CIRCnULATING COPY '10 DE RE8TURNED TO REPORTS My' DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use CIRCULATING COPY TO BE RETURNED TO REPORTS DESK Report No. P-1626-IS REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ISRAEL FOR AN INDUSTRIAL DEVELOPMENT PROJECT May 7, 1975 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. Currency Unit Israel Pound (IL) US$1 IL 6 IL 1 US$0.17 IL 1,000 US$166.67 IL 1,000,000 - US$166,666.67 Fiscal Year - April 1 to March 31 Abbreviations IDBI - Industrial Development Bank of Israel Ltd L.A. - Loan Agreement OCS - Office of the Chief Scientist P.A. - Project Agreement INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO ISRAEL FOR AN INDUSTRIAL DEVELOPMENT PROJECT t. I submit the following report and recommendation on a proposed loan to Israel for the equivalent of US$35 million at the Bank's standard lending rate to help finance a project for industrial development. The Government would on-lend $25 million at the same interest rate to the Industrial Develop- ment Bank of Israel Limited (IDBI) with repayments by IDBI to the Government and by the Government to the Bank conforming substantially to the aggregate amortization schedule of IDBI's subloans. The remaining $10 million would finance industrial research and development and vocational/technical training and be repaid in 15 years, including 5 years grace. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Israel". will be distributed to the Executive Directors shortly. Its principal findings are reflected below. Country Data sheets (Annex I) are attached. 3. Israel has few natural resources. Its economic growth has been based largely on the imported or acquired skills of its people, technological sophistication and a large capital inflow from abroad. Although the domestic market has expanded considerably as incomes have risen, exports remain more than ever crucial for continued growth and economic viability. 4. From 1970 to September 1973, Israel enjoyed a period of prosperity, with rapidly increasing levels of consumption. GNP per capita is estimated to have reached $2,860 (Atlas basis) in 1973. GDP at factor cost grew by 10 percent per annum in real terms in 1971 and 1972, and at an annual rate of 7 percent up to September 1973, with industry growing at 12 percent, agricul- ture at 5 percent and services at 4 percent over the period. Labor force growth over the same period was a rapid 5 percent per annum, and productivity growth 4 percent per annum under the impact of high investment and the intro- duction of capital-intensive technologies. Private consumption grew at an accelerating rate; private savings also grew rapidly with rising incomes. Public consumption was held constant in real terms for three years and real defense expenditures declined. The investment rate increased from 27 to 29 percent of GDP between 1970 and 1972. Gross savings, normally low, rose sharply in those years from 4 to 14 percent of GDP. The current account deficit narrowed from $600 million in 1970 to almost zero in 1972 as a result of a rapid growth of unilateral transfers. The resource gap was equivalent to 72 percent of investment in 1970, but only 41 percent in 1972. The pressures generated by rapid growth led to some scarcity of labor, while Government deficits and large capital inflows raised liquidity and money incomes, raising -2- prices and finally generating an import boom. Unemployment dropped to a re- cord low of 2.5 percent in the first nine months of 1973. Prices rose by about 13 percent in 1971 and 1972 and by 20 percent in 1973; the largest part of the increase occurred before the October 1973 war. Until then, the Government fo- cused more on controlling rising prices than on the underlying weakening of the balance of payments, attempting to control its deficits and employ more orthodox methods of financing them. 5. The October 1973 war caused major economic dislocations. Some 30 percent of the labor force was mobilized. Output fell initially in all sec- tors except agriculture, but most reached prewar levels again by the second quarter of 1974. Public consumption and imports rose sharply, as the war led to a tremendous upsurge in defense expenditures, which doubled to reach IL 12.5 billion ($3 billion), equivalent to 31 percent of GNP in 1973. This came at a time when the civilian economy was already overheated and price rises accel- erating. 6. Real GDP growth in 1973 was 8 percent. This reflects national accounting ccnventions under which defense expenditures contribute to output; non-defcnse output fell by 4 percent during the year. In 1974, however, GDP growth slow-d to about 6 percent. The Government introduced a series of fiscal measures involving large cuts in aggregate demand. Attempts to reduce real private consumption failed because of trade union strength, particularly under full employment conditions, the payment of automatic cost-of-living allowances on basic wages, and possiblv some fall in private savings rates. Tne continuing high level of defense expenditures (I] 16 billion in 1974) led to a continuing Government deficit. Sharply rising prices of fuel and other imports compounded Israel's economic difficulties. The rate of inflation doubled in 1974 to an unprecedented figure of 40 percent. 7. The deficit on goods and services was about $1.2 billion in 1971 and 1972. Exports increased in value bv 24 percent in 1973, but imports rose 60 percent, under the impact of booming consumption, world price rises and defense purchases, so that the deficit on goods and services widened rapidly t reach $2.6 billion. It was almost matched by unilateral transfers, con- sisting of restitution payments by Germany, personal cash transfers and institutional transfers. The transfers were exceptionally high following the October 1973 war, and reached $2.2 billion in 1973, with the current account deficit at $400 million. Gross loan inflow before the war was at a rate of $1 billion per annum and net inflow $600 million, and consisted of U.S. Government credits, German capital aid and commercial loans. The inflows permitted a continual increase in foreign exchange reserves, to a peak of $1.8 billion (gross) at the end of 1973, equivalent to four months' imports of goods and services. 8. imports increased by some 29 percent in value in 1974 to $6.7 bil- lion, rieprly all from price increases for a few key commodities, particularly oil. .!ea though Israel was partly shielded from the worldwide oil price in- -rea_ b.,cause it used oil extracted from the Sinai oil fields, the increase in thri oil import bill was $450 million, equivalent tco 4.6 percent of 1973 CT R n ard nea-y 9 percent of 1973 imports. In February 1975, Israel drew $78 - 3 - million under the 1974 IME oil facility. In 1974, exports increased by 24 percent in value to $3.3 billion, with little volume increase. The deficit on goods and services widened further to $3.4 billion in 1974 (about 23 per- cent of GNP). The increase in the deficit in 1973 and 1974 originated mainly in the deterioration of Israel's terms of trade, and resulted in a consider- able real resource loss because of the high ratio of exports and imports to GNP. The exceptional capital inflows of the war year 1973 could not be repeated. Foreign exchange reserves halved to $0.9 billion by November 1974. 9. The Government is taking strong measures to reduce demand. The proposed 1975/76 budget of IL 56.3 billion is expected to involve no increase, and perhaps a small decline, in real expenditures. Significant reductions have been made in subsidies on basic food items, public utilities and petrol- eum products. The development budget (other than for housing) will be reduced by 15 percent in real terms in 1975/76, with the cuts concentrated in lower- priority sectors. Government industrial investment will be expanded and export-oriented private industrial investment stimulated as much as possible. In November, the Israel pound was devalued from IL 4.2 to IL 6 to the US dollar. An import surcharge (more than halved to 15 percent) and correspond- ing export rebates were retained. The Government expects GDP growth to slow to 3 percent in 1975. Inflation is expected to slow steadily from its record level in 1974. The success of this program depends on a stagnation in per capita private consumption, which requires moderation in wage settlements. In support of its program, Israel made a drawing from the IMF in November 1974, and a second in February 1975, under standby arrangements. 