 2 and 3 respectively. The seven projects include an iron and steel foundry, a hotel, a propylene bag manufacturing project, a local alcoholic beverage brewery, a polyester/ cotton textile mill, a corrugated iron sheet factory and a project for manufacturing plastic crates for bottled drinks. Five of the seven subprojects are located in Blantyre, Malawi's principal commercial and industrial center and two are in Lilongwe, the capital city. Six of the seven subloans financed under the loan were for the expansion and/or modernization of existing projects; only one subloan was approved for a new project. Total investment cost for the seven subprojects amounted to K28.7 million (about US$23 million) and ranged from K19.9 million (US$15.9 million) for the polyester/cotton fabrics manufacturing project to K600,000 (US$480,000) for the expansion of the corrugated iron roofing sheets project. As a proportion of total investment cost per project, INDEBANK financing ranged from 6% for the polyester/cotton fabric manufacturing project to 66% for the local alcoholic beverages brewery project; and averaged about 43% of total project cost, well below the 75% limit set in INDEBANK's Policy Statement. Three of the seven subprojects--the iron and  , -~~~~~~~ 12 - steel foundry whose production is based on scrap steel, a brewery which processes alcoholic beverages from local ingredients and the hotel in Lilongwe--are not import dependent. On the other hand, about 75% of the raw material requirements of the other tour subprojects are imported. All the six subprojects in operation produce exclusively for the local markets The six subprojects which have been implemented, generated 461 new jobs at an average investment cost per job of $49,000. The investment cost per job ranged from $14,000 for a hotel project to $85,600 for the textile mill. The foundry project, when completed is expected to create 15 new jobs at a cost of $68,000 per job. The investment cost per job was high because the investment in the six subprojects was mainly for expansion of existing capacity which typically require only marginal increases in the labor force. 4.03 Six of the seven subprojects financed under the Bank loan were implemented on schedule and within costs estimated at appraisal. The implementation of the seventh project, an iron and steel foundry, is about two years behind schedule following a decision by a foreign company-one of the original project promotors--not to participate in the project. Implementation is currently underway and it is anticipated that the project will be operational by June 1985. All six Bank financed subprojects that are in operation are profitable (Annex 3). V. OPERATIONAL AND FINANCIAL PERFORMANCE 5.01 Operations. Annex 4 gives a summary analysis of INDEBANK's loan approvals from inception to June 30, 1983. During this period INDEBANK approved 72 loans totalling K27.1 million (US$21.7 million) and equity investments amounting to K4.9 million (US$3.9 million) in 20 companies. Details of INDEBANK's equity investments are presented in Annex 6. In terms of number, the majority of loans were between K200,000 and K50U,OUO, and accounted for 35% of the amount approved. In terms of value however, approvals were dominated by loans of between K500,U0O and Ki million; these accounted for 42% of the total amount approved. Large-size loanas of over one million accounted for only 1U% of the amount approved. In line with INDEBANK's policy of limiting its total financial commitment in a single project to a minimum of K100,000 except in exceptional circumstances, loans of up to K100,000 accounted for only 2% of the total approved loan amount. 5.02 INDEBANK's loan approvals are diversified in terms of sectoral distribution and cover a variety of economic activities notably manufacturing, tourism, property development and construction, agriculture, li,restock and agro-processing. Manufacturing represents the principal economic activity for which loans were approved: 57% of the amount approved was for manufacturing activities, mainly textile and chemical production. Agriculture and livestock activities accounted for 17% of the amount approved. Sixty percent of both the number and amount of loans were approved for new projects; expansion projects accounted for 29% and 27% of the number and value of loans approved respectively with the balance representing loans for rehabilitation projects. In line with INDEBA