Nepal - Industrial Development Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 14660 PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (CREDIT 1535-NEP) JUNE 22, 1995 Country Operations, Industry & Finance Country Department II South Asia Regional Office 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 Currency Unit = Nepalese Rupees (Rs) Appraisal Year (FY84): SDR I = US$1.0679 US$1.00 = Rs. 14.50 Rs. I = US$0.069 Completion Year (FY94): SDR I = US$1.0957 US$1.00 = Rs. 48.02 Rs. I = US$0.02 ABBREVIATIONS AND ACRONYMS ADB/N - Agricultural Development Bank of Nepal BANSBARI - Bansbari Leather and Shoe Factory Ltd. CIDB - Cottage Industries Development Board CSI - Cottage and Small Industries DCSI - Department of Cottage & Small Industries DEG - Deutsche Investitions-und Entwicklungsgesellschaft ESC - Export Services Center FITA - Foreign Investment and Technology Act HLI - Hetauda Leather Industries HMG - His Majesty's Government of Nepal ICICI - Industrial Credit and Investment Corporation of India IDA - International Development Association IDP - Industrial Development Project IEA - Industrial Enterprises Act IEF - Import/Export Facility ISC - Industrial Services Center JVB - Joint Venture Bank KfW - Kreditanstalt fur Wiederauftan LICC - Leather Industries Coordination Cell MOI - Ministry of Industry NBL - Nepal Bank Limited NIDC - Nepal Industrial Development Corporation NRB - Nepal Rastra Bank PCR - Project Completion Report RBB - Rastriya Banijya Bank RHCDC - Raw Hide Collection and Development Company UNDP - United Nations Development Programme USAID - United States Agency for International Development FISCAL YEAR July 16 - July 15 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 22, 1995 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completion Report on Nepal Industrial Development Project (Credit 1535-NEP) Attached is the Project Completion Report (PCR) for the Nepal Industrial Development project (Credit 1535-NEP, approved in FY85), prepared by the South Asia Regional Office, with Part II contributed by the Borrower. This SDR 7.5 million credit aimed at promoting industrial exports and strengthening Nepal's Industrial Credit Corporation (NIDC). Project components were a credit line to NIDC, a facility to finance imported inputs (IEF), a development program for leather processing, studies, and technical assistance (TA). The project was prepared by Government agencies, with assistance from IDA. Project implementation was beset by problems. Soon after the credit was declared effective, the Government asked IDA to cancel the IEF and the main studies and TA components. Commitments and disbursements were delayed. The credit was closed two years after the original date, and an amount equivalent to 7.5 percent of the total credit was cancelled. The projects financed by the sub-loans were larger and more capital-intensive than had been anticipated in the President's Report. Financial performance of NIDC has been poor, but it has improved in recent years, with collection ratios ranging between 75 and 90 percent. Notwithstanding these weaknesses, the operation achieved its main objective. It helped finance 39 projects with a total investment cost of nearly US$40 million, a majority of which are in operation, some 4,000 jobs have been created, and the country's industrial exports have flourished. The leather sector benefitted from the assistance provided, and two parastatals were privatized. Interest rates were liberalized in 1990. This relative success was facilitated by a simple, highly focussed design, without excessively detailed conditionalities, and by the liberalization of interest rates. On the other hand, progress in the institution-building aspects of the project was limited. Some components were dropped, and NIDC remains financially weak. The outcome of the project is rated as marginally satisfactory, its institutional development impact as modest and the sustainability of its benefits as uncertain. The PCR contains abundant information, but it could have been compressed and tightened. It does not explain the reason for the abrupt cancellation of key institutional components. It also fails to show the justification for this kind of subsidized lending to large industrial firms, which seemed to have access to commercial credit sources. No audit is planned. Attachment 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.  FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) TABLE OF CONTENTS Page No. Preface ................................................. i Evaluation Summary ........................................ n PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE ............ 1 1. Project Identity .................................... 1 2. Project Background .................................. 1 3. Project Objectives and Description ...... ........................ 2 4. Project Design and Organization .......................... 3 5. Implementation .................................... 3 6. Project Results .................................... 6 7. Project Sustainability and Impact .... .......................... 8 8. IDA's Performance .................................. 9 9. Borrower Performance ................................ 9 10. Project Relationships ................................. 10 11. Consultant Services ................................. 10 12. Project Documentation and Data ........................ . 10 13. Lessons from the Project .............................. 10 PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE ..... 12 PART I: STATISTICAL SUMMARY ........................... 15 1. Related IDA Credits ................................. 15 2. Project Timetable ................................... 16 3. Credit Disbursements ................................ 16 4. Project Costs and Financing ............................ 17 5. Project Results .................................... 18 6. Status of Covenants ................................. 19 7. Use of IDA Resources ................................ 21 ANNEXES: 1. An Appraisal of NIDC.................................. 22 2. Subproject Information................................. 36 3. Subsectoral Distribution of Subloans ..... ........................ 37 4. Subloan Information by Category ..... .......................... 38 5. Cumulative Collection Performance of Subloans ..................... 39 6. Cash Flow Analysis of NIDC ............................ 40 7. Index of Subsidy Dependence for NIDC ...................... 41 8. Rate of Return from Current Portfolio ..... ....................... 43 ATTACHMENT: HMG's letter enclosing Part II ....................... 45 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.  PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) PREFACE This is the Project Completion Report (PCR) for the Industrial Development Project in Nepal, for which Credit 1535-NEP in the amount of US$7.5 million (SDR 7.5 million) equivalent was approved on December 13, 1984, and made effective on December 20, 1985. The project was closed on December 31, 1993, compared with the original closing date of December 31, 1991. The final disbursement under the Credit was made on May 13, 1994, at which time the credit account was closed after canceling a balance of SDR 0.56 million (7% of the original credit amount). The PCR was prepared jointly by the Country Operations, Industry and Finance Division of the Country Department 2 of South Asia Regional Office (Preface, Evaluation Summary, Parts I and III), and the Borrower (Part II). Preparation of this PCR was based on IDA's project completion mission for the project in February 1994, and information from the Staff Appraisal Report, the Development Credit and Project Agreements, supervision reports, correspondence between IDA and the Borrower, internal IDA correspondence, documentation provided by the implementing agencies, field visits to selected project sites and discussions with project and IDA staff associated with project implementation. The borrower contributed to the preparation of the PCR by providing comments on the draft of Parts I and III and preparing its own evaluation of the project's execution in Part II.  - 11 - PROJECT COMPLETION REPORT NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) EVALUATION SUMMARY Project Objectives i. As a follow-on operation to the first Industrial Development Project (Cr. 705-NEP) to the Nepal Industrial Credit Corporation (NIDC), the basic objective of the project was to promote industrial investments and exports in Nepal, primarily in the private sector, and to carry on with the institutional strengthening of NIDC. More specifically the project objectives were to: (a) promote privately owned enterprises, through the financing of Investment Projects for the economic and social development of Nepal, and also promote the leather. industry through financial and technical assistance to the subsector and to two public sector companies; (b) strengthen NIDC's operational standards and procedures, through the provision of technical assistance and training; and (c) enhance HMG's capacity to generate foreign exchange reserves, through the establishment of an Import Export Facility. Implementation Experience ii. Soon after effectiveness HMG changed its mind regarding some of the Credit components. Thus, the Import Export Facility (IEF) of US$1.5 million was canceled and the amount earmarked was added to the subloan component. The tourism promotion study and the incentives study were also canceled. The project was, therefore, left with only the lending component (US$6.5 million) and two Technical Assistance components (totalling US$1.0 million); one to strengthen the NIDC and the other to upgrade the leather sector. This pruning of project components actually improved the clarity and realism of the objectives by focussing on the delivery of credit (lending component) and the vehicle for delivery (TA to NIDC) without, in any way, reducing the importance of the main objective of promoting private sector led industrial growth in Nepal. It also reduced the complexity of the project thereby lowering the demands on the implementation capacity of the borrower (para 4.2). iii. After effectiveness, implementation proceeded slowly. Originally, the Credit was expected to be committed in four years and disbursed in seven years. However, both commitment and disbursement under the line of credit were slower than planned. The TA was fully committed by June 1992, one year after the original completion date, while the Credit component was fully committed by December 1992; however subloan disbursement was very slow and by the time the Credit was closed, an amount of SDR 6.09 million was disbursed representing around 93% of the subloan component of SDR 6.55 million. Some subloans, specially those that were approved in the last quarter of 1992, were not fully disbursed by the Credit closing date due to various problems. These subloans are likely to be financed by NIDC by recycling Project funds as well as from other sources. The Credit account was closed on May 13, 1994, at which time the undisbursed balance of SDR 0.56 million, representing 7.5% of the total Credit, was canceled. The estimated cost of the project at appraisal was about US$12.0 million. The final cost is about US$40 million as shown - 111 - in Table 4A in Part III; it is higher because the total cost of the subproject component was about $38 million compared to about $9.3 million at appraisal. IDA subloans were expected to finance about 70% of total subproject cost at appraisal. Actual contribution by IDA subloans was only 21% with the remaining coming from sponsors and other financiers. The implementation of the technical assistance component proceeded well under the leather development program but was partially delayed in the case of NIDC (para 5.3). Project Results iv. The project's objective of expanding the private sector's role in industrial investment was largely realized. Over 94% of the credit amount was disbursed and majority of the subprojects are in operation and seem to have had a substantial impact on industrial growth, investment, and employment. The other key objective of establishing an efficient and financially viable DFI showed mixed results. The TA to the leather subsector also had a favorable impact on the export sector (para. 6.10). v. At the time of PCR preparation (mid-1994), 26 out of the 39 subprojects financed were in commercial operation, four were under litigation having been seized and/or closed, and the other nine were under implementation and had not drawn-down their respective subloan (Annex-4). Of the 31 subloans that were fully disbursed, nine (29%) had paid off their entire outstanding balances and another six (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four (13%) were under litigation. Although a majority of the subloans were in arrears, the amounts involved were not significant (other than those under litigation). This was expected since most of the subprojects were new and faced unanticipated problems which delayed installment payments from time to time. The collection data for the forty subloans aggregated for the three years up to FY93 and adjusted for the fully paid-off subloans, indicated an overall collection ratio of 75% which matched NIDC's current collection ratio for the entire portfolio, but was higher than the HIDC's total collection ratio of 52% (paras 6.3 & 6.4) vi. Employment figures obtained from the 31 subprojects that were in commercial operation indicate that about 3,600 additional jobs were created due to this project compared to the SAR estimate of 2,300 additional jobs. Moreover, at least another 410 jobs are expected to be created once the remaining nine subprojects go into commercial production, giving a total of about 4,000 jobs with a cost per job of about N.Rs. 450,000 compared to the appraisal estimate of N.Rs. 200,000. This was so because the projects were more capital intensive than anticipated at the time of appraisal (Annex 4). As expected, the A-category subprojects (subloans above free-limit of US$150,000) were much more capital intensive with an average cost per job of N.Rs. 526,000 than the B-category subprojects (subloans below free-limit) with average cost per job of N.Rs. 225,000 (para 6.6). Sustainability and Impact vii. Over the past four years, NIDC has increased its profitability and generated healthy cash surpluses. In FY94, NIDC had a: net income of over 3% of total asset; a Rate of Return on Equity of 9%, a collection rate of 52%; arrears amounting to 23% of portfolio and accumulated provisions equal to 95% of the arrears. An analysis of the overall cash flow of NIDC for the four years ending in July 1993, shows that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection - iv - of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC should be able to recycle more than N.Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's profitability and cash flow performance is good, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy performance is largely due to its long-term borrowing at below market rates, yielding an interest margin of about 6.6%, and its low dividend payout. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate by around 37% (from 17% to 23% p.a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. Looked at another way, the maximum return that NIDC's debt and equity holders could expect from the present stock of loans is about 7.6. % (Annex 8); this is the rate at which the NPV of future cash flow from the current outstanding portfolio -- principal/interest collections, assuming recent collections rates, net of operating costs -- equals the sum of equity and debt outstanding. The expected return (7.6%) from the current portfolio is about 40% lower than market rates on L/T investments (e.g., L/T deposits). viii. To evaluate the impact of the IDA financed lending component on NIDC's financial performance, a model was developed to determine the breakeven interest rate, on both marginal and total cost basis, under different collection scenarios. The marginal break-even interest rate is the nominal lending rate at which the interest income from the subloan equals the marginal cost of borrowing. At the current collection rate of 75%, the marginal breakeven rate is around 10-12% (with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis, the project is generating a positive cash flow for NIDC. On a total cost basis (including operating costs which equal 3% of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75% comes to around 17% which is same as the average lending rate; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds (float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14% indicating a positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of making NIDC a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. ix. The impact of the technical assistance to the leather subsector appears to be positive as well. Both Bansbari and RHCDC have been successfully privatized and while Bansbari's performance and profitability has improved already, RHCDC under private management also holds promise of better performance. In recognition of its positive contributions, LICC has been absorbed within HMG, after completion of the project, and it should continue to contribute towards the improvement of leather goods. The output and value-added of leather and leather goods have increased from N.Rs. 326.4 million and 62.8 million in FY89 to N.Rs. 447.8 million and 131.8 million in FY91 respectively. The exports of hides and skins during this period also increased from N.Rs. 166.1 million to N.Rs.221.5 million. Lessons Learned x. Whereas it is easier to find the reasons for the failure of a project it is relatively more difficult to isolate the reasons for its success. A somewhat similar project in Nepal, under which - V - subloans were made to only small and cottage industries over almost the same period, failed to sustain the lending component through the nationalized commercial banks. While it is true that the reasons for its failure were not all present under this Project, both the projects were implemented under the same overall financial sector framework. The main difference lay in the project conditionalities and the way they were perceived by the implementing agencies and the ultimate beneficiaries. The reasons for the relative success of this Project provide the following lessons: (a) investment lending projects in countries with less developed financial and industrial sectors should be kept simple with a limited number of components. The highly focussed objectives and the simple project design made this Project more acceptable to the Borrower and hence also created a sense of ownership in the Borrower and NIDC (para 9.1). The objectives were understood by all and the demands on the implementation capacity of the agencies concerned were not too great (para 4.2). (b) credit lines though DFIs for encouraging industrial investments should avoid putting in micro-management conditionalities as such conditionalities may violate normal banking instincts and principles. The absence of: subsector or regional lending targets; graduated interest rates and spreads based on subloan size; and such other conditions helped NIDC to make a better credit decision based on the subproject itself (para 4.3). (c) implementing DFIs should be allowed to charge market rates of interest where a competitive lending environment exists. The liberalization of interest rates by NRB in FY90 allowed NIDC to raise its lending interest rates in line with the perceived risks underlying the subprojects. This improved NIDC's margin and also screened out marginal subprojects (para 6.12). (d) foreign equity participation with management assistance for DFIs in developing countries should be encouraged. The presence of an expatriate Director deputed by a foreign shareholder in the management of NIDC appears to have had a favorable impact on the operations of NIDC (para 6.12). NEPAL INDUSTRIAL DEVELOPMENT PROJECT (Credit 1535-NEP) PROJECT COMPLETION REPORT PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE 1 Project Identity Name Industrial Development Project Credit No. Cr. 1535-NEP RVP Unit South Asia Region Country Nepal Sector Industry 2 Project Background 2.1 With an average per capita income of only US$170 (1992), Nepal is one of the poorest countries in the world. Reflecting the fact that about 90% of Nepal's people live in rural areas, Nepal's economy is based primarily on traditional rain-fed agriculture, which accounts for about 56% of GDP and 80% of employment. Agricultural productivity, however, has been stagnant resulting from rapid environmental degradation caused by inappropriate policies and strategies, population pressure combined with excessive grazing and deforestation. Real GDP growth over the past three decades has been virtually offset by an average population growth (2.1 % in 1992) over this period. In a normal rainfall year, Nepal produces barely enough foodgrains to feed its population. While agricultural growth is important to make impact on widespread low income levels, it alone will not be sufficient to improve Nepal's prospects for increasing employment and income and improving the balance of trade. Increases in industrial production and exports are needed to supplement agricultural incomes. 2.2 Nepal's industrial sector is small (16% of GDP in 1992) and under developed, with limited prospects for import substitution or exports of most modern industrial products. Industrial development is constrained by Nepal's limited natural resource base, small domestic demand, lack of skilled labor, landlocked position, and poor transport systems. Because of these constraints, Nepal needs to adopt a selective approach to industrial development by encouraging industrial investment in areas where Nepal has a comparative advantage. 2.3 The Government's approach to development stressed the promotion of private sector expansion. IDP-I (Cr. 705-NEP) for US$4.05 million was approved in 1977 and was relent to 25 subprojects which contributed to increasing incomes and generating employment and foreign exchange through expanded production and exports. The first project also initiated the institutional strengthening of NIDC since it was recognized as the main promoter of private industries in Nepal. 2.4 The second IDA credit line was provided to expand private industrial investment further and to develop the leather and leather goods subsector as a means to diversify exports and enhance value added. Moreover, the institutional strengthening of NIDC that began under the first -2- credit line needed to be carried on in order to turn NIDC into an efficient and viable DFI capable of financing an improved quality of industrial projects in Nepal. 3 Project Objectives and Description 3.1 Project Objectives: The project was designed to promote private industrial investment for the economic and social development of Nepal and to assist in generating more foreign exchange earnings. It also sought to upgrade the quality of leather and encourage efficient domestic processing of leather and its products. Furthermore, the project planned to continue with the strengthening of NIDC's institutional capabilities which was initiated under the first IDA line of credit. The objectives did not include any major reforms for the entire financial sector and were clear and concise, understood by all, and were in line with IDA strategy for the development of Nepal's industrial sector. 3.2 Project Description: To achieve the above objectives the project had the following principal components and costs: (i) a credit line to NIDC for onlending to private industrial enterprises to finance local and foreign costs (including permanent working capital) of sub-projects, and contribution of US$1.0 million to His Majesty's Goverment (HMG) and the National Review Board for setting up an Import Export Facility (IEF) to finance the imported inputs of existing exporters (US$6.5 million); (ii) support to HMG for implementing an integrated development program, through RHDC, LIDC and Bansbari, for the leather/leather goods subsector aimed at increasing the collection of raw hides and skins, upgrading footwear designs, quality and production techniques (US$0.55 million); (iii) advisory/consultancy services for three studies to promote and improve operations of the light engineering and tourism sub-sectors and to review and recommend a package of industrial and export incentives (US$0.2 million); and (iv) assistance to NIDC to build on the institutional improvements made under IDA's first credit line, through provision of consultancies, training, computer hardware and software, equipment and international audit services (US$0.09 million). 3.3 Total project cost, phased over seven years, were estimated at US$12.0 million and an IDA credit of SDR 7.5 million (US$7.5 million equivalent at the time of appraisal) was approved to fund 63% of costs, while HMG and prospective sub-project sponsors were to contribute 14% and 23% respectively. NIDC was given the responsibility to relend the credit component of US$6.5 million to private industrial enterprises for the establishment or expansion and modernization of enterprises in manufacturing, agrobased industries, mining and industrial services, as term loans including permanent working capital. NIDC bore the credit risks associated with the sub-loans, while the foreign exchange risk was borne by HMG. 3.4 The technical assistance component, which focused on strengthening NIDC and upgrading the leather subsector, was to be financed through US$ 1.0 million of IDA funding and a US$ 0.2 million equivalent of local currency financing by HMG. Initially, the TA also included -3- three studies for the promotion of tourism, light-engineering products and industrial and export incentives to be implemented by the Ministry of Industry through NIDC for its strengthening component and through the Leather Industries Coordination Cell (LICC) for the leather subsector component. 4 Project Design and Organization 4.1 Shortly after the credit was signed HMG requested a change in the project design including the cancellation of: (a) IEF of US$1.5 million, to expand exports. The IDA contribution of US$1.0 million, which was earmarked out of the credit component was, reallocated for financing eligible NIDC subloans. The industrial and export incentives study was financed by ADB. (b) The tourism promotion study. This was eventually financed by NRN and the industrial and export incentives study was financed by ADB. Moreover, the trade policy reforms undertaken under SAL I & II were considered to be adequate at that time. Only the study on light engineering subsector was carried out, but it came out with no significant recommendations for reforms. 4.2 With these changes the project was left with a lending component of US$6.5 million and two technical assistance components totalling US$1.0 million; one to strengthen the NIDC and the other to upgrade the leather sector. This pruning of project components actually improved the clarity and realism of the objectives by focussing on the delivery of credit (lending component) and the vehicle for delivery (TA to NIDC) without, in any way, reducing the importance of the main objective of promoting private sector led industrial growth in Nepal. It also reduced the complexity of the project thereby lowering the demands on the implementation capacity of the borrower. 4.3 In retrospect, it now appears that the absence of micro-management conditionalities in the project design and organization contributed most to the relatively better performance under this project. Thus, this project did not: specify any subsector or regional lending targets; stipulate any graduated refinancing interest rates and spreads based on subloan size; nor put in any other micro- management targets as were found in many of IDA's investment lending operations designed at that time. 5 Implementation 5.1 Project Start-up. The Credit became effective on December 20, 1985, twelve months after Board approval. The delay was mainly in processing the amended Policy and Strategy Statements of NIDC and getting it approved by its Board, and in signing the subsidiary loan agreement between HMG and NIDC. 5.2 IMlementation of the Subloan Component. The highlights of the subloan component implementation are as follows: (i) A total of 46 subloans were approved by IDA during the seven years of the Credit. However, six of the approved subloans were either funded by NIDC from other sources or canceled prior to disbursement and 40 subloans to 39 subprojects (almost -4- the exact number estimated in the SAR) were finally financed under the credit component. One subproject repaid the entire subloan ahead of schedule and was later provided with another subloan for balancing and expansion. Total subproject costs were N.Rs. 1.8 billion (US$37.5 million) of which IDA subloans financed N.Rs. 228.5 million (US$4.8 million). IDA subloans represented less than 14% of NIDC's gross loans and advances during 1994. (ii) At appraisal, it was expected that 25 % by number and 70% by amount of subprojects would be reviewed by IDA. In fact, about 49% by number and 89% by amount of subprojects were subjected to prior review by IDA because there were more 'A' category subloans (over the free limit of US$150,000) than anticipated. In terms of subloans, 20 from each category (A-over the free-limit, and B-under the free-limit) were financed under the Project. The average size of the A category subloan was SDR 0.28 million while the average size of the B category subloan was SDR 0.03 million (Annex-2). (iii) A relatively riskier portfolio was financed under the Project since 18 out of the 20 sub-loans in each category were for new sub-projects and only two from each category were for existing subprojects. In regards to location, subprojects were relatively equally distributed, although six B-category subprojects were located in Kathmandu and four A-category subprojects were each in Lalitpur and Bara. (iv) The subsectoral distribution of the subloans was: textile and jute (36.9%); food and mixed products (21.2%); construction (11.2%); hotel and resort (10.2%); paper and printing (8.4%); pharmaceutical and medical products and services (3.6%); and other manufacturing (8.4%). The loans to the textile are jute sectors generating the highest level of new job creation (Annex 3). (v) A substantial number of projects had time overruns. As of February 1994, three A- category and six B-category subprojects were still under implementation because of delays in the import and installation of machineries, delayed power connection, raising promoter's equity, changes in project design and scope, and for other reasons. (vi) The financing of Bansbari and RHCDC for their modernization, upgrading and financial restructuring, as planned under the leather development program, did not fully materialize. Bansbari was privatized in December 1992 and neither the planned equity investment nor any subloan was extended to it. Only the equity investment and the subloan to RHCDC was made, albeit in amounts smaller than planned. RHCDC has also been privatized recently. 