10. The deficit on goods and services in the balance of payments is expected to stabilize at $3.3 billion in 1975. Israel's exports have become more competitive as a result of the November 1974 devaluation. Domestic demand pressures should slacken and cost rises slow under the impact of the Government's stabilization policies. However, defense imports are expected to rise again and debt servicing payments are also increasing rapidly. Pro- jections of foreign inflows depend heavily on developments abroad. Unilateral transfers are expected to grow very little. The Government projects a $1.4 billion net medium- and long-term capital inflow, about half associated with the increased defense imports. Even so, reserves are not expected to increase during 1975. The Government hopes to achieve balance of payments equilibrium again in 1976, by restraining consumption and preventing domestic cost rises from threatening the price advantage brought about by the November 1974 deval- uation. Favorable developments in world market conditions will also be needed to permit a considerable improvement in the current account. In addition, the Government has approached the U.S. for a large special aia allocation for fiscal year 1976. 11. In addition to its three traditional goals of defense, absorption of immigrants and rapid economic growth, Israel has in recent years given more emphasis to social equalization, financial stabilization and the strengthening of the balance of payments. It is experiencing intense competition for re- sources between high consumption and Government expenditures (especially sub- sidies, defense needs, and the costs of absorption of immigrants), exports, - 4 - and investment for future growth. The balance of payments has now become the overriding economic problem, with the critical position in late 1974 and dif- ficult short-term prospects dictating higher priority for exports and export- oriented investment, particularly in industrial Droducts and minerals. Growth depends closely on import capacity and hence on foreign exchange receipts; however, the current recession and uncertain timing of renewed growth of Western economies, which are Israel's major markets and sources of capital inflows, suggest cautious predictions for the short-term growth of Israel's economy. Thereafter, the presently projected medium-term prospects for the OECD member countries should permit Israel to achieve faster growth. 12. As of December 31, 1973, Israel's reported public external debt (including undisbursed) stood at $4,783 million, made up of $1,339 million in conventional debt, $1,697 million in military debt and $1,747 million in Israel Bonds. There has in recent years been some increase in private non-guaranteed debt. Debt service in 1973 was $520 million and was equivalent to 22 percent of 1973 exports of goods and non-factor services. If military debt is exclud- ed from the figures - which may be desirable for inter-country comparisons - the debt service ratio drops to 15 percent. In addition, many holders of Israel bonds have rolled them over as they mature and it may be reasonable to expect them to do so in future if Israel's economic situation required this. Finally, the regularity of a large part of unilateral transfers to Israel should also be taken into account in judging Israel's debt s.rvice burden. The debt service ratio is tentatively estimated to have risen in 194, and is projected to peak at just under 30 percent of exports in 1975, or some 22 percent excluding military debt. It wouild then decline, slowly at first and then more rapidly, on the assumption of rapid but feasible export growth. 13. Economic manageme-nt may be expected to remain prudent and efficient, although the task has been greatly complicated by the increase in consumption and defense expenditures, and the room for manoeuvre reduced by the high debt service ratio and the fall in reserves which has already taken place. The Bank's share in total debt outstanding in December 1974 and debt service dur- ing 1974 was 3 percent in each case; with the growth of the total debt, it is expected to fall steadily. Provided the debt situation and particularly fur- ther recourse to short-term credit is carefully monitored, and provided export incentives are maintained and produce rapid export growth, Israel can support additional long- and mediun-term debt on conventional terms. PART II - BANK GROUP OPERATIONS IN ISRAEL 14. The Bank has to date made ten loans to Israel; tihe amount held by the Bank as of March 1975 totalled $181.5 million. Three loans have been made to IDBI for financing of industry ($60 million), two to the Israel Bank of Agriculture for agricultural credit projects ($55 million), one for the expansion of a potash plant ($25 million), one for the port of Ashdod ($27.4 million), two for highways ($52 million), and one for a national sewerage project ($30 million). Annex II contains a summary statement of Bank loans and IFC investments as of March 31, 1975, and notes on the execution of ongoing projects. -5- 15. Foreign exchange earnings and emplovment opportunities are being increased through the three IDBI loans, which helped finance investment in export industries, and through the two agricultural credit projects, which helped finance the production of flowers, fruit and vegetables for the Euro- pean market, as well as water-saving investments. The two highway projects and the port project contributed to basic infrastructure improvements needed to service the growing ecohomy; the sewerage project will help avoid increas- ing pollution and health hazards while making water available for reuse in irrigation. Project implementation has on the whole been satisfactory. The second highway and the sewerage projects, however, have experienced signifi- cant cost increases, due to rapid inflation in Israel and delay consequent to the October 1973 war. 16. IFC made an equity investment in, and a convertible loan to, t-fakhteshim Chemical Works Limited, a producer of pesticides, in June 1974. It has under preliminary consideration a second investment in Makhteshim to expand pesticide production, besides an investment in Haifa Chemicals Limited to expand production of potassium nitrate. 17. Israel's relatively high per capita income and its access to sub- stantial external sources of capital make it a marginal claimant on Bank resources. Its persistently high capital requirements resulting from a need to increase productivity and exports in order to improve its balance of pay- ments have, however, warranted continued Bank assistance up to now. No addi- tional operations are presently being prepared or contemplated. PART III - INDUSTRIAL ACTIVITIES IN ISRAEL 18. Industry in Israel is mainly privately owned, but subject to con- siderable Government influence through a pervasive incentives system and Gov- ernment predominance in providing finance for industrial investment. Indus- trial output has grown by 12 percent annually since 1970, with employment growing by 4 percent and productivity by 8 percent. Industry accounted for 24 percent of net domestic product at factor cost in 1973. Clothing, rubber and plastics products, chemicals, petroleum products, metal products and diamonds have increased their shares of value added in industry. 19. Industrial exports grew by 27 percent per annum in value (18 percent in volume) between 1970 and 1973 to reach $1,188 million and accounted for 87 percent of commodity exports and 45 percent of total foreign exchange earnings. Polished diamonds remained the largest single item, at $557 million in 1973; Israel already has a significant share of this market. With industrial ex- ports growing rapidly, there has been some diversification, with chemicals and electrical and electronic goods the fastest-growing items, but further efforts are essential. 