Document of

The World Bank

FOR OFICIAL USE ONLY

Report No. 11858

PROJECT COMPLETION REPORT

ETHIOPIA

AGRICULTURAL AND INDUSTRIAL DEVELOPMENT BANK(CREDIT 1275-ET)

MAY 6, 1993

Industry and Energy DivisionEastern Africa DepartmentAfrica Region

This document has a restricted distribution and may be used bY recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EOUIVALENTS

At Appraisal US$1 = Birr 2.07Intervening Years Average US$1 = Birr 2.07Completion Year Average US$I = Birr 2.07

ABBREVIATIONS

AIDB - Agricultural and Industrial Development BankCBE - Commercial Bank of EthiopiaEDB - Ethiopian Development BankEIC - Ethiopian Insurance CorporationGOE - Government of EthiopiaHASIDA - Handicrafts and Small Industries Development AgencyHSB - Housing and Savings BankIDA - International Development AssociationNATRACOR - National Road Transport CorporationNBE - National Bank of EthiopiaPCR - Project Completion ReportSAR - Staff Appraisal Report

FOR OmCIAL USE ONLYTHE WORLD BANK

W"hington, D.C. 20433U.SA

Offic, of Director-GmnralOperatons Evaluation

May 6, 1993

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Completion Report on Ethiopia - Agricultural andIndustrial Development Bank Project (AIDB) (Credit 1275-ET)

Attached is a copy of the report entitled "Project Completion Report on Ethiopia - Agriculturaland Industrial Development Bank Project (AIDB) (Credit 1275-ET)" prepared by the Africa RegionalOffice. No contribution has been received from the Borrower.

The project outcome has been affected by adverse macroeconomic conditions, politicalinstability, government interference in decision-making, and an intermediary plagued by institutional,operational, and portfolio problems.

The PCR does not dwell on the severity of AIDB's financial condition, magnitude of non-performing assets and arrears, restructuring requirements or the dubious merit of many subprojects,especially large industrial schemes launched by parastatals; 70% of the medium-large subprojectsfinanced and over half of the small scale industry subprojects experienced low capacity utilization anddebt servicing problems.

The project is rated as unsatisfactory. Institutional development is rated as negligible, whilesustainability is rated as uncertain.

Since an audit is not likely to enhance understanding of project outcomes, the operation will notbe audited.

Attachment

Tis documm h a n*bited distrbutin and may be used by redpnts only in the perfonance of ohur offial dutd. ltsconits may m otherwise be disclosed without World Bank authorization.

I

PROJECT COMPLETION REPORT FOR OFFICIAL USE ONLY

ETHIOPIA

AGRICULTURAL AND INDUSTRIAL DEVELOPMENT BANK PROJECT(CREDIT 1275-ET)

TABLE OF CONTENTS

Page No.

PREFACE . ...............................................EVALUATION SUMMARY .................................... iii

PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE 1.......

1. Project Identity ........................................ 12. Background .......................................... 1

Country Background .................................... 1The Manufacturing Sector ................................ 2The Financial Sector and AIDB ............................. 3IDA Assistance to AIDB ................................. 4

3. Project Objectives and Description ............................ 4Project Objectives ..................................... 4Project Description ..................................... 4Project Organizational Arrangements ......................... 5Project's Contribution to Institutional Development ................. 5

4. Project Implementation ................................... 55. Procurement .......................................... 66. Disbursement ......................................... 67. Training ............................................ 78. AIDB Financial Performance and Conditions ...................... 79. Audits ............................................. 8

10. Project Results ........................................ 8Attainment of Objectives ................................. 8

11. Bank Performance ...................................... 912. Borrower Performance ................................... 913. Lessons Learned ....................................... 10

PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE 10

PART III - STATISTICAL INFORMATION ........................ 11

1. Related Bank Loans and Credits ............................. 112. Project Timetable ....................................... 113. Credit Disbursements .................................... 124. Project Costs and Financing ................................ 135. Project Results ........................................ 136. Status of Covenants ..................................... 147. Use of Bank Resources ................................... 15

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

PROJECT COMPLETION REPORT

ETHIOPIA

AGRICULTURAL AND INDUSTRIAL DEVELOPMENT BANK(CREDIT 1275-ET)

PREFACE

This is the Project Completion Report (PCR) for the Agricultural and Industrial DevelopmentBank Project in Ethiopia for which credit in the amount of SDR 27.0 million (US$30 million) wassigned on August 27, 1982 and became effective on November 29, 1982. The project was due to closein June 1989, however, after three extensions, it was finally closed on December 31, 1991.

This report constitutes Parts I and III of the PCR. It was prepared by the Industry and EnergyDivision, Eastern Africa Department of the Africa Region (AF2IE). The PCR is based on informationfrom the Staff Appraisal Report, the President's Report, supervision reports, correspondence betweenthe Bank and the Borrower and Beneficiaries, internal Bank documents, and interviews with Bank staffinvolved in the preparation and implementation of the Project.

The Agricultural and Industrial Development Bank (AIDB) in Addis Ababa is preparing Part IIof the PCR, but to date nothing has been received.

