Document of The World Bank FOR OMCIAL USE ONLY RepoMt NeQ 5203-YAR STAFF APPRAISAL REPORT YEMEN ARAB REPUBLIC SECOND INDUSTRIAL DEVELOPMENT PROJECT January 10, 1985 Industrial Development and Finance Division Projects Department Europe, Middle East and North Africa Region This document has a resticted distribution ad may be used by recipients only in the perfonnance of heir official duties. Its contents may not otherwise be disclosed without Wodd Bank wuthoratdon. CURRENCY EQUIVALENTS Currency Unit = Yemeni Rial (YR1) December 31, 1981: UStl.OO = YR1 4.45 December 31, 1982: UStl.0O = YR1 4.45 December 31, 1983: US$1.00 = YRI 4.70 March 15, 1984 : USt1.00 = YR1 5.40 March 15, 1984 : SDR1.00 = US$ 1.10 LIST OF ABBREVTWATIONS ACB AgriLultural Credit Bank CBY Central Bank of Yemen CPO Ministry of Development and Central Planning Organization DEG Deutsche Entiwicklungs Gesellschaft DOI Department of Industry ERR Economic Rate of Return HCB Housing Credit Bank IBY Industrial Bank of Yemen IDB Islamic Development Bank MEI Ministry of Economy and Industry IEDA Industrial Estates Development Authority lILT Medium and Long-Term ST Short-term YAR Yemen Arab Republic YBRD Yemen Bank for Reconstruction and Development YCIF Yemen Company for Investment and Finance FISCAL YEAR Government of Yemen Arab Republic - July 1 - June 30 (prior to 1980) - January 1 - December 31 (from 1981) Industrial Bank of Yemen - July 1 - June 30 (prior to 1980) - January 1 - December 31 ffrom 1981) FOR OFFICUAL USE ONLY YEMN ARAB REPUBLIC STAFF APPRAISAL REPORT ON A SECOND INDUSTRIAL DEVELOPMENT PROJECT Table of Contents Page No. I. INTRODUCTION ................................................. 1 II. THE INDUSTRIAL SECTOR. 2 A. Characteristics, Structure and the Government's Policies. B. Past Performance, the Plan and Recent Trends............. C. Development Constraints, Prospects and Strategy.......... D. IDA's Past Operations in the Sector...................... III. FINANCIAL SECTOR. 6 A. Structure, Operations and Resource Mobilization and Allocation..-..------............ B. Industrial Finance....................................... C. Foreign Exchange Situation, Rates and Risk............... D. Interest Rates........................................... IV. THE INSTITUTION - INDUSTRIAL BANK OF YEMEN (IBY) ............. 10 A. Institutional Aspects ..................................... B. Operations ................................................ C. The Bank's Financial Situation............................ D. Financial Performance and Evaluation...................... E. Performance Under the First Project (Cr. 1122)............ F. Operational and Financial Projections..................... V. THE PROJECT ............... 22 A. Objectives and Components................................. B. Costs and Financing....................................... C. Implementation Arrangements............................... D. Benefits and Risks........................................ VI. Agreements Reached and Recommendations ........................ 29 This report was prepared by Messrs Gore, Gupta, Hunt (IDF/EMP) and Cilingiroglu (Consultant) on the basis of the findings of an appraisal mission that visited the Y.A.R. on March 17-29, 1984 and May 25-June 1, 1984. | This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (Cont'd) Annexes: 1. Institutional Structure of IBY.... 2. Functions and Responsibilities of Planning and Research Department.... 3. Terms of Reference (TOR) for Project Identification Studiess............ 4. TOR for Project Promotion advisor. 5. Implementation Schedule for Project Identification, Preparation and Promotion Activities.. ........... 6. Functions and Responsibilities of Follow-Up Department and Program to improve Follow-up Activities. 7. IBY's Balance Sheets for 1981-83. 8. IBY's Income Statement for 1981-83. 9. Projected Balance Sheet for 1984-88. 10. Projected Income Statement for 1984-88................. 11. Projected Cash Flow Statement for 1984-88.............. 12. Schedule of Disbursement.........................*...... 13. Selected Documents and Data in Project File............ 1. INTRODUCTION 1.01 Industrialization in the Yemen Arab Republic (YAR) is a very recent development and its scope remains limited. Nevertheless, it has an important role in the country in supplying locally needed manufactured goods, providing stable employment and harnessing financial resources of th.e private sector, particularly those accummulated by emigrants. Opportunities exist for further investment in medium and small size import substitution, local resource based and, to some extent, export industries. The key constraints are shortage of viable projects, and inadequate institutional support to promote and finance projects and to assist entrepreneurs who are willing to invest in industry but have limited management capability. 1.02 This report appraises a project whose main aim is to address the above key constraints. The project would help identify about 40 potential investment opportuniti__ in YAR, followed by preparation of 15 feasibility studies. It would, through technical assistance, training and other measures, also strengthen the institutional capacity of the Industrial Bank of Yemen (IBY) to promote and finance industrial projects. Finally, it would provide scarce foreign exchange for investment. The project takes into account the findings and recommendations of the two recent IDA reports: Manufacturing Industry - Performance, Policies and Prospects (No. 3651) of November 12, 1982 and Mobilization of Domestic Financial Resources (No. 3554-a) of January 6, 1982. It builds on IDA Credit No. 1122-YAR for the First Industrial Development Project channelled through IBY which was approved on March 26, 1981. The funds under this credit have been fully committed and are being disbursed. The Project Performance Audit Report is yet to be prepared. - 2 - II. THE INDUSTRIAL SECTOR A. Characteristics, Structure and the Government's Policies 2.01 Manufacturing industry (which includes quarrying) forms a small part of YAP's overall economy, accounting for 7.5% of GDP and 5% of total employment. Manufacturing output is dominated by food processing (44% of manufacturing value added), followed by building materials (21%), chemical and light engineering (10% each), textiles and wood working (5% each) and others (5%). About 3,000 enterprises are currently registered in the country. Most of them are very small units and artisans. About 90% employ four or fewer workers; 7%, between five and nine; and 3%, 10 or more. The majority of these are concentrated around the three major cities; Sanaa (41%), Taiz (26%) and Hodeida (14%). The private sector dominates the manufacturing sector with the Government owning a handful of large enterprises, including textiles, cement, tobacco, drugs and flour milling. The institutional support structure consists of the Ministry of Economy and Industry (MEI), more specifically its Department of Industry (DI), which has the overall responsibility for industrial research, planning, development and regulation. It has established two specialized agencies; the Industrial Estates Development Authority (IEDA), in 1973, to provide physical infrastructure and IBY, in 1976, to provide development finance. 2.02 As seen from the performance of the industrial sector (para 2.03), the policy package for the sector has proved adequate. The basic policy for governing the industrial sector is contained in Law No. 18 of 1975, which encourages an open door policy towards foreign firms, and guarantees repatriation of corporate profits of foreign holdings. The industrial incentives include exemption from import tariffs on equipment and spare parts; a tax holiday and 25% reduction in import tariffs on raw materials and intermediate goods (both for five years). Quantitative import restrictions and price controls are minimal. Import tariffs, primarily seen as a source of the Government revenue, are in general low. The Government's licencing procedures have been kept to a minimum. The Government allows employment of foreign technicians and skilled workers, where necessary. B. Past Performance, The Second Five Years Plan and Recent Trends 2.03 Aided by rising living standards and an adequate policy framework, industrial manufacturing activity increased rapidly during the second half of the 1970s. Industrial value added and investment each increased in real terms by about 12% per annum (p.a.) compared to 6% p.a. for total GDP, and industrial fixed assets by 24% p.a. also in real terms. Employment increased by 10% p.a. Food processing and building materials have been the major growth subsectors and contribute most to the manufacturing output (para 2.01). The major impetus to industry came from the private sector, fueled by worker remittances, and also to some extent, from public sector projects financed by aid. The manufacturing investment growth rate in the 1980s is estimated to remain at about 12% p.a. in real terms. - 3 - 2.04 Despite its quick growth, the sector suffered from several problems, many of which persist today. Most prominent is the weak institutional support structure for industry. The DI has only 10 professionals with limited experience. A UNIDO team, which was to provide technical assistance (TA) to the DI, had a modest impact due to several reasons including overambitious terms of reference, inadequate number and quality of TA personnel, frequent changes in work priorities by MEI and poor counterpart support. Under this situation and the absence of a well developed financial intermediary, many projects were poorly prepared, implemented and managed. IEDA also did not develop as expected; it was not able to demonstrate the replicability of the Sanaa industrial estate financed by IDA (Credit 465-YAR) nor was it able to become financially viable (para 2.14). 2.05 There were other problems. High inflation together with a fixed exchange rate and an open economy made some industries uncompetitive with respect to imports. Water and power shortages worsened and enterprises began to rely on their own, and often high cost and uneconomic, facilities. Due to labor emigration to Gulf countries, labor costs increased by 40X p.a., reaching t5,300 p.a. in 1981-82 for an unskilled worker. The resulting move towards capital intensive industries required skilled manpower, which was even scarcer, and had to be imported at a high cost. The capital intensity of investments, however, itself is not an issue in YAR. It reflects a natural shift in the balance of factors of production. I8B's experience shows that even small and r.edium entrepreneurs prefer automated production processes to reduce requirements of high cost labor. YAR is not suffering unemployment problem and attempt to direct investments towards labor intensive technologies is not desirable since it could lead to distortions in the industrial sector. Given this, Credit 1122-YAR nor the proposed project include maximum limits on investment cost per job for subprojects financed. 2.06 Under the Second Five Year Plan (SFYP: 1982-86), industrial investment was forecast at $731 million or 12% of the total plan investment, while industrial output was expected to increase at 14% p.a., as compared to the planned GDP growth rate of 7% p.a. Of the total industrial investment, two-thirds was expected in public and mixed sectors (majority Government owned) and the remaining in the private sector. 2.07 Due to external economic factors, primarily the decline in aid (para. 3.08), the SFYP industrial targets, particularly those relating to the public and mixed sectors, are unlikely to be achieved. The Government is giving priority to import-substitution in productive sectors, mainly agriculture, industry and energy. Also, given the financial constraints and the Government's liberal market orientation, private investment is strongly encouraged. At the Government's request, IDA sent a mission to review the Public Investment Program under the SFYP and made a number of recommendations for reducing and reforming sectoral investment programs, which have been discussed and broadly agreed upon. 2.08 The SFYP document also underlines the need to identify viable projects. About 70% of the industrial investment envisaged in the SFYP was for new projects for which no study had been initiated. The Government must address this problem on a priority basis. The private sector, which would be expected to implement the bulk of these new projects, needs technical, managerial, and financial assistance to carry out the necessary studies. - 4 - C. Development Constraints, Prospects and Strategy 2.09 YAR's industrialization constraints fall into three broad areas, none of which are unusual in LDCs, but are rarely found together and to such a degree. First, poor endowment of natural resources and small and dispersed domestic markets. Second, weak entrepreneurial capability, severe shortage and high cost of skilled and managerial manpower and poor physical infrastructure, which can only be resolved over a long period of time through technical assistance and training to upgrade skills and productivity and through investment in infrastructure. Third, lack of viable projects and inadequate institutional support to promote and finance such projects and to actively assist enterpreneurs in project planning, implementation and operations. 2.10 The overall prospects for industrialization in the YAR are limited. Yet, analysis of economic growth potentials and prospects suggests that investment opportunities exist in six major industrial subsectors: food processing, building materials, household and light chemicals and plastics, light engineering, wood working and service industries (workshops). The type of industries most likely to be established would be in import-substitution. 2.11 Against this background, the industrial strategy in the YAR at its present phase of development should have three elements: a) to focus on efficient import-substitution projects which, in particular: (i) manufacture products enjoying natural protection (high ratio of transport cost to import price); (ii) maximize domestic value added; and (iii) develop the use of domestic resources, b) to build institutional capacity to (i) identify and prepare viable projects, and (ii) promote and finance them through assistance to entrepreneurs during project planning, implementation and operations, and c) to promote development of technical skills and alleviate physical infrastructure bottlenecks. 2.12 The Government's industrial strategy is in accordance with the above. It has agreed to systematically identify investment opportunities and to prepare feasibility studies in the six subsectors listed in para 2.10. These studies would be financed under the proposed project (para 4.08 and 5.02 a). It has also decided to give IBY a somewhat wider role in the industrial sector: in addition and complementary to its financial intermediation role, IBY would be expected as an agent of the Governement to identify, prepare and promote projects for the private sector. 