Document of The World Bank FOR OFFICIAL USE ONLY OF THE PRESIDENT OF THE TO THE EXECUTIVE DIRECTORS A PROPOSED FOURTH LOAN TO THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FOURTH LOAN TO THE INDUSTRIAL DEVELOPMENT BANK WITH THE GUARANTEE OF THE REPUBLIC OF KENYA March 5, 1980 FILE COPY Report No.P-2736-KE This document ass a restricted distrbutio and my be used by recipients only In the performance of their official duies. Its contents may not otherwise be dxclosed without World Bank authorization.

2 CURRENCY EQUIVALENT Currency Unit = Kenya Shilling (KSh) KSh = US$0.133 US$1.00 = KSh 7.5 (As the Kenya Shilling is officially valued at a fixed rate of 9.66 KSh to the SDR, the US Dollar/K Shilling exchange rate is subject to change. Conversions in this report were made at US$1.00 to KSh 7.5 which is close to the recent average exchange rate.) ABBREVIATIONS ABD - African Development Bank BADEA - Banque Arabe pour le Developpement Economique de l'afrique DFCK - Development Finance Company of Kenya EAC - East African Community EADB - East African Development Bank ECGD - Export Credit Guarantee Department (Morgan Grenfell) ICDC - Industrial and Commercial Development Corporation IDB - Industrial Development Bank IDBI - Industrial Development Bank of India ISPC - Industrial Survey and Promotion Centre KETA - Kenya External Trade Authority KIE - Kenya Industrial Estates KNAC - Kenya National Assurance Company KRC - Kenya Reinsurance Corporation MCI - Ministry of Commerce and Industry NBK - National Bank of Kenya NPC - New Projects Committee UNDP - United Nations Development Program FISCAL YEAR Government of Kenya = July 1 - June 30 IDB = January 1 - December 31

3 FOR OFFICIAL USE ONLY KENYA INDUSTRIAL DEVELOPMENT BANK LOAN AND PROJECT SUMMARY BORROWER: GUARANTOR: AMOUNT: TERMS: RELENDING TERMS: Industrial Development Bank (IDB) Republic of Kenya US$30.0 million equivalent Repayable in accordance with the amortization schedule for sub-loans for which withdrawals from the loan account are approved or requested. Interest rate would be 8.25% per annum. IDB would relend the proceeds from the loan at an interest rate of no less than 12% per annum on foreign currency or at such other rates as may be agreed from time to time between the Borrower and the Bank. Sub-borrowers will bear the foreign exchange risk. PROJECT The purpose of the proposed project is to assist IDB in DESCRIPTION: implementing investment programs, as well as promoting Kenya's industrial development. More specifically, the project will enable IDB to use loan funds to provide term financing for medium and large scale manufacturing enterprises. ESTIMATED FY DISBURSE- MENTS: Annual Cumulative APPRAISAL REPORT: Report No KE, dated February 20, 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.

4

5 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED FOURTH LOAN TO THE INDUSTRIAL DEVELOPMENT BANK WITH THE GUARANTEE OF THE REPUBLIC OF KENYA 1. I submit the following report and recommendation on a proposed fourth loan of US$30.0 million equivalent to the Industrial Development Bank with the guarantee of the Republic of Kenya. The proposed loan is to help finance the foreign exchange components of investments by this development finance company. The interest on the loan will be 8.25% per annum. Amortization of the loan will conform substantially to the aggregate of the amortization applicable to subloans and equity investments financed out of the loan, subject to a maximum of 15 years, including a grace period of three years. PART I - THE ECONOMY 1/ 2. A report entitled "Kenya Economic Memorandum" (Report No KE) dated March 1979 has been distributed to the Executive Directors. A summary of social and economic data is in Annex I. A Basic Economic Report on Kenya is now under preparation. Long-Term Economic Growth and Prospects 3. Kenya became an independent nation in During the entire period since then the country has experienced remarkable continuity in both political leadership and development strategy. That strategy has been to promote rapid economic growth by means of public investment, encouragement of both smallholder and large-scale farming, and promotion of accelerated industrialization, by providing incentives for private, including foreign, investment in modern industry. The Kenyan development model can be characterized as "mixed", in the sense that it incorporates a diversity of organizational forms and incentives and combines private enterprise with a significant amount of government participation and guidance. While the death in 1978 of President Kenyatta, who had led the nation since independence, had been anticipated with concern because of possible political disruption and discontinuity in Kenya's development, it is clear that the country has made a smooth transition to new leadership and that the future will see continuity in both the political and economic spheres. Recent peaceful elections provide additional confirmation of this. 4. Kenya's first decade as an independent nation was one of remarkable growth and structural transformation. Total GDP grew at an annual average 1/ This section is substantially the same as the President's Report on the Structural Adjustment Credits (Report P-2670-KE of February 11, 1980).

6 -2- rate of 6.6% during Both agriculture and manufacturing grew rapidly, 4.7% and 8.4% per annum respectively. The expansion of agriculture was stimulated by redistribution of large estates to smallholders, rapid diffusion of hybrid maize and growth of smallholder output. Growth of manufacturing was very largely made possible by the expansion of domestic demand due to rising agricultural incomes, while investment for domestic production was being encouraged by high levels of protection, a liberal attitude towards foreign investment and active government promotion of and participation in manufacturing ventures. 5. Despite this rapid growth, Kenya remains a poor country, still heavily rural and dependent upon agriculture. Average per capita income in 1978 was US$320 and agriculture accounted for about a third of GDP ( ) and 60% of export earnings (1977). Since the growth of the industrial sector has been largely confined to the major urban areas, agriculture remains the principal source of income in the rural areas where 80% of the population live and work. Thus, while the country has made substantial economic progress in an atmosphere remarkably free from social unrest, it still has significant problems of poverty and under-employment. It is estimated that about onefourth of the population have incomes which place them below the absolute poverty line. Moreover, while Kenya's post-independence growth record has been impressive, a number of problems have been emerging which will make it more difficult to sustain the rapid growth of domestic product and further alleviate poverty. These are: the extremely rapid growth of population, the inward-looking pattern of industrialization and the slow growth of and lack of diversification of exports. 6. The most fundamental problems Kenya faces are posed by the rapid growth of population, currently estimated to be in excess of 3.5% per year, which is among the highest in the world. This is, ironically, the result of Kenya's past success in raising living standards which has resulted in a steady decline in mortality, and has probably resulted in an increase in the country's already high fertility rate. 7. With rapidly increasing population, pressure is beginning to 2 mount on Knya's limited arable land. Of Kenya's total area, 583,000 km 520,500 km is categorized as potentially agricultural; however, only 13% can be regarded as high potential land, with 6% medium and 81% low potential. Thus, less than 20% of the land area has good arable potential. While pressure on the land was alleviated during the years following independence by the opening up of a large part of the land previously owned by Europeans to settlement by Kenyan smallholders, much of the high-potential land is now densely settled. Because of traditional ethnic landholding patterns some higher potential land is not fully utilized. M1ounting pressure on land is resulting in increasing subdivision and landlessness in high-potential areas and in settlement in semi-arid areas ill-suited to farming. The latter also poses a serious threat of environmental degradation.