5.3 Implementation of the TA Components. After the restructuring of the technical assistance component its implementation proceeded well. Under the leather development program a leather industry advisor was provided to LICC for three years who acted as the Chief Technical Advisor (CTA) responsible for the implementation of this subcomponent. The Cobbler Assistance program was implemented by CIDB with the assistance of an expatriate trainer for shoe uppers and another expatriate trainer for leather garments. LICC also hired an expatriate consultant from 1991 for three years for its leather goods training center which offered courses on manufacturing leather -5- goods. The Effluent Control program was not undertaken. Prior to its privatization, Bansbari was provided 20 man-months of TA for improving leather tanning and finishing, shoe design and shoe engineering. The pilot abattoir that was planned to be set up by RHCDC never got completed due to staffing problems and a shortage of funds expected from HMG, although land was acquired near the river just outside Kathmandu. Finally, the Export Market Promotion program was also implemented successfully by LICC. 5.4 Technical assistance to NIDC was aimed at institutional capacity building to complement NIDC's agreement with ICICI to implement an institutional assistance program. It included a "projects course" program aimed at providing practical tools on project preparation, evaluation, and implementation which was implemented successfully. The international audit to determine the financial condition of NIDC was carried out by Price Waterhouse & Co. The computerization of NIDC's operations was significantly delayed and was not complete at the time of project closing. NIDC barley completed the procurement of the hardware by the closing date and is now soliciting funds for consultants to design a proper software to computerize its operations. 5.5 Risk Assessment. The main risk identified in the SAR for the subloan component was that an adequate number of identified and eligible subprojects may not materialize due to inadequate entrepreneurial interest, the multiple constraints to industrialization and difficulties in incentives and their administration. To minimize this risk, the project provided: (a) a conservative subloan amount; (b) entrepreneurial training courses in preparing and promoting viable industrial projects; (c) assistance in the development and implementation of appropriate incentives for industry and exports through training and technical assistance; and (d) incorporation of subsector development components in key product groups. Whereas all the above were implemented under the Project except (c), it is difficult to determine the extent to which the above actions reduced the elements of risk and how NIDC coped with the other elements not mentioned, such as the macro-economic framework, general credit discipline, legal framework for debt recovery, trade relations with India and others. 5.6 Procurement. There were no particular procurement problems identified in the supervision reports. 5.7 Disbursement and Project Cost. The estimated and actual disbursements of the project are given in Table 3A and 3B in Part III. Originally, the Credit was expected to be committed in four years and disbursed in seven years. However, both commitment and disbursement under the line of credit were slower than planned and by June 1992, one year after the original Project closing date, the full TA component and around 95% of the Credit component was committed. Although the Credit component was fully committed by December 1992, subloan disbursement was very slow and by the time the Credit was closed, an amount of SDR 6.09 million was disbursed representing around 93% of the subloan component of SDR 6.55 million. Some subloans, specially those that were approved in the last quarter of 1992, could not be fully disbursed by the Credit closing date due to various problems as stated in Para 5.2 (v). These subloans are likely to be financed by NIDC by recycling Project funds as well as from other sources. The Credit account was closed on May 13, 1994, at which time the undisbursed balance of SDR 0.56 million, representing 7.5% of the total Credit, was canceled. The estimated cost of the project at appraisal was about US$12.0 million. The final cost is about US$40 million as shown in Table 4A in Part III; it is higher because the total cost of the subproject component was about $38 million compared to about $9.3 million at appraisal. IDA subloans were expected to finance about 70% of total subproject cost at appraisal. Actual contribution by IDA subloans was only 21 % with the remaining coming from sponsors and other -6- financiers. The implementation of the technical assistance component proceeded well under the leather development program but was partially delayed in the case of NIDC (para 5.3). 6 Project Results 6.1 The project's objective of expanding the private sector's role in industrial investment was largely realized. Over 94% of the credit amount was disbursed and the majority of the subprojects are in operation with a substantial impact on industrial growth, value added, and employment. The other key objective of establishing an efficient and financially viable DFI showed mixed results. The TA to the leather subsector also had a favorable impact on the export sector (para. 6.10). 6.2 Subloan Component. The subsectoral distribution of the subloans show that a wide variety of subprojects were financed under the Project (Annex-3). These subloans generated incremental productive investments of N.Rs. 1.82 billion compared to the SAR estimate of N.Rs. 160 million (Annex-4). While most of the subprojects cater to the domestic market at least five had either begun exporting or were planning to export their products in the near future. The Project, therefore, had a positive impact on the industrial investment, growth and exports. 6.3 At the time of PCR preparation (mid-1994), 26 out of the 39 subprojects financed were in commercial operation, four were under litigation having been seized and/or closed, and the other nine were under implementation and hence had not even fully drawn-down their respective subloan (Annex-4). Of the 31 subloans that have been fully disbursed, nine (29%) had paid off their entire outstanding and another six (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four (13%) were under litigation. 6.4 Although over half of the subloans were in arrears, the amounts involved were not significant (other than those under litigation). This was expected since most of the subprojects were new and faced unanticipated problems which delayed installment payments from time to time. The collection data for the forty subloans aggregated for the three years up to FY93 and adjusted for the fully paid-off subloans, indicated an overall collection ratio of around 75% which matched NIDC's current collection ratio for the entire portfolio, but was higher than its total collection ratio of 52%. 6.5 Twelve subprojects, representing around 31% of the total, were visited by the PCR mission during June 1993 and February 1994. Ten subprojects were in good running condition and only two appeared to have incurred losses from their operations. The other two subprojects were in the construction stage. 6.6 Employment figures obtained from the 31 subprojects that were in commercial operation suggest that around 3,600 additional jobs were created due to this Project. This is much higher than the SAR estimate of 2,300 additional jobs. Moreover, at least another 410 jobs are expected to be created once the remaining nine subprojects go into commercial production, leading to a total of about 4,000 jobs created under the Project given the cost per job of N.Rs. 450,000 compared to the appraisal estimate of N.Rs. 200,000 showing that most of the subprojects are capital intensive. As expected, the A-category subprojects are much more capital intensive with an average cost per job of N.Rs. 526,000 than the B-category subprojects with average cost per job of N.Rs. 225,000. -7- 6.7 TA Components. The technical assistance provided to the leather subsector fairly achieved the objectives of improving the quality of leather and leather goods and increasing their exports through an export promotion component. The leather subsector was in its infancy at the beginning of the Project with an inefficient system of collection and processing of hides and skin and outdated tanneries. With the assistance of the international experts provided under the TA the condition has improved considerably. Both the collection and processing of hides and skins by RHCDC has improved due to expansion of its collection centers to 300 in 60 districts, most of them with godown facilities to preserve the collected hides and skins until they are distributed to the tanneries. This has led to an appreciable increase in the availability of the hides and skins. 6.8 The three technical experts provided to Bansbari for improving the quality of tanning and finishing, shoe engineering and footwear design led to the production of higher quality leather which is fetching better prices, as well as better quality shoes. 6.9 Under the Export Market Promotion program, LICC arranged for the participation of a four member delegation to the Hong Kong leather fair in May 1987 which resulted in incremental sales of wet-blue, crust and finished leather. Moreover, a 13-member delegation also visited the Paris leather fair in September 1989, followed by a visit to W. Germany and Pakistan to see the latest technology employed by the leather industries in those countries. 6.10 The provision of a Leather Industry Advisor to LICC assisted in the upgrading of its position from a temporary coordination cell at the beginning of the Project to a regular institution at present under the Department of Cottage and Small Industries of the Ministry of Industry, funded from the regular budget of HMG. It had established a leather goods training center which offers one-year course on skills for manufacturing leather goods. The course started with seven students per year and now has expanded to 12 students with plans to take in 18 students per year from next year. The course was started by an expatriate consultant in 1991 who left at the end of 1993 and is now run by a local trainer. Since the demand for the training course is increasing, LICC is planning to increase the number of trainers and offer two courses every year, one for manufacturing leather garments and goods and the other for shoe uppers. 6.11 The TA to NIDC had mixed results. While the institution building objective was partially realized, more remains to be achieved. The "projects course" training was very successful as was the training of NIDC staff at Manila, Philippines. However, the computerization of NIDC's operations was seriously delayed and was not completed by Project closing. This has delayed the implementation of a much needed MIS to record and inform management about the performance of its portfolio, and the use of advanced evaluation and appraisal techniques. NIDC's financial performance, which has been improving over the Project period as discussed below, will get a further boost once the computerization is operational. 6.12 NIDC's Financial Performance - A detailed assessment of NIDC's performance over the last decade is provided in Annex-1. The assessment indicates that NIDC has achieved remarkable stability in its solvency and capital ratios over the last five years while continuously improving its profitability at the same time. In FY94 NIDC had a net income of over 3% of total assets after providing 1.5% for building up provisions. The ROE is almost 9% up from 6% during the last three years. NIDC has a D:E of 2:1, which is well below the 5:1 required under the project; its' debt service coverage ratio has been over 3:1 during the last three years, well above the required ratio of 1. 1:1. NIDC's overall collection ratio is low at about 50%, but in recent years current collections have ranged from 75 - 90%. NIDC has been following an aggressive provisions policy over the last several years, and accumulated provisions are over 95% of the total arrears. A healthy interest rate margin -- 6.6% in FY94 --- resulting from availability of low cost funds on one hand and removal of interest rate controls on the other, has helped NIDC achieve positive cash flow from operations as well as earn profits. In FY90 all interest rate controls were withdrawn. The absence of any lending rate restrictions under this Project allowed NIDC to raise its rates in line with the perceived risks underlying the subprojects, within the new competitive environment. This improved NIDC's margin and also helped in screening out marginal subprojects. The presence of an expatriate Director deputed by the foreign shareholder, in the management of NIDC, appears to have had a favorable impact on the operations of NIDC. 7 Project Sustainability and Impact 7.1 As indicated above, over the last few years NIDC has been increasing its profitability and generating healthy cash surpluses. An analysis of the overall actual cash flow of NIDC for the four years ending in July 1993, shows that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC should be able to recycle more than N.Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's profitability and cash flow performance is good, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy cash flow and profitability performance is largely due to its long-term borrowing being at below market rates, its low dividend payout and a large interest margin of about 6.6%. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate by around 37 percent (from 17% to 23 % p. a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. Looked at another way, the maximum return that NIDC's debt and equity holders could expect from the present stock of loans is about 7.6% (Annex 8); this is the rate at which the NPV of the future cash flow from the current outstanding portfolio -- principal/interest collections, assuming recent collection rates, net of operating costs of 3% -- equals the equity and debt outstanding. The expected return 7.6%) from the current portfolio is about 40% lower then the market rates on L/T investments (e.g., L/T deposits). 7.2 To evaluate the impact of the IDA financed lending comp.onent on NIDC's financial performance, a model has been developed to determine the breakeven interest rate, on both marginal and total cost basis, under different collection scenarios. The model takes into account the difference in the grace periods, the rates of interest, the repayment schedules of the subloans under the Project and the IDA Credit funds, and income from relending of surplus funds resulting from differences in repayment terms of subloans and IDA funds. IDA funds under the Project were provided by -9- HMG to NIDC at the rate of 7% p.a. for a maximum period of 18 years with 5 years grace; NIDC relent these funds to its sub-borrowers for a maximum period of 15 years with 3 years grace. The marginal break-even interest rate is the nominal lending rate, at which the interest income from the subloan equals the marginal cost of borrowing. At the current collection rate of 75%, the marginal breakeven rate is around 10-12% (with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis the project is generating positive cash flow for NIDC. On a total cost basis (including operating costs which equal 3 % of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75% comes to around 17% which is same as the average lending rate; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds (float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14% which would suggest positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of contributing towards NIDC being a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. 7.3 The impact of the technical assistance to the leather subsector appears to be positive as well. Both Bansbari and RHCDC have been successfully privatized and while Bansbari's performance and profitability has improved already RHCDC under private management also holds promise of better performance. In recognition of its positive contribution, LICC has been absorbed within HMG after completion of the project, and it should continue to contribute towards the improvement of leather goods. The output and value-added of leather and leather goods have increased from N.Rs. 326.4 million and 62.8 million in FY89 to N.Rs. 447.8 million and 131.8 million in FY91 respectively; the exports of hides and skins during this period also increased from N.Rs. 166.1 million to N.Rs. 221.5 million. 8 IDA's Performance 8.1 IDA proceeded with the preparation of IDP-II after the results of the first Credit line (IDC Cr. 705-NEP) were available. As a result, it included a technical assistance component for NIDC to address the institutional weaknesses identified in the earlier project. 8.2 IDA fielded 13 supervision missions during the seven years between project effectiveness and termination (Table 7B, Part III). While this helped in monitoring the implementation closely, the continuity of progress suffered somewhat due to the frequent change of task managers for this Project. Consequently, the record of technical assistance component implementation was sketchy in the mission reports. 9 Borrower Performance 9.1 The Borrower and specially NIDC placed special emphasis on this Project and its objective. This sense of ownership by the Borrower contributed a lot to the relative success of the Project. Moreover, the Borrower complied with most of the credit covenants and organizational requirements. NIDC cooperated very well with IDA in all stages of the Project. - 10 - 10 Project Relationships 10.1 Relationships under the project were generally cordial, and the absence of co- financiers avoided any coordination problems. The relationship between HMG and IDA was satisfactory and that between IDA and NIDC was cordial throughout the Project period. The subproject sponsors cooperated fully with the supervision mission during visits to the sites, and had positive comments on NIDC. Relationships with other agencies were also satisfactory. 11 Consulting Services 11.1 In all, around six consultants were provided to the leather subsector through the LICC and at least three consulting firms provided services to NIDC. Most of the consultancy months were effectively utilized and all the agencies were generally pleased with the performance of the consultants, except in the case of NIDC where the computerization component did not progress satisfactorily. The leather subsector consultants recorded their experience in the terminal report for the period June 1989 to February 1990, called "Nepal: Consultancy services to the Leather Industries Coordination Cell (LICC), April 1990." 12 Project Documentation and Data 12.1 The Staff Appraisal Report provided a useful framework for the review of project implementation and the project documents held in IDA files on implementation were also helpful. However, the data on technical assistance performance was incomplete. 12.2 NIDC provided all the data on subprojects as well as on its own financial and management performance. Due to the delay in computerization of NIDC's operations, the subloan data was not complete and up-to-date. Thus, although total collections from each subloan are monitored, the amount is not broken down by principal and interest. The computerization of NIDC's operations would help NIDC to track subloan performance more accurately though the setting up of a proper MIS. 13 Lessons from the Proiect 13.1 Whereas it is easier to find the reasons for the failure of a project it is relatively more difficult to isolate the reasons for its success. A somewhat similar project in Nepal, under which loans were made to small and cottage industries over almost the same period, failed to sustain the lending component through the nationalized commercial banks. While it is true that the reasons for its failure were not all present under this Project, both the projects were implemented under the same overall financial sector framework. The main difference lay in the project conditionalities and the way they were perceived by the implementing agencies and the ultimate beneficiaries. The relative success of this Project provide the following lessons: (a) investment lending projects in countries with less developed financial and industrial sectors should be kept simple and should not have too many components. The highly focussed objectives and the simple project design made this Project more acceptable to the Borrower and hence also created a sense of ownership in the Borrower and - 11 - NIDC (para 9.1). The objectives were understood by all and the demands on the implementation capacity of the agencies concerned were not too great (para 4.2). (b) credit lines though DFIs for encouraging industrial investments should avoid putting in micro-management conditionalities as such conditionalities may violate normal banking instincts and principles. The absence of: subsector or regional lending targets; graduated interest rates and spreads based on subloan size; and such other conditions helped NIDC to make a better credit decision based on the subproject itself (para 4.3). (c) implementing DFIs should be allowed to charge market rates of interest where a competitive lending environment exists. The liberalization of interest rates by NRB in FY90 allowed NIDC to raise its lending interest rates in line with the perceived risks underlying the subprojects. This improved NIDC's margin and also screened out marginal subprojects (para 6.12). (d) foreign equity participation with management assistance for DFIs in developing countries should be encouraged. The presence of an expatriate Director deputed by a foreign shareholder in the management of NIDC appears to have had a favorable impact on the operations of NIDC (para 6.12). - 12 - PART II. PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 1. Overview The credit 1535-NEP for SDR 7.5 million was IDA's second line of credit to Nepal Industrial Development Corporation for the Industrial Development Project in Nepal. The project was delayed in both commitment and disbursement under the line of credit. The credit account was closed on May 13, 1994, and the undisbursed balance of SDR 0.56 million was cancelled. The objective originally laid out in this project was changed after the project became effective. The revised project components actually improved the clarity and realism of the objectives. Thus, it helped in achieving the objectives without any difficulty. 2. Proiect Design The credit 1535-NEP project was prepared by NIDC and Ministry of Industry with the assistance from IDA. Later on, HMG/N overviewed the project and decided to cancel some credit components, such as Import Export Facility, Tourism Promotion Study and the Incentive study. The project included the following credit related components: - to promote the private sector industry by project financing through NIDC; - to strengthen the NIDC activities specially by providing: (i) staffs training on project preparation, evaluation and implementation; (ii) international auditing to determine the financial position of NIDC; and (iii) development of MIS system through computer hardware and software, etc. - to support MHG promote the leather industry through financial and technical assistance. 3. Achievement The project's objective of expanding the private sector's role in industrial development was largely realized as stated in the IDA's Report (PCR). Under this project, over 94% of the credit amount was disbursed in 39 sub-projects and majority of the sub-projects are in operation. The significant achievement of this project would naturally have a substantial impact on industrial growth, investment and employment. Besides, it also provided a remarkable help to NIDC in computerization (Hardware) of NIDC's operation, manpower development and international auditing of NIDC to determine its financial position. But the concept of importing computer software developed in highly advanced countries and hiring the foreign consultants to apply such imported software in local conditions could not be materalized because of some technical difficulties like customization of software according to NIDC needs, timely availability of consultant services etc. - 13 - 4. Lending Operation Altogether 46 sub-loans were approved by IDA. Out of 40 sub-loans, only 39 sub- projects were finally financed under the credit component to the tune of SDR 6,086,401 against the total sanctioned amount of SDR 6,555,380. Sub-sectorial distribution of sub-loans reveals that textile and jute-based industry received the highest proportion of loan. However, the full amount of credit could not be utilized as nine sub-projects under this credit line were under final implementation stage at the time when the credit was closed. In terms of sub-loan, 20 from each category (A and B) were financed under this project. The number of employment created by these 39 sub-projects were estimated at 4,058. 5. Prime Causes of Success Though TA component has a mixed result, the project as a whole enumerated a positive result. some of the factors, responsible for the positive results, include: - the objective of the project was developed and defined clearly as per the borrower's point of view; - credit line has emphasized to avoid unnecessary conditionalities so as to facilitate the borrowers to take decision on sub-projects by themselves; - the liberalization of interest rates by Nepal Rastra Bank in FY 1990 allowed NIDC to raise its lending rate with a satisfactory interest margin; and - the component, specially NIDC's institutional development program, has been well supported by computer hardware for setting up a proper MIS. 6. Borrower's Performance Borrower's performance as a whole is satisfactory in terms of preparing, implementing and monitoring the project. Project Relationship Relationship between IDA and government was satisfactory and that between NIDC and IDA was cordial and friendly throughout the project period. 7. Conclusion The 1535-NEP credit was the IDA's second line of credit to NIDC. The credit was expected to be utilized in five years. However, it was a little delayed and used in seven years. Some sub-loans and TA components could not be fully utilized by the credit closing date due to various problems. However, over 94% of the credit amount was disbursed and a majority of the sub-projects are in operation. So it has helped substantially on the industrial growth, employment - 14 - and investment. TA component has shown a mixed result. For the last 5 years, NIDC has been increasing its profitability and generating a cash surplus also. In general, the objectives of credit NEP-1535 were met despite of some difficulties and delays other than anticipated. - 15 - PART III. STATISTICAL SUMMARY 1. Related IDA Credits Loan/Credit Purpose/Comments Year of Status Approval Cr. 659-NEP Carrying out extensive study for exportable 1978 completed Technical CSI's and preparation of the CSI-I project. Assistance Cr. 705-NEP Assistance to NIDC to become a stronger 1978 completed First Industrial development finance institution, and Development provision of foreign exchange for private Project sector investment. Project under review was a follow-on to this project. Cr. 1191-NEP Employment creation, small-scale industry 1981 completed Cottage and promotion, institutional strengthening Small Industries through technical and financial assistance. Project Project objectives mostly achieved. Cr. 1696-NEP Support to finance private sector small and 1986 completed Second Cottage cottage industries for the growth of exports, and Small output and employment, and institutional Industries strengthening through technical assistance. Project Project objectives partially achieved. Follow-on Project None. HMG has requested for a successor project. - 16 - 2. Project Timetable Item Date Planned Date Revised Date Actual Identification Preparation February 1983 Appraisal Oct./Nov. 1983 Negotiations Oct./Nov. 1984 Board Approval December 1984 Credit Signature June 1985 Credit Effectiveness December 1985 Project Completion June 30, 1991 Dec. 31, 1992 Dec. 31, 1992 Credit Closing Dec. 31, 1991, Dec. 31, 1993 Dec. 31, 1993 per DCA. 3.A. Cumulative Credit Disbursements (US$ Millions) FY FY FY FY FY FY FY FY FY FY 85 86 87 88 89 90 91 92 93 94 Appraisal 1.0 1.7 3.1 4.8 6.0 6.9 7.5 Estimate Actual 0.0 0.0 1.5 3.7 4.7 5.3 6.6 7.2 8.5 Actual as 0% 0% 48% 77% 78% 77% 88% 96% 113% %of Estimate SDR US$ Original Amount: 7,500,000 7,500,000' Amount Disbursed: 6,940,695 9,305,910 Amount Canceled: 559,305 560,000 Date of Final Disbursement: May 13, 1994 1 The revised Credit amount in US Dollars equivalent was substantially higher due to depreciation of the US Dollars against the SDR. - 17 - 3.B. Disbursements by Category (in '000 SDR equivalents) Amount Actual Disbursed as % Allocated at Disbursements of Original Category Appraisal ' 12/31/93 Allocation I Equipment and Vehicles 20.0 16.0 80% 2 TA and Overseas Training 882.3 811.0 92% 3-A Subloans through NIDC 6,555.4 6,086.4 93% 3-B Equity Investments 42.4 27.3 64% TOTAL 7,500.0 6,940.7 93% 4. Project Costs and Financing A. Project Costs (US$ million) Item Appraisal Estimate Actual Subloan Component 9.3 38.0. Import/Export Facility 1.5 0.0 Technical Assistance 1.2 2.0 Total 12.0 40.0 B. Project Financing (US$ million) Source Appraisal Estimate Actual US$ million % US$ million % IDA 7.5 62.5% 9.3 23% HMG 1.7 14.2% 0.9 2.5% Sponsors 2.8 23.3% 29.8 74.5% Total: 12.0 100.0% 40.0 100% As revised later during implementation. - 18 - 5. Project Results A. Direct Results ARoraisal Actual at Closin2 1. Number of subprojects financed 40 39 2. Number of subloans financed - 40 3. Permanent Jobs Created 2,300 4,058 4. Incremental Productive Investment N.Rs. 160 Million N.Rs. 1.82 Billion 5. Cost/Job (N.Rs.) N.Rs. 200,000 N.Rs. 525,000 6. Output and Export Development' - Output of Leather and Leather products N.Rs. 326.4 million N.Rs. 447.8 million (in 1988/89) (in 1990/91) - Output of Footwear N.Rs. 50.0 million N.Rs. 57.6 million (in 1988/89) (in 1990/91) - Exports of hides & skins N.Rs. 166.1 million N.Rs. 221.5 million I/ Incremental increases cannot be attributed to the project. However, project initiatives did play an important role in enhancing the input availability technology had HR skills of the leather industry. - 19 - 6. Status of Covenants Review of Compliance with Relevant Covenants As of June 25, 1993 Relevant Covenants: Status of Compliance Development Credit Agreement DCA HMG/N to furnish report on progress on Facility canceled before establishment, by 3.04 import/export facility. agreement with IDA. DCA HMG/N covenants re operation of No longer applicable (see above). 