R E S U L T S O N T H E G R O U N D 23470 February 1997 THE P}' ~~BOIVIAs -E CT1AND :;EVELOPMENT: ., ~~~~-' - AkGENTiNA MADAGA~SCAR BE N N INDONESIA BOLIVIA R E S U L T S O N T H E G R O U N D THE PP' NATE SEACTORAND DEVELOPMENT: FIVE CASE STUDIES INTERNATIC)NAL FINANCEk CORkPORATIO)N Copyright © 1997 The World Bank and International Finance Corporation I 818 H Street. N.W. WAashington. D.C. 20433. U.S.A. All rights reserved Manufactured in the United States of America First printing February 1997 The International Finance Corporation (IFC). an affiliate of the World Bank, promotes the economic dlevelopment of its member countries through investment in the private sector. It is the world's largest rnultilateral organization providing financial assistance directly in the form of loan and equity to private enterprises in developing countries. The findings, interpretations and conclusions expressed in this paper are entirely those of the authors and should not be attributed in any manner to the IFC or the World Bank or to members of their Board of Executive Directors or the countries they represent. The World Bank does not guarantee the accuracy of the clata included in this publication and accepts no responsibility whatsoever for any consequence of their use. Some sources cited in this paper may be informal documents that are not readily available. The material in this publication is copyrighted. Requests for permission to reproduce portions of it should be sent to Director, Economics Department, IFC, at the address shown in the copyright notice above. The IFC encourages dissemination of its work and will normally give permission promptly and, when the reproduction is for noncommercial purposes. without asking a fee. Permission to copy portions for class- room use is -ranted through the Copyright Clearance Center. Inc.. Suite 910, 222 Rosewood Drive, Danvers, Massachusetts 01923. U.S.A. 'T'he complete backlist of publications from the World Bank, including those of the IFC. is shown in the annual Indlev of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects. authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank. 1818 H Street, N.W., Washington, D.C. 20433. U.S.A., or from Publications, The World Bank, 66 Avenue d'Iena. 75116 Paris, France. This serial publication has been cataloged by the Library of Congress as follows: Library of Congress Cataloging-in-Publication Data The private sector and development : five case studies. p. cm. - (Results on the ground) Includes bibliographical references and index. ISBN 0-8213-3889-7 1. Development credit corporations-Developing countries-Case studies. 2. Economic developinent projects-Developing countries-Finance-Case studies. 1. International Finance Corporation. II. Series. HG3729.D44P75 1997 332.2'8-dc21 97-213 CIP Contents Introduction ..........I 1. Boliv ia: Banco Industrial, S.A...3 The Bolivian Macroeconomic Situation .4 Financial Sector Liberalization .4 World Bank Group Relationship with BISA .5 Evolution of BISA .6 Potholes Along the Road to Growth .9 A Unique Contribution: BISA's Support to the Development of Microenterprise Financial Services in Bolivia .10 Assessing Development Impact: IFC Support to BISA .II APPENDIX: Financial Data on BISA .13 2. Arituiin.i: Aguas Argentinas ..15 The Problem .16 The Solution: Bringing in the Private Sector .17 Privatizing Delivery of Water and Sanitation Services: The Concession .18 IFC's Investments in Aguas Argentinas .19 IFC's Role: Establishing Credibility-As a Catalyst for Long-term Finance .19 The Successful Turnaround: Establishing a Viable Private Company .20 Project Impact .21 APPENDIX: Financial and Operating Performance of Aguas .27 3. Benin: BIank of Africa-Benin 9..2 Bank of Africa-Benin and IFC Support .30 Development Impact. 3 1 Conclusion .33 4. Madagascar: Aquaculture de la Mahajamba ..35 Background .36 The Project .37 Project Rationale and IFC's Role. 42 Development Impact .42 5. Indoinesia: 1'.1. Soutlh Pacific * i V l .... 47 The Project .48 Development Impact .50 Conclusions .54 Annex Figures and Tables Box I Thumbnail Sketches of Some of Bank of Africa-Benin's SME Borrowers .................................................... 34 Figure I Contributions of Non-Capital Market Projects to Major Development ................... 56 Figure 2-1 Aguas: Rehabilitation of the Sewage Network (Km) ............................................... 24 Figure 2-1 Aguas: Rehabilitiation of the Water Network (Km) ................................................. 24 Table I Median Rates of Return for 347 IFC Projects Completed in the Period 1978-95 (percent) .............................................. 55 Table 1-I BISA Shareholders, mid- 1995 .............................................. 6 Table 1-2 Financial Results Summary for BISA. 1990-95 .............................................. 13 Table 1-3 BISA Loans Outstanding and Arrears. 1990-95 .............................................. 13 Table 1-4 BISA Deposits, 1990-95 .............................................. 14 Table 1-5 BISA Foreign and Domestic Resource Mobilization. 1990-95 ............................... 14 Table 1-6 Summary Statistics of the BISA Group. mid-1995 .............................................. 14 Table 2-1 Buenos Aires Water and Sanitation System: Indicators of Operational Progress .23 Acronyms AQUALMA Aquaculture de Mahajaniba BISA Banco Industrial, Sociedad Anonima BOA-Cl Bank of Africa-C6te d Ivoire BOAB Bank of Africa Benin BC)AD Bank Ouest-Africaine de Developpement CAF Corporacion Andina de Fomento CFA African Financial Community CC)FACE Compagnie Francaise d'Assurance pour le Commerce Exterieur DFC Development Finance Company EIB European Investment Bank ESAF Enhanced Structural Adjustment Facility FAO Food and Agriculture Organization FNIO Netherlands Development Finance Company GTZ German Agency for Technical Cooperation IBRD International Bank for Reconstruction and Development IDA International Development Association IFC International Finance Corporation IMF International Monetary Fund LPG Leon-Prado Group NGO Non-governmental Organization OED Operations Evaluation Department OSN Obras Santitarias de la Nacion PNB Pecheries de Nosy Be SPV South Pacific Viscose UEMOA Union Economique et Mon6taire Ouest-Africaine USAID United States Agency for International Development Abbreviatiorz- ATM automatic teller machines BOOT build-operate-own-transfer CEO chief executive officer FCR feed conversion ratio GDP gross domestic product LIBOR London interbank offered rate PPAR project performance audit report SME small and medium enterprises PL post-larva Definitions "A" Loan A loan funded with IFC's own resources '"B Loan A loan funded by commercial banks and other institutional investors, with IFC acting as sole lender of record ' C" Loan Other financial products that are categorized as quasi-equity finance, i.e.. preferred shares, convertible debentures, subordinated loans, income participating loans and loans with warrants Introduction The International Finance Corporation's primary mission is to encourage economic development in developing countries through the private sector. In carrying out that mission, IFC finances and provides advice for private sector ventures in partnership with other private investors. Its particular focus is in promoting development by encouraging the growth of productive enterprises and by creating efficient capital markets. The key to success for IFC thus lies partly in its own profitability and partly in the degree to which the enterprises it has financed contribute to the growth and development of their host countries. About two years ago, IFC's Board, through its Committee on Development Effectiveness, requested a program to provide more detail on IFC's development impact. The program has evolved in three directions. First, IFC's Economics Department began an annual review of five or six IFC projects to determine their development contributions. Second, the department established a database on development impact using questionnaire information collected annually on 30 to 35 projects. Third, IFC's Operations Evaluation Group strengthened its own measurement of development effectiveness on five-year-old projects. This paper reports on the first two of these three initiatives. It contains five case studies carried out by IFC's Economics Department during 1995-96. The projects involved were chosen for their geographic diversity and because they represent a number of sectors in which IFC has traditionally done business. Two case studies cover banks in Africa and Latin America; one concerns an agribusiness project in Madagascar: another describes a textile operation in Indonesia; and the last reviews an infrastructure project in Argen- tina. Each of these studies is intended to illustrate in detail the various aspects of project contributions to development and, occasionally. some of the residual problems that will be the subject of future work. B O L I V I A 1. Banco Industrial, S.A. by D. Fitchett 7or the past quar-ter of'a century IFC has rFbeen active in buildling and supporting financial and capital mar-ket inistitutions - a n d,: and, through those institutions, viable firms. Chapters ] and 3 examine the development ; , , inp1act of banks.The projects involved tak-e N T place in Benini anid Bolivia-both poor h.e - coultr-ies-and offer valuable illustrations of the banks' contributions to development where government mismtaliii-ement of the ecoiomiv had virtually wiped out the banik- ing system. More recenitly, economic policies have improved greatly in both countries, allowing banhks to plav their r ole once again. The "with- and without-banks" contrast llhlkc\ these cases particularly instructive. T'he Bolivian burden through concessional rescheduling with NI ac roe con o m i c Situation bilateral creditors, including five Paris Club reschedulings. Since 1985, Bolivia has made considerable progress Financial Sector in implementing an ambitious program of macro- economic and sectoral policy reforms. Initially Li be r a Ii z at ion focusing on stabilization and halting a hyper- inflationary spiral (peaking at over 24,000 percent During the first half of the 1990s. the Bolivian per annum in 1984). the authorities have moved on financial system-and the banking sector that to implement a broad range of macroeconomic and dominates this system-achieved an impressive sectoral policy reforms, including: rate of growth. After totaling about US$500 million at the end of 1989, by October 1995 bank deposits * Price liberalization were some US$2.42 billion. This rapid rise of bank deposits was accompanied by an increase in the * Unification of the exchange rate and average term of these deposits from about 65 days liberalization of capital flows in 1988 to 216 days in late 1995. This impressive growth was primarily due to the government's * Simplification of the tax regime and policies of economic stabilization (initiated during improvements in tax administration the latter half of the 1980s), structural reforms and financial sector liberalization. The resulting * Trade liberalization and customs macroeconomic stability, with a substantial reform reduction in inflation and moderate economic expansion, combined with financial sector liberal- * Privatization of small commercial ization, provided a fertile environment for financial public enterprises market development. The process was accompanied by a high degree of "dollarization" of the economy, * Financial sector reform. i.e., about 86 percent of all bank loans and deposits are denominated in U.S. dollars. From 1991 to 1995, real GDP grew between 2.8 and 4.6 percent. although Bolivia remains one of The sound macroeconomic management policies of the poorest countries in Latin America. Inflation the authorities have been accompanied by important trended steadily downward during 1991-94 from institutional changes affecting the banking sector. 21.4 percent to 7.6 percent, before increasing to In 1989, the Organic Statutes of the Superinten- around 12-13 percent in 1995. The implementation dency of Banks and Financial Institutions were of this economic reform program has been accom- brought into effect. In 1993, the New Banking and panied by a steady increase in net international Financial Entity Law was also promulgated. These reserves. formal changes have been accompanied by impor- tant efforts to strengthen the regulatory and In carrying out these reform programs. the Bolivian supervisory capabilities of the Superintendencia authorities have been supported by a number of and the Central Bank. These efforts have included focused adjustment credits and technical assistance staff training and new equipment and software to from IDA, the Inter-American Development Bank facilitate operating in an increasingly complex array and bilateral donors, while the IMF has assisted of financial markets, moves that are fundamental to through a series of annual arrangements from an maintaining the confidence of the public and of Enhanced Structural Adjustment Facility (ESAF). external sources of finance in the probity of This support has been complemented by success- Bolivian financial markets and the institutions fully reducing the external debt and debt service operating therein. The World Bank has determined 4 (Report No. 14754) that its provision of financial Credit 455-BO, for US$6.2 million, approved by resources and support for institutional strengthen- the IDA Board of Directors on January 15, 1974.2 ing, training and equipment under the Financial The second operation, Loan 1290-BO, for US$10 Sector Adjustment Credit (FY88) were important in million, was approved by the IBRD Board of halting the downward slide in the banking system Directors on June 22, 1976.3 and providing a foundation for sound future financial sector development. The financial IFC Operations resources and technical assistance provided under lending operations has been reinforced by continu- The IFC relationship with BISA has evolved over a ing country economic and sector work by the World period of almost 20 years. On June 16, 1976-only Bank addressing the ongoing concerns to establish a week before the IBRD Board approved the second and maintain the domestic banking sector on a loan operation-the IFC Board approved a sound footing.' US$0.55 million equity investment and a US$10 million line of credit. After a hiatus of more than 10 Wo rId Bank Group years, the IFC Board approved a second US$10 Relationship with BISA million line of credit on June 16, 1987.4 ADMlO million swap to U.S. dollars was approved on June 28, 1990, and subsequently an NLG 5 million swap Bank/liDA Operations to U.S. dollars was approved on June 27, 1991. With the advent of a more attractive economic The Banco Industrial, Sociedad Anonima (BISA) climate in Bolivia and the improvements in BISA started operating in 1963 as a lending institution in management, the IFC Board approved on March order to channel financial resources from local and 29, 1994, a US$25 million long-term line of credit foreign loans to support the industrial and mining with BISA, and concurrently purchased a 9.2 development of Bolivia. Its principal founders were percent equity stake in BISA for US$2.7 million.5 the U.S. Agency for Intemational Development Additional financial support came from the (USAID), the Camara Nacional de Industrias, and a Corporacion Andina de Fomento (CAF) and the group of local investors. The initial financial Netherlands Development Finance Corporation support for BISA from the World Bank Group was (FMO). Some of the weaknesses in the banking sector that have surfaced in recent years during the process of financial sector liberalization and growth are sketched on page 9. 2 Of the total amount of US$6.2 million, US$5 million was for onlending by BISA to medium-sized mining enterprises. The remaining US$1.2 million was used by the government to help finance a national survey of small mines and a technical assistance program. 3 A proposed project involving a loan of US$20 million for onlending to small and medium-sized mines, divided equally between BISA and the Banco Minero de Bolivia, was appraised in 1981, but was not processed further because of the failure of the Bolivian authorities to come to an agreement with the IMF. 4 On this occasion, IFC negotiated the sale of its existing BISA shareholdings to the Leon Prado Group; this is discussed later in this section. 5 The US$25 million IFC loan to BISA included a USS10 million "B" loan to be syndicated to foreign banks, thus providing an additional IFC vehicle to facilitate BISA's access to international capital markets. 5 Evolution of BISA Cochabamba, one each in Santa Cruz, Tarija and Sucre. It is studying the possibility of opening additional branches in Tarija and Sucre. ,' Ler ">ig,,, .;ons The Leon-Prado Group (LPG) was among the initial shareholders of BISA. Mr. Julio Leon Prado, Since its founding, BISA has been an important head of the LPG, assumed the Presidency of BISA source of term finance for Bolivian enterprises. in 1983. The LPG acquired a controlling interest in Despite the remarkable transformation from a small BISA in 1986, changing the institution's manage- specialized Development Finance Company (DFC) ment and substantially cleaning up its loan portfo- into a large multiservice commercial bank, BISA lio. These changes included shifting its lending continues to play a key role in responding to the focus away from its earlier heavy involvement in diverse financial needs of Bolivia's expanding lending to the mining sector. Furthermore, up until private sector. At the end of 1993, about 42 percent these changes in management in the mid-1980s, of its loans were for a term of longer than one BISA had extensively lent to shareholder-related year-29 percent were for 4 years or more. Since companies. With the progressive financial sector the change in BISA management in the late 1980s, liberalization in the latter half of the 1980s, BISA has reoriented its loan portfolio away from its specialized banking of the type BISA had focused earlier focus in the 1970s and early 1980s on the on disappeared. In these circumstances the new mining sector. In recent years its portfolio has been ownership of BISA shifted BISA from its tradi- about one-third in manufacturing, a quarter in tional development finance functions over to a commerce, and between 7 and 16 percent each in multiservice commercial banking institution- services, construction and agriculture. Concurrent albeit one primarily focused on servicing a broad- with this shift in the composition of the lending ening corporate clientele, rather than embarking on portfolio, rapid growth in loans outstanding has a radical transformation into a consumer-oriented brought BISA to occupy one of the top two or three retail bank. The current distribution of BISA positions in Bolivian banking in this regard. shareholding is presented in Table 1-1. BISA currently has seven branches in La Paz, two in With the improvements in the Bolivian economy in the late 1980s and early 1990s, BISA has increased loans to small and medium enterprises (SMEs), so that today an important part of BISA's portfolio Table 1-1. BISA Shareholders, represents SMEs. At the end of 1993, about 47 mid-1995 percent of the value of BISA's loans were for less than US$500,000. While most of these loans were Shareholder Percentage primarily of a short-term nature, addressing of Total working capital needs of the SMEs, among the Leon Prado Group 31.9 long-term loan portfolio (those loans for more than IFC 9.2 one year) 11 percent of the value of all term lending FMO 6.7 was for loans of less than US$500,000. As many as Corporacion Andina de Fomento 6.7 one-third of BISA's clients may have a balance Bolivian Mining Companies 6.8 sheet value of less than US$2 million, and another Herman Wille 5.3 third in the range US$2 million to US$5 million. As Various other local investors 33.4 these firms tended to be closely (often family) held Total 100.0 businesses without easy access to capital from the thinly traded local stock exchanges, capital re- sources for expansion come from either retained 6 earnings or bank borrowing. The former source of environment in which SMEs are operating has financial resources for business expansion is provided improved access to imported inputs as limited, of course, by the rate of growth and well as the technologies which BISA has financed. profitability of the business and the latter source of Despite the increased availability of similar financial resources is constrained by prudent imported goods, the local demand output of these commercial bank lending practices. firms has grown strongly without having to rely on trade or exchange rate restrictions, and in some Typically in the SMEs in Bolivia, business owners cases the products are being exported to neighbor- often occupy the principal management positions ing countries. and often have a strong understanding of the technological processes underpinning their manu- - 6 5 facturing/business operations. BISA recognizes that e" * SME lending has been a profitable and important line of business, and its loan officers work closely The fundamental reorientation of BISA from a with this clientele. Careful loan application evalua- traditional DFC to become a multiservice financial tion and loan supervision procedures-often institution has been reinforced since 1990 by the corroborated through the broader range of non- banking services BISA provides to its clients- formation of a seines of enterprises designed to permits close tracking of borrower business provide additional financial services-though of a operations and a flexible response to borrower non-banking nature-to BISA clientele. These are needs. However, to maintain a high quality lending as follows: portfolio, prudence must be exercised with respect * RAISAAImacenes Internacionales, S.A. to the extent of indebtedness that may be contracted Established in December 1990, RAISA issues by SMEs. (These same concerns are reflected in the . ' ,> . . . . ~~~~warrants and warehouse receipts backed by operations of Banco Solidario, a specialized goods held in its own warehouses or those of a microenterprise lending institution initially spon- client. These documents may be accepted as sored by BISA and discussed later in this chapter.) collateral for short-term loans to clients by As illustrations of the lending support BISA BISA or other Bolivian banks. RAISA's provides to SMEs, four such enterprises were services consist of storage, custody and care of provide two SMEsc frs enterpis wer. e goods, of either national or foreign origin. Its visited, two of which are engaged in textiles clients include businesses in lumber, textile, production, one in pharmaceuticals and one flour h mill. In each instance, BISA had provided a loan to hydrocarbons, paper, faomeing and commerce. an ongoing operation, rather than supporting the By the end of 1994, its volume of business had grown to US$50 million. It is presently the creation of a new firm. In a couple of instances,lretnepisoftsyeinBiva technological innovations accompanied th largest enterprise of its type in Bolivia. technological innovations accompanied the investment operations; on occasion, financing may * BISA Seguros, S.A. Established in August also be provided for reconditioned machinery to be 1991, BISA Saguros is a general insurance imported.6 The lending operations have provided company, providing fire, automobile and other for the expansion of output capacity and employ- property and life insurance coverage. Paid-in ment, and the investment has characteristically premiums (net of cancellations) in 1994 involved training and upgrading of production worker skills and earnings. The liberalized trade amounted to US$8.4 million. Covering 15 percent of the national market, this is the 6 Bolivian SME managers and technical staff appear to pay close attention to maintenance of machinery and equip- ment, and one often sees machinery in operation that would have been discarded elsewhere. 