7 8. Rapid population growth is felt most seriously through the increasing pressure on available agricultural land, but has already created and is creating other problems as well. First, there is the strong likelihood that, unless population growth slows dramatically or ways are found to increase the rate at which income earning opportunities in agriculture expand, excess rural labor will be pushed into urban areas. Even if the non-agricuitural formal wage sector (which employs less than 15% of the total labor force) grows very rapidly, it will probably be unable to absorb all the new urban labor force entrants because of its small base. The result could be rising urban unemployment and underemployment. Second, considerable budgetary pressure has already been created by rapidly rising population and the concomitant growth of demand for social services, especially education. Finally, efforts to improve the distribution of income will be impeded by the relative lack of access to land and education for the children of the poorest section of the population. 9. Another fundamental problem that has been emerging involves the pattern of the country's industrialization and its effects on export growth and labor absorption. In general, industrialization has taken place behind a wall of heavy protection afforded by tariffs, quotas, licensing and other quantitative restrictions. Rapid growth of industry in the past has been largely based on investments in fairly simple, import-substitution industries by multinational companies. To a lesser extent, manufacturing production was also oriented to the export market in neighboring countries, particularly the protected East African Community (EAC) market. However, the scope for further industrialization along these lines is limited, as most of the easy or economic import-substitution possibilities have been exhausted and the EAC preferences for Kenyan goods have been abolished. Thus, sustaining rapid growth by continuing this strategy is not feasible. Moreover, this pattern of industrialization has had some unfavorable side effects. First, the industrial sector has become increasingly dependent on imported raw materials, components and spare parts. Declines in exports or deteriorating terms of trade which force reductions of imports, therefore, have heavy repercussions on industrial production and employment. Second, the high levels of protection result in an "anti-export" bias by making it more profitable to produce for the domestic market than to export. Finally, the structure of production is relatively capital-intensive and is not sufficiently based on use of domestic resources, including labor. To maintain rapid industrial growth it will be necessary to change the system of industrial protection and incentives to improve the efficiency of the sector and reorient industry toward increased production for export, and increased use of domestic resources. 10. As a result of the anti-export bias, exports have grown slowly and there has been a lack of diversification of exports. Exports have consistently grown at a slower pace than GDP. From 1964 to 1972 the volume of exports expanded at an average annual rate of 4.6%. Between 1972 and 1974 export volume increased by an additional 11% but it has not risen above the 1974 level since then. To some extent this reflects the fact that Kenya's exports have been adversely affected by the collapse of the EAC and that there have been production problems in agriculture and industry. Nevertheless, it is clear that the pace of export growth must be accelerated and exports must

8 be further diversified if the balance of payments is not to become a major constraint on long-term growth. This will require that the system of production and investment incentives be changed so that more resources are directed into efficient foreign exchange earning and/or saving sectors. Recent Economic Performance 11. The slow growth of exports and the increasing import-dependence of industry have increased Kenya's vulnerability to developments outside her boundaries. The country's economic performance over the last five years has thus been strongly influenced, if not dominated, by dramatic variations in the international terms of trade. 12. During the increase in petroleum prices and accelerated international inflation forced the Government to adopt fiscal, monetary, and incomes policies aimed at restraining aggregate demand. These policies were reasonably effective in protecting the country's international liquidity and in keeping externally-generated price increases from spiralling out of control. However, they resulted in a sharp slowdown in economic growth, which averaged only 2.4% per year, compared to 6.6% during By 1976 another equally dramatic reversal of the country's economic fortunes was already underway as international coffee prices, which eventually tripled, were soaring. The Government decided, therefore, to accelerate the pace of development. The public investment program was stepped up in part by increasing expenditures needed to replace defunct EAC corporations by national entities. In addition, a program of military equipment purchases was begun to build up the country's international security. As a result, the overall budget deficit rose from less than 5% of GDP in FY1976/77 to an estimated 9% in FY1978/79. At the same time credit policy was being eased and domestic credit expanded by an average of nearly 30% per year in Finally coffee producers were allowed to capture almost all the windfall gains resulting from the extraordinary rise in coffee prices. The combination of expansionary fiscal and monetary policy and high agricultural incomes produced a resurgence of domestic demand. Economic growth accelerated, averaging 7.2% in real terms in and the value of imports in 1978 exceeded that in 1976 by 85%. 14. By the second half of 1977 coffee prices had passed their peak and had begun to decline and the balance-of-payments situation began to deteriorate. The Kenyan Government's reaction was to gradually switch to a more restrictive economic policy. The growth of credit was restrained somewhat beginning in mid In the latter months of 1978 import license approvals were slowed down to limit import growth. The Government negotiated a first credit tranche Stand-by arrangement which was approved by the IMF in November, Finally, in December 1978, an advance import deposit scheme was instituted. However, with a 20% drop in exports due to falling coffee prices and poor weather and the lagged effect of past expansionary policies on imports, these measures were too mild and came too late to arrest the deterioration of the current account balance, which shifted from an exceptional surplus of