I

I

- iii -

PROJECT COMPLETION REPORT

ETHIOPIA

AGRICULTURAL AND INDUSTRIAL DEVELOPMENT BANK(CREDIT 1275-ET)

EVALUATION SUMMARY

1. Project Obiectives: Designed as a "traditional" IDA Development Finance Corporation(DFC) operation, the project had two main objectives: (i) to strengthen the capabilities of the onlydevelopment finance institution in Ethiopia (the Agricultural and Industrial Development Bank -AIDB) involved in agricultural and industrial development; and (ii) to assist the Government's effortsin expanding the capacity of the manufacturing sector by financing industrial investment and technicalassistance. An additional project objective was for AIDB to provide assistance to small contractorsin financing their equipment requirements.

2. Implementation Experienc: The Staff Appraisal Report (SAR) was completed on May 3,1982 and Credit and Project Agreements signed on August 27, 1982. The Credit became effectiveon November 29, 1982 with no delay.

3. Weaknesses in AIDB's financial structure, contributed to largely by its agricultural portfolio,continued as an obstacle to successful strengthening the bank through the course of the project. Thebank's Industrial Department was strengthened under the project resulting in an enhancement inproject appraisal capabilities. However, project implementation/supervision continued to be weak.

4. An over-estimation in demand during appraisal and some project design constraints may havecontributed to the slow movement in credit disbursement for medium and large enterprises.According to AIDB sources, the credit ceiling of US$4 million to a single entity limited the rate ofdisbursement; this ceiling was subsequently removed. On the other hand, the credit demand fromsmall industries and small contractors was extremely strong.

5. Initial delays in assembling and appraising medium and large scale projects were partly offsetby the improved performance of AIDB staff in the following years, largely due to managerial effortsand technical assistance and training financed by the project. However, the original closing date ofJune 1989 was extended first to June 30, 1990, then to June 1991 and finally to December 31, 1991.Political instability, and related administrative difficulties in late eighties, added to projectimplementation delays in the latter years.

6. Project Results: On the whole, the Project was reasonably successful in achieving itsobjectives. It achieved the effective transfer of financial resources and technical expertise to Ethiopiawhich in turn permitted a considerable expansion and modernization of the country's manufac-turing/productive sector capacity. Although the credit component for small-scale enterprises wasrelatively small, it stimulated a considerable amount of entrepreneurial interest in the productivesector.

- iv -

7. Central among the 'indirect' benefits achieved by the project was the transfer of the riskassociated with the State Farm portfolio from AIDB to the Government. This was brought about bypressure from IDA supervision missions. Support provided by supervision missions and enhancedstaff capabilities have contributed to the current dialogue within the Government to increase AIDB'smanagerial and financial autonomy.

8. The fragility in AIDB's financial condition persisted through the life of the project andcontinues at the present time. The removal of the State Farm portfolio (for purposes of riskassessment) in 1988 brought AIDB's long-term debt to equity ratio below 4:1. This ratio could notbe sustained owing to the general weakness of Ethiopia's financial sector and AIDB's lack ofmanagerial and financial autonomy.

9. Project Sustainabilitv: The sustained operations of the industrial enterprises supported bythe line of credit has been difficult and sporadic however, indications are that their impact has beenpositive. The enterprises were (and continue to be) severely constrained by the country's extremedependence on imported raw materials and the shortage of foreign exchange. The project successfullyprovided for capacity expansion but the working capital (particularly the foreign component) was notforthcoming. As a result, several of the enterprises financed are operating at low capacity utilizationrates and are having difficulty in servicing their debts. The enterprises are considered economicallyviable and it should be possible to revitalize them once the country's foreign exchange constraint isremoved or alleviated.

10. AIDB's staff skills and overall institutional capabilities have been improved considerablyunder the project and will contribute to future industrial development efforts.

11. Lessons Learned: At the project level, the key lesson learnt is the need to address longer-term foreign exchange requirements, and situational constraints, in industrial modernization andcapacity expansion projects. This is particularly true for import-substitution oriented industries butalso applies wherever balance of payment difficulties exist.

12. On the policy and institutional levels, improvements in the performance of Government-owned institutions is not sustainable if the "enabling environment" declines or collapses (as it did inEthiopia); particularly adverse were Government interferences in AIDB management and operations.A constituency for transparent and legally appropriate relationships between Government andGovernment-owned corporations has to be in place to permit operational autonomy. When the Bankfully appreciated the extent of these issues it rightly sought ways to raise them with the Governmentas a part of its sectoral policy dialogue.

PROJECT COMPLETION REPORT

ETHIOPIA

AGRICULTURAL AND INDUSTRIAL DEVELOPMENT BANK(CREDIT 1275-ET)

PART I - PROJECT REVIEW FROM THE BANK'S PERSPECTIVE

1 - PROJECT IDENTITY

Name: Agricultural and Industrial Development BankCredit Number: 1275 - ETRVP Unit: Africa RegionCountry: EthiopiaSector: Development Finance Credit to Industrial and Construction Enterprises

2- BACKGROUND

Country Background

2.01 After the revolution in 1974, Ethiopia was ruled by a Military Administrative Council. Thenew Government's general objectives emphasized raising the living standards of the population. Withan annual per-capita GNP of about US$140 in 1980, Ethiopia was one of the most underdevelopedcountries in the world. At the time of project appraisal, population below absolute poverty incomelevel was estimated at 60% in urban centers and 65% in rural areas. A number of specific reformswere introduced to raise living conditions of the population: one of the most relevant was the 1975land reform, under which all rural land was made the "collective property of the Ethiopian people".Former commercial farms were either handed over to peasants for individual or collective cultivation,or retained as state farms. In the urban sector, ownership of houses was restricted to one per family,with extra houses nationalized.

