Document of The World Bank RECOMMENDATION OF THE PRESIDENT OF THE TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL BANK OF POLAND FOR AN

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFCIAL USE ONLY L.N 31(,1- PoL MEMORANDUM RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENTO US$260 MILLION TO THE NATIONAL BANK OF POLAND WITH THE GUARANTEE OF THE REPUBLIC OF POLAND FOR AN INDUSTRIAL EXPORT DEVELOPMENT PROJECT JANUARY 3, 1990 Report No. P-4761-POL This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CUClf AND W A Currency Unit - Zloty (ZI) (Average rates) (est) (Jan. 1) US$ WGIm AND S Metric System BH - Bank Handlowy EDB - Export Development Bank FTO - Foreign Trade Organization LIBOR - London Interbank Offered Rate NBP - National Bank of Poland PAID - Project Appraisal & Implementation Division PPF - Project Preparation Facility,WMAND FWAL.- ]W January 1 - December 31

3 FOR OFFICIAL USE ONLY POLAND INDUSTRIAL EXPORT DEVELOPMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Guarantor: Beneficiaries: Amount: Terms: Onlending Terms: National Bank of Poland (NBP) Republic of Poland Exporting industrial enterprises, selected commercial banks and Government agencies US$260 million equivalent 17 years, including a five-year grace period, at the Bank's standard variable interest rate Subloans to final beneficiaries will be denominated in US dollars and interest will be at prevailing market rates. NBP will bear the foreign exchange risk between the US dollar and the Bank's currency pool. The interest rate charged by NBP to participating banks will be established as a floating rate linked to the London Interbank Offered Rate (LIBOR) for dollar deposits and will include a margin for NBP. This margin is set at 1.75% for the January 1-June 30, 1990 period, Subloans will be for a maximum of 10 years, including a maximum grace period of three-years. Financing Plan: IBRD Loan US$ 260 million Domes_ic Banks' Loans US$ 70 million Enterprise Funds USS 125 million Total US$ 455 million Economic Rate of Return: Staff Appraisal Report: Map: Weighted average of 32% for seven pre-identified investments utilizing 54% of loan proceeds and a minimum of 18% for additional investments. Report No POL IBRD 20571R This document has a restricted distribution and may be used by recipients only in the performarof their official duties. Its contents may not otherwise be disclosed without World Bank authori..tin

4 MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE NATIONAL BANK OF POLAND WITH THE GUARANTEE OF THE REPUBLIC OF POLAND FOR AN INDUSTRIAL EXPORT DEVELOPMENT PROJECT 1. The following memorandum and recommendation on a proposed loan to Poland for US$260 million equivalent is submitted for approval. The proposed loan would be on standard IBRD terms with 17 years maturity including five-years of grace and help to finance expansion of industrial exports to convertible currency markets. 2. Background. Industry is the leading sector of the Polish economy and contributes 23% of employment, 44% of GNP and 74% of exports. Following a sharp decline of output between 1978 and 1982, recovery has been slow and continues to be constrained by (i) the industrial policy framework within which enterprises operate, including price distortions and central administration interference; (ii) technical constraints, in particular outdated technology and lack of access to imported equipment and intermediate inputs due to a chronic shortage of foreign exchange; and (iii) weak enterprise management, specifically in areas of planning, financing and marketing. Results of the reform process which began in 1982 have been disappointing, at least in part because of a lack of commitment on the part of elements of the bureaucracy and a lack of confidence in the fundamental commitment of the Government to the reform process. 3. As noted in the latest Country Brief, the environment for effecting real reform has recently greatly improved tnd the new Government has initiated measures aimed at moving towards a market-oriented economy with a view to improving the efficiency and productivity of the economy, promoting growth, and im,proving socioeconomic conditions. In this context, deposit and lending interest rates have been liberalized. On January 1, 1990, the zloty was devalued and exchange rates unified, and administrative price controls were removed on most goods and services. Major progress on tax reform is expected in the first quarter of These measures are part of a comprehensive macroeconomic/ stabilization program that has recently been agreed with the IMF. In the short term, high priority is being accorded to sharply reducing the rate of inflation, mitigating the country's severe external debt problem and beginning the process of restoring the country's creditworthiness. In the longer term, priorities in the industrial sector will focus on restructuring, including the development of a strong private sector both through fostering new private sector initiatives and through privatization of existing public-sector enterprises. 4. Bank Strategy and Rationale for Bank Involvement. The Bank's overall strategy and long-term objective in Poland is to support the Government's reform program and related efforts to improve the efficiency and productivity of the economy. In the short term, Bank involvement also focusses on helping to improve the balance of payments and the country's creditworthiness. The major thrust of the investment financing component of the proposed project is to assist this short-term objective by effecting a quick increase in the level of production and of exports to convertible currency markets. The longer-term objective is being addressed through the technical assistance component of the project which on the one hand will help the Government develop and initiate the necessary strategies for restructuring the industrial sector with a larger role foreseen for the private sector, and on the other hand to improve the capacities of various institutions to implement this strategy effectively.