9 - 5 - US$58 million in 1977 to a deficit of over US$650 million in As a result, despite a substantial increase in external capital inflows, foreign exchange reserves declined by US$200 million in In summary, during the period covered by Kenya's Third Development Plan, , the country experienced wide swings in its international terms of trade and in the growth of the economy: sharp deterioration of terms of trade and low growth rates during ; resurgence of growth in following the coffee boom; and, deceleration in Overall, the growth of the economy was disappointing, averaging only 4.7% per year over These results reflected the inadequacies of a development strategy and policies which created an increasingly less viable economic structure. As Kenya begins execution of its Fourth Development Plan, it faces conditions which are, in many ways, analogous to those at the beginning of the Third Plan in 1974, i.e. rising petroleum prices, a slowing world economy and a relatively unfavorable price outlook for its major exports. The Fourth Development Plan: Strategies and Prospects 16. The emphasis of Kenya's Fourth Development Plan is on restoring growth to the pace that prevailed before 1974, while alleviating poverty through creation of income-earning opportunities and provision of social services to meet the basic needs of the populace, especially in rural areas. The Plan recognizes that pursuing rapid growth of employment and income in rural areas will require greater attention to problems of smallholder agriculture and to expanding rural infrastructure. Further, it recognizes that the process of industrial modernization and expansion through import substitution has inhibited the growth of exports, both agricultural and industrial, and that this process is reaching its limits. The emphasis of the Plan is thus placed on reducing protection and expanding and diversifying exports. Finally, the heavy burden rapid population growth is placing on the economy is acknowledged and measures are proposed to limit growth. Thus, the Plan correctly identifies the key problems that Kenya faces and sets forth a development strategy appropriate to their solution. 17. Agricultural Strategy. The Fourth Plan recognizes the strong link between agricultural growth and poverty alleviation. One of the most significant changes proposed in the Plan is increasing access to land through legalizing subdivision of large farms in high-potential agricultural zones. The Government will also have first option purchase rights on any parcel of high potential land greater than 20 hectares which is offered for sale. Any such land purchased by the Government would be made available for leasehold settlement of landless farmers. This is a major departure from recent policy and could have important effects on output employment and income distribution. Once the status of existing small farms, which had been formed by illegal subdivision, is regularized, they will become eligible for extension,

10 - 6 - credit and other services common in smallholder areas. The Government is also prepared to assist owners of large farms who wish to subdivide to do so. 18. The Plan proposes that a National Land Commission be established to review ways of encouraging land use intensification and labor absorption. The Plan also proposes that marketing and pricing policies pay closer attention to the structure of domestic and international prices and that the marketing system be made more competitive and efficient to improve prices to farmers. Research and extension services are to be more closely linked to the needs of small farmers. Finally, in addition to projects to increase larger scale commercial and smallholder production, a series of integrated rural development projects in semi-arid areas is proposed to redress the neglect of these areas. 19. Industrial Strategy. The major thrust of industrial policy during the Fourth Plan period will be to effect a transition from import substitution to a strategy emphasizing industrial efficiency and export diversification. The deficiencies of import substitution strategies, including their adverse impact on income distribution, low employment generation and anti-export bias were recognized in the Third Plan. That Plan did not, however, contain as the Fourth does, a definite commitment to a scheduled rationalization of the protective regime. This will involve further modification of tariffs and elimination of quantitative restrictions on imports over a five-year period. This policy will be very difficult to carry forward over the next few years when, because of balance-of-payments problems, there is likely to be considerable pressure to increase, rather than reduce, protection. It is recognized that reduction of protection and increased industrial efficiency, while necessary to expanding and diversifying exports, may not be sufficient. The Plan, therefore, recommends strengthening the Kenya External Trade Authority, simplifying and rationalizing existing export incentives and adopting an export credit guarantee and finance scheme. 20. No fundamental change is proposed in Kenya's traditionally liberal policy on foreign investment, with the important exception that review and approval of projects for which special concessions or government participation are being sought will rely more on economic criteria and will be centralized in the Ministry of Finance. On the whole, the Plan calls for a more limited role for Government in terms of direct participation and intervention in the industrial sector. Development of the informal sector and small industry will be supported through provision of credit, extension services and technical assistance and essential infrastructure. Licensing and regulation of small business will be reviewed to avoid any unfair discrimination. Efforts will be made to restructure industrial investment incentives to encourage employment and regional decentralization. 21. Population Policy. The Plan is frank in acknowledging the heavy burden rapid population growth is placing on the development effort and makes promotion of family planning a matter of public policy of the highest priority. It calls for a coordinated effort on the part of all relevant ministries and non-governmental organizations involved in development activities related to

11 family life to increase public awareness of the desirability of family planning. The target for new acceptors during is 700,000, compared to 280,000 recruited during In order to achieve this, the number of field educators will be more than tripled (from 430 to over 1,300) and the number of fixed delivery points doubled (from 315 to 630). Although Kenya is doing more to promote family planning than most other African countries, the rate of population growth is projected to remain extremely high (3.5%) because of strong cultural and traditional factors affecting fertility and even greater efforts will be required to bring about a significant decline in fertility. Economic Prospects 22. In spite of the generally well-conceived policy measures proposed in the Fourth Plan, it will be very difficult to attain the Plan's targets, especially the target GDP growth rate of 6.3% per annum. This is largely due to balance-of-payments and budgetary problems which are likely to be more severe and long-lasting than was foreseen at the time of Plan preparation. The balance-of-payments position is likely to remain difficult throughout the Plan period for three reasons. First, export prospects are not favorable for most of the period. It is estimated that export revenues have increased only marginally in 1979 after their significant fall in Coffee export volumes are down because of poor weather and the recent increase in world coffee prices has not benefitted Kenya because the normal timing of its harvest brought the crop to market before the increase in price. Second, Kenya has also been adversely affected by the most recent round of oil price increases. It is estimated that the average price being paid for crude oil in 1979 was 38% above that in The terms of trade are projected to remain unfavorable until Third, there will be a rapid rise in amortization payments over the next few years because of the significant increase in the level of commercial borrowing to finance expenditures associated with equipment of successors to EAC corporations and other large projects and to carry out a major program to re-equip the armed forces in Payments associated with purchase commitments made during this period will have a substantial impact on the balance of payments throughout the Plan period. The budgetary situation will also be tighter than foreseen in the Plan. The lower rate of growth of the economy and of imports will mean lower growth of government revenues. In addition, the President has recently announced several measures which are not included in the Plan but which will have significant direct budgetary consequences. These measures include: (a) provision of free milk for students in the first seven years of school; (b) elimination of school fees for the sixth year of elementary school; (c) initiation of a national literacy campaign; and (d) a 10% increase in employment in the public and private sectors in exchange for agreed wage restraint. Payments on military purchases already made will also increase budgetary pressure.