2.02 Most large enterprises in the modem sector were also nationalized during 1975, and subjectedto centralized policy guidance and investment approval. Under legislation introduced in 1979, a largepart of public enterprise profits were also allocated centrally. The private sector retained a role inthe Ethiopian economy, mainly in construction, small scale manufacturing, trade, and peasantagriculture.

2.03 From 1974 to 1978, GDP grew at less than 0.5% per annum in real terms, reflecting securityproblems and the uncertainties and difficulties which accompanied the economic reforms. Exportearnings were maintained in the coffee sector, but declined in other sectors, while imports increasedsharply at a rate of 21 % per annum. In the industrial sector,the closure of factories in Eritrea, which previously accounted for about one-third of industrialproduction, and increasing shortages of raw materials, spare parts and industrial machinery drasticallyreduced output.

2.04 During this period, the role of the central Government and of the public sector increasedsignificantly. Central Government expenditure reached 22% of GDP in 1977/1978, from about 12%

-2-

of GDP in the early seventies. The Government was forced to increase its reliance on domesticborrowing. In addition, a large part of the increase in bank credit to the non-central Governmentsector was accounted for by public enterprises (particularly the state farms).

2.05 Against this increasingly difficult scenario, in September 1978 the Government started a seriesof "economic campaigns" to revitalize the economy. Specific priority was assigned to the productivesectors. An economic revival was experienced in the late seventies, with a real average GDP growthof 5.4% per annum between 1977/78 and 1979/1980. Main causes were the improvement in thesecurity situation, which permitted a reallocation of resources to productive sectors, the re-functioningof several industries in Eritrea, good production levels in grain-producing areas, and a recovery incoffee export earnings. Furthermore, the Government imposed more stringent discipline in themanagement of public sector enterprises, whose real output grew by about 35% during the firsteconomic campaign (1978) and by about 14% during the second (1979/80). Among the substantialnumber of programs and projects the Government launched since 1974, increasing emphasis wasgiven in the manufacturing sector to expand small-scale, cottage and handicraft industries, and toincrease the production of mass consumer goods.

The Manufacturing Sector

2.06 Medium and Large Scale Enterprises. In 1979/80, medium and large-scale manufacturingaccounted for about 5% of GDP, 2% of export earnings and less than 1% of total employment inEthiopia. This subsector comprised about 140 public enterprises, grouped into fourteen holdingcorporations under the Ministry of Industry. These public enterprises accounted for about 90% ofvalue added and 80% of the sector's employment. Food processing, textiles and beverages were thelargest sub-sectors and contributed about 32%, 20% and 19% respectively of the sector's valueadded. In contrast to most countries where public enterprises have been a significant drain on thebudget, in Ethiopia these public enterprises have been a net contributor to Government revenues,through profit taxes, a 5% annual charge on government equity capital, and the remittance to theGovernment of all profit surpluses exceeding the accumulation of reserves in the amount of 30% ofthe capital.

2.07 While public enterprises were legally autonomous entities, they did not have Boards ofDirectors and for all purposes were directly managed by the Ministry of Industry, which appointedthe company management and directed operational and investment programs. Besides operationaldifficulties produced by such limitations in autonomy, public enterprises faced substantial constraintsin terms of skilled manpower and foreign exchange availability.

2.08 Small-Scale Manufacturing Sector. In 1980, this sector was estimated to account for about6.5 % of GDP and about 3 % employment of Ethiopia's labor force (about 400,000 persons). Of this,handicraft enterprises accounted for about 85% of employment and two-thirds of value added to GDP.The sector produced mainly basic consumer goods (particularly flour, clothes, furniture, cookingutensils, etc.), relying mainly on domestic raw materials and contributing negligibly to exports.Small-scale enterprises were predominantly privately owned, by sole proprietorship, partnerships orcooperatives.

2.09 The Construction Sector. In 1980, the construction sector contributed to about 4% of GDP.Of this, 30% was produced by the informal sector. In the formal sector, which included eight largecontractors and some 160 small-scale contractors, construction activities related mainly to buildingsand housing (60% of the total) and roads (25%). The construction work was almost equally divided

- 3 -

between private contractors and government enterprises. The Government, while strengthening itsown construction agencies to support its economic campaigns, did not have specific policies withrespect to limiting the role of private contractors, in view of the large demand for construction work.However, small-scale contractors were constrained by a number of factors, including access to credit,difficulties in attracting and retaining skilled manpower, and shortage of building materials.

2.10 As previously mentioned, since the late seventies, the Government strongly promoting thedevelopment of the manufacturing sector, which was mostly publicly owned. In the medium andlarge-scale sector, manpower problems were addressed through increased technical training andexpanded use of expatriate expertise. To the extent possible, foreign exchange was made availableto import needed raw materials and industrial equipment. However, capacity constraints and shortageof investment for expansion/rehabilitation continued to represent a key limitation against improvingpublic enterprise performance. To promote the development of Small-Scale enterprises, theGovernment established the Handicraft and Small Industries Development Agency (HASIDA), toassist in preparing projects, provide technical assistance and promote artisanal cooperatives. Inaddition, at the time of project appraisal, the Government was preparing a policy proposal to supportthe development of the small-scale private sector by relaxing restrictions on private ownership andallowing preferential treatment of SSIs with regard to taxes, interest rates, procurement, and rawmaterial allocation.