5 * 2 - S. Support to the development of the financial sector is also an integral part of the Bank's overall strategy for assistance to Poland. Such support waa initiated as part of the preparation of tho proposed Project and the ongoing policy dialogue. The Project, through the participation of a numbor of banks and the technical assistance to be provided to them and to the banking supervisory agency, the National Bank of Poland (NBP), continues this support by strengthening the commercial banking system and competition therein. In line with the high priority the Government attaches to the further development of the financial sector as a part of its current reform effort, it has now requested urgent, expanded Bank and 1MF assistance in this area. A joint review was begun in December, 1989 to deepen the understanding of the issues facing the sector and recommend needed reforms. The insights gained will provide timely input into a proposed policy-based loan to be followed by support for the development and modernization of banks and other financial institutions. These efforts will facilitate effective financial intermediation including for future Bank operations. 6. Proiect Objectives. The main objectives of the proposed project are to contribute to: (i) improving the convertible currency trade balance of Poland by increasing the volume, quality and value-added of industrial exports to convertible currency markets; (ii) improving the project financing and other capabilities of selected banks; (iii) identifying restructuring needs and preparing restructuring programs in industry; and (iv) supporting development of the private sector. These objectives are in line with the country's efforts to enhance rapidly its creditworthiness by improving its balance of payments, and to launch effective industrial restructuring programs that fit in with the ongoing implementation of reforms and changes towards a market economy. 7. Project Descrigtion. NBP will be the borrower of World Bank resources and will coordinate overall project activities for the two components: financing of exnort oriented investments and technical assistance. NBP will refinance loans (US$ 245 million) made by selected participating banks to enterprises undertaking high priority and high return investments to expand exports to convertible currency markets. Seven subprojects in the chemicals, engineering and wood-based industrial subsectors have already been appraised. Loan proceeds would finance direct foreign exchange costs of needed physical improvements to production facilities, including machinery, equipment and spare parts, permanent working capital, technology transfer and technical assistance and training at the enterprise level. 8. Market and marketing prospects for all products appear good. Most of the increased output which will be obtained is in products which Poland is already exporting, thus minimizing the risk normally associated with entry into new markets. As in the past, some of the products will be exported through specialized Foreign Trade Companies. However, taking advantage of the new and more liberalized export trading regime, most enterprises have also begun to investigate the possibilities for direct exports. 9. Environmental degradation is a serious problem in Poland and the Bank is working closely with the Governmento develop an environmentechnical assistance project which would provide specific support for long-term solutions in this regard. Under the present project, preparation of subprojects includes an assessment not only of the environmental impact of the facilities t.o 1wv