12 23. In order to deal with the balance of payments problem, the Government has adopted, among other measures, a comprehensive economic program aimed at limiting the loss of foreign exchange reserves to KL 50 million (US$133 million) for combined and at gradually reducing the rate of inflation to less than 10% by 1980/81 (compared to 12% in 1979). The major policy targets involved in accomplishing this will be a reduction in the overall deficit of the Government from 9% of the GDP to about 6% in 1979/80, a substantial reduction in domestic borrowing by the Government, a moderate expansion of credit to the private sector, and a continuation of incomes' policy which holds wage increases below the inflation rate. The Government's program has also been incorporated into a stand-by arrangement with the International Monetary Fund. The agreement, which is for a period of two years, involves the upper credit tranches, through the fourth, including the use of the Special Fund Facility, and will make an amount equivalent to about US$157.0 million available to Kenya. In addition, Kenya has been permitted to purchase the equivalent of US$89.0 million under the Fund's compensatory financing facility. The first drawing under the stand-by agreement has already been made and subsequent drawings are scheduled quarterly, ending March 31, In addition to attaining access to IMF resources, the Government has signed a US$200 million Eurocurrency loan which it views, however, largely as reserve liquidity. External Debt 24. The recent expansion of government and government-guaranteed commercial borrowing has adversely affected the debt service ratio, which has risen from 5% in 1977 to an estimated 11.2% in This includes service payments on a notional 50% share of the debt of EAC corporations. The debt service ratio is expected to increase to about 16% in the mid-1980's and decline gradually thereafter. Debt service payments to the Bank are 14.9% of total debt service payments; the IDA share is 0.9%. The Bank's share-of total debt service payments is expected to rise to about 22% by 1985, while IDA's share would rise to 1%. The Bank is presently holding 22% of Kenya's total outstanding external debt and IDA 9%. The Bank's share is expected to rise to 26% and IDA's to 15% by The expected rise in Bank exposure is due largely to anticipated repayments of loans with short maturities. An additional factor, however, is the gradual switch by other donors from loans to straight grants (including conversion of some loans to grants). Impact of the De Facto Dissolution of the East African Community (EAC) 25. The major developments in the East African Community were outlined in a report to the Executive Directors dated December 29, 1977 (R77-312) and more recent developments were outlined in a statement to the Executive Directors at the Board meeting held on January 4, Dr. Victor Umbricht, the independent mediator appointed by the Partner States, is completing his work on appraising the assets and liabilities of the EAC Corporations. The establishment of national corporations to replace the former EAC corporations

13 - 9 - has in some cases required large expenditures but the burden should be temporary, as the new corporations are expected to become self-financing. The closure of the border with Tanzania has had some effect on trade -- Tanzania was a large customer for Kenyan manufactured goods but new markets are being developed. As Tanzanian exports to Kenya were small, replacing these has not been a major problem except for specific commodities (i.e. tobacco and cotton). The border closure has also had a slightly negative impact on tourism, although Kenya is expected to overcome this by developing additional beach resorts and game parks within Kenya. PART II - BANK GROUP OPERATIONS IN KENYA 26. Hitherto, Kenya has received 33 Bank loans, including three on Third Window terms, and 27 IDA credits amounting to US$994.1 million, which support 52 operations. In addition, Kenya has been one of the beneficiaries of 10 loans totalling US$244.8 million which have been extended for the development of common services (railways, ports, telecommunications and finance for industry), operated regionally for the three Partner States of the East African Community. Annex II contains summary statements of Bank loans and IDA credits to Kenya and to the East African Community Corporations, and notes on the execution of ongoing projects as of January 31, The Bank has assisted the Government in its efforts to restructure the economy through increased lending in directly productive sectors, particularly agriculture. While recent sector and economic work has also focused on the adjustments which Kenya must make to deal with the changed international economy, the upcoming Basic Economic Report is expected to comprehensively address the issues of income distribution, population growth, and appropriate long-term agricultural and industrial policies. 28. Significant progress has been made in giving the Bank's lending program a rural focus, and in concentrating on employment and income distribution objectives. Projects approved since July 1978 include an Engineering Project (Olkaria Geothermal), a Narok Agricultural Development Project, a Sugar Rehabilitation Project, a Rural Water Supply Project, a First Telecommunications Project, a Highway Sector Project, a Smallholder Coffee Improvement Project, the Olkaria Geothermal Power Project, the Baringo Pilot Semi-Arid Areas project, a Second Integrated Agricultural Development Project and the Structural Adjustment credits to help address Kenya's balance of payments difficulties. A fisheries project has been appraised and a technical assistance credit for export promotion to complement the structural adjustment credits is also being considered. Both of these projects are expected to be ready for consideration by the Executive Directors later this fiscal year. In addition, a railways project has been appraised, while an urban transport project, a fifth education project, an industrial project for expansion of soda ash production and a second population project are under preparation.

14 Overall, project implementation performance is satisfactory. Progress on the Group Farm Rehabilitation Project, however, has been slow due to administrative difficulties and reluctance of group owners to participate. Kenya also has experienced serious cost overruns, most notably on road construction projects, but Government has made funds available to complete these projects. Current cost estimates for the Bura Irrigation Settlement Project (now in the preliminary stages of implementation) indicate that heavy cost overruns are likely to be incurred; the financial consequences are under discussion with the Government and the co-financers. International Finance Corporation (IFC) 30. IFC has committed a total of US$42.9 million for four companies in Kenya: Pan African Paper Mills, Ltd.; Kenya Hotel Properties, Ltd.; Tourism Promotion Services (Kenya) Ltd.; and Rift Valley Textiles (Ltd.). A credit line for medium- and small-scale enterprises was extended to the Commercial Bank of Kenya. As of January 31, 1980, IFC held for its own account US$31.7 million comprising US$23.7 million of loans and US$8.0 million of equity. A summary of IFC Investments in Kenya is included in Annex II. PART III - THE INDUSTRIAL AND FINANCIAL ENVIRONMENT OBJECTIVES, INSTITUTIONS AND STRATEGY 31. Over the past decade manufacturing has been one of the most dynamic sectors in the Kenyan economy, with value added in the sector growing at an average rate of 10.5% in real terms between 1972 and The sector is, however, still relatively small, contributing 13% of GDP and accounting for 13% of modern sector employment in Between 1972 and 1977 manufacturing output grew in real terms at an annual average rate of 9.9%, recovering strongly after declining in 1975 essentially as a result of balance of payments constraints on imports provoked by the international oil crisis. Employment in the sector has grown steadily from 94,500 in 1973 to 122,000 in The increase in manufacturing employment, however, has not kept pace with growth in either output or investment, indicating an increasing capital intensiveness of production. Nevertheless, rapid growth of the sector has brought about shortages of Kenyans who are qualified and experienced technical and managerial personnel. 32. For reasons relating to infrastructure, services and market proximity, manufacturing in Kenya is regionally concentrated in six urban centers, Nairobi (50% of industrial output in 1972) being the most important, followed by Mombasa (19%). Four smaller industrial growth poles--kisumu, Nakuru, Thika and Eldoret--accounted together for 13% of 1972 output. By size, Kenyan industrial production is highly concentrated in 420 firms and establishments in 1976, which contributed 86% of output and 89% of value added in that year. 33. Government policies to promote accelerated industrial growth since Independence have favored private sector development and foreign investment.