The Financial Sector -and AIDB

2.11 A key constraint to the development of the manufacturing sector was the shortage of availablecredit. Following a rationalization of Ethiopia's development banking institutions, the Agriculturaland Industrial Development Bank (AIDB) was established in November 1970 as a wholly-government-owned institution by the merger of two development institutions, the Development Bank of Ethiopia(EDB) and the Ethiopian Investment Corporation. It was re-established as a public corporation undera 1979 proclamation. After the 1975 nationalizations and subsequent restructuring in 1976, inaddition to AIDB the financial sector included four institutions: (i) The National Bank of Ethiopia(NBE) - the central bank; (ii) The Commercial Bank of Ethiopia (CBE) - the only commercial bank;(iii) The Housing and Savings Bank (HSB) - the one home mortgage institution; and (iv) TheEthiopian Insurance Corporation (EIC) - the only insurance firm.

2.12 Banking in Ethiopia was highly regulated. NBE coordinated all banking activities in Ethiopia,and issued guidelines on credit and foreign exchange allocation and interest rate levels. NBE alsoestablished guidelines for the allocation of credit on an annual basis. In 1982, for instance, the publicsector was eligible to receive 70% of the total, the private sector 28% and cooperatives 2%.Allocations by economic sector were set at 44% for agriculture, 37% for services, 11 % for industryand 8% for housing. Market forces were essentially not considered by the Government as a factorin resource mobilization and allocation. Therefore, availability of banking facilities was consideredmore important than lending policies to attract private borrowers.

2.13 AIDB was the only financial institution in Ethiopia to promote agricultural and industrialdevelopment through short, medium and long-term loans. The bank functions with a low level ofautonomy, with the NBE (and the NBE Board) having supervising authority over AIDB. AIDB'sGeneral Manager can approve loans under Birr 3 million for medium and large enterprises and underBirr 0.5 million for small-scale enterprises. Loans in excess of these amounts need NBE approval.AIDB was headed by a competent General Manager and organized in four main departments -Agricultural, Industrial, Finance and Banking, and Controllers - and five support units - Legal,

- 4 -

Research and Planning, Engineering, Public Relations, and Administration. AIDB had eight branchesoutside Addis Ababa and a staff of about 100 professionals. Although the AIDB's statutes compriseda mandate also in the areas of equity investment, government fund management and promotion ofprojects, the bank's role was de-facto limited to providing loans and managing various funds. TheWorld Bank Group has had extensive experience with development banks in Ethiopia and, duringappraisal, the structure of AIDB was considered by IDA to be appropriate for its role. AIDBperformance and capacity were also considered broadly acceptable, however areas of neededimprovements were identified, mainly to: (i) reduce AIDB's exposure to financial and investmentrisks; (ii) develop suitable guidelines for project appraisal; (iii) establish suitable procedures toexpedite loan processing; and (iv) strengthen its operational capabilities in several professional areasand particularly the Industrial Department by acquiring improved engineering expertise.

IDA Assistance to AIDB

2.14 The 1970 merger of the Development Bank of Ethiopia and the Ethiopian InvestmentCorporation into the newly-formed AIDB was suggested by IDA, which also assisted the Governmentto implement the merging process. In 1972, a US$11.0 million Credit (No.304-ET) was providedthrough AIDB to finance agricultural and industrial projects, complementing parallel assistance to themanufacturing sector by IFC which, between 1965 and 1970, provided equity investments and loansto the textile, paper and sugar sub-sectors. This IDA Credit was fully disbursed in April 1977 andsubstantially met its objectives. The new credit (1275-ET) was therefore conceived in a perspectiveof long term assistance to AIDB to support rehabilitation and expansion of the manufacturing sector,enhance private sector participation and continue strengthening AIDB as a development financecompany (DFC).

3 - PROJECT OBJECTIVES AND DESCRIPTION

Project Objectives

3.01 The project was overall a "traditional" DFC operation. It had two main objectives: first,to strengthen AIDB to fulfill its role as the only development finance institution in Ethiopia lendingfor agricultural and industrial development. The second objective was to assist the Government, byfinancing industrial investment and technical assistance, in its efforts to expand the capacity of themanufacturing sector to satisfy the demand for basic consumer goods. In addition to these objectives,the project was to assist AIDB, on an experimental basis, in financing small contractors.

Project Description

3.02 The Project credit of SDR 27.0 million (US$30.0 million equivalent) was comprised of thefollowing five components:

(i) A US$25.0 million line of credit to AIDB to cover part of its foreign resource needs forlending to medium and large scale industrial enterprises. The investments to be financed under thiscomponent were for rehabilitation and expansion of existing enterprises, and also for new projectswith strong links to existing operations. To ensure that AIDB did not lend to only a few largeprojects, the ceiling for a single loan was originally set at US$4 million equivalent. Minimumlending was established at US$250,000 equivalent.

-5 -

(ii) A US$2.0 million line of credit to AIDB to cover part of its needs for lending to small scaleindustrial enterprises. The ceiling for a single loan was set at US$250,000 equivalent.

(iii) A US$1.0 million line of credit to AIDB to launch an experimental scheme for financing theequipment requirements of small scale contractors. The ceiling for a single loan was set atUS$150,000 equivalent.