20. Government policy is to promote exports, giving priority to indus- tries taking advantage of the highly-qualified labor force in Israel, process- ing local raw materials, or locating in less-developed regions. It provides a comprehensive package of incentives which are essential to sustain past high growth of industrial investment and exports. They include development loans, investment grants in exchange for export coTmitments, and tax incentives, including rebates on the imported component of exports. Since investment pro- posals are subjected to careful economic analysis before approval of incen- tives, interest rates play only a limited allocative role in industry. The rates on development loans are currently 8, 10 and 12 percent, with the high- est rate for the most developed central region of Israel. For this region, the Government is in the process of implementing its decision to apply a partial indexing to the loans; if the cost of living in a particular year rises more than 20 percent, the excess will be added to the outstanding prin- cipal. Since 1970, an import surcharge has provided protection against im- ports, even though tariffs have been steadily reduced. The Government is currently considering refining the incentives to increase their emphasis on exports. Their cost is tentatively estimated at 20 percent of the volume of industrial investment. 21. The Government's 1974-78 industrial plan, published in May 1974, envisages annual expansion of industrial investment at 16 percent and output at 10 percent in real terms, and exports at between 15 and 18 percent in vol- ume. Tineral development and processing are expected to account for a large share of industrial investment in the next few years and provide a major part of export growth. A very large investment program has been drawn up for phos- phates, salts such as potash extracted from the Dead Sea, and petrochemical and other chemical products. Exports of metal products and electronics may be expected to expand rapidly. Import substitution will focus on fertilizers, other intermediates, and capital goods for the chemical industry and power generation. 'WN7hile all the plan targets are optimistic, industrial investment is expected to grow rapidly, since industry must provide the main source of increased exports. The export targets are feasible, if Israel's main markets in W*,estern Europe and the US resume growth, and if the price advantage given by the November 1974 devaluation is not quickly lost through domestic wage and other cost increases. 22. Investment in industrial research and development (R&D) is vital for industrial expansion and export promotion. R&D expenditures in product design and process engineering are necessary to utilize Israel's limited natural resources more intensively, make effective use of the high educational levels and technological skills of its manpower, and develop an indigenous technology. Although industrial and university expenditures on R&D in Israel currently amount to some 1.4 percent of GNP, only 22 percent is applied re- search done by industry. To orient research more towards commercial applica- tion, the Government has since 1966 encouraged private sector R&D through 50-50 matching grants for fir,ms lacking the capital necessary to develop new products or processes. During 1971-73, these grants totalled $10.4 million. The Government now proposes to provide grants of up to 80 percent of the cost of selected "projects of national importance", i.e. projects with significant potential oayoff. Private enterprises are presently unable to undertake these because they are new and small by international standards, the required R&D oiitlavs are substantial in re:Lation to their resources, the risks with new cc7phisticated products are high, and the supply of private venture capital is relatively insufficient. - 7 - 23. Because of large-scale immigration from developed countries, the labor force in Israel has an unusually high proportion of highly-qualified people. At the same time, there are shortages of middle- and high-level tech- nicians, skilled workers, and artisans. To match employment opportunities to the labor force, the Government encourages science-based industries such as electrical goods and electronics, scientific instruments, engineering, chem- icals and plastics. It has also undertaken a comprehensive program of tech- nical training, involving expansion of vocational and of post-secondary technical education, retraining and refresher programs, on-the-job-training, apprenticeship programs, youth centers, and rehabilitation programs. 24. Since the mid-1960s, the capital market has been a relatively un- important source of funds for industry. Between 1968 and 1973, enterprises raised only IL 47.5 million in the form of share capital, due to a steady decline in stock prices. Institutional investors, the main source of funds, must invest 85-90 percent of them in Government bonds or Government-approved securities. In addition, the Government absorbs considerable sums through compulsory loans. Because of the market situation, new issues need to be indexed. Between 1968 and 1973, industrial bond issues amounted to only IL 30 million, Given this situation, the Government's grants and development loans have become major sources of long-term financing for industry, account- ing for 7 and 51 percent respectively of total fixed investment financing between 1968 and 1973. This enables the Government to exercise wide influence over the allocation of funds of the financial institutions engaging in term financing, notably the industrial development banks (including IDBI), and the public sector companies. PART IV - THE PROJECT Project History 25. The proposed project was identified in 1973 and 1974. The Govern- ment and IDBI prepared it with assistance from Bank missions in May and July 1974, and appraisal took place in October-November 1974. Negotiations were held in April 1975 with an Israeli delegation headed by Mr. H. Stoessel, Accountant-General in the Ministry of Finance; IDBI was represented by Mr. D. Friedmann, Joint General Manager. The Project 26. The project consists of three complementary components supporting the Government's industrial development strategy: (i) industriUl financing through IDBI, of projects producing for exports or which are located in less- developed regions of Israel; (ii) industrial research and development (R&D), administered by the Office of the Chief Scientist (OCS) in the Ministry of Conmerce,and Industry, and involving strengthening of the Government's capa- city to appraise and supervise R&D programs and support for six identified and prepared R&D activities; and (iii) vocational/technical training, ad- ministered by the Ministry of Labor, designed to increase Israel's output -8- of middle and high-level technicians and skilled workers to meet projected manpower shortages. All project activities would be carried out within Israel's borders as of January 1, 1967. The project is expected to be com- pleted in five years. In view of its composite nature, the Bank loan would be made to the Government, with on-lending to IDBI for the industrial financ- ing component. The details are provided hereunder and in the Loan and Proj- ect Summary in Annex III. A report entitled "Appraisal of an Industrial Development Project -- Israel" (No. 656a-IS) dated May 7, 1975 is being dis- tributed separately to the Executive Directors. IDBI Component 27. Industrial financing under the project, for which $25 million of the Bank loan is allocated, would be carried out through IDBI. The Bank has so far provided three loans to IDBI totalling $60 million, all of which have been satisfactorily implemented. The Government would onlend $25 million from the proposed Bank loan to IDBI, with amortization substantially in conformity with the aggregate amortization schedule of IDBI's subloans financed out of the proposed Bank loan, interest at the Bank's lending rate and a commitment charge of three-quarters of one percent (L.A. 3.02(a)). Signing of an on- lending agreement satisfactory to the Bank would be a condition of effective- ness of the proposed Bank loan (L.A. 8.01(b)). The funds onlent to IDBI would support only private sector projects located in the less-develoned regions of the country, and export-oriented projects wherever located, in line with the Government's development objectives (L.A. Schedule 2). A good part of these projects would be in industries employing sophisticated tech- nologies, which the Government is eager to promote. The Bank funds are ex- pected to be committed by June 30, 1977. About half of IDBI's recent lending has been for terms of 6-8 years, and about one-third for 9-13 years and occasionally more; however, its pipeline contains a number of large projects with long gestation periods which will require an increasing proportion of loans with the longer maturities. Sub-loans to be financed from the Bank loan would have a maximum maturity of 13 years. IDBI's lending rates are set in accordance with Government policy on development loans (see para. 20) and are expected to average between 10 and 11 percent on Bank-funded sub- loans; IDBI's spread will average 1-3/4 percent. IDBI makes its loans in Israeli currency. The Government will bear the foreign exchange risk, in accordance with arrangements to which the Bank agreed under the third loan to IDBI, and with the prevailing practice regarding private companies. In view of IDBI's capacity and past performance, the free limit on sub-loans would be raised from $750,000 to $1,000,000, with an aggregate free limit of $12,500,000 (L.A. 3.01(b) and (c)). 