15 In the 1970s, however, Government has been more active in investing in industry either directly or through parastatals and State-owned development banks. State participations in industry are mostly concentrated in large modern plants and range from small minority to majority holdings. Kenya also has a dynamic and aggressive industrial and entrepreneurial class which, while still predominantly foreign, is becoming increasingly Kenyan, as Government has pursued policies aimed at gradual "Kenyanization" of managerial positions as well as encouraging Kenyan entrepreneurship. 34. The Government has employed a broad range of policy instruments to encourage both domestic and foreign investment in the industrial sector. The domestic market has been heavily protected through tariff and non-tariff barriers to imports. The Government has traditionally followed a liberal policy on repatriation of capital and profits by foreign firms. These were virtually unrestricted until the end of 1978 when, due to balance of payments constraints, dividend transfers abroad were temporarily limited. There is an export compensation scheme which provides a payment equivalent to 10% of the value of non-traditional exports. There are plans to change this to a differential export-subsidy based on local content. Regional decentralization is being encouraged by investment allowances for projects outside of Nairobi and Mombasa. Under the Fourth Plan these will be modified into differential investment allowances favoring investments in rural areas and in laborintensive processes. 35. A number of ministries and government agencies are involved in the formulation and implementation of industrial policies. Tariff and trade policy with respect to industrial protection is the responsibility of the Directorate of Trade in the Ministry of Commerce and Industry (MCI). 1/ The Directorate of Industries in MCI has prime responsibility for industrial policy and monitoring of industrial activities. An inter-ministerial New Projects Committee (NPC) screens and approves all new industrial projects. The Industrial Survey and Promotion Centre (ISPC), an agency of MCI identifies and evaluates new projects and, where possible, assists in their implementation. The Kenya External Trade Authority (KETA), a semi-autonomous public agency, provides assistance to Kenyan exporters in the areas of product development, marketing, trade information, freight problems and handicraft export. The Ministry of Finance is responsible for the administration of price controls, tax incentives, export promotion incentives and monitors the Government's investment portfolio. 36. While institutionally well diversified, the industrial policy framework in Kenya has suffered from (i) inadequate coordination between the various institutions; (ii) shortage of qualified professional manpower; (iii) inconsistencies in the application of industrial policies as a result of ad hoc decision making; and (iv) delays and uncertainties in the administration of industrial policies. These problems have been identified by the Government and in some cases corrective measures have either been taken or are being considered. For example, a Bank staff member has been seconded 1/ This Ministry has recently been divided into a Ministry of Industry and a Ministry of Commerce.

16 to the Government as part of a team of trade experts who would assist with the preparation of technical studies required to reform the country's protective regime to produce a more uniform and rational system. 37. Regarding industrial incentives, the Government is considering a systematic review by the NPC of the technical, financial and economic viability of all proposed projects before any decision on incentives, financial assistance or special treatment is taken. The Government has declared its intention to strengthen the Directorate of Industries to enable it to undertake reviews of industrial policy measures, monitor industrial developments as well as implement the objectives of the current national Plan. To assist with the formulation of policies regarding research and development and the application of industrial technologies useful for Kenya, the United Nations Development Program (UNDP) has provided an Industrial Technology Adviser attached to the National Council for Science and Technology. Other export promotion measures which the Government is considering in support of its industrial restructuring objectives, include an export insurance and financing program and the simplification of the present administratively cumbersome system of export incentives. 38. The Bank has maintained a continuous and active dialogue with the Government concerning Kenya's industrialization policies, and has also provided technical assistance on specific industrial policy issues. The major new emphasis in industrialization strategy proposed in the Fourth Development Plan i.e. to encourage greater efficiency in local production, improve international competitiveness and promote exports, is aimed at effectively increasing the industrial sector's contribution to Kenya's future economic development. The policy measures proposed to implement the strategy, however, will only gradually take effect, in particular because of the present structure of Kenyan industry and presently prevailing macroeconomic constraints, but deserve the Bank's support. The proposed loan to IDB will contribute to this, as will the Structural Adjustment credits which will provide balance of payments support to assist, inter alia, in the restructuring of the trade regime. Development Finance Institutions 39. For a country at its stage of economic development, Kenya has a sophisticated network of financial institutions. These have expanded significantly in recent years in response to the Government's openness to private sector initiative and minimum regulation of their activities by the Central Bank. These institutions include 16 commercial banks, five development banks, 15 non-bank financial institutions and a small stock exchange. 40. Of the five development banks, the Development Finance Company of Kenya (DFCK), the Kenya Industrial Estates (KIE), the East African Development Bank (EADB) and the Industrial Development Bank (IDB) confine their operations

