Document of The World Bank FOR OFFICIAL USE ONLY C#e R F/ Report No.7826-MOZ STAFF APPRAISAL REPORT MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT NOVEMBER 21, 1989 Industry and Energy Operations Southern Africa Department This document has a restricted distribotion and may be used by recipients only in the performaaoce of their offciil duties. Its contents may not otherwise be disclosed without World Bank aothorization. CURRENCY EQUIVALENTS US$1 - 813 Niticais (MT) - October 1989 US$1 . 682 Meticais (MnT) - at tine of Appraisal (March 1989) MT 1000 - US$1.47 ABBJIVIATIONS AND ACRONYMS ADL Arthur D. Little BE Beneficiary Enterprise BM Bank of Mozambique BES Business Environment Study BPD Banco Popular de Desenvolvimento BSTM Banco Standard Totta de Mocambique CCADR Caixa de Credito Agrario e Desenvolvimento Rural CDC Commonwealth Development Corporation CNP Commissao Nacional de Planeamento (National Planning Commission) CREE Commissao de Relacoes Economicas Externas (Commission for External Economic Relations) ERC Enterprise Rehabilitation Component ERP Economic Rehabilitation Program ERTU Enterprise Restructuring Technical Unit GOM Government of Hozambique GPIE Gabinete de Promocao do Investimento Estrangeiro (Office of Foreign Investment Promotion) IDIL Instituto Nacional de Desenvolvimento de Industria Local National Institute for Light Industry Development IFC International Finance Corporation MA Ministry of Agriculture MCW Ministry of Construction and Water MOF Ministry of Finance MIE Ministry of Industry and Energy ML Ministry of Labor MTC Ministry of Transport and Communications PETROMOC Empresa Nacional de Petroleos de Mocambique (National Petroleum Company) PFI Participating Financial Institutions PPF Project Preparation Facility RP Rehabilitation Plan SARL Sociedades Anonimas de Responsabilidade Limitada (Public Limited Liability Companies) SNAAD System for Non-Administrative Allocation of Foreign Exchange SEILA Secretariat of State for Light Industry SETEP Secretariat of State for Vocational and Professional Education SQRL Sociedades por Quotas de Responsabilidad Limitada (Private Limited Liability Companies) UNIDO United Nations Industrial Development Organization FISCAL YEAR Government and Public Enterprises: Calendar Year , , AL_ I MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT TABLE OF CONTENTS Page No. CREDIT AND PROJECT SUIARY . . . . . . . . . . . . . . . . . . . .i-iii 1. THE ECONOMY . . . . . . . . . . . . . . . . . . . . . . . . . . 1 Background ........................... . 1 The Economic Rehabilitation Progranm and The Industrial Sector ............................ . 2 II. INDUSTRIAL SECTOR BACKGROUND .................. . 3 A. The Structure of Industrial Production, 1973-1987 ..... . 3 B. Institutional Framework ............. ... 6 C. Financial Sector .................. ... 7 D. Sector Issues and Constraints . . . . . . . . . . . . . . . . 9 E. Government Objectives and Priorities . . . . . . . . . . . . 14 F. Status of Enterprise Review ............... . 15 G. IDA Assistance .... . . . . . . . . . . . . . . . . .. 15 Past Bank Involvement ................ . 15 IDA's Role in the Sector . . . . . . . . . . . . . . . . 16 III. THE PROJECT ......................... . 16 A. Project Rationale .16 B. Objectives .17 C. Project Description . . . . . . . . . . . . . . . . . . . . 17 Enterprise Rehabilitation Component (ERC) . . . . . . . 17 Technical Assistance Component (TAC) . . . . . . . . . . 18 D. Project Cost and Financing .19 IV. MAIN FEATURES OF THE CREDIT .23 A. Credit and Onlending Terms and Conditions . . . . . . . . . 23 B. Selection of Potential Beneficiary Enterprise (BEs) . . . . . . . . . . . . . . . . . . . . . 24 C. Sample Enterprise Profiles .25 D. Enterprise (Subproject) Eligibility Criteria under the ERC . . . . . . . . . . . . . . . . . . . . . . 27 E. Subloan Processing and Administration . . . . . . . . . . . 28 This document has a restricted distribution and may be used by recipients only in the performance of their offitial duties. Its contents may not otherwise be disclosed without World Bank authorization. MOZAKIQUE INDUSTRIAL ZNTERPRISE RESTRUCTURING PROJECT TABLE OF CONTENTS V. PROJECT IMPLDKNTATION . . . . . . . . . . . . . . . . . . . . . 29 A. Institutional Setting and Management . . . . . . . . . . . . 29 B. Status of Project Preparation and Implementation Schedule . . . . . . . . . . . . . . . . . . . . . . . . . 32 C. Project Preparation Facility . . . . . . . . . . . . . . . . 33 D. Procurement . . . . . . . . . . . . . . . . . . . . . . . . 33 E. Disbursement . . . . . . . . . . . . . . . . . . . . . . . 36 F. Special Account . . . . . . . . . . . . . . . . . . . . . . 38 G. Accounting and Auditing Requirements . . . . . . . . . . . . 38 H. Monitoring and Reporting Requirements . . . . . . . . . . . 39 VI. PROJECT BENEFITS AND RISKS . . . . . . . . . . . . . . . . . . . 39 A. Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . 39 B. Risks . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 VII. SSM#ARY OF AGREEMNTS AND RECONEND&TIONS . . . . . . . . . . . 40 | MOZ^M~~~~~~IWBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT LIST OF ANNEXES 2-1 Structure of Manufacturing Industry, 1973-1987 2-2 Geographical Distribution of Industrial Enterprises - 1973 2-3 "Tutelage of Manufacturing Industry 2-4 Structure of Interest Rates 2-5 Sectoral Distribution of Credit 2-6 Evolution of Bank Credit to Enterprises by Bank and Activity 2-7 Suzmmary Data on 40 Major Enterprises 3-1 Technical Assistance Costs to the Enterprise Restructuring Unit Restructuring Technical Unit (ERTU) 3-2 Human Resources and Training Institutions in the Industrial Sector 3-3 Draft Scope of Packaging Sub-sector Study 3-4 Cost Estimates for 15 likely Project Beneficiaries 4-1 Data Sheet on Probable Rehabilitation/Restructuring Enterprises 4-2 Guidelines for ERTU Operations, Subproject Eligibility Criteria and Subloan Administration 5-1 Project Implementation Organization Chart 5-2 Bank of Mozambique-Summary Accounts, 1980-87 5-3 Monetary and Credit Developments, 1980-87 5-4 Terms of Reference for the ERTU 5-5 Enterprise Restructuring Technical Unit - Jos Descriptions 5-6 Estimated Disbursement Schedule for the IDA Credit 5-7 PCR Preparation Arrangements 6-1 Selected Documents and Data Available on Project File I1OZAMBIQU INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT CREDIT AND PROJECT SUMMARY . Borrower: People's Republic of Mozambique Beneficiaries: Ministry of Finance (MOF); Bank of Mozambique (BM); Ministry of Industry and Energy (MIE); and selected major beneficiary enterprises (BEs). Amount: SDR 40 million (US$50.1 million equivalent) Terms: Standard IDA terms, with 40 years maturity Onlending Terms: Government will pass on US$50.1 million equivalent of the IDA credit to the BM to: (a) channel US$39.9 million to BEs under the Enterprise Restructuring Component (ERC); and (b) retain US$10.2 million equivalent for technical assistance to strengthen the Enterprise Restructuring Technical Unit (ERTU) and other agencies involved in the Project, for consultancies to BEs for subproject preparation, and for training. The ERC would be channelled to BEs primarily as loans through BM. However, in appropriate cases, the Government could use this component to make direct equity investments in BEs in combination with loans according to their assessed needs for fitancial restructuring. The BM would onlend the credit proceeds under the ERC in local currency to eligible BEs at adjustable interest rates based on the structure of rates prevailing in Mozambique. The credit risk on onlending would be borne by the BM who would receive an appropriate spread as determined by the banking system. The foreign exchange risk would be borne by the Government and would be covered by the interest yield on funds onlent, net of the service charge on the IDA credit, and the onlending spread of the BM. The Government would bear the risk on any equity investments. Subloans under the ERC would have maturities of up to 15 years, including up to a 5-year grace period. Project Description: The Project's overall objective, which is in support of the Government's strategy, is to restore production and efficiency in a selected group of major industrial and agro-industrial enterprises. More specifically, the Project aims to: (a) introduce a framework and criteria for selecting enterprises for rehabilitation, based on potential economic, financial and technical viability, and on management capacity to operate efficiently and profitably; (b) finance the rehabilitation, financial restructuring and operational support to selected enterprises. The restructuring process would, where appropriate, include rationalization of capacity, privatization, technical partnership arrangements, or, if necessary, closure of nonviable operations; (c) protect the environment and worker safety; (d) strengthen Government's capacity to implement the rehabilitation - ii - program; and (e) support policy reforms and subsector reviews designed to strengthen enterprise operations in a market-oriented environment. Project Benefits and Risks:. Rehabilitation of selected major enterprises will yield high economic returns through restoration of employment and higher levels of production and incomes. Improvements in the institutional and policy framework, plus increased enterprise autonomy and competition, with more private sector involvement through joint ventures and divestiture, should enhance enterprise efficiency and profitability. The rehabilitation, financial restructuring, privatization and technical management approaches developed for enterprises under the Project will serve as demonstration cases for the design and implementation of similar programs in other enterprises. Further, the Project will aim to increase the market orientation of enterprises through improvements in financial and management information systems, with emphasis on accurate record keeping, cost controls and related training of enterprise personnel. The major risks associated with the Project stem from: (a) the economy's fragility and therefore the possibility that political and social opposition may weaken Government's commitment to the ERP reform program during Project implementation, particularly the more sensitive changes (e.g. price liberalization and state enterprise divestiture or liquidations) whb"i represent a significant departure from past policies; (b) limited Government and enterprise experience in implementing rehabilitation plans; and (c) the security situation, which might adversely affect project implementation. To mitigate these risks: (a) the Project would provide assistance in training a.nd financing tools and equipment for laid-off staff in order to alleviate the social costs and therefore, reduce the risk of resistance on the part of the public; and (b) BEs will be selected primarily on the basis: of their potential economic, technical and financial viability; that they possess a capable management team or plans are made to secure such a team; and that their operations are not seriously affected by the security situations. The ERTU is being strengthened through the services of an experienced consulting firm and enterprise management will also be strengthened and, where necessary, assisted in formulating and implementing their rehabilitation plans. Close supervision during Project implementation will be maintained to deal with problems as they arise to ensure that the environment is not adversely affected by the operations of BEs. Government commitment to, and progress so far in, implementing the reform program has been encouraging and no evidence exists of flagging Government resolve. - iii - NOWKBIOQUE INDUSTRIAL lNTRPRISF RESTRUCTURING PROJECT PROJECT COSTS AND FINANCING PLAN Local Foreign Total A. Estimated Project Costs 1/ (US$ Million Equivalent) Project Components 1. Enterprise Rehabilitation Components (Fixed investments, spares, working capital & TA) 33.5 62.4 95.9 2. Technical Assistance Component: 2.0 8.8 10.8 TOTAL COSTS 35.5 71.2 106.7 B. Financing Plan Government and enterprises 34.1 0.0 34.1 Co-financing 2/ 0.0 22.5 22.5 IDA 1.4 48.7 50.1 TOTAL 35.5 71.2 106.7 C. Estimated Disbursements: 3/ IDA Fiscal Year: FY90* FY91 FY92 FY93 FY94 FY95 FY96 Annual 1.8 6.8 11.4 15.5 8.1 4.0 2.5 Cumulative 1.8 8.6 20.0 35.5 43.6 47.6 50.1 Z of Total 3.5Z 17.02 40.0Z 71.8Z 87.0? 95.02 100.02 Estimated ComPletion Dates December 31, 1996 *Including the Repayment of PPF advance. 1/ Project Cost Estimates exclude taxes and duties. 2/ Interest to co-finance has been expressed by Italy (US$22.5 million equivalent). In addition, several bilateral and multilateral agencies may co-finance specific enterprise rehabilitation, including IFC, CDC, Caisse Central. 3/ Based on standard World Bank, Africa-Region disbursement profiles and recent disbursement experience in Mozambique. MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT / STAFF APPRAISAL REPORT I. THE ECONOMY Background 1.01 Pre-Independence. Despite its considerable natural resource base, Mozambique's principal foreign exchange earnings during colonial times derived from transit trade services and mine workers' remittances, principally from South Africa and Zimbabwe. A variety of agricultural products (including prawns, cashew nuts, tea, cotton, copra, sugar and thyme, mostly from the settler-dominated estate sector) were also exported. Industry consisted of agro-processing operations closely linked to the agricultural estate sector and import substitution activities, which were concentrated in Maputo and Beira and depended on imported raw materials, equipment, and spare parts. 1.02 The 1973-86 Economic Decline. Between 1974 and 1976, the mass exodus (approximately 90%) of the Portuguese settlers and instability in the region, which spread into Mozambique, created major disruptions throughout the economy. Industrial enterprises and agricultural estate operations were abandoned by owners, managers and skilled technicians. Industrial production, which accounted for 12% of GDP in 1973, declined by almost 50% between 1973 and 1976. Destruction of production facilities and infrastructure by armed bandits intensified after 1980, and the deteriorating security situation in rural areas had a severe impact on agro-industries. After recovering somewhat between 1976 and 1980, industrial production continued to decline thereafter and in 1986, was estimated to be about one- third of the 1973 level. Effective production capacity declined sharply to about 10-40% of rated capacity because of obsolescence, mechanical breakdowns, shortages of replacements and spare parts, and war-related damage. 1.03 Other key economic indicators have also been in decline. Between 1980 and 1986 exports fell by nearly 75%; imports decreased by more than one- third from 1980 to 1985, before recovering somewhat in 1986. Since 1980, external imbalances, aggravated by the increasingly overvalued exchange rate, have led to the rapid accumulation of external debt service arrears. Internally, difficulties attributable to inappropriate economic policies were aggravated by the deteriorating rural security situation, which even now seriously disrupts agricultural export production. / Detailed information and analysis on the economy and the sector are available in several Bank reports, including (a) Country Economic Memorandum (June 6, 1985); (b) Memorandum of the President for the 3rd Rehabilitation Credit (April 24, 1989): and (c) the green cover industrial sector "Business Environment Study" (June 20, 1989). -2- 1.04 Government efforts to reverse the decline began in 1984-86 with the introduction of the Economic Action Program. Liberalization measures introduced in the program included a foreign exchange retention scheme for selected export enterprises and a new investment code to promote foreign direct investment. These measures were not sufficient to stimulate any significant turnaround in economic performance. The economy was isolated from international and domestic market forces by centralized economic management and control. The Economic Rehabilitation Protram and the Industrial Sector 1.05 In response to the continuing economic crisis, in 1987 the Government of Mozambique (GOM) with Bank and IMP assistance, launched a far- reaching Economic Rehabilitation Program (ERP). 1.06 In addition to major macroeconomic adjustment measures, which included progressive devaluations of an extremely overvalued metical, the GOM initiated major reforms in economic management. The reforms were intended to (a) progressively reduce centralized administrative controls and encourage private sector participation; (b) encourage improved resource allocation through indirect methods such as market determined prices and credit policies rather than administrative intervention; and (c) establish more direct links between economic performance and financial results. 1.07 Industrial sector objectives included in the ERP were to: (a) restore production, (b) improve efficiency of resource use, (c) increase enterprise autonkomy and accountability, and (d) encourage a comercial business environment. Efficiency in resource allocation is being promoted by a combination of measures, including: (i) a revised foreign exchange allocation system, which became operative in 1987; (ii) more restrictive credit policies and reduced subsidies; (iii) increased freedom to adjust employment in response to economic signals; (iv) progressive decontrol of input and output prices; and (v) greater enterprise-level authority with respect to procurement and marketing. As a result of these measures, two and one half years after initiation of the ERP, enterprises are operating in a more market-influenced environment rather than under the heavily administered system of the past. To assist industrial enterprises in adjusting to this more open environment and to restore efficient production, the GOM requested the International Development Association (IDA) to help design and finance the proposed Industrial Enterprise Rehabilitation Project (IERP). -3- II. IUMJSTRUIL SWGTOR IACIGROUND A. The Structure of Industrial Production. 1973. 1987 2.01 Annex 2-1 presents the structure of manufacturing industry. Data presented are from the last couprehensive pre-independence survey and from preliminary estimates for 1987. In 1973, 1,409 registered industrial enterprises employed 98,868 workers. Manufacturing value added was estimated at 12? of GDP. Numerically, the largest group of enterprises were the 331 (mostly village-level) flour mills (average employment 5.75) and the 285 small bakeries (average employment 15). The largest operations in terms of employment were six sugar mills (5,298 workers) and 15 cashew processing operations (20,850 workers, or 212 of total employment). The food, beverage, and tobacco sub-sectors were the largest contributors to value added (44Z), followed by textiles, garments, and leather (16X), metals fabrication and engineering (13.5Z), and wood, paper, and printing (102). Several recent estimates of industrial employment and composition have been prepared from a variety of sources, but the results have been considerably divergent. A reconciliation of the latest data available from the Ministry of Labor (ML) and from the Ministry of Industry and Energy (MIE) shows an estimated industrial employment level for 1988 of 80-100,000 versus 98,868 reported in 1973. For 1984, a United Nations Industrial and Development Organization (UNIDO) study team estimated 100,000 employees for the formal sector and 50,000 for the informal sector, but these estimates appear optimistic. A 1987 ML survey, covering all enterprises, estimates for 1987 show that there were 66,500 in the manufacturing sector, 17,700 in construction, and 3,700 in public utilities. The National Planning Commission (CNP) estimates for 1987 show that there were 87.800 employed in nationally registered manufacturing enterprises. 2.02 Table 2.1 2/ traces the decline of industrial output from 1973 through 1987. Table 2.1s MOZAMBIQUE - INDEX OF INDUSTRIAL PRODUCTION, 1973-87 Al (1980 - 100) 1973 1975 1980 1981 1982 1983 1984 1985 1986 1987 Total manufac- turing output 139 87 100 103 90 70 56 43 42 45 aI/ 1980 - Base Year, 100 Source: National Planning Commission (CNP), Informacao Estatistica, 1987. 2/ Based on gross output data for nationally registered enterprises only (over 50 employees). -4- The index indicates that output for 1987 was about 72 higher than in 1986, the first increase for 7 years. The modest improvement appeared to be mainly due to donor import support programs, including the IDA First Rehabilitation Credit (Cr. 1610-MOZ), which allocated about US$35 million to industry. The recovery, however, was uneven. Major improvements in production were recorded in textiles (212), wood products (462), chemicals and plastics (16Z), and basic metals (1362). Tobacco and leather production registered declines. Preliminary indications are that industrial production increased by a further 72 in 1988. 2.03 Recent mission field surveys confirm that the composition of registered enterprises is relatively unchanged since the colonial period. due to the extremely low level of post-independence investment. Shutdowns have been numerous, and production by establishments that continue to function has substantially declined because of obsolescence and breakdowns. 2.04 Ownership Structure of Industry. In 1975, following independence, the State's decision to 'intervene' in abandoned or commercially sabotaged enterprises radically changed the operating structure of industry. After an initial "intervention' in about 300 enterprises, the 1977 law (D-L 16-75 of February 13, 1975) permitted chaniges, including full state ownership or reversion to private ownership. By 1984, the structure of ownership of 575 nationally registered enterprises was as follows: state - 114; intervened - 140; private - 294; mixed and cooperative - 27. 2.05 As a result of many restrictions placed on market-based private operation, there was little interest in, or movement towards, privatization of "interveneds or mixed enterprises until the start of the ERP. Recently, the situation is beginning to change. The Government has begun to rationalize the status of some "intervened, enterprises by grouping those within the same subsector and converting them into state enterprises. Some of those already formed are SOVESTE, E.E. (garments - 5 factories); IMOCAL, E.E. (shoes and leatherwear - 5 factories); EMPLAMA E.E. (plastics - 5 factories); and COMETAL (railroad cars and heavy steel fabrication). Other "intervened* firms have either been sold to private investors or returned to the original owners. To date, decisions related to enterprise ownership have been on a case-by-case basis. It is expected however, that the pace of divestiture will significantly increase and will take place in a more systematic fashion, through the proposed IERP. Company asset valuations and the structuring of sales agreements have been carried out by working groups within the MIE. At the larger enterprise level, a number of "intervened" companies have been sold, usually to Mozambican entrepreneurs, who are starting to become interested in purchasing assets at current devalued prices. 2.06 Industrial Location. In 1973, 412 of industrial employment and 51Z of sector value added were located in Maputo Province (Annex 2-2). If Beira were included in the ccelculations, employment and value added estimates were 572 and 712, respectively. Manufacturing activities such as rubber, plastics, chemicals, paints, metal fabrication and engineering were heavily concentrated in these two cities. Agro-based activities such as cereals milling, cotton ginning, sisal and tea production, and forestry operations were more widely dispersed. By 1987, the pattern became further concentrated because of the decline in agro-processing and an increase in the share of total production accounted for by Haputo province. This may reflect, in- part, under-reporting elsewhere. Nevertheless, reported absolute employment in manufacturing and processing in Maputo Province increased from 34,800 in 1973 to 46,400 in 1987. 2.07 Current Investment Climate. The business climate in 1987-88 has improved as a result of the ERP. Principal policy reforms have included: (a) devaluation and an increase in the relative price of internationally traded goods and lower real wages in the organized sector; (b) decontrol of pricing, distribution, and procurement; (c) movement towards non-administered foreign exchange allocation; and (d) increased efforts by the Government to stimulate local and foreign private investment through, inter alia, privatization efforts, investment incentives, and recognition of the role of the private banking sector. The increased availability of imports financed by donor aid has also been a positive factor. Nevertheless, the investment climate continues to be adversely affected by security problems, the generally poor condition of infrastructure and industrial plant, and the potential contraction of demand resulting from lower real wages. 2.08 The few indicators which are available show an upturn in activity. Foreign investment proposals to the Office of Foreign Investment Promotion (GPIE), which was established in 1985, have increased from a total of 15 for the 3-year 1985-87 period to 20 for the first 11 months of 1988. The majority of proposals in the pipeline are tourism and trade related; processing industry proposals included fish, cashew nuts, and tobacco. 2.09 Demand for Industrial Sector Production. Increased foreign exchange availability and market liberalization have created a short-term resurgence of industrial activity and consumer demand. Sustainability is uncertain until the security situation is resolved and rural areas can be reintegrated .nto the formal sector of the economy. In urban areas, the severe drop in real incomes, which has accompanied exchange rate adjustment, has eroded purchasing power at the lower levels of the economic pyramid. The Business Environment Study (BES) survey of 62 enterprises indicated that food processing activities continued to experience strong demand, but some softness was beginning to appear in sectors such as textiles, garments, shoes, and condensed milk. Soft demand for local manufactures may be due in part to a preference for newly available, higher-quality imports, particularly for shoes and apparel. Products whose principal markets are rural, such as bicycles and agricultural implements, continue to experience lagging sales and inventory buildup because of security problems that constrain access to markets. 2.10 Industrial EfficiencS. A survey of industrial efficiency based on a domestic resource cost analysis of a 40-enterprise sample has recently been completed as part of the Business Environment Study. The objective was to identify and rank industrial subsectors in terms of operational efficiency and production cost structure relative to international competition. Given the deficiencies of most enterprise balance sheets, cost accounting practices, and other data shortcomings, the results should be interpreted as only indicative. The analysis indicated that, at the ERP adjusted exchange rates, a fairly wide cross-section of import-substitution industries and some - 6 - agricultural export operations have efficient short-run marginal production costs. This is in sharp contrast to the pre-ERP prevalence of negative value added operations. The long-run efficiency of industries was less clear, emphasizing the need for detailed enterprise-by-enterprise studies before embarking on major rehabilitation investments. 2.11 Preliminary as they are, study results indicate that potential exists for development of low-capital, labor-intensive export oriented operations in the Maputo area. These operations could take advantage of a relative abundance of idle factory capacity and (by Sub-Saharan Africa standards) a relatively industrialized work force. The study also indicates that local resource-based industries such as sugar and edible oil processing and textile manufacturing are currently burdened with high input and operating costs, resulting in part from security-related uncertainty of raw material supply and subsequent low capacity utilization. B. Institutional Framework 2.12 The organization of the industrial sector reflects vestiges of a centrally planned economy. Enterprises deemed to be of national importance --whether state owned, mintervened,o or private--come under the administrative "tutelage, of central ministries. Local enterprises are under the tutelage of the provincial directorates of the MIE. Approximately 580 registered national enterprises (not all in an operative state) are under the tutelage of eleven central ministries. Areas of administrative responsibility are given in Annex 2-3. As of March 1989, SEILA was dissolved as a Secretariat, but its functions were retained in a Light Industry Department created within the MIE. 2.13 Unidades de direccao (Coordination Units) are responsible for supervision. There are a total of 11 unidades under the Light Industry Department (formerly SEILA) and 7 under the MIE, excluding energy production. Each unidade supervises a set of industrial subsectors, each containing between 10 and 30 individual enterprises. In some cases larger enterprises such as SOGERE (beverages) and ELECTROMOC (electrical services) act as the unidades for the rest of the particular subsector. SEILA was also responsible for the Directorate of Local Industries; this directorate is now the Institute for Local Industry Development (IDIL). 2.14 Until 1988, the unidades linked the enterprises with the central planning process. Their main responsibility in practice was the coordination of data for planners, based on data received from compulsory company reporting. The unidades were also responsible for price authorization, foreign exchange allocation, technical assistance, training coordination, and industry studies. 2.15 In practice, unidades varied considerably in terms of the functions they performed. More important, the level of autonomy permitted individual enterprises varied widely, especially with respect to foreign exchange allocation. In some unidades, enterprises could procure and import diractly, whereas in others all such activity was carried out by the unidade's management, and individual enterprises were charged fees for the unidade's services. - 7 - 2.16 Consistent with the rapidly changing sector environment, both de Jure and de facto relationships between unidades and individual enterprises are in a state of flux. In general, enterprises enjoy greater managerial autonomy than in the recent past. An important indicator is that many enterprises are now permitted to trade directly with each other, rather than through wholesaling intermediaries, both in domestic and international trade. C. Financial Sector 2.17 The present financial system came into being when the banking system was restructured in 1978. There are three banks, one of which, Bank of Mozambique (BM), is legally responsible for carrying out the dual functions of both a central and a commercial bank. Both BM and the second bank, the Banco Popular de Desenvolvimento (BPD), are 10O? state-owned. The third bank, Banco Standard Totta de Mocambique (BSTM), is a (largely foreign-owned) private bank. In addition, an Agricultural Development Credit Fund (CCADR) was established in 1988. 3/ 2.18 For the first decade after independence, the banking system operated mostly as a passive conduit of funds to finance p-oduction plans for the various sectors of the economy. In keeping with the Government's new economic policy, considerable changes are now under way in Mozambique's financial sector, including introduction of competition in resource allocation within the banking system. For example, while BM has held a monopoly on foreign exchange operations, a limited foreign exchange operations license was recently granted to BSTM. 2.19 Structure of Interest Rates. The structure of both lending and deposit rates of interest in Mozambique is shown in Annex 2-4 (including a translation of the Ministerial Order of 1989 which sets the most recent rates). As the Annex shows, the rates for 1981 and 1987 were very low in nominal terms, ranging from 0 to 6Z for deposits, and 3 to 102 for lending. In real terms these rates were negative because inflation levels averaged in excess of 1OZ over the period. The structure of interest rates was revised (with increased interest rates on demand and time deposits) effective January 1987, as part of Mozambique's agreements with the IMF for a Structural Adjustment Facility (SAF). Effective January 1989, the number of lending rates was reduced to 16, ranging from 14Z to 352. The number of term (over one year) lending rates has declined from 27 to 7, and the range contracted from 18-35Z to 22-34Z, with rates for most categories increasing by 4-6Z. 2.20 Interest rates are still negative in real terms, although less so now that inflation has started to decline. Under the terms of Mozambique's agreement with the IMF, interest rates would continue to be reviewed and be progressively revised to achieve positive real interest rates by 1990. 3/ A more complete discussion of the financial sector is contained in paragraphs 3.01 - 3.47 of the SMEDP (Small and Medium Enterprise Development Project) SAR (Report No. 7987-MOZ). - 8 - 2.21 Credit Allocation Policy and Sectoral Distribution. Mozambique had no active formal credit allocation policy until 1987, when a ceiling on domestic credit expansion was introduced in the context of the SAF agreements with the IMF. Under the terms of the agreements, additional credit expansion is allowed to the extent of the countervalue in meticais of certain foreign exchange resources, such as IDA Credit loans. 2.22 Credit Ceilings. For 1988, the ceiling on domestic credit expansion was Mt 74 billion, of which Mt 20 billion was for lending to the State and Mt 54 billion for lending to the economy. The level of bank finance available to the State declined significantly in real terms. This shift partly reflects changes in the channelling of financial resources to State enterprises, in the context of rationalization of their operations, as well as increasingly tight controls on the Government's budget and the desire to make adequate funds available to the economy to stimulate growth. 2.23 Provisional figures for 1986 show an actual expansion in domestic credit of Mt 64.9 billion. In 1986, BM accounted for 792 of total bank lending, BPD for about 182, and BSTM for about 32. By year-end 1988, these figures were 69.52, 23.62, and 4.32, respectively, with the remaining 2.62 lent by the newly established CCADR. More significant perhaps are the various institutions' shares in incremental lending in 1988: BM lent less than 482, BPD accounted for about 37Z, BSTM for about 72. and CCADR for about 92. 