Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT ARAB REPUBLIC OF EGYPT CONSTRUCTION INDUSTRY PROJECT (LOAN 2460-EGT)

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT ARAB REPUBLIC OF EGYPT CONSTRUCTION INDUSTRY PROJECT (LOAN 2460-EGT) JUNE 20, 1995 Private Sector Development and Infrastructure Division Country Department II Middle East & North Africa Region Report No 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 Currency Equivalents Currency Unit: Egyptian Pound (LE) = 100 Piasters = 1000 Miliemes Exchange Rates (LE per US Dollar) Official Market Period End of Period Period Average Fiscal Year Of Borrower July 1 to June 30 ABBREVIATIONS AND ACRONYMS BM - Bank Misr CBE - Central Bank of Egypt CCIS - Construction, Contracting Industry Study EFC - Egyptian Federation of Contractors ERSAP - Economic Reform and Structural Adjustment Program EU - Executive Unit FC - Foreign Currency GOE - Government of Egypt HC - Holding Company HCCR - Holding Company for Construction and Reconstruction IDA - International Development Association IDBE - Industrial Development Bank of Egypt ILO - International Labor Organization JCDCI - Joint Committee for Development of Construction Industry LIBOR - London Inter-Bank Offer Rate MOIC - Ministry of International Cooperation MPES - Ministry of Public Enterprise Sector PB - Participating Bank PE - Public Enterprise SAL - Structural Adjustment Loan TA - Technical Assistance TDA - Terminal Date for Application

3 FOR OFFICIAL USE ONLY TABLE OF CONTENTS PREFACE... i EVALUATION SUMMARY.... iii PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Background... 1 B. Statement and Evaluation of Objectives... 1 C. Achievement of Objectives D. Implementation Record and Major Factors Affecting the Project... 4 E. Project Sustainability... 5 F. Bank Performance... 6 G. Borrower Performance H. Assessment of Outcome l. Future Operations... 7 J. Key Lessons Learned... 7 PART II. STATISTICAL ANNEXES Appendix Table 1: Summary of Assessments.11 Table 2: Related Bank Loans Table 3: Project Timetable Table 4A: Loan Disbursements Table 4B: Disbursements by Category... I. 14 Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operations Table 7A: List of Sub-loans under Part A of The Project Table 7B: Studies Included in the Project Table 8: Project Costs and Financing Table 9: Status of Legal Covenants Table 10: Bank Misr Balance Sheet Table 11: Bank Misr Income Statement Table 12: Compliance with Operational Manual Statements Table 13: Bank Resources: Staff Inputs Table 14: Bank Resources: Missions A. Mission's Aide Memoire 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.

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5 IMPLEMENTATION COMPLETION REPORT EGYPT CONSTRUCTION INDUSTRY PROJECT (Loan 2460-EGI) PREFACE This is the Implementation Completion Report (ICR) for the Construction Industry Project in Egypt, for which Loan 2460-EGT in the amount of US$100 million equivalent to the Arab Republic of Egypt, as borrower, was approved on June 28, 1984 and made effective on October 30, The Loan amount was reduced to US$25.3 million as a result of several cancellations at the borrower's request during implementation. The loan was closed on June 30, 1994, compared with the original closing date of December 31, Final disbursement took place on May 2, 1995 at which time a balance of US$ 1,714, was cancelled. The ICR was prepared by a mission' which visited Egypt in September-October 1994, reviewed by Mr. Alastair Mckechnie, Chief, Private Sector Development and Infrastructure Operations Division, and Mr. Gianni Brizzi, Project Adviser, Country Department II, Middle East & North Africa Region. Preparation of this ICR began during the Bank's final supervision mission (May 2-8, 1994). It is based on material in the project files. The borrower and the financial intermediary assisted in the preparation of the ICR by contributing views reflected in the mission's aide-memoire. They, namely MOIC, BM and the EU reviewed the draft of the subject report and indicated their concurrence with its findings. 1/ Consisting of Messrs. N. Shehadeh (Mission Leader, Task Manager), Y.T. Shetty (Sr. Financial Analyst) and R. Saleh (Consultant, Resident Mission, Cairo).

6 ii Evaluation Summary

7 IMPLEMENTATION COMPLETION REPORT EGYPT CONSTRUCTION INDUSTRY PROJECT (Loan 2460-EGT) EVALUATION SUMMARY Introduction 1. The Construction Industry Project was the Bank's first development finance operation for directly assisting the Egyptian construction industry; two earlier loans supported the sector by providing finance and technical assistance for increasing production of building materials: cement (Ln EGT) and reinforcing bars (Ln EGT). In addition, the Bank's loan to support Vocational Training (Ln EGT) financed upgrading and establishing 22 vocational training centers for labor in the Construction Industry Sector; the Industrial Import (Ln EGT) financed the Construction Industry Study (CCIS) which is at the origin of this project. The four loans were satisfactorily completed albeit with considerable delays. Project Objectives 2. The project objectives were to: (i) initiate policy reforms for improving the performance of the construction industry through the provision of financial and technical assistance; and (ii) strengthening the contractual and bidding practices in the sector. The project had two components, namely: (i) line of credit to be made available to construction companies through two Participating Banks (PBs); and a (ii) technical assistance (TA) and development program, consisting of training for middle and senior managers in construction companies, and studies for sector organization and development of bidding and contracting practices. The original loan (US$100.0 million) included US$96.7 million for the lines of credit (97 percent of total) and US$3.3 million for the TA component. Implementation Experience and Results 3. The project suffered a series of delays; signing took place some 29 months after Board approval, and the Loan became effective 11 months following that. The long delays were caused by protracted discussions and disagreements among the Bank, the Government and the PBs on the interest rates to be charged on the sub-loans, and the associated foreign exchange risk. In addition, over implementation, the loan size was reduced by more than 75 percent (from US$100.0 million to US$23.6 million at closing) through successive cancellations. Major among those was the cancellation of the entire line of credit (and related TA, i.e. US$ million) assigned to one of the PBs, three years after the loan became effective. 4. The line-of-credit component was the project's part that suffered the most. In addition to the withdrawal of one PB (Industrial Development Bank of Egypt --IDBE; para. 3 above), commitment, and, subsequently, disbursements under the second line of credit channelled through Bank Misr,