17 to the industrial sector. The Industrial and Commercial Development Corporation (ICDC) operates in both industrial and commercial sectors. These banks have clearly delineated fields of activity and there is little duplication of efforts in the financing of the industrial sector. The EADB has been seriously affected by the break-up of the East African Community and its role is being reformulated. ICDC, the largest source of financing in Kenya for both public and private sectors, is often used by the Government to assist in the execution of its industrial investment policies. KIE focuses solely on the development of small-scale enterprises mainly through the creation of industrial estates. DFCK directs its activities primarily to the larger private foreignowned enterprises, particularly the expansion of well established ones. It has also brought through its overseas majority shareholders, important technical advice and foreign partners into Kenya's industrial sector. The IDB (paras ) is the predominant institution specializing in the provision of term and equity financing to medium and large industrial enterprises, particularly to cover their foreign exchange requirements. PART IV - THE PROJECT 41. The proposed loan to IDB would be the fourth to this institution by the Bank Group since A Staff Appraisal Report entitled "A Fourth IBRD Loan to the Industrial Development Bank" (No KE of February 20, 1980) is being distributed to the Executive Directors separately. The proposed project was appraised in April Negotiations were held in Washington in January, 1980 and the Kenyan delegation was led by Mr. F. Ondieki, Permanent Secretary, Ministry of Industry. A Loan and Project Summary is at the front of this report. A Supplementary Project Data sheet is in Annex III. Objectives 42. The proposed project would support industrial development in Kenya in line with the Government's strategy under the Fourth Development Plan. This strategy will involve a gradual shift from import substitution towards export-oriented industrialization. The project would provide a continuation of Bank support for IDB, a key financial institution in the industrial sector. The Project Institution: The Industrial Development Bank Ownership and Board of Directors 43. IDB has a current authorized Class "A" ordinary share capital of KShs200 million, with KShs129.3 million fully paid in as of December 31, IDB also has authorized Class "B" ordinary shares of KShs4O million, with KShs29.2 million fully paid as of December 31, The shareholders under a new share capital subscription agreement, are the Government (49%) and ICDC, the Kenya National Assurance Company (KNAC), the National Bank of Kenya (NBK) and the Kenya Reinsurance Corporation (KRC) each of whom own 12.75% of IDB's share capital. Class "B" ordinary shares do not under normal circumstances carry voting rights but participate in dividends equally with Class "A"

18 shares. All the subscribed Class "B" ordinary shares are presently held by the Government but other shareholders are also free to subscribe to Class "B" shares. 44. IDB's Board of Directors consists of eight members: two directors appointed for 2-year terms represent the four institutional sharenolders (ICDC, KNAC, NBK and KRC) and six directors appointed for 3-year terms consist of two Government representatives, three independents, appointed by the Minister of Finance (two from the private sector), and IDB's 21anaging Director. The Board has full autonomy in investment and lending decisions and has exercised this authority adequately. It is also active in formulating general policy and overseeing the operations of the bank. Recently, an Executive Director of the Commonwealth Development Corporation who is an experienced Kenyan businessman and has been an IDB Director since its inception, was named the new Chairman. Management and Staff 45. IDB has a strong and capable management and staff. Its organizational structure consists of four departments: Operations (Investigations, Research and Promotion, Investments and Project Advisory Services (PAS) divisions); Accounts (Internal Auditor and two divisions); Legal; and Establishment. As of January, 1979 IDB had a total staff of 33 professionals. Their quality in terms of academic and professional background is excellent at all levels. Only three expatriates -- an Industrial Economist and a Financial Adviser (both UNDP financed) and the PAS Manager (ODM financed) -- hold positions in IDB. 46. While IDB's organization has been adequate to meet past requirements, rapid growth had begun to place increasing strains on the organization. To overcome these, IDB has now taken organizational steps to assure that: (i) the appraisal process provides a more critical evaluation of the risks and issues associated with new loan and equity investment proposals; and, (ii) the rapidly increasing supervision workload is rationally planned, responsibility for action on problem projects effectively assigned and comprehensive followup of equity investments established. IDB will, therefore, maintain its recently revitalized management committee with responsibilities that would include screening all new loan and equity investment proposals and the regular review of the status of projects (Section 3.02(a) of the draft Loan Agreement). IDB will formalize and expand its asset management functions within its finance department (Section 3.02(b) of the draft Loan Agreement). To complement the measures above, IDB has adopted a formal statement outlining its strategy of consolidation and selective growth for the next several years. The strategy includes a limitation on the number of employees to 1979 budgeted levels and increased emphasis on administrative cost control. Operations and Finance 47. Until 1979 IDB had been one of the fastest growing DFCs in Africa. As of December 31, 1979 it had approved, net of cancellations, 83 loans totalling

19 KShs459 million in 71 enterprises. IDB had also approved net equity investments totalling KShs122.9 million in 41 enterprises. Primarily as a result of its consolidation strategy, IDB's total approvals decreased from KShs145 million in 1978 to KShs135 million in 1979 with new equity approvals decreasing sharply. Between 1974 and 1978, IDB's total value of approvals increased by 14.2% annually; loan approvals had grown in real terms at 17.3% and equity investments at 7.2% annually. IDB's growth rate considerably exceeds the estimated growth in capital formation in manufacturing in Kenya (estimated at about 5% annually in real terms during ). This achievement is attributable to active management, successful resource mobilization and IDB's willingness to accept risk. About 11% of the value of IDB's investment approvals have been for projects KShslO million or less in size, and 21% for projects over KShslOO million. The average size of IDB investment is about KShs7.5 million; about 23% are investments of over KShs12 million. The portfolio is reasonably well balanced among sectors, with a relative concentration in engineering, metals and machinery, and food and beverages. An analysis of recent projects approved shows (i) that a significant proportion of the raw materials required came from Kenyan sources; and (ii) that the proportion of the number of projects with majority Kenyan ownership and those located outside Nairobi and Mombasa has increased in recent years, although the percentage of total value for such project approvals decreased somewhat due to their smaller size. 48. Foreign and local currency loans approved by IDB prior to September 1979 carried interest rates of 11% and 12% per annum respectively. These interest rates have since then been increased to 12.5% and 13% per annum respectively. IDB passes the foreign exchange risks on its loans onto its clients. In addition to interest, IDB charges a commitment fee on undisbursed balances which was also increased from 1% to 1.25% per annum. IDB will maintain interest rates on foreign exchange denominated loans at not less than 12% per annum during the commitment period of this loan (Section 3.07(b)(ii) of draft Loan Agreement). The 1979 inflation rate of 12% in Kenya is expected to decrease to 10% in 1980 and remain at that level through Thus the lending rates would be positive in real terms. The Government is currently undertaking a review of its interest rate policy in order to identify modifications required to improve its effectiveness in promoting economic development. The review is expected to be completed in April Partly because of its willingness to accept risk, IDB's loan and equity portfolios in the past two years began to experience some deterioration. New equity approvals, which tend to be of higher risk than loans, represented only 10% of total approvals in 1979 (compared with 26% in 1978) and equity investments at December 31, 1979 were a still relatively high 26% of total portfolio (down from 31.5% in 1978). As of December 31, 1979, IDB had arrears of about KShs19.5 million in its loan portfolio. The more serious arrears related to 10 projects with a total balance outstanding of about KShs54 million or 21% of the portfolio. While IDB has until recently no formal problem project classification, thirteen projects might be described as problem projects, mainly caused by weak financial performance due to, among