7 second largest insurance and reinsurance firm * BISA Factoring. BISA Factoring was estab- in the country. lished in late 1994 as the first factoring business in Bolivia. This service is designed to * BISA Leasing S.A. Today the largest leasing provide additional options for improved asset firm in Bolivia, this enterprise was established management and liquidity to the participating in early 1993. It primarily provides leasing enterprises. While contracts for a total of US$4 services for vehicles (heavy transport and local million have so far been signed with eligible delivery), business/manufacturing plant and firms, sources of finance for BISA Leasing are real estate, and heavy equipment for agriculture still being developed. and construction. It has avoided the more volatile activities of leasing of consumer Expansion of Trade Finance durables, such as personal automobiles and computer equipment. Its services include The economic recovery program initiated in the advice to its clients on insurance, shipping, second half of the 1980s has also been character- transport and installation. It has actively sought ized by a rapid increase in the volumes of intema- to mobilize financial resources both domesti- tional trade. BISA has been active in expanding its cally and from abroad to support its operations, financial services in support of the growth in such and in 1994 it issued a US$700,000 three-year trade. Thus in 1993, the Bank had available from domestic bond issue for this purpose, while its abroad short term lines of trade credit for about shares are traded on the La Paz and Santa Cruz US$35 million. In late 1993 to early 1994, an effort stock exchanges. It presently accounts for was made to mobilize additional funds from foreign about two-thirds of the national leasing market- banks in order to satisfy the growing demand for It is important to recognize that such leasing trade finance from domestic producers and traders.7 services provide BISA clients with an impor- By the end of 1995, lines of credit from abroad for tant and attractive alternative to the more almost US$148 million had been established. This traditional term lending operations to support expansion in resources mobilized for short-term their capital goods financing needs. trade credits was accompanied by an improvement in the terms on which they were made available to * BISA Agente de Bolsa. While BISA had BISA, as the rate fell from LIBOR plus 2.25 originally been authorized in 1989 to operate as percent at the end of 1993 to LIBOR plus 1.8 an agent in the La Paz stock exchange, in mid- percent in 1994 and 1995. BISA also operates with 1994 it moved to establish an independent medium-term (3-5 years) credit lines with U.S. business enterprise to carry out stock market Eximbank, Hermes, COFACE, and the Spanish operations and services for its clients. Its export-import bank. These various lines are services include assistance in the issuing of presently about 70 percent utilized. stocks and bonds, listing of stocks on the La Paz and Santa Cruz exchanges, trading in Technological Innovations stocks and fixed income instruments on the two exchanges, and management of personal BISA has also been on the leading edge in Bolivian investment accounts. BISA Bolsa also manages banking circles in introducing technological the second largest mutual fund in Bolivia, with innovations to better serve its clientele and reduce about 900 clients and a current asset value of the cost thereto. During the period 1989-93, the about US$45.0 million. investments in hardware and software were about US$2.3 million, with further investments antici- 7 Concurrently, trade finance was removed from the business vice presidency and elevated to the level of a separate vice presidency. pated for other innovations. All branches and reliable financial services infrastructure which has agencies in La Paz, Cochabamba and Santa Cruz served both depositors and borrowers and under- are on line and clients can carry out transactions to pinned the recovery and growth of the Bolivian their accounts from any branch regardless of their economy in this decade. location. BISA has also installed a system of automatic teller machines (ATMs), located in Potholes Along the Road important commercial centers, which permit to Growth transactions in both local and foreign currency. Presently, there are 7 A.TMs in La Paz, 4 in Cochabamba, 6 in Santa Cruz and one each in It is clear that BISA has carried out a remarkable Sucre and Tarija. BISA has also taken the lead in metamorphosis from a small, traditional DFC introducing telephone banking and home banking relying primarily on external resources with a (through a computer and modem in the client's government guarantee, into one of the principal residence or place of business). To enhance its multiservice commercial banks in Bolivia. In part, operations in the provision of international banking the remarkable financial success of BISA is services, BISA was the first bank in Bolivia to reflected in the Tables 1-2 through 1-6 in the subscribe to the SWIFT (Society for Worldwide Appendix to this chapter. Therein we see the record Interbank Financial Telecommunications) system to of accomplishment in both the expansion of the permit a broader coverage for international finan- bank's balance sheet and the positive financial cial transactions beyond its regular correspondent returns which have accrued to the business as it has banks and reduce the costs of carrying out such sought to maintain sound banking practices in a services. Despite the demands of adequately vulnerable environment. Concurrently, the expan- servicing its existing clients, growing rapidly and sion into the provision of non-bank financial introducing such innovations, BISA has sought to services-outlined above-has further enhanced stress the efficiency of its staff, which now numbers the profitability of the BISA Group. about 300 throughout the country. While a number of the senior staff have worked in banks outside the This period of growth, however, has not been country. with few exceptions all are Bolivian without its considerable challenges and difficulties. nationals. BISA also maintains an active internal Restoring confidence of the public in the financial training program to maintain and upgrade the skills sector after the cataclysmic experiences of the mid- of staff at all levels. 1980s has been no small task. The most recent example relates to the series of adversities which In summary, the market leadership role played by the Bolivian banking sector has countenanced since BISA through its expansion into these new areas late 1994. At that time, two banks, Banco Sur and has broadened the range of both traditional banking Banco Cochabamba, were forced into liquidation. services and newer non-banking financial services These events more or less coincided with the available to the existing and new clientele of the Mexican financial crisis of late 1994, and there was BISA Group. It has also encouraged other commer- serious concern about a "tequila effect" spreading cial banks to follow suit in providing similar such to and endangering the Bolivian banking sector. services, thus broadening the range of choice of However, there appears to have been no serious bank clientele with respect to the variety of these ripple effect from the Mexican crisis on the services, emphasizing customer convenience, and Bolivian banking system as a whole. One notable encouraging the provision of these services at a result of the apprehension which arose from the competitive cost to the banking public. In carrying liquidation of the two banks in late 1994 was a out these activities, BISA has made important perceptible redistribution of deposits among the contributions to developing and enhancing the remaining Bolivian banks, as cautious depositors 9 moved their holdings into banks-such as BISA- A Unique Contribution: which were perceived to be safer.' BISA's Support to the Unfortunately. in mid- 1995 the continued vulner- D eve lo pm e n t of ability of some of the Bolivian banks again came to Microenterprise Financial the fore, when a third bank was pushed into a Services in Bolivia forced sale; subsequent revelations of the shaky financial state of that bank may lead to a govern- ment-sponsored rescue plan. Moreover, at the end The BISA Group has demonstrated a remarkable of 1995. it was estimated that about one-half of the capacity for innovation, as it has developed and country's banks were not able to meet the risk- delivered a broadening range of financial services weighted capital adequacy ratios foreseen under the to its clientele in the formal financial sector in BIS agreements, which the Superintendencia is Bolivia. On the other hand, the vast majority of phasing in.' (BISA was not among the banks cited small productive and commercial enterprises in as having such difficulties.) It may very likely be Bolivia have in the past not been served by the the case that in the period of rapid banking sector formal financial sector. There have been occasional growth in the first half of the 1990s, there was the programs to provide credit to small and medium phenomenon that "a rising tide raises all ships." It enterprises, often with bilateral agency funding, or appears that regulatory and supervisory responsi- through Non-governmental Organization (NGO) bilities and appropriate remedies may not have been programs. For example, BISA is providing loans of adequately exercised by the authorities at that time, up to US$20,000 for artisans and up to US$50,000 which otherwise would have identified the problem for small manufacturers through a fund provided by banks earlier. With the recent more vigorously the KfW. By and large, however, these individuals exercised banking supervision being introduced, and small businesses have had to resort to the additional latent problems may yet surface-albeit informal financial sector in order to obtain the so as to be addressed in a more timely manner. In financial services necessary for them to carry out order to address such contingencies. the govern- their business activities. The phenomenon of the ment has established the Fund for the Development informal financial sector in Bolivia has been well of the Financial System and Support of the Produc- studied.'' tive Sector. Several external agencies, including the World Bank, the Inter-American Bank and the As a partial response to this situation, in January Corporacion Andina de Fomento may provide 1992 the Banco Solidario, S.A. a commercial bank financial assistance to this fund. specializing in microenterprise credit commenced operations. This bank had evolved from a local NGO specializing in microenterprise credit, with strong support from several local businesses and financial institutions, the Inter-American Invest- BISA's domestic fixed term deposits grew from US$77.5 million at the end of 1993 to US$121.9 million at the end of 1994 (see Table 1-5 in the Appendix to this chapter). Oxford Analytica Latin American Daily Brief. December 22. 1995: "Botivia: Banking Woes." For a review of the BancoSol experience, one may consult Christen, Robert; Elisabeth Rhyne; Robert Vogel and Cressida McKean. Maximioting the Outreach of Microenterprise Finance: An Analysis oj Successful Micr rfinance Programs, USAID Program and Operations Assessment Report No. 10, July 1995. 10 ment Corporation and several foreign NGOs. By Group financial intermediary interventions of that June 1995, the Banco Solidario had 61,172 borrow- period. Broader questions of financial intermediary ers. Of its US$26 million portfolio in mid- 1995. 92 development were not a primary concern- percent was made up of loans of less than reflecting in part the adverse broader sectoral and US$ 10,000 to a total of 60.683 borrowers, with an macroeconomic policy environments which average loan size of US$457. The vast bulk of the prevailed. The project performance audit report lending (98 percent) was for service-sector (PPAR) on the Bank/IDA loans/credits in the 1970s, microenterprises. Thus the BancoSol was massively prepared by OED in 1985, is generally positive orienting its resources and services towards the about the performance of BISA under those two lower income groups engaged in microenterprise operations. Nevertheless. IFC's decision in 1988 to activities, who had not previously been considered sell its shares in BISA to the Leon Prado Group "bankable" and had little or no access to formal followed a long period of economic crisis in financial services. Loans are provided to groups of Bolivia during which BISA did not pay dividends three to eight (unrelated) persons, and there is due to poor portfolio performance, and it seemed mutual responsibility for loan repayment. unclear that BISA would be able to recover from its weak portfolio. It is appropriate to highlight the important seminal role that BISA and Mr. Julio Leon Prado. its The new BISA management, under the leadership president and principal stockholder (along with of the Leon Prado Group, performed remarkably several other Bolivian financial institutions) had in well in turning BISA around by the end of the the establishment and development of the Banco 1980s. ratifying the Corporation's decision in 1987 Solidario. Mr. Leon Prado was in the early 1990s to provide a US$10 million line of term credit to on the Board of Directors of PRODEM, an NGO BISA. In this new management environment, the out of which BancoSol evolved. BISA and two Corporation's decisions in 1990-91 to provide other local banks made initial capital contributions foreign currency swap lines to BISA represented a to the formation of BancoSol."' Mr Leon Prado is useful innovation. It supported BISA's efforts to currently also the President of BancoSol. mobilize additional foreign resources from a variety of sources, and provided an effective risk-hedging Assessing Development financial instrument to BISA which, because of Impact: IF C Support to country risk considerations, would not have normally been available from the market at a BISA reasonable cost. Furthermore, the "know-how" that would be acquired through the transaction would The Corporation's initial support to BISA began in contribute to the development of BISA's financial 1976, concurrent with the second IDA/Bank management capabilities. operation. On that occasion, the Corporation's line of credit (US$10 million) and US$0.55 million As the macroeconomic policy environment further equity investment were made within the context of improved in Bolivia, the Corporation observed the a classical DFC operation. and IFC was represented consolidation of BISA's financial performance on the BISA Board. In this initial operation, the under the leadership of the Leon Prado Group- focus of IFC institutional assistance was primarily including the efforts to broaden the variety of building the capacity of BISA in the areas of DFC financial services-both banking and non-bank- sub-loan appraisal and supervision and in portfolio ing-to a wider range of clientele. In such circum- management-an approach typical of World Bank stances, IFC undertook to provide the 1994 loan Subsequent to the passage of a recent banking law, which, inter alia, prohibited banks from owning other banks, BISA has divested itself of its shares in BancoSol. and equity contributions, in the process mobilizing banking sector during the last year and a half, the important contributions from both the CAF and the recent actions on the part of IFC and the other FMO. This operation represented the Corporation's external financiers who accompanied the lirst syndicated term loan to a Bolivian financial Corporation's initiative to support a soundly institution, and expanded BISA's commercial managed financial institution such as BISA were banking relationships abroad. In addition, this most very timely. In a situation such as Bolivia's. where recent operation includes several important finan- barely a decade ago there was essentially a "melt- cial covenants with respect to, e.g., risk-weighted down"- of the financial sector, the importance of capital adequacy ratios, management of arrears, such external expressions of confidence and support loan loss provisions, and avoidance of term of financial sector institutions cannot be underesti- mismatch in the management of assets and liabili- mated. These recent actions by IFC and others ties. The implementation of these covenants is coincided with a period of growing public appre- intended to reinforce the financial soundness of hension both in Bolivia and abroad in the sound- B31SA in the context of a more complex and ness of the Bolivian banking system, as the events sophisticated financial market environment described above unfolded. IFC support-accompa- necessary for the sustainable development of the nied by the support of the CAF and FMO-was Bolivian economy. widely interpreted as an important expression of external confidence in a major Bolivian bank, and But the Corporation's loans and investment in BISA was highly complementary to the external support have additional dimensions beyond representing a being provided by the Bretton Woods institutions sound use of IFC resources, making an important and bilateral donors to the Bolivian authorities' contribution to the broadening and deepening of economic reform efforts. financial markets in Bolivia. or endorsing the efforts of Bolivian banks to support the develop- ment of new modalities of financial services- including for previously "unbankable" groups. In the period of turmoil and concern in the Bolivian 12 APPENDIX Financial Data on BISA Table 1-2. Financial Results Summary for BISA, 1990-95 (US$000) 1990 1991 1992 1993 1994 1995 (est.) Assets 65,463 110,040 154,319 255,770 364,192 445,743 Liabilities 53,594 97,441 139,764 239,150 334,176 412,013 Equity 11,869 12,599 14,555 16,169 30,016 33,730 Net Income 1,304 1,165 2.780 2,879 4,113 4,657 Debt/Equity ratio 4.5 7.7 9.6 14.4 11.2 12.2 ROAA (percent) 2.1 1.3 2.1 2.8 1.3 1.1 ROAE (percent) 11 10 20 18 18 15 Sources: IFC Documents 1990-94; 1995 (est.) BISA. Table 1-3. BISA Loans Outstanding and Arrears, 1990-95 (US$000) Loans Percent Year outstanding arrears 1990 45,338 17.96 1991 78,216 4.90 1992 121,162 3.08 1993 202,162 2.15 1994 294,863 1.66 1995 (est.) 324,722 4.07 Source: BISA presentation 13 Table 1-4. BISA Deposits, 1990-95 (US$000) 1990 1991 1992 1993 1994 1995 (6 mo.) Amount 20,830 46,088 85,222 125,469 190,741 196,324 Distribution by term: Sight 6,906 11,265 18,690 32,801 47,495 51,332 Savings 2,876 6,091 10,253 13,733 18,025 19,842 < 90 days 7,703 25,774 37,060 34,388 35,133 25,748 91-180 days 157 1,868 10,787 21,125 35,567 33,007 181-360 days 5 951 7,278 2,836 3,923 4,875 >360 days - - 254 18,907 46,883 56,100 Other terms 3,183 939 901 1,680 3,715 5,420 Source: BISA Presentation Table 1-5. BISA Foreign and Domestic Resource Mobilization, 1990-95 (US$000) Foreign Domestic Fixed-term Year deposits Other 1990 24,925 10,987 9,843 1991 41,456 28,496 17,591 1992 39,115 55,564 29,657 1993 97,402 77,523 47,946 1994 125,040 121,982 88,759 1995 (6 mo.) 141,023 124,888 85,200 Source: BISA Presentation Table 1-6. Summary Statistics of the BISA Group, mid-1995 Securities Banking Warehousing Insurance Leasing Trading Factoring Date established Jul. 63 Dec. 90 Aug. 91 Jul. 93 Aug. 94 Nov. 94 Net Worth, US$000 June 1995 31,409 680 1,653 1,499 329 116 Approximate national market share, June 1995 10 percent 17 percent 19 percent 63 percent 12 percent 44 percent National ranking 2/14 3/7 2/28 1/5 3/15 2/2 Source: BISA Memoria Anual 1994 14 A R G E N T I N A 2. Aguas Argentinas by F. Jaspk l sci I n the early I990s, the government of Argentinia launched a privatization program which included the Buenos Aires water and sewerage systems. Aguas Argentinas, an international consortium in which IFC has invested, was set up to oper- N),] f ate a 30-year private concession; operations began in May 1993. Currenitly, it is the largest privately operated water concession in the world. Assisted in par-t by hroad-based assistance from the World Bank and IFC over an exrtended period, Aguas Argentinas has engineered an extraordinary turnaround of a state eniterprise in decay into an effi- cient, viable private company. The residents of Buenos Aires have been the main benefi- ciaries. For the first time, chronic water shortages have been elimizinated. Both the qualitv and quantity of potable water have been increased. Water tariffs paid by con- sumer-s have been cut. An ambitious capital expenditur-e program is being ca7ried out making it possible for the first time to extend water The state enterprise responsible for water supply and sewerage services to the poor with accompany- and sanitation in Buenos Aires up to 1993-Obras ing improvements in the environment and public Santitarias de la Nacion (OSN)-had many of the health. In addition to investing its own resources. weaknesses found in most Argentine government- IC has played an important catalytic role in owned companies. Problems of operational mobilizing resources for this venture through efficiency. weak commercial and financial manage- syndications which have attracted long-term ment. lack of funds, overstaffing and failure to finance. address important environmental issues comprise the key areas of OSN's poor performance. High T'h e Problem unaccounted-for water loss (about 45 percent compared to 10-20 percent in well-managed systems). the consequence of inadequate mainte- During much of the post-war period, Argentina nance, lax billing procedures and corruption experienced low growth in productivity and a adversely affected profitability and prevented secular decline in savings and investment associ-households as the ated with high rates of inflation and unsuccessful population of Buenos Aires expanded. attempts at stabilization. By 1990 national income per capita was 23 percent below that of 1977. Inadequate