2.24 Sectoral Distribution. In recent years, agriculture has accounted for around half of total bank lending; of the remainder, industry accounts for about 172 (39-422 if primary transformation of agricultural products is included), construction for about 5-72, transport and communications for around 12-14Z, domestic trade for some 7-92 and foreign trade for 62. Data for BM (Annex 2-5), which are fairly indicative since BM has accounted for 852 of industrial lending, suggest that manufacturing receives only about 112 of total lending. As of year-end 1988, BM accounted for 702 of total lending to industry, down from 852 in 1986, and BPD and BSTM accounted for 13.52 and 12.92, respectively. The newly established CCADR accounted for 3.5Z. BPD does not at present lend to the construction and trade sectors and only recently has it lent to the transport sector; BSTM has less than a 32 share in lending to construction and transport but an 11-132 share in lending to the domestic trade sector (Annex 2-6). ,.25 Banking System Arrears and Capital Base. The banking system faces a serious arrears problem, which has arisen from several sources. A significant portion of the arrears dates back to independence, when many Portuguese owners of firms left the country. Another portion stems from directed lending by the state-owned banks (mainly BM and BPD), largely to state enterprises and intervened firms. Much of this lending covered operating deficits. Total figures for this type of lending, and for arrears arising from it are not currently available. Since 1987, the Government has covered enterprise operating deficits through direct fiscal subsidies. The level of subsidy has been reduced substantially from Mt 9.1 billion in 1987 (most of which went to the agricultural sector) to Mt 6.8 billion in 1988. - 9 - 2.26 The Government has begun to address the arrears problem in negotiations with BH, which holds most of the arrears (about Mt 40 billion). This amount represents only the principal in arrears, since BH does not accrue interest on doubtful loans. The proportion of these arrears in BM's overall portfolio is declining. In 1986, the proportion of arrears stood at 41Z; by December 1987, they had declined to 34Z and by December 1988, they were only about 152. Other arrears deemed reprogrammable have declined from 42Z of the total portfolio to 212 over the same two years. Reprogrammed amounts now constitute 25Z of the portfolio and doubtful debts have remained fairly stable at about 6?. In the meantime, BM's healthy portfolio has increased from 132 to 332 (or to 58Z if rescheduled amounts are included, and to 732 if the amounts the state has agreed to assume are also included). BH's equity and reserves also increased substantially in the last quarter of 1987, to Mt 25.9 billion; the adequacy (or degree of inadequacy) of this figure is quite difficult to judge because the extent of unrealized foreign exchange losses that may be allocated to the commercial banking function of BH is uncertain. The other two banks have begun similar negotiations with the Government. The total amount of debt the state will assume has not yet been decided. If the banks had to recognize the full extent of their current arrears as losses, they would have negative net worth, given the banks' narrow capital base. The capital-to-assets ratio was about 42 for BH in December 1987 (after an 82? capital increase), 2.32 for BPD, and 1.1Z for BSTM. Assurances about timetables for clearing the commercial banks' lending arrears, and overall rehabilitation of the banking system, are being sought in the context of the Small and Medium Enterprise Development Project (SMEDP). D. Sector Issues and Constraints 2.27 The constraints facing the industrial sector, which include antiquated plant and equipment, often unclear ownership, deficient financial structure, and underqualified management will clearly affect its capacity to respond to the expanded market opportunities that the new policy environment has made possible. 2.28 Initial supply response difficulties since the ERP began have highlighted a series of macro and enterprise-level constraints that must be addressed if the industrial sector is to respond fully to the opportunities inherent in Hozambique's changing circumstances. The following summarizes the latest developments and/or recent policy changes relevant to the industrial sector and areas where further work is needed. 2.29 Exchange Rate Adjustment. The ERP-induced devaluations have helped to rationalize the structure of domestic resource costs vis-a-vis foreign equivalents. Mozambique has become, in international terms, a low-labor-cost producer (in terms of salary, if not as yet in terms of unit cost). The policy of flexible exchange rate adjustment will be maintained, with quarterly reviews in light of actual price developments in Mozambique and abroad, and with a view towards narrowing the gap between the official and parallel market rates. 2.30 Foreign Exchange Allocation. The heavy reliance on external assistance, much of which is provided only on a tied basis, requires the - 10 - continued use of a system for centrally administered direct allocation of foreign exchange. While such a system is necessary, the Government will seek to enhance the operation and efficiency of the allocative mechanisms. As devaluation reduces the level of excess demand for foreign currency, a staged opening up of access to foreign exchange is becoming feasible. The Government has initiated liberalization of the foreign exchange allocation process by setting up two funds. The "Market Fund' provides foreign exchange for the purchase of inventory for trading companies, and the 'Small Enterprise Fund" finances inputs for a short list of 180 designated enterprises. In 1988, a total of US$6.0 million was disbursed from both funds. The fund allocation for 1989 is expected to total US$25 million. With the objective of progressively moving toward a more open trade regime, in 1989, a System for Non-administrative Allocation of Foreign Exchange (SNAAD) is being introduced through the Third Rehabilitation Credit (Cr. 2021-MOZ). In the first year of operation, foreign exchange and import licenses will, on request, be automatically granted for a narrow range of imported inputs (spare parts for cargo and collective transport, and key inputs to the garment and shoe industries). These products will not be subject to domestic price control regulation. The estimated value of foreign exchange to be dedicated to the SNAAD is US$25 million, or about 20 percent of projected "free' exchange for imports during 1989. 2.31 Regulations require that a metical-denominated countervalue of the foreign exchange requested mist be deposited in the BM before the foreign exchange can be utilized. Mission conversations with individual enterprises indicate that a metical scarcity--a result of devaluation and inflation--is impeding some firms from solicitiag foreign exchange. Access to metical countervalue through the local banking system by BEs to be rehabilitated will be an essential part of the IEPP. Operational sustainability of rehabilitated enterprises at satisfactory levels of capacity utilization will require that they have assured access to foreign exchange for the procurement of recurrent imported raw materials and spare parts. 2.32 The Foreign Exchante Retention Scheme, introduced in 1984, entitles exporters to hold a proportion of their sales proceeds at the BM in a convertible account. The proportion retained is variable, with a current average of about 50X. The retention account is normally denominated in meticais and is therefore convertible only at the prevailing exchange rate. Import licenses are granted only after the Ministry of Trade checks for possible local supply availability. A further issue concerns the mechanism for transfer of import entitlements to enterprises supplying the export sector. Refinement of this system in the short run would be beneficial; in the long run, the implications of this system to the economy-wide allocation of foreign exchange merit closer examination. The Government will seek to reduce the export retention rates as the scope of the SNAAD expand, and, with this objective, will review the rate structure in 1989. 2.33 Tariff and Taxation Policy. Before the ERP, fiscal and tariff structures were complex, with a system of turnover taxes and tariffs that had a cascade effect, acting as a disincentive for the use of domestic intermediaries in the absence of quantitative restrictions. The realignment of the currency and the progressive opening of foreign exchange allocation will r.ow permit the price of foreign exchange to play a more important - 11 - allocative role. In line with the Policy Framework Paper (PFP), which has been agreed to with the Bank and IMF, the Government is implementing a two- stage reform of the tax and tariff structure. The first stage, completed in early 1989, concentrated on converting specific rates to ad valorem rates and simplifying rate structures through the consolidation of product categories and reduction in the number and range of rates. 2.34 The legislation also: (a) established a duty drawback scheme for export production with at least 35? local value added; (b) provided exemption for one-half of import duties for raw materials, equipment, and spare parts for import substitution projects with at least 45? local value added; (c) established the possibility of full tariff exemption for raw materials, equipment, and spare parts for export expansion projects; and (d) revoked all existing regulations pertaining to customs tariff exemptions. Measures were also initiated to strengthen the administrative capacity of the Customs Administration. During the second stage of tariff reform, to be completed by end-1989 under the Third Rehabilitation Credit, progress will continue in simplifying the system and harmonizing the tariff nomenclature with international conventions. 2.35 Pricint Policy. Reduction of the incidence of fixed pricing and replacement of ex ante authorization for price changes with ex post review have been key improvements in the industrial sector's operating environment. Those industrial products still subject to fixed pricing are cigarettes, beer, soap, wheat and corn flour, sugar, and cooking oil. All others are subject to price controls. Fixed prices are being periodically adjusted in relation to international prices. As supply conditions and competition improve, the GOM plans to adopt a more flexible pricing policy. 2.36 Distribution Policy. All industrial products except sugar are now freed from trading through monopoly trading corporations. All enterprises are now permitted to trade directly; state trading companies are expected to compete with the private sector. Control over foreign procurement is still exercised through the foreign exchange allocation system and import licensing. Administrative control over allocation of some essential industrial goods (e.g. flour) will be continued through rationing in Beira and Maputo and through priority rural distribution. 2.37 Enterprise Debt, Asset Revaluation, and Financial Restructuring. During the pre-ERP period many enterprises--state-owned, 'intervened," and private--accumulated large debts from sustained operating iosses, often due to price controls, which were subsidized by virtually unlimited credit from the BM. The combination of sustained operating losses, excessive debt, depreciated currency, and now-unrealistic depreciation allowances and understated asset values renders many enterprise balance sheets virtually meaningless. Financial restructuring will therefore be a central element of enterprise rehabilitation contemplated under the IERP. Decree 13/88 requires revaluation of all assets by enterprises, beginning with the balance sheets for fiscal 1988. To simplify the process, the revaluations will be carried out in accordance with a series of monetary correction coefficients issued in January 1989. - 12 - 2.38 The Government has so far taken steps to transfer about Mt. 8.0 billion of the debt of ten State and *intervened" companies to the Central Budget, where revised terms and conditions of repayment will be worked out (para. 2.26). However, the Government has not considered the possibility of restructuring private company debt in this manner. Some individual debt reschedulings have also been arranged through the BM. The BM and Ministry of Finance (MOF) have begun to deal with the resolution of pre-ERP internal debts on a case-by-case basis for parastatal and "intervened' enterprises. Restoration of financial stability for each enterprise will be a subloan condition for enterprises supported under the IERP Credit (para. 4.13). 2.39 Accounting, Auditing and Financial Management Practices. A review of auditing, accounting, and financial management practices of both public and private enterprises was carried out by the World Bank's Internal Auditing Department (IAD) in 1987. The review team found that: (a) a system of standard accounts had been instituted in 1984; (b) because of a scarcity of trained accountants, the accounts of many state enterprises were in arrears; and (c) internal auditing quite often was deficient. Enterprises are currently required to submit annual financial statements to the MOF within four months of the end of the fiscal year. External udit of enterprise accounts is not required in Mozambique, and there is almost no independent accountancy profession. In fact, until recently, there were no public accounting firms in the country and there were only several dozen individual accountants with private practices. Some auditing for tax purposes is undertaken by a small unit in the Ministry of Finance (the Department of Audit and Tax, DAT), and some accounting firms are now showing interest in setting up offices. One local firm is carrying out company valuations on behalf of the Office of Foreign Investment Promotion. The recently promulgated decree requiring updated asset revaluation of all enterprises, though urgently needed, will impose an additional demand for expertise that is in very short supply in Mozambique. Larger firms often contract expatriate accountants. As a response to the shortage of accounting and auditing expertise, the MOF has already authorized a mixed ventu-e with an international firm of chartered accountants and will soon authorize a second. Several large international accounting firms are also considering establishing offices in Maputo. The Commercial Institute of Maputo (CIM), a Government entity, is the only commercial training institute in Mozambique. It offers a concentration in accounting, approximately equivalent to the U.S. Bachelors degree. The lack of affordable and competent financial management expertise is a major constraint to expeditious preparation of plans for the financial restructuring of enterprises. 2.40 Incentive System. Between 1984 and 1986 a variety of measures with the stated objective of promoting private investment in productive activities was introduced. Their cumulative impact was marginal in the face of the fundamental policy, regulatory, and security barriers to most private investment activity. Since initiation of the ERP, considerable progress has been made in policy and regulatory areas to encourage private sector activity, but not much more than a modest recovery of investment activity can be expected regardless of the nature of the incentive system, until the security situation improves. - 13 - 2.41 The Foreign Investment Law of 1984 and the domestic investment law of 1987 established modest systems of incentives including tax holidays, accelerated depreciation allowances and investment credits, and exemption from payroll and turnover taxes and import and export duties. All exemptions are usually negotiated on a case-by-case basis. Export operations are also able to negotiate foreign exchange retention schemes in order to procure imported inputs directly. Recent legislation has established a duty drawback scheme and a partial customs duty exemption for qualifying import substitution operations. Legislation to permit debt-equity swaps, through which foreign investors could acquire Mozambican assets in return for assumption of external debt, was promulgated in January 1989, but as of April 1989 had not yet been utilized. The legislation requires investment in fixed assets, technology, or foreign currency that is complementary to the swap. The legislation protects foreign investors against exchange rate risk but also contains restrictions on repatriation of capital and acquisition of cleat _.tle to "intervened" enterprises. 2.42 Legal and Regulatory Framework. The overall question of company formation and ownership has been partially addressed by the Government through legislation relating to 'intervened" enterprises. The Government has sold off assets abandoned by previous owners and has come to specific agreements with new owners. Conditions of sale have been that the company is retained for its original purpose (otherwise a new license is required) and that labor is retained in acccrdance with the labor protection laws. Sales are negotiated case by case; however, no general clarification of the legal position of "intervened" enterprises has been made (Decree Law No. 16- 75 dated February 13, 1975). The Government has expressed the intention to determine the legal position of intervened enterprises and, in general, to deal with the question of company formation and ownership for the benefit of attracting new investors. Agreement was reached at negotiations that, with IDA support, the Government shall, not later than December 31, 1990, prepare and complete an action plan to determine the legal ownership status of enterprises under Government intervention, and promptly thereafter, take all legal and administrative measures necessary to implement the Plan. Not later than June 30, 1993, the Government would, jointly with IDA, undertake a major review of progress in implementation of the Plan. Progress would also continue to be monitored as part of the normal Annual Project Implementation Review. 2.43 Labor Laws. Until January 1987, employment was governed by Law 4/80 of 1980, which set out 4 basic occupational categories. This system was inflexible and detracted from efficient use of labor. In 1985, a considerable amount of labor shedding took place, and in January 1987 Decree 5/87 implemented a new labor law setting 20 grade ranges in industry, specifying new pay levels, and allowing supplementary payments such as performance-linked and seniority bonuses. During implementation, a series of interim increases were permitted to offset part of the effects of devaluation-induced price increases. The aim was to permit more flexibility in employment by rewarding efficiency and allowing enterprises to lay off workers. It is intended that these measures will allow wage costs to reflect operating conditions more accurately. The prevailing base minimum irdustrial wage in March 1989 was Mt 16,000/month. The prevailing range is Mt 20-30,000 - 14 - per month for production workers. Total employer costs are approximately twice the base salary. 2.44 Enterprise ManaRemet. A certain level of competent management (most often found in privately owned import substitution industries--e.g., food processing, light metal fabrication, etc.) does exist, but quality varies widely among enterprises. The situation in the parastatal, and especially "intervened' enterprises is critical. Typically, management is not sufficiently qualified in technical, marketing, and financial management skills and has matured in an essentially non-competitive environment where most allocation decisions were made at unidade levels. In many 'intervenedo enterprises, the skills required to identify markets, prepare financial and physical rehabilitation programs, and obtain term finance simply do not exist. Skilled supervisory and engineering personnel are also in short supply. Shortages of managerial and technical skills must be regarded as a principal constraint to sector rehabilitation. E. Government Objectives and Priorities 2.45 Government objectives for the industrial sector are to restore production and efficiency and to develop a commercial business environment. To achieve these goals, Government has assigned high priority to: (a) selective investments for rehabilitation, financial restructuring, and privatization of potentially viable major enterprises; (b) improving the policy and incentives system; (c) allocating sufficient resources to manpower development; (d) support for the development of small and medium-scale enterprises (SMEs). The proposed IERP supports strategies (a) - (c). In 1987, the Government undertook the ERP, a far-reaching reform program, which incorporates this strategy and has resulted in some supply response (paras.1.05 - 1.07). However, it will take some time for most of the recent reforms to work through the system, for the shift and reallocation of resources to take place, and, thus, for restructuring to be accomplished. The Government has begun to address some outstanding issues in the sector by: (a) setting up an Enterprise Restructuring Technical Unit (ERTU) in the MOF in 1988 to provide the institutional framework to coordinate the overall rehabilitation program (para. 5.09); (b) preparing rehabilitation and restructuring plans (which may include privatization where necessary) for priority enterprises on a case-by-case basis; (c) initiating studies that will be the basis for reforming the corporate legal framework; and (d) carrying out subsector studies, which may include recommendations on the rationalization of capacity or closure of non-viable enterprises (para. 3.10). Given the large magnitudes, it is unlikely that the Government can raise enough resources in the short term to rehabilitate the entire enterprise sector and restore production to its pre-1975 peak. Moreover, rehabilitation of some production capacity may not be economically justified. Sectoral strategy is, therefore, viewed as essentially a two-phase process: first, cost-effective rehabilitation of selected enterprises to restore production over the short run, and second, a higher level of capital investment to sustain modernization,and rationalization over the medium and long term. - 1S - F. Status of &nterprise Review 2.46 The Industrial and Agro-industrial Enterprise Review of 40 enterprises, completed early in 1988, formed the basis for the design of the IERP. The international consulting firm of Arthur D. Little was contracted to undertake this review, which was carried out at two levels. First, a sample of 40 enterprises, with characteristics representative of the large scale enterprise sector, were selected for the initial sectoral review. Subsequently, 15 enterprises were selected for prefeasibility level review. The prefeasibility studies for all fifteen enterprises have been completed. 2.47 According to the Review, most problems that enterprises face center around four issues: (a) impaired production capacity due to lack of foreign exchange; (b) inappropriate policy environment; (c) scarcity of managerial and technical skills; and (d) security. Donor balance of payments support is assisting Government to address (a) and (b) within the framework of the ERP. The study recomuended that given the delicate economic and security situation, priority be given to rehabilitatior. of enterprises with high marginal returns, especially those that can either save or generate foreign exchange, those with basic managerial competence and those located in relatively secure zones. This strategy was followed in selecting the 15 enterprises for prefeasibility review and in designing the proposed project. The prefeasibility studies and subsequent feasibility studies will be used to prepare each enterprise's rehabilitation plan, which will include plans for physical rehabilitation, financial restructuring, and strengthening operational capacity (para. 4.10). If they meet the eligibility criteria, the 15 firms would form the core group of BEs for the IERP foreign exchange credit line. Annex 2-7 provides a snapshot view of the 40 enterprises. G. IDA Assistance 1. Past Bank Involvement 2.48 IDA has so far made eight credits to Mozambique, both general balance of payments support and several project-based investment credits in various sector operations. At the macroeconomic level, IDA has already provided imported inputs and spare parts to the industrial sector through the First and Second Rehabilitation Credits, approved in 1985 and 1986, respectively, and will continue this type of balance of payments support under the Third Rehabilitation Credit approved in 1989. At the operations level, project investment aims to support restoration of production (and increased productivity), efficiency, and competitiveness. In parallel with the IERP, a project is being prepared to assist smaller enterprises via provision of an APEX credit line for foreign exchange requirements, technical assistance for the SME sector, and training in project and credit analyses for selected staff of participating banks (BM, BPD, BSTM). The Small and Medium Enterprise Development Project (SMEDP) will emphasize support for the emerging private sector entrepreneurs. In addition, the proposed Economic and Financial Management Technical Assistance Project was recently negotiated. Through the project, IDA would help finance institutional support to strengthen the capacity of key economic decision making agencies involved in the implementation of the ERP. IDA's program of sectoral support - 16 - will benefit from the Business Environment Study, which will enable the Bank to advise the Government on industrial strategy 4nd policies beyond rehabilitation and recovery. IDA's dialogue with the Government, together with recent Government policy initiatives, suggests a strong determination to come to grips with the constraints in the enterprise sector, and a convergence of views is emerging on how to resolve some of these issues. Continued Bank involvement over the medium term is important to support and assist in deepening the reform process and in maintaining the momentum of economic recovery. 2. IDA's Role in the Sector 2.49 IDA's assistance strategy to Mozambique is consistent with the ERP and aims to provide: fast-disbursing support for the Government's broad policy initiatives to rehabilitate and restructure the economy by reducing or eliminating macroeconomic distortions and addressing structural constraints to economic growth; and project-based investment lending to facilitate the resumption nf production, employment, and incomes in the productive sectors. The IERP would complement the Government's efforts by emphasizing: (a) enterprise rehabilitation to restore output or increase the rate of capacity utilization from the current low levels (10-30Z) within existing production capacity; (b) restructuring of enterprises to restore financial stability; and (c) strengthening management and operations to improve competitiveness. The strategy views rehabilitation as having two levels. In the short term the objective is to restore production in those facilities that are still usable and that require relatively small investment in spare parts and upgraded equipment; over the medium and long term, much higher levels of investment in modernized plant and equipment will be required to sustain sector recovery in a more competitive external and liberalized internal environment. III. THE PROJECT A. Project Rationale 3.01 The IERP is an integral part of Government's strategy to resuscitate production and growth in Mozambique and complements the ERP's medium-term policy framework for economic recovery. The Project would aim to rehabilitate and restructure about 15 key enterprises that are considered important for a supply response and growth in the sector. The Project aims to build an institutional framework and approach to enterprise rehabilitation and restructuring that could form the basis for a continuing rehabilitation program. Review of the legal ownership status of enterprises under Government intervention under the Project is supportive of the move towards greater private sector involvement and a more market-oriented economy. IDA's involvement--through general policy dialogue, three rehabilitation credits and several project-based investment credits--has contributed significantly in shaping the Government's strategy and priority setting under the ERP. IDA's further involvement through this Project will help broaden and deepen the recovery program and is viewed by the Government as necessary to sustain the momentum of reform, to generate an adequate supply response, and to - 17 - encourage other donors (many of whom have already given strong support to the ERP) to support these efforts in a well-coordinated manner. B. Obiectives 3.02 The IERP is designed to: (a) introduce a framework and criteria for selecting enterprises for rehabilitation that is based on each enterprise's potential economic, financial, and technical viability and on its management capacity to operate efficiently and profitably and that they undertake to introduce measures to protect the environment; (b) finance rehabilitation, financial restructuring and operational support to preselected and potentially efficient major enterprises. The rehabilitation and restructuring process would, where appropriate, include rationalization of capacity, privatization, technical partnership arrangements, or, if necessary, closure of operations; (c) require that each BE institute measures to protect the environment and worker safety; (d) strengthen Government's capacity to implement the rehabilitation program; and (e) support policy reforms and subsector reviews designed to strengthen enterprise operations in a more liberalized, market-oriented environment. The project is conceived as a pilot effort that would develop an approach that could be replicated in other large-scale enterprise rehabilitation, restructuring, or privatization efforts. C. Project Description 3.03 The Project, with a total cost of US$106.7 million (including IDA credit of US$50.1 million equivalent), would consist of two components: an Enterprise Rehabilitation Component and a Technical Assistance Component. A brief description of each is given below. 1. Enterprise Rehabilitation Component (ERC) 3.04 The ERC would assist the rehabilitation and financial restructuring of about 15 selected enterprises. Funds allocated for rehabilitation would finance fixed investments (the repair, replacement, or modernization of obsolete or damaged assets; elimination of uneconomic lines and activities; consultancy services, operational support and training to strengthen management) and incremental permanent working capital needs for the selected enterprises. The project would assist the financial restructuring of enterprises that have good rehabilitation prospects but face financial difficulties because of past policy distortions and operating inefficiencies. Restructuring would be achieved through recapitalization; conversions of debt into equity or quasi-equity; and injection of fresh equity through (where appropriate) divestiture, joint venture, or technical partnership arrangements with foreign or local private investors. The eligibility of BEs would be based on: confirmation (through appraisal) of their efficiency, economic and financial viability, and potential to earn or save foreign exchange; review and approval of their rehabilitation plans; and an undertaking to institute measures to protect the environment. - 18 - 3.05 Subloans and investments under this component will finance: (a) rehabilitation or replacement of fixed assets (machinery, equipment, factory buildings and related civil works); (b) permanent working capital (increases in stocks of imported raw materials, spare parts, and components required to sustain production for the initial period following rehabilitation); and (c) operational support services (including expatriate staff, personnel training, and advisory services on environmental protection) to upgrade BEs' technical, financial, marketing, and general management capacity. 2. Technical Assistance Coponent (TAC) 3.06 The TAC would support institutional development in the following areas. 3.07 Assistance to ERTU. The Credit would finance the services of experts to strengthen the ERTU's (and other institutions) capabilities to implement the rehabilitation program and provide operational technical assistance to enterprises. These advisers would also provide training to local staff in project appraisal, enterprise rehabilitation and restructuring techniques and methodology. A detailed breakdown of technical assistance costs to the ERTU is given in Annex 3-1. The Project also makes provision for additional short-term consultants to assist ERTU in specialized areas. 3.08 Assistance to Enterprises. Most of the BEs will need outside expertise to develop satisfactory business or rehabilitation pians. The Project would, through the ERTU, support the hiring (on a reimbursable basis) of short-term consultant services for the preparation of prefeasibility studies, rehabilitation plans, and/or liquidation, privatization, or joint venture arrangements. Financing would be provided for the preparation of a further 10 enterprise rehabilitation plans, beyond those for the 15 enterprises already identified, whose implementation could be financed under parallel or subsequent projects. To assist enterprises to comply with reporting requirements, financing would be made available for external audits. 3.09 Training of Laid-off Staff. To alleviate the social costs of possible personnel reductions, the IDA Credit would include an allocation of US$1.4 million under the TAC to assist Government in the preparation of training programs for staff laid-off in the course of enterprise restructuring or liquidation. Since staff retrenchment could only be accurately identified after the completion of enterprise reviews and inclusion in the rehabilitation plans, the Government would, in consultation with enterprise managers, design specific training programs for re-deployed staff. The programs would include, inter alia, provisions for financing of skills training and (in some cases) of related tools and equipment for employees seeking to start up in trade or commerce on their own. Since many of the workers laid off are likely to be those with little formal education who may not immediately benefit from the training offered by existing institutions such as the Secretariat of State for Vocational and Professional Education (SETEP), skills training would aim to equip such staff with a practical trade or skill for redeployment or starting up on their own. Programs will be initiated by Government, which will submit them to the ERTU for review and transmission to IDA for approval. Implementation will be - 19 - overseen by the Ministry of Labor (ML). and will be supervised by the ERTU (which would be responsible for coordinating the program). Training will be provided at existing technical institutions in Mozambique. The Government is in the process of initiating changes in the education system that will strengthen the provision of technical training. A profile of some Le the institutions in the country is provided in Annex 3-2. Some of these institutions are to receive technical assistance to strengthen their institutional capacity through a UNDP/UNIDO project. Most training programs would be carried out by local trainers, and the bulk of the costs involved would be local costs. Disbursement of IDA funds for training would be conditional on each concerned BE furnishing to IDA, through Government, the plan for implementing training. 