3.05 & import/export facility. 3.06 DCA HMGIN to maintain records and procedures LICC monitors leather sector TA. Of SDR 3.07(a) for monitoring of TA components and 42,350 earmarked for equity investments only investments at Bansbari and RHCDC. SDR 27,276 has been drawn down as Bansbari investment was never approved. DCA HMG/N to maintain separate accounts for, Complied with. 4.01 inter alia, the TA for leather subsector and light engineering and tourism studies, and have the accounts audited annually, with a certified copy of the audit furnished to IDA within 9 months of end of fiscal year. - 20 - PROJECT AGREEMENT Status of Covenants PA NIDC sub-loans to Bansbari and RHCDC subloan authorized in January 1989. No 2.05 RHCDC to be exclusively for expansion HMG/N guarantees were issued. No subloan to and modernization of facilities and to be Bansbari was granted as it was privatized. secured by HMGIN guarantee satisfactory to IDA PA NIDC shall: Audits in years prior to AND not carried out in 3.02 (i) have its accounts audited in accordance with sound auditing principles. This accordance with sound auditing covenant has been complied with since FY88. principles consistently applied; (ii) FY92/93 audit report has been received. furnish audited accounts to IDA within 5 months after end of each fiscal year. (amended to 12 months) PA NIDC to maintain debt/equity ratio Complied with - FY93 debt/equity ratio was 2:1 3.03/ below 5:1 (ratio to be consolidated for 3.07 subsidiaries). PA NIDC to maintain debt service coverage Complied with - FY93 DSCR was 3.7:1 3.08 ratio above 1.1 PA NIDC to adopt, maintain and apply Complied with. 3.11 policy and strategy statements satisfactory to IDA. Approved policies cover matters including: minimum financing size, financing limit as % of borrower's assets, maximum grace periods and terms, equity investments and limit on exposure any one borrower as % of NIDC's capital (See SAR) PA Aggregate amount of arrears of principal Complied with - FY93 arrears of N.Rs. 250 million 3.12 and interest of NIDC's debtors not to is much less than unimpaired capital and reserves of exceed NIDC's unimpaired capital and N.Rs. 525 million. surplus. - 21 - 7. Use of IDA Resources A. Staff Inputs Stage of Project Cycle Staff Weeks Through Appraisal 37.6 Appraisal through Negotiations 40.9 Negotiations through Board Approval 5.9 Supervision 61.6 TOTAL 146.0 B. Supervision Missions Month/Year No. of Specialization Days Performance Types of Problem Persons in Rating 2 Field October 85 1 FA 8 1 August 86 1 FA 11 1 March 87 2 FA 15 2 M June 87 1 FA ? 2 M, T December 87 3 FA 204 3 M, T February 88 1 FA 3 F, DI September 88 1 FA 3 F, DI November 88 1 FA 16 3 F, DI, M September 89 1 FA 3 M, T April 90 1 FA 3 M,T April 91 1 IE 2 M, April 92 1 IE 10 2 T June 93 2 FA, TA 154 2 T Jan.27 - Feb. 22, 2 FA, TA 274 - Project Completion mission. I FA = Financial Analyst, Credit Line; TA = TA programming; IE = Industrial Economist. 2 1 = Problem free or minor problems; 2 = Moderate problems; 3 = Major problems. F = Financial; M = Management; T = Technical, DI = Development Impact. 4 The mission was for two projects (CSI-II and IDP-II). - 22 - ANNEX I NEPAL INDUSTRIAL DEVELOPMENT PROJECT PROJECT COMPLETION REPORT An Appraisal of NIDC 1. Originally established in June 1959, the Nepal Industrial Development Corporation (NIDC) completed its thirty-fifth year of operation in June 1994, which was a year of growth and profitability following on a year of consolidation and improvement. Building on the experience gathered over the years, the Board of NIDC restructured the organization in December 1993 to make it more effective. The entire functions of the organization are now grouped under eight divisions (down from nineteen divisions of the past) of which only two divisions, the Tourism and Textile Division and the Agro and Manufacturing Industries Division, are entrusted with the complete responsibility for the appraisal, implementation and monitoring of active projects. The new organization structure is shown in Attachment 1. The structural reorganization has been complemented by a management and personnel reform program which has brought young and dynamic officers to responsible positions eager and capable of handling greater delegation of authority. Moreover, an expatriate Director of the rank of General Manager, deputed by DEG, continued to provide regular advice on, monitoring of and support to NIDC's activities. The immediate effect of these changes are apparent from the provisional (unaudited) financial statements of NIDC as of July 1994, which show significant increases in growth and profitability, and the long- term effects are likely to be further improvements in the financial performance of the organization. 2. Asset Management: As already indicated, FY94 was a year of growth in the operations of NIDC following on a year of consolidation. Total loans outstanding jumped almost 37% over the previous year's level to N.Rs. 1.5 billion, thus surpassing the average growth rate of around 15% p.a. over the last decade. This phenomenal loan growth was funded by additional foreign borrowings from IDA, DEG and KfW as well as by further contributions to its equity. Total assets, therefore, grew more than 25% over the previous year, once again far exceeding the average growth rate of around 10% p.a. achieved during the last decade (Table 1). 3. Portfolio Quality: NIDC follows the Nepal Rastra Bank Directive in respect of classification and provisioning of its loan portfolio. According to the Directive, NIDC must provide 5 % of all non-performing loans (including rescheduled/restructured loans) that are current to less than 180 days past due. Past due loans over 180 days to 360 days are classified as Sub- standard/Doubtful for which a provision of 25% of the aggregate loan balance is required. If such loans are secured by collateral then up to 80% of the value of the collateral (at depreciated cost for land, buildings and machineries) may be deducted from the outstanding loan subject to a minimum of 10% of aggregate loan balance. Past due loans over 360 days are classified as Bad and a provision of 100% of the aggregate loan balance (less 80% of the value of securities, subject to a minimum of 25% of aggregate loan balance) is required. To comply with this Directive, NIDC took another big loan loss provision of N.Rs. 36 million in FY94 which increased accumulated provisions to over 16% of total loans outstanding as of July 1994. This additional provision, required to comply with NRB's fairly standard classification and provisioning policy, increased the level of accumulated provisions to N.Rs. 239 million in FY94, which covered more than 95% of the beginning arrears for FY94 (N.Rs. 250 million). Accumulated provisions have increased - 23 - substantially over the Project period from 4% in FY86 to over 16% of the total loans outstanding in FY94. 4. Although the arrears and collections up to July 1994 are not available yet, the figures as of July 1993 (Table 4) show cash collections (of principal and interest) over 75% of current dues (which had gone up to a high of 90% in FY93) and 52% of total dues (down from over 60% in FY92), which is relatively high in the South Asia region. Current collection of principal (80% in FY93) has been higher than that of interest billed (68% in FY93) during the last three years. NIDC has maintained a current collection ratio of over 70% during the last five years. However, its total collection ratio has been lagging at around 50% because of the deadwood of bad loans carried in its books. If these bad loans, which have been adequately provided for, are written off from its books the total collection ratio would rise to almost the level of its current collection ratio. Its current collection ratio has assisted NIDC to maintain a debt service coverage ratio of over 3:1 during the last three years which is well above the required minimum of 1.1:1 agreed during negotiations (Table 4). 5. The higher collection of current principal (96%) and interest (81%) achieved during FY92 caused total arrears in principal and interest to drop from around 16% of total loans outstanding in FY91 to less than 14% in FY92. However, the fall in current collections during FY93 raised the total arrears to over 17% of total loans outstanding in FY93, which is still within acceptable levels. Moreover, as agreed during negotiations the total arrears never exceeded the amount of unimpaired paid-in capital and reserves of NIDC, and in FY93 the ratio was only around 60%. The Aging of Arrears (Table 5) indicate that NIDC placed special emphasis on the collection of loans that have been defaulting for over two years the proportion of which has come down to 29% of total arrears in FY93 from over 32% in FY92. 6. Equity & Resources: NIDC continued to maintained its strong financial position by further infusion of equity funds by its major shareholders. During 1993 and 1994, NRB contributed additional funds of N.Rs. 10 million and 50 million respectively to increase its stake to N.Rs. 79 million (20% of total equity) as of July 1994. HMG contributed N.Rs. 10 million in 1993 and another N.Rs. 20 million in 1994 to increase its stake to N.Rs. 266 million (67%). Finally, DEG also contributed another N.Rs. 30 million in 1994 to increase its stake to N.Rs. 50 million (12%). This continuous expansion of the equity base increased the total paid-in capital to almost N.Rs. 400 million as of July 1994, which represented almost 33% of its net loans and advances. 7. FY93 marked the year in which NIDC completely wiped out the losses from its balance sheet, carried over from FY89 when for the first time it took in to its books bad debt provisions of N.Rs. 58 million, by the earnings retained from profits of that year. The total equity base, therefore, increased to N.Rs. 415 million which went up further to N.Rs. 525 million as of July 1994. This increased the capital ratio to around 32% of total assets in 1994, which is adequate by most standards. The increased capital was accompanied by an increase in local borrowings of N.Rs. 75 million in 1993 and a further N.Rs. 12 million in 1994 from NRB. Moreover, foreign borrowings also increased by N.Rs. 160 million. The borrowings from its shareholders have been at subsidized rates which helped in bringing down NIDC's average cost of funds to around 5% of average assets. Because of its relatively large equity base, the debt equity ratio remained well within the comfortable limits of 2:1 (much below the required 5:1 ratio) in 1994, a level around which NIDC has been operating over the last decade (Table 1). - 24 - 8. Profitability: FY94 was another profitable year for NIDC, the fifth since FY89 when it took in the large net loss of N.Rs. 57 million to build up its provisions for bad debt expenses. The provisional (unaudited) FY94 figures show an operating profit of N.Rs. 51 million, which is more than a two-and-a half times jump over the previous year's figure of N.Rs. 19.2 million (Table 2). Gross interest income, which includes only the interest that is collected in cash or is due up to 90 days as per NRB's Directive, increased more than 50% in FY94 from that of FY93 to almost 12% of total assets, well above the average level of 10% maintained over the last decade (Table 3). Interest margin also jumped to 6.6% of total assets from the average level of around 5%. This healthy spread of more than 5% of total assets is the result of NIDC's low cost of funds which allows it to earn a satisfactory spread while still remaining competitive in the market. Together with a tight control over operating expenses (about 2.6% of total assets) the spread translated into a satisfactory net income of over 3% of total assets even after providing 1.5% for building up loan loss provisions. This represents a fully additional percentage point over the 2% return on assets achieved over the last three years. The corresponding return on equity rose to almost 9% from the level of around 6% during the last three years, which is satisfactory even without considering the large equity base of NIDC (Table 2). 