metering and billing not based on actual Unsatisfactory economic performance was linked to consumption resulted in extremely high. uneco- growth of government spending, including large nomic use of water (estimated at 500 liters per subsidies to finance distortionary sectoral invest- capita per day, double the nofn for iete-ed ment incentives and loss-making state enterprises. systems). Politically determined tariff increases that At its peak. the consolidated public sector, which failed to recover the cost of providing water added included well over 100 state enterprises, accounted to OSN'S financial problems. Hampered by a for close to 40 percent of the country's output. system in which state enterprises played an impor- Many state enterprises were overstaffed, inefficient, tant role in political patronage. enterprises fre- highly protected and dependent on massive quently filled technical positions with political financial transfers from the central government. appointees. For OSN this resulted in uneven Most had become highly politicized. By 1990 the technical management and a serious over-staffing combined operating deficits of the largest state problem that exacerbated the company's financial enterprises were over US$5 billion annually; problem. With a work force of 8,000, the ratio of federally owned public enterprises had accumulated employees per 1000 connections was 8. compared close to US$15 billion of external debt. to 2 to 3 for an efficient system. During this period, large, destabilizing public sector Where OSN expanded coverage, it favored water deficits ranging from 5 to 16 percent of GDP, of over sewerage connection and wastewater treatment which the state enterprises accounted for as much because this was the most effective way to increase as two-thirds. These were financed through the revenues. With a growing number of households inflation tax and through public sector borrowing not connected to the sewerage system and inad- which diverted savings from the private sector. equate investments in wastewater treatment. thereby crowding out private investment. Chronic pollution of v roundwater aquifers had become macroeconomic instability, rooted in the growing severe. As a consequence. groundwater contamina- financing needs of an increasingly bloated govern- tion in the greater Buenos Aires area that had been ment and state enterprise sector, could only be served by OSN had become the single most serious eliminated on a sustained basis by comprehensive pollution problem in Argentina. This was due to the reform of the public sector. health risk exposure for a large number of house- holds-mostly low income groups-that depend on groundwater from their own wells for their daily 16 needs and because of the irreversibility of much of public services and federally owned enterprises. the contamination. High concentrations of nitrates, Results exceeded expectations by a wide margin in bacteria and arsenic as well as the presence. in both the pace and extent of privatization, in the some locations, of heavy metals, posed serious amount of revenue generated. and in the improved health risks. performance of the economy. At the outset, how- ever, much of Argentina's population viewed By late 1994, only one wastewater treatment plant privatization with suspicion, especially where a existed for Buenos Aires. It processed 5 percent of natural monopoly was to be turned over to private the city's sewage flow before discharging it into a owners. From the beginning, the World Bank and river. The bulk of collected sewage was dumped IFC provided important support for this effort. without prior treatment into the River Plate. Their presence enhanced the transparency and Industrial sewage also was dumped into several credibility of the process, serving to widen interna- rivers and creeks across the metropolitan area that tional interest and increase competition in the eventually flowed into the River Plate, in some bidding process. Through its Public Enterprise cases upstream of the water intake. While most of Reform Adjustment and Execution loans, the Bank the raw sewage discharge was well downstream of provided support for public sector reform including the water intakes for the drinking water treatment divestiture of public enterprises, design of an plants. some backflow occured at high tide and appropriate regulatory framework and efficient under adverse wind conditions. Because of the regulatory institutions. The Bank played an enormous waste dilution and self-purification important role in providing technical analysis to the capacity of the river, indications were that under government regarding appropriate options for most conditions a minimal part of that sewage private sector involvement-a management currently reaches the water intake. contract, a lease, a build-operate-own-transfer (BOOT), joint ownership, outright sale or a The cumulative effect of these problems-opera- concession. tional, financial, institutional and environmental- ultimately resulted in unreliable service and IFC supported the privatization program through exposure of the population of Buenos Aires to informal discussions with those involved in the avoidable and unacceptable health hazards. process regarding the market experience with Numerous attempts by the government and the privatization in other countries. Most importantly, it international development agencies. including the facilitated the transition to private sector participa- World Bank, to overcome these problems failed. tion in areas that previously had been the exclusive This record of weak performance and mismanage- domain of the public sector in Argentina. It did this ment and the need to find resources to carry out the by helping a number of the newly privatized backlog of investments required to reverse the companies to gain access to international capital system's widespread deterioration and provide markets (and by indicating that prior to the start of service to Buenos Aires's growing population, the bidding process it would do so), thereby forced the authorities to seek alternative ways of providing them with the resources to carry out dealing with the problem. required capital expansion programs. More recently IFC has tried to ensure future financing for these The Solution: Bringing in companies' long-term investments by attempting to t h e P r i v at e Sector diversify and expand their potential investor base to include non-traditional long-term investors such as insurance companies and pension funds. In 1989 the Argentine government launched a program of radical restructuring and liberalization Synergy between IFC and the World Bank has been of the economy. At its core was a massive strong. The Bank's knowledge of the privatization privatization program that included virtually all process and of the problems left behind by OSN 17 helped the Corporation understand better what such investments are considerable. As a conse- would be needed to create a viable private com- quence, socioeconomic benefits of extending pany. IFC's first-hand knowledge of privatization coverage may exceed the financial returns that and its transactions experience provided important accrue to private investors. Because of the long information to the World Bank's ongoing policy record of poor performance of OSN and recent dialogue, thereby strengthening the reform process. positive experiences in some industrial countries- And by helping to mobilize external resources, IFC which indicate that the benefits of private sector influenced the pace of reform by speeding up participation in providing water and sewerage privatization and supporting the newly formed service can be substantial-the Argentine govern- company's efforts to carry out ambitious and, in a ment attached high priority to privatizing delivery number of cases, long-overdue investment pro- of water and sanitation services as early in the grams. reform process as possible. Privatization was seen as a way of placing former To reduce political opposition to privatization of state enterprises on a sound operational and OSN and to avoid the financial and political financial footing by removing them from the problems some countries had encountered in political arena and by strengthening corporate valuing the assets to be privatized, the government governance. Efficiency gains achieved through decided to forego selling the assets outright and privatization may be sufficiently large as to make instead opted for a 30-year concession. Such an the newly created private company self-sustaining approach helped to strengthen competition in the financially, including payment for the higher capital bidding process by lowering the cost of entry. In costs associated with expanded service. Infrastruc- addition, concessions provide an incentive for the ture was seen as a particularly promising area for operator to seek least-cost output and investment privatization. Operating efficiency was generally decisions because the private operator's profits low and enormous financing was needed to rebuild depend upon recovering both recurrent and capital and expand infrastructure assets that had deterio- costs. A drawback of concessions is that the rated to the point where they had a serious adverse operator has little incentive to invest its own imnpact on social welfare and constrained economic resources in the improvement and expansion of growth. In the case of water and sanitation services, assets since their ownership resides with the state. the situation had become especially precarious. A key challenge in converting OSN into a private Privatiz i ng Delivery of company was to strike the appropriate balance W a t e r a n d S a n i t a t i o n between the need to ( 1) set tariffs at a sufficiently high level so as to provide an adequate incentive for Services: The Concession undertaking investments (estimated by Aguas at US$4 billion) needed to expand coverage, (2) Studies quantifying the impact of infrastructure improve quality of service, and (3) reduce pollu- investments on economic growth show that such tion, while at the same time maximizing consumer investments have high returns. However, because surplus. To achieve this, the government decided water and sewerage systems are capital intensive, that the concession would be awarded on the basis the payback period is long, and because they of the tariff level alone with a commitment to constitute a natural monopoly, they generally have implement an agreed upon capital investment not attracted private capital. For this reason and program within predetermined periods. The because they constitute a natural monopoly. they winning bid was submitted by the Aguas Argentinas generally have been managed by state enterprises in consortium led by Lyonnaise des Eaux, a major most Latin American countries since the 1930s. French water operator, and six other companies Moreover, because of important public health and including a Spanish water operator, Aguas de environmental effects, externalities associated with Barcelona, Sociedad Commercial del Plata S.A. and 18 several other Argentine companies. It committed to The second project covering a portion of the capital a 27 percent reduction in the existing tariff and a $4 expenditure program through for the next two years billion investment plan. included: The capital investment program contained in the * A US$40 million "A" loan concession contract calls for renewal of the distribution systems for drinking water and the * A "B" loan for US$173 million. collection system for sewerage, construction of new production and distribution facilities that will make A third project was approved in June 1996 that expansion of the systems possible and provision of includes: secondary wastewater treatment to reduce pollution in the receiving waters and the environment in * Up to a US$15 million "A'" loan general. By the end of the 30-year concession period, drinking water distribution is to be extended * Syndication aimed at introducing non- to 100 percent of the households in the greater traditional institutional investors to the IFC Buenos Aires area. Connection to the sewerage "B" loan program that would raise up to an system is to cover 90 percent of households. additional US$65 million in the United States. Operation of the concession began in May 1993. IFC's Role: Establishing IFC's Investments in Aguas Credibility as a Catalyst Argentinas for Long-term Finance IFC has participated in three projects with Aguas At the time that IFC first invested in Aguas Argentinas covering the company's capital invest- Argentinas, there was little experience in develop- ment programs for 1993-95 and July 1 995-June ing countries through private sector involvement in 1997. These projects, covering capital expenditures large municipal water and sewerage systems. of US$329 million and US$582 million, respec- Participation of the private sector in a concession in tively. include essential repairs and acquisition of a developing country was a new and untested idea. equipment necessary for improving operations. Moreover, there was virtually no precedent for a They have also included new pump capacity, private company operatinog in such an environment improvements to the drinking water filtration plant raising substantial resources in international capital and expansion of the sewerage system. markets. Because of its size and innovative fea- tures, the Buenos Aires concession was monitored IFC's financial support of investment in the first closely from the outset by developing country project comprised: governments, by private sector investors and by private operating companies. For IFC it represented * A direct investment of US$7 million for 5 the first investment in a private water concession. percent of Aguas Argentinas common equity Specifically, IFC's contribution was lo help define the project's financial structure, to add transparency e " A" and 'C" loans of US$25 million and and credibility to the resource mobilization process, US$13 million, respectively and, through enhianced credibility, play a catalytic role in attracting other participants. It did this by: * A "B" loan of US$134.5 million raised through syndicationi. * Structuring the security package and financial plan so that it would be financeable. 19 * Providing loan finance for its own account on a maintained and unreliable drinking water network. sufficiently long tenor to balance project needs During periods of peak demand, including most of with the shorter terrn loan conditions available the summer, pressure was inadequate to maintain in the market. By doing this. IFC enhanced service throughout the day. To ensure water service the credibility of the financing plan, thereby throughout the day, higher income consumers increasing the potential for mobilization of constructed storage tanks in which water would resources from other investors. accumulate throughout the night. Three million inhabitants not connected to the system relied upon * Taking an equity position, which helped IFC wells, many of which were contaminated. Water mitigate the risk associated with a project that supplied by the system was frequently substandard. depends for its success on a consistent regula- tory environment and continued access to OSN's financial performance had been poor. In the external private finance. latest year for which OSN prepared a financial statement (1991), its billings of US$290 million At the time IFC became involved in the project. only covered operating costs. Negligible investment market financing for this sort of venture in a was being carried out by OSN and it had little debt. developing country had not been undertaken. Delinquent accounts averaged 15 percent for Success of the concession depended heavily on households; for state enterprises it was 50 percent; raising resources from private international inves- a number of the latter were not billed at all. tors. Prior to IFC's second project with Aguas Argentinas and as a result of the Mexican crisis, Aguas Argentinas has improved both operational market sentiment went against Argentina, making it and financial performance dramatically. Its first extremely difficult for private Argentine firms to step was to implement an emergency investment raise financing abroad. Because of the newness of program focusing on urgent repairs and rehabilita- this type of venture and the subsequent adverse tion throughout the system. Aguas also carried out market sentiment, IFC's presence was essential. important productivity-enhancing investment in Without it, market financing on appropriate terms equipment, meters and design work for infrastruc- and of the magnitude required is unlikely to have ture expansion. In addition, major investments were been forthcoming. And without this financing, it made in rehabilitation of water treatment plants to would have been difficult for the government to upgrade them to design volumes and to enable the simultaneously achieve its reform objectives of system to meet standards set by the World Health privatizing water and sanitation services and Organization. This program has now largely been eliminating all government subsidies and guaran- completed and Aguas has begun to implement the tees in the provision of such services. By taking on remainder of its first five-year capital investment the project, IFC introduced financing for this program. purpose to the market. Simultaneously, Aguas set out to rationalize its T h e S u cc e s s f u I operations in order to increase efficiency. reduce Turnaround: Establishing a expenditures and increase revenue. Results have been outstanding. From a loss of US$23 million in Viable Private Company 1993 (the result of inheriting a badly deteriorated system from OSN, low revenue and heavy start-up Since its inception Aguas Argentinas has made costs including US$12 million of amortization impressive progress in strengthening the operating payments on the govemment/Aguas-funded efficiency and finances of the company it inherited voluntary retirement program), the company was in 1993. Service provided by OSN was deficient. generating a profit by the third quarter of 1994. Its Only 70 percent of the households living in the profit for the year was US$25 million. In 1995 concession area were connected to the poorly profits more than doubled to US$54 million 20 (detailed financial data for the company are 2. Decreased clandestine connections (nearly presented in the Appendix). Based on this strong 100.000 were identified) to focus on large improvement in financial performance, Aguas commercial users Argentinas has managed to supplement the cash generated by its own operations with substantial 3. Increased its billing collection rate from 83 external borrowing. This has permitted it to percent in 1993 to 96 percent in 1995 implement the capital expansion program to which it is contractually committed. Thus, in just three 4. Increased billing based on meters from 31.000 years since it took over the Buenos Aires system. customers in 1993 to over 150,000 in 1995 Aguas Argentinas has achieved key objectives: to increase its operating efficiency and financial 5. Received a 13.5 percent increase in its average performance making it possible to operate the city's tariff based on the government's request to water and sewerage systems, and finance expansion increase specific capital expenditures and to outlays without direct cash subsidies or guarantees accelerate closure of OSN's wells at serious from the government. risk of contamination. On the expenditure side Aguas did this by imple- As a result. Aguas almost doubled its billings while menting an expense control system designed to keeping the average tariff 17 percent below that of closely monitor an(d control procurement and cash OSN. flow. Savings were achieved through: One of the most serious challenges faced by Aguas I . A 1 0 percent reduction in energy costs through was to deal with the human resource problem it equipment replacement inherited from OSN. While OSN had at one time a well-trained technical staff, skills had eroded 2. Introduction of a centrally controlled procure- seriously in recent years as real wages fell. There ment system that lowered costs by increasing was growing frustration among staff within the competition among suppliers institution over its inability to carry out needed maintenance to prevent the system from falling into 3. A shift to a tighter inventory control procedure disrepair and capital expansion required to meet the which increased inventory turnover and needs of the city's rapidly expanding population. To reduced working capital requirements develop a corporate culture of commitment to quality. service and performance, it was necessary 4. Renegotiation of contracts for the purchase of to motivate and train staff remaining with Aguas. chemicals used in water treatment, which To achieve this the government introduced a resulted in savings of US$13 million annually. program of employee participation in the company's equity. The employee participation rate In addition, the serious overstaffing problem Aguas is 95 percent. In addition. Aguas has carried out a would have inherited from OSN was dealt with massive training program and real wages have through an Aguas/government-financed voluntary increased substantially since operation of the early retirement program. As a consequence, the concession began. work force was reduced by almost 50 percent. To increase revenues Aguas: Project Impact I . Updated its customer data base, thereby The role of infrastructure in development has long improving the basis for applying tariffs been recognized as substantial and generally greater than investment in other forms of capital. Infra- structure not only generates consumer welfare, but 21 it creates new investment opportunities, reduces percent. This will require an estimated US$4.1 production costs and can have an important impact billion of investment, of which US$1.2 billion is to on the environment. The following economic and be done in the first 5 years. social benefits have been generated by the project. Potable water quality has been improved in Buenos Aires as a consequence of better chemical products used in production of potable water and improve- The most immediate benefits of privatization were ments in the water treatment process itself. Treat- improvements in the welfare of consumers of water ment of wastewater has also improved owing to and sanitation services. At that time the average operation of secondary filters that had been water tariff was reduced by 27 percent with a installed by OSN but never operated. Customer corresponding increase in consumer welfare. relations also appear to have improved as a result of Subsequently, improved management, rationaliza- quicker response to complaints. While the number tion of the company's labor force and investments of complaints for broken pipes is still high, average carried out by Aguas Argentinas have reduced costs response time is down from 180 to 48 hours. and increased both the quantity and quality of potable water produced for Buenos Aires (see Table For more than a decade prior to the concession, 2-1). In accordance with the concession agreement water shortages occurred throughout Buenos Aires the water tariff was subsequently raised by 13.5 during the peak demand of summer Surveys of percent to cover, among other things, costs associ- household response for dealing with unreliable ated with immediate closure of endangered wells water supply reveal that almost all households cope (and connection of households that had relied on by establishing an alternative supply including these wells to the network) that had not been installation of storage tanks and supplemental envisaged in the original agreement. At present the pumps and use of wells, public taps, rivers and tariff remains well below that prevailing in early street vendors. Costs are relatively high. And they 1993 in nominal terms. are regressive since low income households generally spend a higher proportion (an average of Since taking over the Buenos Aires system, Aguas 5 percent) of their income dealing with this has increased water production substantially and problerm. Since the beginning of the concession and added over half a million new consumers (see Table for the first time in many years, Buenos Aires has 2-1 and Figures 2-1 and 2-2). This has been not experienced water shortages. This was the result achieved by extending and rehabilitating the of increasing production of potable water, of existing network, and by increasing treatment improving the efficiency of the pumping system capacity. Aguas has increased sewage service and of reducing water losses in the system. As a substantially by adding to the existing wastewater consequence, consumer outlays on alternative system and by rehabilitating critical portions of the sources of water have been sharply reduced. system. It has incorporated into the concession area the Municipality of Quilmes (a low-income neighborhood in southern Buenos Aires). This will add an additional 1500 km to the existing water Argentina has more environmental pollution than network and extend service to an additional most countries of comparable development. 