2.13 IDA supports the Government's intentions regarding the expanded functions of IBY. Under the aegis of the MEI, IBY is the most suitable institution at present to play an effective developmental role in the industrial sector. Over the years, it has developed extensive contacts with industry and entrepreneurs look to it for guidance. However, IBY is a -5- relatively fragile institution and its staff capabilities and financial situation need to be considerably improved in order to meet its new institutional objectives. IBY's performance and prnposed measures to strengthen it are discussed in detail in Chapter IV. D. IDA's Past and Ongoing Operations in the Manufacturing Sector 2.14 IDA has maintained a positive and substantive dialogue with the YAR Government on manufacturing sector issues: (i) IDA Report - Manufacturing Industry: Performance, Policies and Prospects (No. 3651-YAR of November 12, 1982) - resulted in an interchange of views on significant aspects and problems confronting industry, primarily in private manufacturing but also covering public sector units. It has provided the rationale for including project identification, preparation and promotion activities as part of the proposed project. (ii) At the Government's invitation, IDA undertook a review of the country's draft Second Five Year Plan. As regards the industrial strategy of the Plan, IDA made a number of general recommendations for attracting private to investment to projects which had been 'reserved' for the public sector. These recommendations are being pursued in the context of the Public Investment Program review (para 2.07). (iii) IDA Report on Mobilization of Domestic Financial Resources (No. 3554a-YAR of January 6, 1982) included a discussion of interest rate structure for long-term lending institutions and their role in resource mobilization. (iv) An IDA credit (Credit 465-YAR) of $2.3 million the Industrial Estate Development Authority (IEDA) for Sanaa industrial estate was approved in January, 1974 and closed in December 1982. The industrial estate is experiencing serious financial, managerial and operational difficulties. Although the project has been completed and the credit closed on December 31, 1982, IDA is continuing discussions with the Government on IEDA's future. A Project Completion Report has been prepared examining options for IEDA. (v) A line of credit of SDRs 9.7 million for the First Industrial Development (Credit 1122-YAR) was provided to IBY in 1981 to meet its financial and technical assistance needs. IBY's experience while utilizing this credit line has emphasized the need for systematic project promotion and implementation follow up (Chapter IV). (vi) An IDA seconded senior advisor was appointed in January 1982 for two years to provide technical assistance and organizational assistance to IBY's senior management. During his tenure, he advised IBY towards more rational lending policies to improve appraisal standards and to set up a project supervision system. Strong emphasis was placed on training, particularly of IBY management. As a result, management gained a better understanding of IBY's development role in the national context. - 6 - III. FINANCIAL SECTOR A. Structure, Operations and Resource Mobilization and Allocation 3.01 Structure and Operations. The banking system in the YAR has developed largely in the last decade and is still in its early formative stages. The Central Bank of Yemen (CBY), established in 1971, performs the traditional role of the Government's banker, oversees commercial banks, controls foreign exchange and sets interest rates in the country. CBY's total assets at the end of 1983 were YRl 13.3 billion. 3.02 There are 10 commercial banks, with a network of 60 branches and with total assets of YRI 7.4 billion at the end of 1983. The Government controlled Yemen Bank for Reconstruction and Development (YBRD) is by far the largest, with 62% of the total commercial banks' assets. The remaining nine commercial banks are either partly or wholly foreign owned or branches of foreign hanks. The largest share of credit from commercial banks is short-term lending for financing trade and import (para 3.05). Investment banking activities are very limited and there are no capital and money markets in YAR. 3.03 To provide long-term financial assistance to priority sectors, the Government established three specialized financial institutions with majority state ownership: the Agricultural Credit Bank (ACB) in 1975, IBY in 1976, and the Housing Credit Bank (HCB) in 1977. A Cooperative Bank was established in 1980 under the auspices of the Confederation of Yemeni Local Development Associations 1/. In addition, Yemen Company for Investment and Finance tYCIF) was established by YBRD in 1981, initialLy, to handle its portfolio of long-term investments; YCIF is now eager to go into term financing for industry but lacks technical and financial resources. These institutions are relatively small compared to commercial banks; their total assets of YRl one billion at the end of 1983 represent about 4.5% of the banking sector assets. ACB has offices in each province, IBY has one in Taiz and HCB has none. 3.04 Although precise data is not available, a considerable part of financial transactions in the country is reported to be handled by unofficial channels and licenced money changers. This reflects both the insufficient penetration of the rural areas by the official financial institutions and preference of emigrants for direct remittance flows through the unofficial channels. With the recent increasing pressure on the country's foreign exchange situation (para 3.08), remittances through the unofficial channels and money changers have reportedly increased. 3.05 Resource Mobilization and Allocation. Private deposits, mainly domestic and emigrants savings, are the major financial source for commercial banks. Sources of funds of specialized banks are equity, long-term domestic and foreign borrowings. Since 1979, commercial bank deposits, most of which 1/ The Cooperative Bank and the Agricultural Credit Bank were merged in 1981 to form Cooperative and Agricultural Credit Bank (CACB). -7- are short-term, have increased by 15% p.a. in real terms to reach YRI 4.7 billion in 1983, leaving them highly liquid. Since 1979, the total outstanding credit has increased by 3.6% p.a. in real terms to reach YRI 3.3 billion in 1983. Commercial banks now account for 87% of outstanding credit, of which 10% is medium and long-term (MLT) and 902 is short-term (ST) credit. Total ?4LT credit including credit granted by specialized institutions has increased much more rapidly than ST credit over the past five years (18.0% p.a. versus 2.3% p.a.). The low base and the expansion of the specialized banks activities, together with public enterprise financing by YBRD, account for the high MLT credit growth rate. In future, given their high liquidity, commercial banks can be expected to play a greater role in MLT financing operations, particularly in industry. B. Industrial Finance 3.06 At the end of 1983, the total industrial credit outstanding was estimated to be about YRI 301 million, or about 9% of all credit extended in YAR. However, this figure is underestimated due to the fact that it excludes trade credit for imported industrial goods and direct borrowings and suppliers credits for industry. These cannot be estimated for lack of data. Subject to these considerations, out of the total industrial credit outstanding at the end of 1983, about 51% was for ST from commercial banks and the remaining 49% was for MLT, mainly from IBY (para 3.07). Banks, mainly YCIF, also hold some equity portfolio in industry and guarantees for overseas loans. At the end of 1982, YCIF's equity investment in industry amounted to YRI 17 million in three enterprises and guarantees amounted to YRI 10 million in 10 enterprises. IBY's equity portfolio at the end of 1983 was YRI 7.5 million. 3.07 IBY's Role in Industrial Finance. At the time of the approval of the first credit to IBY, IBY's financial assistance to the industrial sector was small due to its recent creation (staff Appraisal Report No. 3211 of February 17, 1981). The large and medium projects were financed generally through personal resources of their sponsors, borrowings from local and foreign commercial banks and suppliers credits. Small scale industry relied almost entirely on self-financing. But the situation has changed during the past three years. Although still small in absolute terms, IBY now occupies a dominant position in the supply of MLT credit for YAR's industry. At the end of 1983, it accounted for YRI 96 million (or 67%) of the total outstanding industrial NffT credit of YRI 148 million. More important, it is the principal agency for providing scarce foreign exchange for small and medium industries, which do not have direct access to overseas sources. Furthermore, IBY financing also acts as a catalyst for mobilizing the resources of private sector for investment. During the past three years, investment in IBY financed projects amounted to about YR1 350 million, which was about 40% of the manufacturing investment in the country. Finally, IBY has assisted small scale industry which received little institutional finance prior to 1980. During the past three years, although the amount of commitments for small scale projects (investment less than YRI 100,000) were only about 3.4% of IBY's total commitments, their number was 33% of all projects approved. -8- C. Foreign Exchange Situation 3.08 The YAR enjoyed a comfortable foreign exchange situation during the second half of 1970s. But the situation has deteriorated since the early 1980s, because of the continued rise in imports and decline in foreign aid. The Government's response to the emerging foreign exchange situation has been pragmatic. It has formed an Import Licencing and Rationalization Committee (ILRC) comprised of the Ministry of Supply, MEI and CBY. The ILRC assesses the economyts import needs and allocates the required foreign exchange to importers. This process, once a formality, has become more restrictive; priority is being given to import of food, raw materials, spare parts and machinery. The procedure is working satisfactorily. The Government has also begun to adjust the exchange rate. For 11 years the Yemeni Rial was pegged to the US dollar at a rate of $1 = YRI 4.45. Since early 1984, the Rial was devalued five times and is now valued at $1 = YRI 5.90, which is close to the market rate. 3.09 Implications for Industry. In general, the above policy and exchange rate measures are likely to benefit the economy in terms of increased remittances through banking and restoring the competitiveness of some local industries, by making imports more expensive. But the sudden adjustment in exchange rate has meant a very large (over 25%) increase in repayment charges on foreign currency loans outstanding in 1984, as is the case for majority of subloans granted under Credit 1122-YAR. As regards the future, it has been assumed that the depreciation of the Rial would be proportionate to the difference in the projected inflation rates between YAR and its major trading partners; this is reasonable considering that the Government has begun to frequently adjust the exchange rate to reflect market conditions (para 3.08). On this basis and considering that disbursements and repayments under the proposed project are expected to begin in late 1985 and 1986 respectively, the foreign exchange risk on funds under this project would be about 4% p.a. Under Credit 1122-YAR, IBY has been passing the foreign exchange risk to its subborrowers. This would continue under the proposed project (para 5.17). D. Interest Rates 3.10 Commercial banks lend only in local currency and their rates do not vary with the terms of maturity. The commercial bankst interest rate structure, which has prevailed for the past two years, is as follows; The lending rate for all types of commercial loans is 15% p.a. Time deposit rates range from 9.5% p.a. for three months to 12% p.a. for 12 months, the savings rate for deposits of more than 12 months is 7% p.a. In general, the commercial bank rate structure has reflected the euromarket situation, though with a time lag. Given the level of inflation of above 10% p.a., this structure is satisfactory. 3.11 IBY provides MLT loans in local and foreign currency but no distinction is made for terms of maturity or for type of currency. IBY's current lending rate, agreed under Credit 1122-YAR is 11% p.a. (10% p.a. interest rate plus 1% p.a. service charge), with the subborrowers bearing the foreign exchange risk. Under the proposed credit, IBY's lending rate would be - 9 - set at 4% below the local commercial bank lending rate published quarterly by the CBY, with the foreign exchange risk continuing to be passed on to IBY's subborrowers. Once a subloan is committed at a certain rate, however, the rate would remain unchanged for the life of the subloan. According to this proposal IBY's lending rate would oe initially set at 11% p.a. (15% charged by local commercial banks minus 4Z differential), which would be the same as under credit 1122-YAR. This proposal would allow IBY's lending rate to fluctuate in accordance with local commercial banks, which are the main alternatives for Yemeni industrial borrowers. This system of variable rates is particularly desirable in an environment where there are significant interest rate fluctuations as has been the case in recent years and as may well continue in the eighties as long as there are no restrictions on capital flows in the YAR. Thus, the proposal would bring IBY closer to the principle of interest rate variability to reflect market conditions. It would also address IDA's view that an appropriate lending rate for IBY should take into account the cost of alternative resources. The weighted average of eurocurrency short-term rates for a basket of currencies of the countries of likely procurement under the proposed credit would be 10-11% p.a. It is difficult to assess the premium IBY would have to pay over commercial rates because of YAR's lack of access to the eurocurrency markets; a rate of 11% p.a. would not be unreasonable. At this level, the cost of funds to subborrowers would be comparable to the normal domestic rate of 15% p.a. of competing local institutions on the basis of an estimated foreign exchange risk of the order of 4Z p.a. (para 3.09). Tne cost of funds to subborrowers would be substantially above the expected inflation of 10% p.a. 3.12 A possible risk under this proposal is that if the domestic inflation and hence local rates increase significantly with respect to international inflation, IBY's effective rate to subborrowers would become uncompetitive with respect to the commercial bank rate where no foreign exchange risk is involved. However, this possibility is slim assuming continuation of pragmatic open economic policies that the Government has followed in the past as reflected in IDA's projected inflation rate for YAR which is stable around 10% p.a. Nonetheless, to ensure that this concern is properly addressed, and that IBY's rate would not become subsidized in the unlikely event that the Government were to decide to keep local rates at artifically low levels, agreement has been reached during negotiations to review IBY's lending rate and the interest rate differential, currently 4% p.a. (para 3.11), on an annual basis, the first review to be held in December, 1985. - 10 - IV. THE INSTITUTION - INDUSTRIAL BANK OF YEMEN (IBY) A. Institutional Aspects 4.01 IBY's institutional structure has remained essentially the same since the approval of Credit 1122-YAR. The structure is described in Annex 1 and highlights are given below. IBY was incorporated in 1976 as an autonomous institution to promote and assist through financial and technical assistance the establishment of industrial proje=ts in YAR. The Act and By-laws (available in Project File) set out IBY's objectives, powers, capital structure, operational provisions, and Board and management functions. In 1980, IBY adopted a Policy Statement which was drafted with IDA's assistance. The Statement defines IBY's role in industrial development, prescribes project selection and financing criteria and spells out credit limits. The Governuent holds 70% of the authorized share capital of YR1 100 million as ordinary shares. The distribution of the balance of 30%, which is reserved for the private sector as preference shares, is as follows: The German Investment Company (DEG) - 6Z, YBRD - 5%, over 2000 enterprises and individuals - 11.7%, and unsold - 7."2. IBY is negotiating the sale of unsold preference shares to an Arab financial institution. In addition to the equity, IBY's long-term resources consist of borrowings from foreign sources, primarily IDA credit (1122-YAR) of SDRs 9.7 million approved in 1981 and the Kuwait Fund loan of Din 4 million (about $12 million) approved in 1983. 