9. Performance under IDP-II: During the period from May 1986 to December 1992, NIDC obtained refinancing for forty subloans (for thirty-nine subprojects, as one subproject was given two subloans) under the second IDA Credit. Of these, 31 subloans were fully disbursed while the other nine subloans were partially disbursed since those sub-projects were under implementation. Of the 31 subloans that were fully disbursed, nine (29%) had fully repaid their outstanding and six more (19%) were current in their repayments. Twelve subloans (39%) were in arrears and another four subloans (13%) were under litigation. Although around 52% of the subloans were in arrears the amounts involved were not too big in most cases and represented around 6% of the total disbursement. This was expected in the case of new subprojects which faced unanticipated problems from time to time and hence defaulted on some installments. However, outstanding principal affected by arrears is about N.Rs. 89.0 million which represents 64% of the total outstanding principal (Annex 5). The collection data for the forty subloans aggregated for the last three years, FY91, FY92, and FY93, and adjusted to reflect the fully paid-off status of the nine subloans (Tables 7 & 8), indicate an overall collection ratio of around 75% which matches with NIDC's current collection ratio for the entire loan portfolio, but is higher than Total Collection ratio of 52%. Overall, it appears that the performance of the subloans under the second IDA credit is better than the performance of NIDC's total portfolio, reflecting the outcome of greater supervision and monitoring of IDA-financed subloans. 10. The sustainability of the lending component is closely linked to the sustainability of NIDC itself. An analysis of the overall actual cash flow of NIDC for the four years ending in July 1993, show that the annual cash inflow from operations has been, on average, double the cash outflow from operations (Annex-6). Therefore, only half of NIDC's cash collection of principal, interest and other income goes towards meeting its debt-service obligations and paying its operating expenses and short-term liabilities, and the other half is recycled for disbursement of new loans. If this trend continues, NIDC would be able to recycle more than N.Rs. 230 million (which is equivalent to the IDA lending component) from its cash collections to finance new subloans during FY95. While NIDC's collections and cash flow performance is creditable, particularly in relation to many of the government owned DFIs elsewhere in South Asia, this apparent healthy performance is largely due to its long-term borrowing being at below market rates and its low dividend payout. The Subsidy Dependence Index (SDI) for NIDC shows that it would have to increase its lending rate - 25 - by around 37 percent (from 17% to 23% p.a.) to compensate for full elimination of subsidies received during FY94 (Annex 7). If NIDC could improve its collection rates to over 90% it could be sustainable on a non-subsidized basis, without having to raise its lending rates any further. 11. Whether or not the IDA financed lending component has contributed positively to NIDC's financial performance depends upon the actual collection performance of the IDA sub-loans. Using the collection ratio (defined as the percentage of principal and interest due from a subloan that is collected during a particular year) as an indicator of financial performance, a model has been developed to determine whether NIDC is making or losing money from the IDA Project , under different collection scenarios. The model assesses the impact of the IDA financed subloans on NIDC on both marginal and total cost basis. It takes into account the difference in the grace periods, the rates of interest, and the repayment schedules of the subloans under the Project and the IDA Credit funds, for a particular rate of collection of the principal and interest due from the subloans. Thus, for term-loans, IDA funds under the Project were provided by HMG to NIDC at the rate of 7% p.a. for a maximum period of 18 years with 5 years grace. NIDC relent these funds to its sub-borrowers for a maximum period of 15 years with 3 years grace. The model also takes into account returns on reinvestment of project funds . The marginal break-even interest rate is the nominal subloan lending rate, which equals the marginal cost of borrowing. At the current collection rate of 75%, the marginal breakeven rate is around 10-12% ( with and without reinvestment of excess funds) which is substantially lower than the average lending rate of about 17% on IDA subloans. Thus on a marginal basis NIDC is generating positive cash flow from the project. On a total cost basis ( including operating costs which equal 3 % of subloan outstanding based on past trend) the breakeven rate at the current collection rate of 75% comes to around 17% which is same as the average lending rate ; on this basis NIDC is barely breaking even. However if account is taken of the earnings on relending of surplus funds ( float as a result of subloans having shorter maturity than borrowed funds) the breakeven rate is around 14% which would suggest positive cash flow on account of the project subloans. The above analysis suggests that the Project's objective of making NIDC a sustainable development finance institution for term lending to the private industrial sector is being achieved, albeit modestly. 12. Overall Status: The overall performance of NIDC is generally satisfactory, better than most government DFIs in South Asia, and the trend is improving. With better performance on the collections front, NIDC could become a fully sustainable development finance institution and contribute, more significantly and effectively towards the industrialization of Nepal. October 19, 1994. NEPAL INDUSTRIAL DEVELOPMENT CORPORATION ORGANIZATION CHART **flTSOOl . L*LL*KLLL* ....... K L*L<L*L@ØLLI .,M.......K ..,..............n...... SOURCE :NIDC - 27 - Table 1 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION BALANCE SHEET ( ENDING JULY 15) (NRs. Million I PROV. 85/86 86/87 87/88 98/89 89J90 90/91 91/92 92.93 93194 ASSETS Current Assets Cash,Bank and Bonds 49.8 33.8 36.0 88.8 47.8 69.7 73.0 157.1 52.8 Other 55.9 62.2 52.5 40.7 27.4 62.3 81.0 57.8 113.8 Total current assts A 105.4 96.0 88.5 129.3 75.2 132.0 154.0 214.9 166.4 Loans and advances Loan not yet due 440.2 511.8 567.6 599.2 721.5 767.7 821.7 847.5 1,191.7 Loan due 42.1 74.2 122.3 138.4 118.7 145.0 215.8 223.4 275.8 Total loan ourstanding 482.3 580.0 689.9 737.6 838.2 912.7 1.037.5 1.070.9 1,467.5 Less provision 19.3 21.9 25.6 58.7 79.4 153.1 178.8 189.9 238.8 Net lo and advances B 483.0 664.1 664.4 678.9 758.8 759.6 858.7 881.2 1,228.7 Equity & pref. share inv. 94.9 98.2 105.2 1142 117.2 119.8 132.1 150.4 170.1 less provision 5.0 6.0 6.0 28.5 35.6 38.4 39.4 42.4 45.4 Net investments C 89.9 90.2 99.2 87.7 81.6 93.4 92.7 108.0 124.7 Net fIxed assets 0 11.3 13.7 16.1 94.8 95.3 95.4 97.7 102.9 117.7 TOTAL ASSETS (A+8+C+0 689.6 764.0 868.2 990.7 1,010.9 1,070.4 1.203.1 1,307.0 1.837.5 LIABILITIES & EQUITY Current liability & prov. A 27.9 27.2 32.6 48.8 49.6 50.0 58. 49.5 67.9 Borrowings Local I NRB & othersl 102.9 72.5 79.6 89.2 84.2 62.4 197.4 276.8 188.0 Foreign 101.8 154.2 183.2 209.8 220.8 260.4 421.9 Debenture & bonds 210.0 240.0 290.0 295.0 295.0 295.0 295.0 295.0 295.0 Fixed deposit 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 50.0 Others 10.7 27.6 31.0 46.2 48.4 49.2 275.8 271.1 89.7 Total Borroirgs a 425.4 494.3 583.8 840.2 648.4 667.0 768.0 842.9 1.044.8 Equity Authorized capital 500.0 500.0 500.0 500.0 1,000.0 1.000.0 1.000.0 1.000.0 1.0000. Issued capital 200.3 225.3 235.0 265.0 265.0 285.0 295.0 2979 401.8 Paid up capital H.M.G. 181.3 208.3 206.3 236.3 238.3 236.3 236.3 246.3 288.3 Nepal Fastra Bank 9.0 9.0 19.0 19.0 19.0 19.0 19.0 29.0 79.0 DEG (German dev. bank) 0.0 0.0 0.0 0.0 0.0 19.5 19.5 19.5 49.5 Public & other 3.0 3.1 3.1 3.1 3.1 3.1 3.1 3.1 3.1 Total paid up capital 193.3 218.4 228.4 258.4 258.4 277.9 277.9 297.9 397.9 General reserve 22.7 23.7 23.7 23.7 23.7 25.7 29.7 31.2 34.7 Capital and other reserve 0.3 0.3 0.3 77.7 77.7 78.6 80.4 85.5 92.4 Retained profit 0.0 0.1 0.0 0.0 0.0 0.0 0.0 0.0 0.0 f1assl 0.0 0.0 10.61 158.1) (46.9) (28.3) 111.7) 0.0 0.0 Total Equity C 216.3 242.5 251.8 301.7 312.9 353.4 376.3 414.6 25.0 TOTAL LIABILITY (A+B+Cl 669.6 764.0 868.2 990.7 1,010.9 1,070.4 1.203.2 1.307.0 1,637.5 Source: NIOC RATOS Current ratio 3.8 3.5 2.7 2.6 1.5 2.6 2.6 4.3 2.5 Debt/ equity ratio 2.0 2.0 2.3 2.1 2.1 1.9 2.0 2.0 2.0 Acc. Prov/Total Port 4.2% 4.1% 4.0% 10.0% 12.0% 18.4% 18.7% 19.0% 17.4% Net Port. Total Assets 82.6% 85.6% 88.0% 77.4% 83.1% 78.8% 79.1% 75.7% 82.7% Growth of Total Assets 14.1% 13.6% 14.1% 2.0% 5.9% 12.A% 8.6% 25.3% Capital/ Assets 32.3% 31.7% 29.0% 30.5% 31.0% 33.0% 31.3% 31.7% 32.1% Equir[yTotal Portfolio 39.1% 37.1% 33.0% 39.4% 37.2% 41.9% 39.6% 41.9% 38.8% - 28 - Table 2 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION PROFIT AND LOSS ACCOUNT IN.R Mlan) 85/88 86/87 87/88 88/8 aiso 9091 9112 92/93 $3/94 INCOME Interest on ioan 47.4 54.1 54.2 71.3 124.3 112.5 136.72 110.92 170.0 Dividend 12.7 0.0 1.5 1.3 1.1 1.9 1.82 3.28 2.0 Profit on sale of InvJ Assets 1.5 0.0 2.4 0.3 10.2 0.1 20.0 Other monome 5.5 6.7 6.8 8.9 6.3 5.0 8.87 27.99 8.0 TOTAL INCOME 67.1 60.8 64.9 79.8 141.9 120.3 147.41 142.19 200.0 EXPENDITURE interest on borrowings 34.3 30.3 43.2 51.6 53.3 53.5 56.64 66.72 72.5 Fees and commission 1.9 1.2 1.3 0.5 0.5 0.6 1.5 Ortamd expenses 13.2 12.6 13.3 21.8 22.7 23.8 41.73 39.C9 31.0 Outer expenses 0.9 0.3 0.1 0.4 0.1 1.1 1.12 1.14 1.5 Bad debts 0.5 1.2 1.5 2.5 3.3 1.6 2.5 Depreciation 0.5 0.3 0.7 0.9 1.0 1.2 2.0 Provision for loan 4.2 2.7 3.6 33.1 36.7 17.1 9.04 16.04 36.0 Provision for Intereat 0.0 0.0 0.0 4.9 4.3 3.4 2.0 Provision for Investant 1.0 1.0 0.0 20.5 9.1 1.5 2.99 -10.44 0.0 TOTAL EXPENDITURE 58.5 57.9 63.7 136.2 131.0 103.9 111.56 112.54 149.0 OPERATING PROFIT ILOSS) 10.6 2.9 1.2 150.4) 10.9 16.4 38.87 29.65 61.0 Provialon written back, Loan 0.0 0.0 16.0 0.8 12.0 Provision writan back. Int. 0.0 1.4 0.2 0.0 0.9 9.2 3.0 Provision written back. Inv. 0.0 0.0 0.0 0.7 1.0 Net proft before ea and oame 10.6 4.3 1.4 (56.41 27.8 27.1 35.87 29.65 67.0 Provision for bonus 0.0 0.4 0.3 0.4 2.2 2.2 2.87 3.75 8.6 Provision for income tam 2.5 2.6 1.6 0.5 14.2 3.5 8.95 0.00 13.0 Nea proftafter U 6.1 1.3 10.5) (57.3) 11.4 21.4 24.05 25.90 48.4 Staff welfare fund 0.3 0.2 0.2 0.2 0.2 0.5 1.50 3.00 2.0 General reserve 2.0 1.0 0.0 0.0 0.0 2.0 4.00 1.48 8.0 Other reserve - 0.0 0.0 0.0 0.0 0.0 0.8 1.40 5.18 0.0 Proposed dividend 5.8 0.0 0.0 0.0 0.0 0.0 4.47 38.4 Profit transferred to IS 0.0 0.1 0.0 0.0 11.2 18.1 17.1 11.8 0.0 Loss Transferred to 1/5 0.0 0.0 10.71 f57.51 0.0 0.0 0.0 0.0 0.0 Source: NIDC RATIO Operating Proft Int & Cle. Inc 17.6% 5.4% 2.2% .77.7% 8.7% 14.3% 25.9% 26.0% 29.7% Net profit after Tax Ant & Div Inee 13.5% 2.4% .0.9% -76.9% $.1% 18.7% 17.4% 22.7% 28.1% Net profit after tax Eqluity ( ROEl 3.7% 0.5% -0.2% -19.0% 3.6% 6.1% 6.4% 6.2% 9.2% Net profk after text TotalAsset (ROAJ 1.2% 0.2% .0.1% *5.8% 1.1% 2.0% 2.0% 2.0% 3.0% Int. income/ Tetal Loan Outstanding 9.8% 9.2% 7.9% 9.7% 14.8% 12.3% 13.2% 10.4% 11.6% Inr. Expi Total Loan Outstanding 7.1% 6.5% 6.3% 7.0% 6.4% 5.9% 5.5% 6.2% 4.9% Prov. Exo.p Totai Loan Outafnding 0.9% 0.4% 0.% 7.9% 4.0% 1.2% 1.2% 0.5% 1.5% - 29 - Table 3 NEPAL INDUSTRIAL DEVELOPMENT CORPORATION INTERMEDIATION MARGIN (N. Rs Million) PROV. 85/86 86/87 87/88 88/89 89/90 90/91 91/92 92/93 93/94 Interest received 47.4 54.1 54.2 71.3 124.3 112.5 136.7 110.9 170.0 7.5% 6.6% 7.7% 12.4% 10.8% 12.0% 8.8% 11.5% Interest paid 34.3 38.3 43.2 51.6 53.3 53.5 56.7 66.7 72.5 5.3% 5.3% 5.6% 5.3% 5.1% 5.0% 5.3% 4.9% Interest Margin 13.1 15.8 11.0 19.7 71.0 59.0 80.1 44.2 97.5 2.2% 1.3% 2.1% 7.1% 5.7% 7.0% 3.5% 6.6% Other income 18.2 6.7 8.3 8.2 7.4 7.7 10.7 31.3 10.0 0.9% 1.0% 0.9% 0.7% 0.7% 0.9% 2.5% 0.7% Gross margin 31.3 22.5 19.3 27.9 78.4 66.7 90.7 75.5 107.5 3.1% 2.4% 3.0% 7.8% 6.4% 8.0% 6.0% 7.3% Operating costs 17.0 15.9 16.9 26.1 27.6 28.3 42.9 40.2 38.5 2.2% 2.1% 2.8% 2.8% 2.7% 3.8% 3.2% 2.6% Provision expenses(net) 5.2 2.3 3.4 58.5 33.2 11.4 -19.7 5.6 22.0 0.3% 0.4% 6.3% 3.3% 1.1% -1.7% 0.4% 1.5% Profit before taxes 9.1 4.3 -1.0 -56.7 17.6 27.0 67.6 29.7 47.0 0.6% -0.1% -6.1% 1.8% 2.6% 5.9% 2.4% 3.2% Total Assets 669.6 764.0 868.2 990.7 1,010.9 1,070.4 1,203.1 1,307.0 1,637.5 (End of the year Average assets 716.8 816.1 929.5 1,000.8 1,040.7 1,136.8 1,255.0 1,472.2 U-;... AW 驕 神 。藝 計禺 藝藝 法棗j 龍，爭 磬蒙 藝 發 IL Table 6 Nepal industrial Døvelopment Corporatlon Breaksvan Projactions SUBLOAN IDA ban Principal 223500 Principal 223500 operatig Expmnses 3% Operat"ng Expenses Inteøst ritø 16.93% klnuerst rata 7.00% Grace period 3 Grace period 5 Repayment Penod 15 Repaymiint 17 CoHection Ratio 75% Collction Rjio 100% Non Discounted Cash flow Subloan IDA loan Net Cash Flow Year Pncnpal Princ.pal Balance Interest Operating Net Prnc.pal Balance Inte,est Total Du. Collect.d Oum.andng Collected Expenses Collecion Paid Outstmnding Paid Pa.d 0 223,500 0 223,500 0 0 1 223.500 28.387 6 705 21.682 223,500 15.645 15.645 6.037 2 223.500 28.387 6.705 21,682 223,500 15.645 15.645 6.037 3 223.500 28.387 6.705 21.682 223.500 15.645 15.645 6.037 4 18 625 13,969 209,531 28.387 6,705 35,651 223.500 15 645 15.645 20006 5 18,625 13.969 195.563 26 613 6,286 34,296 223.500 15,645 15 645 1865_1 6 18.625 13,969 181 594 24,839 5,867 329 41 18,625 204.875 15,645 34, 270 .-1329 7 18.625 13.969 167.625 23,064 5.448 31.585 18.625 186,250 14.341 32.966 -1,381 8 18625 13,969 153,656 21,290 5,029 30.230 18,625 167.625 13,038 31,663 -1,432 9 18,625 13,969 139,688 19.516 4,610 28,875 18.625 149,000 11,734 30,359 -1.484 10 18.625 13,969 125.719 17,742 4.191 27,520 16,625 130,375 10430 29.055 -1,535 11 18.625 13,969 111.750 15.968 3.772 26,165 18,625 111.750 9.126 27.751 -1.586 12 18,625 13,969 97.781 14,194 3 353 24,810 1.625 93,125 7,823 26,448 -1,638 13 18,625 13.969 83.813 12.419 2,933 23.455 18.625 74,500 6,519 25.144 -1,689 14 18.625 13,969 69,844 10,645 2,514 22,100 18,625 55.875 5,215 23,840 -1,740 15 18.625 13.969 55,875 8.871 2.095 20,744 18,625 37,250 3,911 22,536 -1,792 16 18,625 16.625 2.608 21,233 -21,233 17 18.625 0 1.304 19.929 -19.929 223.500 167.625 308.709 72.917 403.418 223.500 179.918 403.418 NCP- 0 Coaection ratio Intørest rate 40% 34.94% 45% 30.71% 50% 27.31% 55% 24.51% 60% 22.17% 65% 20.17% 70% 18.44% 75% 16.93% 80% 15.60% 85% 14.41% 90% 13.34% 95% 12.37% 100% 11.47% • Figures ar in housaids of N. Ms. "Opw~ern Lxpenes are c~le*tld as 3% of aban outsandarg Figur* 1 Nopal idustral Dovolopmmnt Corporation Breakeven Prjections Colcion raio ereakvn kierest rat wih fisrsata wih indrest rt Operainf fEpes swestmw d OE 40% 27.44% 34.94% 30.03% 45% 24.04% 30.71% 26.28% 50% 21.31% 27.31% 23.27% 55% 19.05% 24.51% 20.80% 60% 17.17% 22.17% 15.73% 65% 15.55% 20.17% - 16.97% 70% 14.16% 18.44% 15.45% 75% 12.93% 16.93% 14.13% 80% 11.65% 15.60% 12.97% 85% 10.58% 14.41% 11.93% 90% 10.01% 13.34% 11.01% 95% 9.21% 12.37% 10.17% 100% 8.47% 11.47% 9.4t% Interest Ratg Sensitvlty 35% 30%-- Curva C ~k n intere.