20 other reasons, competition, management and marketing problems. Large writeoffs of losses on equity investments in the last two years and the anticipated need for future write-offs relating generally to the investment in problem projects are having an adverse effect on IDB's profitability. 50. To improve its equity portfolio situation, IDB will limit its total equity investments during the commitment period for the proposed line of credit to not more than 80% of its subscribed capital consisting of Class "A" shares to which full voting rights are attached (Section 3.07(b)(i) of draft Loan Agreement). To improve its profits, IDB's Board recently authorized the management to investigate divesting in companies where its continued equity participation would affect long term profitability. IDB will also create provisions in its accounts in accordance with sound commercial and accounting practices to cover future losses in respect to equity and loan investments (Section 3.07(a) of the draft Loan Agreement). IDB will make future provisions for losses which will accumulate to no less than 3% of its portfolio by 1982 and will be adequate to fully provide for possible losses. Furthermore, it is expected that the management committee review process and the expansion of the asset management functions within IDB (para 46) should allow for closer supervision of the equity portfolio and quick remedial action to be taken on problem projects. Forecast of Operations 51. IDB's pipeline of proposed projects at the time of appraisal consisted of 42 projects. These projects show a greater orientation than in the past towards Kenyan majority owned enterprises. Import substitution projects are expected to continue to constitute about 80% of IDB's anticipated approvals. However, in the future when the impact of the Government's policies to emphasize export-oriented industrial projects is more fully felt, it is expected that IDB's operations would reflect this change in industrial strategy. 52. IDB was approved as a non-bank financial institution in mid-1979, thus permitting it to raise additional local currency through accepting time deposits (mostly from publicly owned financial intermediaries) and to finance working capital. IDB has decided to limit its initial activities in these areas to financing imported raw materials for its clients and processing letters of credit for transactions it is financing. With IBRD's agreement, IDB also plans to amend its Statement of Policy to allow for lending to the transport and shipping sectors and the acquisition of shares of profitable companies on the Nairobi Stock Exchange as part of its portfolio management to maximise the use of temporarily idle resources. The expansion of lending for other working capital financing, and to include industrial buildings which IDB is also considering, would represent substantive changes in IDB's Statement of Policy and would require the approval of the Bank. Resource Structure 53. IDB's resources have come largely from external sources. As of December 31, 1978 it had negotiated total foreign exchange resources of about

21 KShs416 million (US$56.0 million) of which the Bank's three previous loans constitute 62%. Other lenders include the German Development Company (DEG), the African Development Bank (ADB), Morgan Grenfell and Company (with the guarantee of the British government's Export Credit Guarantee Department (ECGD-UK) and the Industrial Development Bank of India (IDBI). On December 31, 1978, IDB had the equivalent of KShs161.5 million in foreign exchange resources uncommitted which was adequate to meet its requirements until mid From mid 1980 to end 1982, IDB's foreign exchange needs are estimated at US$46.3 million (KShs347 million) of which US$6.0 million and US$2.4 million have already been secured from the ADB and the IDBI respectively. The proposed Bank loan would provide US$30.0 million to help cover a substantial part of the estimated gap of about US$38 million. Banque Arabe pour le Developpement Economique de l'afrique (BADEA) has agreed in principle to provide at least US$5.0 million on a parallel financing basis in conjunction with the proposed Bank loan and IDB should have no problems in securing the remaining US$3 million. The proposed US$30.0 million Bank loan would represent about 65% of IDB's foreign exchange needs from mid 1980 to end It is estimated that IDB's local currency requirements over the next three years would be KShs95 million. This gap would be financed primarily through the issuance of additional "Class A" shares. IDB has obtained agreement in principle to increase paid-in capital from Class "A" shares by an additional KShs71 million from end 1979 levels to a total of KShs200 million by the end of IDB's future ability to borrow long term in the local market will also be enhanced by its new status as a non-bank financial institution. 55. The implementation of the proposed consolidation strategy and other recommended measures should improve IDB's asset management and administrative efficiency and thereby improve IDB's profits. After a loss in 1979 due largely to conservatively large provisions for losses in the portfolio, it is estimated that IDB's after tax profits would rise steadily to a modest 4.5% of average net worth by Total assets are projected to increase at an average rate of 24% annually reaching KShs875 million (US$117.0 million) in The long term debt to equity ratio will increase to 2.6:1 which remains sound. IDB's liquidity position is expected to remain satisfactory. By 1983, projected accumulated provisions are projected to reach an adequate 3.5% of IDB's loan and equity portfolio. Performance Under Previous Bank Loans 56. Three loans totalling US$35.0 million have been provided to IDB since Of this amount, US$30.7 million had been committed and US$19.5 million disbursed at February 25, The first loan (Loan 946-KE) of US$5.0 million is fully disbursed. The second loan (Loan 1148-KE) is also fully committed, while the third line of credit (Loan 1438-KE) is 79% committed. Subprojects approved by IDB have made substantial contributions to Kenya's industrial development. Under the first two loans, IDB financed 20 subprojects of which 16 have been completed. When fully operational, the subprojects will involve