540,000 consumers. The original concession Groundwater contamination in urban areas is one of contract (excluding Quilmes) calls for I million the most severe pollution problems the country inhabitants to be added to both the water supply and faces. This results from the long-standing deficit in sewerage systems every five years for the next sanitary and wastewater treatment infrastructure. fifteen years. By the end of the 30-year concession Given the large number of people affected (a large period, coverage in water supply would be 100 proportion of households in greater Buenos Aires 22 Table 2-1. Buenos Aires Water and Sanitation System: Indicators of Operational Progress INDICATOR DEFINITION to Dec. 1993 to Dec. 1994 to Dec. 1995 (8 months) (incl. Quilmes) 1. WATER SYSTEM Number of Connections Water (Units) 1,170,000 1.200,000 4,900,000 Average Production km3/month) 108,950,000 117,500.000 113,300,000 Storage Volume (m3) 1,456,150 1,456,150 4,456,150 Treatment Capacity (m3/day) 3,640,000 4,550,000 4,600.000 Length of Water Pipe System Kms. 11,000 11,324 13,300 Total Population No. of People 8,580,000 8,650,000 9,300,000 Served Population No. of People 6.000,000 6,200,000 7,022,000 Water Consumption (Lts. per cap./day) 620 644 550 Water Availability (Avg. hours p/day) 24 24 24 Water Rationing (% of Pop. rationed) 0 0 0 Consumer Complaints per Year (Units) 40.900 71,800 90,200 Number of Meters (Units) 83.588 130,783 173,496 Meters Repaired and Installed Annually (Units) 10,966 55,728 55,000 2. SEWERAGE SYSTEM Number of Connections Sewerage (Units) 700,000 732,000 800,000 Served Population No. of People 4,700,000 4,950,000 5,800,000 Volume Collected (m3/month) 82,232.000 84.012,000 74.635,000 Volume Treated (m3/month) 3,413,000 3,546,000 3,733,000 Primary Treatment (m3/month) 3,413,000 3,546,000 3,753.000 Secondary Treatment (m3/month) 3,413,000 3,546,000 3,753.630 Volume Consumed (Lts. per cap./day) 460 462 480 3. PERSONNEL Number of Staff No. of People 3,723 3,880 4,251 Management No. of People 83 118 140 Professional No. of People 241 307 303 Clerical No. of People 986 1,030 1,100 Operative No. of People 2,413 2,424 2.709 use groundwater to meet their daily needs) and the drinking water. Main sources of contamination are low potable water and sewerage coveraage in the septic tanks and. to a lesser extent, industrial outer municipalities, greater Buenos Aires presents effluents. Because of this, the most effective means the greatest pollution problems in the country since of dealing with the problem is to extend water a large share of the population uses contaminated supply and sewerage services to the outer. low- 23 Figure 2-1. Aguas: Rehabilitiation of the Sewage Network (Km) 4500 - 4000 - 3500 - 3000 - 2500 - 2000 - 1500 - 1000 500- O _ , , May-93 Jan-94 Jan-95 Dec-95 Source: Aguas Argentinas Figure 2-2. Aguas: Rehabilitation of the Water Network (Km) 600 - 500- 400 - 300 200 - 100 May-93 Nov-93 Jan-94 Jan-95 Dec-95 Source: Aguas Argentinas .ncome areas of Buenos Aires as envisaged in the losses. Such health problems are widespread in concession's Master Plan. Substantial progress in Argentina, but are highly concentrated among the carrying this out has already been achieved. poor. Parasitic infections and malnutrition of the young caused by exposure to contaminated w\aste and drinking water. the two most important problems, are typical diseases of poverty. Their Costs linked to contaminated drinking water persistence in an upper-middle income country is include health damages and associated productivity an indication of the extent to which investnents in 24 the water and sewerage systems in Buenos Aires this category). And although the poor potentially had lagged. Gastrointestinal diseases are far and are to be major beneficiaries of the investments to away the most important single problem, account- be carried out under the concession agreement, ing for 53 percent of health problems. existing incentives favor expansion of service to those with the ability to pay. An issue yet to be Lack of access to safe water in Argentina is resolved is the extent to which the poor are to be estimated to cause 77,541 episodes of diarrhea and included as beneficiaries of future investments. To 111 deaths per year, over half of which are in deal effectively with this it may be necessary for the greater Buenos Aires. Based on studies carried out concession contract to be clarified with regard to in a number of countries, the median reduction in extending services to low-income consumers that diarrhea morbidity is 27 percent and in diarrhea are not yet served. This may require that incentives mortality is 41 percent following the introduction be put in place which would permit the private of sanitation infrastructure. Using the human operator to extend service to those with limited capital valuation method of estimating the annual payment capacity: if necessary, explicit lump-sum economic cost of morbidity and mortality for that subsidies to support low-income consumers may share of the population not covered by potable have to be considered. Evidence to date suggests water and sewerage infrastructure countrywide that this problem will be dealt with effectively in a indicates losses of over US$70 million annually. way that maintains appropriate investment incen- While these figures are very rough estimates, they tives for the private operator while achieving illustrate the possible order of magnitude of broader societal goals. potential health benefits associated with invest- ments to be carried out under the Buenos Aires Lin. t o concession. E a 4. , to the P The sharp increase in the pace of investment in rehabilitation and extension of water and sewerage The outlying areas of greater Buenos Aires-to the infrastructure in the greater Buenos Aires area has south, west, and northwest of the city-have the had an expansionary effect on the local economy. It highest concentration of low-income households. It has resulted in additional sales by local firms, is in these areas that water and sewerage services additional investment by these firms, and additional are most deficient. In the municipality of Moron to employment. Aguas Argentinas estimates that the northwest, for example, only 30 percent of 15,000 new jobs have been created outside of the households were provided with water, and only 25 company since it took over from OSN as a result of percent are connected to the sewage collection the privatization. It is believed that these jobs have system. By the end of the 30-year concession been generated in the execution of the civil works period, water service coverage is to reach 100 as well as in Aguas' local suppliers. Production of percent. Investments aimed at extending service are pipes has risen as a consequence of purchases from being carried out in these areas. Civil works have Oblak, a local company. It has also resulted in a already begun in a number of these areas. In US$10 million investment in development and Moron, for example, water coverage has already adoption of new technology by Oblak. Increased been increased to 41 percent. In the sixth year of purchases by Aguas from Meranol, a local producer the concession it will reach 70 percent. of chemical products, permitted the company to invest US$5 million to modemize their plant, to Although ability to pay for water and sewerage improve the quality of their product and to reduce services is not a constraint for those above the costs. Quimica del Norte, a local producer of poverty line, evidence indicates that it is for those chlorine and main supplier of the Buenos Aires classified as poor (one-third of the population of water treatment plants, has signed an US$8 million greater Buenos Aires not covered by services are in contract with Aguas. This has permitted it to make 25 large investments to renovate its plant and to adopt project's success has helped to ensure the newer technology. sustainability of this strategic reform. Human Resource Development Institutional Innovation: The Demonstration Effect Within the company Aguas is making a major investment in human resources. Training is being As noted earlier, there was little precedent in provided to the company's employees at all levels developing countries through private sector involve- (115,000 hours of training per year are being ment in the provision of this important public provided). Almost all of this training is to Argentine service. Because of its size and innovative features, employees; expatriates represent less than 1 percent the performance of the project has been and of the company's workforce. As training of local continues to be closely monitored. While it is too staff is completed, the company is increasingly soon to reach a definitive judgment about the shifting responsibilities to them. The announced project's success, there is strong evidence that it policy of the company is that many of the expatriate will be successful and that its development impact staff that leave the company will be replaced by will be great. Over 25 developing countries in Latin local staff. Within the company, Aguas has reduced America, Africa, Eastern Europe and Asia are its employee headcount by 4,000. To compensate its currently studying the Argentine model to determine labor force for the productivity gains that have been whether it would fit their own circumstances. achieved through its investments, improved Preliminary evidence suggests that several will management and the training of local staff, average choose this alternative. wages have increased 43 percent since the company took over. Rationalizing Government During most of the post-war period Argentine development has been hampered by severe macro- economic and financial instability caused in large part by a bloated, ineffective and financially weak public sector. Loss-making state enterprises, many of which were overstaffed, poorly managed, highly protected, inefficient and dependent on large subsidies from the central government for their survival, bear much of the responsibility for this situation. Allocation of financial resources operated through a perverse system of incentives that rewarded the most poorly run state enterprises with the largest financial need with the largest subsidies. Infrastructure, which was entirely owned, managed and financed by the government, deteriorated severely under this system. Government was poorly suited to the roles assigned to it. This project, part of a larger effort to rationalize the public sector by privatizing state enterprises on a massive scale and to shift the government from operator to regulator, has played an important role in this process. The 26 APPENDIX Financial and Operating Performance of Aguas Following is a description of Aguas' operating performance and 3 years of financial projec- tions. Income Statement (USUS$ million) Audited (Year Ending Dec. 31) 1993* 1994 1995 Net Revenues 163 291 361 Net Income (Loss) (23) 25 54 Long-term DSCR n/a 5.0 4.4 Balance Sheet (USUS$ million) Audited (Year Ending Dec. 31) 1993* 1994 1995 Current Assets 107 124 106 Net Fixed Assets 99 245 479 Total Assets 206 369 58 Total Long-term Debt 0 123 173 Shareholders' Equity 95 126 186 Long-term Debt:/Equity Ratio 0:100 49:51 48:52 * 1993 was an 8-month year. The year-end financial results for 1993 (an 8-month year) showed a loss, largely reflecting start-up costs. By the second quarter of 1994 Aguas was generating a positive cashflow. and for 1995 Aguas recorded a net income of US$54 million. 27 B E N I N 3. Bank of Africa-Benin by G. Pfeffer-manni Benin is a west African country of 5 DB million people with a GDP per capita of about US$430. The economy is highly tg open and stronglv dependent on primary and tertiary activities. The primary sector '4e. provides the largest export commodity. cotton. A large tertiary sector dominated by commerce accounts for onie-half the couintry's GDP, and its dynamic re-export \ _-;. activities accountfor two-thirds of export -rc 1 enuic '. In contrast, the industr-ial sector is small (about 13 percent of GDP). In a 1972 coup detat a milita-y government took over Benlin, bringing the bulk of the formal economy under state control. All financial institutions were nationalized, as were nmany private coinn c Cial and industrial enterprises; and many public enterprises were created. Collective farinil , was encouraged, state farms were established with East Bloc help, restrictions were placed on the marketing of food crops and the commercial banks were under liquidation and the marketing of export crops was entrusted to state only existing insurance company was technically monopolies. insolvent. One of the most urgent needs was to establish safe channels to transfer money from Although the impact of these policies on growth Beninese workers abroad to their families at home, was initially favorable, the end of the boom in another was to restore normal import financing. The neighboring countries and the completion of major World Bank supported the diagnosis, audits and public sector projects in Benin revealed an eco- strategy for closure of the state-owned banks nomic structure saddled with poorly designed, low- through a public enterprise reform credit and return investments; heavy external debt service; a technical assistance. Financial reform was sup- large part of the productive economy without ported by two structural adjustment credits and adequate incentives; and a state-dominated modem economic and sector advice. sector suffering losses. The banking system was virtually bankrupt because of corruption, misman- The supply response to policy improvements agement and loans made to the public sector. In depends crucially on microeconomic initiatives, and 1987 the severity of the economic and financial this is where IFC entered the broader World Bank crisis was evident in the collapse of the banking strategy. Initially, the need to attract private banks system. In early 1989 the three state-owned almost at any cost in order to restore a minimal commercial banks became illiquid. financial infrastructure led the government to grant an operating license to an establishment which The military government was subsequently brought performed limited services and made no loans. A down by a series of strikes. In December 1989 the second bank, Bank of Africa-Benin (BOAB), was country's president called a watershed conference incorporated in 1989 when development policies which ushered in multi-party democracy. After a began their shift away from state control. new constitution was approved in December 1990, elections were held in early 1991: the winner was Bank of Africa-Benin and Nicephore Soglo, a former World Bank executive I F C S u pport director. Starting in early 1990, the government embarked on a vigorous structural adjustment program supported by the International Monetary The Bank of Africa-Benin (BOAB) was the second Fund (IMF) and the World Bank. Its strategy private bank to be established in Benin in the wake centered on rationalizing the role of the state. of the economic and financial debacle. Since then improving the fiscal position, containing inflation- several other private banks have opened in Benin ary pressures, and restoring production incentives. and the financial situation has improved steadily. BOAB is majority-owned by Beninese private The results have been encouraging. GDP growth sector investors, including well-established busi- has averaged 4 percent during 1990-95. far in ness people. It has become the largest commercial excess of Africa's average. Figures for cotton, bank in Benin. Proparco, a subsidiary of the French textiles. oil palm products, groundnuts and pine- Caisse Fran,aise de Developpement in charge of apples have improved. Raw cotton production the private sector. is one of the foreign equity increased from 109,000 tons in 1988-89 to more holders. IFC took a 5 percent stake in BOAB than 250,000 tons in 1993-94. Recovery of tradable (1993) which it maintained by exercising preemp- production was further encouraged by the 50 tive rights in 1995 (both Africa Enterprise Fund percent devaluation of the CFA franc in 1994. The investments). structure of the economy is much sounder now than it w as under the previous regime. BOAB's founder and manager, already a banker in Mali, saw the opportunities and the risks afforded After the state-owned banks were liquidated. not a by a virtual institutional vacuum and created BOAB single financial institution operated in Benin; all in the expectation that some of the deposits made 30 abroad by Beninese households and firms would 2. Contributed to BOABWs capital increase welcome a local commercial bank. The bet paid off and deposits increased rapidly. BOAB focused on 3. Supported BOAB's regional expansion. the most immediate needs: to establish a financial institution that could handle money safely, transfer BOAB is very much one entrepreneur's child- funds locally and abroad (a most important function BOAB's managing director. Even though increas- to the many Beninese workers in France and their ingly sophisticated management systems were families back home), handle deposits and transact introduced as BOAB expanded and diversified its letters of credit. The latter is particularly crucial in activities, to this day the success of the bank an economy where services and transit operations depends largely on his personal experience and are very important. entrepreneurship. Likewise, BOAB's regional and institution-building strategies are essentially one The bank's loan operations have increased rapidly man's brainchild. The need for an outstanding in recent years, including term credit drawing on individual who possesses the vision, the technical lines from Proparco, FMO (of the Netherlands) and and managerial skills and will necessary to take the Banque Ouest-Africaine de Developpement such risks undoubtedly limits the replicability of (BOAD). BOAB's market share is 40 percent of BOAB. banking assets in Benin. BOAB has been profitable ever since its establishment. Development Impact From 1990 to 1995, the asset structure shifted from a dominance of liquid assets to the emergence of IFC's impact on Benin's economic and social loans and investments-from 3 percent of total development, by virtue of its stake in BOAB and its assets in 1990 to 25 percent in 1994 and to 52 support for the institution, centers on six areas: percent in 1995. The Bank made a strategic decision to increase its lending to the growth * Mobilizing local savings sectors of the economy. As a result, loans grew by 40 percent in 1995 to CFA 18 billion up from * Modernizing banking CFAI 3 billion in 1994. At the same time, BOAB has significantly reduced its deposits at the Central * Building new institutions Bank from 85 percent of BOAB's total assets in 1990 to 43 percent in 1994 and then to 9 percent in * Supporting privatization 1995. * Supporting exports The breakdown of deposits since the beginning of operations in 1990 has been characterized by a * Supporting small and medium enterprises. faster growth of short-term over longer term deposits (even though this trend tapered off BOAB's long-term strategy. which underlies much somewhat in 1995) and the increasing replacement of this development impact, rests on the premise of public institution deposits by private sector ones. that in a small economy where large firms are few, BOAB is currently developing its medium- to long- banking expansion must depend on small and term refinancing medium local businesses, and creating new finan- cial institutions in neighboring countries. The IFC's role in BOAB itself has centered on three bedrock of BOAB's development is its credibility areas. Making active use of its Board position, IFC as a long-haul player, which results from its has: combining efficient modern banking services with Beninese shareholdership of over 600 persons I . Given moral support to management against (representing initially 65 percent of capital). Local unsound loans and helped strengthen credit shareholders include business people who help screening procedures promote the bank's activities. 