8 iv Evaluation Summary (BM) barely reached 45 percent of the originally allocated amount (US$ million out of US$48.35 million). In both cases, the PBs had difficulties in marketing the sub-loans because of the relatively high cost of borrowing under the sub-loan conditions. The on-lending terms were revised three times during the life of the project in order to make them more competitive and in line with the prevailing market conditions: as a result of the first revision (1987), the project became effective, but the PBs were not able to market any loans; the second (1989), helped launching the BM line of credit (some 62 percent of their share), but the second PB, i.e. IDBE, withdrew because it was not able to market its share in addition to another line of credit (US$170 million, under the Small and Medium Industries loan 2458-EGT) which was implemented simultaneously with the subject loan; the third revision (1992) did not help BM make any additional sub-loans. 5. In contrast to the above, the TA component, except TA for the PBs which was not used by them and cancelled at their request, was successfully implemented, albeit with considerable delays in start-up. The studies undertaken by the Executive Unit for the Development of Construction Industry (EU) in association with the Joint Committee for Development of Construction Industry (JCDCI) were instrumental in setting up the sector organization, establishing the Egyptian Contractors Federation (ECF), and organizing the bidding and contracting practices in the sector. The management development program for management training in the construction companies started provision of training some four years after effectiveness, but was implemented successfully; the EU established under the predecessor organization of, and since then, under the Holding Company for Construction and Reconstruction (HCCR) developed and delivered a variety of 5-6 week training programs for 820 managers in the sector. Recognizing the positive impact of that program, the Bank is expected to continue to finance this component through the on-going IDA-financed Technical Assistance for Privatization Project (Credit 2402-EGT). Project Sustainability 6. The project contributed significantly to the institutional development of the construction industry sector, through both the sector organization and the development of bidding procedures and management training. It had a very marginal impact on the intermediary bank, i.e. Bank Misr, as a result of unsuccessful loan marketing and ultimately, under-utilization of the line-of-credit component. Despite this weakness, however, the project was particularly useful: along with two other Bankfinanced lines of credits (Loans 2458-EGT, Small and Medium Industries, and 2459-EGT, Export Promotion, which were simultaneously implemented with the subject project), the project contributed to the Bank's dialogue with the Government and the banking sector on liberalizing interest rate policy. This has been achieved later under the subsequent SAL ( ). Project Cost, Financing and Time Schedules 7. Total project cost at completion was US$ 30.5 million, i.e. 23 percent of appraisal estimates (US$132.2 million); about 24 percent of the loan was disbursed. Deviations came mainly from under-utilization of the line of credits, resulting from the withdrawal of one PB, and difficulties in marketing the loan; disbursements on the line of credit to PBs (US$21.70 million) barely reached 23 percent of SAR estimates (US$ 96.7 million). The associated TA (US$0.25 million) was not utilized as BM continued to finance training from their own resources. Disbursements on the TA component fared much better (52 percent of SAR estimates); the management training program was not fully executed by the closing date because of the delayed start-up; plans to complete it with Bank financing

9 Evaluation Summary v under an on-going operation are being pursued with the GOE. There was no co-financing for the project. The project was completed in 120 months compared to SAR estimates of 90 months; last disbursement took place in May 1995, i.e. 71 months after the SAR estimate, which projected full disbursement by December Major Factors Affecting Achievement 8. Several factors caused delays in project start-up and under-utilization of the loan proceeds; for the line of credit: (i) the loan was made at a time of deep distortions in interest rate and foreign exchange policies; (ii) demand for borrowing was generally sluggish because of high interest rates and increasing risk of LE devaluation; (iii) on-lending terms were non-competitive because of the foreign exchange risk which, as originally envisaged, was to be borne by sub-loan borrowers; (iv) successive revisions of the on-lending terms took considerable time; and (v) IDBE withdrew from the project because of limited absorptive capacity (para. 4 above). In addition, fluctuating demand, a main characteristic of the construction sector, and recession in the sector in the final years of project execution, made marketing of sub-loan less feasible than envisaged. In the case of the management development component, delays were caused by bureaucratic bottlenecks and the lengthy process for employing consultants for studies and the design of training programs; it took some two to five years to recruit consultants. Bank and Borrower Performance 9. Project preparation and appraisal failed to adequately assess the impact of the macro-economic conditions on marketing the sub-loans; it also underestimated the foreign exchange risk factor as well as the distortions of the interest rate policies. During supervision, the Bank acted responsively to the changing conditions affecting project implementation, albeit not in a timely manner. Despite the fact that the demand for foreign exchange funds, in general, was expected to be high at the time of approval, as a result of foreign exchange restrictions in mid-1980s, the on-lending terms, and the several attempts at revising the sub-loan terms proved less effective. They also proved not flexible enough in view of the market conditions; the success of those revisions was very limited in terms of sub-loan marketing. 10. The Borrower (GOE) found it difficult to apply the project's on-lending conditions to the participating banks in isolation of the overall, distorted interest rate and foreign exchange regimes plaguing the banking system at large. However, the Government was moving in parallel on reforming both regimes under its Economic Reform and Structural Adjustment Program (ERSAP); related policies were undertaken under SAL in mid 1991, but those came late in the project cycle and had little effect on the project implementation. Findings, Future Operations and Key Lessons 11. Marketing of the sub-loans proved more difficult than expected in the SAR. On-lending terms were non-competitive as a result of the multi-currency base of the Bank's funds, distortions in interest rate and foreign exchange policies and the almost non-existent demand for Bank loan because of increasing risk of LE devaluation. More significantly, the project proved that full Government ownership of a concrete plan to remove market distortions should be a prerequisite to on-lending in such markets.

10 vi Evaluation Sunmary 12. The experience under this project also shows that: a. In countries where there is deep distortions in the financial markets, preparation and appraisal of lines of credit should proceed on a clear understanding with the Government on a plan to eliminate the distortions. b. The financial intermediaries should be more closely involved in project preparation and appraisal; when needed, TA programs for strengthening PBs capabilities, should be agreed at an early stage of project preparation. c. The Bank should undertake, in association with potential participating banks, and as early as possible during project preparation, a marketing study to assess actual demand of sub-loans in the target sector. d. The Bank should organize, in collaboration with the participating banks, and shortly after effectiveness, project launch workshops to promote the marketing of the subloans. e. Similar projects should include certain economic incentives to participating banks to market and channel sub-loans through other intermediaries, in order to accelerate and improve loan marketing. f. In case of under-utilization of Bank's funds by the financial intermediaries as a result of economic recession, the Bank should be more flexible in extending the terminal date for loan commitments, and/or agree on a comprehensive restructuring of the project. g. Whenever there are clear indications that funds of the loan would not be fully utilized, the Bank should agree with the borrower, in a timely manner, on cancellation of funds unlikely to be used.

11 IMPLEMENTATION COMPLETION REPORT EGYPT CONSTRUCTION INDUSTRY PROJECT (Loan 2460-EGT) PART I. PROJECT IMPLEMENTATION ASSESSMENT A. Background 1. The Construction Industry Project was the Bank's first development finance operation for directly assisting the Egyptian construction industry. The project's concept originated from the Construction, Contracting Industry Study (CCIS), which was financed by the Bank-financed Second Industrial Imports Loan (Loan 1456-EGT). The study, completed in 1981, recommended a phased approach toward creating a business environment of fair competition between public and private contracting companies. The first phase, embodied in the Project, focussed on the essential elements of the reform: TA program for the JCDCI for institutional and policy reforms and upgrading management skills in the sector, provision of finance for construction equipment and machinery, while strengthening the capabilities of financial intermediaries in appraising and supervising loans. Two earlier loans supported the sector by providing finance and technical assistance for increasing production of building materials: cement (Loan 1085-EGT) and reinforcing bars (Loan 2280-EGT). In addition, the Bank's loan to support Vocational Training (Loan 2264-EGT) financed upgrading and establishing 22 vocational training centers for labor in the Construction Industry Sector. The three loans were satisfactorily completed, albeit with considerable delays. B. Statement and Evaluation of Objectives 2. The project was designed to support policy reforms in construction industry. In particular, the objectives were to: (i) improve the efficiency and capacity of the Construction Industry i.e. contractors and manufacturers of building materials through the provision of financial and technical assistance; and (ii) strengthening the contracting and bidding practices in the sector. The project consisted of two components, namely: (i) line of credit to be made available to construction companies through two financial intermediaries (Participating Banks --PBs), including technical assistance to PBs; and a (ii) technical assistance and development program, consisting of training for middle and senior managers in construction companies, and studies for sector organization and development of bidding and contracting practices. The loan (US$100.0 million) included US$96.7 million for the lines of credit to be channeled through Bank Misr (BM) and the Industrial Development Bank of Egypt (IDBE) and US$3.3 million for the TA component, to be executed by the Executive Unit in association with JCDCI. 3. The project took off after substantial delays; it was declared effective 40 months after Board approval. This took place only after the Bank had agreed to revise the on-lending terms of the subloans following long, protracted discussions with the GOE and PBs. Although timely, and well conceived in matters of TA for initiating the reform of the construction industry, the financial assistance component proved ineffective. The loan was made at a time when demand for foreign