(iv) A US$500,000 grant training fund to help AIDB and other public sector institutions involvedin the industrial sector to upgrade the quality of their professional staff in project development,project management and accounting.

(v) A US$1.5 million grant component for technical assistance and consulting services to helpalleviate the critical shortage of manpower for sectoral studies, sector planning, feasibility studies andenterprise management and operation.

Project Organizational Arrangements

3.03 AIDB was responsible for implementing all components of the project, particularly evaluatingsub-projects for financing. Small scale borrowers could receive technical assistance from Handicraftsand Small Industries Development Agency (HASIDA), in line with existing cooperation arrangementsbetween AIDB and HASIDA. A full-time project officer was appointed by AIDB to coordinate thetraining and technical assistance components. The training component was mainly designed for shortterm skill upgrading for AIDB staff.

3.04 IDA was responsible for final approval of all credit to medium and large-scale enterprises,support to small contractors during the initial phase of the project, studies, technical assistance andtraining programs. IDA approval was not required for AIDB credit to small scale enterprises.

Project's Contribution to Institutional Development

3.05 The Project was expected to significantly contribute to the institutional development of AIDBthrough a number of improvements to AIDB structure, including (i) improvements in the functioningof AIDB management; (ii) the creation of a "Mini Board" to closely monitor project implementation;and (iii) the establishment of a Technical Services Department and of a Training division. Attentionwas paid to strengthening the AIDB staff through recruitment of additional qualified professionals,particularly in the Industry Department.

4 - PROJECT IMPLEMENTATION

4.01 The Staff Appraisal Report (SAR) was completed on May 3, 1982 and Credit and ProjectAgreements signed on August 27, 1982. The Credit became effective on November 29, 1982 withno delay.

4.02 During the first IDA supervision mission in March 1983, three outstanding issues werehighlighted: (i) the need to strengthen AIDB's financial condition, (ii) the lengthy time required forappraising projects, particularly in the medium and large-scale industrial sector, and (iii) the need forall loan agreements with public enterprises to specify the seniority of debt servicing over residualsurplus payments to the Treasury, in the appropriation of their profits (para.2.06). While issues (ii)

- 6 -

and (iii) were eventually resolved, the financial condition of AIDB remained weak through theproject's life and was the single most negative element affecting project performance (see section 8).

4.03 Initially AIDB experienced difficulties in the area of project assessment: AIDB staff werenot familiar with the appraisal of large-size rehabilitation/restructuring projects, which weretechnically more complex than appraising new projects. Similar difficulties were experienced at theMinistry of Industry, where technical proposals were expected to be formulated .There were alsoproblems with the quality of the proposals, which frequently were not presented in a bankable format.Movement in the pipeline for medium-large scale projects remained sluggish and may have beenoverestimated at appraisal. In May 1984, seventeen months after Credit effectiveness, only 18% ofthe medium-large scale industries component was committed, with few prospects for additionalproposals, except five potential projects for which studies were launched (asbestos, metal tools,cigarette, tannery and oil mill/soap). Pressure was put by IDA on AIDB and the Ministry ofIndustry, to finalize a suitable pipeline before the expiration date for sub-project commitment, whichwas originally set at June 30, 1985. AIDB contended that the single-project ceiling of US$4 millionequivalent was a constraint to disbursement in this category; the ceiling was increased toaccommodate projects requiring higher investment.

4.04 On the other hand, the pipelines for small industries and small contractors were significantlystrong. In May 1984, 66% of the component for small scale industries was committed (18 projects),and the pipeline indicated the need for additional US$1 million financing over the component ceilingof US$2 million. In the same period, 36% of the US$1 million for small contractors was committed,and there was a demand in the pipeline for an additional US$1.8 million.

4.05 While slowness in commitment and disbursements continued in 1985, sub-project appraisalcapabilities by AIDB staff gradually improved, thanks to managerial efforts, technical assistance andeffective training. The establishment and functioning of the 'Mini-Board" resulted in improvingcommitment and disbursement performance. Initial delays in assembling and appraising medium-large scale projects were partly offset by the improved performance of AIDB staff in the followingyears. However, the original closing date of June 1989 had to be extended to June 30, 1990, thento June 1991 and finally to December 31, 1991. The aggravation of the political situation, andrelated administrative difficulties in late eighties, also contributed to some project delays in the finalperiod of project implementation.

5 - PROCUREMENT

5.01 Procurement was in accordance with established AIDB procedures,which were reviewed andapproved by IDA. Procurement was in general satisfactory and did not represent an issue duringproject implementation.

6 - DISBURSEMENT

6.01 The proceeds of the Credit to be used for medium and large scale enterprises were to finance100% of the foreign exchange cost of imported goods; 80% of the total cost of previously importedgoods and 60% of the total cost of civil works. The proceeds of the Credit for the other componentswould finance 100% of the total cost of goods and services. On May 3, 1984, of the US$25 millionallocated for medium and large enterprises (or 83.3% of total Credit), only $4.46 million were

committed. For Small Scale industries, of the US$2.0 million in the component, $1.33 million wascommitted to 18 industries. For Small Scale Contractors, $0.36 million, of a budgeted US$1 million,were committed.