31 Mobilizing savings was BOAB's first objective at serving Benin's market, establishing the country's a time when no credible financial institution first leasing company (Equibail) in 1994; this existed in Benin. This objective was achieved to company started operations in 1995. In 1993 IFC the point where deposits represent 85 percent of had conducted a study of the zone's regulatory liabilities. Indeed, in common with other Union framework and had helped to identify a technical Economique et Monetaire Ouest-Africaine partner for Equibail. Most recently, BOAB. again (tJEMOA) banks, BOAB is now experiencing with IFC's support, invested as a minority share- excess liquidity, largely a result of the regional holder in Benin's first private life insurance central bank's capital flow restrictions out of the company (Union B6ninoise d'Assurances-Vie). zone. BOAB offers a broad range of savings BOAB was also the first in Benin to underwrite instruments. The number of individual savings CFA-denominated corporate debentures, which accounts exceeds 21,000. The volume of indi- were placed in Niger and in Mali. vidual savings is sensitive to interest rate changes governed by the regional central bank. That Along a second institution-building line, BOAB has volume rose steadily before flattening out in increased its regional reach. BOAB recently 1995. BOAB has had an influence in causing subscribed to shares, with IFC participation, in a competing banks to open small savings accounts. bank in C6te d'lvoire (BOA-Cl) as well as a regional venture capital company (Cauris) based in In an environment where modem, efficient Togo. banking services recently did not exist, BOAB is expanding its services. This includes branches in BOAB also is supporting the government's Parakou. Porto Novo (Benin's second-largest privatization efforts. Benin's major beer and soft city), and (most recently) in Bohicon, all inter- drinks producer, La Beninoise, which had experi- connected with the bank's electronic information enced serious production and quality problems, was management system. BOAB also invested in privatized in 1992 and is now named Sobebra. Benin's first ATMs and its first system of plastic BOAB participated in a package including asset banking identity cards. BOAB also offers a good purchase and financial restructuring. As noted. correspondent bank network in Europe and the following the 1994 devaluation, BOAB underwrote U.S.A. It has expanded term lending (2-7 years. Benin's first corporate debenture issue for Sobebra. mostly 3-5 years) which now accounts for about one-third of the loan portfolio. Some 90 percent There are other institution-building aspects. For of term loans are being financed out of savings example, BOAB is financing exporting companies, deposits and the bank's own resources, and the notably in the cotton sector, by far Benin's major balance out of aid programs. BOAB's develop- formal foreign exchange earner. This support ment impact includes a spur to competition as it focuses on the activities of Sonapra, the state encourages other banks to improve their services. company which buys, processes and markets BOAB has been training its growing staff (175, cotton. BOAB also helps to finance newly permit- including 2 permanent expatriates and 3 foreign ted private cotton ginning plants and is participating consultants engaged mainly in training activities) in the financial restructuring of COTEB, Benin's internally as well as by means of external courses major textile plant, which employs 550 in the and seminars, hence transferring technology and provincial town of Parakou, moving the enterprise human capital to Benin: none of the local staff toward majority private ownership. Cotton output has left so far. increased from a low of 14.000 tons during the 1970s to about 330,000 tons expected this year. The introduction of a modern efficient bank is BOAB also extends credit to Benin's expanding itself a major institution-building achievement. pineapple export business. Having established a credible base, BOAB, with IFC's support. innovated along two lines. First. it BOAB pioneered the expansion of a Beninese diversified the range of financial institutions commercial bank's client base to individual (often 32 one-person) business people as well as to very aged competing banks to venture into lending to small businesses. This entails a great deal of small enterprises. counseling and technical assistance on the part of BOAB staff and represents a major resource Con cI us ion commitment. Interviews with some of BOAB's small and medium enterprise borrowers convey a flavor of the variety of experiences among BOAB's According to BOAB's general manager, IFC's clientele and help to add a human dimension to the presence on the board of directors has been critical analysis of development impact (see Box 1 at the to the bank's success. It confers enhanced credibil- end of this chapter). ity, moral support for innovative initiatives and a respected external frame of reference as to how BOAB extends investment credits along with banks should be run. all of which have helped several donor-supported institutions: BOAB's profitability and growth. * Cepepe, which helps would-be entrepreneurs One way to conceptualize IFC's and BOAB's with feasibility studies and follow-up technical contributions to development is by reference to assistance recent institutional economics literature that focuses on the notion of credibility.'3 Difficult and volatile e Fobape, which guarantees up to 50 percent institutional environments are usually characterized of somie investment credits by low credibility in terms of security and the predictability of formal and informal rule-making e PAPME, an IDA-supported credit program and enforcement, as well as high transaction costs. In such business environments a nexus formed * PADME, which caters to microenterprises among credible institutions such as IFC and BOAB and small firms and individuals can play a decisive * Campus-Benin, which guarantees up to 30 role in encouraging the emergence of viable percent of some microenterprise businesses. Such a nexus gives small businesses the credits.` chance to test their own credibility in the market and hence opens up new development potential. Altogether BOAB participate , fThis is what has happened in Benin. where manv of Altogether BOAB partcipates in financmg some 75 BOAB's small business clients are expanding their envestmisen crMEdisosml and mic tedriu-sized Bbusinesses. IFC's development impact consists enterprises (SME) and microenterprises. BOAB patyisreghngcedbefmsrodwih also extends short-term credits to more than 200 partly in strentthening credeble firms around which SMEs and microenterprises: these credits require pother vable enterprises can develop. This gradual intensive suevso beas mshigonte Improvement in the business climate IS reflected in iortuntensive supervisiondbcaus mIn the. Benin's private investment, the share of which has fortunes of a single individual. In the words of rsnfo ecn fGPi 90t BOAB's general manager, "'this is the bank's risen from 6.8 percent of GDP in 1990 to 9.2 market." Small-scale borrowers cover a broad range percent in 1 995, a trend interrupted only in 1994 of activities including trading in the markers, small owing to the devaluation of the CFA franc. This is still a modest level (private sector investment construction firms, metal working printing, a represents about 20 percent of GDP in East Asia, beauty parlor, soap manufacturing and transport. and averages 14 percent in Latin America) but the BOAB's clients also include private primary . . schools and clinics. BOAB's strategy has encour- rising trend is a most welcome indication. 2 In Benin the term "microenterprise" usually refers to informal sector activities, whereas "small enterprise" refers to firms in the formal sector. '3 See. for example, Borner S; A. Brunetti; and B. Weder, Political Credihility and Economic Developmzent (New York: St. Martin's Press, 1995). 33 Box 1. Thumbnail Sketches of Some of Bank of Africa-Benin's SME Borrowers Mr. B., of Cotonou, is 30 years old and earned his baccalaureat in 1984. His parents are farmers. Having lived in and traded with Nigeria, he started a small shop in 1987, using his US$140 in savings to buy a typewriter and a copying machine. He opened an account with BOAB soon after it was established and began a word processing and copying business. He obtained a US$40,000 investment credit from the bank and expanded his business into printing and manufacturing stationery and school notebooks. He is currently expanding again, having purchased modem 4-color offset printing equipment from India, and is selling in Benin, Niger, Togo and Burkina Faso. He employs 40 permanent workers including female computer technicians who were trained in private vocational establishments. Next, he plans to explore the possibility of exporting to Nigeria. Mr. B. owns BOAB shares, which have more than doubled in value from CFA5,000 to 12,000 since he bought them. Mr. G., of Cotonou, studied literature and law. In 1980 he started a trading firm in the informal sector, selling jewelry and foodstuffs, later also construction materials. He then established a formal sector firm which now employs 25 mostly professional staff (up from 7 in 1988). The firm, whose assests have increased to US$1.6 million, is diversifying its activities into pineapple and yam production. Mr. G.'s main need is for a foreign marketing partner interested in agricultural exports. He is a BOAB shareholder and is using the bank's trade credit. Ms. P., of Parakou sells goods. She started in 1976 with US$65 and expanded her business gradually. Today she sells flour, canned food, batteries, liquor and other consumer goods. Her turnover exceeds US$I million. According to her, she would have been unable to expand without a BOAB credit line of US$30,000. She has received lots of advice from BOAB's Parakou branch about the best product mix she should trade in. An environmental footnote: rather than using chemicals to keep her flour stock from being damaged by rodents, she relies on cats-who are doing a good job of it. Mr. G., of Cotonou, tells an unfortunate story. Having started in the construction business in Abidjan, Cote d'Ivoire, he moved back to Benin in 1990. After combining his savings with a US$18,000 credit line from BOAB, he began manufacturing soap in 1992. After a period of rapid expansion he fell on hard times. His manufacturing process and consumer tastes required him to buy his main input, palm oil, from a Beninese state enterprise that was mired in deep trouble. Its top executive is being sought for having left the country with company funds. The oil palm plant has been inoperative for some time now. First Mr. G. tried to buy palm oil in C6te d'Ivoire, but the amounts he required were too small in a strong market of big buyers. He managed to obtain one truckfull but extortion on the way back to Cotonou made the shipment unprofitable. Soap output has ceased and seven out of twelve workers were laid off. Mr. G. is exploring ways to revive production, investigating whether he could use palm oil bought from villages. This requires a chemical process that remains to be developed. Meanwhile he is servicing his loan with help from the family's construction business. Ms. D., Cotonou worked from 1977 to 1991 as an employee at a supermarket. She worked, in succession, as a secretary, cashier, in personnel, accounting and lastly port shipments. During lunch breaks and after working hours, she ran a market stall with the help of a cousin. In 1992 she applied for a BOAB loan on a Friday, expecting a friend's guarantee as collateral. Next Monday it turned out that her friend had decided against this. She then offered BOAB her house and inventory as collateral. BOAB's credit director tried to dissuade her, pointing out the risks she would be running of losing her house and livelihood, but in the end the deal was clinched. Her decision proved to have been the right one. Today she employs three persons, is building a new house, is trading in flour, sugar and rice, using a US$70,000 BOAB credit line, and re- exporting to Nigeria. 34 MADAGASCAR 4. Aquaculture de la Mahajamba by I. Karmokolias A quaculture de Mahajamba (Aqualma) A i is a company created to produce and It' < .,,; process sh/inmp in a r emote at-ea of Mada- gascar: Aqualma is 73 percent owned by a Malagasy company whose main activity is to q_ fish and process wild shrimp off the coast of s fSK Maclagascar. IFC owns close to 5 percent of .. ~~~~~~... , the shares. i -~; Jw Aqual/ma's facilities inc lude a hatchery, a 675 hectare (ha) shrimp farm and a process- ing plant. Shrimp production in 1996 is estimated at about 2,350 tonzs. Most of the catch is exported to Wester n Europe, and the remain7der to Japan. The project has had a significant develop- mental inmpact on both the r egional and national economy. Although the project would have had a positive inmpact anywhere, this is especially true in Madagasca7, which has few moder n productioni fac ilities. In the Mahajamba area, where the shrimp farm and Ba c kg r o u n d processing factory are located, the only other economic activity is subsistence agriculture. =I ~ ~T- - Country Benefits include improved natural resource man- agement; innovation and technology transfer; The world's fourth largest island, Madagascar is significant forward and backward linkages; located in the southwestern Indian Ocean and is employment; skills development; income genera- separated from the African mainland by the 250- tion and poverty reduction; a positive, although mile-wide Mozambique Channel. The country has a small, fiscal impact; substantial foreign exchange rugged topography, a wide range of soil types, rich earnings; infrastructure improvements; and private mineral reserves and unique flora and fauna. which sector development. Aqualma is planning to expand have suffered greatly in recent years from environ- operations which will result in even greater mental degradation. benefits, particularly those to be generated by new supplier companies to the company. Madagascar's population is about 13 million, 95 percent of whom are Malagasy people of different So far the project has had minimal negative impact. tribes; the balance consists mainly of foreign Environmental effects have included the discharge communities of Indians, Pakistanis and Chinese. of wastewater from the ponds and the processing Urban areas along the eastern seaboard and at the plant, as well as the cutting of trees during con- highland capital of Antananarivo are densely struction. However, the amounts of wastewater are populated, in contrast to most rural areas, where small enough to allow absorption by the ecosystem density is low. The population is growing rapidly at without lasting harmful effects; and for the few an average rate of 2.8 percent in recent years. trees that were cut down, the company has more than compensated by creating a 50 ha forest Socioeconomic conditions have deteriorated over reserve. the years. About 75 percent of the people now live in poverty, as compared to 43 percent in the 1960s. There is potential, however, for significant damage The public health and education systems are both to project operations and to the area's social inadequate and inefficient. Life expectancy is about and ecological systems. This stems from the rapid 50 years, child mortality is high, malaria is a major growth of the village adjacent to the farm that was health problem and the incidence of tuberculosis created to house company laborers. Its population and other communicable diseases is increasing. In has been growing rapidly as dependents, new some areas, 40 percent of the population suffers families, merchants, prospective employees and from malnutrition and the illiteracy rate has risen. others have settled there. The total absence of any institutional and physical infrastructure creates a Infrastructure is limited. Telecommunications are great risk for social disorder, spread of disease and difficult, the transport network is inadequate and ecological damage that could spell disaster for the power is dependent on oil imports and, to a limited project. extent, on hydroelectricity. However, most people use charcoal for energy, a practice that has greatly The company is taking some steps to provide contributed to the country's deforestation and elementary health care and education facilities, but environmental degradation. has neither the authority nor the resources to assume responsibility for administration of the Recent economic performance has been poor. After village. At the same time, the government's stagnating in 1994, GDP grew by 2 percent in 1995, resources and capabilities are limited and, it could still less than population growth. The budget deficit be argued, are needed more urgently elsewhere. and inflation fell but remained high at 9 percent of How these issues will be resolved is not currently GDP and 39 percent, respectively. Foreign debt is clear. 36 currently about 140 percent of GDP and the current estimated to have the potential to treble the account and trade balances have been deteriorating. country's current export receipts from shrimp. The government's policies have been less than sound and ongoing political bickering at high levels t Re has prevented the consensus necessary to adopt and implement a comprehensive reform program. The Aqualma shrimp farm is near the town of Besakoa, which is some 40 km inland from the Madagascar's economy is based on agriculture, provincial capital of Mahajanga, also known as which accounts for about one-third of GDP and Majunga. With a population of about 150,000, nearly 60 percent of export earnings. The staple Majunga is the second largest city in the country fpod crops are rice and cassava. along with maize, after the highland capital, Antananarivo. The area bananas and sweet potatoes, mostly produced in immediately outside Majunga is relatively uninhab- small, subsistence-oriented farms. The main cash ited and totally lacking in infrastructure. Although a crops grown for export are coffee, vanilla and road connects Majunga to the capital, Besakoa's cloves. formal link to Majunga is an airfield originally constructed by an oil company but now owned by Industry, mostly food processing, accounts for the project group. The rural economy is based on about 14 percent of GNP. while mining and energy subsistence agriculture, but there are some commer- together account for an additional 23 percent. cial farms near Majunga. Majunga's economy relies Manufacturing has shown some vitality recently on port operations, textile and food processing due in large part to the success of the Export facilities and service and trade establishments. Processing Zones, which at the end of 1993 Majunga's port is home to a number of fishing accounted for some 370 enterprises concentrated in vessels and is the area's center for international the textile sector. commerce. The fishing industry is important to the local T h e Project economy. The total catch in 1995 was an estimated 120,000 tons. The value of fish exports grew by about 50 percent between 1993 and 1995, and Sp ; s amounted to an estimated US$107 million in the latter year. Shrimp accounts for about half of total Pecheries de Nosy Be (PNB), a well-established fish exports, and is the country's third most shrimp-fishing company in Madagascar, is the local important export commodity after coffee and sponsor of the project. PNB is owned by Groupe vanilla. Madagascar has the potential to benefit Socota Agro-Alimentaire S.A., a Luxembourg- considerably more from fishing: currently only based holding company in turn owned by the Ismail about one-third of the estimated offshore catch is family of Madagascar. Socota's main activities are landed locally; the balance is taken by Japanese, textile mills in Madagascar and Mauritius, shrimp Russian and European fleets that operate in the fishing and shrimp farming. The Aqualma shrimp same offshore waters. Some signs of overfishing farming company is 73 percent owned by PNB and have emerged in the shrimp sector, where many 18 percent by Socota. open-sea shrimp fishermen exceed the limit recommended by the United Nations Food and The foreign technical sponsor of the project, Agriculture Organization (FAO) in 1994. Because responsible mainly for technical assistance, was of over-fishing or other factors, the 1995 shrimp until recently Cofrepeche (formerly France Aquac- catch was 33 percent smaller than that of 199 ulture), a leading French aquaculture research and 6,400 tons and 7,700 tons, respectively. The best management firm. Cofrepeche was, at the time that prospects for the industry appear to rest with an it ceased operations, retained on a performance- expansion of inshore shrimp farming, which is linked technical assistance contract. Aside from 37 responsibility for the technical management of the variant, could be successfully undertaken in overall project, Cofrepeche was also responsible for Madagascar. managing hatchery operations. Aqualma now contracts technical assistance personnel indepen- Encouraged by the early results of the pilot opera- dently, in essence retaining former Cofrepeche tion, the company started looking in late 1989 for a staff. IFC has a small equity holding: 7.5 percent of suitable site for a commercial operation. This was the shares. not an easy task in view of the large number of prerequisites that needed to be satisfied, including: The management team was assembled by PNB. General management and marketing services are * Low to medium water salinity provided under contract by Iproma, the Ismail family's management company. The core manage- * Sufficient supply of oxygen in the water ment team includes staff from PNB, Cofrepeche, and Iproma. * Absence of mangroves Ject 4 * Low or no risk of flooding PNB was established to fish shrimp in the coastal * Protection from rising seas in case of storms waters of Madagascar and process it for export. As more boats from other countries started fishing the * Accessibility same waters, the increased competition and its eventual impact on the shrimp population led PNB * Sufficient size (minimum of 400 ha and to preliminary discussions of possible shrimp preferably 600-800 ha). farming as early as 1981. Nothing concrete hap- pened until 1986 when FAO conducted a survey to The company was guided by the findings of the identify and evaluate possible shrimp farming sites FAO survey with which it had been closely in Madagascar. PNB assisted FAO with the survey involved and, perhaps most importantly, by its by providing information and logistical support. experience in shrimp fishing. The company One of the sites identified in the survey was Nosy reasoned that wherever catches of wild shrimp had Be, an island near the northwestern coast of been traditionally good-and PNB was very Madagascar, where PNB operated a shrimp knowledgeable about this-conditions, especially processing plant. This site was subsequently water characteristics, would also favor shrimp selected for the establishment of a pilot farm aquaculture. sponsored by FAO, the government of Madagascar The company's first choice was a site in Norther and PNB. Madagascar in a remote area near Ambilobe. The The objective of the pilot farm was to assess the site had most of the attributes that PNB was seeking viability of a large-scale commercial shrimp and was relatively close to its operations in Nosy aquaculture to raise any of three types of shrimp Be. PNB sought permission from the local