12 2 Implementation Completion Report exchange-denominated, fixed rate term loans was sluggish as result of increasing inflation and distorted exchange rate and interest rate policies. The original terms, which required sub-loan borrowers to bear the foreign exchange risk, and their successive revisions allowing the option to borrow either in foreign exchange or local currency, proved relatively costly and non-competitive; marketing of the lines of credit was very difficult. The PBs were not able to market any loans as a result of the first revision (1987); the second revision (1989) helped launching BM line of credit (some 62 percent of its share), but the second PB (IDBE) withdrew and requested cancellation of its share. The third revision did not yield any new sub-loans for BM. 4. The technical assistance (TA) component, except TA for the PBs which was not used, was successfully implemented, albeit with considerable delays. The studies undertaken by EU in association with JCDCI helped substantially in organizing the sector, creating the Contractors Federation, and organizing the bidding and contracting practices in the sector. The development program for managementraining in the construction companies though started some four years after effectiveness, was implemented successfully; the EU, established under the predecessor organization of, and then under the Holding Company for Construction and Reconstruction (HCCR), developed and delivered a variety of 4-6 week training programs for some 820 mangers in the construction companies, both public and private. Recognizing the positive impact of that program, the Bank is expected to continue to finance this component through the on-going IDA-financed project (Credit 2402-EGT). 5. During implementation, the loan size was reduced by more than 75 percent (from US$100.0 million to US$23.6 million at closing) through successive cancellations (including the cancellation of the IDBE's entire line of credit --US$ million. In addition, disbursements under the BM's line of credit barely reached 45 percent of the allocated amount (US$ million out of US$48.35 million.) Macroeconomic and Sector Policies C. Achievement of Objectives 6. The construction industry sector has undergone substantial changes over the past few years: First, as part of the SAL-supported economic reform ( ), which separated management of public enterprises (PEs) from the government's ministries (Law 203, 1991), the PEs for construction were all transferred, along with all PEs, to the Ministry of Public Enterprise Sector (MPES): 26 of them are now affiliated with the HCCR, the Holding Company (HC) for Construction; 14 other PEs are affiliated with few other HCs. PEs' operation and management are being aligned with private sector practices; they no longer have access to public banks' financing under government guarantees. The PEs are being restructured or liquidated by the HCs and the MPES, in association with public creditor banks. 7. Second, the creation of the Federation of Contractors (EFC) is also playing a substantial role in helping create a competitive environment in the sector. This is being achieved through classification of contractors, establishing sector and contractors' database, and reforming procurement and bidding practices.

13 Implementation Completion Report 3 8. The financial sector is also being reformed substantially under ERSAP particularly in the areas of interest rate and foreign exchange regimes which were introduced in Changes in the banking regulations, and the application of more stringent reserve and liquidity ratios are having positive impact on the financial management of the banks, despite some negative effect on the cash flow and profitability of banks at the initial stage. They were also reinforced by CBE's requirements of the banks to make provisions covering loans in arrears over six months and to suspend interest income accruals on a tax deductible basis. The banks had to adjust their policies and procedures accordingly in order to survive in competitive markets. Physical Objectives 9. The project failed to achieve its objectives in providing term finance to construction companies, which were able to mobilize financing from other sources. Compared to SAR estimates of some sub-loans (by the two PBs) under the project, BM was able to approve eight sub-loans only, totaling US$30.0 million. Total comnitments went down, however, to US$ million (representing 26 percent of the original amount of the line of credit), following cancellation of one sub-loan. The balance of a second sub-loan was cancelled subsequently, after withdrawing less than 10 percent of the approved amount; those two sub-borrowers found the terms unfavorable. Of the seven sub-loans, two were made to private sector, construction equipment dealers; the other were for modernization of equipments of five public sector contracting companies. Five out of the seven subborrowers showed highly satisfactory performnance following successful completion of their projects; the other two are facing major problems, mainly because of high overdue receivables largely from public sector entities. 10. In contrast, the performance under the managementraining program exceeded SAR expectations, albeit considerable delays in launching this component. The EU expanded training beyond the expected sub-borrowers, attracting trainees from both private and public sector construction companies; it provided 42-day training programs to some 820 professionals (including 290 senior and middle managers) covering topics such as maintenance management, MIS, financial management, procurement and contract management. In addition, EU developed training modules, trainees screening tests and MIS for HCCR's affiliates. EU charges fees for the courses and training; it was able to recover 60 percent of its cost on average. 11. The seven studies for institutional and policy reform of the sector were all completed according to SAR plans, but with substantial delays. The EU employed and supervised the local consultants which carried out the studies; the senior advisors employed by the EU for developing and supervising the work plan of the JCDCI, did not perform satisfactorily; their contracts were not renewed beyond the first year. Financial Objectives 12. The core objective for the PBs under the line of credit was to strengthen the PBs capabilities in appraising and supervising the sub-projects. While the loan was not expected to have a substantial impact on the operations of BM as a major commercial bank, as it was at the time of appraisal a financially sound and viable intermediary. 13. BM continues to be one of Egypt's leading commercial banks; its financial situation is satisfactory, and shows a sound record of profitability. As of end-fy94, BM's liquidity ratio was 55

14 4 Implementation Completion Report percent on foreign currency deposits, and 24 percent on LE deposits (against CBE's requirement of 25 and 15 percent, respectively); its capital adequacy ratio was 8:1 (which was within CBE's ceiling limit.) However, arrears are on the high side, and slightly increasing: they reached LE 555 million in FY 93 (3.5 percent of outstanding loans), but increased to LE 668 million (4 percent of loans) by end-fy94. BM did not utilize its share of the loan's TA funds for enhancing in project appraisal and supervision; it continued funding this task as part of its regular training activities. Institutional Development 14. The project contributed significantly to the institutional development of the construction industry sector, through both the studies for institutional and policy reforms, and the management training program. The studies' recommendations were instrumental in: (i) launching the sector organization, and in the creation and functioning of the Egyptian Federation of Contractors (EFC); and (ii) developing the bidding practices for construction. The management training program had also a significant impact on improving managerial skills at the construction companies. EU's effort on training, and related services, including MIS development, as well as its role as the JCDCI's technical arm on institutional development, was very beneficial for fostering sector reform. 15. The project had, however, a very marginal impact on the institutional development of BM as the intermediary bank. The application of the loan's appraisal guidelines for sub-loans, and the ensuing reviews and supervision contributed to some improvement in BM's procedures. The impact may have been enhanced had BM used related TA under the project. D. Implementation Record and Major Factors Affecting the Project 16. The project's original design called for implementing the project over five years ( ) on the assumption that the loan would become effective in mid Effectiveness did not take place until 1987, i.e. more than three years following Board approval because of disagreement between the Bank and financial intermnediaries on the onlending termns. It took nearly seven years to complete the project (from October 1994 when the loan became actually effective). The line- of-credit component remained un-marketed for some three years after effectiveness; one PB withdrew at mid-course, and the second PB disbursed only 45 percent of its share because the terms of onlending agreed with the Bank were not competitive with financing terms from other sources. The TA component was delayed because of bureaucratic bottlenecks and the lengthy procurement process: the management training program started some four years following effectiveness, and the sector policy and institutional studies, which were originally to be carried out by ILO under special arrangements, were awarded to a local consultant some three years after the loan effectiveness. Currency of Lending and On-Lending Rates 17. The SAR's on-lending terms of the sub-loans underestimated the effects of distorted, local financial practices on the marketing of those sub-loans: interest on foreign currency (FC) loans were market-determined and pegged to LIBOR, while interest on LE-denominated, commercial loans was set by the CBE. According to SAR plans, PBs were to on-lend only in FC at a fixed interest rate with sub-borrowers bearing the foreign exchange risk between the US$ and LE (calculated at the highest rate by CBE at the time of repayment), and the GOE bearing the exchange risk between the US$ and the currencies of disbursement by the Bank. The on-lending rate was calculated as 14