28. IDBI has an experienced management team and competent staff and is efficiently run. It has a notable record of performance since its creation in 1957, in terms of both financial assistance to industry and development impact. It continues to be the most important development finance institu- tion in Israel, with assets of IL 2.4 billion as of September 30, 1974, and loan approvals which have increased in amount by 30 percent per annum since 1968. It provided 30 percent of total financing for industrial investment between 1969 and 1974. IDBI is also an important instrument of Government industrial policy. Its portfolio is diversified and sound. Arrears are well -9- within acceptable limits and provisions for losses are adequate. Administrative expenses are low. Earnings have shown steady growth and have represented a return of 15-16 percent on non-Government held share capital in recent years. IDBI's project appraisal methods pay suitable regard to economic criteria, and its follow-up work will be strengthened by the recruitment of additional staff. 29. IDBI has been reasonably successful in mobilizing resources abroad. Between July 1970 and June 1974, it raised $155 million equivalent in foreign loans and debentures, including loans from a dozen new sources in the US and Western Europe. This represented about one-half of its total resource require- ments. At home, the Government's policies have restricted IDBI's access to the capital market. However, the Government has willingly provided a large part of IDBI's local currency needs, as part of its program of development loans, and plans to remain its major source of such funds. IDBI forecasts ccommitments of IL 2.8 billion (some $470 million) over the period July 1975 - - June 1977, based on its pipeline and realistic projected growth rates of industrial investment. About half will be in local currency and will be covered by internally generated funds, debentures, and loans or other receipts from Government, which will cover any shortfall. About half of the foreign currency requirements totalling IL 1.4 billion, or some $240 million equiva- lent, will be covered from existing lines of credit or new loans at various stages of negotiation. The rest will be covered by as yet unidentified sources, and by the proposed Bank funding of $25 million, equivalent to 10 percent of requirements. IDBI will have to further intensify its resource mobilization effort abroad, and is expected to continue its past success. 30. IDBI has reached and, as a direct result of the November 1974 de- valuation, possibly exceeded the limit of 3:1 on its overall debt-equity ratio agreed under the previous Bank loan. This ratio is conservative for an institution as financially strong as IDBI, and it would be raised to 5:1 under the proposed loan (P.A. 3.03(a)). IDBI's ratio of secured debt to equity would also be raised, from 2:1 to 5:1 (P.A. 5.01). Even so, IDBI is expected to experience some pressure to increase its equity base. IDBI has agreed that its loans and advances to, or investments in, subsidiaries in which it has a majority shareholding would not exceed 20 percent of its own unimpaired paid-up capital, surplus and free reserves (P.A. 3.02). IDBI has operated over the years with a current ratio less than one, keeping its resources fully committed and relying for short-term needs on its long- standing arrangements with the Bank of Israel. It will continue to have its accounts audited by independent external auditors acceptable to the Bank (P.A. 3.01 (b)). 31. Between 1974 and 1979 IDBI's loan portfolio is expected to grow by 28 percent per annum. Net earnings would grow by 13 percent per annum to provide an increasing rate of return on share capital, even though the equity base is likely to be expanded. Debt service coverage is projected to be satis- factory. IDBI's liquidity, provisions against losses, and build-up of other reserves, are projected to be sufficient. Overall, IDBI's financial position is sound. - 10 - Industrial Research and Development Component 32. The industrial research and development (R&D) component, for which $5 million of the Bank loan is allocated, is the first of its kind to be fi- nanced by the Bank. It would assist OCS to make technological, financial and commercial appraisals of R&D proposals and supervise their implementation. The Bank loan would also help finance six identified and prepared R&D activi- ties with industrial and commercial application, which have been closely de- fined (L.A. Schedule 2, Annex B). The first is the expansion of facilities of the Negev Research and Development Authority, which is associated with the Ben-Gurion University of the Negev and provides R&D and technical services to industrial enterprises and university laboratories, by the provision of a unit process laboratory and a testing service facility. Of the other five R&D activities, two are subprojects at the stage of pre-commercial development (ponds to collect and store solar energy, liquid wax from jojoba beans), while three involve the development of commercial prototypes (rural telephone system, a range of prime movers (engines), improved tomographic scanner (for X-ray diagnosis)). 33. The six activities proposed for Bank funding were selected after appraisal of nine "projects of national importance" submitted by the Govern- ment. All nine were reviewed for their commercial and technological feasibil- ity and potential spin-offs; potential benefit to Israel's economy; usefulness of the prospective technology to other developing countries; and overall capability of the undertaking entity. Those projects involving private firms wcere also reviewed for possibility of market success; inability of the sponsor- ing finr to borrow for R&D or self-finance; and the experience, ability to commiercialize technology, and financial strength of the firms. The ability of the Negev R&D Authority to render R&D services not generally available to tn* industrial community was considered in the appraisal of this subproject. OCS will launch these projects along with a similar group not funded by the Bank, together selected a, the most promising so far prepared. 34. Since its creation four years ago, OCS has administered the rela- ;vely small matching grant program for R&D. To handle much larger and more imoortant R&D projects, it needs to develop not only the technological ap- prraisal capability typical of a scientific research granting agency, but also financial and commercial expertise sufficient for it to review competently proposals for R&D on a timetable leading to prototypes and products with specifications and selling prices dictated by a market. To do this, OCS is expected to strengthen and double its professional staff to a total of 25 by Mlarch 1976, and to continue a rapid expansion thereafter. The Government would provide the funds needed for this build-up (L.A. 5:01(a)). To help determine future priorities for the R&D activities it finances, OCS would establish a Policy Advisory Committee with representatives from industry, Government and the academic technological community (L.A. 5.03(a)). 35. Appraisal of R&D activities will be continuous. OCS will establish standing review committees, organized by technological sector, each to handle up to four projects of national importance. Each will include at least two OCS staff members, one.designated as monitor for the project being reviewed, or as an assistant monitor, to provide continuity within OCS and work and be trained under the supervision of an outside monitor, in cases where OCS does not yet have qualified staff. Committee members would have technological, financial, marketing and business planning expertise (L.A. 5.03(b)). So far, committees covering electronics, machines, and industrial crops have been created, and will supervise four of the six project activities. Others will be set up for the Negev R&D Authority and solar ponds. Initial appraisal will establish the project activities, a timetable, and outline plans for the production stage (including indications of the sources of finance) for com- mercial projects. As the project progresses, the monitor will prepare quarterly and comprehensive annual reports to the Chief Scientist, based on the sponsor's reports, reviewing progress against the agreed timetable, technological and market developments affecting ultimate success, and the revised market studies presented by sponsors. The committee will review these, recommending assistance to resolve difficulties or termination of support, as appropriate. 