leaders present in the waters off Madagascar. The pilot to develop the farm there as a prerequisite to farm comprised 7 ha of ponds, of which 4 ha were starting negotiations with the government to lease devoted to intensive (high-density shrimp popula- the land. Whereas a quick and positive outcome had tion), 2 ha to semi-intensive, and 1 ha to extensive been expected, discussions actually continued for aquaculture. The pilot farm was operated from 1989 many months and ultimately the company's request until 1993. Early results were well above expecta- was denied. The local leaders were worried about tions. It soon became apparent that commercial the influx of non-local workers, who would shrimp farming, especially its semi-intensive certainly be attracted by employment prospects at the shrimp farm. 38 After considering several alternative sites, the only from the sea using landing ferries or small company settled on the current location, even boats. Construction equipment was ferried in, though there was some apprehension over the engineers and supervisory personnel lived in site's susceptibility to tidal flooding and the trailers and construction labor lived in huts. By existence of some mangroves. The same area had October 1991 the first ponds were operational, and been the site of a French-sponsored project for the the first harvest was realized in January 1992. commercial production of manioc, and the local inhabitants were used to the presence of foreign- Success in constructing the ponds combined with ers and people from other pailts of Madagascar. the early high yields to persuade the company to Permission by the local leaders was granted, push ahead with construction, and 200 ha were clearing the way for negotiations with the completed by the end of 1992. The plan at the time government. It took about two years to negotiate was to add 200 ha in 1993, but Aqualma decided to the lease on 4,000 ha for 49 years. with the option expand by 400 ha. At that stage Aqualma requested to extend it for an additional 50 years. additional funds from IFC and from the European Investment Bank (EIB). Although both institutions In the meantime Aqualma had been established to agreed in principle, they decided to wait until after implement the project. A multinational manage- that season's harvest to finalize the agreements and ment team was recruited, including a Malagasy disburse the funds. The delay forced the company CEO, a French resident of Madagascar, an Indian to resort to short-term, and expensive, bridge production manager, an American construction financing to continue its construction program. At manager, and a French hatchery manager. While present, total pond area is 675 ha, with plans to negotiations for the site were going on, Aqualma expand further to about 900 ha by the end of 1997. staff visited shrimp farms in Asia and Latin America to learn about possible farm designs and The processing plant was originally scheduled to be production methods. located on the farm site. Subsequent soil analysis showed that swampy characteristics would have Although the company was planning to start with made construction difficult and the plant would a farm of 400 ha, IFC, which had been ap- actually be resting on floating pylons. Aqualma proached as a possible financier, recommended considered Majunga and Nosy Be as alternative that the farm area be increased to about 700 ha to sites but subsequently dismissed both. The reason fully realize economies of scale. Initially the was that the market segment that the project was company started with 10 ha on a pilot basis. This aiming for would not accept shrimp that would be decision was only partly based on the need to test frozen at the farm, thawed for processing and the waters. A much more important factor was refrozen for export. Finally it was decided to locate political instability, which made the company the plant adjacent to the farm, on high dry land, decide against a large investment. A few months where the remains of the manioc project warehouse later the situation stabilized sufficiently to allow still stood. Since the farm would be much larger the company to proceed with the construction of a than originally envisaged, plant size was increased large-scale farm. accordingly. The original plan was for an 800 m2 plant but the actual plant is 2,000 m2. The new plant It is literally true that the farm was made from can handle the output of the larger farm and process scratch. In April 1991, when construction started, the shrimp into a greater variety of products. the only infrastructure present consisted of foot paths; scattered huts built by local inhabitants living on subsistence farming and fishing; and an abandoned, dilapidated warehouse from the earlier manioc project. The site was accessible 39 Project Q,1 ..;. The company has adopted a semi-intensive method of farming, i.e., there is no mechanical aeration of Project facilities consist of: the water, and the shrimp population is about 7-8 per M2. The low population density reduces the risk * The hatchery in Nosv Be adjacent to the FAO of disease development and results in no require- pilot farm, currently leased from the govern- ment of antibiotics in the feed. After the PL arrive ment and used as an experimental site at the farm from Nosy Be, they are placed in nursery ponds for 24 hours of acclimation and are * The shrimp farm in the Bay of Mahajamba subsequently transferred to adjacent grow-out ponds. Pond bottoms are sterilized with lime and * The processing factory adjacent to the shrimp chlorine and are fertilized with chicken manure farm before stocking. * An area of about 200 ha available for workers' Feed is a major cost of the operation and, conse- housing and for a 50 ha forest preserve. quently, the feed conversion ratio (FCR) is all- important and is closely monitored. Feed is The company's offices are located in Majunga. broadcast from paddle boats 3-4 times a day. An experiment is underway where feed trays have been Aqualma is vertically integrated. Operations range installed in some ponds. The uptake is continuously from selecting breeder stock and spawning to monitored to determine the times during which the exporting fully processed and packaged shrimp. A animals feed in an effort to improve the FCR. total of 3,000 male and 2,000 female shrimp per Water exchange in the ponds is 12-14 percent per year are selected for breeder stock. Most day, ewhange in the 16-14 percent per broodstock, about 80 percent, comes from wild day, somewhat less than the 16-t8 percent per day shrimp caught by PNB vessels. During the March that the company would prefer. The exchange is to May off-season, broodstock is selected from the limited by the water pumping capacity. Dissolved farm. Average fertility is about 870,000 eggs per oxygen is monitored 4 times daily to ensure that it spawn, 900.000 for wild shrimp but only 600.000 does not fall below the minimum of 5 percent. If it for farm shrimp. Only one or two spawns per does, the water is exchanged earlier than scheduled. female are taken and if any lot of newborn has a survival rate of less than 50 percent the lot is Shrimp are harvested twice a year and are immedi- rejected. After spawning, the offspring are kept in ately transported to the plant for processing and nurseries through the post-larva (PL) stage, a total packaging. The plant is very modern, well-designed period of about three weeks, and the baby shrimp and well constructed. Processed shrimp meet all are subsequently transported by plane to the farm in European Union and Japanese health standards. The Mahajamba. plant currently operates two shifts per day for 48 weeks, with 15-day shutdowns in July and Decem- The Mahajamba farm is located between the ber. Capacity is 10 tons per day which, at the Marovoaikely and Masokoenjy rivers in the current schedule, translates to 2,680 tons per year. Besakoa area. The site is elongated, about 14 km To satisfy the demand of different market segments, long and less than 4 km at its widest part. This and shrimp is processed and packaged in a variety of the elevated layout of the ponds resulted in 19 out ways, including with or without the shell, with or of 82 ponds to discharge into the intake side of the without the head, cooked or raw; and packaged in farm thus raising the risk of contamination. The risk several weights. About 76 percent of the output is is greatly reduced by the high tidal exchange-it sold as "head-on-raw" shrimp. This produces can reach up to 4 meters-which flushes the rivers relatively little solid waste and the overall process substantially. results in well diluted liquid effluent. Most solid 40 waste is recycled as feed and some is given to 4. Local inflation surged to about 20 percent artisanal fishermen to use as bait. during the construction period. After processing, the shrimip are packed in ice and Phase II construction costs were more or less in line transported by boat to Majunga, from where they with projections. One indicator of the difficulties are exported in refrigerated ships. All marketing is presented by the remoteness of the site, the absence the responsibility of a distributor based in France. of infrastructure, and the importance of site-specific About 90 percent is sold to wholesalers in France, experience, is that construction of the first 400 ha Spain and Italy. About 70 tons were recently cost about US$25 million, or US$62,500/ha, exported to Japan. They were well received, so the whereas the subsequent 200 ha cost about US$6.5 projection is for exports to Japan to reach nearly million or US$32,500/ha. 400 tons during 1996. Operating costs have been higher than projected- Pr- - -t P 7r , ,e US$5.35/kg in 1995 compared to the US$3.94/kg estimated during appraisal-primarily because of In 1994 Aqualma suffered a loss of US$5 million unanticipated increases of feed prices and because on production of 408 tons. In 1995, with full the company had to borrow at high interest rates production of 1,535 tons from 440 ha of ponds, the until funds from IFC and EIB were disbursed. loss was reduced to US$1.47 million. In 1996, with Another factor was the relative inexperience of the 675 ha of ponds in operation. production is ex- company in shrimp farming in Madagascar. pected to reach 2,340 tons and income, before tax, Although members of the management team had a of US$990,000. lot of experience elsewhere, it took time for optimal teamwork efficiency to develop and for them to The project has been burdened with higher costs adapt their knowledge to local conditions. For than had been predicted. Projected construction example, feeding schedules and quantities were not costs and actual construction costs are not easily optimal at the beginning, pond fertilization was comparable because the scale of the farm changed, incomplete and delays in completing the processing and because the processing plant was ultimately plant necessitated delayed harvesting which in tum located at a different site and was larger than had negatively affected the FCR. Fortunately, higher been planned. Phase I, construction of 400 ha of shrimp prices have enabled Aqualma to compensate ponds, was budgeted at US$19 million but actual for the higher costs, most of the short-term loans cost escalated to US$26 million. The overrun was have by now been repaid and the increase in pond primarily the result of the following factors: area has brought down fixed unit costs. 1. Logistical problems, such as the remote Overall perfornance to date has been satisfactory. It location of the farm site and the total absence is expected to improve further as the larger farm of infrastructure, were underestimated. brings about economies of scale and management continues to gain experience with conditions 2. Civil works equipment originally purchased by peculiar to Mahajamba. Although projections call the company was unsuitable for the muddy for a 1996 pre-tax income of about US$1 million, terrain at the site and had to be replaced by low the recent surge in prices could push it up to ground pressure equipment (construction was US$2.4 million. shortly thereafter contracted out). 3. Because of these conditions, productivity during construction was lower than expected. 41 Project Rationale and IFC's "bad" shrimp farms whose practices should be Role avoided. The knowledge acquired during these visits was critical in selecting the semi- intensive farming method. IFC also contributed The project supports the World Bank Group's technical assistance through a consultant who strategy for Madagascar, which focuses on (I) devised procedures to develop a better pond promotion of exports, (2) support to the private layout, improve the FCR and lower the risk of sector, and (3) improved resource management. viral infection in the broodstock. The company has been especially appreciative of IFC for the Until the project became operational, all shrimp technical advice. exports came from offshore fishing, pushing the catch to its maximum sustainable yield as deter- * IFC staff met with local environmental mined by FAO. The project relieves the pressure by authorities to advise on drafting a master plan making recourse to onshore shrimp farming an for the sustainable development of the alternative to offshore fishing. In addition, shrimp Mahajamba estuary and the preparation of a farming has several positive attributes for Madagas- regulatory framework for aquacutture in car. It allows shrimp production to take place Madagascar. almost all year round; shrimp production can be oriented toward specific market requirements and The company was critical of the length of time it customer specifications as to size and variety; and took IFC to reach a decision and, once a decision the project serves to further one aspect of was made, for disbursements to start. IFC and EIB Madagascar's development strategy which is to disbursements were on a pari passu basis and the diversify the commodity composition of its exports. company felt that it took these institutions, espe- cially their legal departments, an excessive amount IFC's participation provided critical support to the of time to develop a coordinated approach. This project in the following ways: was costly because, as stated earlier, the company had to borrow short-term to continue construction * The Corporation provided long-term foreign until funds were disbursed. The delay in proceeding exchange financing that was not otherwise with the first disbursement resulted from complexi- available in Madagascar. The country has been ties arising from the different types of subordina- chronically short of foreign exchange, a tion in the first and second EIB loans. EIB legal situation exacerbated at the time of project staff indicated to IFC that, after realizing the preparation because of political instability. Of complexities created by their loan structure in this the total investment cost of about US$33 transaction, they would examine different ap- million, IFC provided US$5.8 million in loans proaches to try to avoid such difficulties in the and US$772,000 in equity (7.5 percent of the future. shares), or 20 percent of the total investment. Development Impact * IFC played a catalytic role in mobilizing long- term funds from other investors who coordi- nated their appraisals with IFC. As company Resoe officials acknowledged, IFC's appraisal was the basis for decision-making by the other The project can help ease the pressure on wild lenders who often followed IFC's lead. shrimp from overfishing. Shrimp fishing in Madagascar's waters has been practiced on an * IFC staff were instrumental in advising the artisanal and industrial basis for many years. company and in arranging visits to "good" Recently the number of fishing vessels has in- shrimp farms that should be emulated and to creased, putting increasing pressure on the shrimp 42 population. Although there is no guarantee that the Now that operations are in full swing, the company wild shrimp resource will be properly managed buys 40 tons of lime per month from a local thereafter, commercial on-farm production and supplier, sizable quantities of chicken manure to corresponding export receipts should make it easier fertilize the ponds, and food for the workers, for the government to insist that fishing regulations including more than half a ton of beef per month, be respected and to improve enforcement. Other- rice, vegetables and other items. A negative aspect, wise the results could be disastrous, as demon- albeit for a brief period, was that Aqualma's food strated by the situation in the South Pacific, where purchases drove local food prices sky-high until the scarcity of wild shrimp recently drove the price of market adjusted and prices dropped to normal one female breeder shrimp to over US$1,000. levels. In total, local purchases are estimated at US$250,000 per month, of which about half is for Innovation fuel (which is imported). Mahajamba is the first shrimp farm in Madagascar The project has led, directly or indirectly, to the and the first in the world to adopt a semi-intensive establishment or promotion of artisanal industries method on such a large scale for tiger shrimp. The in the area such as the construction of flat bottom project has amply demonstrated the financial and boats used in the ponds, mosquito nets for project technical feasibility of this type of venture. Already, personnel and their families and some retail shops the government has received several requests from catering to the work force and their dependents. local and foreign investors to launch similar projects. One, backed by French sponsors, is in the The Nosy Be hatchery also generates linkages, preliminary design stage and will most likely including supplies and feed, mostly fresh seafood materialize soon. bought from local fishermen. Aqualma will provide PL shrimp to the new farm, a Local transport services have received a major mutually beneficial arrangement for both compa- boost. Project-related imports, (feed, packaging nies. In this way, Aqualma will better utilize its material) and exports (shrimp) represent about 50 hatchery and, through higher volumes, achieve percent of the activity of the port of Majunga, economies of scale, while the new project will be resulting in significant earnings for the transport able to forego the risk and expense of breeding. companies, the port authority and the stevedores. Also, the company is leasing airplanes for trans- Linkages porting PL from the hatchery to the farm and to connect the farm to Majunga on a daily basis. The project has generated many linkages both In addition, two major undertakings are in the during the construction and operational phases, and planning stage. Testing is underway to see whether has helped supplier firms develop. Most of the local ingredients could at least partially substitute construction of the ponds and of the processing for imported feed. Early results indicate that a plant was subcontracted to local companies. One combination of imported and local nutrients, mainly indicator of the economic activity generated is that cotton cake and rice, will be appropriate. The the main contractor, who owned 5 bulldozers prior second undertaking involves the local supply of to project start-up, now owns 20 bulldozers and packaging material. Although Aqualma has some other heavy equipment, has expanded his business reservations about the quality of the local product, throughout Madagascar and currently is looking to they are willing to work with the sponsor of that win contracts both in Madagascar and in nearby project to ensure that any difficulties will be countries. On average, about 300 workers were overcome. Both these projects would result in employed full-time during the construction period, substantial foreign exchange savings for the country. 43 Employment Foreign Exchange Aqualma employs 969 persons, of whom 850 are As production and exports have increased, so have full-time permanent employees. Of these, 581 foreign exchange earnings, from US$2.53 million workers are employed on the farm, 353 at the in 1994 to a projected US$16.25 million in 1996. At processing plant, and 35 in the hatchery. Eleven are the same time, the company spends significant foreigners. foreign exchange, an estimated US$7.5 million in 1996, on imports. Thus, the net foreign exchange In comes earnings for this year amount to US$8.75 million. Feed accounts for most of the foreign exchange The company payroll amounts to US$1.3 million outflow, US$4.8 million or 64 percent of the total in per year, of which US$200,000 is paid to personnel 1996. Once the new feed mill is in operation, in the administrative offices and US$ 1.1 million to mixing imported with local ingredients, it is workers in the farm, plant and hatchery. Production projected that the bill for imported feed will be workers are paid the equivalent of US$2 per day, as reduced to about half its present amount. compared to a minimum wage of US$1.20 per day, which is what most unskilled workers usually earn. Social Impacts and Standards An additional US$450,000 is spent annually to of Living provide meals for company personnel. The project has had a profound impact on the lives Skills Development of its employees. For the majority of them it was their first systematic involvement in a modem The company is cooperating with FAO in training economic system. At least 80 percent of the biologists specializing in shrimp aquaculture and workers had never had a wage-paying job before. In has provided training for its laboratory personnel. In addition to the wages, the company provided plots addition, many production workers receive on-the- and houses for the first batch of employees re- job training while all workers participate in regular cruited in Nosy Be for work at the Mahajamba sessions to learn about proper health and occupa- farm. Those hired later have been assigned plots on tional safety practices. company-leased land where they have built their homes. All workers receive free meals at work. Fiscal Impact Employment opportunities and, to a lesser extent, the prospect of employment have attracted people Aqam' diec imato'h aioaugths from many parts of the country to the site. The so far, been small. The project's contribution to reu has been the cratio o a ge wich.now government revenues is limited because it is result has been the creation of a village which now gover in reenes is te usex it is numbers about 3,000 persons, expected to grow to simprtutated anfr zonesand lso, thuslex is emptofrom about 5,000 within a year or two. This has had both import taxes and duties. Also, Aqualina IS enjoying poitv an neatv asecs On th .oiiv ie a 5-year tax holiday and until recently was not positive and negative aspects. On the positive side, making profits. After the tax-holiday period, the the project has generated substantial employment company wlbelalfra4pand incomes that have had a multiplier effect, as company will be liable for a 45 percent income tax, illustrated by the development of various business The company pays its share of social security tax activities such as a hostel and small retail stores. and withholds income tax on employees' wages and Negative aspects include pressures on the social salaries, which are then transferred to the govern- and physical environent. The village, having ment. This is estimated to be about US$270,000 and grown The village, he annaly. qulm ha nt bneitd foman sprung up and grown rapidly virtually from the bush, lacks both administrative and physical government expenditure, as the latter has not infrastructure. The company is addressing two of provided any infrastructure or other services to the the many needs, namely, community health and company or to its employees. 