15 Imnplementation Completion Report 5 percent at appraisal (including 1.5 percentage points for GOE to cover its foreign exchange risk.) This rate was relatively costly when compared to available alternative borrowing in LE at 13 percent (at that time); it was borrowers' preference to borrow in LE (at 13 percent), and purchase the FC from the local free market. Given this and, as inflation was on the rise, and the prospects of devaluation of the LE were increasingly high, demand for FC loans at fixed interest rate was virtually non-existent. 18. The persistence of those conditions following Board approval (June 1984) held up loan signing and, subsequently, effectiveness was delayed until the terms were revised in Under this revision, PBs were to on-lend in either FC (at 13.5 percent) or LC terms. The interest rate for the latter was calculated at percent, including a premium of 9 percentage points for GOE to cover the foreign exchange risk. The rates proved high; agreement was reached with the GOE and PBs in a subsequent loan restructuring (1989) to lower the GOE's premium to 6.35 percentage points. The revision also, inter alia, expanded the types of sub-loans to cover financing of: purchase of construction equipment, TA for enterprise restructuring and permanent working capital, opening new avenues for marketing the loan. It also encouraged the PBs to channel the sub-loans through other financial intermediaries, and increased the sub-loan limit by about 35 percent (up to US$6.0 million). BM, the only PB under the project (following withdrawal of IDBE), successfully marketed eights subloans. Meanwhile, terminal date for sub-loan applications (TDA) was extended from December 31, 1989 to December 31, Lack of progress in sub-loan marketing (as commitments through end 1991 reached only 62 percent of BM's original share), and the ensuing liberalizing of interest rates and foreign exchange policies (under SAL; 1991), led to a further revision of the on-lending terms in It was agreed that the sub-loans could be offered at either fixed or variable interest rates to be priced at two and three percentage points, respectively, below the CBE's discount rate; variable interest rates to be adjusted semi-annually with 1.5 percentage points limit each time and 6 percentage points cap over the life of the loan. Despite this revision, and a further extension of TDA till end-1991, and subsequently end-1992, BM was unable to market any new loans. As a result, a cancellation of US$22.1 million (45 percent of BM's share) was effected at BM's request in E. Project Sustainability 20. Despite the small number of sub-borrowers, and the limited amounts of sub-loans, compared to SAR plans, the introduction of enhanced procedures for appraising and supervising new projects had positive impact on the operations of the intermediary and sub-borrowers. The on-going liberalization of the economy, including foreign exchange and interest rates, investment laws and regulations, restructuring and privatization of public sector construction companies, will enhance the role of the private sector in the construction industry, and its access to competitive funding. 21. The Egyptian Federation of Contractors, a major outcome of the project-supported reform of the sector, is also playing an increasing role in setting the environment of fair competition between various players in the sector. Its role in upgrading the rules of procurement, bidding, and measurement of construction works will also enhance the efficiency of the sector. Under the continuing management training program. the EU will be playing a significant role in improving managerial and technical skills of the private and public construction companies.

16 6 Implementation Completion Report F. Bank Performance 22. The Bank has played an important role in promoting a more viable, market-driven construction sector since 1979, when it financed the construction industry study (CCIS). Since then, the Bank helped in: (i) creating and launching the Egyptian Federation of Contractors; (ii) developing systems data base, records and classification of contractors; (iii) formulating a comprehensive plan for reforming the construction sector; (iv) establishing a mechanism for coordinating the implementation of reform measures; and (v) improving project appraisal and supervision practices at the intermediary bank. 23. However, project preparation and appraisal did not adequately assess the risks associated with the then foreign exchange and interest rate distorted policies on project implementation. In addition, the SAR's projected use of the line of credit was not supported by a market survey to assess demand, nor the risk associated with expected fluctuations in demand, a common characteristic of the construction industry sector, was sufficiently examined. SAR seemed to have had underestimated, as well, the impact of the foreign exchange risk associated with the multi-currency base of Bank loan on the on-lending terms. 24. During implementation, the Bank acted responsively to the changing conditions affecting project implementation, albeit not in a timely manner. Despite the fact that the PBs were willing to market the sub-loans, the on-lending terms were uncompetitive with other sources of finance. The several attempts at revising the sub-loan terms proved less effective and probably not flexible enough; the success of those revisions was very limited in sub-loan marketing. The Bank should have taken a more flexible approach, in the light of prevailing market conditions, particularly following the structural reforms (interest and foreign exchange) in G. Borrower Performance 25. The Borrower (GOE) found it unrealistic to apply the loan's on-lending terms to PBs in isolation from the overall, distorted interest rate and foreign exchange regimes plaguing the banking system at large. The Government engaged in a protracted, lengthy discussion to rectify the situation before loan effectiveness. Those persisted later, when the first revision proved non-conducive, and this led the borrower to request down-sizing the loan three years after effectiveness, and, subsequently, two years later when the second revision of the on-lending terms did not yield any new loans to the PB. However, despite those shortcomings, the Government was moving in parallel on reforming both regimes under its economic and structural reform program (ERSAP); related policies were undertaken under SAL in mid 1991, but those came late in the project cycle and had little effect on the project implementation. 26. Under the TA component, the EU demonstrated a quality performance in the design and delivery of training; it was less effective in processing the recruitment of consultants because of lengthy preparation and review procedures. In addition, Borrower's insisting on contracting out the studies on sole-source basis, when this was not justified, delayed award and completion of the studies by more than three years.

17 Implementation Completion Report 7 H. Assessment of Outcome 27. In terms of funds utilization, approximately 24 percent of the original loan amount was disbursed. The project was delayed by about five years (including about three years taken for effectiveness). Seven public and private sector construction companies benefited from sub-loans under the project: six of them completed their projects successfully. Only two of the sub-borrowers (public sector companies) are facing financial difficulties, but are currently being restructured as part of public sector reform. The five others were highly successful, and are showing sound financial results. As for the TA component, the EU provided training courses beyond SAR expectations, and the Bank is expected to maintain its support to the program under an IDA-financed, on-going operation. All studies for institutional reform were completed and their findings are being used in the on-going reform of the sector. 28. In retrospect, the project proved effective in terms of sector institutional building, but not so in its financial assistance to the sector. The objectives and design of the line-of-credit component proved too ambitious. Although the project was in line with the prevailing Bank lending strategy at the time of appraisal, the project design at appraisal underestimated the effects of the macroeconomic environment on demand for foreign exchange-denominated loans. Appraisal did not adequately assess the project risks associated with distortion of foreign exchange and interest rate policies. Those risks were particularly significant because of the prevailing uncertainty of foreign exchanges rates (following the GOE's discussion with IMF in 1982) and the multi-currency base of the Bank's loan. Despite this failure, however, the project was particularly useful: it helped along with two other Bank-financed lines of credits (Loans 2458-EGT, Small Industries, and 2459-EGT, Export Promotion) in engaging with the Government and the banking sector in a constructive dialogue toward liberalizing the interest rates policy. This has been achieved later under the subsequent SAL in I. Future Operations 29. Of the seven sub-projects financed under the loan, five are operating successfully and no problem is foreseen in their future operation. Two projects which are facing technical and/or financial problems, are expected to overcome their problems by the end of this year. Moreover, demand for term loans is becoming increasingly high, and the Bank should be able to provide such funding, possibly under an apex loan. However, future operations will have to be significantly different from the present one, given the substantive, ERSAP-related changes in the macroeconomic environment, and the increasing role of the private sector in construction industry. Provision of similar lines of credit should be associated with support to restructuring of the participating banks, as and when required; it should aim at increasing private sector participation, and subsequently privatization of the banking sector. J. Key Lessons Learned 30. Marketing of the sub-loans was more difficult than anticipated; on-lending terms were not at all competitive as a result of: (i) the multi-currency base of the Bank's funds; (ii) the serious distortions in interest rate and foreign exchange regimes; and (iii) the slowing demand for borrowing in foreign exchange because of high interest rates and increasing risk of devaluation of the Egyptian Pound. These factors had been exacerbated by: (i) the fact that the loan was marketed on terrms different from those of other available FC operations in Egypt which are based on a single currency or conducted in LE; and (ii) the fluctuations of demand on term loans by construction companies, resulting from sector own characteristic and recession in the sector.