3.10 Subsector Studies. The TAC would finance subsector and policy studies, which will be implemented by the MIE. On the basis of preliminary findings of the Business Environment Study, the subsectors that require further review include edible oils, textiles and garments, transportation, sugar, and public sector enterprise management. During appraisal, an understanding was reached with Government that four subsectors--packaging, metal-working, textiles and edible oils--would be studied initially. The scope of the studies is attached in Annex 3-3. At negotiations, the Government requested, and a decision was made, to undertake a fifth study for the construction and building materials subsector. The TOR fl this study are expected from Government before end of FY90. The five stu_.es will be initiated before end of FY89 through PPF financing and are expected to be completed by September 30, 1990. Provision has been made to finance several other sectoral and subsector studies in the course of Project implementation. Agreement was reached at negotiations that the Government shall: not later than April 30, 1991, submit to IDA acceptable terms of reference for all subsector studies in addition to the original five to be undertaken and completed under the Project Preparation Facility; not later than December 31, 1991, the Government shall carry out and submit to IDA the recommendations of all subsector studies: not later than June 30, 1992, the Government shall exchange views with the Association on the recommendations and agree on an action program; and not later than March 30, 1993, carry out the action program. It was agreed that Government will make efforts to initiate implementation of the recommendations for the original five studies before September 30, 1991. D. Prolect Cost and Financing 3.11 Justification of Project Cost. Aggregate investment costs for the rehabilitation of all large-scale enterprises (UNIDO estimate for 130 large scale enterprises) in Mozambique over the next five years are estimated at about US$1.0 billion of which US$500 million would represent foreign exchange expenditures (equipment investment and spare parts, US$ 400 million; technical assistance, US$100 million). This amount would be divided about equally between fixed investments and increases in permanent working capital. Preliminary estimates of rehabilitation requirements for the 15 potential BEs are provided in Annex 3-4. The Project cost estimates and financing plan for the 15 BEs are szumarized in Table 3.1. Total Project cost is estimated at - 20 - US$106.7 million equivalent, including US$71.2 million in foreign currency. The IDA Credit of approximately US$50.1 million equivalent would finance 47S of total Project costs and 70Z of foreign exchange requirements. The balance is being sought from co-financiers. About US$34.1 million equivalent would be financed from local sourcess Bls, Government, and local banks (paras. 3.12 - 3.14). The cost estimates under the ERC assume hat rehabilitation of two enterprises (CIH and IMA) would be phased and exclude financing requirements for three enterprises (CELMOQUE, CAJU and CARMOC) that are being considered under separate operations. Should financing from those sources not materialize, these enterprises would be eligible for financing under the IERP. If they were to be included in the estimates (and if CIM's and IMA's rehabilitation were not phased), total ERC costs would be US$107.9 million ($74.4 million in foreign currency). Detailed project costs for these enterprises are on Project file. - 21 - Table 3.1: MOZAMBIQUE - PROJECT COST ESTIM&TES AND FINANCING PLAN Local Toreign Total (USS million) l Enterprise Rehabilitation Component (ERC) Fixed Investments 4.8 36.6 41.4 Spare Parts 1.2 2.8 4.0 Working Capital (incremental) 27.2 18.2 45.4 Technical Assistance 0.3 4.8 5.1 Subtotal 33.5 62.4 95.9 Technical Assistance Component (TAC) ERTU operations 0.6 3.5 4.1 Other institutions - 1.0 1.0 Technical assistance to enterprises - 3.8 3.8 Other studies - 0.5 0.5 Staff training 1.4 0.0 1.4 Subtotal 2.0 8.8 10.8 Total project cost 35.5 71.2 106.7 FINANCING PLAN: IDA 1.4 48.7 50.1 Govermnent/Project Entities 34.1 - 34.1 Co-financing: Not yet finalized - 22.5 22.5 Total Project Finance 35.5 71.2 106.7 3.12 Co-financing. In view of the large foreign currency requirements of the sector, co-financing from other donors is being sought to fill the financing gap. IDA's involvement in providing untied long-term financing of the foreign exchange component is important in coordinating and attracting further co-financing for enterprise rehabilitation. The other donors look to IDA to assure the technical and financial viability of the BEs and their economic contributions to Mozambique. Discussions have taken place, and official solicitations of interest were sent to several potential co- financiers for a financing gap of US$22.5 million equivalent. The Government of Italy has agreed in principle to co-finance the project through bilateral - 22 - agreement with the Government of Mozambique. The IFC and Commonwealth Development Corporation (CDC) have also indicated their interest in co- financing the Project. Prefeasibility studies for some of the fifteen enterprises have been sent to CDC. Participation by both institutions would be on an enterprise-by-enterprise basis, contingent on viability of the enterprise. Caisse Central de Cooperation Economique may also participate on a case-by-case basis. To encourage full use of cofinancing, IDA financing of individual subprojects will be limited to US$8 million. For enterprises with financing requirements exceeding US$8 million (4 out of the 15 enterprises may fall into this categoryw Annex 3-4), Government will be required to seek other sources of financing to complement the IDA credit. 3.13 Local Currency FinancinR. The BEs would finance about 23Z of the physical rehabilitation and related working capital expenditure in local currency. This will, to the extent feasible, be financed by: enterprise net profits, new shareholders through cash purchases of newly issued enterprise shares, and new borrowing from the local financial markets. 3.414 Government contribution to Project financing will be limited by the tight foreign exchange and fiscal budget constraints prevailing in Mozambique. The Government would finance 52 of overall Project costs, mostly in the form of the recapitalization of enterprises through equity contributions and the local operating costs for the ERTU. A lOZ cost contingency has been included in the rehabilitation cost estimates. A reliable estimate of the financial needs of each enterprise to be rehabilitated will only emerge from the final feasibility studies, which will provide a basis for adjusting the scope of the project during implementation. Should financing be insufficient to cover all 15 enterprises, Government (with agreement from IDA) may delete some of these enterprises from the Project. Conversely, if funds available exceed the requirements of these enterprises, additional enterprises could be selected jointly by IDA and Government for prospective rehabilitation according to the process established under the Project. 3.15. Technical Assistance Requirements. The foreign exchange requirements of the TAC would total US$8.8 million over the Project period for: (a) consultancy services to prepare prefeasibility studies and rehabilitation plans; (b) Project management and ERTU training; and (c) sectoral and subsector studies. The cost is estimated on the basis of actual costs for those contracts already concluded and similar experience in the region. The magnitude of this technical assistance is explained by the complex nature of this Project in the Mozambican environment; the multiplicity of enterprises in a wide range of subsectors to be assisted, each requiring specialized expertise currently unavailable in the country; and the need to have appropriate quality control and to strengthen management skills within the ERTU and the BEs. Valuable transfer of know-how is expected to be derived from the presence of external experts, in sector management as well as in the technical aspects relating to enterprise operations. In view of limits on Government expenditure as part of its recent agreements with both the Bank and the IMF, IDA would allocate the equivalent of US$1.4 million in local currency to help finance the local costs of retraining laid-off workers. - 23 - IV. MAIN FEATURES OF THE CREDIT A. Credit and Onlending Terus and Conditions 4.01 The proposed IDA Credit of US$50.1 million equivalent will be made to the People's Republic of Mozambique on standard IDA terms. The Government will pass total credit proceeds to BMH to: (a) channel $39.9 million equivalent to BE's primarily as loans. However, in appropriate cases the Government could use the ERC to make direct equity investments (US$5 million shoulld be initially allocated for this purpose) in BEs in combination with loans according to their assessed needs for financial restructuring as identified in the Rehabilitation Plan (RP); and (b) US$10.2 million would be retained for the TAC, to be administered by the ERTU. The ERC amount will be passed on by the Government to the BM under a subsidiary administration agreement on terms and conditions acceptable to IDA. The onlending arrangements as well as the eligibility criteria for BEs, subloan processing and administration, and onlending terms and conditions are briefly outlined below. 4.02 Financial restructuring would be a major issue for almost all the enterprises assisted under the proposed Project. BM is the commercial bank with which most of the targeted enterprises have operated and, therefore, which holds most of their debt. BM is also an interested party, in its capacity as Central Bank, in all programs to help clear the banking system's loan portfolio arrears. For this reason, BM would be the financial intermediary for the ERC under the proposed Project. Once the initial subloan is made, it would be possible for subloans to be sold by BM to the other commercial banks, either in entirety or through syndication, with BM acting as the lead manager. BM would be acting in its commercial banking function when making subloans, for which it would bear the normal banking risk. The signing of a subsidiary administration agreement between the Government and BM, transferring the funds to BM and defining the functions and responsibilities of the latter, shall be a condition of Credit effectiveness. 4.03 With respect to the lending portion of the ERC, the BM would make the Credit proceeds available to the BEs at variable interest rates in accordance with the interest rate structure prevailing in Hozambique. That structure has been established in consultation with the IMF, and it has been agreed that the level of interest rates will evolve so that they become positive in real terms by 1990. The revised interest rate structure (para. 2.19) introduced in January 1989 raised lending rates for loans with maturities of over one year to between 22? and 35? and was also considerably simplified. Annual reviews of the interest rates charged on subloans under the Project will be undertaken jointly by the Government and IDA. 4.04 The subloans or investments in BEs would be denominated in meticais converted at the exchange rate prevailing on the date of disbursement from the Special Account. The BM would retain, out of the interest payments due from the BEs, an annual administration fee (about 0.5? of the outstanding subloan amounts) to cover its costs in administering the Credit plus a margin - 24 - not to exceed 452 of the annual interest rate charged by the BM to the BE to cover the credit risk. The foreign exchange risk would be borne by the Government and would be covered by the interest yield on funds onlent, net of the service charge on the IDA credit, and the onlending spread of the EM. The Government would bear the risk on any equity investments. 4.05 Subloans for financing fixed assets, spare parts, and the aLsociated increase in permanent working capital, and for the preparation of rehabilitation plans would have maturities of up to 15 years, including grace periods of up to 5 years. Onlending to BEs will be under subloan agreements on terms and conditions acceptable to IDA. Repayment of each subloan by a BE to the EM would be on the basis of a fixed amortization schedule. 4.06 The Government could use up to US$5 million of the Credit to make equity investments in enterprises where this is necessary for financial restructuring. The proceeds of the investment would also finance fixed assets, spare parts and permanent working capital. All such equity investments, including the respective Investment Agreement between BM on behalf of Government and the respective BEs, would require prior approval by IDA. Whenever equity investments are made, a divestiture policy satisfactory to IDA would be adopted. When a divestiture takes place, the Government's equity investment under the proposed Project could be repaid either at once or on the basis of a fixed amortization schedule. The funds repaid by the BEs to the BM could be used by the Government to finance enterprise rehabilitation and restructuring in a manner consistent with the objectives and financing arrangements under the Project. Eligibility criteria for subprojects, and onlending terms and conditions under the Project will be reviewed at least once annually to identify changes needed to ensure successful Project implementation. B. Selection of Potential Beneficiary Enterprises (BEs) 4.07 During Project preparation, the Government in consultation with IDA selected 15 enterprises, from a sample of 40 enterprises studied by a team of consultants, as potential Project BEs. The 15 prospective BEs were selected on the basis of their potential technical, economic and financial viability and on their ability to adjust to or operate under the new incentive system. Viability would be confirmed through prefeasibility studies to evaluate market potential as well as technical and managerial capacity. The status of studies undertaken so far is summarized in para. 5.12. Other enterprises may be added depending on the availability of finance (para 3.14). The enterprises that were selected fall into three broad categories: agro-industry, as represented by processing of cashew nuts (Caju de Mocambique) and edible oils and soaps (Grupo Madal and FASOL/SABOREL), timber (Madeiras de Cabo Delgado), citrus fruit (Citrinos de Manica), and grain milling (Compagnhia Industria de Matola); light manufacturing industry, represented by metal working (Metal Box and ECOME), cables (CELMOQUE), paper cartons (CARMOC), pipes and roofing material (IMA), steel drums (Van Leer), construction material (PROSUL), plastics, and rubber products (FACOBOL); and heavy industry (Cimentos de Mocambique-Dondo). As a group the selected enterprises have: (a) a significant impact on the performance of the subsectors they represent; (b) a substantial impact on foreign exchange savings through efficient import substitution or generation - 25 - through exports; (c) important links to other enterprises; and (d) important potential as generators of employment and incomes. 4.08 To overcome security constraints, only those projects located in fairly safe zones were initially selected. The maximum amount of ERC proceeds that could be used for investments or subloans to a single enterprise would be US$8 million. This ceiling would enable the Credit proceeds to be spread equitably among the 15 BEs. For subprojects with large rehabilitation requirements, Government would make efforts to secure additional financing above the US$8 million from other sources, especially to meet the enterprise's working capital requirements (allocations for this purpose could come from the import support programs). The Government would actively seek the involvement of institutions such as IFC and CDC to supplement the IDA funds. Specific eligibility criteria for BEs are summarized in paras. 4.10 4.13. C. Sample Enterprise Profiles 4.09 Summary details of the 15 beneficiaries enterprises are provided below in Table 4.1, and more complete profiles are provided in Annex 4-1. 1le 4.1t H2EBW - PEE; M S ENWII MUWIMT urN IML DENE MLFG I SAM Nb. E- AMTfY - FDWaN P s S EMN( ME= rr UIMErLIDN 1986) a/ J fc.) !5 b/ k E; RN ~I W IUrL Caju de 1tx aq Ca ns ts State 8.53 0.00 8.53 12.3 6,500 E kmn b * .ww. Me= do 400 4pn, t x.q Co D11 7lne State 3.00 0.00 3.00 1.2 Cl z ,s de Ctiriws State 4.05 0.00 4.05 5.3 1050 irr.g. rdtib.Ie 2din >kii Qu4 Oopm & edib oil Ptiwate 8.43 3.42 11.85 3.5 3600 TO ,B defi.d (e 4p. zmhb. & aq;szt) able E"Tiit }nterwnmd 6.46 5.03 11.49 4.4 485 RMub./fkru&ia restr. CxutC at lb be deflild (zeub. In mulvJcnfc±zdyt Iktxzaterzvud 11.96 18.33 30.29 32.1 450 pses) -M M -. M ZIfa0% Mfta Bk Ma1 castalxis Pdvute 1.50 0.00 1.50 1.2 250 dpzu Wub.Izw,lw./- (abmxpe clas IrAwud 1.50 0.00 1.50 1.3 160 t ; t Ist.(TV VWur cztm/Uie-td bcz?d n 2l Mind 2.00 0.00 2.00 0.4 250 i iid7 cq tAl IM 1 E p%m& FlcTsnt Rme 3 pdpei m dpes l t boed 8.64 3.07 11.71 0.4 310 Fblati lJzu BOWS Mtal cLxCAts State 2.28 0.26 2.54 2.0 360 Ejdpiet rdbb. EEDL Mcr tiz1n W )Mteuals Tztvwd 5.03 0.78 5.81 4.0 1306 rE.tFL4m r hin str./ITA MUEN Sb duneffipmstic nrwlPmiatln; setki State 1.67 1.13 2.80 0.5 72 cbc tAl Di L EtSiber & a s ptab. (teWA ises, Euber -loIxt r mludtLm; 1sk fttitts, pgaiRtS) Pvftate _5.44 1.07 _6.51 7.2 -400 tiu t czct SMSb_tObil 2SC17; 5M1 37T7 Irl 3IW5 4x,abique (Mub) 0MHt State _.3.91 _0.40 _.4.31 _3.2 30 lwtIivatirfin of I2ND Itil ar15 74.40 33.49 107.89 79.0 15, a/ Ecrty etepqrises wie stxided by Arthr D. Tittle, Inc. (AL) as a repqesmtative spile of the ntetpris r. 1986 salsflues f muy be distorted dbe to mavaUind eadw rate. b/ I*jir manzalats to uterfrise ciratins inlde meek or la-d*&: maikets; zzdmaterllas; plmlrqg irtmxkil csols; p.oxxM mmean3nt Y4ty; icistxus; labor; fore* secliy; tmainiqg; ourfsbtlp. - 27 - D. Enterprise (Subirolect) Eligibility Criteria under the FRC 4.10 Rehabilitation Plans (VPs). Under the Project, BEs will be required to prepare RPs once their potential viability is established through the prefeasibility studies. (Terms of reference for pre-feasibility studies were agreed to between IDA and the Government during project preparation and are available on the Project file.) If necessary, the Project will finance consultants hired by the enterprises to assist with the preparation of RPs. For an enterprise 'ound viable, a full RP will be developed by enterprise management for subsequent negotiation with the Government and BM in order to reach agreement on an effective rehabilitation and restructuring program. The agreement reached shall be documented in the subproject appraisal report prepared by the ERTU and in the subloan and investment agreements. 4.11 The RP would include: (a) a marketing plan aimed at establishing realistic marketing goals in domestic and foreign markets and identifying steps to improve the product mix, distribution channels, product design, quality etc.; (b) a plan for the rehabilitation of plant and equipment to restore production and to fill needs identified in the marketing plan; (c) a plan to strengthen management and technical skills and to rationalize staffing; (d) a financial restructuring plan to reduce the debt burden to serviceable levels, to restore the enterprise's financial stability and, where necessary, a plan for privatization or involvement of foreign investors through equity participation or technical partnership arrangements; (e) a proposal for a subloan to finance fixed investments, permanent working capital and technical and managerial service contracts; (f) proposals for access to foreign exchange to meet recurrent working capital needs for imported raw materials, spares, and other inputs during the first three years of operations; and (g) financial projections showing the expected results of all these measures. 4.12 Another element of the financial restructuring will be to strengthen enterprise financial and accounting standards and practices to be in line with national accounting standards. Where these do not exist, the RP should include measures to strengthen the enterprise's financial and accounting systems (including adoption of and adherence to generally accepted accounting standards and practices, the hiring of competent financial managers, and use of a firm of qualified accountants as external auditors). Use of external auditors, who may be financed through the Project, will be a condition for subloans to enterprises. 4.13 The appraisals of all RPs and their related restructuring proposals (and, where necessary, divestiture or technical partner arrangements) would have to be done on a case-by-case basis. They would be expected to include a calculation of the enterprises' incremental internal economic rate of return (IERR) and incremental financial internal rate of return (FIRR). Sub- loan requests would be financed only if the incremental FIRR and IERR exceed 12? in real terms. Similarly, equity investments would be expected to yield an after-tax return of 12? in constant prices. The IERR would be estimated using border prices. To determine if the RP is viable, the ERTU would ensure that the proposed restructuring plan would, given reasonable assumptions, enable the enterprise to service adequately its debt while maintaining - 28 - satisfactory liquidity (with a debt service ratio of at least (3:1). The 15 enterprises selected would be eligible if they were found to be viable. The IDA Credit would finance up to 100Z of eligible foreign expenditures of the subproject. Guidelines for the operations of the ERTU, subproject eligibility criteria, and subloan administration are provided in Annex 4-2. E. Subloan Processing and Administration 4.14 Primary responsibility for preparation of prefeasibility studies and RPs, and for implementation of the actual rehabilitation will rest with enterprises seeking financing. However, the technical requirements for defining and preparing the rehabilitation plans are likely to be complex and beyond the capacity of most enterprises. Many enterprises lost key management, professional or technical staff over the past te:.. years resulting in a generalized shortage of qualified personnel in Mozambique. To overcome this constraint, the Government would, through the ERTU, finance the enterprises' hiring of consultants to assist with preparation of feasibility studies, RPs, and when necessary, implementation of the actual rehabilitation. These costs would be refinanced through subloans. 4.15 The BM will assume the credit risk on subloans financed by the proposed Credit and will satisfy itself that the rehabilitation and restructuring plans are sound and the enterprise is creditworthy. The BM will also undertake to supervise subprojects it finances. BM's review of subprojects would be based on the subproject appraisal reports prepared by the ERTU. The BM would appoint a qualified officer to coordinate and work with the ERTU during subproject appraisal. Through working with the ERTU and with training to be provided under the Project, it is expected that staff of the BM will over time develop the necessary experience -o undertake in-house appraisals of large, complex projects. 4.16 The ERTU will undertake a detailed analysis of each RP to ensure that enterprises meet established eligibility criteria. On the basis of the review, the ERTU will prepare a subproject appraisal report recommending that the Minister of Finance approve or reject the subproject (including the rehabilitation plan). In reviewing the subproject, the ERTU will determine whether there are policy issues (such as divestiture, resolution of ownership, joint venture arrangements, or a complex restructuring plan) that require Government decision. In such a case, if the subproject meets the other eligibility criteria, it will be approved then submitted by the Minister to the Commission for External Economic Relations (CREE) for resolution of the issues identified by the ERTU. The BM will then indicate its approval or rejection for financing of investment proposals on the basis of banking criteria. The MOF and BM will actively seek to secure co- financing (especially for enterprises requiring large investments) from private sector joint venture or technical partners, both local and foreign, including IFC and CDC. 4.17 All subprojects would require IDA's prior review and approval for financing under the proposed Credit. Subprojects submissions sent by the ERTU to IDA for review would includes (a) an appraisal report of the subproject, analyzing the economic, financial, technical, and environmental - 29 - viability. The appraisal would be carried out in accordance with guidelines satisfactory to IDA; (b) a copy of the rehabilitation plan; (c) the proposed terms and conditions of the subloans or equity investments; (d) a list of goods and services to be financed out of proceeds of the IDA Credit and the respective method of procurement; (e) the method of procurement of goods and services; and (f) where necessary, the results of efforts to secure co- financing. ERTU and the BM would coordinate closely to ensure that all required elements of the package are submitted to IDA. BM and IDA will review jointly the subproject approval procedures after the first three subproject have been onproved by IDA. 4.18 The ERTU and BM would regularly supervise subprojects to ensure that implementation is effective, that subloans are utilized for the intended purposes, and that sub-borrowers adhere to subloan conditions. ERTU would keep supervision reports on file for review by IDA Project supervision missions. The ERTU and BM would also have the right to visit the BEs as necessary and to receive relevant information, including enterprise quarterly and annual audited financial statements. The BM will submit to the ERTU quarterly reports on the performance of the portfolio financed from the Credit proceeds. As part of Project preparation the ERTU will hold orientation seminars for the staff of BM, Ministries responsible for potential BEs, MOF, and enterprises to familiarize them with project appraisal, financial restructuring techniques, and procedures for subloan processing and administration. A series of training seminars and workshops coordinated by the ERTU will be held throughout Project implementation to train local staff in these institutions in the use of project appraisal and restructuring techniques. 4.19 Environmental Safety Arrangements. In reviewing subprojects, the ERTU would assess the environmental aspects of all subprojects to ensure that they do not negatively impact the environment. BEs will be required to protect the environment by incorporating in the RP measures to minimize the discharge of pollutants and to provide for a safe working environment for their workers. The environmental impact and necessary measures to control effluent emission for each of the 15 enterprises for which prefeasibility studies have been undertaken are briefly discussed in Annex 4-1. Supervision missions will be required to review compliance of the BEs with the parameters set for pollution control and document any variations and the reasons for not meeting the limitations. V. PROJECT IMPLEMENTATION A. Institutional Setting and Management 5.01 The arrangements for the organization and management of the Project and ERTU shown in Annex 5-1 reflect the various aspects of enterprise rehabilitation which must be addressed in the RPs. These include term lending, debt to equity conversions, debt rescheduling, joint venture or technical partner arrangements or privatization, training, sector and subsector studies, and policy and institutional reforms affecting several Ministries and the enterprise sector in general. These arrangements also - so - take into account Mozambique's administrative system which divides responsibilities among several different Government entities. 5.02 Comission for External Ecooanic Relations (CURE). CREE was established by the Government of Mozambique to serve as a coordinating committee on external economic relations, particularly those relating to foreign exchange allocation among competing projects. For the proposed Project, the CREE will act as the Steering Committee, responsible for providing inter-Ministerial coordination in planning, resource allocation, policy coordination and resolution of issues affecting project implementation. CREE meets on a weekly basis and is chaired by the Prime Minister. Other members include: the Minister of Planning; the Minister of Finance; Minister of International Cooperation; Minister of Foreign Affairs; Minister of Trade; and the Governor of the BM. Other sector Ministers and Government agencies are co-opted whenever issues affecting operations under their jurisdiction are being discussed. 5.03 The Ministry of Finance (MDF), will be the Project executing agency. Acting on the recommendation of the ERTU, the Minister would approve financing of RPs. Once approved by the Minister, in consultation with the responsible Ministry and the BM, a subproject would be submitted to IDA for approval of financing under the Credit in accordance with the process described in paras. 4.14 - 4.18. 5.04 Bank of Mozambique (BM). The BM will make final arrangements for subloans with BEs for approved RPs. The BM would bear the credit risk on the subloans. As fiscal agent of the Government, the BM would operate foreign exchange accounts and designate officials who would sign withdrawal applications for eligible expenditures. As a member of CREE, BM will also be actively involved in approving RPs and will cooperate with ERTU in subproject implementation. The ERTU, which would have primary responsibility for subproject appraisal and supervision, would work and coordinate closely with the BM to ensure smooth Project implementation. 5.05 BM is the largest of the three banks, and the one with the broadest mandate. It was created in 1975 to take over the central banking role previously played by Portugal's Banco Nacional Ultramarino (Statutes approved by Decree No. 2/75 dated May 17, 1975). In 1978, it absorbed the Mozambican operations of four Portuguese-owned banks. BM has 10 filiais (provincial head offices), 17 agencias (district branches) and 13 delegacoes (deposit offices). The limits &-aigned to each branch for credit approval tend to vary from branch to branch and-aecording to factors such as the size and complexity of operations. Each directorate hap-4 staff of three or four credit analysts, of whom on average one may have been to university. The remainder usually will have completed secondary school and done some vocational training, generally in accounting or a related subject. Many BM credit analysts, from both Maputo and the provinces, have received training in project analysis and processing, financed under an IDA PPF advance. 5.06 Central vs. Commercial Banking Functions. Although distinctively defined in its statutes, the two functions of BM, as central bank and commercial bank, were not clearly distinguished in practice. It is still difficult today to distinguish properly between these two functions in both - 31 - accounting and operational terms. BM is now taking steps to distinguish between and separate these two roles. 5.07 In 1988, BM introduced a new accounting framework to be fully applied to all banks. This framework will eventually permit all aspects of operations to be clearly identified according to either the central banking or the commercial banking function of BM. A full separation of accounts along these lines is expected to be available after 1992. 5.08 Financial Situation. Its two functions make BM's financial situation more difficult to evaluate. Selected BM financial statements and a Monetary Survey are shown in Annex 5-2 and Annex 5-3, respectively. An important development in the balance sheet is noted in 1987 and 1988 and reflects the impact of the devaluation of the Metical. The devaluation caused medium to long-term foreign liabilities to increase from Mt 36.8 billion in December 1986 to Mt 612 billion in December 1988 (of which Mt 78 billion corresponds primarily to IDA financing), with corresponding unrealized losses. The sectoral distribution of credit, covering the bulk of BM's lending portfolio, indicates that from 1987 to December 1988 the relative share of agriculture declined from about 42Z to 392 of total lending, whereas industry's share declined slightly from 17Z to 16Z. The share of domestic trade increased from 8Z to almost 14?, with construction and foreign trade each accounting for about 7-8Z and transport and communications accounting for the remaining 17-18Z. 5.09 EnterDrise Restructuring Technical Unit (ERTU). The ERTU was created in the MOF on February 19, 1988, to help design and coordinate implementation of the ERP. The ERTU is responsible for planning, managing and supervising Project implementation, including: supervision of enterprise studies; appraisal of enterprises' RPs; providing advisory support to the Government on enterprise policy issues; and supporting enterprises in identifying and organizing management training. The terms of reference for the ERTU were agreed between IDA and the Government during Project preparation and are available in Annex 5-4. The ERTU would be responsible for the day-to-day management of the Project and for monitoring the use of Project funds and ensuring that reporting requirements are met (para. 5.24). The MOF's assistance to enterprises includes the preparation of financial restructuring proposals, seeking local and foreign private sector investors, preparing joint venture or technical arrangements, and overseeing implementation of approved RPs. A detailed budget for technical assistance to the ERTU is provided in Annex 3-1. 5.10 The ERTU is headed by a Project Director (the Deputy National Director of Treasury in the MF), who reports directly to the Minister of Finance. At negotiations, it was agreed that the Project Director would devote sufficient time to the Project to ensure effective implementation. Besides the Project Director, the ERTU includes a technical assistance team of three experts provided by PARTEX, CPS, an international consulting company. The team, which was initially employed under a PPF advance and has been in Mozambique since October 1988, includes a Project Advisor, who coordinates the work of other professional staff, supervises the work of all consultants hired by the ERTU, and provides policy advice on enterprise sector issues to the Minister of Finance; an Engineer who oversees all _ 32 - technical aspects of the Project; and an Economist, responsible for economic analysis and for providing project appraisal training. A local Economist has also been seconded from the MF as counterpart to the expatriate economist. Other local staff to be recruited include, an Accountant and a Procurement Advisor. Terms of reference for the expatriate staff are provided in Annex 5-5. To complement its full-time staff, the ERTU will also have access to the services of consultants (including legal expertise on corporate workouts, ownership arrangements, and liquidations) and will be able to co-opt staff from other Government Ministries for specific tasks. The ERTU will also provide advisory service to the Government on issues affecting enterprise performance, and will, as may be requested by enterprises, continue to provide technical assistance after completion of this project. Government gave assurances at negotiations that it will take all necessary steps to ensure that ERTU staffing remains both capable and sufficient in numbers to discharge the responsibilities associated with the IDA Credit. 5.11 Interministerial Working Group (IWO). The IWG's objective is to ensure that relevant sector Ministries, and the BM, concur with RPs prepared for various enterprises, that the enterprises have an opportunity to participate in the discussion of the RPs, and that most issues are resolved before the proposals are submitted to the Minister of Finance. The Project Director would be expected to seek the advice of the IWG in carrying out his responsibilities. The IWG would be composed of senior-level officials representing inter alia the Ministry of Finance; Ministry of Industry and Energy; Ministry of Construction and Water; Ministry of Agriculture; Ministry of Transport and Communications; and Bank of Mozambique, all of which will be directly involved in Project implementation. B. Status of Project Preparation and ImPlementation Schedule 5.12 Preparation of the Project was undertaken in close collaboration with the ERTU. Inputs were also provided by other Government agencies (BM and MIE) and enterprises. During Phase II of the Arthur D. Little (ADL) Enterprise Review, ten enterprises participated in "profiling" sessions which involved most key people who would need to cooperate in project implementation. The objective of the sessions was to discuss with the principal managers and staff, the merits and disadvantages of various rehabilitation alternatives and to attempt to reach a consensus on which alternative should be pursued. The premise of the rehabilitation program is that it will only be successful if it is accepted by all concerned parties. Given the skills shortage in Mozambique, the sessions imparted knowledge about project evaluation and financial restructuring to local staff of the ERTU, Government, and the enterprises. Government has indicated that it will continue the approach in reviewing other enterprises for rehabilitation. Enterprise managers expressed their appreciation that for the first time they were directly involved in developing ideas affecting the future of their companies. Preparation activities have proceeded well and are nearly complete. 