44 education. A clinic is in the final stages of construc- The site had no infrastructure when the project tion to provide basic health care, maternity services, started. All equipment came in by landing craft. medicine and education in disease prevention. Since then, an airstrip has been constructed, the Workers and their families will receive these landing has been improved, and a small road services free of charge, local inhabitants will pay network is in place around the farm and between for medicine and a minimal fee for the physician the plant, the farm, and living quarters. As de- and those from outside the area will pay full cost. scribed earlier, workers recruited in Nosy Be and Land adjacent to the village has been set aside for brought to Mahajamba were given plots and the construction of an elementary school, which houses, construction of a clinic is nearly complete should be ready within a few months. and a school is in the planning stage. The village population is an agglomeration of i ; , * X t people from different pans of Madagascar with different customs and traditions. Although this has Environmental considerations are critical to the caused occasional friction it has, for the most part, commercial success of the project, quite apart from been a successful experiment in peaceful coexist- any ecological externalities that may influence the ence. project's social rate of return. As to commercial success, the project technology pays particular Institutional Develo } .i^s t attention to the need to protect the environmentally sensitive shrimp growth process from the poten- The shrimp farm is the largest private sector tially devastating effects of pollutants and disease. investment to materialize in the country in many As to the social rate of return, the key environmen- years. Its success has demonstrated to local and tal issues relating to the project are: expatriate entrepreneurs the feasibility of large- scale private projects in Madagascar. It has also I . Effluent discharge from the shrimp ponds and demonstrated to the government the important role the hatchery that the private sector can play in the country's development. In addition to the tangible benefits 2. Use of biocide chemicals to control disease generated by the project, e.g., jobs, backward and problems between harvest and new grow-out forward linkages, and foreign exchange earnings activities the project has been a source of pride for many Malagasy people who hear of visitors from differ- 3. Possible loss of sensitive coastal resources and ent countries wishing to learn from Aqualma's habitats such as mangroves. experience. The project location and design deal effectively In fr sc t e with these three issues. The use of semi-intensive farming methods result in effluent discharges of The project's contribution to infrastructure develop- negligible toxicity. Moreover, no chemical treat- ment in the Mahajamba region has included about ments are required to reduce risk of disease. The US$1.6 million worth of roads, utilities, communi- liquid effluents from the hatchery are treated in cations, housing and amenities in the vicinity of the wastewater ponds that comply with accepted project. Moreover, at the national level, the project international environmental guidelines. Finally, has been partly responsible for the initial steps project location was chosen so that only 3 percent toward the formation of a regulatory policy for the of the mangrove growth on the banks of the aquaculture industry-which, as noted above, is a surrounding rivers and mud flats is affected by process to which IFC has contributed. pond discharges. Aqualma is committed to preserv- ing the mangrove and has engaged in a mangrove planting program in areas with sufficient tidal immersion and along man-made internal water 45 canals to fortify the banks and to encourage The farm faces a potentially major problem biological oxygenation. stemming from the totally unplanned growth of the village near the farm. In the absence of a disposal Forest resources on the site had been largely system all waste is haphazardly dumped either in destroyed prior to the development of the project, nearby streams and rivers or on the soil, whence the goal being to clear land for farming or to cull certain substances eventually find their way to the firewood. The few trees that remained were cut sea. As the population of the village grows, the down as the ponds were created. The company is danger of contamination rises proportionally. The compensating for this by establishing a forest on 50 experience of East Asian countries has shown that ha of land adjacent to the farm. The forest will this presents a real risk with potentially catastrophic provide wood to company employees but the consequences. The company is in a quandary. It process will be controlled by the company to does not want to undergo the significant expense of prevent excessive cutting. In addition, Aqualma is providing infrastructure for the village which it introducing kerosene stoves to its work force to believes to be the responsibility of the government. reduce the demand for wood. Not only is the expense substantial but if infrastruc- ture is provided, it would attract more people so Pollution is of major concern to Aqualma. The that the system would quickly be overloaded and recent experience of Thailand and Taiwan, China, the same problems would resurface. On the other contains vivid examples of what could happen. The hand, the government is short of resources and its production of Taiwan, China, declined from about priorities are in more densely populated areas with 95,000 tons to less than 30,000 because of disease. inadequate infrastructure. The company is appeal- Thailand's shrimp industry is leaving in its wake ing to multilateral aid agencies such as the German abandoned shrimp farms, decimated mangroves, Agency for Technical Cooperation (GTZ), who has and micro-ecosystems laden with chemicals and already contributed to the construction of the clinic, various toxic substances. Both the hatchery at Nosy USAID and others. As of now there are no concrete Be and the farm at Mahajamba utilize sea water plans for action and the problem continues to grow pumped in to the ponds and are therefore suscep- with the project facing a potential catastrophe. tible to harmful substances that may be in the water. As mentioned above, IFC's appraisal concluded Another potential danger lies in the possible that project-originating pollution at both the nursery introduction of exotic shrimp species in future and the farm can be handled by the system, aided in aquaculture projects, either in Madagascar or particular by the strong tides prevalent in the area. nearby countries. Exotic species are capable of Operational experience to date has proven this introducing bacteria or viruses to which the carriers assessment to be correct and pollution from may be immune but Aqualma's tiger shrimp may be Aqualma operations presents no danger, although susceptible. Aqualma has asked the government to the situation should continue to be monitored. develop a set of rules and regulations governing the further development of the shrimp industry in Pollution from external sources is of greater Madagascar. However, even if such a charter is concern at both the hatchery and the farm. Of developed, the government may not have the concern to the hatchery is pesticide run off from necessary resources to enforce it. There is also the sugar cane plantations and the risk posed by an oil risk that the new charter could be constructed to terminal serving Nosy Be island, located very near prevent new companies from entering the field and the hatchery. Small oil spills have occurred in the competing with existing producers. There is past without contaminating the hatchery ponds. The currently no evidence that this is the case, espe- pesticide danger is more difficult to assess as it may cially since the development of a charter is still at have a cumulative effect which could cause the conceptual stage. Nonetheless, care should be problems before it can be detected. taken to ensure that it is not used as a barrier to legitimate competition. 46 I N D O N E S I A 5. P.T. South Pacific Viscose by J. Glen S outh Pacific Viscose (SPV) is afbreign- S owned company that produces viscose (or rayon) staple fiber, using, in large part, imported raw materials. The management K .sk f skills and technology provided by its parent and technical partner have made the company intetrnationially competitive, which allows the company, and Indonesia, to captlure the value-added component of viscose production that would otherwise be lost to imports. That value added is the direct element of the development impact of SPV's operations and its contribution to the Indonesian economy is substantial. In addition to its direct development effects, SPV has played an important part in the industrialization of the region where the plant is located. This transformation has had a major impact on the lives of inhabitanits of the region, both those directly employed as a result of the three SPV investments that have taken place, and those who year of viscose staple fiber. Through hard work and have benefited indirectly through the expansion of additional investment in streamlining production, the service sector that the investment has induced. management was able to push the capacity of Line 1 to 37,000 tons per year, its current capacity. This chapter summarizes some of the main effects that SPV has had on the local economy and on the Growth in the local textile industry and the success inhabitants of the region. Many, but not all, of those achieved with Line 1 induced the company's effects are included, at least in part, in the economic management to consider the addition of a second rate of return calculations normally prepared for line which would nearly double the plant's capacity any IFC investment. However, the analysis that to 72,000 metric tons per year. Initially, the com- reduces the rate of return to a single number hides pany began work on the expansion using short-term much of the value of the individual effects. funding from its traditional bank sources. However, as work progressed and the costs started adding up, The Project it became apparent that a different long-term financing plan was needed. Company Background Discussions with IFC began and a loan package of US$45 million (an "A" loan of US$20 million and SPV was formed in 1978 as a joint venture between a "B" loan of US$25 million) was approved by its main shareholder and technical partner, Lenzing IFC's Board in 1992. Total project cost at that time A.G. (Lenzing), and a group of other investors, was estimated to be US$92 million, with the most of whom were also foreign. The company company providing US$32 million as equity using produces viscose staple fiber, sold internationally cash flow generated by existing operations. for spinning into yarn, which is then woven into Working capital loans for US$15 million completed cloth for use in the garment industry. Sodium the financial package. Loan disbursement took sulfate is produced as a byproduct of viscose place in late 1992 and early 1993. Estimated production and is sold separately. The company's economic rate of return on the project is 14 percent. sole production facility is located in Purwakarta, West Java, located about 120 kilometers east of Line 2 was finished in line with expected costs and Jakarta. the operating results have been good. Quality improved as a result of the technology employed in Following its formation, the company began Line 2 and ongoing management efforts. As a searching for a site in 1980. Essential for its result, SPV was awarded ISO 9002 certification in operations were a source of abundant fresh water, 1995, official recognition that its product is electrical power and access to the textile industry. considered to be of high international standards. In Purwakarta satisfied these needs-spinning addition, a total of nearly US$15 million was companies had set up operations in the area in the included in the expansion budget for emission 1970s-and, in addition, the government offered control and treatment equipment, which has tax concessions to induce development of what was reduced the company's environmental impact and then a relatively undeveloped location. At the time, has allowed it to process byproducts into valuable Purwakarta was a remote and largely rural area. raw materials for its production process. Infrastructure was not in place and the company had to develop the road to its plant site before The success achieved with Line 2 persuaded operations could begin. company management to consider an additional expansion to increase capacity by an additional 50 The initial investment, done without IFC financing, percent, for a total of 109,000 metric tons per year. resulted in Line 1, which began operations in 1982 Line 3 will employ new technology. including even with an initial capacity of 16,000 metric tons per better control of gaseous emissions and should 48 result in an even higher quality product. IFC the textile industry, but other industries are also financing was approved by the Board in 1995. present. In total about 48,000 workers are employed Construction is now taking place and operations are by industry. Given the total population, that implies expected to begin at year-end 1996. Expected that each industrial job provides for more than 12 financial and economic rates of return on Line 3 are individuals, either directly or indirectly. Alterna- 17 percent. The increase in the rates of return tively, each industrial job in the region is estimated relative to Line 2 is a result of the economies of to provide indirect employment for an additional scale achieved through the expansion. These 1.5 workers outside of the industrial sector. economies of scale promise to make the company more internationally competitive, in addition to The Product and the Market improving the quality of its product. Rayon, now commonly called viscose, was the original man-made fiber and was introduced in the Company Sponsors first decade of the twentieth century. It is widely The major equity holders of the company are used in a variety of applications, but the viscose foreign. Lenzing A.G. of Austria is the largest staple fiber produced by SPV is sold almost entirely shareholder, with 41.98 percent of total equity. for use in the textile industry, which values viscose Located in Austria, it operates one of the largest for its properties that make it, in many ways, viscose plants in the world and is also active in superior to both cotton and other synthetics. paper, plastics machinery and equipment. Lenzing's experience in the industry has made it an invaluable Despite the fact that it is man-made, viscose is technical partner and the source of the SPV actually a natural fiber based on cellulose. The management team, which is seconded from Lenzing primary raw material used in its manufacture is as part of its management contract. Other major pulp, a wood product that is sourced internationally, shareholders include Avit Investments Ltd. (Turks then dissolved and extruded into spinbath to and Caicos Island, BNI, 31.18 percent), Penique produce a continuous fiber. This fiber is then S.A. (Panama, 11.97 percent), and P.T. Pura Golden finished and cut to the length needed for spinning Lion (Indonesia, 11.92 percent). into yarn and then finished. The fiber is similar in feel and comfort to cotton, but has superior spin- Company Base: Purwakarta ning and dyeing performance. Viscose can be used Purwakarta is a regional center located sufficiently alone or blended with other fibers in the spinning far from Jakarta to be considered economically process. independent of the capital. When SPV first estab- lished its operations there in the early 1980s the Despite its notable attributes, viscose is somewhat area was relatively undeveloped from an industrial more costly than either cotton or polyester and, as a point of view. Agriculture was the backbone of the result, it has only about a 4 percent share of the regional economy and infrastructure was generally fiber market globally. Within Indonesia, however, undeveloped. Since then, government policy and viscose consumption has increased strongly in other factors have resulted in a substantial amount recent years, climbing to 16.4 percent of total fiber of industrialization in the region. As a result, the consumed in 1990. The stronger Indonesian economic base has switched from agriculture to demand arises at least in part from the fact that the industry. country has no indigenous cotton production, which makes locally produced viscose relatively more The region of Purwakarta has a population of nearly attractive than in many countries. 600,000, an increase of 50 percent since 1980 as a result of the country's high population growth rate There are three Indonesian producers of viscose and immigration attracted by the industrialization staple fiber. Total 1995 Indonesian production was that has taken place. Approximately 100 companies 200,000 metric tons, of which SPV contributed are now located in the region, with an emphasis on 49 72,000 tons, or 37 percent. Globally, Indonesia is presence encouraged the participation of other long- the second largest producer of viscose fiber, with term investors. only China producing more. But Indonesian demand exceeds local supply and imports of 15,000 Development Impact tons were required in 1993. Expected increases in Indonesian production should soon eliminate the need to import and result in increasing levels of Employment, Payroll and direct exports of viscose fiber. Benefits SPV sales in 1995 were about US$150 million, of SPV currently employs 1,260 local staff and 55 which 86 percent was in the Indonesian market. expatriate staff; approximately half the expatriate The major direct export markets were Pakistan and staff is employed temporarily for the expansion India, but much of SPV's production is exported project. Total salary and wages paid to local staff in indirectly in the form of yam, cloth and garments. 1995 was about US$3.3 million. In addition, Although accurate figures are difficult to obtain, it employees are provided uniforms, shoes, meals, is estimated that at least 60 percent of Indonesian transportation and medical benefits that total an viscose fiber is exported, and SPV probably additional US$0.7 million. The company also exceeds that level. makes a contribution to the national social security system, which in 1995 was US$0.1 million. In Project Performance addition, the company has a private pension scheme to which its contribution equals 3.5 percent of the Project performance has been good. Line 2 costs employee's salary; the employee's contribution is were equal to projections and the project was 1.5 percent. completed on schedule. Production in 1992 and 1993 was in line with projections, but lower market All employees work 40 hours per week, with prices for viscose led to lower total sales than opportunity for overtime at substantially higher expected. This was offset by lower interest expense, hourly wages. Workers are represented by a labor however, with the result that net income exceeded union and work under a collective labor agreement. Board report forecasts. Sales and profits have In 1995, SPV received a government award for continued to increase in 1994 and 1995 and Line 3 providing outstanding worker welfare benefits. An expansion activities are proceeding on schedule. example of these benefits include interest free loans for housing. Project Rationale and IFC's Rol e Housing for workers at the supervisory level and above, who may be needed at the plant on short notice, of whom the majority are Indonesian, is The project supports the World Bank Group's provided free of charge at the plant site. Total strategy for Indonesia, which includes the promo- original cost of that housing, including related tion of internationally competitive export-oriented infrastructure, was US$5 million. private sector manufacturing companies. The project also supports the Indonesian government's In addition to its permanent labor force, the development strategy of promoting the textile company is currently employing nearly 1,000 industry and encouraging economic development additional workers performing the civil works and outside the country's major urban areas. erection for the expansion project. SPV also employs approximately 350 workers on a contract IFC's participation was important in two ways: the basis to provide a variety of services, including Corporation provided long-term debt financing groundskeeping. In total, it is estimated that SPV which was otherwise unavailable, and IFC's 50 provides employment for approximately 4,000 employees eventually expected to complete the locals either directly or indirectly, excluding those course. Upon completion, the participants will have employed in the construction of Line 3. a strong background in the various chemical and mechanical aspects of the production process. SPV wages are, for the most part, well above the required minimum wage and are among the highest To promote in-house training generally, the paid in the Purwakarta region. Evidence of the company has employed a retired Lenzing trainer to desirability of SPV jobs is provided by the fact that develop pedagogical skills among 10 of its univer- turnover in 1995 was only 0.7 percent. sity graduate employees. Following this training, the students are now better prepared for teaching Human Resource Development other employees various technical aspects of the production process, which they are expected to do The viscose industry in Indonesia has a relatively on a regular basis. brief history and is dominated by foreign-owned companies. Consequently, there is no large pool of In order to alleviate the shortage of trained local well-trained Indonesian technicians and managers technicians, the company has hired seven Indone- available to the company. Add to that the plant's sian students, which it chose on the basis of a location distant from any major urban area and the national examination and interview process. Those problems of recruiting