~ s 0wi a 25% 20% 15% 10%- 40% 45% 50% 55% 60% 65% 70% 15% 80% 85% 90% 95% 100% Cas. Ra Table 7 Nepal industrial Development Corporation Collection Ratios l Prin ipal ) IDA Subloa Amount Duu Amount collected Colecion Ratio NAME OF SUB PROJECT approval Number PRINCIPAL. PRINCIPAL PRINCIPAL date 91 92 93 TOTAL 91 92 93 TOTAL 91 92 93 TOTAL Textile and ute 8 10.800 11,442 24.267 46.509 3.000 10.809 30.041 43.850 27.8% 94.5% 123.8% 94.3% Nepal ute -May_8e A-001 1.399 1.904 6_6 3.989 1.904 2.085 3.989 0.0% 1000% 3039% 100.0% Annapurna texyld II May-87 A 007 9.021 8,905 6.820 24.746 3.000 8.905 12,841 24,746 33 3% 100.0% 188.3% 100.0% Annaputna textile¯ Jun-92 A-019 0 0 B.960 8.960 6.960 6,960 NÅ NÅ 77.7% 77.7% Arnica Processing Nov-89 A-014 0 0 1,529 1.529 0 0 1,529 1.529 NA NÅ 100.0% 100.0% Joyedmspning_ Jan-90 A015 0 0 6,148 6,148 6,4148 8.148 NA NA 100.0% 100.0% P,agat. TexIde Industries Dec-92 A-021 0 __ _ - - -0 NÅ NÅ NÅ NÅ Saba Textiles Feb 87 B-003 380 633 124 1,137 0 0 47B 478 0.0% 0.0% 385.5% 42.0% Feod and mixed product 8 1.296 54 846 3.8 313 1,599 780 2.692 24.2% 91.2% 92.2% 69 1% Vcnayak Biscuit Dec.86 A.005 0 0 0 0 0 0 0 0 NÅ NÅ NÅ NA Laxnu Vana4ai, Ghe Ap--7 A-006 _ 0 91 91 _____ 0 0 25 25 NA NA 27.5% 27 5% indreni Soyabean Feb 89 A-010 ____ - 0 __- - 0 NA NÅ NA NA Nacayani Dairy Dec.86 A-012 0 0 0 _ 0 0 0 0 0 _ NA NÅ NÅ NÅ Natural Products Dec-89 8009 655 0 600 1,255 0 0 600 600 0.0% NA 1000% 47.8% Gandeki Noodles (PvB i)d. Sep92 B019 641 1.754 155 2.550 313 1.599 155 2.067 __48 % 100.0% _81% Himalayan Food CompaylPvt) ltd Sep 92 B-023 - - 0 - -0 NA NA NA NA Mani Wax and Wao ipvillid Sep-92 8 025 - 0 90 NÅ NÅ NA NÅ Construction 5 4.913 8.827 7.902 21.642 0 1.234 6.220 7.454 0.0% 14.0% 78.7% 34.4% T,oen Cemen Se 6 ¯-004 4,913 6.369 1.647 12.929 0 0 259 259 00% 0.0% 15.7% 2.0% alayan lita Sep.87 A-008 0 1.224 3.734 4.958 0 0 4.958 4.958 NA 0.0% 132.8% 100.0% P,elab Conciete Ind Dec-88 A-009 . 0 1.234 1,820 3.054 0 1.234 1.003 2,237 NA 1000% 55.1% 73.2% Sidhico tie Aug-89 B 006 0 0 701 701 0 0 0 0 NA NÅ 00% 0.0% SDB Bricks and 1.1a industry Sep 90 8-013 0 0 0 0 0 0 0 0 NÅ NÅ NÅ NÅ Hotel and resort 7 3.649 3.649 _ 3.997 11.295 3.649 3.649 3.997 11.295 100.0% 100.0% 100.0% 100.0% Hotel Jaya international Sep-86 A-003 3,649 3649 3.654 10,952 _649 3,649 3.654 10.952 100.0% 100.0% 1000% 1000% Hote Bluebird Aug-90 A.016 0 0 0 0 0 0 0 0 __ NÅ NÅ NÅ NÅ Himayan Height Resort Jun-90 B-012 343 343 _0 343 343 NÅ NÅ 100.0% 100.0% HOl eiraaPvI Ltd. Sep-92 B-017 - 0 NÅ NA NA NA Kakan Mountain Resort (Pvll Ltd Sep-92 B 020 0 0 NA Evei¯tb Panotama Resott iPvI ltd. Sep-92 9-021 0 0 NA NA NA NA Hotel Space mountamnp(t) ltd Sep-92 -022 _ ._ N NANNA Paper and piing 3 5,492 11.536 5.026 22.054 3.251 14 14.175 17,440 59.2% 0.1% 282.0% 79.1% Malla Press (Pvt) ltd Nov-90 B-014 0 0 302 302 0 0 0 0 NÅ NÅ 0.0% 0.0% United graphic ponters Nov-90 B-015 0 0 192 192 0 0 192 192 NÅ NÅ 100.0% 100.0% Everest Paper MlsIPv0 ltd Sep-92 B-018 5,492 11.536 4.532 21,560 3,251 14 13.983 17.248 59.2% 0.1% 308.5% 800% Pharmaceutical an d meldicl--- - - -- -- producus and services 5 1.505 1.321 2,194 5,020 726 601 3,552 4.879 48.2% 45.5% 161.9% 97.2% Nepal Med IPvI litd. I Sep.92 A-020 0 0 0 0 0 0 NÅ_NÅ NÅ _N NepalPharmaceuticals _ _May-86 0001 1.385 1.221 1.605 4.211 606 501 3.104 4,211 43.8% 41.0% 193.4 100.0% Simca Laboaiones Mar-89 B004 0 0 261 261 0 0 120 120 NÅ NÅ 460% 46.0% alJun89 2 007 _ 20 0 228 348 1__0 228 348 100.0 _NÅ 1000% 100.01. Kathmandu Dontal _;he Ja-90_ 010 100 _ 100 200 ___ _1_200 NÅ 1 _% 1_.0% ._.0. Othr mafacturng 5 500 556 3.393 4.449 500 400 2,251 3.151 100.0% 71.9% 66.3% 70.8% Prenier Electrical Jun-86 A-002 0 400 1.927 2.327 0 400 629 1.029 NÅ 100.0% 32.6% 44.2% Tfishakti soap Apr-92 A-017 0 0 0 0 0 0 0 0 NÅ NA NÅ NA Everest Rubber Ind. Ap(-92 A-018 0 0 0 0 0 NA NA NA NA Hmalaya Au1o May-89 8.005 0 156 1.466 1,622 0 01622 1.622 NA 0.0% 110.6% 100.0% RHCDC - NIDC loan Aug- 89 A 013L 500 500 500 0 500 100.0% NA NÅ 100.0% TOTAL 40 28.155 39.085 47.625 114.865 11.439 18.306 61.016 90.751_ 40.6% 46.8% 128.1% 79.0% Table 8 Nepal Indusitrial Development Corporation Collection Ratios 1 Interest ) IDA Subijan Amount due A.nount Collected Collection Ratio Totai NAME OF SUB PlOJECT approval N.nber INTEREST INTEREST INTEREST collection date 91 92 93 TOTAL 91 32 93 TOTAL 91 92 93 TOTAL Ratio T..". nd lae 7 8,508 530 20.497 29,535 7.223 0 20.319 27.542 84.9% 0.0% 99.1% 93.3% 89.41% Nepal jLte May6 A-001 1,284 597 1,881 395 1.486 1,881 30.8% NA 248.9% 100.0% 100.00% Annapuna 1en. i May7 A -007 6.828 _ 3.602 10.430 6.828 -_ 362 10.430 1000% NA 100 000% 100.00% Anaprna e.Ede Jun-92 A-019 0 _ 0 33.601 3.601 0 0_2.534 2.534 NA NA __70.4% 0.4% 75.58% micaProcessng_ __ No89 A 014 ___ _______0 983 883 0 _ 9_83 _9 NA NA _100.% 100.0% 10.00% Jovakispn.ing _an-90 A0 0 0 1120 10 11,008 11.008 NA NA 1.0% 000% 100.% PragaiwTe=ede indusines Dec-92 A 021 - 0 0 NA NA NA NA NA Saba Te.2ij. Feb.87 9-003 396 530 706 1.632 0 0 708 706 0.0% 00% 100.0% 43.3% 42.76% FoodadrnW.¯e produc- 8 10.310 7.260_ 11,042 _ 288,12 5.361 1.500 _ 4.701 11,56 _52.0% _20.7% 42.6% 40.4% _43.85% _vaak bcuit _ _ Dec-86 A 005 2.834 3.892 5.357 12,123 _ 0 _ 0 0 - 0 . 0.0% _0.0% _ 00% 0.0% 0.00% La."iVanaspaeGhee Apr-87 A006 6.665 3.368 3,971 14.004 4.761 1.500 3,971 10.232 71 4% 44.5% 100.0% 73.1% 72.77% Indrent S.yabean Feb-89 A 010 _ 0 NA NA NA. NA NA NalayaiDáoy Dec-6 A012 272 0 1.034 1.306 101 0 61 162 37.1% NA 5.9% 12.4% 1240% Naural Products Dec-89 8.009 7 0 _ 290 297 7 0 279 286 100.0% NA 96.2% 96.3% 57.09% Ga_ndek. N-di.s [Pnl bd Sp.92 B019 492 _ 0 390 882 492 0 390 882 100.0% NA 1000% 100.0% 85.93% _Hnalayan Food Com,pany(Pvi la Sep 92 8.023 0 0 NA NA_ NA NA NA Mani Wax and Wax ipvtIlid Sep.92 9-025 0 0 NA NA NA NA NA 0 Cosuc¯on 5 3.062 2,166 5.160 1088 _ 187 _ 520 1.834__ 41 _ 5 _.4 _ 24.0 ¯_35.6% 39.9% 36.20% Triven, Cemen! Sep 86 A-004 1,781 1,443 1.021 4,245 0 421 561 982 0.0% 292% 549% 23.1% 7.23% HIalayno lita Sep-87 A-008 0 522 929 1.451 1,244 0 207 1.451 NA 0.0% 22.3% 100.0% 100.00% Ptetab_Concete Ind. Dec-88 A-009 1.046 , 0 1.066 2,112 522 0 1,066 1.588 499% NA 100.0% 75.2% 7404% S.dhico id. Aug 89 9008 235 201 _682 1.118 21 99 0 120 8.9% 49.3% 0.0% 10.7% 6.60% SD Bricks and ida idustry Sep-90 6013 0 1,462 1.462 0 0 0 0 NA NA 0.0% 0.0% 0.00% 0 Hoteland b oae - 7 1.990 0 750 2.740 1.938 f 802 2.740 97.4% NA 106.9% 100.0% 100.00% Hotel Java iniemnationa Sep-66 A-003 1.990 0 63? 2,627 1.939 0 689 2.627 97.4% NA 108.2% 100.0% 100.00% Hotel Bluc tord Aug-90 A-016 0 0 0 0 0 0 0 0 NA NA NA NA NA HMnayan H.ight RsorJ un-90 8012 0 113 113 0 113 113 NA NA 100.0% 100.0% 100.00% Hotel Nirvana (Pvt) Lid. Sep.92 8017 0 0 NA NA NA NA NA Kakani Mountain Resor i(Pvil Lid Sep-92 8020 0 0 NA NA NA NA NA Eve¯est Panorama Resor (Pvr) ir Sep.92 8-021 0 0 NA NA NA NA NA Hotel Spacem Iountain(pvi) lid Sep-92 8-022 0 0 NA NA NA NA NA P..e nd printing _ 3 4,196 0 2.496 6.892 4.196 0 2.494 6,692 100.0% NA 100.0% 100.0% 83.95% Mana Pgess lPvil kd Nov-90 B014 0 0 421 421 0 0 421 421 NA NA 100.0% 100.0% 68.23% Uniued gaph. p,intas Nov.90 8.015 0 0 62 62 0 0 62 62 NA NA 100.0% 100.0% 100.00% Everest Paps, M.Is(P. ld Sep-92 8-018 4196 0 2.013 6,209 4.198 0 2.013 6.209 100.0% NA 100.0% 100.0% 84.47% Pharmaculical &nd medicat producis md setice 5 743 195 386 1,324 S72 142 610 1.324 77.0% 72.8% 158.0% 100.0% 97.78% Nepal Med IPvI) lid. Sep 9 2 A-020 0 0 0 0 0 0 NA NA NA NA NA Hepatharmaceut.als May-8 B-001 617 142 0 759 461 142 0 603 74.7% 100.0% NA 79.4% 96.86% S.mca Labortofies Mar-89 8.004 0 0__ 0 00 0 NA NA NA NA 45.98% ¯niaaIoxygen .89 8007 126 0 386 512 111 0 383 494 88.1% NA 99.2% 96.5% 97.91% Kath.and. Dental ho. Jan-90 8-010 53 0 53 0 0 53 53 NA 0.0% NA 1000% 100.00% 0 Odher nLacitgrn 6 1.586 624 1.154 3.264 1,586 524 612 2.722 100.0% 100.0% 53.0% 83.4% 76.14% Preier Electuical jun-86 A-002 1,294 524 0 1,818 1.294 524 0 1,818 100.0% 100.0% NA 1000% 68.69% Trishakti soap Ap-92 A017 0 0 0 0 0 0 0 0 NA NA NA NA NA Eveesse Rkbber Ind. Apr.92 A-018 0 0 553 553 11 11 NA NA 2.0% 2.0% 1.99% Hnalaya Auto May.09 033 0 601 834 33 0 801 634 100.0% NA 100.0% 100.0% 100.00% RHD.IConAug-89 A-013L 259 259 259 0 259 100.0% NA NA 100.0% 100.00% RTCOC - Ni3C oo5m10_675 41 42E2.i633 7 4 25. 7_.81% TOTAL 40, 30.95 10.676 41.485 92.655, 2663 2688 31,374 66.723 24% 26 75.6% 63.7%! 74.01% - 36 - ANNEX 2 Nepal Industrial Development Corporation Subproject Information (SOR '000) No. of Subprojects % Amount Disbursed I % A. Above Free Umit 19 49.00% 5,398 88.68% 8. Selow Free Umit 20 51.00% 689 11.32% Total 39 100.00% 6,086 100.00% (In SoFt) Actual Amount Disbursed Total number of subloans 40 Maximum Subloan 920,055 Minimum Subloan 2,376 Average 'A' category Subloan 284,089 Average 'B' category Subloan 33,434 Average Subloan Size 156,061 Note: Free Limit was below US$150,000 - 37 - ANNEX 3 Nepal Industrial Development Corporation (NRS '000) Subsectoral Distribution of Subloans Name of sub project Number Total Percentage Employment Percentage of disbursement of of total loans Disbursement employment 8 146,898 36.91% 1,447 35.66% Nepal jute 5,287 1.33% 513 12.64% Annapurna textiles 54,039 13.58% 371 9.14% Arnica Processing 9,811 2.47% 94 2.32% Joyati spinning 73,502 18.47% 450 11.09% Progati textile 795 0.20% NA Saba Textiles 3,464 0.87% 19 0.47% 8 84,479 21.23% 409 10.08% Vinayak Biscuit 14,657 3.68% 82 2.02% Laxmi Vanaspati Ghee 28,518 7.17% 132 3.25% Indreni Soyabean 20,781 5.22% 82 2.02% Narayani Dairy 7,113 1.79% 18 0.44% Natural Products 4.945 1.24% 28 0.69% Gandeki Noodles (Pvt) ltd. 7,519 1.89% 42 1.03% Himalayan Food Company 91 0.02% 25 0.62% Mani wax and wax 855 0.21% NA NA 5 44,731 11.24% 274 6.75% Triveni Cement 12,929 3.25% 30 0.74% Himalayan Itta 10,084 2.53% 66 1.63% Prefab Concrete Ind. 8,225 2.07% 40 0.99% Sidhico tile 4,758 1.20% 32 0.79% SDB Bricks and tile industry 8.735 2.19% 106 2.61% 7 40,680 10.22% 642 15.82% Hotel Jaya international 21,896 5.50% 250 6.16% Hotel Blue bird 10,719 2.69% 198 4.88% Himalyan Height Resort 1,657 0.42% 40 0.99% Hotel Nirvana (Pvt) Ltd. 1,262 0.32% 82 2.02% Kakani Mountain Resort 2,205 0.55% 35 0.86% Everest Panorama Resort 794 0.20% 20 0.49% Hotel Space mountain 2,147 0.54% 17 0.42% 3 33,539 8.43% 106 2.61% Malla Press (Pvt) ltd 2,229 0.56% 18 0.44% United graphic printers 3,362 0.84% 16 0.39% Everest Paoer Mills(Pvt) ltd 27,948 7.02% 72 1.77% ,at 5 14,412 3.62% 432 10.65% Nepal Med (Pvt) ltd. 1.077 0.27% 33 0.81% Nepal Pharmaceuticals 2.713 0.68% 30 0.74% Simca Laboratories 3,252 0.82% 95 2.34% Himal oxygen 6,870 1.73% 254 6.26% Kathmandu Dental home 500 0.13% 20 0.49% Urdy 5 33.273 8.36% 748 18.43% Premier Electrical 14,129 3.55% 42 1.03% Trishakti soap 8.603 2.16% 52 1.28% Everest Rubber Ind. 4,956 1.25% 37 0.91% Himalaya Auto 3,163 0.79% 81 2.00% RHCDC - NIDC loan 2,422 0.61% 536 13.21% TOTAL 39 398,012 100.00% 4,058 1100.00% - 38 - ANNEX 4 Nepal Industrial Development Corporation Subloan Informadon by Category of loan - .__in million N. Rs) Name of sub project Visited by Project Total cost Employment Average the mission? Status cost per job created A Category (Above (IS$150,0001 Nepal jute No Fully Repaid 14.01 513 0.027 Premier Electrical No Operational 20.25 42 0.482 Hotel Jaya international Yes Fully Repaid 137.49 250 0.550 Triveni Cement No Operational 16.00 30 0.533 Vinayak Biscuit No Seized/Closed N.A. 82 Laxmi Vanaspati Ghee No Operational 87.17 132 0.680 Annapurna textiles Yes Fully ReDaid/Ops 261.23 371 0.704 Himalayan Itta No Fully Repaid 22.47 66 0.340 Prefab Concrete Ind. Yes Operational 12.85 40 0.32t Indreni Soyabean No Seized/Closed 72.20 82 0.880 Narayani Dairy No Closed 95.51 18 5.306 RHCDC - NIDC loan Yes Fully Repaid 6.18 536 0.012 Arnica Processing No Fully Repaid 24.12 94 0.257 Joyai spinning Yes Operational 491.60 450 1.092 Hotel Blue bird Yes Implementation 139.04 198 0.702 Trishakti soap NO Operational 30.81 52 0.593 Everest Rubber Ind. Yes Operational 24.59 37 0.665 Nepal Med (Pvt) ltd. Yes Implementation 26.36 33 0.799 Pragati Textile Industries No implementation 109.81 na Sub total 8 Visited 1,591.69 3.026 0.526 a Category (Below US$ 150.000/ Nepal Pharmaceuticals Yes Fully Repaid 3.69 30 0.123 Saba Textiles No Legal Action 2.67 19 0.140 Simca Laboratories Yes Operational 11.80 95 0.124 Himalaya Auto No Fully Repaid 11.00 81 0.136 Himal oxygen No Operational 6.13 254 0.024 Sidhico tile No Operational 11.38 32 0.356 Natural Products No . Operational 6.34 28 0.226 Kathmandu Dental home No Fully Repaid 2.29 20 0.115 Himalyan Height Resort No Operational 10.00 40 0.250 SOB Bricks and tile industry Yes Operational 20.76 106 0.198 Malla Press (Pvt) ltd No Operational 7.01 18 0.389 United graphic printers Yes Operational 10.87 16 0.679 Hotel Nirvana (Pvtl Ltd. No Implementation 30.79 82 0.375 Everest Paper Mills(Pvt) Itd No Operational 61.44 72 0.853 Gandeki Noodles (Pvt) ltd. No Operational 13.89 42 0.331 Kakani Mountain Resort No Implementation 9.67 35 - 0.276 Everest Panorama Resort No Implementation 5.71 20 0.286 Hotel Space mountain No Implementation 5.30 17 0.312 Himalayan Food Company No Implementation 1.70 25 0.068 Mani Wax and Wax (pvtiltd No Implementation na Sub total 4 Visited 232.43 1,032 0.225 TOTAL 12 Visited 1,824.12 4.058 0.450 - 39 - ANNEX 5 Nepal industrial Development Corporation Cumulatve Collection performance of Subloans IDA NAME OF SUB PmOJECT Subaen Torai amount AeCa Tera Dues, Arrows loss Arros approval Aunber d1sbe as Oursrandi"g as at Apr* 94 Ifso bereen B to dare at Apr 93 as ar AWN 94 mths eM 24 moIdns ola Textle endjutm 6 148.898 15,004 6.007 3.,66 2.000 May-86 Nepal ture A-001 5,287 0 0 0 0 Nov-89 Arnica Processing A-014 9.811 0 0 0 0 Jan-90 Joyati sinning A-015 73.502 0 0 0 0 Jun-92 Annapurna textes A-019 54.039 14.500 5.689 3.668 2.000 Dec-92 Pragati Tatle Industries A-021 795 0 0 0 0 Feb-87 Saba Textiles 603 344 506 338 0 Food and mired produt 8 94480 43.092 8.106 2.219 5$8ge Dec-66 Vinavak Biscuit A-QOS 14,657 Apr-87 Lamme Vanaspat Ghso A000 38.518 32.840 4.084 0 4.084 Feb-89 Indreni Soyabean A010 20.781 0 0 0 0 Dec-86 Narmyanraery A-012 7.113 5.061 - 2.431 1,215 1.216 Dec-89 Naoural Products B*003 4.945 3.523 1,174 57 587 Sep-92 Gandeki Needles (t Itd. S-Oil 7.519 1.867 417 417 0 Sep-92 Himaleven Fed CasmpiPvd la. W023 91 0 0 D 0 Sep-92 Mati Wax and Wa Iplvdltd 25 856 0 0 0 0 Cana6eden 44,731 22.16S 3.724 2,021 1.104 Sep-so Triveni Cement A-004 12.929 9.218 0 0 0 Sep-87 Himalayan Itts A-008 10.084 0 0 0 0 Dec-88 Prefab Concrete Ind. A-009 8.225 1.620 l18 818 0 Aug-89 Sidhicot ale 400 4.758 3.317 1,506 402 1.104 Sep-90 SDO Bricks and ile industry 413 8.735 7.991 1.400 1.40, Herandseserr 7 40,680 21.448 172 172 0 Sep-86 Hotel Jave internationa A-003 21,894 0 0 0 Aug-90 Hotel Blue bird A-016 10,719 11,200 0 0 0 Jun-90 Himalvan Heigh Reon 8-012 1.657 951 172 172 0 Sep-92 Hatel Nirvana IPvr Ltd. 3417 1,202 3.068 0 0 0 Sep-92 Kakeni Mountain Resort (Pv Ltd. 020 2.205 2.185 0 0 0 Sew-92 Everest Panoram Reeon (Pud td. 1-021 794 1,770 0 0 0 Sep-92 Hotel Soace mountaingytt ltd 642 2.147 . 2.27 . 