4.02 The overall policy and activities are directed by the Board of Directors, which consists of seven members; the Chairman, who is also the Chief Executive (Managing Director), 4 ex-officio representatives appointed by the Government and two representatives of local commercial banks and private sector preference shareholders. In 1981, IBY appointed a General Manager to cope with the increasing level of activities. IBY is organized into five functional departments: (i) Projects for appraisal and supervision;(ii) Finance and Accounting; (iii) Administration; (iv) Legal and (v) Planning and Research. The total staff of 55 includes 18 graduate professionals, 22 diploma/secondary school level and 15 supporting staff. IBY has four advisors (para 4.11). 4.03 The overall legal and administrative structure has proved adequate as seen from IBY's progress since IDA's approval of Credit 1122-YAR. IBY has emerged as a dominant institution for industrial finance (para 3.07). Many subborrowers are repeaters and look to IBY for guidance, which indicates their overall satisfaction with its services. IBY's senior management has gained considerable experience in DFC operations. Staff, though needing experience is qualified and stable. The staff stability is partly due to preference for public sector employment but, nonetheless, noteworthy considering the severe shortage of skills in the country. The quality of appraisal reports has improved, particularly in the financial area. - l1 - 4.04 The first IDA credit has basically allowed IBY to establish itself as a financial intermediary. However, to perform a more effeLtive development role (para 2.13), it needs to be substantially strengthened in terms of institution and finances. With IDA's assistance, IBY has developed a comprehensive and suitable program to achieve this objective. The program is to be implemented as part of the proposed project. The institutional measures, their linkage with the proposed project and the status of their implementation are described below. The financial measures are summarized in para. 4.30. Institutional Development Program 4.05 Changes in the Act. Under Credit 1122-YAR (Section 3.04), the Government had agreed to change IBY's act by June 30, 1981 as follows: (i) to treat the Government loans as debt for calculation of debt/equity ratio; (ii) in the absence of IBY's chairman, to delegate his responsibilities so as to ensure the uninterrupted conduct of IBY's Board functions; and (iii) to permit IBY to take a pari-passu charge on the assets of its subborrowers, instead of the existing Act which requires IBY to take first charge. The above changes required the approval of the People's Assembly (Parliament), but this was not achieved. IBY has since proposed an additional change: to increase IBY's lending limit from 10 to 15% of its equity, enabling it to finance larger projects. IBY and IDA consider these changes as essential to improve IBY's overall management effectiveness and lending and resource mobilization capability. The Cabinet has approved all of the above changes in October, 1984. Thne People's Assembly approval is now expected in April-May, 1985. Given their importance and considering the delays in the past, enactment of the amendments would be a condition of effectiveness. 4.06 Economic Appraisal of Subprojects. IBY has prepared economic evaluation for all subprojects financed under Credit 1122-YAR, where subloan amount exceeded $300,000. The economic rates of return have been above 20Z. The methodology, which uses border prices, is satisfactory. To ensure continued and proper selectivity in subprojects it finances, IBY has now agreed to prepare economic evaluation for and to use a cut off Economic Rate of Return of 12% for all subprojects with subloans made by it exceeding $300,000. The above change has been incorporated in the 1980 Policy Statement developed in consultation with IDA, which is currently in force. 4.07 As under the previous credit, IBY would consult IDA prior to any changes in the By-Laws of 1977 (para 4.01) and the Policy Statement. 4.08 Project Identification, Preparation and Promotion Activity. IBY has made the identification, preparation and promotion of new projects the primary function of its Planning and Research department (PRD) and has adopted its functions and responsibilities (Annex 2). It would hire short-term consultants for project identification and preparation of feasibility studies. It would also hire an advisor for project promotion on a two-year contract and two local counterparts. Terms of reference of the consultant for identification studies and of the promotion advisor, developed with IDA's assistance, are given in Annexes 3 and 4 respectively. IBY is in the process - 12 - of selecting a suitable consultant in accordance with IDA Guidelines. Annex 5 shows the schedul- for implementation of this function. As a condition of effectiveness, IBY should have appointed the consultant for the project identification studies and the promotion advisor (a consulting company and an individual respectively). IBY has appointed the director (local staff) of PRD. His qualifications and experience are satisfactory. The second counterpart, a statistician, is expected to be appointed by June 30, 1985. 4.09 Project Follow-up. Recognizing the need to organize an effective follow-up system, IBY has decided that it would upgrade its follow-up section, currently under the Projects department, to a separate department reporting to the General Manager. The existing follow-up staff of two professionals and the recently reassigned full time advisor have been transferred to the new department. IBY has also decided to appoint two additional professionals, including an engineer, to the department by June 30, 1985. The proposed staffing level would be adequate for IBY's current follow-up requirements. Ihe need for additional staffing in the Follow-up department would be periodically reviewed. IBY's Board has approved the formation of a separate Follow-up department reporting to the General Manager and adopted the agreed functions and resposibilities and program to improve follow-up (Annex 6). The program would include organization of project data, planning of site visits, reporting formats and review procedures. Such program should enable IBY to supervise subprojects under construction every 2-3 months and subprojects in operation every 3-12 months. During negotiations, IBY's agreement has also been obtained on the rehabilitation programs of six enterprises in serious difficulty, which account for about 45Z of IBY's arrears (para 4.24). 4.10 Staff fcr Appraisal. IBY has recently recruited two economists/ financial analysts in the Projects department bringing their total strength to five. IBY would also recruit one engineer by June 30, 1985, to bring total to three. This is adequate considering the expected level of project lending activities. 4.11 Advisory Services. Currently, IBY has an economic and an engineering advisor in the Project department, a finaacial advisor and an advisor for follow-up. They are financed by British and German aid, and the Kuwait Fund. The advisors are performing satisfactorily. Their current contracts are due to expire between December, 1985 - June, 1986. While IDA supports IBY's long-term goal to reduce its dependence on foreign advisors, it is clear that IBY would continue to need the existing level of advisory services for the next three to four years during which counterparts are expected to be trained. Agreement has been reached during negotiations that the Government and IBY would ensure that not less than the present level of advisory services is maintained during the implementation of the proposed project. 4.12 Training. IBY would have seven professional staff trained abroad, through short-term courses, during 1985 through 1986. The proposed project would finance this training. The General Manager would visit several development banks to study management aspects of the development banking function. Two staff, already identified, would be trained in project appraisal work. One staff each, also identified, would be trained in project promotion and legal work. Training of two remaining staff, yet to be identified, would be organized in future depending on further training needs. - 13 - B. Operations 4.13 IBY's main area of operations continues to be long-term loans (more than three years), though it has also given some guarantees and made equity investments. The operations are summarized below: Table 2: IBY's Summary of Operations Approvals (in YR1 million) 1978-78 1979-80 1980-81 1/ 1982 1983 (18 months) Long-term loans 17.8 32.9 26.5 40.7 48-9 Guarantees 1.5 - - - 8.0 Investments 2.1 0.9 3.1 - 3.4 Source: IBY 1/ Data for 18 month due to change in IBY's fiscal year. 4.14 Long-Term Loans. The long term loans, which are for capital expenditure of subprojects financed by IBY, have increased at an average annual rate of 19% in nominal terms during the past five years. The high growth rate indicates IBY's rapid development as an important financial intermediary in YAR. 4.15 The average commitment/approval ratio in a given year has been about 80Z and the average disbursement/commitment ratio has been 88%, with allowance for annual fluctuations due to a bunching effect. This is satisfactory. 4.16 In accordance with the general trends in YAR (para 2.05), IBY's portfolio is biased towards projects which are relatively capital intensive. Of the total approvals during the past three years, 33% have been for projects with investment costs in excess of YRI 7 million, 45% between YR1 5 and 7 million and 22% below YR1 5 million. Projects financed by IBY were primarily of medium scale, as small entrepreneurs prefer self-financing. Also, due to the high administrative costs, IBY has not actively cultivated small entrepreneurs. In line with the overall regional distribution of industry (para 2.01), IBY's portfolio is concentrated around Sanaa (63% of the total subloan amount), Hodeida (22%) and Taez (11%). The portfolio also generally reflects the relative growth of subsectors: construction materials (46%), food processing (26%), chemicals and plastics (16%), metal products (10%). 4.17 Guarantees and Investments. In general, IBY has treated guarantees and equity investments with caution and preferred loans instead. The two guarantees given in the past were for suppliers credits, where entrepreneurs had secured favorable terms compared to IBY. Equity investments have been - 14 - taken in YCIF and in three manufacturing projects, two of which are in the mixed sector and one in the public sector. The position on guarantees has been satisfactory, but return on equity investments has been disappointing. The equity investments portfolio is expected to remain small until IBY's financial situation permits greater exposure. C. IBY's Financial Situation 4.18 Financial Position. IBY's comparative audited Balance Sheets and Income Statements for the 1981-83 period are given in Annexex 7 and 8 respectively. IBY's total assets reached YRI 146 million at the end of 1983. During the past three years, its long-term loan and investment portfolio increased by 29Z p.a. in nominal terms to reach YR1 105 million in 1983. The long-term debt/equity ratio increased from 0.1 in 1981 to 0.3 in 1983. The liquidity is high (para 4.19). As of December 31, 1983, the liquidity, measured as the ratio of current assets to current liabilities, was 5.0. Also as of that date, provisions for possible losses were 6% of the outstanding portfolio, a rather low proportion considering weaknesses in the portfolio (para 4.22). Further, profitability of 2.1% of paid in capital was low (para. 4.27). 4.19 The main source of liquidity is IBY's equity, which is difficult to invest because of lack of demand for local currency resources. Admittedly, IBY's need for liquid funds is somewhat larger than comparable DFCs because its subloans, primarily from foreign funds, often involve long reimbursement periods. Yet, the liquidity is excessive. Also, although surplus funds are profitably deposited in commercial banks, this is not an efficient use of the available resources from the point of IBY's development objectives. Measures are being taken under this project to use local resources for investment. At present on an average, IBY financing covers only the foreign exchange costs of subprojects. IBY is being encouraged to consider local currency subloans to finance local expendituzes, thereby absorbing some of the liquidity. IBY's local currency subloans are expected to increase from the current level of about YRI 12 million p.a. to about YR1 20 million p.a. by 1988. Although IBY's experience is limited, it is also considering provision of local currency subloans for working capital and equity investments. - 15 - 4.20 Resource Position. The long term resource position as of December 31, 1983 is summarized below. Table 3: IBY's Long-Term Resource Position as of December 31, 1983 (YRI Million) ($million) in percent a. Resources Equity + Reserve 107.0 21.2 44.9 Local borrowings 5.7 1.2 2.3 IDA resources 1122-YAR 60.7 12.0 25.4 465-YAR 0.8 0.2 0.5 Kuwait fund 64.0 12.6 26.9 Total 238.2 47.2 100.0 b. Applications Long-term loan portfolio 96.3 19.1 Investments in subprojects 8.8 1.7 Other Investments 12.9 2.6 Total 118.0 23.4 c. Available for Disbursements (b-a) 120.2 23.8 d. Undisbursed Commitments 10.6 2.1 e. Uncommitted Resources (c-d) 109.6 21.7 of which in foreign currency 78.8 15.6 and local currency 30.8 6.1 Source: IBY - 16 - D. Performance and Evaluation 4.21 High arrears and low profitability require remedial actions. 