6 - 3 - installed in the various enterprises, but also of the existing operations of the enterprises concerned. Subloan covenants will require that subprojects not contribute to environmental or safety hazards, and in more than half of the subprojects already selected, there will also be a reduction in polluting discharges from existing operations. The project is thus introducing standards which are expected to be replicated by the participating banks for their other lending operations. 10. The project includes substantial technical assistance, not only to provide direct support to the investment component of the project, but also to assist financial institutions and other agencies to begin the process of adjustment to the new economic and political environment. Specifically, the technical assistance component (US$15 million) will be used for programs designed first to strengthen the banking system, enhancing the capabilities of NBP and financial institutions in Poland, including the participating banks. Terz.s of reference have been agreed for programs which will assist Polish banks to develop and implement programs to improve their operations, and also for an advisor to NBP who will help to develop a comprehensive plan for strengthening bank supervision. Second, technical assistance will support the restructuring of industry through the development of subsectoral restructuring strategies and the introduction of international accounting standards and auditing practices. In this context studies are proposed and terms of reference have been agreed for determining the restructuring needs in the packaging and components industries and the steel subsector. Considerable progress has already been made in introducing improvements to accounting and auditing practices with the Project Preparation Facility (US$ 1.5 million), approved by the Bank in June, Third, technical assistance financed under the project is aimed at helping to stimulate rapid development of the private sector through both the development of new private enterprises and the privatization of existing public sector companies. Astivities envisaged under this component include a program to help determine the assistance needs of ailing and financially distressed enterprises, assistance to the development of small-scale enterprises, and a program to support the transformation and privatization of state-owned enterprises. 11. Total project cost is estimated at US$455 million equivalent, with a foreign exchange component of US$276 million (61%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Poland are given in Schedules C and D, respectively. A map is also attached. The Staff Appraisal Report, No POL, January 3, 1990 is also attached. 12. Agreed Actions. NBP has agreed to the following for the operations of the onlending component, to be implemented via Subsidiary Financing Agreements with participating banks: (a) signing of a Subsidiary Financing Agreement, satisfactory to the Bank, with at least one participating bank would be a condition of loan effectiveness; (b) each participating bank would undertake a special external audit of its operations in order to develop and implement plans to improve its operations and financial condition, with explicit measures to achieve adequate ratios for capital to risk assets, concentration of portfolio, and loan loss reserves; and (c) onlending to final beneficiaries would be in US$ at market-determined interest rates.

7 * For the selection of subprojects eligible for refinancing from the Bank loan, the participating banks would ensure that, among others: (a) the selected subprojects would demonstrate financial and economic rates of return of at least 18X; (b) the subprojects would be completed within at most three years and earn net additional foreign exchange in the first four years after completion at least equal to the foreign exchange cost of the subproject; and (c) the subprojects would not contribute to a safety hazard or to environmental deterioration. 14. For the implementation of the technical assistance components, NBP has agreed to: (a) coordinate overall arrangements; (b) onlend to commercial banks, through Subsidiary Lending Agreements satisfactory to the Bank, funds needed to develop and implement action programs to improve their operations and financial conditions; and (c) onlend to the Government, through a Subsidiary Loan Agreement satisfactory to the Bank, funds needed to implement technical assistance and training activities executed by Government agencies. Conclusion of these subsidiary agreements would be a condition of disbursement for such activities. 15. Benefits. Economic benefits under the proposed project are expected from: (i) convertible currency earnings derived from the increased availability of quality products for exports; (ii) upgrading of the project preparation and supervision capabilities of banks; and (iii) environmental and other benefits, as described below. The economic rates of return of pre-identified investments, the preparation and appraisal of which have been made jointly by Polish and Bank staff, are expected to average 32X. The selection of further investments is to be made on the basis of similar criteria and similar benefits are anticipated for the other investments to be financed, with a minimum required economic rate of return of 18Z. The benefits of technical assistance, though not quantifiable, will be significant in such areas as banking capabilities and initiatives to expand the role of the private sector. In addition, the project will contribute to the strengthening of Polish institutional capabilities to develop restructuring programs, and to identify and meet further restructuring needs in industry. It will also support efforts to stimulate private sector development and privatization efforts in the ongoing move towards a market economy. 16. Risks. In the short term, possible uncertainties associated with the transition period might delay the implementation of the project and adversely affect some of its expected direct benefits. To safeguard against this risk, the selection of the pre-identified enterprises has been focussed on those enterprises which are financially healthy under the current environment and can be expected to remain so during the course of reform. To accelerate project implementation, procurement has been initiated for the pre-identified projects, for which retroactive financing of up to US$25 million is proposed. Furthermore, the project includes stringent financial and economic rate of return criteria to be met by all investment projects to be financed. Another short-term risk concerns the operations of the new banks created from existing NBP branches which could induce delays in identifying and appraising projects. To minimize this risk, project appraisal training courses have been conducted for staff of potential participating banks, and joint appraisal by participating banks, NBP and the Bank is being arranged for the larger subprojects. Furthermore, under the project, action plans to strengthen both NBP and the participating banks will be developed and implemented. A longer-term risk stems from the ambitious program of adjustment and stabilization that the Government is implementing.