6.02 Disbursements were expected to be completed by June 1989. However, as of September 28,1988, US$12.1 million, or only 40% of the total Credit, had been disbursed, compared to US$25.3million (or 84.3% of total credit) estimated in the SAR. On May 10, 1990 the credit to small scaleindustrial enterprises was fully disbursed, but delays still persisted in completing the disbursementfor two medium-large scale industrial projects (exercise books and Ambo Mineral Water factories).According to AIDB sources (in May 1992), amounts actually approved for each project had beenfully disbursed. There is, however, an outstanding balance of about SDR 1 million (in AIDB's favor)created by exchange rate fluctuations.

7 - TRAINING

7.01 On June 3, 1983 AIDB presented a detailed training program to IDA for approval. Theprogram was designed and implemented effectively, and was substantially completed by the end of1985. Key areas of training were accounting, finance and project analysis. The largest part oftrainees was sent for short term courses in U.K.

8 - AIDB FINANCIAL PERFORMANCE AND CONDITIONS

8.01 The fragility of AIDB's financial position was accurately detected at the time of ProjectAppraisal. Since 1976, AIDB's profitability declined as a result of a growth in arrears thataccompanied the rapid increase in the level of its operations. The state farm portion of theagriculture portfolio was very weak, suggesting that the arrears problems were indications offundamental operating and financial problems in the state farm sector. AIDB had only limitedresponsibility for poor performance in this area as loans to state farm enterprises were extended uponinstructions from the Government.

8.02 The situation of the industrial portfolio was weak as well, with all the loans inherited fromEIC in arrears by more than twelve month at the time of project appraisal. In addition, about 12%of the principal of the new loans was in arrears. About 6.5%, or US$3.3 million equivalent, of theprincipal of AIDB loans in other sectors was also in arrears, and the proportion of affected loans was43%. A plan to improve AIDB financial condition was discussed and agreed upon with IDA. Theplan included the rescheduling of loans, recovery of outstanding credit, writing off some bad loans,etc. The objective was, inter-alia, to lower the long-term debt-equity ratio from 7.7/1 to an agreed4/1.

8.03 However, the poor conditions of the AIDB portfolio (particularly the credit to the agriculturalsector which comprises some 80% of all lending) could not be reversed through sustainableimprovements during the life of the project. Because of large provisions necessitated by doubtfulinvestments and potential losses, AIDB incurred losses which gradually eroded its paid-in capital fromBirr 100 million to Birr 83 million as of December 1983.

8.04 The need to expeditiously address the portfolio problems was constantly felt by AIDBmanagement and stressed by all IDA supervision missions. In January 1984 IDA suggested the

-8 -

writing-off, with possible Government compensation, of certain bad loans which included oldagricultural loans (Birr 20.5 million), loans to inactive coops (Birr 4.6 million), AIMS (Birr 15.2million), old industrial loans (Birr 11.5 million), loans to private enterprises (Birr 0.6 million), andloans to the National Transport Corporation (NATRACOR), a major defaulter experiencing financialdifficulties.

8.05 An Action Program to strengthen AIDB's financial condition was requested by IDA duringthe Bank/Fund annual meeting in September 1984. However agreed remedial actions were difficultto implement, mainly because general difficulties in state finances made it difficult absorb some ofAIDB's bad loans to the public sector. Some remedial measures were taken (writing-off of someloans, transfer to the Government of foreign exchange risk for some hard currency borrowing, etc.)the situation did not improve significantly. Between June 1987 and June 1988, arrears in the non-state farm portfolio increased by 119% and, at the Government's request, AIDB exceeded its lendingexposure (debt/equity) limit of 20%. The IDA supervision mission in September 1988 reported thatAIDB's condition continued to be aggravated by further deterioration in its non-state farm loanportfolio, ineffective supervision of its investment projects, and inadequate debt collection. After1988, IDA supervision of the project was sporadic reflecting Ethiopia's difficult security andeconomic situation. At the time of project closing, AIDB was still struggling to improve its portfolioand overall financial condition.

9 - AUDITS

9.01 Shortcomings in the quality of audit reports were detected at the very beginning of projectimplementation (for instance the audits for the period ended June 30, 1982 were found to beunsatisfactory). The situation improved considerably in the following years, and the audit reportswere satisfactory both in term of quality and punctuality by the end of the project.

10 - PROJECT RESULTS

Attainment of Objectives

10.01 On the whole, the Project was reasonably successful in achieving its objectives. It achievedtransfer of financial resources and technical expertise to Ethiopia. In addition to the direct benefitsdiscussed below, their were considerable indirect benefits. Central among these was the transfer ofthe risk associated with the State Farm portfolio from AIDB to the Government (brought about bypressure from IDA supervision missions) and the current dialogue within the Government to increaseAIDB's autonomy.

10.02 The main project objective of expanding and modernizing the capacity of the manufacturingsector was achieved. In the medium and large scale industrial subsector, the Credit financed a broadrange of enterprises in areas such as printing, agro-industry, beverages, textiles, exercise books,industrial gases and tire retreading. In the small industry subsector, the line of credit financedbakeries, carpentry shops, tailors, shoe factories, furniture, cosmetics, mechanical workshops, etc.AIDB judged this component to be small (compared with credit demand) but it did stimulate a lot ofentrepreneurial activity. The component to support the construction industry financed about 8 to 10contractors. In general, these sub-projects were implemented and completed in a timely manner.Indications are that their impact has been positive. Their sustained operation, both from production

-9-

and financial points of view, has been difficult and sporadic. The enterprises were (and continue tobe) severely constrained by the country's extreme dependence on imported raw materials and theshortage of foreign exchange. The project successfully provided for capacity expansion but theworking capital (particularly the foreign component) was not forthcoming. As a result, several ofthe enterprises financed are operating at low capacity utilization rates and are in default on their loansfrom AIDB.