4.22 Arrears. IBY's arrears situation is summarized below: Table 4: IBY's Arrears in 1982, 1983 and 1984 (in YR1 1000) 12/31 12/31 9/30 1/ 1982 1983 1984 A. Portfolio 87,062 96,250 111,600 B. Loans affected by arrears 52,498 41,646 54,684 C. B as a percentage of A 60.3 43.2 49.0 D. Principal in arrears of - up to 3 months 4,189 3,369 3,486 - 3-6 months 1,910 1,926 2,106 - 6-12 months 2,050 3,187 3,148 - over 12 months 5,331 6,692 9,364 13,480 15,174 18,104 E. D as a percentage of A 15.5 15.7 16.2 F. Percentage of arrears over 3 months 12.2 12.2 13.1 1/ Unaudited Source: IBY IBY has categorized arrears as follows; Table 5: Breakdown of IBY's Arrears by Categories (in YR1 1000) 12/31/1982 12/31/1983 9/30/1984 Problem Principal % Principal Z Principal Z Status in Arrears in arrears in arrears Category 1 minor 6,099 45 4,826 32 5,701 31 Category 2 serious 4,815 36 6,768 45 8,120 45 Category 3 litigation 2,566 19 3,580 23 4,283 24 13,480 100 15,174 100 18,104 100 Source: IBY Analysis shows that a relatively small number of subprojects (ten in Category 2 and seven in Category 3 out of the total portfolio of over 110 subprojects) account for 69% of IBY's total arrears. The ten subprojects in Category 2 are closed or operating at low capacities and are facing serious marketing, financial, technical and managerial difficulties. Nine out of the 10 subprojects are to be rehabilitated under the proposed project (para 4.24). The seven subprojects in Category 3 are closed and under court litigation. One of the subprojects in category 2 and all of those under litigation have no - 17 - prospects for rehabilitation. The subloan amount of YR 10.8 million due from these subprojects may be considered as IBY's potential doubtful debt, although much of it is recoverable by sale of assets (particularly land), subject to favorable Court settlement. 4.23 Several factors are responsible for IBY's arrears. The debt repayment discipline in YAR is weak; other financial institutions also suffer from high arrears. Further, some of the serious cases in IBY's portfolio were approved prior to Credit 1122-YAR at the Government's direction. There were also temporary delays in early 1984 in the issuing of import licences to industries following the establishement of new licencing procedures by the Government in response to the deteriorating foreign exchange situation. This led to production difficulties in enterprises and to a slowdown in the growth of IBY's portfolio. Nonetheless, high arrears do reflect IBY's initial weaknesses in appraisal in some cases and limited follow up and debt collection efforts in general. 4.24 IBY management is giving priority to bringing arrears under control. The penalty rate of interest was raised from 1 to 5%, thus bringing the interest rate, including penalty, to commercial banks' levels. IBY is setting up a special unit for debt collection consisting of two persons in Sanaa and one in Taez under the direct supervision of the General Manager. Procedures have been set up to prepare arrears report periodically. Six cases facing genuine difficulties have been rescheduled. Subloan maturities are now generally longer. To a large extent, these measures are responsible for the reduction in arrears in Category 1 and they would continue in future. Furthermore, IBY has prepared rehabilitation programs for the 10 serious cases (Category 2), which account for 45% of IBY's total arrears. Programs for each of the 10 enterprises were agreed during negotiations and are available in Project File. They range from management overhaul to rehabilitation of physical facilities, rescheduling and court action. Their implementation would be closely followed. Also, the improvements proposed in IBY's follow-up system should serve as early warning to IBY to spot emerging problems among enterprises before they reach serious levels and should help reduce arrears. 4.25 As regards the future, arrears in category 1 should fall significantly, although the overall level is unlikely to contract rapidly because of the compounding effects of arrears in Categories 2 and 3. Arrears will, therefore, remain a serious issue for IBY for next 2-3 years. The level of arrears over three months as a ratio of IBY's portfolio is expected to be about 12% at the end of 1985, 8% by 1986 and 5% by 1987. 4.26 In spite of the present high level of arrears, IBY's financial position remains sound: (i) IBY's subloans are covered by a large margin of security; (ii) the provisions for losses and the general reserve (YR 6.2 and 8.9 million at the end of 1983 respectively) fully cover the subloans due from Category 3 subprojects, which represent 'doubtful debt' (YR 10.8 million, para 4.22); and (iii) With the proposed improvements in the follow-up system and the rehabilitation programs for 10 problem enterprises, the arrears situation should improve. To protect IBY further against risk of its portfolio, during negotiations, it has been agreed that IBY would increase by December 31, 1988, its provisions for losses to 8% of the outstanding portfolio and maintain it as long as the arrears exceed that level. In addition, IBY has agreed during negotiations to take measures for reducing its level of arrears to below 12% by the end of 1985, 8% by 1986 and 5% by the end of 1987. - 18 - 4.27 Profitability. IBY's profitability has declined from 6.2Z of the paid in capital in 1981 to 2.1% in 1983. The decline has been the result of IBY's low spread. Under Credit 1122-YAR, the spread was expected to be about 5% p.a. during 1981 through 83, which was based on the spread of 3% provided on the IDA credit and of 6.5% on the Kuwait Fund loan. There was also a large cushion on equity which was provided by the Government at no cost. In fact, the actual spread during these years was little over 32 p.a. because of the delayed effectiveness of the Kuwait Fund loan, and a reduction of the effective spread under the Kuwait Fund loan to about 3.75% p.a.; the balance being allocated to a technical assistance fund. 4.28 Analysis shows that IBY's spread on all long-term borrowings must be maintained at least at 5% p.a. during the next 3-4 years to earn profits in the satisfactory range of 5-7% on paid in capital. The spread requirement is high though not unreasonable given IBY's particular circumstances; Ci) the general high salary levels in YAR (para 2.05), (ii) small portfolio (scale economies) (para 4.06), and (iii) the need to build up provisions for losses because of weaknesses in portfolio (para 4.22-4.26). When rehabilitation prograns for problem enterprises are substantially implemented (para 4.24) and as the portfolio increases with the increasing level of operations (para 4.33), IBY's spread requirements should decline to an acceptable 3-4% p.a. 4.29 To provide IBY with the required spread, it has been agreed during negotiations that the Government onlending rate to IBY under IDA funds would be set at 5% p.a. below IBY's prevailing lending rate (para 3.11). Thus, the onlending rate would also fluctuate in accordance with IBY's lending rate to subborrowers. For the time being, at IBY's lending rate of 11% p.a. (para 3.11), the onlending rate would be 6%. It has also been agreed during negotiations that the Government would allow IBY a spread of at least 5% p.a. on other long-term funds made available to it (IBY) during 1985-87 period. The proposed Government's onlending rate is substantially lower than under normal IDA policy, which requires an onlending rate to be the equivalent of the Bank rate, now 9.89% p.a. However, this is justified given that IBY is a young institution struggling to develop infant industries and still in the process of building its organization and staffing. As IBY gains experience and YAR's industrial sector becomes more developed, it should be possible to set onlending rates at more appropriate levels and, if necessary, to pass on a part of the increased interest costs to IBY's subborrowers. 4.30 Summary of Financial Measures. To summarize, the following financial measures, designed to improve IBY's financial situation, would be taken under the project: a) the Government to provide to IBY a spread of 5% p.a. under the proposed credit (para 4.29); b) the Government to allow IBY a spread of at least 5% p.a. on all long-term funds made available to it (IBY) during the 1985-87 period (para 4.29); - 19 - c) IBY to undertake rehabilitation programs for 10 enterprises in serious difficulties (para 4.24); d) IBY to increase, by December 31, 1988, provisions for losses to 8% of outstanding portfolio and maintain it as long as the arrears exceed that level (para 4.26); e) IBY to take measures for reducing arrears to below 12% by the end of 1985, 8% by the end of 1986 and 5% by the end of 1987 (para 4.26). E. IBY's Performance Under Credit 1122-YAR 4.31 IDA approved a Credit of SDRs 9.7 million in March, 1981. While the effectiveness was delayed by six months until November 1981 for various reasons beyond IBY's control and the final date of commitment was postponed from December 31, 1983 to June 30, 1984, IBY's overall performance in the implementation of this credit has been satisfactory. As of June 1984, the full credit has been committed. SDRs 5.7 million have so far been disbursed. 4.32 IDA has so far approved 19 subprojects, with total investment of $30 million. The total employment to be created is 465, with an average cost per job of $64,000. This is not out of line in YAR where the cost of skilled labor is very high and the investors prefer automated production processes (para 2.05). Of the 19 subprojects approved, 39% were for construction materials production, 35% in food-processing, 16% in metal working and 10% in the chemicals and plastics subsectors. Of the 19 subprojects, 12 are operational and seven under construction. Of the operational subprojects, nine are profitable, with IRR estimated between 30% - 40%; two projects expect to breakeven this year and one has had to resort to product diversification, as the originally anticipated sales to the Government did not materialize. Three subprojects are involved in exports, albeit in a small way, to South Yemen. Only one of the 12 subprojects in operation suffered a cost overun. Implementation delays have been moderate: in five subprojects, delays exceeded three months out of an average construction period of 12 months estimated at appraisal. F. Forecast of Operations and Financial Performance 4.33 Operational and financial projections are based on IBY's pipeline, and mediumrterm plans for 1984-88, taking into account the economic prospects in the country for the private industrial sector and the expected beneficial effects of the proposed project identification, preparation and promotion activity. IBY's approvals are projected to increase at a rate of 13% p.a. in nominal terms or about 3% in real terms. This is a realistic expectation. - 20 - Table 6: IBY's Projected Approvals and Commitments (in YR1 million) 1984 1985 1986 1987 1988 Approvals: Foreign 48 54 62 70 78 Local 12 14 15 17 20 60 68 77 87 98 Commitments: Foreign 66 53 60 67 76 Local 16 13 15 17 19 82 66 75 84 95 Source: IBY's and IDA's Estimates. 4.34 Resource Requirements. Repayments on loans made out of its equity would be sufficient to meet IBY's local currency needs during the 1985-June 30, 1987 period. It is on the foreign currency side that additional resources are needed. The Kuwait Fund loan is expected to be substantially utilized by June 30, 1985. This would leave, on a commitment basis, a gap of about $21.0 million in 1985 through June 30, 1987 as shown in the following table. Table 7: IBY's Projected Foreign Resource Requirements (in YR1 million) $million a. Uncommitted foreign resources available as of December 31, 1983 (Table 3) 15.6 b. Expected foreign exchange commitments in 1984 = YRs 66 million (Table 6) (13.1) c. Uncommitted foreign resources available as of December 31, 1984 (b-a) 2.5 d. Expected foreign exchange commitments in 1985 through June 30, 1987, Table 6) (23.7) e. Foreign exchange shortfall during 1985 and 86 (c-d) (21.2) Source: IDA's Estimates - 21 - 4.35 IDA has allocated $8.0 million for the project. Taking into account the requirement of $1.4 million for institution building and training (para 5.15), the amount available for the line of credit for lending would be $6.6 million. In addition in October, 1984, the Islamic Development Bank (IDB) has approved a line of leasing of $10 million equivalent for IBY, with a first tranche of $5 million. The proposed IDA credit and the IDB line of leasing would meet about 79% of IBY's commitment requirement during the project period. Discussions are underway with other donors to mobilize the remaining required resources. 4.36 Financial Projections. Projected Balance Sheets, Income Statements and Sources and Applications of Funds Statements are given in Annexes 9, 10 and 11. 4.37 The projected financial position of IBY is satisfactory. Total assets are projected to increase by 15% p.a. reaching YRI 322 million in 1988. The long-term loans and investments portfolio would increase by 16% p.a. reaching YRI 243 million in 1988. The long-term debt/equity ratio would increase from 0.6:1 in 1984 to 1.5:1 in 1988. Long-term borrowings would increase by 31% p.a. reaching YRI 188 million in 1988. The current ratio would decline from 4.7 in 1984 to 2.5 in 1988. Net income is projected to increase by 18% p.a. to YR1 6.7 million in 1988. Administrative expenses would decline from 4.0% of total assets in 1985 to 3.1% in 1988. The available interest spread would decrease from 4.1% in 1984 to 3.4% in 1985 and then increase to 3.8% by 1988. - 22 - V. THE PROJECT A. Project Objectives and Components 5.01 The principal objective of the project is institutional; namely to strengthen IBY's capacity to be more responsive to the technical and financial needs of the private industry in YAR. It would also provide scarce foreign exchange for investment. 