18 8 Implementation Completion Report 31. The experience under this project also shows that: a. In countries where there is deep distortions in the financial markets, preparation and appraisal of lines of credit should proceed on a clear understanding with the Government on a plan to eliminate the distortions. b. The financial intermediaries should be more closely involved in the project preparation and appraisal; they should also be part of the Bank's supervision teams; this would provide them with on-the-job training, and enhance the banks' capabilities in development financing. When needed, the TA program to be included in the project, should be agreed with PBs at an early stage of preparation. c. The Bank should undertake in association with potential participating banks, and as early as possible during project preparation, a marketing study to assess prospects of demand of sub-loans in the target sector. d. The Bank supervision should reach the sub-borrowers more regularly; it should be intensified as early as possible at the take-off stage to help identify implementation problems early on, and resolve the issues in a timely manner. e. The Bank should develop a pipeline of sub-projects during appraisal and subsequently organize, in collaboration with the participating banks, and shortly after effectiveness, project launch workshops to promote the marketing of the sub-loans. A marketing plan and campaign should be agreed with the participating banks as early as possible after effectiveness. f. The participating banks should be given economic incentive to market and channel sub-loans through other financial intermediaries, in order to accelerate and improve loan marketing. g. In case of under-utilization of Bank's funds by the financial intermediaries as a result of an economic recession, the Bank should be more flexible in extending terminal date for loan commitments, and closing dates, if needed, or agree on a comprehensive restructuring of the project. h. Whenever there are clear indications that funds of the loan would not be fully utilized, the Bank should agree with the borrower, in a timely manner, on cancellation of funds unlikely to be used.

19 IMPLEMENTATION COMPLETION REPORT EGYPT CONSTRUCTION INDUSTRY PROJECT (Loan 2460-EGT) PART II. STATISTICAL ANNEXES Table 1: Table 2 Table 3 Table 4A: Table 4B: Table 5: Table 6: Table 7A: Table 7B: Table 8A: Table 9 : Table 10: Table 11: Table 12: Table 13: Table 14: Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Disbursements by Category Key Indicators for Project Implementation Key Indicators for Project Operations List of Sub-loans under Part A of Project Studies Included in the Project Project Costs and Financing Status of Legal Covenants Bank Misr, Balance Sheets Bank Misr, Income Statements Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions

20 10 Implementation Completion Report

21 Implementation Completion Report 11 Table 1: Summary of Assessments A. Achievement of Obiectives Substantial Partial Negligible Not Applicable Macroeconomic policies Sector policies Financial objectives Institutional development x x x x x Physical objectives Poverty reduction Gender concerns Other social objectives Environmental objectives I x x I x Public sector management Private sector development Other Substantial Partial Negligible Not Applicable B. Project Sustainability x Highly Satisfactory Satisfactory Deficient C. Bank Performance Identification x Preparation Appraisal I a Supervision Highly Satisfactory Satisfactory Deficient D. Borrower Performance Preparation x Implementation Covenant compliance x Operation Highly Satisfactory Satisfactory Unsatisfactory Highly Unsatisfactory E. Assessment of Outcome x

22 12 Implementation Completion Report Table 2: Related Bank Loans Title Ln/Cr Ln/Cr Purpose Year of Status Number Amount US$ m Approval Tourah Cement Expansion 1085-EGT Increase supply of 1/28/75 Completed five Constiuction Materials, years behind Cement schedule Second Industrial Imports 1456-EGT Increase supply of 6/14/77 Completed Industrial Materials El-Dikheila Reinforcement 2280-EGT Increase supply of 5/12/83 Completed I Bar Construction Materials, year behind reinforcing bars schedule Vocational Training Project 2264-EGT Establishment of 22 4/19/83 Completed 2.5 training centers in years Construction Industry behind schedule H ~~~~~~~~~~~~~~~~~~~Sector Table 3: Project Timetable Steps Date Planned Date Revised Date Actual Identification NA January 1982 Preparation NA June 1982 Pre-appraisal NA November 1-28, 1982 Appraisal Mission November 1982 May 14 - June 6,, 1983 Loan Negotiations May 1984 March 26-30, 1984 Board Approval June 1984 June 28, 1984 Loan Signature NA November 5, 1986 Loan Effectiveness July 5, 1984 Sept 4, 1987 October 30, 1987 Loan Closing Dec 31, 1992 June 30, 1994 June 30, 1994 Project Completion Dec 31, 1991 October 30, 1994

23 Implementation Completion Report 13 Table 4A: Leon Dbursaments Cumulative Estimated and Actual Disbursemnts (USS minion) June June Jue June June Jue June Juem Ju June De L994 Appraisal estimate Actual - = = Actual as % of esimate _ Date of final May 2, 1995 disbursement Note: Loan amount of US$48.35 million was cancelled in July 1990 and US$22.11 million was cancelled in March 1993; cancellations totaling USS5.92 million were effected subsequendy during tbe period from August 1993 to May 1995.

24 14 Implementation Completion Report Table 4B: Disbursements by Category (US Dollars) Category SAR Estimates Actual Disbursements Sub-Loans under Part (A) 96,700,000 21,753,556 Advisors' Services under Part B (1) 2,535,000 1,403,200 Advisors' Services under Part B (2) 315, ,634 Advisors' Services under Part B (3) 200,000 0 Front-End Fee 249, ,377 Total 100,000,000 23,618,768

25 Implementation Completion Report 15 Table 5: Key Indicators for Project Implementation l Appraisal Target at Completion Actual Sub-Loans Amount (US$ Million) (Revised) (48.4) (21.7) Number of Sub-Loans of which:(to Private Sector) (20-25) (5) of which:(to Dealers in Construction (Not Envisaged) (2) Equipment) Average Size US$ Million USS 3.2 Million Start Receiving Proposals for Sub-Loans 9/ Terminal Date for Sub-Loan 12/31/89 12/31/92 Commitments Full Disbursement of Loan 12/31/89 12/12/94 Overall Project Implementation Period (months) Loan Closing 12/31/92 6/30/94

26 16 Implementation Completion Report Table 6: Key Indicators for Project Operations Estimate Actual Capacity utilization for Sub-projects at Completion (%)