8 - 5 - While the Government's current plans are satisfactory, the major institutional and systemic reforms are unprecedented in Poland and may take longer than currently planned. The Bank's on-going economic and sector work dialogue will be important in helping to identify weaknesses in implementation of the reform and to support the Government's overall industrial policy reform program. 17. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Attachments Washington D.C. January 3, 1990 Barber B. Conable President

9 -6 1NDU TRIA&L EXPORT DEVELOPMNT PROECT ESTIMATED C-OSTS-AND FINANCING PA Estimated c"t-n.: Local Al ForeignTota (US$ million) Pre-identified Investments Other Investments Technical Assistance A Total Financina Plan: Local /Forei6n Total (US$ million) - IBRD Loan Domestic Banks Loans Enterprise Funds Total IBRD Local costs in September 1989 prices were converted to US$ at the official exchange rate which prevailed at that time (Zl US$1.00).

10 Schedule B Page 1 of 3 POLAND INDUSTRIAL EXPORT DEVELOPMENT PROJECT PROCUREMENT METHOD AND DISBURSEMENTS Procurement Method a/ IGB Local LIB IS Other Total Civil works Equipment & machinery (108.0) - (33.0) (51.0) (15.0) (207.0) Engineering services, technical & management assistance (28.0) (28.0) Training (2.0) (2.0) others k/ ~~(- ) (- ) g/ (108.0) - (33.0) (51.0) (45.0) (237.0) Note: Figures in parentheses represent the respective amounts to be financed by the Bank. a/ ICB: International Competitive Bidding; LIB: Limited International Bidding: IS: International Shopping k/ Including duties, taxes, working capital but excluding local interest during construction. _/ Excluding World Bank financed interest during construction

11 -8 Schedule a Page 2 of 3 POLA4D INDUSTRIAL EXPORT DE'ELOPMENT PROJECT DISBURSEMENTS Category Amount of the Loan Allocated X of (Expressed in US Expenditures Dollar Equivalent) to be Financed (1) Consultants' 500,000) services and ) training under ) Part A of the ) Project ) ) (2) Goods, con- 4,000,000) 100Z of foreign sultants' ) expenditures and services and ) 100X of local training under ) expenditures (ex- Part B of the ) factory cost) for Project ) goods, and 100% ) of foreign expendi- ) tures for technical (3) Under Part C 245,000,000) licenses, consulof the Project: ) tants, services ) and trainiing ) (a) goods, ) technical ) licenses, ) consultants' ) services and ) training (b) interest on the Sub-loans (4) Goods, Con- 2,000,000) 100% of foreign sultants' ) expenditures and services and ) 100% of local training under ) expenditures (ex- Part D of the ) factory cost) for Project ) goods, and 100% of ) foreign expendi- ) tures for consultants' ) services and training )

12 -9- Scbedule B Page 3 of 3 (5) Refunding of 1,500,000) Project Prepa- ) ration Advance ) (6) Unallocated TOTAL 260,000,000 Estimated Disbursements Schedule IBRD Fiscal Year FY90 FY91 FY92 PX92 FY94 FY (US$ million) Annual Cumulative

13 - 10 Schedule C P-QLANI) INDUSTRIAL EXPORT DEVELOPMENT PROJE-CT Timetable of Kev Protect Processing Events (a) Time taken to prepare: (b) Prepared by: (c) First Bank Mission: 10 months National Bank of Poland and enterprises, with Bank assistance Msarch 1987 (d) Appraisal Mission Departure: November 23, 1987 (e) Reappraisal Mission Departure: September 9, 1989 (f) Negotiations: December 4, 1989 (g) Planned Date of Effectiveness: March 1, 1990

14 Schedule D Page 1 of 1 STATUS OF BANK GROUP OPERATIONS IN POLAND A. STATEMENT OF BANK LOANS (as of December 31, 1989) As of December 31, 1989, except for a Project Preparation Facility of US$1.5 million to help prepare the present project, Bank lending to Poland had not yet commenced. B. STATEMENT OF IFC INVESTMENTS (As of September 30, 1989) Fiscal Year Obligor Type of Business Loan Eguity Total 1989 Hortex Horticulture US$ Million Total Original Gross Commitments LESS Cancellations, Repayments & sale TOTAL Commitments now held by IFC TOTAL Undisbursed

15 or O W Slz rl 14 }6 1't 2CZ <g 22 i4 ~~~~~~~ 2057 Baltic Seo _\U.S rj 5 ioz t ~~~~~~~~~~INDUSTRIAL EXPORT LU~o f2>2. }2 ~ A~~~~~~~~~~~~~~~~~~~~~~~~Wo I vt6stries ~ t *>~~~.M i