10.03 On the institutional side, AIDB project appraisal capacity was improved considerably throughthe training and technical assistance provided by the project. The "Mini-Board" created within NBEto approve loans under the project functioned well. The Industrial Department was strengthened byhiring 8 additional qualified and experienced bank officers. AIDB project supervision andimplementation remained weak through the project. The Implementation Section has recently (1992)been upgraded into a Department and is being strengthened.

10.04 The fragility in AIDB's financial condition persisted through the life of the project andcontinues at the present time. The transfer to the central Government of the risk associated with theState Farm portfolio in 1988 brought AIDB's long-term debt to equity ratio below 4:1 targeted at thetime of appraisal. This ratio could not be sustained and prevented AIDB from strengthening its roleas the main lending institution to productive sectors. Lack of managerial and financial autonomy,and the general weakness of Ethiopia's financial sector, contributed to AIDB's inability to consolidateits financial condition on a sustainable basis.

11 - BANK PERFORMANCE

11.01 The Bank performance was satisfactory. The Supervision Teams performed in a professional,responsive and dedicated manner. They were particularly effective in assisting the AIDB in theevaluation of sub-project proposals, a time-consuming exercise which contributed greatly to theproject's overall success. Assistance was provided with continuity and in a detailed and timelymanner. Political instability in the last two years of project implementation resulted in a decline insupervision intensity.

11.02 Regarding the dialogue on financial sector issues, the Bank had to wait until 1988 for itsperiodic remonstrations (under this and other parallel projects) to lead to in-depth sector work aimedat reforming the financial sector.

12 - BORROWER PERFORMANCE

12.01 The AIDB, particularly its Industrial Department, performed remarkably well in improvingits internal capabilities in sub-project assessment and monitoring. It undertook significant changesto its structure, which improved its operational efficiency. Staff training was undertaken in a timelymanner and effective internal training programs were instituted resulting in enhanced staffperformance from an early stage of project implementation.

12.02 The AIDB management was however, and understandably, unable to undertake the massivefinancial restructuring that was needed. Key issues in this area exceeded AIDB statutes and capacityof intervention. The fundamental issues had more to do with sectoral policy and could not be tackledat the project level.

- 10-

13 - LESSONS LEARNED

13.01 At the project level, the key lesson learnt is the need to address longer-term, working capitalrequirements for foreign exchange in projects aimed at expanding manufacturing capacity. This isparticularly true for import-substitution oriented industries but also applies wherever balance ofpayment difficulties exist.

13.02 On the policy and institutional levels, improvements in the performance of Government-owned institutions is not sustainable if the "enabling environment" declines or collapses (as it did inEthiopia); particularly adverse were Government interferences in AIDB management and operations.A constituency for transparent and legally appropriate relationships between Government andGovernment-owned corporations has to be in place to permit operational autonomy. When the Bankfully appreciated the extent of these issues it rightly sought ways to raise them with the Governmentas a part of its sectoral policy dialogue.

PART II - PROJECT REVIEW FROM THE BORROWER'S PERSPECTIVE

Part II of the PCR is being prepared by AIDB, but to date nothing has been received.

- 11 -

PART III - STATISTICAL INFORMATION

1. Related Bank Loans and Credits

Loan/Credit Year ofTitle Purpose Approval Status Comments

Credit 304-ET Finance agricultural and 1972 Completed Project objectivesProject industrial projects, and a in 1977 substantially

consulting study on achieved.agricultural credit.

2. Project Timetable

Item Date Planned Date Revised Date Actual

Identification

Preparation 5/81

Appraisal 5/82

Negotiations 4/82

Board Approval 6/82

Credit Signature 8/82

Credit Effectiveness 11/82

Credit Closing 6/89 6/90-6/91-12/91 12/91

Credit Completion 12/91

- 12 -

3. Credit Disbursements (US$ '000)

IDA FY Credit T.A. Est. Actual Actual as %and Qtr Comp Comp Cum. Cumulative of Estimated

1983 1 258 68 3262 516 136 652 1,260 2523 774 204 978 1,510 1374 1,032 272 1,304 2,020 96

1984 1 2,339 388 2,727 2,790 962 3,647 500 4,147 2,980 733 4,955 612 5,567 3,340 654 6,521 736 7,257 3,580 56

1985 1 8,207 847 9,054 4,000 552 9,893 958 10,851 4,240 503 11,579 1,069 12,648 4,670 484 13,263 1,180 14,443 5,400 51

1986 1 14,700 1,269 15,969 5,510 482 16,137 1,358 17,495 5,750 463 17,574 1,447 19,021 6,110 454 19,011 1,534 20,545 6,290 43

1987 1 20,005 1,593 21,598 6.450 432 21,000 1,652 22,652 6,700 433 21,995 1,711 23,706 7,010 444 22,989 1,768 24,757 7,450 47

1988 1 23,911 1,802 25,713 7,680 482 24,832 1,836 26,668 7,780 493 25,753 1,870 27,623 8,440 534 26,674 1,902 28,576 9,030 56

1989 1 27,005 1,927 28,932 9,170 572 27,337 1,952 29,289 9,620 603 27,668 1,977 29,645 9,900 624 28,000 2,000 30,000 10,910 68