experienced employees is students have been sent to a foreign-run training magnified. facility near Jakarta, where they are enrolled in technical education programs: four as electricians, To date, much of the problem in securing local three as instrument technicians. The program lasts 2 technicians has been dealt with by hiring Indian years, after which the students will have a 5-year engineers who come with education and experience contract with SPV. Of course, expectations are to gained in the Indian viscose industry, which is both employ these students permanently, but a contract is well developed and has a long tradition. Rather than needed in order to ensure that they are not hired continuing to depend on foreign contract labor, SPV away quickly, which is possible given the education is also investing a considerable amount in the that they will have received. Total cost of the development of local technicians through a training training is about US$46,000. program that it has developed and implemented. A central part of the program is English language The company also has additional training programs training for all higher level staff, for which the that are under development and that will commence company has hired a full-time foreign language in the current calendar year. They include a trainer. Language training makes communication management training program for all department between company employees and managers easier, heads; total cost is expected to be about and also increases employment opportunities for US$300,000, plus lost work time. Also ready for the workers as most foreign investors in Indonesia implementation is an in-house program on chemical give preference to applicants with English language processes, which will target about 200 operators skills. and supervisors and involve about 1,000 hours of training. Eventually, the company's most expensive The technical part of the training program is based training effort could be an ongoing in-house on a course designed to provide a technical back- program on advanced general mechanics, for which ground in the viscose fiber production process. The the company has already invested US$500,000 in program involves 32 weeks of training and includes facilities and equipment and hired two full-time a series of three examinations. A professional trainers, with a third trainer expected. trainer has been employed to teach the class and currently one-third of all employees, not just higher SPV has adopted Microsoft software for its level staff, are targeted to participate with all computer needs, but finding office personnel in 51 Purwakarta with personal computer skills is million in capital costs will be paid to Indian difficult. For that reason, the company hired a suppliers. This experience suggests that there are professional trainer and has trained all its office advantages to working with a company that is well staff in the use of Microsoft products. established in a country, because their experience allows management to establish linkages with other In summary, SPV is making a considerable finan- domestic businesses, which helps to reduce the cost cial investment in the professional training of its of any capital investment, as well as to increase the local employees. In addition, those employees are development impact of the investment. benefiting from the direct exposure that they have with Lenzing management and the Indian contract In addition to its expansion, the company has an employees. As a result, the company is providing a ongoing investment program to cover equipment considerable amount of human capital to the maintenance and repair. Total cost of that program country. was about US$6 million in 1995, of which about US$2.4 million was spent on local suppliers. Lnkages Industry Effects Viscose production involves the use of several raw materials, most of which are imported at this time. SPV has become an industry leader both locally and Discussions with a local producer of pulp are internationally. Its product is of the highest quality, currently under way, but until they can meet SPV's the company is cost competitive and an aggressive quality and price needs, pulp will continue to be customer service approach to marketing has been imported. developed. This has had three effects. First, it has forced other domestic producers to be aggressive in Despite the importance of imports in the production improving their quality in order to be competitive. process, the company still has considerable busi- Second, it has allowed domestic spinners to be ness contact with local firms. Transport to and from more competitive internationally both because their the plant is provided by a local shipping company quality is high as a result of using SPV fiber, and that has grown over the years with SPV. Given the also their costs are reduced because a location close plant's current level of activity, about 150 jobs have to suppliers reduces transportation costs. Third, been created to provide transportation services. close proximity to clients combined with commit- ment to service has allowed SPV to work with its When Line I was installed, Indonesian contractors clients to overcome technical problems quickly and were employed to provide construction services, at low cost. but nearly all equipment was sourced internation- ally. After nearly a decade working in the country, Infrastructure however, management developed local contacts and much of the Line 2 capital cost was sourced The company is responsible for the development of domestically, in addition to the construction the main road linking the plant with central services. Of the total cost of US$92 million, Purwakarta, located about 9 kilometers away. As a approximately US$30 million was spent domesti- result of the growth of the company and the growth cally, of which US$23 million was for the purchase of the area more generally, that road has become a of capital goods (although some of those were central artery in the regional transportation network imported) and US$7 million was for construction and is well developed commercially. Still, the services. Domestic procurement has continued for company continues to maintain the road, spending Line 3, with US$14 million budgeted for construc- US$45.000 last year on road maintenance for what tion costs and US$14 million for domestically- is in fact a public road. manufactured components. An additional US$11 52 The Line 3 expansion will also include construction Technoo t ^ Transfer of an 8-megawatt power plant, which will be used to supplement the power the company buys from For producing viscose fiber and recycling emis- the local utility. There are two reasons for the sions, SPV employs sophisticated equipment investment in the captive power plant. First, power imported from various international sources. In from the utility is now in scarce supply. Second, addition, the management expertise needed to SPV needs to consume large amounts of steam in operate the plant is provided by Lenzing. In that its production process and it is economical to sense, technology and expertise have been trans- coproduce that steam with electricity. As a result of ferred to Indonesia, but not yet to Indonesian coproduction. the company is able to produce individuals or companies. power at about one-fourth the cost of power provided by the utility, which will produce savings En vi> m en t of US$1.6 million annually for the company. This also represents savings for the country more generally because power utilities do not have the Viscose fiber production iS not a very clean process. adanag o cprdutonan terfoe PVi The combination of chemicals employed in the able to produce its power more efficiently than is process results in the emission of a variety of sulfur the utility, compounds and the large amounts of water em- ployed are ultimately fouled with both organic and So ia l l 5 - t inorganic matter. Without proper procedures and equipment for capturing and processing, the The industrialization that has occurred in potential impact on the environment is great. Purwakarta in the last 20 years has had a positive Lenzing has adopted an aggressive attitude with social impact. Although SPV alone cannot claim respect to the environmental aspects of the project. credit for that impact, the company has played an A recovery system for gaseous emissions has been important role in the process because of its position incorporated into the production process. This as a central player in the local textile industry, system captures the vanious gases, then converts the which is in large part responsible for the transfor- sulfur compounds into sulfuric acid, which is then mation that has taken place. As a result of the used in production. A total of US$15 million was industrial investment in the region, the economy invested for the technology used in this conversion has expanded, with the creation of a large service process, but the sulfuric acid produced has suffi- sector that feeds off of industry. The town now has cient value that the investment has a positive a number of banks as well as department stores, financial rate of return. Included in the budget for which it did not have when SPV began its opera- the current expansion is an additional US$2.5 tions. million for revamping this system, which will further improve its effectiveness. SPV has had a directly observable positive social impact as well. For its employees, their families Water used by the company is taken directly from a and the people living near the plant, SPV has river adjacent to the plant. The water is first treated invested about US$1 million in a mosque, a and then used in a variety of manners. Wastewater community hall, a medical clinic and a football is processed in a US$3 million treatment plant field. The company also provides financial help to located on the site. After treatment, the water is the local school and, through its interest-free loan discharged back into the river. The discharged program, has helped its employees to purchase and water meets government standards, with the improve their own housing. exception of sodium sulfate, a relatively benign compound. 53 Wastewater treatment results in a sludge that is a Co n cI us io n s combination of organic and inorganic matter. Currently, that sludge is placed in a landfill adjacent SPV has made a substantial impact on the local and to the plant which has been designed to contain hal m y. a onting opations and drainage. Once the current expansion is completed, national economy. Its ongoing operations and the sludge will be incinerated in a company power investment program have resulted in the injection plant, and its volume will be significantly reduced. of millions of dollars into the economy annually. It The ashes from the power plant will then be placed provides direct and indirect employment to thou- in the landfill. sands in an area that was previously largely undeveloped, and has developed an extensive SPV's decision to aggressively pursue environmen- training program to develop technical skills in its tally sound technology has not been followed by all workers. It also provides the government with Indonesian viscose producers. Adjacent to the SPV substantial tax revenues and has made a significant plant is another viscose plant, but without the contribution to the local community by investing in sophisticated gaseous emissions recovery system commercial and social infrastructure. Environmen- incorporated by SPV. As a result, sulfur compounds tally, the company has been conscientious, with a are released into the atmosphere and are easily significant investment in equipment and technology detected when the wind is in the wrong direction. that reduces the company's environmental impact to The government is working to improve its regula- acceptable levels. In summary, SPV is a good tion of gaseous emissions, but its emphasis is more example of the positive role that a relatively simple on water quality at this time. SPV is clearly well manufacturing project can have in the economic ahead of its competitors in the environmental development of a country. aspects of its operations. 54 Annex IFC over the years has used the financial rate of return (FRR) as a primary measure of project feasibility from a business viewpoint and the economic rate of return (ERR) as a gauge of its development effective- ness. The FRR is based upon constant price projections of pre-interest net cash flows, subtracting for project costs. The procedure calculates the rate of return that exactly offsets positive and negative cash flows. The ERR differs in some respects from the FRR. Although the method of formal analysis is similar, the cash flows are modified to represent the project's impact on national welfare, not corporate welfare. For example. if project revenues benefit from elevated prices that are a consequence of high tariff barriers, an adjustment is made to the cash flows to reflect this distortion. That is, international or "border" prices are used for tradable goods. The table below provides data on the FRR and ERR calculated at two different times. The so-called ex anite figures are estimates made prior to project implementation. The other columns provide figures on re- calculated FRRs and ERRs when an Investment Assessment Report (IAR) is completed. Typically. IAR estimates are made some years after the project implementation has been completed and funds disbursed. Effectiveness of IFC in Encouraging Development Table 1. Median Rates of Return for 347 IFC Projects Completed in the Period 1978-95 (percent) Region Ex Ante FRR* IAR FRR Ex Ante ERR IAR ERR Africa 18 9 19 10 Asia 19 14 20 13 CAMENA 20.5 11.4 24 13.6 Europe 19.4 12 19.9 15 LAC 20 13 20 12 Average 19 12 20 12 Source: IFC Economics Department * Definitions: FRR = Financial Rate of Return ERR = Economic Rate of Return. IAR = Investment Assessment Report In 1995 IFC initiated a program intended to summarize various aspects of the Corporation's impact on development. In its first year the program detailed the development contributions of 32 investment projects that had been financed several years earlier. Because the number of projects remains small, results must be considered preliminary. IFC's Economics Department plans to add infornation on approximately 30 projects annually, creating a database that in time will paint a broad picture of development results from IFC's investment activities. 55 In the following summary, individual projects have been grouped into two categories: non-capital market projects and capital market projects. Because the fonrer outweigh the latter in IFC's portfolio. the 1995 sampling contains 26 noni-capital iniarket projects, u itt the remtainder Fallirig into the second group. Non-Capital Market Projects Information on development impact was gained using a detailed questionnaire organized according to xarious areas of development impact. Major results from these questionnaires are summarized in Figure 1. Figure 1. Contributions of Non-Capital Market Projects to Major Development 80 - - 70 U _ _ _ _ _ _ 60 * - __ 50 _ U U __ 40 U _ _ 30 U 20 -U 10U U U U U Enhanced Project Increased Employee Technologx Improved Demonstration Intiastructure competition viability employment trainiing transfer environment etfect generation income In over 90 percent of projects reported. IFC enterprises have beeti sustainable in the sense that they ate fnanciallv viable and have resulted in increased market competition: only three are dependent in any way on government protection or subsidies. Moreover, in the vast majority of cases projects included extensive employee training and resulted in worker incomes that were higher than prevailing wages in thei- respec- tive coinmunities. In addition. IFC has insisted on attention being given to employee health and safety, with the result that in nearly all cases covered in this survey such conditions were improved. Technology transfer also has been an important part of IFC projects, occurring in over 60 percenit of the projects. In most cases, the transfer has been complete. because the local company has been able fully to absorb the knowledge and, in many situations, make improvements. This technology has taken many fonms. ticludin- not only engineering knowledge but also improved operational practices and management procedures. Some projects provide infrastructural elements. such as electricity generationi or roads, that can he used by others in the community once the project facility has been put in place. Such projects are generally excep- tions, but they still represent one-third of the teported cases. Siiilai-lv. all IFC projects are required to abide 56 by World Bank environmental standards, and these projects have tended to serve as examples for others. either in demonstrating to the host government that reasonable environmental standards can be imposed or in convincing other business people that acceptable standards can be achieved within a competitive environment. Capital Market Projects IFC activities encompass a wide variety of projects intended to improve the capacity and operating charac- teristics of financial markets. These include credit lines through commercial banks, institutional loans and equity financing. leasing companies. and venture capital and equity funds and others. Thus far, the number of such projects that have been reviewed in detail is comparatively small: only six in 1995. More reviews will be added to the database as time goes on, but for this report there is considerable variety in the types of projects summarized. For example. this group of six projects involves three banks, two leasing companies and an equity fund. The overall objective of a capital market project is either to establish or support a sustainable financial institution or to improve the functioning of local capital markets. Typical of the first type of project would be a credit line to a local commercial bank allowing the bank to serve an expanded clientele or to widen the scope of product offerings to existing customers. In the second category would be equity. which expands potential markets for equity securities, thus serving to deepen such markets for local companies. Each of the six capital market projects was successful in the sense that the institution involved was viable without any external support. In contrast to non-capital market projects, financial institutions generally did not depend on IFC or other sponsors for technology that would assist in making the institution successful. Instead, most financial companies relied almost entirely on their own skills for success. Moreover, as in non-capital market projects, financial projects usually had the effect of raising employee incomes and. relatedly. training was an important feature of project structuring. The most important measure of development effectiveness for a financial institution, however, is the degree to which a project promotes capital market growth and maturity. Did the project result in the introduction of new products or services? Did it add competition to the market'? Were financial sector standards, practices or procedures improved? Did positive changes occur in the sector's regulatory framework? In these areas. IFC projects usually contributed directly. In addition, in all but one project (the equity fund). the assisted financial institution provided increased services to small and medium-sized enterprises in the recipient country. IFC's Role in Assisting Companies Without question, the major contribution IFC makes when it becomes involved in a project is in the prov ision of financing-both its own linancing and the additional funding ofteni made possible by IFC involvement. In lFC. this mobilization of funding has become known as the catalytic role, and it is impor- tant in both capital and non-capital market projects. Beyond its catalytic role, IFC is expected to make special contributions that add to a project's development contribution. For example, in the 26 non-capital market projects reviewed in the study. IFC's presence was critical in improving the environmental standards applied to the project. Other areas of contribution noted in the study were carrying out market assessments, arranging acceptable contractual terms, bringing sponsors together. and helping to resolve various issues with the government. The object in all of these areas is the promotion of a healthy private sector in which. through competition, sustainable private enterprises can be built. 57 l; 'Iset THE PRIVATE SECTOR AND DEVELOPMENT: FIVE CASE STUDIES he International Finance Corporation, a member of the World Bank Group. was established more than 40 years ago to encourage economic growth in developing countries through the private sector. It has undertaken this mandate by investing its own funds, together with those of other private sector partners, in more than 100 coun- tries, often in very difficult business environments. It does so by sharing full commercial risks without recourse to any government guarantees. Because IFC always assumes only a minority position, the enterprises it supports represent a sizable multiple of IFC's own financial interest. Today, IFC's active portfolio amounts to more than $10 billion of long- term loans and equity in over 1,000 developing country firmns. To be true to its mandate, IFC requires more than financial success. It requires above all that the investments it makes also contribute to economic development in its host countries. Documentation of these contributions is no easy task, because there is no ton- sensus about precisely what constitutes "development" and because the data upon which judgments might be based have not, in the past, been collected systematically. This publi- cation represents a first effort by IFC to systematically measure and dissemninate informa- tion about the development contributions of a sample of IFC investments. Thlie Sector and (Case . presents five individual base studies of companies and financial institutions in which IFC has made investments. These cases span a broad range of investments: the initiation of shrimp production in a remote area of Madagascar, the first privatization of a large water and sewerage company in Argentina, textile production in Indonesia and two financial institutions, one in Benin and the other in Bolivia. Together, they provide a striking picture of how imaginative private projects, when structured appropriately, can contribute measurably to the growth and well- being of their host countries. An Annex provides data in summary form from a wide sam- ple of IFC projects. The .nthe( Crould series has been launched to make information available to the public on the development impact of IEC's work. As information becomes available and cases are documented, a more complete picture will emerge of the wide scope of development contributions resulting from IFC's financing activities. ISBN 0-8213-3889-7 Colver design: Jeffrey Kibler1The Magazine Group