Madagascar - Bankin'ny Indostria (BNI) Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 7179 PROJECT COMPLETION REPORT MADAGASCAR aANRIN'NY INDOSTRIA (BNI) (CREDIT 977-MAG) April 4, 1988 Eastern and Southern Africa Projects Department Industrial Development and Finance Division This document has a restricted distribution aud may be used by recipients only in the performance of their official duties. Its contents may not othenrise be disclosed without World Bank authorization.  CURRENCY UQUIVALENTS CurreacY Unit - Malagasy Franc (1MG) ftchge Rate.(An"ual Average): IUSS a 1MG 1980 211.28 1981 271.73 1982 349.74 1983 430.45 1984 576.60 1985 662.48 1986 676.34 1987 833.00 (end May 1987) FISCAL YEAR January 1 - December 31 ABBREVIATIONS BCIM - Banque pour la Comerce et l'Iadust!le de tadagascar BCRt - Banque Centrale de la Ripublique lUalgache BDPI - Bureau de DWveloppemeat et de Promotion Industriels BPV - Banque Nationale pour le Comrce NI - Banque Nationale pour le Diveloppemnt Industriel BNH - Banque Nationale Malegasy de DSveloppemnt BTM - Banque Nationale pour le DSveloppe.mst Rural CCCE - Caisse Centrale de Coop6ratlon Economique CCP - Ceatre de Chiques Postaux CRAPS - Caisse Nationale de Privoyance Sociale CPA - Certifled Public Accountant EIB - European Investent Bank FItG - Malagasy Franc KfW - Xrsdltanstalt fur Wiederaufbau SERDI - tSocit d'Etude et de rdalisation pour le developpeuent industriel SPA - Special Fac1lity for Sub-Saharan Africa SNI - SocietS nationale d'investissewent SSE - Small-scale enterprise(s)  FOR OMCIL USE ONLY THE WORLD BANK Washmgton. D.C. 20433 U.S.A. Ok.4 i1 DKNEVGhIWN1 April 4, 1988 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Madagascar - Bankin'ny Indostria (BNI) (Cr. 977-MAG) Attached, for information, is a copy of a report entitled 'Project Completion Report on Madagascar - Bankin'ny Indostria (BNI) (Credit 977-MAG)' prepared by the Africa Regional Office. Further evaluation of this project by the Operations Evaluation Department has not been made. Attachment 1This document has a festricted distribution and mauy be used by fecipients only in the Perfornance| of their offtiail dutzes. Its contents tnay not otherwLse be disclosed without World Bsank autitofization.  FOR OMCIAL USE ONLY PROJECT COMPLETION REPORT MADAGASCAR - BANKIN'NY INDOSTRIA (BNI) (CREDIT 977-MAG) Table of contents Page No. PREFACE .................. 1 BASIC DATA SHEET ................... ii HIGHLIGHTS ......... iii 1, INTRODUCTION I............................................ 1 l.l Background ............ ........ 1 1.2 Project Objectives and World Bank Group Role ...s.... 3 2. MACROECONOMIC. INDUSTRIAL AND FINANCIAL OBJECTIVES ....... 3 201 Macroeconomic Setting *e..3... .................e.. 3 2.2 The Industrial Setting ............................... 5 2.3 The Flinncial Sector ...... 6........................ 6 3. THE INSTITUTION ............... 8 3.1 Initial Issues 8 3.2 Overall Development. during Project Implementation and Current Status 9 3.3 Impleusntation Performance under IDA Credit .......... 12 4. ALLOCATION OF THE CREDIT ................................. 12 4.1 Overview ........,.......................... 12 4.2 Economic and Financial Characteristic of Subprojects . 12 4.3 Feasibility Studies *.....e0**ge0 0e06 14 5. OPERATIONAL AND PINANCIAL PERFORMANCE .................... 15 5.1 Overall Operational Performance ...................... 15 $.2 Resource Mobilization ........ ....e...eec.......e. 16 5.3 Financial Condition and PerformaAce L................. 17 6. CONCLUSIONS .................. 19 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.  Annexes 1. Evolution of Staffing aQd Regional Offices, 1980-86 22 2. List of Subprojects and other Project Componeats PFianced under Credit 877-MAG ... 23 3. Schedule of Estimated vs. Actual Disbursemnts . .24 4, Actual and Projected Operations, 1977-85 . .25 5. Analysis of BN1 Investments (Loans and Participations) durlg 1979-85 ..26 6. Analysls of BNI Investments (Guarantees) during 1979-85 . 27 7. Actual and Projected Summary - Balance Sheets, 1977-85 ..28 8. Actual and Projected Summary - Income Statements, 1977-85. 30 9. Actual and Projected Sources and Uses of Funds, 1977-85 .. 