27 Implementation Completion Report 17 Table 7A: List of Sub-loans under Part A of The Project (Amount in US$ Million) -,_ --,- _- _-.- _ -. Actual Amount of Initial Revised Disb. Est. Total Financing Actual Date Loan Loan Through Type of Cost at. Total Subloans Sub-borrowers Approved Amount Amount Dec. 94 Project* Approvals IBRD Own Cost _ Public Arab Co. for Foundation (VIBRO) 11/9/ E JV Arab Contractors 11/9/ E Public El-Nasr building for Construction 11/9/ E (EGYCO) _ Public Misr Concrete Development (MCDC) 3/18/ E Private MANTRAC 8/7/ E NA Private Industrial Engineering for Construction 9/23/ E (ICON) Private Egypt Int'l Motors (EIM) 10/4/ E Public General Nile Reinforced Concrete 4/29/ E (SPECO) * E: Extension NA: Not available Totals

28 18 Implementation Completion Report Table 7B: Studies Included in the Project Title of Study Purpose at Appraisal/Redefined Status Impact Tendering and Contracting Procedures for - To prepare standards relating to tendering and - Carried out Improving tender and contract award procedures Public Works contract conditions for public works National Standard Method of - to study the main international standards of - Carried out Helped up-grading the methods of measurement of construction works Measurement, Building Specifications and measurement and prepare one standard of Codes of Practices measurement for Egypt, and update existing and prepare new codes of practice Client's Brief and Site Acquisition - To improve the quality of present briefung to - Carried out Improving tender and contract award procedures avoid abortive designs and disputes and delays Price, Cost Indices, and Escalation - To produce price data in a standard analytical - Carried out Developed a basic data bank for construction activity Formula fashion for assistance in tender evaluation Scheme for Registration of Contractors - To determine capacity and competence of - Carried out The setting-up of the Federation of Constructors, which manages the preparation of potential bidders a register of contractors Standard Monitoring System for Client - To prepare proposals for a system of - Carried out Improved the quality of construction management and monitoring Project Management and Control monitoring the construction process Development of Professional and - To prepare proposals for training programs and - Carried out Recommendations are being reviewed in the light of a restructuring/privatization Technical Skills devise incentives to retain experienced and qualified staff

29 Implementation Completion Report 19 Table 8: Project Costs and Financing (Amount in US$ Million) SAR Estimates Actual Project Components Foreign Local Total Foreign Local Total I. Line of Credit II. Technical Assistance 1. Management Development JCDCI Participating Banks Subtotal III. Front-End Fee Total Financed By:_ IBRD Loan Government Beneficiaries of Sub-Loans Total

30 20 Implementation Completion Report Table 9: Status of Legal Covernats Lomn/ Orginal Revised Description of Covenant Credit CovenanM Fulfil Fulfill Agreement Number Ten Reference Class(es) Statns Date Date As part of restructuring, free standing permanent working capita sub- loans were eligible for financing from Loan 2460 prior lo the terminal date for sub-loan conseitments. Lener L02460 Lerer dated 7/17/89 3 C Guidelines and criteria for free standing subloans for replenissment of permanent working capita. Leter dated 11/9/90 3 C Amendments to enable private dealers in construction equipmento be eligible for subloans. Comments Conftrmation signatures on official amendment letter dated 11/9/90 received ott 1/11/91. Three sub-loans to private dealers were approved; one was later canceled in full. Loan L02460 Section CD 12131/92 06/30/94 Loan closing date. Amended by exchange of letters dated 4/16/92. Loan closed on 6130/94 Section 3.01 (c) 9 C Review of terms and conditions of sub-loans in IDBE dropped out of project for lack of loan densand & its loan Section 3.01 (c) of Loan Agreement and Section portion cancelled On-lending terms amended 5/6/87 to allow 2.04 and 2.05 of Project Agreement. lending either foreign or loc. curr., the latter to incl. 8 percent pt. spread to cover FE risk of the GOE. Section 3.02 (a) 5 C EU Staffing Originally completed satisfactordy. The EU was strengtlening substantially afsir January 1993 to enable it to manage effectively the proposed training programs under pars B (1). Section 3.02 (b) 5 C EU employmecn of advisors 3 Advisors hired initi. did nor perform well & EU didn't renew contracts, expired 10/ Since then, EU hired short-term consult. as needed. Also contracted with AC & CPU to imnplement manage dev. comp. & w/arab Bureau for const. ind,reforms stud. Section C Reporting on reform studies anid imnplementation All seven tasks have been substantially completed. Reconunendations of of agreed recommcndation sonme have been fully implemented; others are under consideration by the Egyptian Federation of Contractors. Section CP Use by public agencies of procurement Reform Study Task 1. I of Pan B(2) focusses on this issue. procedures which ensure wide coxmpetition in Recommendatons are under consideration by the Egyptian Federation civil works. of Contractors, prior to submission to Parliament Section Soon Auditing of EU Accounts Audited accounts are current. L02460 Schedule 1 3 NC Wididrawal of loan proceeds. IDBE's shares of Category I ($48,350,000) and of Category 4 ($100,000) were cancelled as of June 30, 1990, reducing the total loan amount to $51,550,000. Sas: C Complied with CD Compliace after delay NC Nc complied with SOON Compliance Expected in Reasonably Short Time CP Complied with Partially NYD Not yet Due

31 Implementation Completion Report 21 Loan/ Original Revised Description of Covenant Comments Credit Covenant Fulfdl Fulfil Agreement Number Teat Reference Class(es) Status Date Date Project L02460 Section 1.01 (a) 3 C Amount of free-limit subloan. Iricreased as of 6/17/89 from Sl, to $1,450,000 to reflect real price increases. Section C Comouitmen of PBs to the objectives of the IDBE's participation in the project ended as of June 30, Refer Project. LA 3.01 (c). Section 2.02 (a) 3 C Subloan limit to a single bortowers. Lncreased on June 17, 1989 from $5,000,000 to S6,000,000 to reflect real price increase. Section 2.03 (c) 3 C 12/31/89 12/31/92 Termia date for subloan applications Original date of 12/31/89 postponed to 12/31/90 by telex dated July 6, 1990, then to 1231/91 by telex dated March 20, 1991, and then to 12/31/92 by exchange of letter dated Aprd 16, Section 2.04 (b) 9 C Review of terms and conditions of subloans See comments given above under Loan Agreement, Section 3.01(c). Section 2.04 (c) 2 CP Calculation of requtred financial and economic Revised on June 17, 1989 to reflect real price increase. Exemption rates of retum for manufacturing wsbprojects. limits raised from LE 800,000 to LE 2, for subproject cost and ERR must be not less than 12% and FRR not $650,000 to $950,000 for subloan ainount. less than interest rate applicable to subloan. Section 2.05 (a) 3 C Subloan grace periods and methods of None amortization Section NC Employment of advisors by the PBs to develop Not implemented; PBs refused to use loan proceeds for this purpose. their appraisal and supervision capacities in Proceeds cancelled as of Aprd 10, construction lending. Section C PB to disseminate information on loan to the Done. private sector. Section 3.02 I Soon Auditing of PB accounts BM's Annual Report including its audited annual report for the year ending June 30, 1993 (FY92) has been received and satisfies the Bank's minimum requirements for BM. However, audited annual report for FY93/4 overdue as of end-april Follow-up reminders have been sent. L02450 Suppl. Letter No. I 10 C Application of management development Contracts with (AC and CPU) consltants have been underway since Para I program January Suppl. Letter No. 1 5 C Composition of Advisory team Refer to Loan Agreement Section 3.02 (b) Para 2 Suppl. Letter No C Procurement Procedures Ceiing for non-icb procedures raised on June 17, 1989 from S2,000,000 to S3,000,000 to reflect real pricc increases. Stati: C Complied with CD Coompilance after delay NC Not complied with SOON Compiawce Expected in Reasonably Short Time CP Complied with Partially NYD Not yet Due