5.02 To support the above objective, the project would consist of three components: a) strengthening IBY's institutional capacity by (i) using consultants to identify industrial opportunities, to prepare feasibility studies and to promote these and other projects (para 4.08 ); (ii) using technical assistance to strengthen IBY's capacity to appraise and supervise industrial projects, and to assist entrepreneurs during their implementation (para 4.08 through 4.11); (iii) training of IBY staff to improve their effectiveness through short-term overseas on-the-job and formal training courses (para 4.12); and (iv) seeking measures to improve IBY's financial health and operational efficiency (para 4.05 through 4.07 and 4.30); b) a line of credit to finance a part of IBY's resource requirements during 1985 through June 30, 1987 (paras 5.05 through 5.12); and c) a small pilot component primarily for training of industrial managers of subprojects through overseas short-term and on-the-job training courses (para 5.13). Institution Builaing of IBY 5.03 The institutional and financial measures to be taken under this project have already been discussed in paras indicated above. The identification studies would lead to identification of about 40 projects (in six subsectors) for which short-term consultants would prepare project profiles in agreed formats. These would be followed by 15 feasibility studies. The identification studies would require 24 man-months (MM), or 4 MM per subsector. Feasibility studies would require 60 MM or four MM per study. The long-term promotion advisor for IBY has been budgeted for 24 MM. Training for IBY staff would require 25 MM. 5.04 The procedure for retaining consultants and for approval studies is described in paras 5.22-5.28. - 23 - Line of Credit - Main Features 5.05 Purpose_ The line of credit is expected to finance up to ten subprojects. As noted above, the main recipient under the credit would be import substitution and local resource based subprojects. The subloan proceeds would be used to finance the foreign exchange cost of fixed assets and permanent working capital. There would be no maximum size for subprojects but the maximum subloan amount would be according to IBY's Act which would restrict it to 15X of its equity (i.e. presently about $3 million). To ensure that the needs of the small and medium industries are properly addressed, at least 60% of the credit would be used for subloans not exceeding $1 million. 5.06 Interest Rates. IDA would provide the credit to the Government on standard terms. IBY's lending rate to subborrowers would be set at 4X below the local commercial bank lending rate published quarterly by the Central Bank of Yemen. The Government's onlending rate to IBY under the line of credit would be set at 5% below IBY's prevailing lending rate. Once committed, the rates for a subloan would remain unchanged for its life. 5.07 Commitment Charge and Appraisal Fee. IBY would apply its standard commitment charge of 1% p.a. and an appraisal fee of 1% of the subloan amount under the proposed IDA credit. 5.08 Credit and Subloan Maturities. The IDA credit to the Government would have the standard maturity term of 50 years including 10 years of grace. The maturity and grace periods of the onlending from the Government to IBY would be the average of those corresponding to the subloans provided by IBY to subborowers under the credit. IBY subloans would have maturities of up to 15 years including a maximum grace period of three years. 5.09 Free Limit and Aggregate Free Limit. Taking into account IDA's experience under Credit 1122-YAR and at the same time to ensure IDA's continued involvement in subproject review process, the free limit would be set at $300,000, with an aggregate limit of $4 million. It is expected that the above arrangement would ensure IDA's review of about 85% of the credit amount and 60-65% of the number of subprojects. 5.10 rconomic Evaluation of Subprojects. As under Credit 1122-YAR (para 4.07), IBY would prepare economic evaluation for those subprojects financed by it where the subloan amount exceeds $300,000. The minimum cut-off ERR would be 12%. 5.11 The final date for submission of subproject applications to IDA would be June 30, 1987. The closing date of the credit would be December 31, 1991. 5.12 Procurement for goods to be financed under the credit would be done in accordance with the normal procedures of IBY described in para 18 of Annex 1 which are satisfactory. These procedures have been reconfirmed during negotiations. - 24 - Training 5.13 The objective of this component is to provide exposure to local industrial managers in modern management practices. A small pilot component of 30 MM is provided for this purpose ($1,800 per MM). The training would be in the form of specific short-term overseas formal and on-the-job training programs in production, marketing and other functional areas immediately relevant to operations of the benefitting enterprises. IBY would primarily use this facility to address the training needs of managers in subprojects financed by it. Procedures for selecting candidates is given in paras 5.29 and 5.30. B. Project Costs and Financing 5.14 Project Costs. The project is estimated to cost about $18.2 million as follows: Table 8: Project Costs (in $1000) Local Foreign Contingencies 1/ Total A. Institution Building i) Identification Studies - 275 25 300 ii) Preparation (feasibility Studies._ - 640 60 700 iii) Promotion by IBY 270 275 55 600 iv) Training for IBY - 45 - 45 270 1,235 v) Contingencies 30 110 140 Total of A 300 1,345 1,645 B. Subprojects financed by the Line of Credit 9,900 2/ 6,600 - 16,500 3/ C. Training of Industrial Managers - 55 55 10,200 8,000 18,200 Source: IDA Estimates 1/ Contingencies have been provided at 12% on local costs and 9% on foreign. 21 Local to foreign costs ratio (66:40) is based on the experience under Credit 1122-YAR. 31 Contingencies on subproject costs are assumed to be included in the total. - 25 - 5.15 The institution building component (item (A) in the above table) involves costs of project identification, preparation and promotion activity and training. Other institution-building measures such as strengthening of appraisal and follow-up capacity should be a part of IBY's ordinary activity and, therefore, not included in the project costs. 5.16 Project Financing. The proposed IDA credit of $8 million would finance all of the foreign exchange requirement of the project. Of this, $6.6 million would be allocated to the line of credit, $1.345 million to institution-building of IBY and $55,000 to training of industrial managers. In order to avoid delay in the appointment of consultants for project identification studies and for promotion tasks, the credit has included a retroactive financing provision of $300,000. Signing of a Subsidiary Loan Agreement between the Government and IBY on terms and conditions satisfactory to IDA would be a condition of effectiveness of the proposed credit. A special account of t300,000, to be operated by IBY and representing three months of disbursements on average, would be opened to facilitate withdrawals against eligible expenditures. 5.17 Foreign Exchange Risk. The Government would bear the foreign exchange risk on the credit allocated to institution building and training ($1.4 million). Subborrowers would carry the foreign exchange risk on subloans granted under the Credit ($6.6 million). IBY would not bear foreign exchange risk on any other funds made available to it. 5.18 Disbursements of funds would be made to cover: a) For Investment Project - 100% of foreign expenditures for goods and services, 70% of local expenditures for the goods purchased locally, and 60% of the cost of civil works; b) For Consultants' Seriices and Training - 100% of foreign expenditures; and With the exception of the cost of small contracts costing the equivalent of $10,000 or less, all disbursements would be fully documented. Withdrawal against contracts costing the equivalent of $10,000 or less would be made against statements of expenditures, the documentation for which would be maintained by IBY and made available for review by IDA during the course of supervision. No withdrawals would be made on account of expenditures made in respect of a subloan more than 120 days prior to the date on which IDA would have received the application and information required. The estimated disbursement schedule of the Credit is given in Annex 12. 5.19 Financing of Project Identification, Preparation and Promotion. The financing plan for this component has been based on two considerations: First, IBY would only act as a Government agent in carrying out this component and its cost implications for IBY should be minimal L/. Second, entrepreneurs 1/ IBY's management and other staff would have to devote some of their time for this component. But such 'agency costs' are expected to be small and, in any case, would be compensated by additional business that IBY expects to generate out of this activity. - 26 - intending to proceed with feasibility studies should bear a reasonable share of their costs. To provide sufficient incentive to entrepreneurs to proceed with feasibility studies and, at the same time, to ensure that such studies are carried out for genuinely interested entrepreneurs, it would be required that they pay 50% of the cost of these studies to IBY in advance. In accordance with these considerations, it has been agreed during negotiations that: a) Government would lend to IBY $300,000 equivalent in Rials for 20 years, including three years grace, at no cost to finance local costs. b) The lI)A credit, which would be to Government, would initially finance the foreign exchange costs (S1.3 million). This amount would be paid to IBY in Rials, thus protecting it from the foreign exchange risk. IBY would reimburse the Government for 50% of the cost of feasibility studies ($350,000) to be charged to entrepreneurs. The Government would finance through IBY the remaining $950,000, which would cover the full cost of identification studies ($300,000), 50% of the cost of feasibility studies ($350,000) and the foreign exchange cost of promotion ($300,000). 5.20 Financing of Training for IBY Staff and for Industrial Managers. The IDA credit would initially finance the training costs which would be in foreign exchange. IBY would reimnburse to the Government the full cost of training of its IBY's staff ($45,000) and of industrial mangers ($55,000). As regards the industrial managers, IBY would recover 50% of the cost of their training from sponsoring entrepreneurs in advance; the remaining 50% of the cost would be borne by IBY. C. Project Implementation Arrangements 5.21 Reporting Requirements. IBY would implement the entire project and would submit to IDA quarterly reports which would include, inter alia, a summary of operations, progress on utilization of credit, staff position, annual reports and audits. The Government and IBY would also submit a report to IDA when the project is completed. Procedure for Implementation of Project Identification, Preparation and Promotion Tasks 5.22 IBY's Role. IBY's Planning and Research department (PRD) would actively liaise with the consultants carrying out the identification and feasibility studies. It would specifically assist in the collection of data, review with IBY management the progress reports submitted by consultants and ensure adequate quality of project profiles and feasibility studies. 5.23 Upon completion of the identification studies, PRD wouli identify potential investors to sponsor the identified projects. It would prepare a list of prospective investors according to their interest, financial strength, etc. Particular emphasis would be given on emigrants, traders and existing clients. PRD would also develop a systematic marketing and contact program with potential clients. - 27 - 5.24 Once an investor is firmly committed to the project idea, PRD, where necessary, would assist him in carrying out a detailed feasibility study. If an investor does not proceed with the project within six months of the completion of a study, it would become IBY's property and IBY would be free to find other investors. 5.25 Approval of Identification Studies. IBY's Board would approve the initial short list of project ideas identified by consultants before developing them (project ideas) iato project profiles. The short listed ideas would be primarily based on the industrial development strategy considerations stated in para 2.11 - namely focussing on viable import-substitution projects which Ci) manufacture products enjoying natural trade barriers, (ii) maximize domestic value added and (iii) use domestic resources - as well as on IBY's knowledge of the industrial sector and its consultations with the Ministry of Industry and other Government agencies. IBY would also review and approve project profiles prepared by consultants. 5.26 Approval of Feasibility Studies. IDA would approve all proposals for studies for which the cost is estimated to be $20,000 and above. IBY would approve all proposals below $20,000. This would enable IBY to quickly respond to the feasibility requests for smaller projects. To ensure that the needs of small and medium industries are addressed, at least 75Z of the proposed allocation for feasibility studies ($700,000) would be used for eventual projects estimated to cost below or equal to $3.0 million. The principal criteria for selecting a project for feasibility study would be that (i) the project profile (para 5.27) has demonstrated with reasonable certainty the technical, financial and economic viability, (ii) entrepreneur has been located to sponsor the feasibilitr study and is prepared to pay in advance 50% of the expected cost of the study and (iii) the entrepreneur has the technical and financial capability to quickly implement the project once the feasibility study has demonstrated the project's viability. 5.27 Recruitment of Consultants. IBY would recruit consultants for identification studies, and all feasibility studies costing $20,000 or more and the advisor for promotion in accordance with IDA Guidelines on the reruitment of consultants. The consultants for identification studies and the promotion advisor would be recruited prior to effectiveness with IDA's prior approval. To expedite studies costing less than $20,000, IBY would invite offers from at least three recognized consultants and, as in para 5.26, appoint the most suitable consultant, without IDA's prior approval. 5.28 Payment Arrangements. IBY would process all withdrawal requests to IDA, duly supported by normal documentary evidence. IDA would debit the credit allocation for this component by the amounts disbursed. Further, as noted in para 5.19 (b), IBY would receive from entrepreneurs their 50X contribution in local currency in advance at the time of signature of contract for the feasibility studies between the two of them. When IBY submits withdrawal applications to the Government, it would reimburse to the Government the equivalent of 50% of the withdrawal claims. - 28 - Procedure for Training Courses and Candidates 5.29 For IBY staff, 5 out of 7 candidates have been identified (para 4.12). IBY would provide to IDA the names of the two remaining candidates before June 30, 1986. Training programs would be acceptable to IDA, which would assist IBY in the identification of appropriate places. For industrial managers, entreprises would identify candidates and training places ir, consultation with IBY. IBY would ensure that the selected training programs would be of immediate relevance to the activities of enterprises to improve their efficiency of operations and that candidates (Yemeni nationals) have appropriate qualifications. IBY would inform IDA the names of candidates and training places, duration of training and estimated itemized costs prior to the start of training. 