1990 1 - 11,240 702 - 11,820 743 - 12,300 774 - 12,640 79

1991 1 - 13,050 822 - 13,370 843 - 14,580 914

SDR US$Original Amount 14,000,000 16,000,000

Less Disbursed 12,233,431 14,580,000Less Canceled 1,766,569 (2,020,000) at appraisal exchange rate

- 13 -

4. Project Costs and Financing

Expenditures from Credit by Categorv/Component (in '000 SDR equivalents)

CAT I Description Planned Actual

A. AIDB lending to Medium and Large Scale 22,500 (25,400)Industrial enterprises (Planned IDA financing of (US$)100% of forex comp. and 80% of local exp. forimports and 60% of civil works)

B. AIDB lending to small-scale industrial enterprises 1,800 ca.2,300(IDA credit to finance 100% AIDB lending,equivalent to about 57% of total project costs)

C. AIDB support to small-scale contractors to purchase 900 ca.868equipment (IDA credit to finance 100% AIDBlending. Borrower to contribute at least 20 % oftotal cost.

D. Training for AIDB and other public institution staff 450in proj. dev., management and accounting

E. Consulting services and Technical Assistance - 1,350sector and subsector studies, sector planning,feasibility studies, and enterprise management (150man-months of assistance).

TOTALS 27,000

5. Poect Results

A. Direct Benefits: Line of Credit

Category Number Impact: Status and CommentsFinanced

A. Medium & 10 7 enterprises experiencing forex and raw material limitations causing lowLarge-scale capacity utilization and debt-servicing problems. Updated information onindustrial all enterprises is being compiled by AIDB (expected in June 1992)enterprises

B & C. Small 52 For. exchange requirements financed. Industrialization andindustrial entrepreneurship development accelerated. 23 enterprises and contractorsenterprises & settled loans w/o difficulty. 2 projects reasonably healthy. 21 in arrearscontractors due to low capacity operations caused by forex/raw material limitations.

Legal action against 6 by AIDB due to poor debt-servicing capacity.

- 14 -

B. Technical Assistance and Studies

Category/Description Impact/Comments

D. Training to AIDB & other public institutions Designated staff received external training promptly.concerned with ind. dev. External training and Training unit est. in AIDB. Training effective inestablishment of local programs upgrading skill levels.

E. T.A. and consulting services to alleviate T.A. effectively strengthened AIDB Ind. Dept.shortage of prof. expertise in planning and capacity. Engineering div. was strengthened byimplementation of industrial development. hiring an ex-pat. engineer for 3 years.

6. Status of Covenants

Credit Agreement (Between IDA and Borrower)

Cove. Compl.(Sect.) Subject Deadline Status

3.04 AIDB State Farm Portfolio: Repayment of Risks associated withAIDB debt to central bank (for this portfolio) to be AIDB credit to state farmslimited to actual AIDB receipts from state farms. transferred to GOE in '88.

3.05 Facilitate project implementation by AIDB Complied with

Proiect Agreement (Between IDA and Agricultural and Industrial Development BUak)

Covenant Compliance(Section) Subject Deadline Status

2.01 (b) Sub-loans under Part A restricted to - Complied with.projects with ERR > 10%

2.01 (c) Ceiling of USS4 million to any single - Ceiling limit for Part Aenterprise under Part A and US$150,000 projects removed due tounder Part C of Project slow disbursement.

2.02 (a,f) AIDB to obtain IDA approval for all loans - Complied withto investment projects under Parts A and Cand for technical assistance sub-projects.

2.08 (a) AIDB to employ qualified industrial - Complied with.engineer.

2.08 (b) AIDB to add 8 qualified and experienced Dec. '82 Complied with.loan officers in its Industrial Dept.

3.01 AIDB to maintain records to monitor Complied with.l_________ Project and sub-project performance.

3.02 Audit of AIDB accounts by independent Within 12 mths Initial delays butauditors and submission to IDA. of year end complied with later.

3.05 AIDB's fin. commitments in a single Complied with.enterprise shall not normally exceed thelower of 20% of its net worth or 80% oftotal capital cost in an investment project.

|~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~---- -- -----

- 15-

7. Use of Bank Resources

A. Staff Inputs

Stage of Project Cycle Staff Weeks Comments

Through Appraisal 43.1 Some project preparation occurred while supervisingCredit 890-NIR.

Appraisal through 8.2Board Approval l

Board Approval -

through Effectiveness

Supervision 81.9 Missions devoted time to sectoral reform supervision inaddition to project supervision.

Lending Preparation 14.8

TOTAL 148.0

B. SuDervision Missions

Types of

No. of Days in Perform. ProblemsDate Persons Field Specialization Rating 1/ (2J)

10/82 2 12 Operations officers 2 F

3/83 2 10 Operations officers 2 T,F

3/84 2 10 Operations officers 2 T,F

5/84 4 9 Ops.officers-2, Industrial Econ., 2 F,M,TConstruction Industry Officer

5/85 3 10 Ops.officer, Ind. Econ., Consultant 3 F,M,T

7/86 2 14 Operations officer/YP 3 -

3/87 1 21 Operations officer 2 -

12/87 1 7 Operations officer 3 -

7 /88 1 14 Operations officer 2 -

1/ 1. Problem free or minor problems2. Moderate problems3. Major problems

2/ F. Financial M. Managerial T. Technical3/ No form 590