32 22 Implementation Completion Report Loan/ Original Revised Dcscription of Covenant Comments Credit Covenant FuElfil Fulfill Agreement Number Text Reference Class(es) Stants Date Date Suppi. Letter No. 3 l0 C Implementation of JCDCI action progranm for reforms EU contracted with Arab Bureau (consulting firn) in June 1989 to carry out most of reform studics. Studies have been substanially completed. Refer to LA 3.03 above. Suppi. Letter No. 4 9 C Bank review of subloan proposals Eight subloan proposals totalling about $30.0 million (aftcr cancellations) were approved, including one free limit subloan. The terminal date ror subloan conuiiitments expired on December 31, Status: C Complied with CD Compliance after delay NC Not cemplied with SOON Cormpliace Expected in Reasonably Short Time CP Complied with Pariay NYD Not yet Due

33 implementation Completion Report 23 Table 10: Bank Misr Balance Sheet FY ; Actual FY , SAR Estimates (LE Million) AL d Jung-O ASSEr S AC- IdL UR E WrAr5 Cash b Banks ,614 11,620 14, ,539 1,754 1,900 2,080 2,300 Loans 9,268 11,548 0X1 15,506 16,853 2,940 3,352 3, Invesnnts 1,410 5,262 10,473 7,096 7, Flxed Asse" & Othe 4,012 2,015 2,580 2,396 2, Less: Provlbw (884) (829) (1,164) (2,343) (2,543) (213) (261) (322) (398) (486) TotalAsstg 19,759 28,510 32,780 37,070 37, ,211 5,870 5,718 7,611 LLABILITIES & EQUITY Depodt 15,8 22,790 26,698 31,545 32,830 3,581 4,082 4,653 5,303 6,048 BommlIngs & OO Debts 3,756 4,608 4,952 4,361 3, , ,566 Total LibIllfe 19,580 27, ,906 36,494 4,489 5,079 6,721 6,540 7,614 Pai-in Capia 100 1,000 1,000 1,000 1, Reorves TotdlEquky 199 1,112 1,132 1,164 1, Totat LhBbpbs & Equfty 19,759 28,510 32,760 37,070 37,693 4,598 6,211 5,870 6,714 7,811 - Cash 8a ew.depe h% LOaNsDepoulX% LbbRlWsliEquicy(Ms) Provl8ns& PsRere,wi Loan B Is Parfolb%

34 24 Implementation Completion Report Table 11: Bank Misr Income Statement FY , Actual FY198488, SAR Estimates (LE Million) A of June INCQME STATEMENTS ntbetstoanloen d 438 1,938 1,379 2,068 nderestondeposl Inc" mom lnvrnents oo Coannsbns OUhe IncomD 67 T Total Incom 1,649 2,268 3,453 3,699 3, S2u DO'ENSES In*re Expenses ,635 2,309 3,011 2,92 AdminisbaUv 232 Expeose PrNvtbn 64 T T7 88 Total Expens 1, , ,"1f Prdfl befom To Taxes MOWPrdl s Pwft bef.taxuulav.equffy% Pflobef.TaxJAv. TN AutB% A*irrn.Exp.I/TAnet% IA IA 1A Averave Itri SruaSpddof bons over DeposI % 2A

35 Implementation Completion Report 25 Table 12: Compliance with Operational Manual Statements There are no known incidence of non-compliance with Operation Manual Statement

36 26 Implementation Completion Report Table 13: Bank Resources: Staff Inputs (In Staff-weeks) Stage of Project Cycle Planned Actual Through appraisal Appraisal through Board Board through effectiveness Supervision Completion Total

37 Implementation Completion Report 27 Table 14: Bank Resources: Missions Stage of Project Cycle Month/Year No. of persons Days in Specialization Performance Types of field represented rating status/a problems/b Through appraisal 6/ Economist. Tech. Assist Appraisal through Board approval 6/ Economist Fin. Analyst Board approval through effectiveness 10/ Economist Fin. Analyst 3 D Supervision 3 D 2/ /c 3 M 9/ /c 3 R 12/ /c 3 RM 6/ /c 3 R /c 3 R /c 3 M 6/ Economist 3 M 11/ /c 2 M 4/ Economist 7/ Economist 5/ /c -- Completion 5/ Economist Sept Operat. Off. Fin. Analyst /a Status: 2 = Moderate Problems /b Type of Problems: M = Management R = Restructuring; S = slow fund utilization; D = Delay in implementation /c All supervision mission comprised of at least one economist & one development finance specialist.

38 28 Implementation Completion Report

39 APPENDIX A

40 30 Implementation Completion Report

41 ARAB REPUBLIC OF EGYPT CONSTRUCTION INDUSTRY PROJECT (LOAN 2460-EGT) WORLD BANK IMPLEMENTATION COMPLETION MISSION (September 18 - October 6, 1994) AIDE MEMOIRE 1. A World Bank Mission consisting of Messrs. Nabil Shehadeh and Y.T. Shetty carried out the Implementation Completion Review of the Construction Industry Project (Ln EGT) from September 18 - October 6, Dr. Rouchdy Saleh, of the Resident Office in Cairo, provided support to the mission. The mission met with officials of Bank Misr, the National Company for Construction and Development (NCCD), and the Executive Unit (under NCCD which carried out the Management Development Training Program under the Project). A list of officials met is given in Attachment I. The findings of the mission are subject to review in Washington by the Bank management. Following this review and comments by the Borrower (the Government), this Aide Memoire will be finalized and incorporated as an annex to the Implementation Completion Report (ICR) to be submitted to the Board of the World Bank. Project Objectives 2. The main objectives of the Project as originally conceived were to: (i) improve the efficiency and capacity of the construction industry (construction contractors, building materials manufacturers, equipment leasing companies) in Egypt by providing financial and technical assistance; (iii) strengthen the capabilities of the Industrial Development Bank of Egypt (IDBE) and Banque Misr in appraising, financing and supervising sub-projects in the construction sector; and (iv) help bring about institutional and policy reforms. The project had three main parts: (a) financing of the foreign exchange costs of construction equipment or of the manufacturing of construction equipment and building materials, with Banque Misr and IDBE serving as the intermediary lending institutions (Part A of the Project); (b) financing of technical assistance (TA) programs for (i) the management development of contracting companies (Part B (1)); (ii) help JCDCI (Joint Committee for Development of Construction Industry) formulate an action program for construction industry reforms (part B (2)); and (iii) strengthening of appraisal and supervision capacity of BM and IDBE (Part B (3)). Cancellation of Project Components and Loan Portion 3. Because of economic recession and slow-down of construction activity in the country in the mid-1980s, IDBE found demand for loans in the construction industry was not strong. Further, under the recessionary conditions, IDBE found it difficult handling simultaneously substantial loan portions under two IBRD loans -- Ln EGT and Ln EGT (the Small and Medium Industry Project). Therefore, following IDBE request, IBRD cancelled IDBE's participation in the Construction Industry Project as of June 30, 1990.

