Nepal - Second Cottage and Small Industries Project

Do_aM of The World Bank FOR OMCIuL USE ONLY Report No. 6112-NEP STAFF APPRAISAL REPORT NEPAL SECOND COTTAGE AND SMALL INDUSTRIES PROJECT April 22, 1986 Industrial Development and Finance Division South Asia Projects Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENT (As of December 18, 1985) Currency Unit Nepalese Rupees (Rs) US$ 1.00 = Rs 20.8 Rs 1.00 US$0.05 ABBREVIATIONS ADBN - Agricultural Development Bank of Nepal BTI - Bankers Training Institute CCC - Credit Guarantee Corporation CIDB - Cottage Industry Development Board CIED - Cottage Industry Export Division CIHE - Cottage Industry Handicraft Emporium CSI - Cottage and Small Industry CTA - Chief Technical Advisor DCVI - Department of Cottage and Village Industries EDP - Entrepreneurship Development Program EEE - Exporters' Exchange Entitlement ESC - Export Service Center GTZ - German Technical Corporation HMG - His Majesty's Government NAB - Nepal Arab Bank, Ltd NBL - Nepal Bank Ltd. NIDC - Nepal Indusurial Development Corporation NMTC - Nepal Metal Trading Company- NRB - Nepal Rastra Bank NWTC - Nepal Wool Trading Company PCI - Participating Credit Institutions PDC - Product Development Center PON - Products of Nepal PCU - Project Coordination Unit RBB - Rastriya Banijya Bank RNAC - Royal Nepal Airlines Corporation SBPP - Small Business Promotion Program TA - Technical Assistance TPC - Trade Promotion Center UNDP - United Nations Development Program FISCAL YEAR HMG/Financial institutions: July 16 to July 15  FOR OMCIL USE ONLY NEPAL SECOND COTTAGE AND SMALL INDUSTRIES PROJECT Table of Contents Page No. SUMM ARY *...*.....*.**.e..****e.**e** ...e..* , i-i I INTRODUCTION . 1 II. SECTORAL FRAMEWORK .. ....*,* . . .............***** 2 A. Economic Environment .........2...................... .... 2 B. Industrial Sector ....... ...................... . 3 C. Role of Cottage and Small Industries ..... ................ 5 D. Industrial Policy Framework *............................. 6 E. Industrial Finance . ............ ..........0.... ... ... .. .. 11 III. STRATEGY AND PROJECT DESIGN ............... ................. 13 A. First Project-Achievements and Lessons Learned ........... 13 B. Building Term Lending........ .. ............................ 14 C. Promoting Exports ....... ........... ...................... 15 D. Developing Skills......................................... 19 E. Supplying Materials................... ............. ....... 20 F. Coordinating and Monitoring............................... 20 IV. THE PROPOSED PROJECT ....... ................................ 21 A. Objectives, Scope and Financing ..... ..................... 21 B. Subloan Component ..... ................................. .. 23 C. Export Development Components ............................ 30 D. Policy Formulation and Implementation .................... 34 E. Entrepreneurship, Skills Training, and Extension Services. 35 F. Raw liaterial Supply ...................................... 38 G. Project Coordination, Monitoring and Evaluation ........... 39 V. THE PROPOSED CREDIT ....... ......... 40 A. Credit Arrangements...... .. .. ...... ................... .. 40 B. Subloan Terms and Conditions ............................ 40 VI. PROJECT BENEFITS AND RISKS .. ......... .. . . .. . . . ......... . . . . . . 44 VII. RECOMMENDATIONS .................. .. ................ 46 This report is based on the findinge ot in Appraisal Mission which visited Nepal in August 1985. The mission t'.omplised M. de Nevers (leader), A. Hasan (ASPID) and A. Singer (Consiltait). Thi document has a restcted distribution and may be used by recipients only in the performance of their official dutes. Its contents may not otherwise be discimod without World Bank authorization.  LIST OF ANNEXES 1. Interest Rate Structure 2. List of Districts 3. Estimated Costs and Sources of Finance 4. Draft Statement of Policies and Operating Procedures, ESC S. Estimated Schedule of Disbursements for the Proposed IDA Credit 6. Draft Statement of Policies and Operating Procedures for Lending to CSIs ADDITIONAL ANNEXES, VOLUME II II-1 Credit Guarantee Corporation--Premium Rate Table II-2 CSr II Training Needs--Suggested Training Courses II-3 Banker's Training Center--List of Training Programs II-4 Distribution of Existing Manpower of PCIs in Proposed CSI II Project Area (I-5 Current Investment of PCIs by Zone in CSI II Project Area II-6 Calculation of Credit Demand II-7 Estimates of Project Generated Incremental Foreign Exchange II-8 Note to Financing Plan: Staffing Assumptions II-9 Export Performance of Key CSI Products during Implementation of First CSI Ptoject II-10 Proposed CIDB Staffing Plan II-}1 Agreement between CIDB and GTZ  NEPAL SECOND COTTAGE AND SMALL INDUSTRIES (CSI II) PROJECT Project Summary Borrower : His Majesty's Government of Nepal Beneficiaries : Rastriya Bani,ya Bank (RBB), the Agricultural Development Bank of Nepal (ADBN) and Nepal Bank Limited (NBL). Amount : An IDA Credit -- US$10.0 million equivalent, Terms : Standard Cofinancing : The UNDP would provide a grant of US$1.8 million on a parallel basis. Relending Terms : The Government would relend about US$7.6 million of the proceeds of the IDA Credit for the subloan component to Nepal Rastra Bank (NRB) at an average rate of 3Z per annum repayable over 14 years, including three years of grace. NRB would use these funds to refinance at an average rate of 6.5X per annum subloans made to cottage and small scale industries (CSIs) by participating credit institutions (PCIs). The foreign exchange risk would be borne by HMG. Project Objectives : The proposed Project would support the Government's objectives of development of efficient industries, export growth and increasing output, export earnings and employment in small and cottage industries. Project Desc-.iption : The proposed Project would: (i) finance private projects in cottage and small industries through the financial system; (ii) strengthen the term-lending capability of PCIs and upgrade overall operations of two commercial banks; (iii) strengthen public and private agencies in providing marketing, raw material supply and training services to CSIs; and (iv) support improvements in policy and procedures to foster efficient industrial-investment. The ultimate beneficiaries would be cottage and small industries, market agents servicing CSIs and raw material supply companies which meet eligibility criteria in 27 districts included in the project area. About 4,720 subloans would be made by participating credit  -ii- institutions to CSI projects. Average cost per job is estimated to be about US$900 and the incremental employment generazing under the Project would be about 21,000 jobs. The major risk affecting manufacturing projects in rural areas is the weak raw material supply and market system. This risk is expected to be minimized by support provided under the Project to local market agents and the Cottage Industry Handicraft Emporium. To help ensure that the Project achieves its export objectivest the Project provides technical assistance to HMG for improvement in the duty drawback and quota allocation systems and for market research and product development. To help minimize project implementation risks, the Project provides for a full-time chief technical advisor and supporting experts. Estimated Costs: Local Foreign Total --------