5.13 Implementation Schedule. An appraisal mission visited Mozambique in March 1989, and reviewed with Government the rehabilitation prospects of each potential BE. On the basis of this review it was estimated that implementation of approved RPs will stretch over 3 - 5 years starting March - 33 - 1990. Restructuring of enterprise balance sheets may take slightly longer, which leads to a conservative estimate of a Project implementation period of six years with completion in December 31, 1996. The Credit is expected to be closed by December 31, 1997. C. Proiect PreRaration Facility 5.14 A PPF advance for US$750,000 was approved by IDA on January 19, 1988, for project preparation. The PPF advance provided financing for: (a) the cost of hiring an international consulting firm to provide technical assistance to the ERTU; (b) enterprise prefeasibility studies (Phase II studies) and RPs; and (c) sector reform studies. Following appraisal, IDA approved a second PPF advance of US$700,000 to supplement the first PPF and to ensure completion of preparation activities and prompt Project start up. The advance total now stands at US$1.45 million. D. Procurement 5.15 Enteririse Rehabilitation Component. The ERTU would supervise procurement and will ensure that BEs follow established and suitable commercial practices acceptable to IDA. The ERTU would be responsible for both International Competitive Bidding (ICB) and non-ICB procurement and for ensuring competitiveness (in price and quality), of the items procured and their suitability for the purpose intended. Assurances were given at negotiations that award of rehabilitation contracts will not be undertaken without a detailed RP and engineering estimates of the actual rehabilitation needs of each BE. Given the weak technical, administrative and financial capacities of some enterprises, the ERTU would closely monitor the procurement process. 5.16 All individual contracts with a value of US$500,000 and above would be procured in accordance with ICB, with prior IDA review of the bids as well as contracts. Preferences would be granted to domestic manufacturers and contractors for purchases of goods costing less than US$500,000 which shall be procured on the basis of local compet-.Ltive bidding (LCB), or international or local shopping (IS or LS) procedures, as appropriate, but with quotatioas from at least three suppliers eligible under Wor'd Bank guidelines, and contracts will be reviewed by the ERTU prior to award. The aggregate value of IS and LS procurement would be approximately US$10.5 million, and for LCB $1.6 million. LCB procurement would be limited and mainly for the procurement of civil works (foreign firms would be allowed to participate in such bids in accordance with local procedures acceptable to IDA). The first LCB document will be reviewed by IDA prior to its release to bidders. IDA requirements for LCB should be specified in local advertising, including public bid opening, clarity in evaluation criteria, and award to the lowest evaluated responsive bidder. 5.17 Specific brands of spares and equipment made by only one manufacturer for the ERC and ERTU would be purchased directly from the - 34 - suppliers of the original plant and equipment through direct contracting procedures. Where enterprises are unable to undertake their own procurement, advice may be sought through the Procurement Advisor at the ERTU. All subproject appraisal reports prepared by the ERTU would include a list of goods and services to be financed under the credit and the methods of procurement. Procurement of vehicles, office equipment, and furniture under the technical assistance component would be through local shopping as described for international shopping above. Appointment of an Accountant to the ERTU acceptable to IDA will be a condition of Credit effectiveness. 5.18 Consultants. Consultancy services necessary for Project implementation (categorized under "other procedures" in Table 5.1), will be procured locally and internationally in accordance with Bank Guidelines for the Use of Consultants. To ensure knowledge transfer, those activities requiring the use of foreign firms and experts would be linked to training programs. All consultancy contracts would have terms of reference and consultant selection subject to IDA approval before contracts are awarded. 5.19 As part of its normal supervision of subprojects, the ERTU would review procurement to ensure that approved practices have been followed. The ERTU would maintain records of the procurement methods and documents in order to monitor use of Credit funds (see Table 5.1). IDA supervision missions would review procurement procedures to ensure compliance with the agreed Procurement Guidelines. - 35 - Table 5.1t NDOUNIQU - PROCURCN5 ARRANGDNTS (US$ Killion) ICB Other Proce- Proce- Project Item dures ISILS LCB dures Total Enterprise Rehabilitation Component (ERC): Rehabilitation, Restructuring and TA to Enterprises a/ 28.3 10.0 1.6 56.0 d/ 95.9 (28.3) (10.0) (1.6) (0.0) (39.9) Technical Assistance Component (TAC) 0.3 10.5 10.8 (0.3) (9.9) (10.2) Consultants' Services b/ 7.6 7.6 Training of laid-off staff 1.4 1.4 Vehicles and Equipment cI 0.3 0.0 0.3 Refunding of PPF 1.5 1.5 Total 28.3 10.6 1.6 66.5 106.7 (28.3) (10.3) (1.6) (9.9) (50.1) Note: Figures in parentheses are the respective amounts financed by IDA. a/ Contracts would be awarded as follows: (i) in excess of US$500,000 equivalent through ICB; (ii) less than US$500,000 through LCB and local and international shopping (IS/LS); LS/LCB (with public bid offering) would be suitable for civil works contracts. bl Consultant contracts would be procured in accordance with Bank's Consultants' Guidelines. c/ Procurement of vehicles and equipment would require at least three price quotations. d/ Items to be financed by Government, enterprises and co-financiers. - 36 - R. Disburses_nt 5.20 The allocation of the IDA Credit is summarized in Table 5.2 and the disbursement schedule in Annex 5-6. The IDA Credit would be disbursed against the following itemst (a) for the Enterprise Rehabilitation Component, 1002 of the foreign exchange expenditures or 1002 of subloans and equity investments, 10O2 of expenditures for technical assistance to enterprises, and 10O2 of approved expenditures for training of staff laid off as part of the rehabilitation effort; and (b) for the Technical Assistance Component, 10O of foreign expenditures, 10O of foreign expenditures for vehicles, equipment, and office supplies, 10OZ of operating costs of ERTU, and 1002 of expenditures for technical assistance and training. The IDA Credit would also reimburse the PPF advance. Disbursements would be made on the basis of full documentation, except for withdrawals related to contracts valued at less than US$20,000 equivalent, equipment and civil works contracts valued at less than US$100,000 equivalent, and local training programs, which would be disbursed on the basis of statements of expenditure (SOEs). Supporting documents related to amounts withdrawn on the basis of SOEs would be retained by the ERTU and made available on request for review by auditors and Project supervision missions. Only expenditures made no more than 180 days prior to the receipt by IDA of information relating to a subloan or investment operation, or before the receipt of the request by IDA for approval of the subproject shall be eligible for reimbursement. The extension of the normal 90 day limit is justified by the limited implementation capacity in Mozambique. Appointment of a Procurement Advisor, and approval by IDA of a model subloan aRreement between BM and the respective BEs, will be conditions of disbursement on the ERC. - 37 - Table 5.2: MOZANIQUE - ALLOCATION OF IDA CUDIT Amount Z of Expenditure to Category (US$ million) be Financed Enterprise Rehabilitation 39.9 10O of foreign expenditures Component (ERC) of each subproject. (Rehabilitation, restructuring and TA to enterprises) Operating Costs of ERTU 0.2 1002 of total expenditures. Technical Assistance to ERTU: 2.9 10OZ of foreign expendi- (Consultant services, training, tures. vehicles & equipment) Consultant services for 3.2 1002 of foreign expendi- Feasibility Studies & Subsector tures Studies Training of laid-off staff 1.4 10O? of total expenditures. Refunding of PPF 1.5 1002 of amount advanced. Unallocated 1.0 TOTAL 50.1 - 38 - 5.21 Disbureement Schedule. In accordance with the standard disbursement profile for industry loans and credits in the Africa Region and recent disbursement experience in Mozambique, the IDA credit is expected to be disbursed as shown in the schedule given in Annex 5-6. The last date for the submission of subprojects for IDA approval or authorization would be December 31, 1996, and the Project closing date would be December 31, 1997. F. Special Account 5.22 To facilitate disbursements, a Special Account to be managed by the ERTU and operated by the BM would be established in US dollars at a commercial bank acceptable to IDA. The Special Account, with an initial deposit of US$2 million (equivalent to an average disbursement of four months) would finance Project-eligible expenditures under the ERC. All foreign exchange transactions would be made through BM under existing regulations governing the allocation of foreign exchange in Mozambique. BM would advise ERTU promptly of all transactions affecting the special account. The ERTU through its Accountant would be responsible for all record keeping, reconciliation of bank statements under the credit as required by IDA, and for preparation of replenishment applications for signature by designated BM officials. 5.23 Documentation to be submitted by the ERTU for withdrawal authorization from the Credit account or from the Special Account with respect to subloans or investment operations would includes (a) a summary description of the BE and an appraisal report on the subproject, including its economic, technical and financial viability, and environmental aspects in accordance with guidelines satisfactory to IDA; (b) a list of goods and services to be financed out of the proceeds of the IDA Credit; (c) the methods of procurement of the goods and services; and (d) terms and conditions of the subloan or investment, as appropriate. G. Accounting and Auditing Requirements 5.24 The ERTU would maintain accounts and records adequate to reflect the Project's operations and financial situation in accordance with sound accounting principles. Independent auditors acceptable to IDA would annually review: (a) project accounts kept by the ERTU; (b) the Special Account; and (c) financial statements of each BE, including a statement on compliance with eligibility criteria and subloan covenants. The auditors would also include a separate statement on whether satisfactory accounting procrlures are in operation. Assurances were obtained from Government at negotiations that audit reports of the Project and the audited accounts of the BM shall be submitted to IDA not later than six months after the end of each Government of Mozambique fiscal year. The audited statements of enterprises are also expected to be submitted to IDA. If a suitably qualified Government employee cannot be found to prepare accounts, the credit would finance a consultant to serve as Project Accountant, and any training program needed to equip a local staff member to take over this responsibility. - 39 - B. Monitorins and Reporting Require_ents 5.25 For monitoring Project implementation, the ERTU will prepare an implementation schedule that establishes monitorable milestones, which would be used to assess progress in the various components. The ERTU would be responsible for monitoring, evaluation, and reporting activities. The ERTU would be required to prepare, in consultation with other agencies involved in project implementation, detailed Project monitoring formats for review by IDA. Other project implementing agencies would provide the ERTU with the data necessary for preparing reports for submission to IDA. Based on this data, the ERTU would prepare consolidated annual progress reports. BM would submit to the ERTU the following: (a) a monthly report summarizing all transactions on the Special Account; (b) a quarterly report on the status of the portfolio of subloans and investments financed under Project; and (c) disbursement reports on the Project Accounts. BEs would submit quarterly reports and audited annual financial statements to the ERTU, with copies to the BM. The ERTU shall consolidate the quarterly reports with reports on other Project activities and would prepare a quarterly report on the progress of Project implementation. Such progress reports would be submitted to IDA one month after the end of each quarter. In addition, the ERTU would prepare an annual report summarizing progress in all key areas of the Project to be submitted to IDA three months after the end of each year. At the close of the Credit, the ERTU will prepare a Project Completion Report, based on the PCR preparation arrangements summarized in Annex 5-7. VI. PROJECT BENEFITS AND RISKS A. Benefits 6.01 Major enterprise rehabilitation will likely yield high economic returns through restoration of production employment and higher production levels and incomes. Improvements in the institutional and policy framework, plus increased enterprise autonomy and increased competition from more private sector involvement through joint ventures and divestiture, should enhance enterprise efficiency and profitability. The rehabilitation, financial restructuring, corporate privatization, and technical management approaches developed for enterprises under the Project will serve as demonstration cases for the design and implementation of similar programs in other enterprises. The Project will also contribute significantly to the strengthening of Mozambican institutional capability to develop and implement rehabilitation and restructuring plans and, where appropriate, privatization. It is expected that the rehabilitation and financial restructuring strategies developed under the Project will contribute to improvements in enterprise operations, including consolidation or specialization in core businesses while abandoning or separating out unprofitable or unrelated activities, with emphasis on achieving a viable scale of enterprise operations. Further, the Project will aim to increase the market orientation of enterprises through improvements in financial and management information systems, with emphasis on accurate record keeping, cost controls, and related training of enterprise personnel. Individual enterprise rehabilitation investments must have - 40 - minimum economic rates of return of 122. In most cases the rates of return are expected to be substantially higher. B. Risks 6.02 The major risks associated with the Project stem from: (a) the economy's fragility and, therefore, the possibility that political and social opposition may weaken the Government's commitment to the ERP during Project implementation (particularly to the ERP's more sensitive changes e.g., price liberalization and state enterprise divestiture or liquidations which represent a significant departure from past policies); (b) limited Government and enterprise experience in implementing rehabilitation plars; and (c) the security situation, which may adversely affect project implementation. To mitigate these risks: (a) beneficiary enterprises will be selected primarily on the basis of their potential economic, technical, and financial viability (i.e., that they possess a capable management team or plans are made to assure such a team, and that their operations are not seriously affected by the security situation); (b) the Project would provide assistance in training and redeployment of laid-off staff in order to &ileviate the social costs of adjustment and therefore, reduce the risk of resistance on the part of the public. The ERTU is being strengthened through the services of an experienced consulting firm; and enterprise management will also be strengthened and, where necessary, assisted in formulating and implementing their rehabilitation plans. Close supervision during Project implementation will be maintained to deal with problems as they arise. Government commitment to and progress so far in implementing the reform program has been encouraging and no evidence exists of flagging Government resolve. VII. SUMMARY OF AGREEM}NTS AND RECONMENDATIONS 7.01 During negotiations, the following major assurances and agreements were obtained from Government regardings (a) Formulation with IDA support by December 31, 1990, of an action plan to determine the legal ownership status of intervened enterprises, and to promptly thereafter take all necessary legal and administrative measures to implement the Plan. Although implementation progress would be reviewed as part of the Annual Implementation Review, a major review shall be undertaken by June 30, 1993 (para. 2.42); (b) Submission to IDA for review of the terms of reference for subsector studies to be undertaken under the Project would not be later than April 30, 1991 and all studies would be carried out by December 31, 1991. The Government will exchange views with IDA on recommendations of the studies and agree on action program by June 30,. 1992, and carry out said action program by March 31, 1993 (para. 3.10); - 41 - (c) Government and IDA will, not later than June 30, 1991, and annually, as part of the annual project implementation review, undertake reviews of the interest rates charged on subloans under the proposed Credit, including commitment levels, subproject eligibility criteria, onlending terms and conditions, and general project implementation progress (para. 4.03); (d) The Project financing plan (para. 3.11), arrangements for channelling the credit to the eligible BEs, economic, financial and technical subproject eligibility criteria, and onlending terms and conditions (paras. 4.01 to 4.08); (e) The credit operating guidelines and subloan processing and administration procedures (para. 4.18); (f) Procurement, disbursement, accounting, and reporting and monitorir.g arrangements (paras. 5.15 - 5.24); (g) An Enterprise Restructuring Technical Unit and IWG, shall be maintained throughout the life of the Project with staff and responsibilities acceptable to IDA, (para. 5.09); (h) Audit reports of the Project and audited accounts of enterprises to be submitted to IDA not later than six months after the end of each Government of Mozambique fiscal year (para. 5.23). (i) All subloans to be financed under the Credit shall require prior approval by IDA (paras. 4.17 and 5.22); (j) All equity investments would be under an investment agreement that shall require prior approval by IDA (para. 4.06); (k) Financing of training programs for laid-off staff would require prior IDA approval (para. 3.09); and (1) The Government would carry the foreign exchange risks (para. 4.04). 7.02 Conditions of credit effectiveness would be: (a) Signing of the subsidiary administration agreement between the Government and BM passing on US$39.9 million to BM for the ERC and defining the functions and responsibilities of the latter (para. 4.02); and (b) Appointment of an accountant as part of the ERTU staff (para. 5.16). _ 42 - 7.03 Conditions of disbursement for the ERC would be: (a) Submission to IDA and its approval of a model subloan agreement between the BM and the respective BEs (para. 5.19); and (b) Appointment of a Procurement Advisor (para. 5.19) 7.04 On the basis of the above assurances and agreements being reached, the Project would be suitable for an IDA Credit of US$50.1 million equivalent to the Government of the People's Republic of Mozambique at standard IDA terms, with a 40-year maturity. I I I MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT ANNEXES MOZAMBIQUE - STRUCTURE OF MANUFACTURING INDUSTRY - 1973, 1967 …-----------------------------------------------------------------__---------__-----------------------------------------------------------------__--- 1973 Number of 1973 Value Added 1987.0 *J Food Products Establishments Percentage Employment Percentage (Esc Million) Percentage Employment Output X % Food Products 772.0 54.8 41643.0 42.1 1616.4 29.6 26.0 of which: Vegetable Oil 9.0 1887.0 130.6 Flour Mills 331.0 1909.0 81.6 Sugar *.0 6298.0 630.2 Cashew Processing 16.0 20860.0 284.4 Tea 19.0 3073.0 87.8 Bakery, Confectionary 286.0 4304.0 83.6 Bverages, Tobacco 24.0 1.7 4111.0 4.2 732.0 14.3 30.0 11.0 Textiles, Carments Leather, Fibre 111.0 7.9 16879.0 16.9 808.6 16.8 24.0 26.0 of which: Cotton Ginning 21.0 29S4.0 186.6 Spinning, Weaving 3.0 4461.0 256.9 Garmnts 28.0 4211.0 156.2 Wood, Paper, Printing 227.0 16.1 16797.0 16.0 628.6 10.8 14.0 10.0 of which: Logging, saumilling 76.0 7665.0 143.0 Carpentry, furniture 91.0 3607.0 102.6 Printing 4S.0 3293.0 199.9 Petroleum, Chemicals Rubber, Plastics 6s.o 4.6 4088.0 4.1 449.9 8.8 8.0 11.0 of which: Rubber Products 2.0 774.0 66.8 Plastic Products 12.0 742.0 64.2 Paint, Varnish 4.0 393.0 129.7 Nonmetal, Mineral Products 62.0 4.4 4686.0 4.7 360.3 7.0 3.0 2.0 of which: Aloes Products 1.0 6e7.0 63.1 ..ment 3.0 898.0 184.0 M*elhs and engineering 139.0 9.9 11484.0 11.6 692.9 13.6 19.0 14.0 of which: Struct. Metal Prods. 40.0 2107.0 101.4 ebsic Iron A Steel 3.0 1131.0 57.0 Metal Furniture 15.0 1618.0 89.0 Shipbldg, Repairs 8.0 1436.0 110.6 Other Industries 9.0 0.6 380.0 0.4 28.2 0.6 2.0 TOTAL 1409.0 100.0 98868.0 100.0 6114.8 100.0 100.0 100.0 …----------------------------------------------------------------__----------__------------------------------------------------------------- Source: Based on Estatisticais Industriais 1973 and 1987. Note: a/ Based on gross output at 1985 prices, VA figures are not avail-ble for 1987; however 1973 and 1987 output shares appear comparable. b/ Includes food products and beverages, tobacco, textiles and garments. - 44 - ANNEX 2-2 MOZANBIQUE GEOGRAPHICAL DISTRIBUTION Of INDUSTRIAL ENTRPRISES - 1973 Province Enterprises Eployment Number % of Total Number % of Total (000' s) Maputo 428 34 34.8 41 Beira (Sofala) 229 18 12.9 16 Vila Pery (Nampula) 88 7 6.6 8 Zambezia 166 13 4.7 6 Manica 121 9 16.3 19 Ceza 52 4 4.3 5 Tete 86 7 0.7 1 Cabo Delgado 29 2 1.0 1 Inhambane 49 4 2.7 3 Niasa 24 2 0.3 1 TOTALS 1272 100% 84.3 101 - 45 - AN* 23 Page 1 of 2 NOZAMBIOUS INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT TU=L"QGE OF MANUFACTURING nDUSTRY (activities supervised) MINISTRY OF INDUSTRY AND ENERGY (HIE) Electric Power Petroleum Refining [Management Unit (U.D.) for Petroleum] )/ Metallurgy (U.D. for Metallurgy) Heavy Metalworking Metal Fabrication (Gabricom) Electrical Machinery and Materials (U.D. for Electrical Engineering) Refrigeration and air-conditioning equipment (U.D. for Refrigeration) Rubber and Rubber Goods Glass and Glassware Basic Chemicals (U.D. for Chemicals) Fertilizers and Pesticides (U.D. for Chemicals) Paints, Varnishes and Lacquers (U.D. for Chemicals) Explosives (U.D. for Chemicals) Miscellaneous Chemicals Products (U.D. for Chemicals) Paper, Paperboard and Paper Products (U.D. for Chemicals) Shipbuilding and repair - steel vessels (MIE) Shipbuilding and repair - wooden and other vessels (U. D. for Fishing) Office Equipment (U.D. for Electrical Equipment) Support for Industrial Machinery (EQUITEC, E. E.) PREVIOUSLY UNDER STATE SECRETARIAT FOR LIGHT AND FOOD INDUSTRY (SEILA) (339 ENTERPRISES) h/ Textiles from cotton and other fibres (U.D. Textiles) Garments (U.D. for Garments) Footwear and Tanning (U.D. for Footwear and Tanning) Animal and vegetable oils and fats (U.D. for Oil Products) Soap including toilet soap (U.D. for Food Products-UDRAT) Noodles, Confectionery and Cakes (UDRAT) Dairy Products (UDRAT) Processed Tobacco (UDRAT) Canned Fruit and Vegetables (U.D. Agro-Foodstuffs) Cleansing Products (M.U. for Matches and Hygiene) Raw, homogenized and refined salt (U.D. for Salt) Plastic Articles (U.D. for Plastics) Wet and Dry Batteries Miscellaneous Metal Products (U.D. for Beverages) Wood Furniture (U.D. for Wood Furniture) A! U.D. - Unidade de Direccao (Management Unit) hi Formerly SEIDA, which was integrated into the MIE in March, 1989. - 46 - ANNEX 2-3 Page 2 of 2 SECRETARY OF STATE FOR FISHING (SSF) (2 ENTERPRISES) Building and Repair of wooden and fibre boats Canned fish Manufacture of fishing nets MINISTRY OF CONSTRUCTION AND WATER RESOURCES (nCA) (21 ENTERPRISES) Cement and lime Pottery and cement products MINISTRY OF AGRICULTURE (NA) (77 ENTERPRISES) Piocessed tea Processed and canned meat Milk and dairy products Sawing and machining of wood Rice hulling and polishing Sisal defibering MINISTRY OF INFORMATION (31 ENTERPRISES) Printing and publishing MINISTRY OF HEALTH (O(S (1 ENTERPRISE) Pharmaceutical products SECRETARY OF STATE FOR COTTON (MA) (9 ENTERPRISES) Cotton ginning and pressing SECRETARY OF STATE FOR CASHER (MA) (14 ENTERPRISES) Preparation of cashew kernels NATIONAL SUGAR INSTITUTE (NA) (5 ENTERPRISES) Raw and refined sugar MINISTRY OF EDUCATION (1 ENTERPRISE) PEOPLES REPUBLIC OF MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT Structure of Interest Rates -------------------------------------------- (In percent) Rates Effective from January 1, 1981 Rates Effective from January 1, 1987 1/ Public Cooper-Fam_ily r Individ- 91-160 181-365 1-2 2-6 Over 6 Enterpri- tiv-n Sector Et*t- uols 90 Days ODys Days Years Years Years LENDING RATES 2/ Agriculture Investment 4 a 4 S - LEVEL 1. Priority productive Working Capital 6 3 4 6 - sectors. Group I: Agriculture, light Fishing manufacturing (consumer goods), Investmnt S 3 4 6 - traditional exports, fishing, Working Capital 6 3 4 7 - and mining 12/14 13/16 16/18 18/20 19/21 20/22 Industry A Tourim Group I: Public Investmnt 6 4 - 6 - tranportation, Working Capital 6 4 - 7 - construction, agricultural, traders, manufacturing Transportation (other), end housing. 13/16 16/16 17/19 19/21 20/22 21/23 Investment 6 - - 6 - Working Capital 6 - - 7 Group III: Hotels (touricm) and 4s other priority activities. 16/10 16/17 18/20 20/22 21/23 22/24 Trade A hostelry Investmnt 6 4 - 6 - LEVEL 2. Services, comerco Working Capital 7 4 - 8.6 - crafts, and personal (essential consumer goods, etc.) 16/16 18/20 20/22 22/24 24/26 26/28 Other Activitie Investmnt 6 - _ 6 - LEVEL 3. Nonessential goods and Working Capital 7 - - 8.6 - services 26 26 28 30 32 36 Housing 6 4 - 6 6-10 Coemumption 3/ - - - - 8-10 DEPOSIT RATES Demand deposits 0 2 1 1 2 Demand deposits: 3 percent - - - Time Deposits Tiso deposits 12 13 16 18 20 20 1O-386 days 0 3 3 2 a 1-2 y-ars 0 4 4 3 4 Over 2 yrs 0 6 6 4 6 Source: Bank of Mozambique 1/ Lower rate shown appli-s to cooperatives and family sectors; and higher, to enterprises (public and private). 2/ Central bank discount rate: 3 percent, 1981-806; 10 percent, 1987 on amounts up to 6O of demnd deposits; 12S on dditional x of deposits). * 3/ So-called 5guided5 consumption, ie, for purchases of durables such as furniture, appliances, bicycles. o - 48 - ANNEX 2-4 Page 2 of 4 INTEREST RATES. 1989 THE MINISTRY OF FINANCE AND THE BANK OF NOZAXBIOUE NINISTERIAL ORDER Pursuant to the provisions of numeral 5 of Resolution 11/80 of December 31, concerning credit and interest rate policy, the Minister of Finance and the Governor of the Bank of Mozambique order the following: 1. The following interest rates are hereby fixed for lending transactions: 1. Central Bank discount vwndow: Rate 1 a. Rate: 10 percent p.a. b. Amount: up to 6 percent of demand deposits c. Term: Up to 3 weeks Rate 2 a. Rate: 12 percent p.a. b. Amount: Up to an additonal 6 percent of demand deposits c. Term: Up to 2 weeks II. Level 1 Covers the following economic sectors: - Agriculture and forestry - Farm marketing - Coor ratives (agricultural, consumer, and others) - Food industry - Electricity, gas, steam, and water Workin Cultural Investment To To To To To Over 90 180 365 2 3 3 da- s years years years 14 15 16 22 22 22 - 49 ANNER- 2- Page 3 of 4 III. Level 2 Covers the following economic sectors: - Manufacturing (light and heavy) - Extractive industries - Construction, public works, and housing - Export - Fishing - Railroad and maritime transportation and other public transportation for passengers and freight (enterprises and associations) Working Capital Investment To To To To To Over 90 180 365 2 3 3 AAYs d ay s days years years years (In percent) 18 20 22 24 25 26 IV. Level 3 Covers the following economic sectors: - Wholesale and retail trade, restaurants, hotels, tourism, and other - Passenger and freight transportation (individual operations) - Other activities not included in Levels 1 or 2 and individuals Working Canlital Investment To To To To To Over 90 180 365 2 3 3 d ays davs yvears years years (In Rercent) 26 28 30 32 33 34 2. Investments in construction and freight transportation made by the commerce and tourism sector and the housing sector by individuals may benefit from Level 2 interest rates. 3. Surplus inventories of essential goods in the consumer goods, commerce and industry sector may benefit temporarily from credit support Level 2 rates. - 50 - ANNEX 2-4 Page 4 of 4 4. The Bank of Nozanbique will determine by public announcement which goods are to be financed on these terms and the loan terms therefore. 5. The interest rate system fixed herein may also be applied to loans outstanding on the date of entry into force of this ministerial order if the pertinent contracts provide for modification of the interest rate in the event a different ceiling is legally established. 6. Disputes arising from interpretation and implementation of this ministerial order shall be settled by joint order of the Minister of Finance and the Governor of the Bank of Mozambique. 7. This ministerial order shall enter into force on January 1, 1989. Maputo, December 31, 1988 /sj /s/ Eneas da Conceicao Comiche Abdul Magid Osman Governor, Bank of Mozambique Minister of Finance - 51 - MOZAMBIQUE ANNEX 2-6 INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT Soctoral Distribution of Credit (Meticals, million) 12/81/86 12/31/87 09/30/66 SECTORS --------------------------------------------------------- Working Working Working Capital Investment TOTAL Capital Investmnt TOTAL Capital Investment TOTAL 1. AGRICULTURE AND CATTLE 41208 746 41904 482sa 1408 40696 54622 1464 66076 Tea 5504 62 5566 5570 96 56 7065 06 7181 Sugar 24090 68S 24866 27262 694 27046 28667 694 29351 Cashew 1522 6 1580 1697 16 1606 2627 16 2646 Sisal - - 0 - - 0 - 0 Copra 1761 s6 1847 2508 864 2857 8006 446 3641 Cotton 7731 1S 7746 10609 70 10679 12296 0 12296 Others 677 32 6os 672 171 1043 6S1 201 1062 2. FORESTRY AND WOOD PRODUCTS n.& n.o n.a n.o n.c n.a n.u n.o n.a 3. FISHERIES 2646 191 2889 4277 120 4397 5661 0 681 4. MINING 2078 129 2207 2161 184 2815 2161 184 2316 Coal 1504 129 1688 1674 134 1708 1574 134 1708 Others 674 0 674 607 0 607 607 0 607 S. MANUFACTURING 12127 770 12697 12801 690 13494 16027 997 17024 Food, Bov. & Tobacco 2302 74 2876 2762 188 2695 8770 527 4297 Textilea A Germ-nte 1864 222 2076 2096 256 2851 4000 19 4019 Chemicals 648 256 1090 946 217 1168 1858 247 1600 Metal Iurgy 3724 60 8804 4271 24 4295 4367 6o 4427 oth-r- 8404 180 8648 2726 64 2790 2657 144 2681 6. ELECTRICITY GAS A WATER 0 140 140 0 a 88 3 0 0 0 7. CONSTRUCTION A PUBLIC WORKS 7867 1142 8609 8629 1458 10082 10206 418 10624 6. DOMESTIC TRADE 2564 144 2708 9122 860 9462 14997 891 15868 9. EXTERNAL TRADE 7118 0 7118 9079 0 9079 11078 0 11076 10 TRANSPORTS WAREHOUSING A COMMUNICATION 6006 7824 15420 11119 0837 2006s 11176 12698 23e73 Rail Tranep. 7187 6707 12644 9071 6210 17971 90761 1066 20444 Road Tranap. 117 588 705 179 612 691 28 646 671 Other Trenop A Warehousing S66 1029 1694 900 1ll 2015 1112 1867 2479 Coi _unlcations 177 0 177 279 0 279 279 0 279 TOTAL 83206 10686 93792 105501 14008 1195684 125965 16502 142657 SOURCE: Banco de Mocambique, November 28, 1980 - 52 - ANNEX 2-6 MOZAMBIQE ---- INDUSTRIAL ENTERPRISE RESTRUCTURtNQ PROJECT Evolution of Bank Credit to Enterprises by BSnk and Activity (Neticais, million) 12/31/36 03/31/87 06/30/67 09/31/37 DESCRIPTION Value X Value X Value X Value X …---- ----- ----- ----- ----- ----- -------- …- -- Total Credit 126,360 100 126,460 100 1S1,370 100 137,063 100 B.M 99,210 79 101,630 79 103,990 79 109,567 79 B.P.D 22,400 18 23,040 18 23,390 16 24,818 18 B.S.T.N 3,770 a 3,790 3 3,990 3 38,6S 8 Agriculture 68,090 100 64,780 100 66,730 100 69,632 100 B.1 42,820 67 43,510 67 44,640 67 46,684 67 B.P.D 20,700 88 21,270 83 22,190 38 22,967 88 B.S.T.M 70 0 0 0 0 0 81 0 Industry 21,420 100 21,890 100 22,280 100 22,841 100 B.U 18,180 85 17,990 84 16,820 64 19,303 e6 B.P.D 1,700 8 1,770 6 1,700 6 1,861 8 B.S.T.M 1,590 7 1,680 6 1,760 8 1,667 7 Construction 8,580 100 8,590 100 9,040 100 9,004 100 B.M 8,600 99 8,500 99 8,970 99 6,965 99 B.P.D 0 0 0 0 0 0 0 0 B.S.T.U 80 1 90 1 70 1 49 1 Transport 16,450 100 16,290 100 16,720 100 17,714 1OO a.111 15,310 9 16,160 09 16,640 100 17,657 100 B.P.D 0 0 0 0 0 0 0 0 B.S.T.M 140 1 130 1 s0 0 57 0 Commorce 16,840 100 17,410 100 17,100 100 18,862 100 B.11 14,950 89 16,470 89 15,020 88 17,118 91 B.P.D 0 0 0 0 0 0 0 0 B.S.T.U 1,890 11 1,940 11 2,080 12 1,744 9 SOURCE: Banco de Mocambique. Maputo, February 4, 1986 MOZAM ~ ~ ~ ~ ~ ~ ~~ .0 ZINUSMAL U PrOCT SUMER" DATA UN 40 NAiM EITEWIS1 ORGAZISQ RECI2ES L1?1C?ASI , - -. - j4USD EGO Z Ca LXEW~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 HERAE CLS-VX | 37 - ClMtlXOS DE .ICA CLtrinos * * ',160 1,.E0} 3,60DI t.050 _ lwlgrLos- u s to 2 t7 - EtlOcHx Chi _3$ * 0,S75 1,St5 32,5001 17.500-a' 32 -CJ DCR CcUrs. .Co do |a*ta b 0 4,00 104,c0 -ol,OD01'.?5l A 34 - C;RUPO HAUOL Coor. altos alimetntses - '.9 ).798! 1-.91~ Sl,m 17 -__ETAL tlOX L_to_rL_ (CO_te_t_e_)__ __ 1,155_ __ IO s5 -_ ! 3% - CM-OLWRASE CCoabs EI.ctrtcos * Toros s1 * _s r I,2 :0,i *5 O1 U0_ 03 -CI SC C CiatTes "fIs (3 13a0O I a3. 1 .01 01 - XAOCi Pneus 087$ 00S 7.'3001 jD5 .II I $ 05 - VTuASAL Sl .T3uo i 3O7 21 - CSO TOS DE CArI.UE ii o ii ... *_ :001 1,:D3 1.sa _2 - P2RSUL AIuDAL lCos. * tes | th 3i 9001 3?00t .30_ I 'i -10 cLn4CCabot .lcs bcacs so91L:~( 4 eu* 23 - LUSALTE OE OC C ttE U Caes or. tuolsncai - u.s M 1 t31.3911 400 2S - G2UPO J.F . S(TSOoi Al-od1o. ciz4tl o r | * 1 2.' as Co_; hr* 10 - FLOHA - ltiD IFIOESTAIS DE AhlCA T oros de teaira %.01 .. " C, |§ J.'6t*ZOi172 ~;$441uteci si 01 - LPOno - t 7.800 P. $IC5 DE LIONDE 5 rrog 4.I | 1 ;'v0! 7ettis 14 -FSOL - FTAUbCAS ASSOC7AAS DE aLEO S oK OA1U I - '3.4031 |43 11 II Cfl4VETO- CUtVEIAS N 1EtICE CRAe,TIE Ie!- 3 1 i.6oo1001 2.500 _ NI_me_ 29 - SOCIEDAOE AC22COLA DO 1;COYATT A qfisuear il { I *1 1 ] ~ 3 ; 13.!00 3.ooo _i 3O 3 3S AcCUARElIgA OE 'UFAKtUSSE i eucar ||U | !* i- 'I,l !,}00 t S.OO .' - * 13 - TtECRIra T mxcs bIr3*61eaIt 503; " | L'° - ALCODS DE L . Algozio * C I *.04 02 - FWSlCA tE 13tCLETAS DE 'wmB10UE Cuaicielst 1- 1 1C iluo I !s * I_ultriss jO3 -GRUFO bLRCZR Tincas1 || |- ,cS ,3t .2 ; L bs racmetttte |10- -FACZA - FAB. tL .OtESTORSS DA TilIA d Cobcores * I C - , 4 I6 - CRUOLAG.ESA:tOS lTadia cL il * O 1 ,I 31 t *lta * I IS -CO'tEC Cucelarna. uccosilios X ctlic.| *, S i *-- I OS2I),S601| i5Oi | J tt rl*T I I I 1 - UNl;tI FABRIL - UCLD LOC Sao:o dI - to de b.rah i.. I .0O _C | S; 12 - ACObOL - FAb. CA TMENL*DTAL DE 39LRACO SJOOsi j I 3 ;43, 1 uS1 *uol !C - CI CEL i FundiCio i * i- i j |-.JOta .I |.00 ;6 0 29 - SOCTEDADE Et .AAOS - SAT ECTabOco Ak 0 -L I 3 I.s OI °.,°0; 3.6 33 - A-;CAACO ( ComcerctilZJCo ro 1.7 a001 3001 :TOOII1 U 35 - -)Klt tOERCi OL Xos. S3nences. 