36. No disbursements from the loan would be permitted for any of the activities proposed for Bank financing until a review committee has been es- tablished to supervise it, and until OCS and the sponsor have entered into an agreement satisfactory to the Bank (L.A. Schedule 1, para 4 (b)(i). The reports covering Bank-funded activities would be submitted, with the review committee's and the Chief Scientist's recommendations, to the Bank (L.A. 5.05 (b)(i)). Material changes would be made only with Bank approval; an under- standing was reached that if financing of any of the subprojects were term- inated, the Bank would permit one substitution, provided initial appraisal proved feasible and the new subproject justified. 37. OCS would enter into arrangements with the sponsors of Bank-funded commercial subprojects providing, inter alia, that if successful products are developed, they would be licensed for use in other developing countries on reasonable conditions; that sponsors would contribute between one and four percent of sales of such products for ten years to a special Government fund to finance other R&D "projects of national importance", thus permitting flex- ibility in the light of experience and the financial structure and performance of the firm; and that no reference would be made to the Bank in product ad- vertising or promotional literature (L.A. Schedule 6). Ownership of the technology will, as is normal in Israel, rest with the sponsors. An under- standing was reached that OCS would report to the Bank annually on the Negev R&D Authority's degree of autonomy, activities, emphasis on contract applied research, budget, staffing, work program, methods of project selection, and internal financial controls, as well as furnish regularly updated assessments of the likely demand by industry for R&D infrastructure facilities. 38. In supervising this project component, the Bank would draw on the work of the monitors and review committees. OCS has already hired consulting accountants and would set up an accounting system designed to ensure full accountability on Bank-funded subprojects (L.A. 5.05 and 5.06). The Govern- ment would provide the Bank with that part of the Accountant-General's annual financial report to the State Comptroller dealing with OCS operations, as well - 12 - as any evaluation reports on OCS operations produced by the State Comptroller. Finally, OCS has agree to hire monitors (when no qualified OCS staff are available) and consultants to assist in reviewing Bank-funded subprojects if the Bank deems it necessary. In addition, OCS might in consultation with the Bank hire consultants to assist OCS in developing its system of R&D management and in handling other R&D projects of national importance (L.A. 5.02). A sumi of $150,000 would be allocated out of the proposed Bank loan to meet the foreign exchange costs involved (L.A. Schedule 1). Two years after completion of each subproject, OCS would prepare and submit to the Bank a completion report, covering inter alia the further development and commercial history of, and the benefit to Israel and other developing countries from, the product. One year after completion of the whole R&D component, OCS would submit to the Bank a comprehensive report assessing its overall impact (L.A. 5.05(b)(iii) and (iv)). Vocational/Technical Training Component 39. The project includes an allocation of $5 million from the Bank loan to help finance the expansion of training facilities and programs sufficient to meet about 35 and 30 percent respectively of the shortages of skilled workers and technicians projected for 1985. It comprises constructicn and equipping of the expansion of one technician/practical engineering institute (Beersheva); equipment only for two more (Haifa and Jerusalem); construction and equipping of the expansion of three vocational training centers (Haifa, Jerusalem, and Holon - near Tel Aviv); and equipment for a fourth one (Tel Aviv). These expansions would increase the number of student places in proj- ect institutions, by 760 (54 percent) at technician/practical engineering institutes and by 850 (167 percent) at vocational training centers. The proj- ect would also provide the additional equipment needed to meet new program requirements or replace obsolete equipment. 40. The technician/prac:tical engineering institutes provide post-second- ary courses lasting one year (for technicians) or two years (for senior tech- nicians or practical engineers), with an additional six to twelve months de- voted to preparation of a research project in their respective fields of spe- cialization. The proposed project institutions will concentrate on training programs in electrical/electronics fields and mechanical, instrumentation and controls, and automation technology. The vocational training centers admit trainees after 9-10 years of full-time schooling for courses varying in length from three to thirteen months. The proposed project institutions offer courses focusing on metalwork, mechanics, electricity/electronics, carpentry, needle trades and drafting. 41. To implement and coordinate all aspects of this project component, a Project Unit would be established within the Ministry of Labor's Department of Vocational Training. The appointment of a qualified and experienced proj- ect director, equipment procurement coordinator and accountant, would be-con- ditions of effectiveness of the proposed Bank loan (L.A. 4.01 and 8.01 (c)). - 13 - 42. Due to the urgent need for the extensions to facilities included in the project items, qualified consultant architects have been selected to pre- pare preliminary designs in accordance with criteria acceptable to the Bank. They would also supervise construction, along with participating institutions and the Ministry of Labor (L.A. 4.02). Space standards are based on detailed schedules consistent with accommodation requirements. Equipment and furniture needs have been appraised and detailed lists will be submitted for Bank ap- proval prior to procurement. All project institutions will be cost-effective, with double-shift working. Project Cost and Financing 43. The proposed loan would provide $35 million to finance these three components. Out of this amount, $25 million would be onlent to IDBI to meet a part of the foreign cost component of IDBI's expected total commitments of IL 2.8 billion (some $470 million) over the two-year period July 1975 to June 1977. 44. $5 million would be used to cover 60 percent of the foreign exchange cost of industrial R&D expenditures under the project. The total cost of this component is estimated at $22.3 million, and $5.6 million would come from sponsors' own funds, $6.1 million in medium-term loans from banks (possibly including IDBI) for equipment purchase and construction, and $5.6 million from the Government. The proceeds of the Bank loan would be passed to sponsors as a grant. The Government's contribution would provide $3.4 million to complete the foreign exchange requirements, and $2.2 million to cover local expenditures. The Government's proposed financing arrangements will ensure that each R&D sponsor has an important interest in the success of his subproject. 