5.30 Payment Arrangements for Training Expenses. As noted in para 5.20 when IBY submits a withdrawal application for training, it would reimburse to the Government the full equivalent of the withdrawal amount. For industrial managers, IBY would receive from sponsoring enterprises 50% of expected cost of training in advance at the time of signature of contract between the two. D. Project Benefits and Risks 5.31 The principal project benefit is that it would make a lasting impact on IBY's institutional capability to play a more effective development role in the industrial sector. The project identification, preparation and promotion activity would generate and lead to financing of viable industrial projects, which would benefit not only IBY but YAR in general. It would harness an untapped market of potential entrepreneurs and their resources for investment in industry. It would also strengthen IBY's pipeline and, thus, mean more business for IBY. Improved follow-up would enable IBY to understand the problems of entrepreneurs at an early stage so that timely corrective actions could be initiated. These and other institutional and financial measures, and training under the project would make IBY a stronger institution in terms of staffing and financial health. 5.32 The project carries acceptable business risks, normal for an operation of this kind. The technical assistance and training would enable IBY to integrate within its organization the functions of project promotion and follow-up. Also, the risk that IBY may not be able to find entrepreneurs for some of the projects identified is being minimized by phasing identifi- cation and feasibility studies, by requiring IBY to fully scrutinize technical and financial capability of sponsoring entrepreneurs to implement eventual projects and by obtaining financial commitment of entrepreneurs prior to feasibility studies. - 29 - VI. AGREEMENTS AND RECOMMENDATIONS 6.01 During negotiations, agreements have been reached with the Government and IBY on making a credit of $8 million to finance (i) an institution building component for IBY through project identification, preparation and promotion and IBY's training activities ($1.345 million), (ii) a line of credit ($6.6 million) and (iii) a pilot component for training of industrial managers ($55,000). The Government would finance through IBY $950,000 of the credit for project identification, preparation and promotion tasks as its contribution to YAR's industrial development. Essential to the project but not financed by the credit, are the advisory services: the Government and IBY would ensure that not less than the present level of advisory services would be maintained (para 4.11). Agreements have also been reached during negotiations on the following main points. a. Changes in Policy Statement. Consultation with IDA prior to any changes in its By-laws of 1977 and Policy Statement of 1980 (para 4.07). b. Recruitment of Local Personnel. Recruitment by IBY before June 30, 1985 of Ci) one professional in addition to the incumbent Director in the PRD, (ii) one engineer to bring the number of engineers and financial analysts in the Projects department to three and five respectively and (iii) two professionals in the Follow-up department to bring staffing strength in this department to four professionals (paras 4.08, 4.09 and 4.10); C. Feasibility Studies. Procedures for identification and feasibility studies (paras 5.22 through 5.28). Specifically, IDA would approve all feasibility study proposals estimated to cost $20,000 or above and IBY would select consultants for them in accordance to IDA guidelines, with IDA's prior approval (para 5.27). IBY would approve all such proposals estimated to cos; less than $20,000, invite offers for each proposal from at least three recognized consultants and select the most suitable consultant. At least 75% of the credit amount allocated for feasibility studies ($700,000) would be used for projects whose costs are less than or equal to $3 million (para 5.26); IBY would require the sponsor of a feasibility study to pay 50% of the cost of the study and would transfer the amount so paid promptly to the Government (paras 5.16 and 5.28). d. Follow-up and Arrears. Program to strengthen IBY's follow-up and to rehabilitate 10 enterprises in serious arrears (paras 4.09 and 4.24); e. Provisions for losses. Increase by IBY in the level of provisions for losses, by December 31, 1988, to 8% of the outstanding portfolio and its maintenance as long as the arrears exceed that level - 30 - (para 4.26). IBY would undertake measures to reduce arrears over three months to below 12% of the outstanding principal by the end of 1985, 8% by the end of 1986 and 5% by the end of 1987 (para 4.26). f. Training. IBY to undertake a training program for its staff and industrial managers as described in paras 4.12, 5.14, 5.20, 5.29 and 5.30 respectively. g. Interest Rates. IBY's lending rate to subborrowers to be 4% below the local commercial bank rate published quarterly by the Central Bank of Yemen (para 5.06). The Government's onlending rate to IBY to be 5% below IBY's lending rate. Once a subloan is committed, the rates would remain unchanged during its life. The Goverment would allow IBY a spread of at least 5% p.a. on all long-term funds made available to it (IBY) during 1985-87 period (para 4.29). IBY's lending rate and the differential between the local commercial rate and IBY's rate (currently 4% p.a.) would be reviewed annually, the first review to be held in December, 1985 (para 3.12). h. Line of Credit and Subloan Features to include Ci) use of at least 60% of the line of credit for subloans not exceeding $1 million (para 5.05), (ii) free limit of $300,000 and aggregate free limit of $4 million (para 5.09), (iii) economic evaluation, calculation of ERR and minimum cut off rate of 12% p.a. for all subprojects financed by IBY with subloans exceeding $300,000, (para 5.10), (iv) subloan maturities of up to 15 years including a maximum grace period of three years and (v) no withdrawal on account of expenditures to be made in respect of a subloan more than 120 days prior to the date on which IDA would have received the application and information required (para 5.18). i. Foreign Exchange Risk. The final subborrowers to bear the foreign exchange risk on the line of credit ($6.6 million) (para 5.18). The Government would bear the foreign exchange risk on the credit allocated for project identification, preparation and promotion tasks and for training of IBY staff and industrial managers (para 5.17). j. Retroactive Financing. The project to include retroactive financing of $300,000 to finance the cost of consultants for identification studies and for promotion prior to effectiveness (para 5.16). 6.02 Conditions of Effectiveness a. Enactment of the amendments to IBY's Act (para 4.05). b. Appointment by IBY of consultant for project identification studies and advisor for promotion tasks (a consulting company and an individual respectively) (para 4.08). c. Conclusion of a Subsidiary Loan Agreement between the Government and IBY satisfactory to IDA (para 5.16). - 31 - ANNEX 1 Page 1 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT IB'- s Institutional Structure, Performance & Evaluation 1. Legal Framework. IBY's legal framework is essentially the same as described in Staff Appraisal Report (No 3211 of February 17, 1981) for the First Industrial Development Project. IBY was incorporated by Act No 55 of 1976 as an autonomous institution to promote and assist the establishment of industrial projects in private, public and mixed sectors. The Act and By-laws of 1977 set out IBY's detailed objectives, powers, capital structure, operational provisions, organization and Board and management functions. The Act and By-laws are available in Project File. These are satisfactory but certain modifications are to be made to improve IBY's effectiveness (para 4.05 ). 2. Ownership. The Government holds 70% of the authorized share capital of YRls 100 million as ordinary shares. The balance, which is reserved for the private sector as preference shares, are held as follows: The German investment Company (DEG) 6%, YBRD 5% and over 2,000 enterprises and individuals 11.7%. The remaining 7.3% are unsold; IBY is negotiating with the Arab Industrial Company the sale of the unsold preference shares. The Government has not anticipated any returns on its equity investment in IBY, which is seen as a support to industry. But since its inception, IBY has paid dividends of between 7 and 8% per annum on the preference shares, the minimum required being 6% per annum. 3. Assembly Board of Directors and Senior Management. The General Assembly meets once every year to review overall operations, pass annual accounts and declare dividends. The Board of Directors consists of 7 members, including the Chairman of the Board who is also IBY's Chief Executive (Managing Director), appointed by a Presidential decree upon recommendation of the Minister for MEI. Four Board members are ex-officio representatives of the concerned Government agencies, Central Planning Organization (CPO), Ministry of Finance (MF), Ministry of Economy and Industry (MEI) and Central Bank of Yemen (CBY). Two members represent the preference shareholders. In 1981, IBY appointed a General Manager to cope with its increasing activities. 4. IBY's Board is active, scrutinizing all significant matters in considerable depth. Specifically, it sets policy and internal regulations for IBY. It also approves loans exceeding YRI 400,000 and all borrowings. Yet, in general, the Board needs a more development orienCed outlook, as against the traditional conservative banking approach to lending. - 32 - ANNEX 1 Page 2 5. Policies and Activities. In 1980, IBY adopted a Policy Statement, drafted with IDA's assistance, defining its role in industrial development, prescribing the project selection and financing criteria and spelling out banking limits and minimum economic rate of return for subprojects. The policy statement is available in Project File. The overall statement is satisfactory. 6. As regards the activities, IBY is primarily a financial intermediary extending medium and long-term loans and making some guarantees and taking some equity in subprojects. It also provides some technical assistance for subprojects through consultants and its own staff and undertakes economic and technical research as related to its operations. The technical assistance role is to be expanded through the strengthening of the project identification preparation and promotion activities and follow-up under the proposed project (paras 4.08 and 4.09). 7. Organization. The Senior Management team, consisting of the Chairman and the General Manager, is stable and competent. The Chairman has largely delegated the day to day management to the General Manager. 8. IBY has two standing committees. The Management Committee reviews all policy and personnel matters. The Projects Committee (formerly called the Loan Committee) reviews all operational matters related to subproject preparation, appraisal and supervisLon. The Projects Committee also approves subloans between YR1 40,000 and 250,000 (subloans below YRI 40,000 can be approved by the Chairman alone). 9. IBY has six departments organized along functional lines: The Projects, Follow-up, Finance department for financial and accounting function, Administration department for personnel and office upkeep, Legal department and Planning and Research department to be responsible investment promotion. All six departments are headed by directors. IBY has recently opened an office in Taiz to promote business and to follow up on subprojects in that area. The overall organizational structure is satisfactory. The primary responsibility of the Planning and Research department would be to identify, prepare and promote projects (para 4.07). 10. Staff and Advisors. Excluding the Chairman, General Manager and Deputy General Manager, IBY's total staff is 56. This includes 19 graduate professionals, 22 diploma/secondary school level and 15 supporting. Despite pervasive shortage of skills in YAR, IBY has maintained a reasonably permanent cadre of Yemeni professionals. IBY's salary levels compare favorably with other public and semi-public institutions and may partly explain low turnover. Though well educated, most professional staff are relatively - 33 - ANNEX 1 Page 3 young and inexperienced, which compels a heavy reliance on advisory services. Also, although the staff is adequate for the present level of activities, substantial strengthening would be needed in number and quality to cope up with future responsibilities. IBY, with IDA's assistance, has prepared a recruitment and training program (para 4.12). This is adequate to carry out future intended tasks. IBY's existing and proposed professional staff is as follows. Table: IBY Professional Staff Department Existing Proposed A. Projets Economic 5 5 Engineering 2 3 B. Planning and Research 1 2 C. Follow-up 2 4 D. Finance/Accounting 7 7 (including internal audit) E. Legal 1 1 F. Administration 1/ 0 0 G. Taez Office 1 1 TOTAL 19 23 11 The Deputy General Manager is the only professional in the Administration. The rest are diplomas/school leavers and support staff. 12. At present, IBY has four expatriate advisors on fixed term; an economic advisor in the Economic Section of the Projects department financed by the Kuwait fund, a tachnical advisor in the Technical section of that department financed by the German GTZ, a financial advisor in the Finance and Accounting department financed by the British ODA, and an advisor recently shifted on full-time in the Follow-up Department also financed by ODA. The advisors are performing satisfactorily. Their current contracts expire within 12 to 18 months. While the long-term goal is to reduce the dependance on expatriate advisors, during the period of the proposed project (1985-87), IBY will need and has agreed to continue present level of advisory services (para 4.11). 13. IBY also plans to recruit an advisor its Research and Planning department to strengthen its project promotion capability (para 4.08). 14. Appraisal. IBY's appraisal staff usually collects relevant data and information for small projects as the original loan applications are generally very sketchy. Loan applications for larger projects are normally submitted to IBY together with feasibility studies prepared by consultants. The technical section of the Projects department reviews projects feasibility and, if necessary, recommends to sponsors desirable modifications in project design. - 34 - ANNEX I Page 4 Once agreement is reached on basic project features including production method, capacity, and machinery specifications, the projects's financial evaluation is done by the Economic Section of the Projects department. The financial appraisal normally require entrepreneurs to obtain quotations for civil works and major equipment. 