4ec. d|e er.30os 02 -i :CTA - CS. .; ... Ait.; i.eLaio a* terrenCs jC0EAS DC aCoe S -- g * * 20-3 AOA -LCA ACR. LOC.TRS AS$&S!iZCA Coborcores CIO I-- * 161 - ElIMA:caGL2.S '.AoLC amoores¢$tencil Go s-oul. 3 col. | -- -1 ).3|I -61 ri t ;_ zss O uSL - barracE s I .+I *- I_ !09 - ECOMt ! 'caercta&lzaricui I.Od. Lii i , o11 3..00 35 - ~~~~~~~rn0fl CO:IERCIAL dufos, ioaenC~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~s. .1CC. 20.680 :o,~~~~~~~~~~~~~~~~~~~~&,l 233 . ~~~~~~~~~~~ IDUSTRIAL ENTEPRISE RESTRUCItPIO PROJECT TEOINICAL ASSISTANCE COSTS TO THE ENTERPRISE RESTRUCTINO UNT (S DolIare. 00) 19(Actual) 1 1969 1 190 1991 192 19 1994 I TOTAL IwaNt L.C. I F.C. IWII L.C. I F.C. iNxul L.C. I F.C. Iatxl L.C. I P.C. |IdMl L.C. I F.C. Ilixi L.C. I F.C. IlxNl L.C. I F.C. 11 I L. C. F F.C I I -- @_I-I I-I I I I III-I-I1 1I1 1I-l.l. . II-__ _ _I -I-1I-I -I A. PArWVX ST:AF COSTS 1. Lea nd. Advisor 3 0.00 29.50 12 0.00 111.60 12 0.00 119.41 12 0.00 127.77 12 0.00 158.71 12 0.00 140.28 12 0.00 156.62 75 0.00 627.81 1 2. cit 3 0.00 24.20 12 0.00 91.20 12 0.00 97.58 12 0.00 104.41 12 0.00 111.72 6 0.00 89.77 3 0.00 851.96 60 0.00 82.87 S. Egsns r 3 0.00 24.20 12 0.00 91.20 12 0.00 97.68 12 0.00 104.41 12 0.00 111.72 6 0.00 59.77 3 0.00 81.96 60 0.00 820.87 ? Total Parex Coat. 9 0.00 77.90 8 0.00 294.00 86 0.00 314.88 S 0.00 388.60 J6 0.00 860.18 24 0.00 265.6S 18 0.00 220.40 198 0.00 1.869.86 1 -- - ------ - - - - -- - ------- ----------- ---------- -------- ----_--- --__----- - - --- -- - --- -- _- --- -- _----- -- _----- -------- -_- _- ___________________________________________________---- - - D. LOCAL STAFF 4. Project Coordinator 12 2.07 0.00 12 2.07 0.00 12 2.21 0.00 12 2.37 0.00 12 2.84 0.00 12 2.71 0.00 12 2.90 0.00 e4 18.66 0.00 I 5. Econoaiata (a2) 0 0.00 0.00 24 3.11 0.00 24 8.32 0.00 24 3.56 0.00 24 8.60 0.00 24 4.07 0.00 24 4.36 0.00 144 22.22 0.00 i S. Procuremnt Officer 0 0.00 0.00 12 2.07 0.00 12 2.21 0.00 12 2.87 0.00 12 2.84 0.00 12 2.71 0.00 12 2.90 0.00 72 14.81 0.00 l 7 nginer 0 0.00 0.00 12 2.07 0.00 12 2.21 0.00 12 2.37 0.00 12 2.54 0.00 12 2.71 0.00 12 2.90 0.00 72 14.61 0.00 8 Accountant 0 0.00 0.00 12 0.99 0.00 12 1.06 0.00 12 1.14 0.00 12 1.22 0.00 12 1.80 0.00 12 1.39 0.00 72 7.11 0.00 I 9 Layer 0 0.00 0.00 6 1.44 0.00 6 1.84 0.00 6 1.68 0.00 6 1.76 0.00 6 1.66 0.00 6 2.02 0.00 86 10.29 0.00 10. Secretary (42) 0 0.00 0.00 24 1.90 0.00 24 2.08 0.00 24 2.17 0.00 24 2.33 0.00 24 2.49 0.00 24 2.66 0.00 144 13.5 0.00 1 11. Other Support Staff 0 0.00 0.00 24 1.21 0.00 24 1.29 0.00 24 1.38 0.00 24 1.48 0.00 24 1.86 0.00 24 1I6 0.00 144 6.64 0.00 1 (Driver A Cleanning) Total Local Staff Coat& 12 2.07 0.00 126 14.85 0.00 126 15889 0.00 126 17.01 0.00 126 18.20 0.00 12 19.47 0.00 126 20,8S 0.00 7 106.82 0.00 I Tota Staff Coat, 21 2.07 77.90 162 14.85 294.00 162 15.89 314.58 162 17.01 356.60 162 18.20 380.16 10 19.47 268.83 144 20.83 220.48 963 10S.32 1.n69.5 C. OPUPATINO COSTS 12. Translation 0.00 0.00 0 0.00 21.60 0 0.00 23.11 0 0.00 24.78 0 0.00 26.4t 0 0.00 28.81 0 O.0O 30.60 0 0.00 184.81 I 13. Doaatic Travel 0.00 0.00 0 20.00 0.00 0 21.40 0.00 0 22.90 0.00 0 24.50 0.00 0 26.22 0.00 0 26.05 0.00 0 143.07 0.00 1 14. Other Equipmnt 0.00 0.00 0 80.65 0.00 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00 0 0.00 0.00 0 eo.68 0.00 1 15. Miscellaneous 0.00 0.00 0 44.78 0.00 0 47.92 0.00 0 81.27 0.00 0 54.86 0.00 0 86.70 0.00 0 62.81 0.00 0 320.33 0.00 I 16. Housing (PAMI 0.00 9.60 0 0.00 40.80 0 0.00 43.68 0 0.00 46.71 0 0.00 49.96 0 0.00 53.46 0 0.00 87.22 0 0.00 301.45 4I 17. Intnti Travel (PARTE 0.00 6.60 0 0.00 18.20 0 0.00 14.12 0 0.00 16.11 0 0.00 16.17 0 0.00 17.80 0 0.00 18.51 0 0.00 101.02 1 18. Equipment (PARTEX) 0.00 60.88 0 0.00 80.00 0 0.00 0.00 0 0.00 0.00 0 0.00 70.00 0 0.00 0.00 0 0.00 0.00 0 0.00 Io.58 1 19. Hone Off Coat. (PARTEXO 0.00 2.88 0 0.00 26.70 0 0.00 28.87 0 0.00 30.57 0 0.00 32.71 0 0.00 85.00 0 0.00 37.48 0 0.00 19.67 I Total Operating Ceota 0.00 79.t3 0 145.43 152.30 0 69.32 109.48 0 74.17 117.12 0 79.86 195.32 0 84.91 134.09 0 90.e6 148.46 0 544.04 981.41 1 -_ -_ -_--------- -- ----_ -_ -_ -_-__---_-_- _- _-_- _-- _- _---------- --------------- ---------------- ------------ - -_ --_-_ ---------_ ----_-_ ------ ------------_ -- --_-_-_-_ ---_ -- ------_ -_-_-_- _-___-- _- _- _- - 0. COI6,II1 ESC 20. Foreign Costa (8S) 0.00 0.00 0 0.00 22.32 0 0.00 21.20 0 0.00 22.89 0 0.00 27.77 0 0.00 20.00 0 0.00 18.20 0 0.00 132.17 1 21. Local Costa (86) 0.00 0.00 0 8.01 0.00 0 4.26 0.00 0 4.86 0.00 0 4.68 0.00 0 8.22 0.00 0 6.86 0.00 0 32.81 0.00 1 Total Continganciee 0.00 0.00 0 8.01 22.32 0 4.26 21.20 0 4.56 22.69 0 4.88 27.77 0 8.22 20.00 0 .586 18.20 0 32.51 132.17 1 TOTAL COSTS S0 2.07 157.53 162 168.29 488.82 162 89.47 448.24 162 98.73 476,41 162 102.43 630.261 15 109.60 419.92 144 117.26 862.16 988 66614.801 8293. 114.13 63,616.01 I tIEIO: WiN - eaneontha, L.C a local currency. F.C. . Fore'ign Currency 181.986 61.073 IO0.00%1 I' - 55 - ANX3-2 Page 1 of 6 MOZAMBIOU HUMAN RESOURCES AND TRAINING INSTITUTIONS IN THE INDUSTRIAL SECTOR The acute shortage of qualified personnel is a major constraint to industrial sector development. The banking sector requires personnel trained in financial and credit analysis; the business community requires trained employees, in the areas of general business management, financial management, accounting, marketing and sales, production, inventory control, and plant management and technical fields. Computing and information management systems are needed in all sectors. Between 1975 and 1986, Government accorded high priority to education. Primary enrollment more than tripled and secondary enrollment more than quintupled. Over 1.5 million adults enrolled in specially-designed courses at all levels of the education system. The literacy rate jumped from an estimated 10 percent to about 38 percent during the same period. In 1986, there were an estimated 1.26 million enrolled at the primary level, 132,000 at the secondary level and 1,630 at post-secondary level. The effects of Government attention to education are apparent in the 1980 census data, which show literacy rates for the 15-24 year age cohort reaching 40-50 percent, as opposed to less than 8 percent for the over-60 population. 1/ The two IDA credits to the industrial sector would support Government efforts to build and sustain human resource capacity: the Small and Medium Scale Enterprise Development (SHED) credit--to strengthen the capacity of the banking system to manage long-term credit, its appraisal and supervision; and the IERP credit--to strengthen Government capacity to implement the overall rehabilitation program, in particular to finance training and to assist Government develop redeployment programs for laid-off staff. The following preliminary assessment of available training facilities which could eventually provide assistance to the industrial sector is based on mission interviews and visits. Ministry of Labor (ML). At present Government maintains within the Ministry of Labor a Provincial Labor Directorate (Gabinete da Funcas Publica) with a department where those who have lost jobs or seek employment may register. Most of the applicants who register are low-level, unskilled workers. Some ministries and enterprises notify the Directorate when they have vacancies, others do not. A recent draft proposal on labor force policy- -which was to be discussed in March by the Council of Ministers --would require enterprise registration of vacancies and prohibit an employee who has / Data in this paragraph taken from the SAR for the Mozambique Education and Manpower Development ProJset, April 15, 1988. - 56 - ANEX 3-2 Page 2 of 6 a job from accepting new employment without first leaving the current one. This is intended to discourage job-hopping motivated by higher salaries. SETEP (Secretaria de Estado da Educacao Tecnico Profissional) is the State Secretariat for Technical-Vocational Instruction. Under the Ministry of Education, SETEP is responsible for coordinating at a central level and setting guidelines for technical and vocational training throughout the country. It began functioning as the National Directorate of Technical Education in 1977, with training followed by job placement; in 1983, SETEP was created, and in 1986, legislation was enacted formally setting it up as a semi-autonomous entity within the Ministry of Education. SETEP carried out job placement until 1987, when the function was transferred to the Ministry of Labor. SETEP maintains that the ML is not make sufficient efforts to place those who have completed training. However, there is a reorganization underway within both the SETEP and the Ministry of Labor and it is uncertain which entity will eventually handle job placement. Under the auspices of SETEP within the subsystem of technical and vocational training, there are 24 basic level schools (8 agricultural, 2 commercial, 6 industrial and 8 commercial/industrial) and 8 medium-level institutes, of which 1 is commercial and 2 are industrial. It is required that those intern at the basic level have four years of primary education. At medium-level nine years of educations are required. Lack of books, inoperative equipment and scarcity of teachers undermine the quality of vocational education. SETEP TRAINING CENTERS AND INSTITUTES The Commercial Institute of Maputo (ICM) offers a medium-level certificate in accounting in both three-year (full-time) and four-year (part- time) programs. The academic requirement for entrance is nine years of primary education. Last year the ICM trained 617 students in the two programs. Graduates from the ICM are qualified to begin university training. The ICM is presently receiving assistance under the on-going IDA Education and Manpower Development project to update accountancy curricula and examinations that would be of sufficiently high standard to be internationally competitive. The Commercial and Industrial Institute of Beira is expected to begin offering medium-level courses with IDA assistance under the Beira Corridor and Second Education projects. SETEP expects to set up a commercial institute in Nampula in the future. There are several vocational training schools (for high-school aged students) and centers (for adults) in Maputo and all are constrained by lack of technology, old machinery, dilapidated buildings, lack of qualified instructors, inadequate budgets, and outdated equipment not relevant to enterprises for which they are training. The schools (escolas) are geared to young people who enter after six years of primary education. The May 1 Industrial School offers courses in lathe operation, welding, civil construction, design for civil construction, analytical chemistry, and electricity. After three years, including 2-3 months with OTJ training in an enterprise, students receive a Basic-level Certificate and are placed in enterprises. Their first year of work is difficult since they have had a - 57 - Page 3 of 6 limited amount of actual machine time, and training has been on outdated equipment. The Industrial School of Natola has similar curricula and similar problems: the pedagogical director mentioned that the machinery used for teaching was installed in 1979 when the school was opened. The centers/institutes cater mostly to enterprise employees. The Electro-Technia Center trains enterprise employees in industrial electronics, coil-winding, electrical installation, and automobile electricity. Courses last for 36 weeks followed by 10 weeks of on-the-job practical application in their respective enterprises. A certificate of professional qualification is granted after passing exams. In 1984 one course on refrigeration was given; however, after the instructor left the country, the equipment fell into disuse and the course was not offered again. Sometimes Electro-Technia accepts repairs from enterprises which are more poorly-equipped. The Industrial Institute of Maputo (IIX) offers three-year (full- time) and 3.5-year (part-time) courses in general mechanics, electricity systems, industrial electronics, construction, hydraulics and analytical and industrial chemistry. A certificate of mid-level technician is awarded after exams. Graduates are prepared to enter university-level engineering training. Most return to their sponsoring enterprises. The IIM director cited problems in providing practical experience to students, especially lack of modern equipment (for general mechanics and electricity) and limited access to raw materials (for construction). The IIM has contracts with various enterprises to provide its students with practical training in electricity systems and electronics. IIM received Swiss and Swedish support in the past and expects continued SIDA assistance in construction of a new building for electric systems and electronics. The Vocational Training Center of Nachava trains students in automechanics and carpentry. It operates at 50 percent capacity and in 1988 trained 24 students. A Certificate of Category C is awarded after the first 10 months of training; if a student returns for more technical training, usually the case in automechanics, he would receive a Certificate of Category B after 10 months. SETEP coordinates with the National Planning Commission (NPC) the employment needs of ministries, including enterprises under their supervision. The NPC is responsible for establishing skilled manpower allocations for university graduates and for technical graduates. Ministries and State Secretariats inform NPC annually of their needs for medium- and higher-level technical staff in each specialty. On the basis of these requests, manpower needs are registered at SETEP, which then supplies ministries with graduates from the technical/vocational and commercial training institutions under its tutelle. However, SETEP does not contact ministries directly. SETEP is willing to provide assistance to enterprises and maintains that 90 percent of its personnel are skilled technicians. SETEP would likely benefit from increased promotions of its services. Recently it has prepared information brochures with animated designs in black-and-white to inform the public of opportunities for technical/vocational training in, inter alia, - 58 - ANNEK 3- 2 Page 4 of 6 civil construction, mining, administration (bookkeeping, typing), industrial and laboratory chemistry, electricity and construction. At present SETEP offers job counseling in vocational training only for full-time students but plans to set up a similar program for adults. There was a first m4eting of all directors of vocational training in May 1988 and SETEP is now preparing a policy to implement decisions taken at that time. MINISTRY OF INDUSTRY AND ENERGY TRAINING CENTERS Ministry of Industry and Energy (MIE). There are three training centers set up under the MIE: The Center for Industrial Training (CFI), which was set up under the previous MIE; and two Vocational Training Centers, which were established under the previous SEIIA. On March 15, 1989, both vice-ministers of MIE were to present to the Minister a plan to integrate MIE and SEIIA, including the merger of the CFI and SEIIA training centers under one umbrella. At appraisal, this had not been completed: MIE was basically at a standstill due to its reorganization and consequent turf battles at the management level and uncertainty on the part of employees about their future. Center for Industrial Training (CFI). While the majority of courses offered by CFI are technical (production planning and management, maintenance, design, inventory and stock control) and clerical (word- processing, bookkeeping, stenography, English), there are several courses aimed at middle-level managers (basic and applied accounting of 1.5 months each, financial management including economics in association with the Eduardo Mondlane University for 3 months). CFI was originally set up under MIE as its Department of Human Resources. Beginning in 1986 with SIDA support, and in 1987 with UNDP/UNIDO assistance, it began to operate with financial autonomy while still under the auspices of MIE. It offered courses in operational methods for foremen (OTJ with machine training) and a seminar for managers on industrial development and training (organization, methods, work simplification). It was intended to assist enterprises under the tutelle of MIE although its services are available to enterprises which fall under the tutelle of other ministries; cooperative agreements with eight of these have been signed. Enterprises cover the fees for their personnel to attend courses at CFI. Since February 1988, CFI has been self-financing. About 8,000 students have enrolled in various courses at CFI during its two years of operation. The academic entrance requirement for most business courses is six years of primary education. CFI has eight classrooms and is well- equipped. In Phase 2 of UNDP/UNIDO and SIDA assistance, which would focus more on enterprise management, CFI expects to target middle- and higher-level managers and plant supervisors from the 40 selected enterprises drawn up by Government and the Bank to be considered for rehabilitation assistance, beginning with ERMOTO, ELECTROMOC and AGRO ALFA. CFI would continue to offer the above-mentioned courses as well as workshops to address problems particular to women, establish a personnel information system in MIE and a documentation center. CFI hopes to recruit instructors from the university - 59 - ANNEX 3-2 Page 5 of 6 to reinforce its own in-house personnel in order to develop a local consulting capacity. SEILA Vocational Training Centers (2). originally established in 1978 under the Ministry of Labor and transferred in 1984 to SEILA to assist enterprises under its tutelle, SEILA vocational training is offered in two locations. With Italian financial and technical support, the centers offer practical training in repair and maintenance of equipment with courses in mechanical design, civil and industrial electrical installation (at one center) and in machine tool work, machine maintenance and welding (at the second center). A new site for consolidation of some activities is nearly finished and some classrooms are operational. The academic requirement for welding and machine training is completion of the sixth year of primary school. For electricity and design, ninth year. Since 1984 the SEILA centers have trained around 124 workers. Course duration runs from 12-28 months, depending on the subject. In periodic inspections, the Ministry of Labor evaluates classes to determine the level of professional qualification. A certificate of professional qualification is awarded upon completion of each level of instruction, e.g., welder, first-level, second-level, third- level. SEILA officials state that there are few course participants from enterprises; experience has shown that enterprise employees drop out after six months, due to a law which states that the employee must contribute a percent of his salary to Lover training costs after six consecutive months of training. Thus SEILA estimates that 97 percent of those who attend training are private individuals who do not have jobs prior to training but secure employment after its completion. Other problems cited by SEIIA officials include reticence by enterprises to contribute to operating costs of the training centers, need for modern equipment and protective clothing and participants' difficulties with transportation, lodging for those from outside Maputo, and a relatively low average and general level of literacy. ENTERPRISE TRAINING CENTERS Enterprise Centers. Several enterprises maintain their own training centers, which vary from one room with some equipment to a well- planned training program for each employee, classrooms, workshops, equipment and visual aids. A few of the better-equipped enterprises include ENTREPOSTO, MABOR, EDM and SOGERE. ENTREPOSTO, the Mercedes and Peugeot dealer in Mozambique, maintains a showroom, garage and training program in each of its four centers: Maputo, Beira, Nampula and Quelimane. Courses are given in electrical systems, fuel injection, general mechanics and parts maintenance. Completion of the sixth year of primary school is a prerequisite for enrollment in this program. Entreposto covers the cost of training external participants, which have included employees from the military, PETROMOC, EDM, CAJU and Toyota as well as interested individuals. The enterprise trains approximately 300 persons annually depending on needs in their four centers. A diploma is given upon completion of each course. Turnover is extremely low. ENTREPOSTO has modern well-maintained workshops, equipment and machinery, and benefits from private, as well as KfW, financing for its activities. - 60 - AN=E 3-2 Page 6 of 6 The President and General Manager of HABOR, the tire company, believes that the most pressing need in the industrial sector is for trained middle-level managers. Each new employee takes an exam (reading, problem- solving, accounting) to determine scholastic ability and placement. He is then interviewed by the President. If an employee receives a favorable evaluation by supervisors after an initial 1-3 months, a training program-- both on-the-job and coursework- -is developed and his progress reviewed by the President every six months. In order to raise the literacy level of staff, the enterprise offers evening classes such as math and chemistry. Classes in English are mandatory and employees are aware that they cannot progress beyond a certain stage without it. There are about 500 employees in MABOR. MABOR accepts about 20-30 employees per year from other enterprises, e.g., TEXLON, PETROMOC, MAQUINAGA, VIDRERA and provides them with the same evaluation and opportunities for training. It has also provided training of 3-4 months for employees from Tanzania and Angola tire plants. About 10 percent of higher-level technicians are female and the percentage is increasing. EDM (Electricity of Mozambique) provides training for its own employees and for staff whose enterprises sponsor them to learn production and distribution of energy. It maintains a new, well-equipped training center in Maputo. The Ministry of Agriculture controls the planning and curricula of several enterprises which offer training. One of these, MECANAGRO, is essentially a service enterprise for agricultural machinery but also makes spare parts. With technical assistance from Italy, the self-financing center instructs 70 students per annum in a basic course of 10 months in operation and maintenance of tractors, diesel mechanics, automobile electricity and spare parts management and inventory. Nearly all places are filled by MECANAGRO employees--sent from branch offices--although outsiders are allowed to attend, at a fee, on a space-available basis. The minimum academic requirement is sixth year primary. After completion of the course, a Certificate of Vocational Training is awarded. The center has equipment in good operating condition, some of it brand-new, financed by Italy. Other agricultural enterprises require four years of primary education before commencing training, such as GAPECON, a dairy and training center in Namaacha, and INCOL, a pig-raising enterprise in Maputo; both offer training for 6-12 months and award the same certificate. Women from rural cooperatives are more visible in the two latter agricultural training activities (5-15 percent) than in the agro-industrial or industrial training. SETEP should make available to enterprises its information on training opportunities, but the Ministry of Labor is better-placed to handle and match offers of supply and demand, as it is already doing. This is recommended at least for the present until Government has reorganized (within both SETEP and the Ministry of Labor; it is uncertain which will handle job placement in the future, and there is also discussion that some of their functions may be merged). - 61 - ANNE 3-3 Page 1 of 8 MOZAMBIOUR INDUSTRIXL ENTERPRISE RESTRUCTURING PROJECT DRAFT SCGPE OF PACKAGING SUB-SECTOR STUDY 1. Approach to the Study. Packaging is of great importance for the protection of goods during transport and handling as well as for the marketing of goods with the help of attractive appearance and/or clear definition of the content of the package. Therefore it is proposed that a team of consultants would review the principal packaging practices and materials in Mozambique in order to provide the Government with recommendations for rehabilitation, diversification and/or increase of its packaging materials industry. The terms of reference and the selection of consultancies would be jointly made by the Government, UNIDO and the World Bank in Accordance with the Bank guidelines for the rise of consultants. The consultancies would be financed under the proposed Industrial Enterprise Restructuring Project (IERP), initially through an IDA Project Preparation Facility advance (P-470-l). 2. StudX Obiectives. The consultants would carry out an in-depth study to: (a) analyze the present practices of packaging goods, including industrial products. The study would identify areas for improving packaging practices with the view to possibly reduce the cost of packaging, increase attractiveness of goods and reduce transport damages and increase the use of locally available raw materials for packaging; (b) propose possible solutions to existing problems in the packaging material industry, including the analysis of the present trend to disperse the production of packaging materials such as glass bottles and tin sheet containers. The results should lead to recommendations to a development strategy and to medium-term policy measures to be implemented at the macro-economic, sub-sectoral and enterprise level. 3. The scope of the investigation and the final report would cover the following issues: (a) The packaging practices and their improvement, covering packaging materials such as paperboard and paper, wood, glass, plastic natural and artificial fibres etc.; (b) The analysis of the locally available and the imported packaging materials with the view of increasing the use of locally available raw materials and their processing; (c) The investigation of existing industrial capacities for packaging material production: capacity utilization, degree of equipment obsolescence, production technology, locations and ownership. The investigation should also include a description of inputs and sales markets, including connections for imports and exports; - 62 - AN=E 3-3 Page 2 of 8 (d) Individual enterprise-level, key performance indicators will be determined such as production efficiency, cost, profitability, product demand (domestic and abroad). These data should be compared with comparable performance indicators from other developing countries. (e) Constraints should be identified which may impede the adjustment of the packaging industry of Mozambique towards the desirable volume and composition of output. Such impediments could be technology, management, logistics (transport), labor, finance, etc.; and (f) Recommendations should comprise an overall long-term development strategy for the packaging sub-sector, medium- term policy measures necessary to support restructuring and rehabilitating the sub-sector, and selected, individual measures, primarily at selected enterprise level, such as modernization of technology, re-investment, divestiture, mergers, product diversification, etc. - 63 - ANNEX 3-3 Page 3 of 8 MQZADBIOUE INDUSTRIAL ENTEPPRISE RESTRUCTURING PROJECT DRAFT SCOPE OF METAL-WORKING SUB-SECTOR STUDY 1. Ap=roach to the Study. The Metal-Working industrial sub-sector is to be understood to cover all metal-mechanical and metallurgical industrial processing activities. In Mozambique, main activities include non-flat steel re-rolling, ferrous and non-ferrous casting, mechanical processing. In the field of industrial operation and product design, there is certainly room for improvement. At the same time, production cost and product prices could be reduced in absolute terms. Therefore it is proposed that a team of consultants would review the current status of this sub-sector (excluding metal packaging which will be covered by the packaging sector study) with a view to provide the Government with recommendations for rehabilitation and possibly for restructuring, and for efficient growth. The terms of reference for the consultancies and the selection of the consultants would be jointly made by the Government, UNIDO and the World Bank in accordance with the Bank guidelines for the use of consultants. The consultancies would be financed under the proposed Industrial Enterprise Restructuring Project (IERP), initially through an IDA Project Preparation Facility (PPF) Advance (P-470-1). 2. Study Objectives. The consultants would carry out an in-depth study to: (a) obtain an overview of the existing metallurgical and metal mechanical industrial activities in Mozambique, including existing vertical and horizontal inter-sectorial linkages; (b) identify possibly existing productive imbalances and/or missing production steps which might be introduced; and (c) identify possible solutions to constraints, including recommendations of policy measures which could be implemented by the Government at macro-economic, sectoral and enterprise level for the rehabilitation and rationalization of this sub-sector. 3. The scope of the study would, therefore, cover at least the following main issues: (a) The structure of the sub-sector with main industrial processing activities and units; the present effective industrial capacity; t-he degree of capacity utilization; the present condition of plant and equipment as well as the applied technology. Patterns of ownership, domestic and foreign markets, capital structure, ecc. should be described; (b) The performance should be analyzed showing brands, production volume and composition, costs and productivity, domestic and export sales, competitiveness and efficiency. The study would compare the performance of selected Mozambican enterprises with those from other, comparable developing countries; - 64 - ANNEX 3-3 Page 4 of 8 (c) Constraints would be identified which impede continuous growth and efficiency of different segments of the sector, such as technology, engineering, linkages or integration with other industrial sub-sectors. Problems may also be identified in the areas of management and labor, industrial inputs, access to financing for assets and/or working capital. etc.; (d) Serious deficiencies in labor safety and/or pollution control should be identified and improvements should be proposed; and (e) Recommendations should be made concerning a longer-term development strategy for this sub-sector. These concepts should be supported by medium-term policy measures such as investment incentives, export promotion, improved provision of industrial infrastructure (energy transport, etc). The sub-sector rationalization should also consider possible divesture, mergers, etc. - 65 - ANEK 3W- Page 5 of 8 HOZAMBIO INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT DRAFT SCOPE OF TEXTILE SUB-SECTOR STUDY 1. AhDroach to the Study. The textile sector plays an important role in the economy of Mozambique in terms of employment and value added. Therefore, it is proposed that a team of consultants review the current status of the sector with a view to provide Government with recommendations for its rehabilitation/restructuring and promoting its efficient growth. The selection and terms of reference for the consultancies would be jointly made by the Government, UNIDO, and the World Bank in accordance with Bank guidelines for the use of consultants. The consultancies would be financed by the proposed Industrial Enterprise Restructuring Project (IERP) and IDA's Project Preparation Facility (PPF) Advance (P-470-1). 2. Study Obiectives. The consultants would carry out an in-depth study to: (a) identify productive constraints that face enterprises within the different segments of the textile chain (ginning, spinning, weaving, knitting, and garments). The study would, in particular (but not exclusively) include in its review a comparative analysis of performance and problems that affect public sector textile firms; (b) identify possible solutions to the constraints, including recommendation of policy measures to be implemented by Government at the macroeconomic, sectoral, and enterpri..e level for the rehabilitation and rationalization of the textile sector. 3. The scope of the study would, therefore, cover the following issues: (a) The structure of the sector: usable capacity; capacity utilization; present condition of plant and equipment and technology; patterns of ownership; distribution (domestic and exports markets) channels; capital structure etc.; (b) Performance: key indicators of performance (trends, production data, costs, productivity); effective demand (domestic and export) estimates and competitiveness; efficiency. The study would compare the performance of Mozambican enterprises with those from relevant developing countries; (c) Constraints: identify the factors that have impeded the growth and efficiency of the different segments of the sector (technology, engineering, linkages or integration with other sectors, management and labor, non-labor inputs, access to long term finance, etc.), marketing etc; (d) Safety (sanitation, pollution control, effluent treatment etc.); and - 66 - Page 6 of 8 (e) ReCoendations, (i) short term measures necessary to rehabilitate/restructure the sector, (ii) medium policy measures on export and investment incentives, import competition, sector rationalization (divestiture, mergers, etc.), tern finance etc. The objective would be to reorient the sector in a ianner consistent with Mozambique's comparative advantage. - 67 - ANNEX 3-3 Page 7 of 8 hOZAMBIOUE INDUSTRTAL SNEPISE RESTRUCTURING PROJECT DRAFT SCOPE OF EDIBLE OIL SUB-SECTOR STUDY 1. Approach to the Studv. Potential exists for the edible oil sub- sector to quickly begin to make a significant contribution to industrial growth in Mozambique, provided its assets are rehabilitated and complementary policy measuLes instituted. Government, therefore, proposed to retain a team of specialized consultants to review the current itatus of the sub-sector with a view to provide Government with recommendations for its rehabilitation/restructuring and promoting its efficient growth. The selection and terms of reference for the consultancies would be jointly made by the Government, UNIDO, and the World Bank in accordance with the Bank guidelines for the use of consultants. The consultancies would be financed by the proposed Industrial Enterprise Restructuring Project (IERP) and IDA's Project Preparation Facility (PPF) Advance (P-470-1). 2. Stud! Objectives. The consultants would carry out an in-depth study in order to provide the background data and the insights necessary to put the enterprise-specific studies in their proper context. A clear global picture of the industry will be necessary as a basis for decisions regarding its rehabilitation and restructuring. The study would identify productive constraints that face enterprises in the sub-sector, its performance, and recommend possible solutions (both enterprise-specific and policy measures) to the sub-sector constraints at the macroeconomic, sub-sectoral, and enterprise level. 