45. Vocational/technical training expenditures under the project are expected to total $15.8 million, with a foreign cost component of $5.2 mil- lion. These expenditures would be financed by $5.0 million from the proposed Bank loan, virtually covering the foreign cost component, and $10.8 million from the Government. The Government would also provide the annual running costs of project institutions, estimated at $5.7 million. Procurement 46. Procurement in the case of industrial lending through IDBI would take place through normal commercial channels. IDBI usually asks its clients for quotations from more than one supplier and satisfies itself that the quality and price are the best obtainable. For the industrial R&D component, civil works contracts would be let by sponsors following normal local competi- tive procedures. Bank funds would not be used to finance these works, which amount to only US$1.4 million and involve three subprojects in different locations. R&D equipment is- to a considerable extent specialized and pro- prietary. The individual items are of relatively small value and procurement - 14 - is spread over a period of up to five years; bulking is not feasible. Fur- thermore, there is adequate representation of foreign suppliers locally to ensure competition. As at present, OCS would satisfy itself about the need for the equipment, the actual purchase and use, and its cost. However, OCS would require the sponsor to request quotations from at least three suppliers if the value of each item is over US$20,000. For vocational/technical training expenditures, civil works and equipment supply contracts, except for residual equipment, would be awarded following international competitive bidding in accordance with the Guidelines for Procurement under World Bank Loans; furni- ture would be locally procured and would not be financed out of the proposed loan. Local manufacturers of equipment would be allowed a preferential margin of 15 percent of the CIF costs of competing imports or the existing rate of customs duty, whichever is the lower. Bid comparisons would be made in ac- cordance with the Bank's guidelines on the application of domestic preferences in bid evaluation. Items would be grouped to the extent practicable to form sizeable bid packages and to permit bulk procurement. Up to 20 percent of equipment contracts may be won by local bidders, including 10 percent ($300,000) in residual items. The Project Unit would be responsible for all aspects of bidding on equipment and would coordinate with the Department of Public Works with respect to bidding on civil works. No foreign firms are expected to submit bids on civil works, given the relatively small size and widespread locations of project items and the well developed construction industry in Israel (L.A. Schedule 5). Disbursement 47. The part of the proposed Bank loan relent to IDBI would finance the foreign exchange component of IDBI's subloans, which is the c.i.f. cost of equipment procured directly from abroad and is estimated at 50 percent of the cost of goods produced outside Israel and purchased from local suppliers, and 2o percent of the cost of goods produced in Israel (L.A. 3.01(a)). For the industrial R&D component, the proposed Bank funding would finance 60 percent uf the CIF cost of imported equipment and materials, and the foreign exchange cost of consultant services obtained from outside Israel, up to the specified limit of Bank funding for each activity and for technical assistance to OCS. For the vocational/technical training component, disbursement for equipment would he on the basis of 100 percent of the CIF cost or ex-factory price, and 18 percent of the estimated total cost of civil works, including professional services (L.A. Schedule 1). This latter percentage would be adjusted as necessary, to distribute disbursements over the period of implementation. Project Justification 48. The IDBI component would directly help to improve Israel's diffi- cult balance of payments situation through expansion of industrial exports, the Government's main policv aim. IDBI has a notable record of support of economically viable projects as well as mobilization of external resources. BoLli can be expected to be maintained. The project would further another ..mportant Government policy objective, that of spreading industry to less-developed regions. - 15 - 49. The industrial R&D component is complementary to lending through IDBI. It would assist Israel to develop institutional mechanisms to appraise and supervise R&D projects and link them to production and marketing, both at the enterprise level and within the Government's supervisory apparatus. The Bank would participate in the institution-building process, gaining new in- sights which might be applied as appropriate in other developing countries. The component would also assist Israel in making more effective use of its large body of scientists and technologists in expanding exports of science- based industries. The products to be developed could lead to substantial exports for Israel and also benefits for other developing countries to which the technology developed might be licensed. 50. Estimates of the financial rates of return, if successful, for the three R&D sub-projects where these are amenable to quantification are high; the economic rates of return are acceptable to high. However, they are neces- sarily based on tentative estimates of sales and costs and will need to be recalculated regularly as development progresses. R&D activities involve technological, financial and commercial risks which are greater than for developments involving known technologies. These risks have been minimized, in the case of the proposed activities, by careful initial appraisal and by the institution of a review process which will continuously monitor their pro- gress and developments which could affect their ultimate success. The risks involved are acceptable. 51. The vocational/technical training component would complement the other two. It would support the Government's soundly conceived manpower strategy by meeting about one-third of the projected shortages of skilled workers and middle and high-level technicians, particularly in industry, through a substantial increase in the number of training places and greater efficiency and qualitative improvement in their use. It would particularly assist early leavers from the formal school system and adult workers requiring retraining for productive employment in a changing labor market. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between the State of Israel and the Bank, the draft Project Agreement between the Bank and Industrial Development Bank of Israel Limited, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a draft resolu- tion approving the proposed loan are being distributed to the Executive Directors separately. 53. Features of the Loan Agreement of special interest are referred to in paragraphs 32 to 38 of this Report. 54. Additional conditions of effectiveness are: - 16 - (i) signing of a satisfactory relending agreement between the Government and IDBI (para 27); (ii) appointment of a project director, equipment procurement coordinator, and accountant for the project unit to carry out the vocational/technical training component (para 41). 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOITIENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 7, 1975 ANNEX I Peg. 1 or 3 Pages 0)U0Th? DATA -ISRAEL AREA POPULATION ffXMfl 70,700 lee T 3.0 f11oe (mid-1972) Pr)2faal w SOCIAL IDISCAT0OR Referenc Ceounttes I srael Sinvapore Greece Fi-lendo GNP PER CAPITA U3$ (ATLAS BASIS) /I 1, ?0, /a ' 610 /t2 1,300/2 1 ,oh /t 2,810 /2 Crud bir-th rote (pee thou-ad) ti 2 69 /2 ?l~. t5./b 12. d Crude death rate (per thrunad) U b i 9 3 /d Infant mortality rate (per thousand jive hirthe) 20 k 25/ 3/ Life exectancy- et birth (years) -0 0 70L Population gosath rate2h 04 Populatio grow.th rate - uban 1.019 Age.:u;r (eu.u 0506 yu 58 7 c9 -P. 4 Lcoe"cde,cry C;c. /2 ± l7 Ormen oupulti-on. preoat of total 70, ..8.. 100u ~/ 53 /,,P 57.1 2/d2 Fustly Thlueci,g: No of accptors es1olti-e (theus.) . No. oruf r (I of carried eases) . Total.1 c forc (thous-ds) 7 06 3,100 /d. 730 3,300 c/5 2,2~00 / Peroottago sepivyrd in egrirulture <~~~~~~~~~~~~7 3 o /P 10.1 /b Po. ulg,. oocsjlyod 3 t g ID 23 . 10100?, DSTiRIBUTION PF-r7ioca.tioaiivue rcivej by highest 5% 13 /lo, 13 /y Per. n f t reiou incm recived by bigeast 20% 39 4yce 388L Pecooc_t of_ctilclIncoe rcived by lowest 20% 7/, 2. Porno,- ofnotonel Ilcvcu. received by Ioamet LQ% ?0 7 0 / iJISTh[PIBT1o;; OF LAND O6MJjSdSiIP % .(.d bytqlcT5%_ cf eansee HEALTHi iND NUTRITIOP Po_puleti-r pe p~hyscctoe 110 /2 100/ 1_5202± 620 980 Population per nursing peron ..210/ 1,6o 1,1l,o 2± 80 L Pepulothon per bospital had 15Cco 170 270 160 80 Per ouplta coborin supply as % of requirestaoe/ 109 40 116 1i3 /Ab 106 Ill Per capite protein supply, total (grams Per day)/6 8I, P 92 63 (50 99 91 Of shich, oiceol sod pulse Li3 zf L9/2.. 