42 32 Implementation Completion Report As a result of this and a request by the other participating bank (Banque Misr), the loan amount was reduced from US$ 100 million to US$ million. Of this revised loan amount, US$ 2.13 million was undisbursed as of mid-september, The undisbursed amount as of October 31, 1994 (when the IBRD account books for disbursements on the project will be closed) is to be cancelled. 4. Described below is the achievement of progress under each component of the project: 5. Banque Misr (BM) Component: BM was able to approve eight sub-loans, of which one sub-loan was cancelled as the borrowing entity found the terms less favorable than those available from other sources. Of the seven existing sub-loans totalling US$25.13 million, two sub-loans were to construction equipment dealers (in the private sector) and five sub-loans were for modernization (replacement of worn-out old construction equipment) of the operation of five public sector construction contracting entities. One equipment dealer who received a loan of US$2.5 million, cancelled most of it (as he found the terms unfavorable), using only US$205,650. Another subborrower also cancelled part of the loan. The net commitments of BM (after cancellations) amounted to US$25,132,000. Of the seven entities which received loans, two (EGYCO, one of the public sector companies under NCCR, and VIBRO, a public sector building foundation contractor) are facing major problems mainly because of high overdue receivables largely from public sector entities. The other five sub-borrowers of BM are showing highly satisfactory performances following successful completion of their sub-projects. One beneficiary (Misr Concrete Development Co.) is participating in major construction contracts in Africa and Middle East. 6. The financial situation of BM, one of the leading public sector commercial banks, continues to be satisfactory. It shows profitable operation. Its liquidity ratio in FY94 was sound at 54.6 percent on foreign currency deposits and 23.8 percent on local currency deposits (as against the Central Bank requirement of at least 25 percent on foreign currency deposits and 15 percent on local currency deposits). It has a debt/equity ratio of 21/79 and a capital adequacy ratio of 8:1 (meeting the Central Bank ceiling limit). However, its arrears in FY93 were LE million which accounted for about 5 percent of the outstanding loans (compared to 6 percent in FY92). The arrears increased by about 20 percent to LE 668 million in FY94. The bank needs to intensify efforts to collect the arrears and monitor them on a regular basis, focusing on the age profile of the arrears. 7. IDBE Component: This was dropped from the Project for reasons described earlier. 8. Technical assistance Component: The implementation of this component has turned out to be highly satisfactory, exceeding appraisal expectations. The Executive Unit under the Holding Company, NCCD, has been able to expand the training program for the construction industry, attracting trainees from both public and private sectors. EU has adopted a new approach to in-service training in Egypt by using modern testing and screening techniques. By this approach, EU is able to assign selected candidates to appropriate training courses. Through these training courses which last from 5 to 6 weeks, EU has so far trained about 820 engineers and other professionals. EU is able to recover about 60 percent (on average) of the costs by charging fees for training. The training courses cover topical subjects such as maintenance management, management information systems, accounting and financial management, contract management, procurement, etc. EU is trying to train personnel and modernize MIS in all the viable enterprises of NCCD.

43 Implementation Completion Report EU has utilized about US$750,000 under Ln EGT for training and study components. Funds under this loan are no longer available except for commitments made prior to the closing date, June 30, Disbursements will stop on October 31, 1994, the date when the IBRD account books will be closed on Ln EGT. As the training program is on-going and as the demand for EU training is increasing, there is an urgent need for continued financing of this activity (possibly to the end of 1997). EU is exploring the possibility of having access to US$1 million financing from the proceeds of the IDA-financed TA Privatization Project (Cr EGT) which is being restructured under separate arrangements between the Government and IDA (as the Government is using grant funds from donors to finance TA for privatization). The Bank is supporting this reallocation of funds needed by EU if a satisfactory proposal is submitted to the Bank by the Government for this purpose. EU informed the mission that it has submitted a project proposal to the Ministry of Public Business Sector. Following approval by this Ministry and the Ministry of International Cooperation, EU indicated that an official request by the Government is expected to be sent to the Bank. The mission emphasized that this request needs to be sent before October 31, 1994, the date for closing the IBRD accounting books for all disbursements under Ln EGT. 10. Studies Component: Under Ln EGT, NCCD has carried out financial restructuring studies for 16 public sector companies (PSCs) under the Holding Company. Following these studies, one company has been liquidated and two more are in the process of liquidation. Three more are also identified for liquidation. When these liquidations take place, the PSCs under NCCD would be reduced to 21. NCCD is not proposing to carry out restructuring of these PSCs as they are slated for privatization. Compliance with Covenants 11. The compliance with legal covenants has been generally satisfactory except for delays in submitting audit reports. Further, in the course of implementation, several amendments were made to the terms and conditions of on lending to reflect changes in the macroeconomic policy environment and financial market conditions. Achievement of Development Objectives 12. The project was carried out at a time of serious economic recession impacted by far-reaching economic reforms under the Structural Adjustment Loan (SAL). For lack of demand for loans in the construction industry, the project was restructured twice -- in 1989 and and a total of US$ million (75 percent of the original loan amount of US$ 100 million) was cancelled. Although the loan utilization fell far for short of the amount envisaged at appraisal, the development impact of the project was generally satisfactory in the context of the market conditions and needs of the construction sector. Major changes introduced in onlending arrangements in mid-1992 were consistent with the financial market liberalization under SAL. This helped increase the demand for sub-loans and the rate of commitments accelerated until the December 31, 1992 deadline for sub-loan commitments. Further, under the Project, construction equipment dealers (in addition to construction contractors and equipment manufacturers) were made eligible for sub-loans. This flexibility also helped increase sub-loan commitments during 1992, following the financial market liberalization under SAL.

44 34 Implementation Completion Report 13. Establishment of the Egyptian Federation of Contractors, one of the objectives under the project, was achieved in This Federation is headed by the Chairman of NCCD. The Federation classifies Egyptian contractors according to their capability and experience. This helps ensure that the bidders for complex jobs are capable contracting firms. The Federation has prepared a list ranking local construction contractors. This is one of the major tasks achieved under the project. Another major task accomplished was a study on reforming the procurement and contracting system. The reconmnendations of this study have been reviewed by the Ministries of Housing and Reconstruction and New Communities as well as by the Federation of Contractors and necessary legislation is being prepared to reform the procurement and contracting system and procedures for the construction industry. Major Risks 14. Major risks in the operational phase of the Project are: (i) continuing delays and delinquencies in payments by public sector clients for works performed by public construction companies are undermining the viability of some beneficiary entities under the Project. (As noted, two of the seven beneficiary companies under the Banque Misr Component are facing this problem); (ii) the on-going Management Development Training Program being carried out by EU is facing the risk of being cut back for lack of funds; and (iii) the priority recommendations under the Studies Component may remaiii.htout imple.aentation in the face of uncertainty facing the PSCs and holding companies. Plans for Sustainiability 15. The Government plans to resolve the issue of overdue arrears among public sector entities need to be implemented soon. This would improve the financial viability to the seven entities in the construction industry which have benefited under the project. 16. Funds need to be secured to complete the on-going Management Development Training Program of ETU. This training program has been an outstanding success so far but, without financial support, it would be adversely affected as it is not able to recover the full cost of training, and the training staff would leave EU. The Bank management has indicated willingness to consider providing funds from the surplus in an IDA-financed project (TA Privatization) if a request is received from the Government. This request need to be presented to the Bank by October 31, NCCD needs to prepare a strategic plan for its operation following the recommendation of the various studies carried out under the project. This strategic plan needs to be developed taking into account the Government objectives of privatizing PSCs. To expedite the privatization process in the construction sector, NCCD's strategic plan is necessary. Some PSCs may need financial restructuring before privatization. Priority recommendations of the studies need to be taken into account in developing the strategic plan. m:\egt\pa5044\1n2460\pcr\main6426. icr