3. The scope of the study would, therefore, cover the following issues: (a) The edible oil sub-sector structure: domestic milling usable capacity (including an inventory of oil mills in the country, focusing on solvent extraction facilities); size and location of plants; capacity utilization; present condition of plant and equipment and technology; patterns of ownership; distribution (domestic and exports markets) channels; capital structure etc; (b) Raw material supply, both domestic and imported; in the case of domestic supply of inputs- marketing channels from farm gate to oil mills, mode of payment and terms, and transportation issues should be highlighted. Data on imported inputs such as sunflower and palm oil. Prospects for the supply of inputs from both local and foreign sources should be evaluated, as well as the likely and desired evolution of the marketing chaia, and the extent to which operations (including transportation) are affected by the war; - 68 - ANNEX 3-3 Page 8 of 8 (c) erformance: key indicators of performance (trends, production data, costs, productivity); effective demand (domestic and export) estimates and competitiveness; efficiency, the actual delivered cost of oil from the main sources of supply to the urban retail outlets; (d) Constraints: identify the factors that have impeded the growth and efficiency of the sub-sector (technology, engineering, demand (actual and potential demand of oil by type and region) management and labor, non-labor inputs, access to long term finance, etc.), policy environment (production licensing, pricing, e.g., pan territoriality of prices etc., taxation and institutional issues); (e) Safety (sanitation, pollution control, effluent treatment etc.); and (f) Recommendations. (i) short term measures necessary to rehabilitate/restructure the sector, (ii) medium policy measures on investment incentives, import competition, sector rationalization (divestiture, mergers, etc.), term finance etc. PEOPLE'S REPUBLC OF MOZI41JE ZISUSTRIAL ENTERPRISE RESTR ING PROJECT Cost Estimtes For 15 Likely Project Sneficiaries (USD I re, m1l iIon; CAPITAL DNESTMIENT SPARE PAMTS WORKING CAPITAL TECHIICAL ASSISTANCE TOTAL Forelp Local EWERRISE To - - o- INESTMENT Currency Currency Ttenl Totel Total Total L.C. F.C. C.I. L.C. F.C. S.P. L.C. F.C. .C. L.C. F.C. T.A. 01. CAJU (Mozomb)l/ 0.00 8.00 3.00 0.00 0.00 0.00 0.00 2.88 2.6 0.00 2.70 2.70 8.58 B." 0.00 02. CITRINO( Ianica) 0.00 1.47 1.47 0.00 0.00 0.00 0.00 0.7C 0.75 0.00 1.88 1.38 4.06 4.06 0.00 08. MADEROS (C. 0.) 0.00 2.50 2.50 0.00 0.00 0.00 0.00 0.50 0.50 0.00 0.00 0.00 3.00 8.00 0.00 04. METAL WX 0.00 1.00 1.00 0.00 0.00 0.00 0.00 0.50 0.50 0.00 0.00 0.00 1.60 1.50 0.00 06. CELU0IOE 1/ 0.00 1.00 1.00 0.00 0.00 0.00 0.00 0.50 0.60 0.00 0.00 0.00 1.50 1.50 0.00 08. IMA 2/ 0.08 1.50 1.65 0.11 0.64 0.76 2.93 6.60 9.43 0.00 0.00 0.00 11.71 6.64 8.07 07. MATOLA 2/ 1.00 10.41 11.41 0.86 0.00 0.86 16.68 0.60 17.28 0.00 0.9s 0.95 80.29 11.96 13.88 0. FACOBOL 0.66 3.15 3.81 0.02 0.06 0.07 0.39 2.00 2.39 0.00 0.24 0.24 6.51 5.44 1.07 09. CIMENTOS (Dondo) 0.40 2.27 2.67 0.00 0.00 0.00 0.00 0.87 0.87 0.00 0.77 0.77 4.31 8.91 0.40 10. CARMIOC 1/ 0.00 2.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 2.00 2.00 0.00 11. ECOIE 0.00 1.15 1.15 0.03 0.10 0.13 0.00 0.93 0.93 0.23 0.10 0.33 2.54 2.23 0.26 12. MADAL 1.60 6.73 7.63 0.29 0.72 1.01 1.28 1.48 2.76 0.05 0.50 0.66 11.85 8.48 8.42 C 13. VAN LEER 0.0,0 0.40 0.40 0.09 0.20 0.29 1.04 1.00 2.04 0.00 0.08 0.06 2.80 1.67 1.18 '0 14. PROSUL 0.78 8.50 4.28 0.00 1.03 1.03 0.00 0.50 0.50 0.00 0.00 0.00 6.81 5.08 0.76 15. FASOL 0.18 8.50 8.63 0.00 0.11 0.11 4.90 2.50 7.40 0.00 0.85 0.85 11.49 6.46 6.08 TOTAL 4.80 42.68 47.86 1.19 2.865 4.04 27.22 21.48 48.68 0.28 7.52 7.30 107.69 74.40 33.49 1 I Total Funding Requirements*: 6.U _62.17 638.49 1 NOTE: The dots Is derlvd fram consultant field work and preliminary analysis. 1/ Caju, Celmoque and Carmoc may bh excluded from this Project and considered under *oparat IDA-supported projoet. 2/ The assumption Is that Matola and IMA would be rehabilitated In stages. Cost. estimte. are: for Matols - US839.02 mlliIon (with 620.69 mlliion In foreign currency). and IMA - US81.06 atillion (with 326.01 million In F.C) which would lncroas total project costs, the ERC component, to US81U6.5S8 million (with 6102.5 million In F.C). o Total Funding Requirement estimates exclude financing rquirement. for CARMOC, CEUlMUE (both of which havo already secured financing), end CAJU, whose financing require_onts are being considered under a e_perete IDA operation. - 70 - ANNEX 4-1 Page 1 of 31 MOZAHBIOU INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT DATA SHEET ON PROBABLE EEHABILITATIONIRESTRUCTURING ENTERPRISES I. CELKOOUE (Fabrica de Conductores Electricos de Mozambique) SARL. Beira 1. Current Status/Ownershi.: Intervened. Supervising Ministry: Ministry of Industry and Energy, but under control of Electromoc E. E. Original Owners: The British Group, BICC, through CEL-CAT, its subsidiary in Portugal. CEL-CAT has expressed interest to participate in CELMOQUE in the future. Origin: Celmoque was formed in 1961 by private sector interests (British and Portuguese) in the 1950s and 1960s. In 1976 the Government intervened and all the mid- and high-level technicians left the country. 2. Products: High and low tension cables, and insulated wire for automotive, television and telephone use. Raw Materials: Imported. Markets: Government and private sector (civil construction). 3. Operational Data and Background: Capacity: copper wire/year (3 shifts): 1,000 tons; Cable (installed but inoperable): 1,000 tons. Emtplo2ment: 160 workers. The equipment was installed in 1961 and is still in operating condition even though some of it is over 40 years old. A recent study, by GEL-CAT engineers, concluded that rehabilitation of equipment could be made at a cost of US$500,000, including $200,000 for equipment and the remainder for technical assistance. Financial proposals for new competitor projects were estimated at between US$2 and 3 million. The new line, if made operational, would permit polyethylene coating. 4. Firance and Accountint. CELMOQUE is in fairly good financial condition. As other industries, around 80% of its fixed assets are already amortized. The firm's cost accounting system does not include annual depreciation of fixed assets and thereby understates the costs of production. The cost accounting system needs to be strengthened. - 71 ANEX 4-1 Pa8e 2 of 31 Financial Highlights: 198 1984 198 1986 Operating Results (Mt. Millions) Total Receipts n.a. n.a. n.a. 56.87 Total Expenses 43.68 Operating Profit(Loss) 13.20 Balance Sheet 8 194 19 Mt (Mt. millions) Current Assets 161.77 160.57 148.13 n.a. Fixed Assets 11.34 7.84 5.97 n.a. Total Assets 173.12 168.41 154.10 n.a. Current Liabilities 102.33 107.61 78.36 n.a. Long Term liabilities n.a. n.a. n.a. n.a. Net Worth 70.79 60.80 75.74 n.a. 5. Prospects and Rehabilitation Requirements. Celmoque is a company that was operating successfully prior to independence and is in a line of business that can be rehabilitated and returned to profitability at an estimated cost of about US$500,000 (capital investment and technical assistance). To realize this rehabilitation, the following areas need to be addressed: improved access to foreign exchange for rehabilitation and import of inputs, improvements in financial practices and controls, strengthened management, resolution of the ownership question, study and implementation of a market development strategy, technical assistance during the start up period for the second line of production, and staff training. BICC, the previous owner, has already prepared a rehabilitation study and is willing to provide technical assistance and supply equipment. BICC has also expressed interest to return as a shareholder. 6. Environmental ImRact. The production process involves use of coating extruders for plastic coating, wrapping machines for applying ribbon insulation, and cable twisting and bunching machines. The environmental impact of the process is through dust emission which would have no permanent adverse effects. However, to control dust emissions for the work place and to protect the workers, the enterprise would be required to institute measures to keep the dust levels below the threshold limit valves (TLV). II. METAL BOX. S.A.R.L.. Machava Industrial Area. Maputo. 1. Current Status/Ownership: Private sector Metal box, South Africa - 53% (expected to be transferred to Metal Box, U.K. in the future). Printex Fabrica de Tintas - 47% Government Supervision: Secretariat of Food and Light Industry. rijgiu: Metal Box was started by private sector interest in 1965 and remains in the hands of foreign private investors. A proposal has been put forward to alter the capital structure and is awaiting a decision. 2. Products: Metal cans. - 72 - MM 4-1 Page 3 of 31 Raw materials/suppliers: Tin plate and solder are supplied by Metal Box RSA and other foreign companies. Customers: Various local food product canners, paint companies. 3. Operations Data and Background: Capacity: 38 million units; Employment-250; Sales - 3.9 million units (1986 est.). Although the 15 stamping presses are well maintained, they are old and obsolete. The plant is fully depreciated. The lead-based solder Metal Box used inhibits exports to the USA and EEC. 4. Finance and Accountina: General accounts for 1986 had been closed. By 1986, the company had incurred a debt of more that US$12 million at the BM and Banco Stanidard Totta. Financial Highlights 1983 1984 1985 1986 Operating Results: (Mt. millions) Total Receipts 49.13 Operating Expenses 49.12 Operating Profit (Loss) 0.01 Balance Sheet= Current Assets 109.88 93.87 118.35 Fixed Assets 21.85 18.80 316.78 Total Assets 131.73 112.71 135.12 Current Liabilities 36.90 514.84 15.08 Long Term Liabilities 431.68 465.32 506.49 Banks (429.13) (460.31) (501.49) State -0- (0.25) (0.23) Shareholders (2.55) (4.76) (4.76) Net Worth (336.91) (367.46) (386.45) 5. Prospects. Metal Box is part of a well-organized worldwide can-making group with financial, management, and technical resources to sustain and expand the Mozambican operation. The most significant problem is that Metal Box lacks access to foreign exchange to carry out the necessary rehabilitation and modernization program to make it competitive. Rehabilitation costs are estimated at about US$0.5 million, with annual requirements of about US$1.5 million for raw materials. 6. Environmental Imact. The environmental impact of the production process is through dust emission which would not have no permanent adverse effects. However, to control dust emissions for the work place and to protect workers, the enterprise would be required to institute measures to keep the dust levels below the threshold limit valves (TLV). - 73 - AMWE 4-1 Page 4 of 31 III. CAJU DE MOZAMBIOUE. Machava Industrial Area. NaiMto 1. Current OwnershiD Stats: Intervened. Government Sunprvision: Ministry of Agriculture. Secretariat of Caju. Previous Status: Six separate cashew processing plants located at Angoche (1): Beira (1): Inhambane (1): Manjacaze (1): and Maputo (2). OrLgin: The company was set up in 1979 to administer the abandoned assets of the six plants. 2. Products: Cashew nut kernel in 23 grade3, and shell oil. Ra_ Materials: Raw cashew nuts, tin cans, and cardboard cartons. Suppliers: Authorized brokers buy from family farmers who gather nuts. Also some medium sized estates furnish nuts. CM makes some of its own tin cans and buys cartons from GARMOC. Markets: 20-25 international buyers and bilateral trade agreements. 3. Operational Data and Background: Capacity - 70-75,000 MT/year raw cashew. Employment: 6,500 (was 12,000 at peak): 5% - maintenance and 10% - administration. Because of the civil war disturbances and shortages of consumer goods, farmers started to give up cashew collection in favor of subsistence farming. The fall-off in the collection of nuts led CM to close two factories. It now transports the raw nuts by coastal vessels from those areas to Maputo. Mos: of the equipment is more than twenty years old, designed by the previous owners, and is labor intensive. 4. Finance and Accounting: CM showed a small operating profit in 1986. The accounting practice followed is not analytical but rather a simple totalling of incomes and expenses. 5. asnpects: CM can easily increase capacity utilization if supply of cashew nuts increases and foreign exchange is made available for rehabilitation and estate development. Assuming stable world prices for cashew, CM would earn about US$36 million by raising throughput to 7,600 tons of end product, about double current production levels. Direct investment necessary for the rehabilitation of existing equipment, purchase of selected new equipment, conduct of selected studies, and management assistance and training is estimated at US$6.3 million. Of the total, 50% would be for equipment repair and the balance for management support and technical assistance over a four year period. Most of the costs would be in foreign exchange, according to a study by Arthur D. Little. - 74 - ANNEX 4-1 Page 5 of 31 6. Environmental Imfact. The enterprise is not being considered under the project. Should it be, appropriate studies to determine its impact on the environment and measures to reduce pollution would be undertaken. IV. hADEIRA DE CABO DELGADO E. E. (NCD). Peuba. 1. Current Status/Ownership: Public (State owned). Government supervision is by Ministry of Agriculture. Oriain: The enterprise was formed in 1981 as a result of the MONAP-1 program (a collaboration program between Mozambique and Scandinavian countries). Total investments were US$2.3 million ($1.0 million for forest resources study: $0.3 million for acquisition of equipment and US$1.0 million for technical assistance). The sawmill started operations in 1983 and is able to process most tree species in the region except for ebony. 2. Products: Logs and sawn wood. Raw Materials: Native forest. Suppliers: Various for parts, fuel and lubricants. Customers: Japan, W. Germany, South Africa, etc: and domestic buyers. 3. Poerational Data and Backeround: Capacity: 1986, 5,000 cu m/year of sawmill capacity to produce lunber except ebony which requires special saws that are not yet fully installed. Emplovment: 400 - 500. Due to security problems in the southern part of the forest, activities were moved temporarily to the northern part. However, the northern area's 250 km distance from Pemba makes road transportation uneconomic, such that logs are transported by coastal freighter to the factory. This mode of transportation is limited because there is only one boat with a 70 ton capacity. The problem affecting the enterprise is lack of capacity (lack of tractors, cranes and boats) for surface and water transportation of logs and sawn wood. 4. Finance and Accounting: Accounting data was not available for review by the consultants. Summary report from the National Planning Commission showed a 1986 income of US$1.16 million against costs of $1.5 million. 5. Prospectp: The enterprise seems to have good potential for generating foreign exchange for the country. Forest reserves are extensive and comprise a large proportion of mixed hardwoods. The possibility to increase production for export is good, and will not require an excessive investment given the results that can be obtained. It is estimated that an investment of about US$6.0 million would be required over a three year period to finance logging equipment and infrastructure improvements. 6. Impact on Environment. Current extraction rates are well below the natural replacement rate. However, the enterprise would be required to ensure that - 75 - ANNEK 4-1 Page 6 of 31 extraction of the forestry products is accompanied by appropriate measures to replace extracted trees in order to protect and maintain forests. V. CITRINOS DE MANICA S.E. (GM). Chizoio. 1. Current Status/OvnershiA: Public (state owned). Government supervision: Ministry of Agriculture. Origin: The enterprise resulted from the consolidation of four private farms abandoned by the Portuguese after independence. At first "intervened", the enterprise was converted to a state enterprise in 1978. The aim in joining the farms was to maximize their syner& ' ? in production and management policies related to citrus production for i-tcernal and export markets. 2. Products: Oranges, grapefruit, lemon and litchees. Raw materials: seedlings, water, fuel, fertilizer, packing boxes, agricultural tools, farm equipment and lorries. Sunpliers: Some are imported. Markets/Customers: 60% is exported and 40% is distributed locally through wholesalers. 3. Operational Data and Background: Capacity: Total farm - 1,150 ha. (660 ha is cultivated). Estimated potential output from 660 ha - 21,000 tons. Actual output from 660 ha - 13,073 tons (8,218 tons of oranges; 4,184 tons of grapefruit; and 761 tons of lemons). Employment: 750 permanent and 300 seasonal pickers/packers. Agricultural activity has been severely affected by the security situation in Manica Province. Guerrilla activity has obstructed worker access to the farms and, therefore, restricted harvesting, and prevented effective maintenance of infrastructure, and generally prevented the orchards from receiving necessary care. Irrigation pumps and pipes (installed on 250 ha) face maintenance problems due to foreign exchange shortages. Out of a fleet of 35 tractors, only 17 are in working condition. 50% of the eight operational trucks are grounded due to foreign exchange shortages and lack of qualified personnel. 4. Finance and Accounting: The enterprise's cost accounting system needs to be strengthened. The company has shown profits for the past ten years despite the operational difficulties it faces. Financial High_lihts 1984 1985 1986 Operating Results (mt. million) Total Receipts n.a. n.a. 229.81 Total Expenses n.a. n.a. 179.12 Operating Profit (Loss) n.a. n.a. 50.69 Balance Sheet - 76 - Page 7 of 31 Current Assets 241.74 342.27 429.35 Fixed Assets 166.94 166.94 166.94 Total Assets 408.68 509.21 596.29 Current Liabilities 16.43 n.a. n.a. L.T Liabilities 84.64 181.43 313.50 (Banks) (58.61) (58.61) (155.40) (Shareholders) (26.03) (26.03) (26.03) Net Worth (307.67) (327.78) (282.79) 5. Prospects: Citrus production is an expanding business worldwide due to an increase in demand for citrus products. Mozambique is well positioned to take advantage of the expansion in demand. Western markets absorb the greater part of world fruit demand; however, Eastern Block countries as well are experiencing gradual demand expansion. With the strong prospect of expanding export markets for fresh fruit, Citrinos de Manica could become a major foreign exchange earner for Mozambique. The major risk to this potential is the security threat, however, because of its location on the Beira corridor, the problem is not as severe as it is for some companies outside the corridor. 6. Impact on Environment. Effluent from citrus processing are primarily a mixture of solid and liquid waste stream. Wastewaters from processing are: (a) common to the fruit processing industry; (b) made of biodegradabale organic matter; (c) unlikely to have a permanent adverse effect on the environment; and (d) amenable to biological treatment at the point of discharge. The enterprise will be required to maintain in-house procedures and house-keeping practices that are effective in reducing the waste load to be treated. VI. INDUSTRIA MOCAMBICANA DE ACO S.A.R.L. (IMA). Matola. Maputo. 1. Current Ownership Structure: Joint Venture - Public/private GOM - 50% and the Agolfo Group in Portugal - 50t Supervising Ministry: Ministry of Industry and Energy. The company was founded in 1966 by Portuguese private sector interests. In 1975, the firm lost its skilled labor, cut back production and in 1979 was intervened by Government. In 1985, Government invited former owners back with promise of autonomy in management and the company was eventually registered as a mixed enterprise. 2. Products: (i) High pressure water pipes (galvanized); (ii) irrigation pipe; and (iii) galvanized roofing sheets. Raw materials are imported from South Africa (steel sheets, zinc, lead, antimony, acids, and flux). IMA sells to GOM for construction and irrigation projects and exports to USA. 3. Operations Data and Backfround: Annual Capacity: 23,000 tons of steel. Actual Production: 1975 (peak year) - 15,000 tons of steel; 1979 - 2,000 tons of steel; 1985 - 7,200 tons of steel. 77 - ANNEX 4-1 Page 8 of 31 250 The firm operates two pipe manufacturing lines, which are 20 years old. The zinc galvanizing plant needs urgent rehabilitation. Similarly, the corrugated sheet production facility operates below rated capacity (about 31% of a total capacity of 23,000 tons of steel per annum) due to maintenance problems. The major problem has been shortage of foreign exchange for importation of equipment, spare parts and raw materials. 4. Finance and Accountin2: The accotnting system is being upgraded so that the internal management information systems and reports to Government can be more effective. Past debts of US$6.02 million are being consolidated with a 4 year grace period followed by a 10 year repayment schedule at the interest rate that was effective at the time of the loan. 5. Management: Part of the rehabilitation plan includes upgrading of management and the work force. Four former employees of ALGOLFO have been contracted for the positions of Director General, Director of Production, Director of Maintenance, and Director of Finance. Other employees of the Portuguese firm are called on for technical support and for specific consultations. 6. Rehabilitation ProsRects: ADL's brief investigation concluded that IMA has plant and management adequate to produce according to international standards, and should be encouraged to maximize its productivity and foreign exchange earning potential. Three rehabilitation options are summarized in the following table. Option 1: Rebuild existing plant and continue to operate at one shift per day. Option 2: Expand to two shifts per day and install a line to produce irrigation pipe couplings which are currently purchased outside. Option 3: Expand capacity by installing a new production line for high pressure pipe, the installation of the irrigation pipe coupling line, and operate two shifts per day. Option 1 involves rebuilding the existing plant and continuing to operate at one shift per day. Options two and three require this basic rebuilding plus fixed investments. Expansion investments would take place in the second, third and fourth years of the project. Because the company has capable management and production supervisory staff, no technical assistance will be required beyond installation assistance which will accompany the purchase of new equipment. 7. Environmental Impact. The environmental impact of the production process is through dust emission which would not have no permanent adverse effects. However, to control dust emissions for the work place, the enterprise would be required to institute measures to keep the dust 'evels below the threshold limit valves (TLV), to protect the workers. - 78 - ANNEX 4-1 Page 9 of 31 | CAP~~~~~~~gITAL INVESTNENT (All data in USS 000) 1 - Option 1 2 - Option 2 Foreign CurrencX Local Currency 3 - Option 3 F .O.B. Insurance Freight Duty Other TOTAL 1 0 FIXED INVESTMENT 2 6,673 153 844 336 8,006 3 12,772 294 1,615 616 15,297 1 635 15 80 29 759 SPARE PARTS 2 635 15 80 29 759 3 635 15 80 29 759 1 7,500 173 948 2,586 345 11,552 RAW MATERIALS 2 13,030 300 1,641 4,491 791 20,253 per year 3 13,388 308 1,693 4,616 875 20,880 T 0 T A L Option 1 8,135 188 1,028 2,586 374 12,311 T 0 T A L Option 2 20,338 468 2,565 4,491 1,156 29,018 T 0 T A L Option 3 26,795 617 3,388 4,616 1,520 36,936 - 79 - A 4-1 Page 10 of 31 PIUIT I Ul IN - nl to a- I $ l am me lilt him him Me sum 19i iwI 19_ UW6E3 Ladsi ~4S 3,541 5,434 5,070 A%,3 17 ,79 1146" 14133 151, 15,125 14,145 LoWt N4Ii 4A 41 744 4,06 5,018 ?,%1 9,54 9,7 10,312 10,150 11,695 .~~ - TOTE. 3,M 30,17 30,1 S 3543 1,7N 9%15 85,111 1, 5,075 ,30S ca OF Ldw 7 357 5so 14 144 677 710 746 703 no Nb lals 3,7 1 1 5,460 21,06 11,65 II,= 81,90 3,0 A14 2,5 ;Uilitia 14 134 IN in 13 134 134 in In 17 Oe X30 J2 350 3 35 35 35 32 320 320 ToTE. 4,0 ,M 17494 30,1 A73 40 ,1 lo ,441 4470 8381 _I m (S 1,S I 3,63 7,1 3,013 2,007 1.711 1.1 1. 519 (0) b1ld 0.7 15.% 117 11I1 W0IU 10.4% 10.0% 9.5 swITD eVP AM1u I 74.lc 0 113 1to la la 103 la la 103 583 OU __m m 0 735 100 1t0 100 100 100 100 t10 t0 Ohp1dia as 15 77 m 74 713 G 65 634 609 TI a 1,00 ,X I,=1 1,5 gm so 93 917 693 UEwT OE (1I7) US 81 6,707 1,19 1,35 1,131 1,7U4 1,60 1,6t1 O-E ElE Iluwt 0 57 2,1491.0 3,05 1.001 2,5 2,24 1,94 1,616 ME-= PI T (67) 31i (5) 4s1 (1,1 (910) (719) (45) (a) I tmm TN 0 104 03,141 0 0 0 0 0 0 MET Plt 1(617) 504 (5) 8,141 (1,47 (910) (719) 40) (25) 0 to) O." -0.81 7.0% -4.0 -3.5 -1o -1.05 -1.05 0.0% tOI Nw OML MM CM U ti IVA I'm 1n 19 1 " 1 19u e aI 9s 19a ' ime (617 1to (S) 8,141 (1,01) (910) (710 (450) (a5) 0 Plu ltMwwu bmI (E_ to mvib 0 170 2,2" 1,11 3,46 8,01 8,55 241 1,934 1,104 b .eltim Eupmus, a 11 15 771 741 .713 6 659 634 609 buidal awl (Ya 10) (11.601) Lam amp in VW" cth1 7 4,667 10 (1,04 (013) I to 31 (14) 31 Capital CuA 0 640 710 7,00 0 0 0 0 0 0 T P15 o R1 (0m (4,771) 8,57 (1,741) 3,5 8,54 8,34 8,418 1,3Z (10,90) Mm bte 11% Not miad V.. (m1,3U) 1m tOf Sl11" m lw al All EWty Cus Flea 54 (8,80) 3,40 1S 5,517 4,576 4,51 4,4 4,411 (,0 -80- -fl 4-1 Page 11 of 31 VII. ECOME: Machava Industrial Area. NaMuto 1. Current Ownership: State; intervened. Supervising Ministr=: Ministry of Industry and Energy. Origin: The company resulted from a merger of 8 privately-owned companies, which were intervened in 1978 and placed under an Administrative Commission. The Commission was subsequently replaced by one director general in 1987. The company is now being transformed into a state enterprise. 2. Products: The company consists of four production lines, each with the capability to produce a variety of metal products. Proprietary hoes, shovels, catanas, and sheet metal products made to order (water tanks, towers, truck bodies, safes, push carts, flame cut pieces, etc.). Raw Materials: Steel sheet and bars, welding rods, wooden handles. Suppliers: Direct import on price/delivery quotations. Customers: AGRICOM and DIMAC for agricultural tools. Custom work is sold directly to buyers. 3. Operations Data and Background. Cavacitv: Large Custom-made Items: 180/year: Agricultural tools: 180,000 items/year; Actual production: n.a. Emnlovment: 505 5. Finance and Accounting: The national plan of accounts has been modified to accommodate the particular characteristics of this business. Accounts are for the most part current. 6. Prospects. In 1986, the company lost US$400,000 equivalent, largely due to shortages of raw materials in the fourth quarter. ECOME is in the service sub-sector which is vital for Mozambican industry. Two rehabilitation options exist. The first involves providing spare parts and raw materials. The second involves purchase of new equipment (metal cutting, metal bending, welding, lathes, presses, etc.) to upgrade existing production lines, improve production quality, and add new capabilities. The estimates below relate to the second option, which will require US$1.9 million in foreign currency. -81 - Page 12 of 31 7. Environmental Impact. The environmental impact of the production process is through dust emission which would not have no permanent adverse effects. However, to control dust emissions for the work place, the enterprise would be required to institute measures to keep the dust levels below the threshold limit valves (TLV), to protect the workers. CAPITAL INVESTMENT (All Data in US$ 000) ForeigLn Currency Loan Currenc,y F.O.3 Insurance Freight Duty Other TOTAL FIXED INVESTMENT 626 4 51 70 751 SPARE PARTS 128 10 22 40 200 RAW MATERIALS 776 4 42 106 928 per year TECHNICAL ASSISTANCE 230 30 260 per year TOTAL 1,760 8 103 92 176 2,139 -82 - ANNEX 4-1 Page 13 of 31 ECOIE: ANALYSIS OF OPTION 2 XV-A. PROFIT & LOSS - WITH PLAN 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 REVENUES ----- ..... ----- . Local Market 907 1,718 2,187 2,392 2,619 2,870 3,147 3,454 3,793 4,169 Export Market 0 *O 0 0 0 0 0 0 0 0 TOTAL 907 1,715 2.187 2,392 2,619 2,870 3,147 3,454 3,793 4,169 COST OF SALES Labor 120 120 126 132 138 145 153 160 168 177 Raw materials 215 1,042 1,359 1,481 1,616 1,765 1,928 2,109 2,308 2,527 Utilities 36 121 151 166 182 201 221 244 270 298 Other 0 0 0 0 0 0 0 0 0 0 TOTAL 371 1,283 1,636 1,779 1,936 2,111 2,302 2,513 2,746 3,002 GROSS MARGIN 23 435 551 613 682 759 845 940 1,048 1,167 0 25 25 26 26 26 27 27 28 28 OPERATING EXPENSES Adnin & Technical 93 77 77 77 77 77 77 77 77 77 Other Expenses 30 240 140 140 30 30 30 30 30 30 Depreciation 8 61 116 112 108 103 99 96 92 88 TOTAL 130 378 333 329 215 210 206 203 199 195 OPERATING MARGIN 107 56 218 284 467 548 638 738 849 972 OTHER EXPENSE: Interest 0 45 71 108 101 90 79 68 57 46 PRE-TAX PROFIT (107) (12) (147) (176) (366) (458) (559) (670) (792) (926) INCOME TAX 0 6 73 88 183 229 280 335 396 463 NET PROFIT (107) 6 (65) 88 183 229 280 335 396 463 DERIVATION OF ALL EQUITY CASH FLOW 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 Net Income 31 67 73 88 183 229 280 335 396 463 Plus: Interest Expense (after tax savings) 0 7 36 54 50 45 39 34 29 23 Depreciation Expense 8 69 116 112 108 103 99 96 92 88 Residual Value (Year 10) 4,859 Less: Change In Working 181 266 207 78 84 93 103 114 126 140 Capital Capital Costs 0 641 540 0 0 0 0 0 0 0 NET PROJECT CASHFLOWS 142 763 521 176 257 284 315 350 390 5,294 Discount Rate 11I t Present Value: 2,144 InternaL Rate of Return: 31 - 83 - ANNEX 4-1 Page 14 of 31 VIII. GRUPO NADAL. S.A.R.L.. NMauto Plant Locations: Maputo, Quelimane, Pebane, Beira. 1. Current Status/Ovnershlg: Private. Norwegian Individuals and firms-85%: Bobone Family of Portugal - 15%. Government Supervision: Ministry of Agriculture and Association of Copra Producers. Origin. The enterprise dates back to the turn of the century when a Portuguese group and varicus Norwegian individuals and corporations invested in the parent company. Although the Bobone family holds only a 15% interest in the company's stock, they control 50% of the voting rights. MADAL is reported to be the largest private agricultural firm in the country. 2. Products/Raw Materials & SupnliersZCustomers: Madal is a vertically integrated company based on: copra production for export; cattle ranching; feed production; agency business for Ford tractors, Mobil oil and diesel fuel; shipping services; and the production of salt, and margarine for employees. Comae. Two grades of copra are produced: 1) hot air dried for export; and 2) ambient air dried (termed "free merchandise"), which is purchased from private growers for domestic sale. Due to the current guerrilla war, production of hot air dried copra now averages only 4,000 to 6,000 tons per year down from 11,000 tons. Many of the copra stands are old (40-60 years), are declining in productivity, and need to be replaced. Two thirds of the coconut producing areas have been affected by the war. Nfargarine. Madal has installed capacity to produce 7,000 tons per year at the plants in Beira and Maputo, which now operate at less than 50% capacity Due to the war, the Beira plant has suffered from interruptions in the delivery of copra and shortages of foreign exchange to purchase hydrogenated oil. Livestock and Fish. Cattle production is used to provide manure fertilizer for the plantations. Due to the war the herd has dropped from approximately 100,000 to 8,000. FEED. Mixing capacity is 12,000 ton/year, but in 1986 only 4,000 tons were produced. Tea. Due to the lack of security in Zambezia province since 1982, Nadal's 700 ha tea farm is not in production, but is slowly being recuperated. In 1981, the hectarage produced 1,100 tons of tea. Salt, The salt beds in Quelimane have a production capacity of 2,000 tons/year, and were able to produce 1,100 tons in 1986. Spare parts for pumps and repairs to the beds are needed to maintain and increase production. Raw Materials: Coconuts. Spp=ijera: Company nucleus estates and other estates. Customers: ENACOME, Madal group companies, and FASOL. 3. Operational Data and Backaround: Capacity: 10,000 - 12,000 tons of copra a year. - 84 - ANNEX 4-1 Page 15 of 31 EmIJ&23Mn2: 5,500 contracted, and 500 permanent. 4. Finance and Accounting. The accounting system is not only fragmentary from a management point of view, but has fostered an added tax liability. The company has petitioned the authorities to resolve this so that profits can be reported on a consolidated basis. Financial Hiahliuhts: I m 851986 Operating Results: (It. Million) Total Receipts 29.70 18.49 63.32 Total Expenses 23.70 22.85 50.86 Operating Profit (Loss) (6.01) (4.36) 12.45 Balance Sheet: Current Assets 44.43 70.18 88.35 Fixed Assets 12.50 12.39 14.39 Total Assets 56.92 82.57 102.74 Current Liabilities 45.08 87.65 87.79 L-T Liabilities 0.05 0.05 29.51 (State) (0.05) (0.05) (0.02) (Shareholders) -0- -0- (29.49) Net Worth 11.79 (5.13) (14.56) 5. ProsRects: As an integrated company, Madal has the potential to be a profitable enterprise for processing local raw materials, even given the uncertainties of world copra prices. If other related product lines were added and economies of scale developed, additional profits could be generated to fuel growth and sustain employment. Crucial, however, is access to foreign exchange to maintain equipment and upgrade processing equipment. With some financial and management reorganization, the companies in the group could effectively function as separate profit centers, but within a corporate unit that could share resources such as accounting, training, transportation, communications, data processing, and banking services. - 85 - ANE 4-1 Page 16 of 31 6. Environmental Imnact. MADAL is a diversified operation which requires that each operation be looked at separately. The product lines that have an impact on the environment are: (a) copra (see Citrinos above); and (b) MARGARINE, for which the effluents are primarily all liquid (semi-processed raw material is imported). the effluents in Margarine result from detergents, lubricants, and wastages. The wastes are organic in nature. MADAL will be required to take measures to limit effluent emissions to permissible levels of biochemical oxygen demand through efficient waste monitoring systems. MADAL CAPITAL INVESTMENT (All Data in US$ 000) Foreian Currency Local Currency F.0.B Insurance Freight Duty A/ Other a/ TOTAL FIXED INVESTMENT 3,877 21 300 1,798 5,996 SPARE PARTS 402 2 30 288 722 RAW MATERIALS per year 1,129 6 90 400 875 2,500 TECHNICAL ASSISTANCE 500 50 550 per year TOTAL 5,908 29 420 400 3,011 9,768 a/ To be paid in local currency. IX. CARNOC Plant Locations: Maputo and Beira. 1. Current Status/Ownership. Mixed (State/Private). Government of Mozambique - 50%: NAMPAK (Subsidiary of Barlow Rand, RSA) - 50%. Origin. CARMOC started as a private company, capitalized at Mt. 20 million. Shares were then held by NAMPAK (50%) and F. Dicca Ltd. (50%). The Government of Mozambique took over the Dicca shares from the former Portuguese owners who ceased to operate in Mozambique. 2. Products/Raw_Materials/Suppliers/Customer3: Products: Corrugatedpaperboard cartons, linerboards and sultcases. Raw Materials: Kraft paper in rolls and fluting in rolls. Suppliers: Barlow Rand, RSA, and Sweden. Customers: Many. CARMOC is the only producer of linerboard and the leading producer of cartons. Suitcases are sold to distributors F.0.B. factory. 3. Operational Data and Background. Capacity: Maputo - 24,000 tons; Beira - 10,000 tons (presently not utilized). Employment: Maputo - 185 : Beira-120. The biggest problem has been access to foreign exchange for raw material imports. - 86 - Page 17 of 31 4. Finance and Accounting: Factory controls are based on standard cost. General and cost accounting procedures are manual. However, most of the accounting staff are technical school graduates. Financial Hiahlights 18 1984 18 -Oerating Results: (Mt. million) Total Receipts 146.60 117.66 99.92 Total Expenses 143.41 118.17 107.70 Operating Profit (Loss) 3.19 (0.51) (7.83) Balance Sheet Current Assets 166.19 127.19 117.25 Fixed Assets 72.24 61.00 243.81 Total Assets 238.44 188.21 161.06 Current Liabilities 152.38 110.03 86.74 L.T. Liabilities n.a. n.a. n.a. Net Worth 86.05 78.17 74.32 5. Prospects. CARMOC is a well run company in the service industry with good prospects for growth if it can gain access to foreign exchange for importation of raw materials. 