15. IBY's appraisal procedures have gradually evolved to a satisfactory level, although market evaluation is sometimes rather general due to lack of secondary data. This aspect can be improved by more in-depth studies such as the identification and feasibility studies financed under the project and by reaching primary sources in appropriate cases. The methodology being used for economic evaluation, which was introduced under the first project (Credit 1122-YAR), is working satisfactorily. 16. Approval and Commitment. Once appraised, subproject appraisal reports and subloan documents are submitted to Projects Committee for review and transmittal to the Board for approval. A subloan is considered committed when signed. IBY normally requires that civil works is contracted before subloan commitments, which may explain the high commitment to disbursement ratio for IY as a whole. 17. Follow-up. Follow-up has been weak and ad hoc due to several reasons, including inadequate emphasis by management, inability of staff to design and operate a follow-up system. There is also the problem of obtaining proper data. IBY management now fully recognizes the need to improve follow-np and has adopted a comprehensive but simple system designed with IDA's assistance (Annex 6). The formats to collect data are available in Project File. 18. Procurement and Disbursement. As IBY finances small and medium size projects, individual contracts for the procurement of machinery and equipment under subloans are not normally large enough to justify international competitive bidding. As for similar DFC operations, except for very small items which are purchased off-the-shelf, procurement would involve international shopping. IBY normally requires at least three quotations from different machinery suppliers. The Projects department of IBY often assists borrowers in the selection and purchase of the required machinery. [BY is thus in a position to ensure that the procurement of goods is done efficiently, and at economical prices. These procedures have been reconfirmed during negotiations (para 5.12). 19. Disbursements are done against satisfactory evidence of expenditures mostly through letters of credit for the imported machinery and equipment. Disbursement procedures are well monitored and satisfactory. EMENA/IDF June 1984 - 35 - ANNEX 2 Page 1 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Functions and Responsibilities of the Planning and Reeearch Department (PRD) to Undertake Industrial Promotion Activities Introduction 1. The following sequence of activities typifies the industrial project cycle: a. Preinvestment b. Appraisal by financing institutions and loan approval c. Implementation d. Operations 2. Industrial promotion involves assistance to entrepreneurs at the preinvestment stage. In YAR's context, it would include: a) identification of investment opportunities, b) assistance to project preparation (feasibility studies), c) promotion of entrepreneurship through technical counselling to them at the project planning stage. 3. The Government of YAR has decided that, as its agency for industrial development, IBY would systematically undertake industrial promotion tasks as a permanent feature of its (IBY's) development activities. IBY has decided to make industrial promotion as the primary function of its Planning and Research department (PRD). 4. PRD would initially have a director reporting to the General Manager of IBY and one junior professional staff. To rapidly build up PRD's capacity in industrial promotion, 1BY, at the direction of the Government of YAR, has decided to (i) subcontract project identification and feasibility studies to short-term consultants and (ii) appoint an advisor under contract for two years. The director of PRD would be the advisor's counterpart. Objectives, Functions and Responsibilities 5. The main objective of the Planning and Research Department (PRD) would be to steer potential entrepreneurs during preinvestment stage of industrial projects from identification of investment opportunities through their development into investment projects. A secondary objective would be to generate additional business for IBY. - 36 - ANNEX 2 Page 2 Identification and Feasibility Studies 6. Under close supervision of the General Manager, PRD would: - prepare terms of reference for identification and feasibility studies 1/, - identify and build up a roaster of potential consultants, - invite and analyse bids for studies from consultants and recommend suitable consultants to management, - negotiate contracts for studies with consultants, - assist consultants, when sollicited, on work permit formalities and access to local data, - establish quality control system for studies, particularly, but not restricted to, the format and quality of project profiles to be prepared by consultants under identification studies, - establish a system of monitoring, evaluating and reporting progress of studies to TRY and, where necessary, to the Government. Promotion of Entrepreneurship 7. Under the close supervision of the General Manager, PRD would: - develop publicity campaigns for marketing of IBY's assistance programs, - prepare list of potential entrepreneurs from among the existing subborrowers of IBY, existing industrialists i- YAR at large, emigrants and others, - classify them according to their financial technical capability and subsector of potential interest, - develop a program of systematic contacts with entrepreneurs with a view to 'market' project profiles developed through identification studies (para 6) as well as to sense their own project ideas, - Counsel and assist entrepreneurs, when sollicited, on the Government formalities and technological, management, financial and locational matters. 1/ Terms of reference for the identification studies are included in Annex 3. - 37 - ANNEX 2 Page 3 Development of Information Sources and Liaison 8. PRD would develop its information sources on YAR's industrial sector as related to project opportunities and entrepreneurs through close contacts with agencies including CPO, MEI (industrial licences), Chamber of Commerce, Central Bank, banks and Emigrants Union. EMENA/IDF June 1984 - 38 - ANINEX 3 Page 1 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Terms of Reference for Project Identification Studies 1. The Industrial Bank of Yemen (IBY) is a specialized institution of the Government of Yemen Arab Republic (YAR) under the Ministry of Economy and Industry (MED) to promote and finance industrial development in the country. To accelerate the exploitation of the country's industrial potential, IBY intends to initiate a systematic program to identify industrial projects, to promote (market) them among potential local and foreign entrepreneurs and to prepare feasibility studies for the identified projects where justified and for which sponsoring entrepreneurs have been located. Subsequently, viable projects could be financed by IBY singly or in coordination with other local and foreign financial institutions. The above activities form part of Second Industrial Development Project for which the Government of YAR has requested a credit from the International Development Association. 2. To carry out the projects identification studies described in para 1 above, IBY would appoint, one or more consulting firms (called consultants hereafter) with appropriate qualifications and experience. Consultants are planned to be appointed by January 1, 1985 and the identification studies are to be completed seven months later by July 31, 1985. Projet Identification Studies 3. The following paragraphs describe in detail the suggested steps in the carrying out of the project identification studies (preparation of project profiles), a) The priority subsectors selected by the Government of YAR and IBY for the purpose of identifying investment opportunities are as follows: (i) food processing, (ii) construction materials, (iii) light and household chemicals and plastics, (iv) light engineering, (v) wood working and (vi) service industries for mechanical and electrical repairs. b) Within each of the above subsectors, consultants would as the first step study all available data and list as many potential investment opportunities as possible for new projects. Such investment opportunities are expected to exist in import-substitution, domestic resource based, export and other industries, in that order. The list should be submitted to IBY within 45 days of consultants arrival in the field. - 39 - ANNEX 3 Page 2 c) Consultants with the agreement of IBY would then prepare a short list of at least 40 investment opportunities with appropriate justification for further investigation. Priority should be given to bankable medium-size projects (between $1-3 million). The short list should fully take into account the work carried out or being carried out in YAR, so as to avoid duplication. d) After the finalization of the short list, the consultants would proceed to prepare project profiles (4 to 5 pages) for each of the short listed investment opportunities. The format for project profiles should be agreed with IBY in advance but, in any case should include brief notes on the market, project capacity, main products, process description, machinery and space needed, project investment costs, income statement, personnel requirement including foreign technical skills, raw material requirements including imports, projected range of financial and economic rates of return and a list of critical areas which need further investigation in feasibility studies. e) About 40 project profiles are expected to be prepared in the six subsectors listed in para 3a above. f) The profiles would be submitted to IBY in 10 copies in English six months after the starting date. g) After review and comment by IBY, the consultant would finalize the profiles and submit 30 copies in English to IBY. h) The profiles would be deemed as completed when finally accepted by IBY, all outstanding points have been clarified and 30 copies of the final profiles submitted to IBY. EMENA/IDF June 1984 - 40 - ANNEX 4 YENEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Terms of Reference for the Advisor in IBY For Two Years for Project Promotion 1 The Promotion advisor would assist the establishment of industrial project promotion capability in the Planning and Research Department (PRD) of the Industrial Bank of Yemen (IBY). The advisor would report to the General Manager. The director of the PRD would be his counterpart and training of the director and of PRD's other staff would be an integral part of his terms of reference. 2. Within three months of his arrival, the advisor would be expected to get an overview of the industrial sector in YAR, its constraints and prospects, the Government's plan for the sector and IBY's role and operations. During this period, he would also prepare for IBY management's approval (i) detailed action program for priority areas of work, (ii) operating procedures for the department, including for work planning, for performance reporting and review, (iii) quantitative work targets for six months. Thereafter, he would develop new targets on a six monthly basis for the management approval on the basis of the experience of previous six months. For reporting performance, he would develop formats to be filled out by PRD. 3. As regards the work priorities, these are expected in three areas: (i) supervision of and support to consultants carrying out project identification and feasibility studies, (ii) promotion of entrepreneurship and (iii) development of information sources. Details of the tasks involved in these areas are given in para 6, 7 and 8 of the Functions and Responsibilities of the PRD (Annex 2). Together with his counterpart as under study, the advisor would have the primary responsibility in carrying out these tasks. 4. The advisor would be retained by IBY for 24 months. He would have an advanced degree in finance, business, economics or engineering. He should have experience in managing industrial sector, subsector and feasibility studies and in entrepreneurship promotion. Experience in a development bank would be of particular advantage. Knowledge of Arabic and experience in training would be desirable but not essential. EMENA/IDF June 1984 - 41 - YE NARAB EMJKE CMAR) 5 Se=nd Trxkstra1 Davelaeint ?o=iet hwlarzoo Seule for Pwject .eitificarioc, Peparation an PXion Itiviries 1 9 84 1 9 85 01 02 03 04 05 06 0 7 08 09 11112; 0 02 03 0405 06 07 Pjiet 2enc scat ou sties a) Agee on piorty aiecstrsX ad draft s of refereace b) 2ixalize :em= of referarce, identify coslrtars & design evaluation proceduzes X c) hLvize consulrants by telex to bid X d) Receive offes fmcosultats X e) iAmlyze offes and send evaluation & ecz-atioi to ID X f) select consultants, fizliz & sign cCMact XX g) Ariva lof COOSlr== in ia X h) Compledon of studies by cosultants 12/85 Csultant for Pmijr Pzozvion a) DEt temw of tefeme X b) FinaLim tes of refelna & idetify agen:iesfidividuals x c) Invite by teLer ca-didaceslagexries teo serd CVs X d) Receive CVs & irifonnation or fes x e) Ctepleteirviws, sect dne cardidte, coamlete visa foandities & send a fi= offer X f) r,,,;m of consultant in Sa"aa X EMENA/IDF December 1984 - 42 - ANNEX 6 Page 1 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Functions and Responsibilities of the Follow-Up Department, Procedures for Strengthening Follow-Up and the Department's Initial Work Program 1. Follow-up activity involves assistance to entrepreneurs during implementation and operation of industrial suhprojects. It would begin after the approval of a subproject by IBY's Board and end after the subloan for that project has been fully repaid. 