3L 2 5-2,'/ 6025 Death rate I -v Y-cr I? .7- 1.0/ ..0.9 /2 0.7 EDUCATION AdJUsted .'8 -i-ory sch-cI.. ouoltent -atin 100 91.2 105 laf 109 (A! 98 AdJ_nted /8 eood.ry -ched enrollment ratio LB 56 42 7 - 60 75 Yeaf,o suh_liut provided, first and aecond leve 17 12 12 02 1 Vocational s-elleet as 5 of sac. school e..rolleont 29 1. 29 20 2± 30 Adublt litarocy rate 5 ... 7,/eg,ah 82 ~gl 99 Av-r,geA. N- ofsrO-c- per room (urban) ..±./ 2.9 k .1 0.9/2 i3 lILB Pecnt o unule oiuathanttpiped water . 1~20 Iaca 35 /2 ~ oSa Acco.soto elctn icit (aes of total population) ..97 /pan 87 ___ 8i a 96 Percetnf gora.l populations connected to electrIcity ... .73 (a 91 CONSUMPTION0 R.dSTW2 -sscirs per 110)0 Ppeletisn 191 221 /2 10i/ 112/ LI 13/b Ps.s...e cars.. per 1(50 popullation 13 65 a, 8 IL91/ 163 / Electric peoer cenecoeption (komb p.c.) 1,165 If 2,753 2 1,161,/ 1,53/ 525PI Dewopriet esnecuption p.c. kg per year 6.0 10.9,/ 10.1,l 5.6 b2 18.7 Delco. Figures cefor either to the latest periede or to ecn.fevr,asa temperature, body siiEbte, and the 1blest yoc.- lonoec periods refer in pr-niple to dietetbotlen by age end ceo of natioeal pepolatiene. the yearu 1956-60 or 1966-70; the latoest years io prii._ /6 lrovts e taodarda (rawstrameant.) f-cc1 all -trime me eatab- riple to 1960 cod 1970. liahud by 10)DA Esenoinde Raaaorh Serielo preside fsr a miniumo /2The Per Cepitu GISP el t is at market prOmo roe olocanse of 60 gracs of total pre.tls per day, 0,5 20 grom of mac- -oti,-r th-c 19500 -oculsted by the vane cos-er.ios unini and pclee protein, of which 10 gram. ubh-ld be moieu- tontoique as the 1972 World Bob Atlloy. pr-teo. These stan,dardso are somewhat 1eae than th.ee of 75 A orrge ouster of doughtere per aemon of reprdu-tive graze of total pretein and 23 gramo of aactwal protein as an g.9 overage for the seld, prepeced by PAO in the Third Warld Thed /2 opeolul- r-wth rates are for t-he denudes ending in Surey. 19,60 and 1970. /7 Sane studies have euggested that erode death ratee of childrmn /2 Ratio of pepultion under 15 and 65 and ever to ppsula- atae 1 through 1, say be uced ae a fical approlmiatlon Index of 11cr, of sges 15-61, fer age dependency ratIo and to labor e8 al-ottrtie.n 5fence o.f ages 15-61, f-reosi dependency ratio. /8 Parantags enoelled of oo-repondivg population of eschool Age /1FAG rference eta"drds repreacon. piyaiolugioaa m-a defined for nubh coatry. qairmacctn fur sereo ontloity and henith, taking a Cueputed.bytapply'ing tn tRe 1870 figure the growth rate of the GOP/rep. in ree~l tea-ee free, 1960 ts 197n; lb 1979; Data tahul.aed by year hr regietnatien rather then ereuranre; Zd 1973; La Jewish population; If. 19Ur La 1970-75 estivate; 2h 1966-70; LA. 1960-72; a4 All eettle,mete of ears than 2,000 inhabitante, eccpt thoee where at leas.t use third of the heads of houeeholds participoting in civilian labor fsrce, mar their living free agriculture lb 3961 census dots; /I City of Singapore; /2 A4uunlrpolttier and r-sunes in hlich the largest populaliuc center has 10,000 ic ur lhahitanto end the popolation of 12 ether whean ogglomeratione irrespective of their pupolotiun1 /n trbe cuun 2± Inclubdes data relatisg to certain territories under -c-pation hy Israeij Juitacy fuors. sinces June 1967; 12 971; /2 Includiog data fur East Jersaslen; /r Inoludee peresse who did not ourb in, the. cuntry woo-tg tinph oln nacloe eonthn; Ls Excluding pernsc. Ic cc-pu'scry' military service, and persoos ceekiog conk fur Eve fore- ocr /2 Doloding sined Curses; A± Exclurtiw( un-s'loyed seaeen; 2± Jewish wage eorrers house.holds; "c I 57-55! I'lI6?; Z2 HNte'r on the register, sot afl airking iolie country; 2z 1969; /2pa Coverage of data nroh_un ( 161-66; lao 1969- 70; /ad 1967; /2. 1970-71; ZL' lucluden overage studeos; /2M 15 Yearn -0 0c; h~ DefCioLi-c unIsouwc; 1st Dsta refer to h-oceolds in cove-tie...l deellinge; /2j Totol , urb-an sd r-ra; 1.4 1966; /al lUD eslatiet; Lam Inside or cutsidr; Lot PcIeretage cf occupied d-elliogo; /ao Ic.de.. Flisci., nan b,- urlecoud ana bjective c-untry bec.auv its p-c capita income and poypciticor ore ninA ar Lc Lb_e 82 March 11, 1975 AYO'EX I Page 2 of 3 pages ECONOMIC INDICATORS 080R55 IN,TIO0NAL PR8D0i!ST IN 1973 ANNlJAL RATE OF GROWTH (%, 1970 constant vrices) V03.t Mln. - . 1902 -61 l967 -72 1973 ;'!l' t M;irkct ?i fces 9.709 1C0.0 P3t6 7.5 lro(o, s nDestic Investnent 3.092 ni.6 1., 1G.° 125 Gross National davinO 743 7 J Cui roolt Accooint Balance 2.349 1. 2 Z: Lacrbs of uoals, NFS 2. 527, 26. 11 .7 1_.7 0.6 Isnort3 otf Giccd3, NFS 4.931 s0.8 C 13.c 33.2 OU7TPUT'I, LABGR 'OFRCE AND P.RCDIUCTIVITY IN 1977 Value Added Labor Force V. A. Per Worker US$ lln. _ '00 % U0 Agriculture 493 5 5 93 7.9 5.355 74.1 Industrv e3.120 76.7 418 35.5 7.464 10,.2 Services 4,893 57.5 637 54.1 7,681 106.2 Unalelocatea. 29 2.5 ,5~I1 100.0 1,177 T. 7.231 10.0 GOVERINMENT FINANCE General Government Central Government (IL Mln.) _% of GDP (_IŁ Mlln.) % ofs GDP 19'? 2 197Y 1969-71 1972 1972 1i969 71 Current Receipts 12.304 39.7 77.1 11,479 37.0 34.2 Current Expenditure 14 921 48.2 49.5 14 ,325 46.2 47.1 Current Surplus - 2.-517 124 - 2,74b Y.2 17 Capital Expenditures 2.977 9.3 9.9 2,365 7.6 8.6 External Assistance (net) 2,950 9.5 9.7 2,950 9.5 9.7 Septemb,r MONEY, CREDIT and PRICES 1969 1972 1973 1974 (Million Ig outstanding end period) Money and Quasi Money 8,051 16,401 20,539 23,263 Bank credit to Public Sector 2,85 4,4OO 4,725 7,498 Bank Credit to Private Sector 4,550) 8,302 11,635 15,h59 (Percentages or Index Numbers) Money and Quasi Money as % o1 GDP 48.2 51.6 49.3 ,. 1/ General Price Index (1963 = 100) 130.1 17h.5 209.2 292.6 Annual percentage char.ges ins 1/ General Price Index 2.5 12.9 20.0 39.8 Bank credit to Public Sector 86.2 - 5.6 - 3.6 78.3 Bank credit to Private Sector 21.6 24.6 40.1 4,.8 ...'c: All conversions to dollars in this table are at the average exchange rate prevailing during the period covered. not available not applicable ANNMX I Page 3 of 3 pages TRADE PAYMENTS AND CAPITAL FLO'WS BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1971-73) 1968 1972 1973 US $ Mln x (Millions US $) Exports of Goods, NFS 1,029 2,002 2,393 Imports of Goods, NFS - 1,699 2,923 4,771 Polished diamonds 404 33 Resource Gap (deficit = -) - M - 91 - 7378 Textiles and clothing 130 10 Citrus 111 9 Interest Payments (net) -80 -136 -164 Chemicals, rubber and plastics 100 8 Workers' Remittances 16 21 24 Food,beverages and tobacco 95 8 Other Factor Payments (net) 16 - 65 - 79 Machinery& other metal products 71 6 Net Transfers t435 1,053 2,188 All other commodities 325 26 Current Account Balance - 283 4 -70W9 Total L 236 100 Direct Foreign Investment 39 108 136 EXTERNAL DEBT. DECEMBER 31, 1973 Net MLT Borrowing Disbursements 480 1,012 1,232 US $ Mln Amortization 229Z1 432 LI 420 L4 Subtotal 251 580 812 Public Debt, incl. guaranteed 4,520 Capital Grants - - Non-Guaranteed Private Debt (1972) 332 Other Capital (net) 5 35 3 Other items n,e i 6 - 6 Increase in Reserves ( /3 -2 669 578 DEBT SERVICE RATIO for 1973- %28 Gross Reserves (erd year) 894 2,503 3,510 Net Reserves (end year) 601 991 1,517 Public Debt, incl. guaranteed 21.7 Non-Guaranteed Private Debt and other 6.5 Fuel and Related Materials Total outstanding & Disbursed 28.2 Imports 63 97 210 Exports IBRD/IDA LENDING (March 31, 1975)(Million US $): RATE OF EXCHANGE IBRD IDA Through 11/9/1974 Since 11/10/1974 Outstanding & Disbu 77 5 UISŁ 1. 00 = US $0 24 US $ 1. 00 = IŁ 6 00 Outstanding incl. Undisbursed 181.5 1/ Amortization figures include some prepayments pn bonds and some payments in local currency. 2 Ratio of debt service to exports of goods and non-factor services. 