6. Impact on Environment. Most effluents are likely to be organic in nature and CARMOC will be required to take measures to limit their emission and ensure effective disposal. X. FASOL (Fabrica Associades de Oleos. S.A.R.L.. Maputo. Plant Location: Machava Ir4ustrial area, Maputo. 1. Current Status/Ownership: Intervened. Government Supervision: Oleaginous Products Directorate. OrQgjz. FASOL resulted from a merger of several enterprises of the same kind in Maputo. Founded in 1964 as a stock company to produce oils and soaps, it was converted into a corporation in 1968 and consisted of two distinct enterprises: FASOL and SABOREL (Saboreiras Reunidas de Oleos, S.A.R.L.). The Government intervened in 1977. 2. ProductstRaw Material/SuDnliers/Markets. FASOL/SABOREL are two companies that produce refined and unrefined vegetable oils (and oil by-products) and soap by-products. Raw Materials consist of oilseeds and copra. PVC and polyethylene for containers. Spjljers are both local (AGRICOM) and foreign (Quimica E.P. , Portuguese, etc). Customers include Enacome and Interquimica, Maputo Supply Company, and Cogropa (Spence portuguesa) Dionisio e Almeida. 3. Operations Data and Background. Capacity: Crushing - 26,000 tons/year; Refining - 14.400 tons/year. Employment: 485 -87 - ANELX 4-1 Page 18 of 31 4. Finance and AccountWnn. FASOL operated, like many other companies in Mozambique, under a regime of price controls. Consequently, it accumulated large losses in the past few years, which were financed by overdrafts at the Bank of Mozanbique. As of 1986, FASOL's debt to BM stood at about US$15 million, plus other debts of about US$2 million, resulting in a debt to equity ratio of 10/1. Financial Highlights: 1983 1984 1985 Operating Results: (Mt. millions) Total Receipts 140.79 49.75 190.53 Total Expenses 203.18 75.23 278.41 Operating Profit (Loss) (62.39) (25.48) (87.87) Balance Sheet: Current Assets 623.71 576.93 75.39 Fixed Assets 144.41 147.89 158.52 Total Assets 768.12 724.81 733.91 Current Liabilities 285.08 370.21 350.52 L.T Liabilities 474.22 475.63 616.74 (Banks) (468.86) (467.16) (609.15) (State) (0.96) (4.08) (3.20) (Shareholders) (4.39) (4.39) (4.39) Net Worth (7.39) (32.88) 5. Prospects: The future viability of FASOL will depend on resolution of the three major problems (obsolete equipment, lack of imported raw materials, and high debt) through: modernization of equipment, access to foreign exchange for raw material imports, and financial restructuring. 6. Environmental Imnact. Wastes originating from oil processing operations are generally limited to solids and liquids. The solid materials from copra and other raw materials and are readily amenable to separation and disposal. Liquid wastes originate from the sterilizers and the oil clarification stages resulting in sludge. FASOL will be required to institute measures to limit effluent emission and institute appropriate pollution measurement parameters. - 88 - NNS4-1 Page 19 of 31 FASOL A phased rehabilitation of FASOL is recommended. The first phase will be based on importing crude oil and rehabilitation of the mechanical pressing operation in the refinery and soap plants, upgrading the refinery plant, and recuperation of the soap plant and boiler house. A second phase would involve rehabilitation of the solvent extraction plant, and would bring the total project cost to US$27.6 million equivalent. Only phase one costs are included in the table below. Out of the total (US$21.3 million), US$16.3 million would be in foreign currency. CAPITAL INVESTMENT (All Data in US$ 000) Foreign Currency Local Currency F.O.B Insurance Freight Duty -/ Other S/ TOTAL FIXED INVESTMENT 3,335 20 260 125 3,740 SPARE PARTS 1,288 7 105 1,400 RAW MATER14LS per year 10,000 50 900 900 4,000 15,850 TECHNICAL ASSISTANCE 300 50 350 per year TOTAL 14,923 77 1,265 900 4,175 21,340 a/ To be paid in full currency XI. VAN LEER (EMBALAGENS VAN LEER MOZAMBIOUE) LTD.. Haputo. Plant Location: Matola Industrial Area, Maputo. 1. Current Status/OwnershiR. Nationalized Factory. Government Supervision: Metals and Mechanical Light Industry Directorate. Origin. The enterprise was founded in 1960, as "Metal Containers Proprietary, Ltd" with 1% of shares held by Metal Containers of South Africa Ltd. and 99% by Antonio Mendoca. In 1962 its name changed to Embalagens Van Leer Mozambique Ltd. In 1975, Van Leer of South Africa (Proprietary) Ltd. transferred 1,750 of its shares to each of the Dutch companies: Valeyafa B.V., Van Leer Netherlands B.V., Iszerhander Van Der List or Joner B.V., Royal Packaging Industries, Van Leer B.V. e Emballage Fabrieeken Verna B.V. The remaining shares were retired by the company. From 1975 to the Government's intervention in 1975, direct management support was provided by Van Leer of South Africa. 2. Products/Rat Materials/SulMliers/Markets. Products. Steel drums and plastic sheeting. Raw Materials. Steel sheet. plastic granules, and - 89 - ANNEX 4-1 Page 20 of 31 chemical products. SgJ1l.su. Van Leer of South Africa. Nbrkots. Petroleum refinery and paint factories. 3. 0Ierations Data and Background. Cagacit: 210 and 160 litres drums - 175,000/year; 20 litres drums - 740,000/year; Plastic Sheeting - 100,000 sq. n/year. Zb12uant: 68. Machines are old and not wvll maintained, particularly due to shortages of spare parts and technicians. Until 1980, the enterprise had recourse to South African technicians to calibrate and adjust the machines but after 1980 the company did not have access to this resource due to lack of foreign exchange. 4. Finance and Accounting. The company has made significant losses in recent years which are eating into its capital base. Rehabilitation would have to include introduction of a cost accounting system to control expenses. 5. Pirospects: Van Leer is a vital intermediate producer in Mozambique. Because of the antiquated equipment, the weak present management, and current market limitations, rehabilitation would be limited to provision of sufficient spare parts to rebuild existing equipment. With an adequate supply of raw materials, this would enable the company to return to a pre- independence production level of 30% of capacity, as compared to just over 10% at present. US$3.8 million equivalent in foreign currency would be required for the purchase of spares and raw material. 6. Environmental Impact. The environmental impact of the production process is through dust emission which would not have permanent adverse effects. However, the enterprise would be required to institute measures to keep the dust levels below the threshold limit valves (TLV) to protect workers. CAPITAL INVESTMENT (All Data in US$ 000) Foreign Currency Local Currency F.O.B Insurance Freight Duty a/Other a/ TOTAL FIXED INVESTMENT 0 SPARE PARTS 250 5 28 75 10 368 RAW MATERIALS 3,067 67 338 920 123 4,515 per year TOTAL 3,317 72 366 995 133 4,883 A/ To be paid in local currency. - 90 - Pago 21 of 31 __________ _______*n...uu.UUUuU-uuinm m2nim m-'uuu'uauUwy3asssu a'. ,aur £T LCSS - iWN 09.hS :191 11910 I: :99 1993 1114 1915 1)56 :997 l:?i ; I . iret 0 :S 2,2307 2,3*5 2,63 i ,62? 4732 2, 75 26 26I'3 EApmt ark@t 0 0 0 0 0 0 0 U 0 , TOM O l,15 J207 2,35 2,663 2,621 2,732 2,7. 9 ,2fi6 i,23 COST OF S.AS L&ea 0 37 39 *l 43 * i ". so Nhtarsas 261 1,46 1,*71 1,53 1,655 1,747 1,52 :,S39 1,1 :.12i Utilities 29 :oo 97 103 to I15 119 U! I :3: Owlm,* 0 ~~ ~ ~ ~ ~ ~~ ~ ~ ~~0 0 0 0 0 0 0 0 TOTAL 291 1,606 1,607 1,707 1,507 1,907 1,14 2a,)10 2,XI i:1; 6GM 561% ;2!11) 36U 600 636 676 7:6 746 79 76' 7'i: EPA 19.2% 27.2% 27.2% 27.2% 27.2% 27.2% 27.11 27.3% 27.;1s TL U EP Abbn A Tgchecal 12 12 12 12 12 12 12 :2 :a :U o 01_Enpenn 0 275 O 0 0 0 0 0 0 h~~c:at:w~~~~ * 0 ~~ 0 0 0 0 0 0 0 0 0 TOM. 12 57? 12 la 12 12 12 :2 :: *a WIMATZ1 PIN ii031 5 516 E26 66 702 7?32 737 7?3 ! 7E 31R EPIU I; 'ntust 0 35 1to 10 1in 122 610 94 10 Si M-TIR PIFIT 1303) 99 "a 616 :26 579 624 663 673 ?:3 IEl TAX 0 29 224 to3 264 210 312 321 336 351 mu 0WIT (33) 29 44 243 2" - 0 312 3al 33i 3:1 El 1.51 MRS2 10.6% 10.63 11.1% 11.IS :1. 13s :*.:t INIVA'>TM4F ALL' 3IY C f.OII 19 110 1"91 19 195i 11" :55 1S% 1957 I;35F 1t !'tcgus (30J) 9 2_6 243 26 2190 312 321 3oi '11 PlUs2 Interestf (after tog uvi 0 17 70 70 66 61 56 *7 40 __ huiatioa bEpense 0 0 0 0 0 0 0 0 0 bsi a1l valu (est :01 3,a3 j Lo: Owap in ioriq Capital 30 we0 40 56 56 56 65 . 7 2? Capitl Cats 0 0 0 . 0 0 0 0 0 0 NT PECt C L . M333) (673) .;6 i 57 276 321 .4 Pk *, j4 OiuSi ate 11% ltt PreNt Val" 2,114 Inet-l R ate of Retw,, 40.Js *aim lierdl All Eqty Cum Flow (406) t,070) 12 (6%) .267 12) u: :6 3,762 .%. rt - - 91 - AM=K 4-1 Page 22 of 31 XII. CINENTOS DE NOZAMBIOUJE. NMto. Plant Location: Beira (Dondo). 1. Current Status/Ownership: State. Government Supervision: Ministry of Construction and Water Development. Origin. The enterprise was originally formed in 1970 as a joint venture operation by Cimentos Portugueses (90% shareholder) and the Bank of Mozambique (10% shareholder). By 1979, the company had run up a debt of US$30.5 million with the Bank of Mozambique and other creditors. The Government intervened in the management in 1979. In 1983. the Bank of Mozambique in essence foreclosed on the company's assets and assumed operating control. As part of this process, the company's debt was transferred to the books of the central government. Until now, the Government has not been able to reach agreement on settlement of these debts with the former majority shareholders and the creditors. In 1980, a year after intervention, the company commissioned a feasibility study by a Cuban consulting company, ACEMAT. The study included an extensive analysis of the problems of domestic cement distribution. Despite this study, and conversion of the company into a state enterprise, management problems have been not yet been successfully resolved. 2. Products/Raw Materials/SupDliers/Markets: Products. Bulk and sacked cement. Raw Materials. Limestone. Suppliers. Normally self sufficient in limestone but now importing clinker. Markets. Government of Mozambique and private domestic construction industry. 3. Ogerations Data and BackMround. Capacity: 177,000 (represents 14% of total cement production capacity in the country). Employment: not broken down by factory, but all 4 factories together employ 1,049 workers. The Dondo plant is a wet process installation. It began operations in 1973. Clinker was originally to have been supplied by the Matola plant, but is currently imported. Rehabilitation plans on the plant were shelved in the past due to the security situation itl the country. Operations at the Dondo plant have virtually stopped. 4. Finance and Accounting. Not separated out by plant. The consolidated statements show operating losses of over US$30 million between 1976 and 1979. Both the accounting systems and the organization of the people who operate it are inadequate to support the management of an indutstrial complex of this magnitude. 5. Prospects. Consultants have been appointed to review the viability of the Dondo plant. Rehabilitation costs for the entire complex (the four plants) are estimated at US$15.2 million. 6. Environmental Impact. Cement manufacturing plants vary widely in volume and composition of pollutants discharged. Differences arise from process variations, inplant practices, housekeeping, etc. three basic steps are normally utilized in cement manufacture: (i) raw material grinding and blending; (2) clinker production; and (c) finish grinding: Cementos is potentially able to have all these process stages, but at the moment only - 92 - ANNEX 4-1 Page 23 of 31 has the latter due to the security situation in the country thus forcing the importation of clinker. Cement manufacture can result in pollution of air (dust), water (dust) and land (dust, raw materials, clinker, coal, etc.). Cementos would be required to take measures to limit the emission of these pollutants within permissible levels. DONDO Government's intention is to rehabilitate the Dondo Cement Plant to supply the central region with sufficient low-cost, high quality cement. Three options are currently under consideration. Ontion 1: Shut down plant and service the region with imports and/or production from Nacala and Matola. Option 2: Rehabilitate the plant's cement grinding capability, enabling the plant to produce cement with clinker which would be initially imported and eventually produced by the Matola plant. Option 3: Full rehabilitation, including clinker production capability. Option 3 is not considered feasible and can not be considered until 1994 due to Cimentos' agreements with EIB. Costs in the table below are for Option 2 and include a requirement of US$40 million equivalent in foreign currency. CAPITAL INVESTMENT (All Data in US$ 000) Foreign Currency Local Currency F.0.B Insurance Freight Duty Other TOTAL FIXED INVESTMENT (with engineering) 2,000 200 200 200 200 2,800 SPARE PARTS 300 30 30 30 390 RAW MATERIALS 800 80 96 976 per year TECHNICAL ASSISTANCE 380 380 per year TOTAL 2,680 230 1,030 310 296 4,546 XIII. FABRICA CONTINENTAL DE BORRACHA. S.A.R.L. (FACOBOL) A. FACOBOL. Maputo, Mozambique. 1. Current Status /Ownershin: Private. Ownership: Fabrica Portuguesa de Borracha - 50%; Various Portuguese Families - 40%; Costa and Cordeiro - 10%. Government Supervision: SEILA. Oriain: FACOBOL was founded in 1942 with local capital and the same shareholders have continued to own the firm. The firm was never intervened. 2. Products/Raw Katerials/SuW2lierslMarkets: Products. Canvas/rubber shoes, leather shoes, bicycle tires, tubes, various rubber rings and gaskets. Materials. Natural and synthetic rubber, canvas cloth, leather. Suppliers. - 93 - Page 24 of 31 Raw materials are imported from Europe, Malaysia and Brazil. Domestic supplies are by Textafrica. Nar.kts. ENCATEX of the Ministry of Commerce. 3. Onerations Data and Backaround: Capacity: 1,500 tons of rubber/year made into various products. Aaloynt: 400. The equipment operated by the company is antiquated: the last new installations occurred in 1973, and some shoe molding machines date from 1930. The biggest problem facing the company is shortages of raw materials and spare parts. 4. Finance and Accountina. The firm has up-to-date financial statements. However, accounting methods do not accurately reflect account balances or unit operational costs. 5. Prosnects. FACOBOL, even with its old equipment line, is capable of increasing production and gross income. However, because of shortage of raw material inputs, along with low production rates, it is unlikely that profit margins can be significantly increased. Profitability can be achieved through rehabilitation, ready access to raw materials, and a significant reduction in labor costs. Upgrading of mid-level supervision, accounting, and maintenance personnel should accompany any capital injection. Rehabilitation would upgrade production capabilities in all three production areas (canvas shoes, bicycle tires and tubes, technical articles). The shoe production line would be upgraded and expanded with the installation of new PVG injection and compression molding equipment, a turntable mold, and new lasts. Also, a delivery vehicle will be purchased. Tire production would be upgraded and expanded with the purchase of automated equipment for producing cord, new tire fabrication machines for BNX and moped tires, and new vulcanizing molds. The inner-tube line will be entirely replaced with new extruding, cooling and rubber welding equipment as well as new inner- tube molds. Technical articles production will be upgraded with the purchase of spares for presses, extruders and mixers. A new extruder, a cooling and cleaning bath, laboratory equipment, transport vehicles and a forklift will be purchased. Total sub-project costs would be US$5.2 million, with a US$4.2 million foreign currency component. 6. Impact on Environment. Most effluents are likely to be organic in nature and FACOBOL will be required to take measures to limit their emission and ensure effective disposal. ~ 94 - AM=NEL 4-1 Page 25 of 31 FACOBOL SHOES CAPITAL INVESTMENT (All Data In US$ 000) Foreisn Currencm Local Currency F.O.B Insurance Freight CIF Duty Other TOTAL FIXED INVESTMENT 1,255 188 126 1,569 SPARE PARTS 40 6 4 50 RAW MATERIALS per year 800 240 1,040 TECHNICAL ASSISTANCE 100 20 120 for 2 yrs. TOTAL 1,195 434 150 2,779 - 95 -AM 4-1 Page 26 of 31 FACOBOL - TIRE & TUBE CAPITAL INVESTMENT (All Data in US$ 000) Fore ln Currency Local Currency F.0.B Insurance Freight CIF Duty Other TOTAL FIXED INVESTMENT 620 93 62 775 SPARES 30 5 35 RAW MATERIALS 300 90 390 per year TECHNICAL ASSISTANCE per year TOTAL 950 188 62 1,200 FACOBOL - TECHNICAL ARTICLES CAPITAL INVESTMENT (All Data in US$ 000) Fore len Currency local Currency F.0.B Insurance Freight CIF Duty Other TOTAL FIXED INVESTMENT 780 117 78 975 SPARES 30 5 35 RAW MATERIALS 200 60 260 per year TECHNICAL ASSISTANCE per year TOTAL 1,010 182 78 1,270 - 96 - ANNEX 4-1 Page 27 of 31 FACOBOL - TOTAL CAPITAL tNVESTMENT (All Data in US$ 000) Foreign Currency Local CurrencY F.O.1 Insurance Freight CIF Duty Other TOTAL FIXED INVESTMENT 2,655 398 266 3,319 SPARES 100 15 4 119 RAW MATERIALS 1,300 390 0 1,690 per year TECHNICAL ASSISTANCE 100 0 20 120 per year TOTAL 4,155 803 290 5,248 XIV. PROTURA DE MATERIAIS DE CONSTRUCAO. E.E. (PROSUL). Mauto. Plant Locations: Umpala, Icbul, Cimoc, Machava, Julio G. Ferreira, Xinavane. 1. Current Status/Ownership. State owned. Government Supervision: Ministry of Construction and Water. Origin: PROSUL was formed by the State in 1979 by merging 24 abandoned small-to-medium scale enterprises. By 1986, PROSUL had run up a debt of Mt. 750 million because of controlled prices for construction materials (not adjusted since 1974). In 1986, PROSUL reorganized its operations so that 16 divisions (2 quarries, 2 tile factories, 5 stone dressing operations, a machine shop, an auto repair shop, a furniture factory and 4 pre-cast concrete installations) were retained. The assets of 4 divisions have been rented out to private operators on a 50/50 net profit sharing basis (no share in operating losses), 2 other divisions were placed (one each) in 2 construction consortiums as PROSUL's joint venture contribution. The remaining 2 were returned to their former owners. 2. Products/RAw Katerials/SupDliers/Markets: Products: crushed stone, roof tiles, cut marble, pipes and sheets of cement and furniture. Materials include: wood, stone, clay and cement. Most of the raw material is source locally. PROSUL sells directly to construction contractors, wholesalers and individuals. 3. Oferations Data and Background: Cagacity: 14.9 million pieces of products. E=1m2pent: 1,306 (administration: 52, skilled: 21, qualified technicians: 5, and unskilled: 1228). Most of the equipment is old (more than 20 years) and in need of replacement. The company operates at 25% to 30% of capacity, due primarily to: lack of raw materials, lack of spare parts, old and worn out equipment, - 97 - ANNEX 4-1 Page 28 of 31 inadequate maintenance of machinery, difficulties associated with transportation and inadequate planning capability. 4. Finance and Accounting: PROSUL's books follow the national plan of accounts. They are not up to date and the company has not developed analytical costing, because it has been unable to gain control over its inventories which are spread over widely scattered areas. They receive inventory movement reports from each warehouse weekly, but their warehousemen are not well trained. 5. jros2ects: PROSUL performs an important function of supplying construction materials to the economy and could be profitable if it were rehabilitated and restructured. PROSUL - QUARRY CAPITAL INVESTMENT (All Data in US$ 000) Foreign Currency Local Currency F.O.B Insurance Freight Duty Other TOTAL FIXED INVESTMENT 1,400 140 168 140 84 1,932 SPARES 600 60 72 60 792 RAW MATERIALS per year TOTAL 2,000 200 240 200 84 2,724 PROSUL - BRICKWORKS CAPITAL INVESTMENT (All Data in USS 000) Foreion Currency Local Currency F.0.B Insurance Freight CIF Duty Other TOTAL FIXED INVESTMENT 1,090 109 67 1,266 SPARES 300 30 330 RAW MATERIALS per year TOTAL 1,390 139 67 1,596 - 98 - Page 29 of 31 PROSUL - TOTAL CAPITAL INVESTMNIT (All Dat. in US$ 000) Foreign Currency Local Currency F.O.B Insurance Freight Duty Other TOTAL FIXED INVESTMENT 1,400 140 1,258 249 151 3,198 SPARES 600 60 372 90 1,122 RAW MATERIALS per year TOTAL 2,000 200 1,630 339 151 4,320 i - ~~~~~~~~~~~~~~~~~99 - ANE -1 Page 30 of 31 PROfIT LOS5 - 6ITH PLAN as - 119" 196 199 19"1 1W2 1M9 14 9 1W6 197 s998 _~~~~~~~~~~- - .. .. --- --- --- ----. ... . ;EVERES :xQcal Market 1.Sl1 1.023 2836 2.45 2,850 3.097 3,503 3.548 3,611 3,611 Export Market 127 160 232 201 216 233 260 265 272 272 TOTAL 1644 19M3 3.018 247 3.06 3.330 3t763 3.813 3,883 3.883 COST OF SALES Labor 347 144 512 537 564 593 622 653 686 720 Raw Materials 126 175 20 183 193 206 213 217 m 222 Utilities 13 18 23 18 1, 20 22 22 23 Z3 Other 241 241 241 241 241 241 241 241 241 241 TOTAL 727 79 96 979 1.O07 1.059 1.m0 1,133 1.172 1.206 mOSS M6IN 919 1.185 Z.089 1.88 2s050 2270 2.665 2.680 2.711 2,677 55.61 S9.81 68.01 45.61 66.8 68.21 70.81 70.31 69.81 68.91 OpERATINGEXP Aduin Tehnical 28 28 20 28 28 28 28 28 28 28 maintenance lOther 367 367 367 367 367 367 367 367 367 367 Depreiation 40 577 735 707 413 397 382 367 353 339 TOTtL 802 973 1130 1.102 80 792 m 762 748 735 ENATIING MARGIN 117 212 951 766 1241 1.475 188 1I918 1.963 1,94Z OTHER EXPENSE: Interest 363 374 46 516 425 327 240 214 180 145 PRE-TAX PRFIT (246) (162) 492 250 816 1,151 1640 1.704 1,783 1.797 INC01 TAX 0 24 125 48 575 820 852 892 898 ET POFWIT (24) (142) 24 125 48 575 820 852 892 698 -14.99. .21 6.01 4.41 13.31 17.31 21.6 22.31 23.01 23.11 DERIVATION OF ALL E0JITY CASH PLON 199 190 19 199 193 199 1995 1996 1997 1998 Not Income (24) (112) 246 125 40 575 20 852 892 898 Plus, Interest Expense (atter tax uving) 363 374 233 258 213 164 124 107 90 73 Depreciation Expense 4U 577 735 707 413 397 382 367 353 339 Re"idual VaIue (Yr 10) 9,712 LUss Chnew in Wltkins Capital 78 57 193 (37) 36 46 75 10 14 2 Capiul Costs 0 1.9" 1.94 0 0 O 0 0 C NET PROJECT CAIfLOiS 445 (1.212) (923) 1,126 915 1.090 1.250 1.316 1.321 :1,020 Oiscount Rts 11i Not Ptesent Valu$ 7.180 Internal Rate of Return 49.41 - 100 - Page 31 of 31 XV. CO_PANHiA nDusTRIAL (CIX) Matola. Ilpto. l.CIN is a large integrated company that produces basic foodstuffs such as wheat flour, pastas, bread, animal feed, candies and chocolates. 2.Pros;2cts The rehabilitation strategy includes rebuilding the wheat and flour mills in two stages. building silos to store incoming grains, construction of new pasta plants in Maputo and Nacala, erection of a feed plant, installing new material handling equipment and vehicles, and installing fire prevention equipment. NOT: It is assumed that, in the interim, CIM will continue to purchase its raw materials from the Government through donor supported import programs. This reduces the total foreign currency requirement to about US$22.4 million equivalent out of total project costs of US$41.3 million. A small component of technical assistance will be required for those production facilities in which new equipment has been installed. -101 - ANX4-2 PlaS 1 of 9 STAIN APPRA3"ISA MMPR ENTERPRISE RESTRUCTURING TECHNICAL UNIT (UTU) GUIDELINES FOR ERTU OPERATIONS. SUBPROJECT ELIGIBILITY CRITERIA. AND SUBLOAN ADNINISTRATI 1. This statement lays down the policies and procedures that the Ministry of Finance, as executing agency, and the Bank of Hozambique, as the financial intermediary, will carry out through the Enterprise Restructuring Technical Unit (ERTU) in discharging their responsibilities under the proposed Industrial Enterprise Restructvring Project (the Project) which is to be financed in part by a Credit (the IDA Credit) to the People's Republic of Mozambique by the International Development Association (IDA). I. ERTU ORGANIZATION STRUCTURE AND OPERATING GUIDELINES (a) As part of its broader responsibilities, the ERTU will review (see IV (a) below) proposed investment projects (the subprojects) in order to ensure they are eligible for financ4ng out of the proceeds of the IDA Credit. Based upon this review, the ERTU will recommend either approval or rejections to the Minister of Finance (hereafter referred to as the Minister). Subprojects approved by the Minister will (in consultation with the BM and other Ministers unde.r whose responsibility beneficiary enterprises fall) be submitted to IDA for review and approval for financing under the Credit. However, if the Minister determines that a subproject involves issues which require approval at the Government level, then the subproject shall first be submitted to the Committee on External Economic Relations (CREE) for resolution of outstanding issues and approval. Subsequent to the approvals by the Minister or CREE and IDA, the Bank of Mozambique (BM) will finalize subloan arrangements based on its normal banking criteria and the subloan conditions in Sections III and VI below. (b) The ERTU staff will consist of a Project Director and a number of professionals, some of whom will be working full time on the Project while others (including staff from other Government Ministries and agencies) will be seconded temporarily for specific tasks. The Project Director will report to the Minister of Finance and will be responsible for the management of the ERTU and overall coordination, supervision and implementation of the Project. The current National Director of Treasury for Economic and Price Analysis - 102 - ANNEX 4-2 Page of 9 in the Ministry of Finance has been appointed Project Director. It is expected that he will devote most of his time (not less than 70%) to project implementation activities. In addition to the Project Director, at least four other professionals (Project Advisor, Economist, Engineer and Procurement Advisor) will work full time in ERTU (ERTU TOR are provided elsewhere). The Project Advisor will work closely with the Project Director and act as Program Coordinator for the Project. The economist will be seconded to the Unit by the Ministry of Finance. The ERTU would have access to legal expertise (possibly on a retainer basis) equivalent to an actual full-time lawyer. This arrangement would provide the flexibility required to handle all the different legal aspects of restructuring or privatization, which could exceed the expertise of any individual lawyer. The ERTU will also have access to consultancy services or staff seconded from other Government agencies for short periods to carry out specific assignments. (c) The ERTU will take all the steps necessary to ensure that its staffing remains both capable and sufficient in numbers to discharge the responsibilities associated with the IDA Credit. Both its consultant managerial and technical staff, will be hired in accordance with the Bank's guidelines for hiring consultants. (d) In carrying out its task, the ERTU, will collaborate with other Ministries, especially the concerned technical ministries, the BM aud the Ministries of Industry and Energy, Commerce and Labor, which are dir,ctly responsible for supervising the performance of enterprises as well as management of some of the beneficiary enterprises. Coordination with these parties will be facilitated through the Interministerial Working Group (IWG). The purpose of the IWG is to ensure that relevant line Ministries, BM and enterprise management have the opportunity to provide inputs in the development of enterprise rehabilitation proposals, and that agreement is reached on issues, before the proposals are submitted to the Minister. II. Utilization of Funds (a) The IDA Credit funds will be managed and disbursed by BM. (b) The proceeds of the IDA Credit shall be used, in accordance with the terms of the Development Credit Agreement entered into between the People's Republic of Mozambique and IDA (the DCA), to finance the procurement of capital and intermediate goods, raw materials, spare parts and services needed for the restoration and normal operation of enterprises that are currently in need of rehabilitation or in financial distress _103 - ANNEX 4-2 Page 3 of 9 and which undergo financial restructuring under the Credit that transforms them into fully viable enterprises. (c) The beneficiary enterprises that may receive financial assistance shall be manufacturing and agroindustrial enterprises. (d) The proceeds of the IDA Credit will be used to finance only specific projects that are technically, legally, financially and economically eligible. Financing out of the proceeds of the Credit will be provided only for the purposes, and to cover the types of expenditures, stated in the DCA. No funds from the IDA Credit will be used for repayment of existing obligations of the enterprise. III. Subloans Terms and Conditions (a) Subloans will finance fixed investments for fixed assets and spare parts (including investments carried out in order to restore production or improve the beneficiary's technical capabilities) and increases in permanent working capital. Such subloans financing fixed investments and the working capital associated with these investments, will have maturities of up to 15 years, including grace periods of up to 5 years. Subloans for the preparation of rehabilitation plans will have maturities of up to 5 years, including grace periods of up to 2 years, and could be refinanced when fixed investment subloans are approved. However, no subloan will mature after the IDA Credit's closing date. (b) Subloans will be denominated in Meticais. Each subloan will be intermediated by the BM which will make a commitment to provide any supplementary domestic financing needs to complete the investment project. (c) Interest rates for subloans will be variable and in accordance with the interest rate structure which prevails in Mozambique. The current interest rate structure has been established in consultation with the IMF, and it has been agreed that the level of interest rates will be adjusted so that they become positive in real terms by 1990. Thereafter, BM and IDA shall consult and agree on both the structure and level of interest rates to ensure they remain positive in real terms. IV. Subloan Apnraisal and Supervision 2. Role of the ERTU will be, inter alia, to assist enterprises prepare rehabilitation plans and financial restructuring proposals. For the purposes of the IDA Credit, the ERTU will appraise the proposals for rehabilitation and/or restructuring presented by potential beneficiaries to ensure that they meet the subproject eligibility requirements and will recommend subprojects -104 - 4-2 Page 4 of 9 to the Minister for approval or disapproval on the basis of the appraisal. Technical assistance needed to prepare the rehabilitation plans would be eligible for financing under the Project. (a) Rehabilitation Plan. Each rehabilitation proposal would include the following basic elements: (i) a marketing plan, aimed at increasing the enterprise's revenues, through emphasis upon the more profitable products and customers, product redesign, quality improvements, and expanded geographic coverage; (ii) a production rehabilitation plan, devised to restore production, fill the needs identified under the marketing plan. The rehabilitation plan could include measures to downsize productive capacity, achieve a fuller utilization of existing capacity, or, where necessary, expand existing capacity; (iii) a management Rlan reviewing existing management capacity and recommending measures to streamline management and the organization structure. The need for specialized staff and training would also be identified; (iv) a financial restructuring olan to restore financial soundness and to assist enterprises regain competitiveness if they have excessive debt on their balance sheets; and (v) a financing "1an prepared outlining how to implement the preceding marketing, production, management plans, restructuring plans, the elements of which are briefly discussed below. Financing arrangements under the ERC would take two forms: (a) subloans contracted through subloan agreements would finance rehabilitation of enterprise fixed assets, spare parts, working capital and technical assistance; while (b) financing for restructuring purposes would be contracted through an investment agreement. The restructuring proposal, would typically include: (a) the sale of unnecessary assets; (b) a reduction in the enterprise's financial burden, accomplished through the use of any of the instruments suitable for restructuring, or a combination of several of them. The restructuring program will include, a review of the current ownership of the enterprise and justifiable proposals on whether the enterprise should remain a public enterprise, or be divested to operate as a joint venture with the private sector (involving both local and foreign investors); (c) other measures to improve the firm's financial situation (extended maturities, for instance); (d) an issue of new shares to mobilize fresh capital, whenever possible, (e) a request for a subloan that could include financing for free-standing permanent working capital, fixed investment, or a combination of both; and (f) financial projections showing the expected results of all these planned measures. Subloan requests should also include an independent legal opinion, on terms satisfactory to ERTU, confirming that the beneficiary enterprise is a legal entity, that no further claims can be leveled against the firm in connection with its previous ownership or liabilities at the moment of restructuring, and - 105 - ANEXD 4-2 Page 5 of 9 that the ownership of the enterprises's controlling interest is clearly defined (or it will be so as a result of the restructuring). Enterprises may request ERTU to provide technical assistance and finance for preparing the rehabilitation plans and corporate workout. (b) In reviewing subloan requests, ERTU should receive from the applicant enterprises a complete disclosure of all the information relevant for the appraisal of the subproject, including information about the identity and history of the company's owners. To proceed with the appraisal of an application, financial statements satisfactory to ERTU, will be requested, and beneficiary enterprises will be contractually obliged to appoint external auditors satisfactory to ERTU as a condition of individual enterprise subloans. (c) A precondition for restructuring enterprises will be that the banks, Government, and enterprise management agree on a base balance sheet that reflects the real net worth of an enterprise, taking into account an adequate revaluation of assets and confirmed outstanding liabilities. Creditors to the enterprise should commit themselves, in principle, to consider reducing their claims on the enterprise's cashflow by foregoing all outstanding penalty charges and fees relating to the debt in default, and converting part of the unserviceable debt into equity or quasi-equity. (d) In appraising a subproject, ERTU and BM will ensure that: (i) The owners are bona-fide entrepreneurs, committed to the success of the enterprise. If the enterprise's ownership is controlled by local banks or Government, or the status of ownership is uncertain, provide justifiable proposal on how to restructure the enterprise and resolve the ownership question within a specified time period (generally about six years). For intervened enterprises, the proposal will provide for the review and regularization or reorganization of their legal status as a condition of the subloan. (ii) The managerial abilities of the enterprise's executives are sufficient to undertake the tasks required by the plans included in the rehabilitation plan. (iii) The administration and organizational setup of the enterprise are adequate to carry out the proposed rehabilitation plan and salaries and wages are - 106 - Page 6 of 9 reasonable in accordance with pre-existing labor practices in Mozambique. (iv) The enterprise has either already sold, or has designed a plan satisfactory to IDA, or is planning to divest itself of all assets not essential for its industrial activities as spelled out in the corresponding rehabilitation