2. To strengthen its follow-up activities, IBY has established a Follow-up department reporting to the General Manager. The department would initially have four local staff, including head of the department, and an advisor. The department head would be the advisor's counterpart. Objectives 3. The objectives of the department are two fold (i) to develop timely information and recommendations during implementation and operation of subprojects in IBY's portfolio to overcome problems as they develop and (ii) to provide information (feedback) to allow better project preparation and appraisal in future. Scope of Follow-up Activities 4. The scope of follow-up is determined by the general objectives described para 3 above. The follow-up activities are a means for enhancing the partnership between subborrowers and IBY to achieve subproject goals. The activities should cover not only supervision of physical works but also all other areas which are necesary for success of a subproject, including organization, management, technical aspects, finance and marketing. The approach is not to blame those responsible for failures but to anticipate problems and to seek prompt measures to resolve them. 5. While the responsibility of the Follow-up department would extend to all subprojects in IBY's portfolio, particular attention would be initially given to subprojects which are in serious difficulty (para 19 b). Functions and Responsibilities 6. The functions and responsibilities of the Follow-up department are: - to periodically review subprojects in IBY's portfolio, - 43 - ANNEX 6 Page 2 - to ensure that subprojects are being implemented in ac:ordance with descriptions in their appraisal reports, including compliance with subloan conditions and IBY's procurement procedures, - to report status of subprojects to IBY management, identify key problems, make recommendations and to obtain management decisions, - to convey to subborrowers, decisions of the IE management. Procedures 7. Organization of Information. IBY has decided to centralize its filing system in the Administrative department. The subproject files would be identified by subproject numbers and would receive all correspondence in chronological order; including during appraisal and follow-up. The Follow-up department would also prepare a list of all projects under supervision, with a summary of important information, including name and address of subborrower, project cost and subloan amount, date of subloan approval, status (implementation or operation), and problem rating (para 8). The list would be updated every three months. The format has been agreed (Form I in Project File). 8. Follow-up Planning. The key to follow-up planning is the problem rating system which IBY has already introduced. IBY has classified its projects under follow up in four problem rating categories summarized in the following table. The average frequency of visits is indicated. Projects With Major With Minor Problems Problems Under Rating: A Rating: B Construction Frequency: 2 months Frequency: 3 months of visits: of visits Under Rating: C Rating: D Operation Frequency Frequency: 12 months of Visits: 3 months of visits 9. The Follow-up department would plan its activities by preparing work programs every six months. The planning statement (Form 2 in Project File) would identify subprojects to be visited, dates on which visits are to be made and persons to visit. Normally, a team consisting of an engineer from the Projects department and a follow up officer would visit subprojects. Frequency of visits is indicated in para 8. However, follow-up would vary in intensity, composition of supervision teams, and frequency depending upon the needs of individuals subprojects. The follow-up planning statement would be submitted to IBY's General Manager for approval in advance of the planning period. - 44 - ANNEX 6 Page 3 10. Field Review. During field visits, the follow-up teams would collect data summarizing status of subprojects. The format for collecting data, which have been designed (Forms 3 and 4 in Project File) and essentially compare progress of subprojects as against their appraisal reports. During construction stage (Form 3), particular attention would be paid to planned versus actual implementation schedules for equipment procurement and physical works, project costs, recruitment of technical assistance and local staff, availability of utilities and project finances. During operations (Form 4), focus would be on capacity utilization, marketing, and profitability. 11. IBY would initially prepare the information needed for reporting. But, it would aim to progressively transfer this task to subborrowers as much as feasible, with the supervision teams checking the accuracy of information provided. 12. During field visits, the follow-up teams would also review with subborrowers major problems and possible solutions. 13. Reporting and Management Review. Follow-up teams would prepare summary reports (Form 5 in Project File) for IBY's management within one week after the completion of field visits. The reports would identify key problems facing subprojects, their current status and recommendations. The reports would be reviewed by the General Manager. The Projects Committee, which meets every month, would review the reports for all projects with major problems and make decisions on recommendations made by follow-up teams and the General Manager. The Project Committee may consult the Board through the chairman on major decisions, such as loan cancellation or recall and undertaking court proceedings. 14. All decisions would be promptly communicated to subborrowers. 15. Summary Report on Implementation. Once a year, the Follow-up department would prepare a summary of its performance (as against plans), major achievements and problems, projects facing moderate/major problems and most common problems facing subprojects. 16. Procurement and Disbursement. The ultimate responsibility for procurement would rest with subborrowers. Suppliers and contractors are normally identified at the appraisal stage. But, Follow-up department would assist subborrowers in procurement. 17. Follow-up department would review and certify for disbursement by the Finance department, withdrawal applications submitted by subborrowers, to ensure that goods and services are in accordance with subloan agreements. 18. The Follow-up department would collaborate with the Finance department in preparing withdrawal requests to external financing agencies. - 45 - ANNEX 6 Page 4 19. Initial Work Program. a. Follow-up department would prepare a list of subprojects under follow-up with summary information (para 7) and Problems Rating (para 8) by March 1, 1985. b. The department would prepare a field visit plan for July-December, 1985 period by June 15, 1984 (para 9). Thereafter, the Follow-up department would prepare the plan one month before the beginning of each planning period. In drawing up the plan, IBY would give priority to subprojects approved during 1983 and 84 and to ten enterprises in serious difficulty for which rehabilitation programs have been prepared. c. IBY would implement the review procedures by December 31, 1985 (para 10 through 13) d. The department would prepare the first Annual Report for 1985 on follow up by January 31, 1986 (para 15). EMENA/IDF June 1984 - 46 - ANNEX 7 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT IBY's SU' 2MARY OF BALANCE SHEETS (in YR1 1000) Year Ending Decamber 31 1981 1982 1983 ASSETS Current Assets Cash 4,086 4,205 7,800 Time Deposits 24,000 7,000 17,553 Current Maturities of loans 24,391 33,050 33,196 Other current assets 4,300 7,360 8,566 Total Current Assets 56,777 51,615 67,115 Portfolio Investments Loans outstanding 68,298 87,062 96,251 Equity investments 1/ 6,400 6,400 8,823 Sub-total 74,698 93,462 105,074 Less: Current maturities 24,392 33,050 33,196 Provision for losses 2,580 4,113 6,210 Total Portfolio 47,722 56,299 65,668 Fixed Assets 3,572 6,218 12,794 TOTAL ASSETS 108,070 114,132 145,577 LIABILITIES Current Liabilities Payables and accrued expense 1,471 1,416 4,835 Dividends payables 2,947 2,440 2,481 Total Current Liabilities 4,419 3,856 7,316 Staff Retirement Fund 737 1,082 1,079 Borrowings 2,386 5,908 29,458 UNCDF Management Grant 905 905 905 TOTAL LIABILITIES 8,447 11,751 38,758 EQUITY Ordinary shares .0,000 70,000 70,000 Preference share 18,584 18,900 22,745 Reserves 11,039 13,481 14,074 TOTAL EQUITY 99,623 102,381 106,819 TOTAL LIABILITIES & EQUITY 108,070 114,132 145,577 Guarantees outstanding 317 - 8,000 1/ Including land and buildings valued at YRIs 1.3 million acquired in 1983 as a result of court proceedings against a borrower. EMENA/IDF June 1984 - 47 - ANNEX 8 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT IBY's SUMMARY OF INCOME STATEMENTS (In YRL 1000) Year Ending December 31 1981 1982 1983 INCOME Loan Interest 6,419 8,878 10,947 Commitment charges 170 94 78 Guarantee charges 9 3 69 Consultancy fees 188 438 434 Bank interest 4,543 1,901 1,228 Management fees 132 - - Other income 77 281 98 GROSS INCOME 11,538 11,595 12,854 EXPENSES Administration & general 4,616 5,902 6,778 Depreciation & amortisation 194 188 217 Provision for possible losses & write-offs 1/ 1,184 1,706 2,808 Interest on borrowings 31 47 1,180 TOTAL EXPENSES 6,025 7,843 10,926 NET INCOME 5,513 3,752 1,928 Transfer to Legal Reserve 4,212 2,441 593 Dividend 1,301 1,311 1,335 1/ For the first time in 1983, IBY wrote off YRls 0.46 million. EMENA/IDF June 1984 - 48 - ANNEX 9 YENEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT IBY's Projected Balance Sheets for 1984-1988 (in YR1 Million) As of December 31, 1984 1985 1986 1987 1988 ASSETS Cash and Bank deposits 34.5 46.1 59.9 65.0 66.6 Long term loans and investments 141.0 171.4 196.6 227.8 260.1 Other assets 14.7 14.2 13.9 14.0 14.2 Less provision for losses (6.8) (9.4) (12.1) (15.1) (18.4) TOTAL ASSETS 183.4 222.3 258.3 291.7 322.5 LIABILITIES Foreign currency borrowings 60.3 95.9 130.2 160.8 188.0 Other liabilities 13.4 12.7 11.9 11.1 10.4 TOTAL LIABILITIES 73.7 108.6 142.1 171.9 198.4 EQUITY Share capital 97.7 100.0 100.0 100.0 100.0 Reserves 12.0 13.7 16.2 19.8 24.1 TOTAL EQUITY 109.7 113.7 116.2 119.8 124.1 TOTAL LIABILITIES AND EQUITY 183.4 222.3 258.3 291.7 322.5 EMENA/IDF December 1984 - 49 - ANNEX 10 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT IBY's Projected Income Statement: 1984-88 (In YR1 million) As of December 31, 1984 1985 1986 1987 1988 INCOME Interest on loans 12.5 16.2 19.1 21.9 25.0 Equity investment income 0.4 0.5 0.5 0.6 0.7 Bank interest 2.3 3.1 4.1 5.4 5.8 Miscellaneous Income 0.9 1.0 1.1 1.2 1.3 TOTAI INCOME 16.1 20.8 24.9 29.1 32.9 EXPENDITURE Interest on borrowings 3.8 6.3 8.8 10.9 12.7 Administration & Gen. expenses 6.6 7.3 8.0 8.7 9.7 Provision for losses 0.6 2.6 2.8 3.0 3.3 Depreciation 0.4 0.4 0.4 0.5 0.5 TOTAL EXPENDITURE 11.6 16.6 20.0 23.1 26.2 NET INCOME 4.5 4.2 4.9 6.0 6.7 APPROPRIATIONS Reserves 2.2 1.8 2.5 3.5 4.3 Dividend on Preference shares 2.3 2.4 2.4 2.4 2.4 Total Appropriations 4.5 4.2 4.9 6.0 6.7 EMENA/IDF December 1984 - 50 - ANNEX 11 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Statement of Sources and Applications of Funds for 1984-88 (in YR1 million) As of December 31, 1984 1985 1986 1987 1988 SOURCES Internal generation 5.7 7.2 8.1 9.4 10.6 Share capital 5.0 2.3 0.0 0.0 0.0 Repayment of loans 20.4 30.9 41.2 51.6 61.3 Borrowings 36.1 47.9 56.2 63.6 71.9 Other 5.6 0.3 0.3 0.5 0.4 Total Sources 72.8 88.6 105.8 175.1 144.2 APPLICATIONS Loan disbursements 52.6 61.6 70.3 79.6 89.9 Equity investment 1.3 1.4 1.6 1.9 2.2 Repayment of borrowings 6.2 13.4 23.0 34.2 45.8 Other applications 3.6 0.6 (2.9) 4.3 4.7 Total APplications 63.7 77.0 92.0 120.0 142.6 INCREASE IN CASH AND BANK DEPOSITS 9.1 11.6 13.8 5.1 1.6 CUMHULATIVE CASH END OF YEAR 34.5 46.1 59.9 65.0 66.6 EMENA/IDF December 1984 - 51 - ANNEX 12 YEMEN ARAB REPUBLIC (YAR) SECOND INDUSTRIAL DEVELOPMENT PROJECT Projected Disbursement Schedule (in US$ million) Year Half-Year Amount Cumulative 1985 July-December 0.42 0.42 1986 January-June 0.84 1.26 July-December 1.10 2.36 1987 January-June 1.19 3.55 July-December 1.26 4.81 1988 January-June 1.02 5.83 July-December 0.67 6.50 1989 January-June 0.60 7.10 July-December 0.36 7.46 1990 January-June 0.25 7.71 July-December 0.17 7.88 1991 January-June 0.12 8.00 EMENA/IDF December 1984 - 52 - ANNEX 13 YEMEN ARAB REPUBLIC (YAR) SECX)OD INDUSTRIAL DEVELOPMENT PROJECT Selected Documents Available in Project File 1. Manufacturing Industry: Performance, Policies and Prospects, Bank Report No. 3651-YAR of November 12, 1982. 2. Mobilization of Domestic Financial Resources in Yemen Arab Republic, Bank Report No. 3554a of January 6, 1982. 3. IBY'S Act and By-laws . IBY'3Ys policy St-atement 5. Rehabilitation Programs for 10 enterprises in serious difficulty 6. Formats for field supervision of subprojects to be used by IBY. r.!iMA/IDF December 1984 _. J ? ISLAMIC A 44 ,,IRAO\ REP O AICNIANIMAN YEMEN ARAB REPUBLIC PAK.-A N IDA-ASSISTED PROJECTS BY SECTOR PROJECTS. AgriCultural SAUDi ARABIA K Cooperative and Agricultural Credit Bonl * (CACB)Cets Agricultural ResForch Cent,rs V2^X YE -n Demonstratilon Forms j ~~~~~~~~~~~~~~~~~~~~~~~Grain Storage D ljoulfJ i , Fisheries \~,WALIA CAź Fish Markets cr.wrp7. / IL Industrial L_ Et4 np,.\ +~~~~~~~~~~~~~~~~~~~~~~~ Health /. ( -----H~A 1/ '_ * Education Power Distribution Areas I S~~~~~~~~ Power Stations I Trarnsmission Lines Geothermal Exploration J- Water Supply \S - ' " _;; _! > lr, vJ a ]Part Development -. N / ~~~~~~~~~~~~~~~~~~~~~~C Urban Development * ~ ~ ~ ~ ~ ~~~~~i / ~~~~~~~~~~~EXIS TINGIATURES. I ~ ~ ~~- ', . -"~~~~~~~~~Primary Roads N, | ) fJ \ >Secondary Roads \ '5IEtA'Nl).5 -1'CHuIk -. X * ! 6 Airports .t'1P.)ZANI)S I IN ~~~~~~~~~~~~~~~~~~.1. Paris ~~~~ I . ~~~~~~~~~~Wadis | .1 ,f/ I I. Governorate Capitals 16i D j 40 b j 161 ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~INational Copilt%l 6 / ,.~~~~~, i' ', - -- - - - ~~~~~~~~~~~Provinciol Boundaries /. ~~~~~~~~~~~~EASTEN International Boundaries ~ ~ ~ JA+2 \~~~~~~).\\~~~~~ r 15~~-00 'Khowbo / 0 A ~ A'r ~ %. IIY,a -,' ivA! Boil - \ \ 20 040 60 liowDow . . C h I I1 " \ Sowi;' A omrse r Alm 0 4 0 I 6AR0 c4 , (Q .>olobak PROJECT F5APPROVED IV .@ I% 2~..iLI * tlirjhwcay Iuo upS6Sunl 1975 *$< EducatiJ. n,on n 197R P^ocho ~~~~~~~~~~ ^51 pJ 9Z; X \ S~~~~~~~~~~~~~~~rrrllondjseri v orlpruietf0ll^ 1914 /~~~~~~~~~~~~~~~~~~~~~~~~~~S,a Walesrrs Supl 199787 / . . tIaEamo agrlc4l,Ure ~~~~~~~~~~~~rI~ut n 1I978 I i .: ~ ~ ~ ~ ~ ~ vj A Hobo P*a Si.s bllen nlad R1a euopnrtI 979 I \ z X f~~~~~~~~~~~~~~~~~~~~~~~.liwairi AgIcuu 1 1979 ,}~~~~~~~~~~~~~~~~~~~~~~ kiherb DWatnr 5uie upplj & Scuraqen 1970 \ ~ ~~~~~~~~~~~~~~~~~~~~~~~ O 9robn SaaeA Pr aceloIVin 1980 \~~~~~~~~~~~~~~~~~~~~~~~~~~~ v Qulestoc Creitd rocesingooolmn 1981 Mocha ¶ Sonar, Wler Supionl: Slciewerage 1977l 1 * Parutro Development 1977 HODEIDAAE ZUOIO\r. l987 ,Allzgh*all IY 1tg1 / ~~~~~~~~~~~~~~~~~~~~~~Ptihrnluma Agriulture II 1978 go, Hcollh 1Pe u Tiara Ariculturel CoII 1989 , Education V0 1979 PRoJet DhAge 198 nitrmoa Agricultuew IV 1980 ,- /Aricannoll in iis D nt 19814 Al Hy n moo hes becn porvirerf cy rhe tStutd oanX f slalt couthern Uplands Rwor DIhvnInmurnert t 1981W ,gwer 11 Regan E l 19815 Inndusra Devel ohpmn a 0htdn hl o 1985 ADEN filuca~~~~d,taon El 1982) MOC44 ~ ~ ~ 44 40'oioc Crdi A caz 1 Urban I . _ rfighivajs IV 1978 Plraleu &isGriutlirna 1982 N, ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~iAgriculturalltCredItI 1989 7 . ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Education M 1983 Powe m Ar icuD oI 1980 Centralt Upiglands ARiclural D evelorpm ent a 1984 Inusrban Development0 1981 Tismpba enpearr yTreWrlfanseiADcar4Ie ieemr E N ~ I41 (tiiay IV 1984 troraesadi vk,it c h nenlus tTeItk ln edtebtatnlEUcation VI 984 t. rhylisiI IV 1982~~~~~~~~~~~~li utterly, on the pat01 The Wxfl flank nti lire brternatmoat FeParcee Co p Gatiort any ptkynBn art thelegal satus atarty trritoryor any neto'aenenl o acceptnce of Ho blthria9ie Agiulua Crdi 18 Education V 1983~~bIt