31 10. Actual and Projected Financial Ratios, 1977-85 . .32 11. Economlc Characteristic of Subprojects Financed under Credit 977-M..AG .. . 33 12. Financial Characteristics of Subprojects Financed under Credit 977-MAG ..34 13. Summary Description and Present Status of Above Free Limit Subprojects Financed under Credit 977-MAG. 35 14. Studies Financed under Credit 977-MAG . .41 15. Comments from the Borrower ..42  PROJECT COMPLETION REPORT HADAGASCAR: BANKIN'NY INDOSTRIA (BNI) (CREDIT 977-MAG) PREFACE This report presents an evaluation of Credit 977-KAG to the - Democratlc Republic of Madagascar, with the Bankin'ny Indostrli (BNI) as lmediate beaeficiary. This first IDA line of credit to BNI.was approved in January 1980, and was declared effective in February 1981. Disbursements were completed in July 1986. The Association'a Eastern and Southern Africa Regional Office has prepared this report on the basis of written and oral informatlon provlded by the Borrower during a miosion to Madagastar In November/December -1986. The report reviews BNI's use of the credit proceeds and its institutional development over the past years. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department (OED), but the project was not audited by OLD staff. Following standard procedures, OED sent copies of the draft report to the Borrower for comments. These comments have been taken into account in finalizing the report and are reproduced as Annex 15.  - ii - PROJECT COMPLETION REPORT MADAGASCAR - BANKIN'NT INDOSTRIA (BNI) CREDIT 977-HAG BASIC DATA SHEET (Amounts in USS Million) AS of February 29, 1988 Orifinal Disbursed Cancelled Repaid Outstanding Credit No. 977-MAG 5.0 4.992 0.008 - 5.0 Cululative Disbursements Fiscal Year 1981 1982 1983 1984 1985 1986 (1) Estimated 0.4 2,0 4.2 =T 0 5.0 5.0 (ii) Actual - 0.8 2.0 2.9 3.8 4.9 (iii) (LI) as Z of (l) - 40 48 58 76 98 Prolect Data 'Orginal Dates Actual/Revised Board Approval 01/29/80 01/29/80 Loan Agreement Signed 05/08/80 05/08/80 Effectivenes 09/08/80 02/24/81 Completion of Commitmaents 12/31/82 12/311d4 Loan Closing 12/31/84 12/31/85 Mission Data No.of No. of Staff Mouth/Year Weeks Persons Weeks Date of Report 1. Reconnislaace/ - Identlfication 11/77 1 1 1 1/78 2. Pre-Appradsal 06/78 2 3 6 7/78 3. Appraisal 11/78 2 2 4 1/80 4. Supetvision 1 05/80 2 3 6 6/80 5. Supervision 2 05/81 2 2 4 7/81 6. Supervision 3 09/82 2 3 6 10/82 7. Supervision 4 07/85 2 2 4 8/85 8. Project Completion 11/86 1 1 1 6/87  - ill - PROJECT COMPLETION REPORT MADAGASCAR - BANKIN' NY INDOSTRIA (BNI) Credit 977-MAG HIGHLIGHTS The Bankin' ny Indostria (BNI), which started operations in 1977/78, was appraised for the fxrst IDA line of credit in November 1978, and the project in the amount of US$5.0 million was approved in January 1980. The line of credit provided BNI wizh foreign exchaage resources to finance part-of its lending in industry and mining for medium and larger subprojects, artisans and SSEs, feasibility/pre-investment studies as well as improvements in institution building. At the time of appraisal BNI had several weaknesses: the level of its interest rates was low, it lacked clear strategy and policy statements, and its accounts were not audited by independent qualified CPAs (para. 3.01). BNI made progress in correcting some of these weaknesses during project implementation and thereafter. First, it increased interest rates and medium- and large-scale subborrowers assumed the foreign exchange risk which raised effective real interest rates considerably following several devaluations of the Malagasy currency in recent years. Second, new general Policy Statement was adopted in late 1979. During project implementation, however, BNI was unable to act independently as a financial intermediary. The Government as the principal shareholder increasingly intervened directly in BNI's activities. The Government's direct involvement in BNI's decision making process eroded de facto BNI's. independent functions and responsibilities as well as its operational'and financial autonomy. Third, BNI's audits were initially adequately prepared but submissions were delayed. A special IDA country-wide audit review mission concluded in 1985 that BNI's auditors were no longer suffictently qualified to prepare comprehensive statements and loan portfolios. IDA, therefore, requested