0.. Paer and prkori 3 33.829 10.492 3.836 3.936 0 Nov-90 Male Press e lid 6014 2.229 1,927 0 0 0 Nov-90 United graphic pinters 1419 3.362 0 0 0 0 Sep-92 Everest Paper MimsIP" Itd 8418 27,940 8.505 3i93m 3,36 _a phrawsedca46 Awstfseagse 5 22.264 8578 791 123 257 and so ais Sep-92 Nepal Med IPvt ltd. A-020 8,929 0 0 0 0 May-86 Nepal Pharmae.uticals 8.001 2.713 0 0 0 0 Mar89 S1ncs Laboratories 8.004 3.282 2.387 786 523 257 Jun-89 Himal oxygen B.007 6.870 3.218 0 0 0 Jan90 Kathmandu Dental home 0.010 500 0 Q0 othr menufaoetn 5 33A73 20.338 2.048 1.148 900 Jun-8 Premer Electrcal A002 14,129 6.549 11058 15s 900 Apr-92 Trishakti seoap A-017 8.603 10.494 0 0 0 Apr-92 Everest Rubber Ind. A-018 4.956 4.980 990 990 0 May-S9 Himalava Auto 8-005 3.163 0 0 0 0 Aug-89 RHCDC - NIDC loan A-13t 2r422 0 0 0 0 ITOTAL 39 398,012 130.7uu 24.778 14.287 10.147 As a % of Tot. Diabrsement Note: Total principa affected by arrears is N.Rs. 89.014,108 which Ia 64 % of.total outstahning as at April 94. - 40 - ANNEX 6 Nepal Industrial Development Corporation Cash Flow Actual Projected 89/91 90/91 91/92 92/93 93/94 94/95 95/96 96/97 Cash inflow from Operations Collection of Principal 74.0 162.6 194.9 184.0 238.3 275.76 310.76 345.76 Collection of interest 85.9 75.0 111.5 137.0 132.4 154.86 170.36 185.86 Other income 15.4 5.1 6.4 32.7 5.0 14.96 15.64 16.32 Total 175.3 242.7 312.8 353.7 375.7 445.6 496.8 547.94 Cash outflow due to operations Debt service: Principal 7.7 28.0 12.1 26.4 40.5 42.14 48.54 54.94 Interest 55.4 52.6 56.5 118.2 90.1 115.06 128.56 142.06 63.1 80.6 68.6 144.6 130.6 157.2 177.1 197 Expenses 25.0 26.1 31.2 27.2 34.0 34.43 36.34 28.25 Ualties paid 11.2 11.0 25.0 11.7 20.0 21.27 23.1 24.93 Total 99.3 117.7 124.8 183.5 184.6 212.9 236.5 260.2 Net Operating Cash Inflow(Outflowl 76.0 125.0 188.0 170.2 191.1 232.7 260.2 287.8 Non operating cash inflow Other Collection 1.3 3.8 4.3 1.7 2.7 2.97 3.04 3.11 Borrowings 13.7 45.8 92.9 152.8 150.0 204.92 242.88 280.84 Sale of share 6.2 0.5 5.9 5.3 4.0 4.5 4.54 4.58 Equity 0.0 19.5 0.0 20.0 100.0 88.05 108.1 128.15 Sale of fixed asset 0.3 0.6 0.5 12.9 0.5 6.77 8.04 9.31 Total 21.5 70.2 103.6 192.7 257.2 307.2 368.6 426.0 Non operating cash out flow Loan Disbursement 127.5 168.6 267.7 241.2 470 482.28 558.04 633.8 Share investment 9.2 3.1 18.2 27.3 30 37.3 43.88 50.46 Fixed asset 1.6 1.6 2.4 53.1 10 34.23 41.06 47.89 138.3 173.3 288.3 321.6 510 553.81 642.98 732.15 Net non operating Inflow (outfiowl (116.81 (103.11 (184.71 1128.91 1252.81 (246.51 (276.41 (306.21 Net Increaseldecrease) In cash balance (40.8 21.9 3.3 41.3 (61.7) (13.9) (11.2) (18.4) Actual Projected 89/90 90/91 91/92 92/93 93/94 94/95 95/96 96/97 Opening Cash Balance 88.6 47.8 69.7 73.0 114.3 52.6 38.7 22.5 Net Cash Flow (40.8) 21.9 3.3 41.3 (61.7) (13.9) (16.2) (18.41 Closing Cash Balance 47.8 89.7 73.0 114.3 52.6 38.7 22.5 4.1 - 41 - ANNEX 7 INDEX OF SUBSIDY DEPENDENCE NEPAL INDUSTRIAL DEVELOPMENT CORPORATION 1993/941 (Million N.Rs.) Index of subsidy dependence Subsidy Calculations (see attached for formula) 1. A = Concessional borrowed funds (547.9+749.6)/2 648.75 (annual average) 2. m = 13% (Assumed market rate based on deposit rate of 5 year deposits) 3. c = 7.6% (Average actual interest rate paid on concessional borrowed L/T funds) 4. A(m-c)= (648.75 x (13% - 7.6%) = 35.03 5. E = Equity (annual average) (414.6 + 525)/2 = 469.8 6. E*m = 469.8 x 13% = 61.07 7. P = Profit = 48.4 8. LP = The average annual outstanding loan (881.2 + 1228.7)/2 = 1054.95 portfolio 9. K = Other subsidies = 0 10. n = The average annual lending interest = 12% p.a. 11. LP*n = = 126.59 Without taking the reserve requirement into account: Annual subsidy = S = A(m-c) + [E*m)-P] + K = 35.03 + 61.07 - 48.4 = 47.4 Index of Subsidy Dependence SDI = S/LP*n = 47.4/126.59 = 37.44% Finding: Average lending rates of interest would have to be increased by around 37 percent (from 17% to 23% p.a.) to compensate for full elimination of subsidies received by NIDC in FY94. IL The SDI is calculated without taking into consideration the impact of compensatory balances (obligatory savings), thereby reducing the net loan portfolio and increasing the effective on-lending interest rate. Calculating the SDI for the altered data reflecting loan portfolio minus obligatory savings would have resulted in a higher SDI. - 42 - A. COMPUTATION OF THE SUBSIDY DEPENDENCE INDEX (SDD The amount of the annual subsidy received by an DFI is defined as: S = A (m-c) + [E * m) -P] + K when; S = Annual subsidy received by the DFI A = DFI concessional borrowed funds outstanding (annual average) m = Interest rate the DFI would have to pay for L/T borrowed funds if access to borrowed concessional funds were eliminated c = Average annual concessional rate of interest actually paid by the DFI on its average annual concessional borrowed funds outstanding E = Average annual equity P reported annual profit (adjusted, when necessary, for loan loss provisions, inflation etc.)' K The sum of all other types of annual subsidies received by the DFI (such as partial or complete coverage of the DFIs operational costs by state.) The financial ratio that is suggested as a subsidy dependence index (SDI) is: S SDI = - LP*n LP = Average annual outstanding loan portfolio of the DFI n Average on-lending interest rate of the DFI' I/ Without adequate provisions for loan losses, profitability data is likely to be misleading in cases where arrears constitute a serious problem. n is calculated simply as interest earned as a percentage of the average annual loan portfolio. This implies that whenever interest is not accrued on non-performing loans, while no provisions for loan losses are made, n would be lower compared with the interest earned on performing loans. However, when interest is accrued on non-performing loans, the SDI denominator is overstated, and consequently the SDI is understated. -43 - ANNEX 8 Nepal Industrial Development Corporation Rate of Return from Current Portfolio (million) Loan Outstanding 1467.5 1/ Operating Expenses 3.0% Interest Collection 10.7% 2/ Principal Collection 17.4% 2/ Debt+Equity 1442.5 1/ Year Loan Collection 3/ Operating Net 4/ Outstanding Principal Interest Expenses Collections IRR FY94 1467.5 1/ -1442.5 1/ FY95 1212 255 157 44 368 368 FY96 1001 211 130 36 304 304 FY97 827 174 107 30 251 251 FY98 683 144 88 25 208 208 FY99 564 119 73 20 171 171 FY00 466 98 60 17 142 142 FY01 385 81 50 14 117 117 FY02 318 67 41 12 97 97 FY03 263 55 34 10 80 80 FY04 217 46 28 8 66 66 FY05 179 38 23 7 54 54 FY06 148 31 19 5 45 45 FY07 122 26 16 4 37 37 FY08 101 21 13 4 31 31 FY09 83 18 11 3 25 25 1384 851 239 1997 7.65% 5/ 1/ Provisional FY94 ending balances - 2/ Average three year collection rates of interest and principal as percent of loan outstanding 3/ Expected principal (interest) collections calculated by multiplying loan outstanding by principal (interest) collection rates of 17.4% (10.7%) 4/ (Principal plus Interest Collection) less Operating Expenses, which are assumed to be 3% of loan Outstanding 5/ Int. Rate at which NPV of net collection equates aggregate of Equity and Debt.  O 昌碧 甘O 闐f今 籮常 迆蔔 卜叫 卜叫 & 鴆 & h l 吋  、〔！&！戶，& -48- Part II - Project Review From Borrower's Perspective ---------------------------------------------------- 1. Overview The credit 1535-NEP for SDR 7.5 million was IDA's second line of credit to Nepal Industrial Development Corporation for the Industrial Development Project in Nepal. The project was delayed in both commitment and disbursement under the line of credit.The credit account was closed on May 13, 1994 and the undisbursed balance of SDR 0.56 million was cancelled. The objective originally laid out in this project was changed after the project became effective. The reVised project components actually improved the clarity and realism of the objectives Thus, it helped in achieving the objectives without any difficulty. 2. Project Design The credit 1535 NSP project was prepared by NIDC and Ministry of Industry with the assistance Ira= IDA. Later on, HMG/N overviewed the project and decided to cancel some credit components, such as Import Export Facility , Tourism Promotion Study and the Incentive study. The project included the following credit related components:- To promote the private sector industry by project financing through NIDC; To strengthen the NIDC activities specially by providing; (i) Staffs training on project preparation, evaluation and implementation; (ii) International auditing to determine the financial position of NIDC; and (iii) Development of MIS system through computer hardware and software, etc. to support HMG to promote the leather industry through financial and technical assistance. -49- 3. Achievement The project's objective of expanding the private sector's role in industrial development was largely realised as stated in the IDA's Report (PcR). Under this project, over 94% of the credit amount was disbursed in 39 sub-projects and majority of the sub-projects are in operation.The significant achievement of this project would naturally have a substantial impact on industrial growth, investment and employment. Besides, it also provided a remarkable help to NIDC in computerisation (Hardware) of NIDC's operation, manpower development and international auditing of NIDC to determine its financial position. But the concept of importing computer software developed in highly advanced countries and hiring the foreign consultants to apply such imported software in local conditions could not be materialised because of some technical difficulties like customisation of software according to NIDC needs, timely availability of consultant services etc. 4. Lending Operation Altogether 46 sub-loans were approved by IDA. Out of 40 sub-loans, only 39 sub-projects were finally financed under the credit component to the tune of SDR 6,086,401 against the total sanctioned amount of SDR 6,555,380. Sub- sectorial distribution of sub-loans reveals that textile and jute-based industry received the highest proportion of loan. However, the full amount of credit could not be utilised as nine sub-projects under this credit line were under final implementation stage at the time when the credit was closed.In terms of sub-loan, 20 from each category (A and 3) were financed under this project. The number of employment created by these 39 sub-projects were estimated at 4,058. 5. Prime Causes of Success Though TA component has a mixed result, the project as a whole enumerated a positive result. Some of the factors, responsible for the positive results, include. -50- - The objective of the project was developed and defined clearly as per the borrower's point of view ; - Credit line has emphasised to avoid unnecessary conditionalities so as to facilitate the borrowers to take decision on sub-projects by themselves; - The liberalisation of interest rates by Nepal Rastra Bank in FY 1990 allowed NIDC to raise its lending rate with a satisfactory interest margin ; - The component, specially NIDC's institutional development programme, has been well supported by computer hardware for setting up-a proper MIS. 6. Borrower's Performance Borrower's performance as a whole is satisfactory in terms of preparing, implementing and monitoring the project. Project Relationship Relationship between IDA and government was satisfactory and that between NIDC and IDA was cordial and friendly throughout the project period. 7. Conclusion The 1535-NEP credit was the IDA's second line of credit to NDC. The credit was expected to be utilised in five Years. However, it was little delayed and used in seven years. Some sub-loans and TA components could not be fully utilised by the credit closing date due to various problems. However, over 94% of the credit amount was disbursed and majority of the sub-projects are in operation. So it has helped substantially on the industrial growth, employment and investment. TA component has shown a mixed result. For the last 5 years, NIDC has been increasing its profitability and generating a cash surplus also. In general, the objectives of credit -1535 were met despite of some difficulties and delays other than anticipated. -51 - Comments on Part I & III Project completion Report (Cr. 1535-NEP) prapared by the IDA is found balanced and satisfactory. Basically, we do not have difference in IDA's finding. IDA financed lending component has contributed positively to NIDC's performance. On the marginal basis NIDC is generating positive cash flow from the projects. Thus, NIDC has managed to recycle its internal cash generation for the disbursement of new loaz. Following comments are made on IDA's report: Cost of the Sub-projects: NIDC was given the responsibility of financing the credit component of about 6.5 million SDR to different industrial enterprises. Concerning IDA's comments that the total cost of sub-projects exceeded the appraisal cost by 400 percent, basically, we did not find so much differences in the project costs. As per ou. information given in Annex-I, the total cost of sub-projects amounted to NRS 1,758.55 million whereas the appraisal cost was estimated at NES 1569.604 million resulting the differences of NRS. 188.94 million i.e. the project cost exceeded the appraisal cost only by 12% approximately. Implementation delays in most of the projects brought about cost escalations in local construction materials and imported equipments thereby increasing the project cost . So to meet cost over-runs, NIDC provided additional-financial assistance to some of the projects. Out of 39 sub-projects, nine sub-loan projects were only partially financed under this credit line as they were under implementation stage at the time when the credit was closed. So, the short-falls in financing these nine projects had to be met through NIDC's own source of fund. Arrears Position The arrears position of NIDC financed projects as of mid July 1994 are presented in Annex - II. -52- Detail of Consultancy 1. Price Waterhouse Price Waterhouse, a partnership firm constituted under the provisions of the Partnership Act 1948 of India was hired by NIDC for statutory and special audit of accounts of NIDC for the financial year 1988-89 applying internationally accepted accounting and auditing standards. The time frame of the audit team members was set for 218 working days. 2. Bergstrom Associates Inc. Bergstrom Accociates Inc., a limited liability company incorporated under the laws of Illinois has agreed to provide NIDC computer software service and training of NIDC staff. It was supposed to complete the computerisation. .within 28 weeks. But unfortunately, this package could not be fully utilised due to some unavoidable circumstances. Ultimately, the software package was cancelled. 3. Asia Business Consultants Manila - based Asia Business Consultants conducted three training courses with a view to developing platform techniques and conduct a project course, utilising a standardized curriculum and local case studies and materials. i) Competitive Business Strategy - One Week ii) Faculty Development Programme Four Weeks iii) Faculty Development Programme - One Week 4. M/S Martin Stoller & Associates NIDC has engaged the service of MIS Martin Stoller and Associates with a view to examining NIDC's key accounting policies and practices so as to understand how these confirm with generally accepted International Accounting Standard, - make recommendations on financial reporting and make an analysis of the implications of these practices upon NIDC's actual performance. This consultancy service was completed in a month. 1   にI 1_12二 っこン Z こク了上 く江a 念全と・