plan. (v) All expenditures proposed to be financed with the proceeds of the IDA Credit are eligible in accordance with the DCA. (vi) the enterprises's Financial Rate of Return (FRR) and Economic Rate of Return (ERR) both are equal to, or exceed, 12% in real terms, after taking into account the proposed investment subproject. The ERR will be estimated using border prices. (vii) The projected debt-service-coverage ratio (cash generation divided by financial charges plus principal repayments), of a restructured enterprise is no less than 1.0 in each and every year of the life of the project, and averages not less than 1.5 during the period. (ix) The projected current ratio (current assets divided by short-term liabilities) is not lower, at any time, than 1.2, unless IDA agrees otherwise. (x) As a guideline for determining the amount of debt to be serviced by the enterprise, a determination will be made of the principal amount outstanding which can be serviced over 10-12 years, taking into account the projected cashflow of the enterprise. Prior to defining the debt, the banks, Government and the enterprise must agree on the treatment to be given to depreciation, a dividend policy, and the amount of funds the firm would retain to increase working capital and asset replacements. The target should be to achieve a long-term debt-to-equity ratio not to exceed 3:1. Provisions for the repayment of the debt would be included. (xi) The enterprise has considered in its financial plans the contingent liabilities that could arise from the restructuring process. In particular, if subordinated convertible instruments were used to restructure the enterprise's debt, a sinking fund should be established in order to cover the cash - 107 - ANNEX 4-2 Page 7 of 9 outlays that would take place if the holders of these instruments decided not to convert at maturity. (xii) For the purposes of estimating the current and long- term-debt-to-equity ratios, the term "debt" will include all outstanding and contingent liabilities of the enterprise with respect to persons or entities other than its shareholders, excepting only those that are subordinated in both service and repayment of principal. The term "subordinated" will be used to identify those debts that are senior only with respect to the claims of the shareholders. A debt will be "subordinated in the service of debts" when it is serviced only after all normal debts have been serviced, and then, only if the liquidity of the enterprise is enough to service it while keeping it within the limits agreed on in the Subloan or Investment Agreement. A debt will be "subordinated in repayment of principal" when, in case of failure of the enterprise, repayment of its principal is effected only after all normal debts have been fully repaid. The term "capital' will include all net claims of the enterprise's shareholders, plus those of the holders of subordinated debts. (e) ERTU will also make sure that the Subloan and Investment Agreements are in accordar.ce with the provisions of the IDA Credit and DCA. V. Conditions of Disbursement (a) All relevant agreements should have been entered into by the competent authorities and be binding upon them, including, inter alia, existing debt restructuring agreement, shareholders agreements whereby shareholders agree to offer the necessary pre-emptive rights needed to implement possible conversions, new equity issuance, etc., as well as possible security agreements and shareholder undertakings regarding actual or contingent commitments to provide financial support. (b) All other disbursement conditions established in the Subloan Agreement should have been complied with. VI. General Subloan Conditions BM and ERTU will ensure that: - 108 - AWM% 4-2 Page 8 of 9 (a) Beneficiaries will present to ERTU quarterly financial statements and annual financial statements audited by independent auditors. (b) All transactions effected by the beneficiary enterprise with any individual or enterprise related to it through ownership should be clearly explained. (c) All or any revenue-sharing arrangements entered into by the beneficiary should be subordinated to payments to senior creditors. (d) The beneficiary enterprise will not declare nor pay dividends if such payment is likely to impair its liquidity or ability to meet its debt service obligations. (e) Limits will be imposed upon investments and indebtedness not included in the rehabilitation plans and as determined by BM according to prudent commercial banking practices. (f) No prepayments of long-term debt will be effected unless proportionate payment is also made to the subloan. (g) No change in the beneficiary's by-laws will be authorized during the age of the subloan without BM approval. (h) All other conditions contained in the DCA. VII. Supervision 3. ERTU will be responsible for overseeing the disbursements of subloans. To this end, ERTU will review the documentation for disbursement before it is submitted to BM for disbursement and together with BM will. pay periodic visits to the beneficiary's facilities to confirm that the rehabilitation plan is being implemented in accordance with the Subloan or Investment Agreement. During the period of disbursement, these visits will be realized quarterly, and, after disbursement, once every year. ERTU and BM will carry out at least one major formal review of each subproject per year, and will send a copy of its results to IDA. BM will be required to maintain adequate records reflecting the operations financed out of the proceeds of the Credit, and to submit to IDA (with a copy to the ERTU), quarterly reports on the performance of the portfolio financed out of the IDA Credit. VIII. Procurement 4. ERTU will monitor closely the procurement of items to be financed under the Credit, in order to. make sure that the items are reasonably priced - 109 - ANMMt 4- 2 Page 9 of 9 and appropriate for their intended use. Particularly, ERTU will ensure that enterprises receive quotations according to the procedures and conditions set out in the DCA. IU. Amendments and Clarifications 5. Amendments to this policy statement may be made upon agreement between the authorized representatives of the People's Republic of Mozanbique and IDA. In addition, the procedures to be used by BM or ERTU in dealing with any subloans or investments of a type not previously subject to agreements between the IDA and Government would be clarified through an exchange of letters. INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT PROPOSED PROJECT IMPLEHENTATION ORGANIZATION CHART Steering Com_ittee for Resolveing COOMITTEE FOR EXTERNAL r-! Project Policy Issues: IECONOMIC RELATIONS (CREE) (Policy Reforms, Restructuring of Enterprises - debt & ownership issues) Sector Mlnistries IANK on NOF MZ IQUE KINISTRY OF FINANCE Responsible for Overall Project Execution. SNTZRPRUSL 3RSTtUCTURING R.sponsibilities Inclodes Intertinisterial TECUNICAL UNIT (UTtU) 21 - Sub-project Appraisal Working Group (IW3)lI - Project Imples natlon & Managemnt - Liaison with 3M -Procurement Advice to Enterprises ENTERPRISES - Technical Assistance Coordination Policy and Economic Training, Support to Consultancy Analysis; Consultant Reporting and Enterprises fors Services Supervision Monitoring Pre- & Feasibility Studies & Preparation of Rehab. Plans 11 IUG co prises representatives of. 21 Staff Compositions -Ministry of Finance (ERTU) Internationally Recruiteds Local Staff -Bank of Mozambique -Lead Industrial Advisor (PARTEX) - Project Director -Ministry of Industry and Energy - Economist (PARTEX) - Economist -Ministry of Construction and Water - Engineer (PARTEX) - Accountant -Ministry of Agriculture - Procurement Advisor - Seconded or Assigned -Ministry of Transport and Communications - Short-term Consultants Staff -BEs (co-opted when necessary) - 111 - Annex 5-2 MOZAMSIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT Bank ot Mozambiqu* - Summary Accounts, 1980-87 (In Millions of Mbtloels) ......... .............. ,........ ............. _ ......... .............................. _ . ......._ . _......_.. 1984 19:s 1986 1987 19" 898 Hhrch June Sept. Dec. nhrch JUne foreign assets 3%2 2921 3140 6tO05 7386 60126 105131 12849 Clains on 6Svernment 72075 7432 53089 69569 102110 101103 11199 121671 Clains on the economy 78734 91905 109301 13642t 145531 151569 166053 1BM? (laiMs on the banks 1766 1500 673 873 673 873 2671 2679 Unclassified assets 77426 74351 77519 1765708 2057310 2i12015 ... 2932656 fixed and stocks 213 211 201 276 267 1OO ... 692 Rdju3tment accounts 334 - 1274 1160 1439 ... 5544 Trmnsitorv accounts 76801 74140 71474 63071 719375 733737 ... 100737 Other assets 2 - 2844 1133385 1336268 140639 . 111683 3ssets * babilities 233963 244959 243222 2053579 2379102 2466286 3377692 leservt noney 62863 73813 66167 133037 145060 15755 ... 202466 Currency issued 28751 31157 33904 38640 39382 5365 471S3 6459S ners' deposits 6064 12698 16001 25511 317 31737 ... 41529 Ossand deposits 26048 21198 36262 66653 74391 0453 .. 16340 lTine and foreign currency deposits . ... 437 7011 137I8 13040 ... 16315 Hedir and long- tern foreign v liabilities 27227 34248 36791 413660 43444 4351S2 555437 61204? Short-ten foreign liabilities 3030 2264 3139 14169 s766 57370 61557 62550 of uhich: Sof - - - 6021 15666 19230 23417 24410 6owerment deposits 49510 47789 20576 38075 41432 50112 54317 62607 Capital accounts 91472 10485 12374 25861 27577 28900 30744 26036 Unclassified liabilities 81831 76330 63738 1391458 165971 1746157 ... 2393569 Restricted deposits 2000 2000 20 20 20 20 2 2000 2000 2000 Ndjustnent accounts - 1015 1465 12514 8KIS 924 ... 40016 Transitory accounts 781% 71541 ?11 79 22C094 26Z214 26666? ... 347629 Cashier's check 1635 1774 2664 7499 9272 10522 ... 13843 Continget liabilities (net) Other liabilities - - 571 1140951 137039 145752 ... 1910021 Source: bta provided by the aW of Mozanbique. - 112 - Ann x 5-8 MOZAMBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT Moneotry and Credit Development., 1980-87 I/ (In Millions of Meticals) Dec Doc Dec Dec. Dec. CATEGORY l910 1911 1982 1938 1964 1915 1991 1907 193 __- - --- -- -- -- -- -- -- - -- - - -- - -- - - - -- - -- -- -- -- -- -- -- -U- -- -- -- -- -- -- -- - - - - - - - - - - - Net Foreign Asset. 2/ 6,173 6,484 1,441 (1,682) 987 615 86o 21,941 6e,482 Assets 8,397 7,407 2,769 2,478 4,017 2,860 8,600 61,090 122,58a Liabilities (724) (923) (1,31b) (4,140) (3,030) (2,265) (3,140) (89,149) (69,151) Domestic credit 49,599 62,316 72,988 102,915 124,243 144,190 168,912 217,493 290,642 Claims on Governmnt, Net 1,678 6,39 8,8653 13,671 22,266 27,028 82,948 47,262 62,907 Clalim on Government 25,954 87,498 W0,823 86,763 80,006 82,817 61,524 91,565 142,154 Government Deposits 24,278 81,169 46,965 52,192 67,740 56,789 28,576 51,818 89,247 Claims on the Economy 47,928 65,979 69,130 69,344 101,977 117,162 186,964 170,241 287,785 Money and quasi-mtony 86,817 46,880 59,481 72,$91 83,622 96,627 111,407 170,868 288,891 Currency outside banks 9,137 12,227 17,811 23,632 27,02' 29,791 32,216 36,572 57,076 Demand Deposits 28,525 30,854 38,454 46,028 65,s18 62,827 75,142 128,951 169,868 Time Deposits 2,656 8,079 3,218 3,931 2,777 3,909 4,049 9,888 9,947 Foreign Borrowing 8/ 6,627 5,995 10,426 26,725 27,227 84,248 36,791 419,909 621,780 Other Items, net 15,828 17,147 4,523 3,037 14,381 14,030 21,074 (851,831) n.n Capital Accounts 11,226 11,869 11,028 10,496 11,589 12,745 14,718 28,6831 28,6831 Interbank Claims, net .. (1,350) (821) (878) 8,877 n.a Unclassified Items net 4,608 5,78e (6s,50) (7,459) 4,142 2,106 7,284 (389,839) n.a Memorandum Item: Not Domestic Credit 4/ 27,144 89,176 58,040 74,153 82,685 95,912 111,047 149,416 n.a Source: Bank of Mozambique 1/ Data for 1900-93 are not strictly comparable with those for following years. 2/ Includes foreign eurrency demand deposit. at Bank of Mozambique. 8/ Bank of Mozambique mdi um- and long-torm foreign liabilities (set. A approx through Sept. 1986). 4/ Domstic Credit lso foreign borrowing and other Items, net. -113 - AN= S-4 Page 1 of 3 MOZANDIIUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT ENTRPRISE RESTRUCTURING TECHNICAL UNIT TERMS OF REFERENCE Date of Establishment: February 19, 1988 Location and Funding: As a follow-up to the Arthur D. Little Study of 40 industrial enterprises, Government, with support from the World Bank, established an Enterprise Restructuring Technical Unit (ERTU) located in the Ministry of Finance, to act as a catalyst in the enterprise rehabilitation program and to invigorate the indtustrial sector. The cost of setting up the ERTU and costs of consultancies would ultimately be financed from the Industrial Enterprise Restructuring Credit, but to expedite the industrial rehabilitation process, Government received an IDA Project Preparation Facility (PPF) to finance the start-up of the ERTU and relevant studies. COMPOSITION The ERTU is headed by a Project Director, who is currently the National Director of Treasury in the Ministry of Finance and is staffed as follows: (a) Internationally Recruited Staff: (i) One Project Advisor; (ii) One Economist/Financial Analyst; (iii) One Engineer; (iv) One Procurement Advisor (vacant). (b) Local Staff will be supplied, as needed, to undertake specific assignments, by the Prices and Economic Analysis Department (PEAD) of the Ministry of Finance. The core local staff will consist of: (i) Project Director -National Director of Treasury Head of PEAD; (ii) Economist (currently occupied by an economist from PEAD); and (iii) Accountant (Vacant). (c) Additional local staff would be temporarily seconded or assigned to the Unit from other Government departments as needed, to work on particular projects or enterprise plans which come within their responsibilities or expertise; - 114 - ANNEX 5-4 Page 2 of 3 (d) Foreign consultancy staff will be recruited as needed for specific assignments. ERTU is expected to be entrepreneurial and to play an important role by providing guidance for the timely implementation of the rehabilitation program and the IERP. RSZQSIJILLIKTI Gen ral: The main task of the ERTU will be the preparation and implementation of the enterprise rehabilitation program. On behalf of the Ministry of Finance, the ERTU, shall be responsible for the overall coordination, management and supervision of implementation of the IERP. This will include collaboration with and supervision of consultants appointed to carry out Phase II of the enterprise review. In carrying out this responsibility, the ERTU will liaise closely with and help coordinate other Government agencies' involved in the Project. It will develop capability to provide operational support to enterprises under rehabilitation. The ERTU will also undertake ad hoc tasks, including sector and sub-sector studies, as may be assigned to it by Government through the Ministry of Finance. Due to the general shortage of qualified staff, the ERTU will initially depend on external consultants to carry out its responsibilities. However, with time, it is expected that the Unit would strengthen its own capabilities and, where available, recruit local consultant expertise under this program. Soecific The immediate task of the ERTU will be to: (i) Select, with the assistance of the consultants undertaking the review, enterprises for in-depth study using criteria agreed to in the terms of reference for the enterprise reviews; and (ii) Supervise the work of the consultants undertaking the enterprise reviews. The ERTU will coordinate other Government departments' actions in relation to the rehabilitation program, and backup the efficient implementation of agreed reforms. Implementation support includes refinement of the studies, identification of technical partners, sources of knowhow and sources of finance both within and outside the country, and agreeing on a timetable for the rehabilitation program; Responsibilities under the IERP In the context of the IERP, the ERTU shall: (i) assist beneficiary enterprises (BEs) to identify and select cowultants to carry out prefeasibility, feasibility and design studies in accordance with World Bank guidelines for the use of consultants; - 115 - ANNEX 5-4 Page 3 of 3 (ii) assist BEs in the design and implementation of the Rehabilitation Plans; (iii) in collaboration with the Bank of Mozambique, carry out appraisals of subprojects to be financed under the Project; (iv) jointly with the BEs, develop and irplement co-financing plans; and (v) strengthen the capacity of local project insticutions through training, especially in project appraisal and enterprise restructuring; (vi) provide policy advice to Government through analysis of the impact of specific policies on the performance of enterprises, inter alia taxation, pricing and price controls, production quotas, credit and foreign exchange allocation, industrial licensing, trade (import, export and domestic) policies and policies relating to asset revaluation; (vii) ensure completion of sub-sector studies according to the timetable set in the terms of reference; and (viii) ensure effective implementation of the IERP. - 116 - ANI[[ 5- 5 Page 1 of 6 MOZANBIOUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT ENTERPRISE RESTRUCTURING TECRNICAL UNIT JOB DESCRIPTIONS The Enterprise Restructuring Technical Unit (ERTU) was set up in the Ministry of Finance to facilitate the preparation and timely implementation of the Government's enterprise rehabilitation program. On behalf of the Ministry of Finance, the ERTU is also charged with the responsibility for the overall coordination, management and supervision of the implementation of the IERP. The Unit will initially consist of a core team of five (two local and three internationally-recruited staff) and be supported by external consultants and, additional temporary, local staff seconded when needed from other Government agencies. The ERTU will liaise closely with other Government agencies and supervise consultants appointed to carry out work relating to enterprise rehabilitation or restructuring. The setting up of this '.t has created the need for the following positions. 1. Proiect Director The ERTU shall be headed by a Project Director (currently National Director of Treasury responsible for Economic and Price Analysis Department in the Ministry of Finance), who shall report directly to the Minister of Finance. He will be responsible inter alia for: (i) overall efficient coordination, management and supervision of Project implementation, including providing the link with Government agencies and other institutions; (ii) the Project Director will be responsible for the day-to-day management and supervision of the ERTU in accordance with the provisions of the Development Credit Agreement (paragraph 2 of Schedule 6); and (iii) serve as chairman of the Interministerial Working Group (IWG). In his capacity as Project Director, he will also ensure that the ERTU collaborates closely with other Government agencies and the enterprises involved in project implementation. Project Advisor 2. Reporting to the Project Director for the proposed Industrial Enterprise Restructuring Project (IERP). - 112 - Annox 6-8 MOZAUBIQUE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT Monetary and Credit Developmonts, 1980-87 1/ (In Millions of Moticals) Dec Dec Doc Doc. Dec. CATEGORY 198c 1981 1982 1993 1984 1986 1988 1987 1988 _-- -- -- -- -- -- -- -- -- -- -- -- -- - -- - ---------- --------- - - - --------- - --- _- -- -- -- -- ------ - - - -- - - - - -- - - - -- - - - Not Foreign Assets 2/ 8,173 8,404 1,441 (1,682) 087 816 860 21,941 63,432 Assots 8,897 7,407 2,769 2,478 4,017 2,890 8,600 61,090 122,658 Liabilitios (724) (923) (1,819) (4,140) (3,030) (2,265) (8,140) (89,149) (69,161) Domestic credit 49,699 82,318 72,98a 102,916 124,243 144,190 188,912 217,493 290,642 Claims on Oovernment, Net 1,678 6,339 3,858 13,671 22,288 27,028 32,948 47,262 62,907 Claims on Government 26,964 37,498 60,923 65,783 80,006 82,817 81,524 90,685 142,154 Governmnt Deposits 24,278 31,169 48,986 52,192 57,740 65,789 28,576 61,313 89,247 Claims on the Economy 47,923 56,979 69,180 89,344 101,977 117,182 185,984 170,241 287,736 Money and quasi-money 85,317 45,680 59,481 72,491 83,622 96,627 111,407 170,36e 286,391 Currency outside banks 9,187 12,227 17,811 23,632 27,027 29,791 82,216 88,672 57,076 Demand Deposit. 28,525 80,364 a8,464 45,028 63,818 62,827 76,142 128,951 169,3S Time Deposits 2,866 8,079 3,218 3,931 2,777 3,909 4,049 9,883 9,947 Foreign Borrowing 8/ 6,827 6,995 10,426 26,726 27,227 34,248 86,791 419,909 621,780 Other Ytems, not 15,828 17,147 4,523 3,037 14,881 14,030 21,074 (851,881) n.a Capital Account. 11,226 11,889 11,028 10,496 11,589 12,745 14,718 28,681 28,681 Interbank Claim*, net ... ... (1,360) (821) (878) 8,877 n.e Unclassified Item, net 4,803 5,778 (86,60) (7,4s9) 4,142 2,106 7,284 (889,839) n.a Memorandum Item: Net Domestic Credit 4/ 27,144 89,176 58,040 74,158 82,e36 95,812 111,047 149,416 n.e Sources: Bank of Mozambiquo I/ Data for 1980-83 are not strictly comperable with those for followlhg years. 2/ Includes foreign currency demnd deposits at Bank of Mozambique. 8/ Bank of Mozambique medium- and long-tarm foreign liabilities (set. A approx through Sept. 1986). 4/ Domestic Credit leo foreign borrowing and other items, net. - 118 - ANNEX S-5 Page 3 of 6 Additional Duties will be: (i) assisting the Project Director with the recruitment of staff for the Unit and training local professional staff; (ii) reviewing and proposing to the Project Director a detailed work program, priorities, and budget for the efficient performance of the ERTU; (iii) coordinating and supervising policy or sectoral studies undertaken by the Unit on behalf of Government; (iv) advising on the regulatory framework as it affects enterprises under the Project; and (v) undertaking any other duties, relevant to the operations of the ERTU, as may be assigned to him from time to time by the Project D4rector. OUALIFICATIONS Higher level degree(s), MBA/CPA or Finance or Economics. A solid understanding and clear record of management level accomplishments in industry, especially in finance, strategic planning and information systems. A key is the ability to monitor a wide range of diverse activities and enterprises and ensure that timely rehabilitation or corrective action is taken to attain desired results. Since the position will have an unusually wide span of responsibility over such areas as investment decisions, foreign participation, enterprise financial restructuring, economic policy, and possibly divestitures, a highly flexible professional is sought who functions effectively in a delicate leadership role without close supervision. He will be expected to work within tight schedules, thus, timeliness and quality work are of essence in this assignment. LANGUAGE Fluency in English and Portuguese/Spanish essential. Engineer 3. Will work under the supervision of the Project Advisor. He will ensure that all the technical aspects of Project implementation are well integrated into the general work of the ERTU. The Engineer shall be responsible inter alia for: (a) coordinating ERTU's technical activities, reviewing rehabilitation and restructuring plans for soundness of their - 119 - ANNEX 5-S Page 4 of 6 technical designs. During project implementation, assisting the beneficiary enterpris3s to ensure that implementation schedules are adhered to and, when necessary, identify any technical or production bottlenecks and suggest appropriate solutions; (b) evaluating rehabilitation needs and corresponding design activities, and assessing the technical and production implications of capital expenditures to determine their consistency with project objectives and eligibility criteria; (c) reviewing and assisting the BEs in establishing technical specifications for design, construction, and equipment procurement to be undertaken under respective enterprises' rehabilitation plans; (d) reviewing technical proposals and recommending eligible suppliers for contracts to be awarded under the Project; and (e) undertaking any other duties as may be assigned by the Project Advisor. Qualifications and *:erience Postgraduate training in engineering (industrial, mechanical, electrical, or chemical). Extensive relevant work experience in industry, part of which should have been in a position not below that of chief engineer, technical director, factory manager, or the equivalent. In addition, an economics background or experience in general management, and project appraisal will be an added advantage. Economist 4. Will work under the supervision of the Project Advisor. He will be responsible for developing the ERTU' s capacity in economic and financial analysis, project appraisal, debt restructuring, etc. These responsibilities will include inter alia: (i) Planning, coordinating and supervising the economic activities of the ERTU; undertaking subproject appraisals to determine their financial and economic viability; restructuring and divestitures; reviewing the economic and financial aspects of enterprise rehabilitation plans; (b) He shall be responsible for providing training to local counterparts in the economic and financial aspects of project appraisel and enterprise restructuring; and (c) the Economist shall undertake any other financial and economic activities that may be assigned to him by the Project Advisor. - 120 - ANNEt 5_-5 Page 5 of 6 Oualifications and Exoerience A professional accounting certificate plus an advanced economic degree. Extensive experience in industry, consulting, accounting and project appraisal. The four staff listed above would be supported by other staff appointed to the ERTU or staff from other Government Ministries thlat would be seconded on a temporary basis as needed to work on particular assignments which come within their areas ot responsibility or expertise. Accountant 5. The Accountant shall work under the supervision of the Project Advisor. The Accountant shall be responsible inter alia for keeping financial records and accounts for all project components; preparing withdrawal applications for signature by the authorized representative of the BM; reconciliation of the Special Account in coordination with BM and in accordance with the Association's disbursement procedures and annual financial plans and budgets; and preparing Project accounts for audit. The Accountant shall also be responsible for providing training to local staff in basic accounting, sufficient to efficiently carry out their duties. Procurement Advisor 6. The Procurement Advisor shall be responsible inter alia for: (a) providing training, monitoring and supervising all relevant procurement procedures for the acquisition of equipment vehicles, supplies and services, including the preparation of tender documents; and (b) reviewing bids and contract awards in accordance with the Association's guidelines and guidelines of other parallel co- financing agencies. Other Technical Staff 7. To complement its full-time staff, the ERTU shall employ, in accordance with the World Bank guidelines for the use of consultants, consultants to provide technical assistance to BEs and the Government. Interministerial Wording Group (IWG) 8. (a) in discharging his responsibilities, the Project Director shall seek the advice of an interministerial working group composed of senior-level officials representing, inter alia: the Ministry of Industry and Energy; the Ministry of Construction and Water; the Ministry of Agriculture; the - 121 - 5-S Page 6 of 6 Ninistry of Transport and Communications; and the Bank of Mozambique; (b) the IWG may, at its discretion, request the participation of representatives of the BEs involved in Project implementation to discuss issues relevant to the respective BEs; and (c) the IWG shall ensure that: (i) the relevant sector ministries, BM and the BEs have an opportunity to participate in the design and implementation of the Rehabilitation Plans; and (ii) interministerial agreement is reached with reference to policy issues before subloan and investment proposals are submitted to the Minister of Finance for approval. - 122 - Annex 5-6 SINDUSTRIAL ENTERPRISE RESTRUCURING PROJECT Eetimated Disbur_sent Scheule for tho IDA Ceilt Estimated Disbursement Schedule Africa-Region Disbursement Profile Profile for Industrial Projects. (Cumulative X Disbursements Cumultive IDA Fiscal Year Disbureemnte) a/ during the Period Disbursemente (USS mi lIIon) _ _ _ FY90 - 12/31/69 OX 0.0 0.0 - 06/30/90 ax 1.6 1.5 FY91 - 12/31/90 10X 2.9 4.4 _ 06/80/91 17X 3.1 7.5 FY92 - 12/31/91 27X 4.4 11.9 - 06/30/92 40X 5.7 17.6 FY98 - 12/31/92 s0X 4.4 22.0 - 06/30/93 71X 9.2 31.2 FY94 - 12/31/93 s1X 4.4 35.6 - 06/30/94 671 2.6 36.3 FY95 - 12/31/94 921 2.2 40.6 - 06/30/95 95X 1.3 41.8 FY96 - 12/31/95 99X 1.6 43.6 - 06/30/96 100X 0.4 44.0 / Estimates based on recent disbursement experience on IDA projects in Mozambi quo AFSIE Jun. 1989 - 123 - hZ.. t ~~~~~~ ~ ~ ~~~- 123 - ANNEX 5-7 Page 1 of 4 hOZANBIOUE NvUSTRIAL ENTERPRISE RESTRUCTURING PROJECT (IERP) PROJECT COMPLETION REPORT (PCR) PRPARATION ARRANGEXEN A. Introduction 1. Project Completion Reports (PCRs), which provide a retroactive assessment of the project, are prepared for all investment and adjustment lending operations financed by the World Bank (IBRD/IDA), wittin six months of the Loan/Credit Closing Date. The content of the PCR and allocation of responsibility between the Bank and the Borrower under an IDA Credit for the proposed Industrial Enterprise Restructuring Project (IERP) are briefly outlined below. B. Scpoe and Content of PCRs 2. The PCR will provide a comprehensive but focussed account of the project's objectives, design, implementation, and impact. These objectives are in Parts I through III, as outlined below. PART X (a) A brief description of the implementation record of the operation and analysis of key issues (to be prepared by the Bank within three months of the Credit Closing Date). PART II (b) There should be an analytical review of the project from the Borrower's perspective and should be prepared within three months of the Credit Closing Date. The Project Director would, on behalf of the Borrower, be responsible for preparing Part II of the PCR. A format to meet the reporting requirements would be prepared by IDA in advance of the first supervision mission for the Project. Essentially, the Borrower would prepare this section with the purpose of: (i) evaluating IDA's performance during the evolution and implementation of the project, with special emphasis on lessons learned that may be relevant for the future; (ii) evaluating the Borrower's own performance during the evolution and implementation of the project; - 124 - ANNEX 5-7 Page 2 of 4 (iii) assess the effectiveness of the relationship between IDA and the Borrower during the evolution and implementation of the project; and (iv) confirm the adequacy and accuracy of the information contained in Parts I and III of the PCR (if these have been sent to the Borrower by IDA). i PART III 3. The ERTU will be required to prepare and furnish to IDA supervision missions statistical data and background information necessary to prepare Part III of the PCR. The information would include the following: (a) Progect Implementation. Basic documents for this purpose would consist of annual Project work programs, budgets, and progress reports prepared by the ERTU, approved by the Ministry of Finance, to be submitted to IDA and reviewed during supervision missions. The work programs and budgets will include monitorable targets on Credit approvals, commitments, disbursements, and implementation schedules to be compared against the targets set at appraisal. This would include information on the Enterprise Restructtring Component, and Technical Assistance Component. Before each supervision mission, IDA would submit a set questionnaire for collecting additional information that may be necessary. (b) Reporting Requirements Proiect Costs. The information will be derived from: the rehabilitation plans prepared for each enterprise; ERTU's supervision reports on each enterprise which would indicate actual costs incurred during implementation; and enterprise annual reports. All of these reports will be made available to IDA in accordance with the reporting requirements described in the SAR. Basic information will be presented as follows: (i) type of sub-project: rehabilitation, expansion, working capitel, or financial restructuring; (ii) enterprise size by assets, production capacity, sales and employment; (iii) sector/sub-sectors; (iv) location of sub-project; (v) financial intermediary; - 125 - ANNEX 5-7 Page 3 of 4 (vi) investment costs with breakdown of foreign and local costs; (vii) amount of sub-loan committed with breakdown of the IDA credit, equity contributions from enterprise's own sources, or by Government; (viii) total investment for each sub-project, classified by investment item (machinery and equipment, civil works, technical assistance, consultancy, training, etc.) B. Project Financing. Information will be derived from the rehabilitation plans; sub-loan agreements; and from ERTU's enterprise supervision reports. 4. In both (A) and (B), the actual results would be compared against the appraisal estimates. 5. Prxoiect Results. The information on each enterprise and on the Project in general, will include data on: A. Direct Benefits: Mi) employment; (ii) exports and consequent imports (market development and performance); (iii) manpower development; (iv) structure of ownership; (v) percent use of local inputs, and value added; and (vi) capital labor and capital/output ratios. B. Economic Benefits: Mi) economic rate of return; (ii) economic benefits and spin-offs; (iii) environmental effects; and (iv) overall economic justification (at sub-project appraisal vs. actual results) C. Financial Impact: (i) financial rate of return (ii) financial results (including working capital analysis) - 126 - AM=t 5-7 Pago 4 of 4 (iii) financial covenants and targets (including results of financial restructuring); and (iv) financial and structural ratios. D. Studies: Assess purpose as defined at appraisal, status durin.g implementation, and impact of the studies. 6. Status of compliance or non-compliance with the covenants. These will be reviewed for compliance during IDA supervision missions. 7. The basic data sheet overleaf will be prepared for each enterprise rehabilitation financed under the Project. BASIC DATA SHEET Key Project Data Original Current/Actual ITEK Estimate Estimate Total Sub-project Cost (US$ Million) Overrun or Underrun (%) Cost of Fixed Assets (US$ Million) Working Capital (US$ Million) Financing (US$ Million) Internal Cash Generation External Aid Agencies (specify) Other Sources Sub-loan Amount (US$ Million) Disbursed Cancelled Repaid to Outstanding to Completion of Physical Components (date) Start-up of Operations (date) Achievement of Full Production (Date) Full Production Level (Units) By Product (Units) Financial rate of Return (%) Economic Rate of return (%) - 127 - Annex 6-1 NOZANDIODE INDUSTRIAL ENTERPRISE RESTRUCTURING PROJECT SELECTED DOCUMENTS AND DATA AVAILABLE ON PROJECT FILE A. Phase I Reports prepared by consultants for the Ministry of Finance (MF) "Review of Agricultural and Industrial Enterprises" in Seven Volumes, May 1988: Vol. 1 - "Factual Summaries of 40 Industrial and Agroindustrial Companies in Mozambique"; Vol. 2 - Analysis of Issues; Vols. 3-7 - Prefeasibility Studies on Five Enterprises. B. Phase II Pre-feasibility Studies on Ten Enterprises prepared by consultants for MF, "Industrial and Agricultural Enterprise Review" in 10 volumes, July 1989. - CIM, IMA, MADAL, CARMOC, PROSUL, FACOBOL, VAN LEER, FASOL/SABOREL, ECOME and CIMENTOS. C. Contact and Terms of Reference for above studies. D. Contract and Terms of Reference between GOM and PARTEX to provide Technical Assistance to the ERTU. E. Legislation Relating to Depreciation and Amortization, of January 27, 1968. F. DECREE No. 13/88 of November 11, 1988, relating to Asset Revaluation.