BNI that--in line with comprehensive audits already undertaken for the other two state banks as agreed with the IMF-a full audit of both BNI's accounts aud portfolio be undertaken by, or. in collaboration with, an international auditor. actions to this effect have been taken in the meantime. The experience with the first IDA-financed line of credit to BNI suggests that the operation was reasonably successful in financing a number of priority industrial and SSE subprojects. However, the project's institution building objective of upgrading and strengthening BNI's operational and management capabilities was only partly achieved essentially due to three inter-related factors (para. 6.04). First, macroeconomic conditions deteriorated during project implementation, affecting seriously quality and volume of BNI's operations and financial position. Second, Government's expansionary policies in the late 1970s/early 1980s, had to be replaced by stabilization and deflationary measures, starting in 1982, which had a profound impact on production and  - iv - profitability of BNI's clients and caused in turn a serious deterioration of BNI's portfolio and financial position. Finally, the Government's interventionist .tance and interference in BNI's activities constrained institution building efforts. BNI's current operational and finarcial shortcomings are not only institution-specific; they represent also more fundamental problems of the country's banking and financial system, presently under review by the Government in collaboratior with the Bank and the IMF (para. 6.04). A proposed banking reform, presently under consideration and involving BNI as well as the other two national banks, would be an important prerequisite for BNI to play an effective role in the development of the industrial sector. Reform measures would include portfolio restructuring, improved internal control and management, more independent decision making and financial autonomy; and further deregulatory measures to enhance competition and expand the range of financial services. Other points of interest are: -Trends ia the economy and the industrial and SSE sectors (paras. 2.01-10); - Implementation performance under the IDA credit (paras. 1.04/05; 3.05); - BNI's financial condition and performance (paras. 5.07-5.10); - Performance of subprojects financed under the credit (paras. 4.02-4.08 and Annex 13).  PROJEC" C,OMPLETION REPORT MADAGASCAR: BANKIN'NY INDOSTRIA (BNI) (CREDIT 977-MAG) 1. INTRODUCTION 1.1 Background 1.01 The Bankln'ny Indostria (BNI) was created in January 1977 as a result of the satioavide b^aking reform that took place Ia 1976. 8NI then assumed ti) tt- loan and equity portfolio of the former Banque Nationale Malagasy de D6veloppement (BNM) in the industrial and social sectors, and (ii) the portfolio of the former Banque pour le Commerce et l'Industrie de Madagascar (BCIM), a comercial bank nationalized in 1976. BNI's basic objectives, as a combined commercial and development baok, Include the promotioa of Industrial and handicraft development through short, medium, and long term loans as well as equity investments. It also finances Individual and collective housing and provides loans for household equipmnat. 1.02 BNI has a share capital of FMG 4.5 billion owned by the Government (56.77%), the Central Bank (6.67%), the Social Security Fund (19.90%), the ARO insurance company (8.33%), and the Ny HAVANA insurance company (8.33%). BNI's board (Comite de Gestion) is chaired by the Minister of ieinance. Until recently, BNI and the other two national banks were governed by a Joint Management Board (Comite de Gestion unique) which was responsible, inter alia, for the approval of credits exceeding certain amounts. As part of banking reform measures agreed during the Sixth StandbyArrangementwith the IMF, a new, independent and separate Board of Directors was established for BNI (separate Boards were also established for the other two banks) in November 1986 which includedrepresentatives of the Government and the public and private sectors. The Minister of Finance continues to chair the Board. 1.03 The World Bank Group's involvement with BNI began in 1977, BNi's first year of operations* At the request of the Government, a Bank reconnailssance/ideat