31 Does not match change in net reserves because of valuation adjustments. not available not applicable May 7, 1975 ANNEX II Page 1 of 3 THE STATUS OF BANK GROUP OPERATIONS IN ISRAL A. STATEMENT OF BANK LOANS (as at larch 31, 1975) US$ Million _ Loan oWtessTndis- Number Year Borrower Purose cancellations) bursed Seven loans fully disbursed 129.1 - 685 1970 IDBI III Development 25.0 2.6 Finance 781 1971 State of Israel. Roads II 30.0 25.2 869 1972 State of Israel Sewerage 30.0 28.6 972 1974 Israel Bank of Agricultural 35.0 21.1 Agriculture Ltd. Credit II Total 249.4 of which has been repaid 67.9 Total now outstanding 11.7 Amount sold 5.1 of which has been repaid Total now held by Bank / 181.5 Total undisbursed 77.5 B. STATHMEZT OF IFC INVESTMENTS (as at March 31, 1975) Type of Amount in US$ million Year Obligor Business Loan Equity Total 197) Makhteshim Chemical Pesticides 1.75 1.75 3.50 Works Ltd. Total gross commitments 1.75 1.75 3.50 less cancellations, terminations, repayments and sales - - - Total commitments now held by IFC 1.75 7 3.50 Total undisbursed _ …------------------------------------------------------------------__--------__ 1/ Prior to exchange adjustments ANNEX II Page 2 of 3 C. PROJECTS IN EXECUTION 1/ Ln. No. 689: Third Industrial Finance Project; $25.0 Million Loan of June 15, 1970; Closing Date: (Original) June 30, 1973, (current) June 30, 1975. IDBI was granted extensions of the terminal dates for submission of projects and for disbursements. The delay in utilizing the loan is attri- butable mainly to the need for IDBI to reappraise several large projects fol- lowing the 1971 devaluation, and to IDBI's efforts to use existing lines of credit tied to sources of procurement wherever possible. IDBI successfully mobilized large foreign resources during the period of the loan. It also improved its analysis of the economic justification of subprojects. The loan is fully committed and IDBI expects to disburse it completely before the current closing date. Ln. No. 781: Second Highway Construction Project; $30.0 Million Loan of July 14, 1971; Closing Date: June 30, 1976. Difficulties in obtaining right-of-way, extension of bidding periods, and mobilization of equipment during and after the October 1973 war are ex- pected to result in a delay of up to eighteen months in the original construc- tion program. Because of two devaluations of the Israel pound in August 1971 and November 1974, and rapid inflation in Israel, costs for the original proj- ect are expected to rise by 68 percent. The Government has submitted pro- posals to revise the scope of the project to fit with the financing available. Ln. No. 869: National Sewerage Project; $30 Million Loan of December 21, 1972; Closing Date: June 30, 1978. After a slow start, progress is now improving and is satisfactory. Completion of the original project would now take fifteen months longer than estimated at appraisal. The two devaluations and rapid inflation in Israel hiave increased cost estimates for the original project by 50 percent. The Government intends to complete the project, but over a longer period than originally foreseen, and is reconsidering construction priorities to extract maximum benefit from the early years of project execution. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any prob- lems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. AJJNLX II IPage 3 of 3 Ln. No. 972: Second AgTicultural Credit Project: $35 Million Loan of April 3, 1974; Closing Date: June 30, 1978. Progress of project activities has been very good. As of March 31, 1975, disbursements were $13.9 million. ANNEX III Page 1 of 3 ISR-AFL - INDUSTRIAL CREDIT PROJECT LOAN AND PROJECT SUT2MARY Borrower: State of Israel Beneficiary: Industrial Development Bank of Israel Limited (IDBI) Amount: $35.0 million in various currencies. Terms: (i) $25 million on-lent to IDBI: Amortization substan- tially in conformity with the aggregate amortization schedule of IDBI's sub-loans, not to exceed 13 years, financed from the proceeds of the loan; (ii) $5 million for industrial research and development (R&D) and $5 million for vocational/technical training: Amortiza- tion over 15 years including 5 years grace. Interest standard. Relending Terms: $25 million onlent to IDBI, repayable substantially in conformity with aggregate amortization schedule of IDBI's sub-loans financed from the proceeds of the loan, with interest at the Bank's lending rate and a commitment charge of 3/4 percent per annum. In turn, IDBI would relend to its sub-borrowers for a maximum period of 13 years and at interest rates of 8, 10 or 12 percent per annum, depending on subproject location. Project The project consists of three components: Description: (i) Provision of $25 million to meet part of IDBI's requirements for financing of the import component of specific industrial projects aimed at producing for export or located in less-developed regions; (ii) Provision of $5 million to help finance imported equipment, materials and consultants' services estimated at 25 man-months required for (a) strengthening the Government's capacity to appraise and supervise industrial R&D projects; (b) establishment of a basic R&D facility for the Negev R&D Authority at Beersheva con- sisting of a unit process laboratory and a testing service facility: and ANNEX III Page 2 of 3 (c) five R&D subprojects to develop a prototype non-convecting pond to collect and store solar energy; commercial cultivation of the jojoba bean and a family of commercial waxes derived from it; a telephone system for communities of between 100 and 400 subscribers; a family of engines compatible with a variety of energy sources; and a high-performance tomographic scanner; (iii) Provision of $5 million to help finance expansion of (a) three technician/practical engineering in- stitutes, to provide some 760 additional student places, involving construction and equipment at Beersheva and equipment only at Haifa and Jerusalem; and (b) four vocational training centers, to pro- vide some 850 additional student places, involving construction and equipment at Haifa, Jerusalem and Holon and equipment only at Tel Aviv. Estimated Cost: Local Foreign Total ($ million) ---- (i) Industrial finance (IDBI) 25.0 (ii) Industrial R & D 13.9 8.4 22.3 (iii) Vocational/technical training 10.6 5.2 15.8 Financing Plan: Other R & D Govt. IDBI Banks Sponsors Bank Total Industrial R & D 5.6 -- 6.1 -- 5.6 5.0 22.3 Vocational/technical training 10.8 5.0 15.8 Estimated Disbursement: 1975 1976 1977 1978 1979 1980 Annual 1.5 7.8 13.1 10.0 2.5 0.1 Cumulative 1.5 9.3 22.4 32.4 34.9 35.0 ANNEX III Page 3 of 3 Procurement Arrangements: (i) For industrial financing (IDBI): Through normal commercial channels (ii) For industrial R & D: R&D equipment is to a considerable extent specialized and proprietary. The individual items are of relatively small value and procurement is spread over a period of up to five years; bulking is not feasible. Further- more, there is adequate representation of foreign sup- pliers locally to ensure competition. As at present, OCS would satisfy itself about the need for the equip- ment, the actual purchase and use, and its cost. However, OCS would require the applicant to request quotations from at least three suppliers if the value of each item is over US$20,000. (iii) For vocational/technical training: Civil works and equipment supply contracts, except for residual equipment, would be awarded following international competitive bidding in accordance with the Guidelines for Procurement under World Bank Loans; furniture would be locally procured and financed. Local manufacturers of equipment would be allowed a preferential margin of 15 percent of the CIF costs of competing imports or the existing rate of customs duty, whichever is the lower. Bid comparisons would be made in accordance with the Bank's guidelines on the application of domestic preferences in bid evalua- tion. Items would be grouped to the extent practicable to form sizeable bid packages and to permit bulk pro- curement. Consultants: For design and supervision of construction of vocational/ technical training facilities (about 10 man-years). The firms of Tatzvit Architects Ltd. (Beersheva) and Pascual Broid Architects (Jerusalem) have been selected. Economic Rate of Return: N/A Appraisal Report: No. 656a-IS dated May 7, 1975 IDBI - FINANCIAL FORECASTS (IL Millions) Projected Total Camitments (July 1975-June 1977) 2,840 Financed by: Internal cash generation 40 Loan collections 150 Withdrawal of long-term deposits 50 Existing loans 5° Identified new loans 1, 600 Bank loan 150 Unidentified new loans 800 2,8h0 ProJected Balance Sheets Assets 1714 1975 1976 1977 1978 1979 1-arrent assets 38 5o 66 81 97 109 loan portfolio (neto4F provisions) 2,108 2,733 3,592 4,641 5,879 7,293 Other assets 608 456 363 292 243 209 Total assets 22754 3,239 !j,021 6221 7,611 Liabilities & Equity current liabilities 187 180 190 205 224 240 long-term borrowings 2,074 2,553 3,307 4,259 5,k08 6,736 equity 493 506 524 550 587 635 Total liabilities 2L754 3,239 4,021 5,014 6,219 7,611 Debt/Equity Ratio as defined in Loan Agreement 3.3 4.3 5.7 7.1 8.6 1o.0 Projected Earnings Mtal Incmne 221 286 347 430 533 655 'total Ixpenses 131 182 227 290 369 462 Provision for taxes 42 51 60 73 86 105 Vtet Profit 48 53 6o 67 78 88 as percent of year-end share capital 12.8 14.3 16.o 18.3 21.3 24.2 as percent of year-end net worth 9.7 10.6 11.4 12.3 13.3 14.0