22 an estimated total investment of US$209 million and create about 7,400 jobs at a cost of about US$28,000 per job which is comparable to other DFCs in East Africa. The projects will produce estimated annual foreign exchange gains of about US$36.0 million. During , IDB participated financially in 44 projects whose total cost was KShs2460 million. Disbursements made by IDB in 1977 represented about 6.5% of gross capital formation in manufac- ring in Kenya in that year. Generally, the Bank's experience with IDB regarding commitments and disbursements in the past has been satisfactory. IDB has responded in a cooperative and effective manner in dialogue with the Bank concerning institution building as IDB rapidly evolved as one of the leading financial institutions in Kenya. Project Description 57. The proposed project would consist of a line of credit of US$30.0 million of Bank funds to cover part of IDB's foreign exchange requirements to finance medium and large scale enterprises from mid 1980 to end The free limit for a subproject would be raised from US$600,000 to US$800,000 (similar, in real terms, for the previous loans) and the aggregate free limit to US$7.0 million. Disbursements from the Bank's loan would be made against 100% of the foreign cost of direct imports, 65% of the invoice price of goods previously imported into Kenya and 40% of the cost of civil works. IDB would be charging an interest rate of no less than 12% on foreign funds (from 11%), and 13% on local funds (from 12%) (para. 48). Sub-borrowers will continue to bear the foreign exchange risk on foreign funds. The loan would carry an interest rate of 8.25% per annum and the amortization schedule would conform substantially to the aggregate of the amortization schedules of subloans and equity investments made by IDB, with a maximum maturity of 15 years, including a grace period of three years. Project Justification 58. IDB has established itself within the past five years as a major institution for providing funds and expertise for developing and assisting Kenya's manufacturing sector. Continued support for the institution at a time when Kenya's industrial policies are being refocused and IDB faces a period of consolidation should assist IDB to further improve its internal quality control and supervision of existing projects. The proposed loan would finance projects with a total cost of about KShs1600 million during the period mid 1980 to end These projects are expected to create 5,500 jobs at an average cost of $38,800 per job and increasingly support the country's export orientation objectives. Risks 59. The loan carries no particular risks except those normally associated with DFC lending. However, such risks would be minimal in view of IDB's good past performance, sound management and the Bank Group's familiarity with IDB's operations.

23 PART V - LEGAL INSTRUMENTS AND AUTHORITY 60. The draft Guarantee Agreement between the Republic of Kenya and the Bank, the draft Loan Agreement between the Industrial Development Bank and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank and the text of draft resolutions approving the proposed loan is being distributed to the Executive Directors separately. These draft Agreements conform to the normal pattern for loans to development finance companies. 61. I am satisfied that the proposed Development Loan will comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 62. I recommend that the Executive Directors approve the proposed Loan. Robert S. McNamara President Attachments Washington, D.C. March 5, 1980

24 - 20- ANEX I KEYA-SOCIAL INDICATOIS DATA SHEET Page I ENYA RIRER.ENCz GROUPS (ADJUSTED AYCRACES LAND AREA (THOUSAND SQ0. LMC) -- 0ST RECENT ESTIMATE) - TOTAL SAME SAME NEXT HIGHER AGRICULTURAL 59.4 MOST RICEZNT GEOGRAPHIC INCOME INCOME 1960 lb 1970 /b ESTI.ATE /b REGION /c GROUP /d GROUP /a GNP PER CAPITA (US ENERCY CONSLQI,ON PER CAPITA (KILOCRAJ OF COAL EQUIVLENT) POPULATION AND VITAL STATISTICS POPULATION. M-YEAR (MILLIONS) ULAN POPULATION (PERCENT or TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 30.0 STATIONARY POPULATION (MILLIONS) 94.0 YEAR STATIONARY POPULATION IS RZACHD 2135 POPULATION DENSITY PER SQ. 1CM PER SQ. KM. AGRICULTURAL LAND POPULATIO6N AGE STRUCTrE (PERCENT) 0-14 YRS YRS YRS. AND ABOVE POPULATION GROWTH RATE (PERCENT) TOTAL URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCtION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF M!AUlED WOMEN) FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) PROTEINS (GRAMS PER DAY) OF WHICH ANIMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEALTR LIFE WECTANCT AT BIRTH (YEARS) INFANT MORTALITY RATE (PER THOUSAND) 126.0/f ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL URBAN RURAL * ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL URBAN RURAL POPULATION PER PHYSICIAN O/ L POPULATION PER NURSING PERSON 232O.O/f,a 170O.O 1070.BOŽ? POPULATION PER HOSPITAL BED TOTAL 830.0/f /i URBAN RURAL ADMISSIONS PER HOSPITAL BED HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL URBA,N RURAL * AVERAGE NUMBER OF PERSONS PER ROOM TOTAL URBAN 2.5/f.... RURAL ACCESS TO ELECTRICITY (PERCENT OF DOWELLINGS) TOTAL URBAN RUBAL

25 -21 - ANNEX I Pate 2 FZ2ftA 50CL A- INDICATORS DATA SHET &EFERMNCE GROUPS (AADJUSTED A ERGES,MST RECENTT T SITIYT- SAME SAME sem HIGRFR 115T RECENT 0OGRAPSIC INCOME INCOME 1960 /b 1970 /b ESTIMATE /b RECG01N /c GROUP /d GROUP /a EDUCATIOM ADJ'STED f.nollment LATIOS PRIMARY: TOTAL MALE FP2AL SECONDART: TOTAL MALE FMLtU VOCATIONAL EN1OL. (1 OF SEC0ODhRY) PWIL-TLACUI RATIO PrIARY SECONDARY ' ADULT LlTERACY RAZ (PUCEXE) 20.0/1f CONSUPlTION PASSLNGER CARS PM THOUSAND POPULATION ADIO LZCZIVUS PCR TOUSAND POULATION " TV SECEIVS PER THOUSAND POPULATiON NESPAPER ("DAILY CUERL INTECRST") CRCULATION PER tiousand POPULATION CIMENA ANNUAL ATMEDAWCS PI CAPITA LABOR FORCE TOAL LASOR FORCE (TdOUSANDS) OLI MMALE (PERCENT) AGRICULTUR (PERCENT) DWDUSTRY (PERCENT) PARTICIPATION RAT! (PERCENT) TOTAL MALE FEMALE ECONOHIC DEPENDENCY RATILO MNCOME DISTRIIUTIQN PERCENT O?f PRIVATZ INCmE IECEIVED S7 5IGEEST 5 PERCT Or BOUSUOLOS. 20.2/k IIGUKST 20 PERCENT OF ROUSZROLDS 52.6/k LOUEST 20 PERCENT OF HOUSEHOLDS 3.97k tlest 40 PERCENT 0O FOUSUOLDS ?z POVERTY TARGET GROUPS ESTI4ATED ABSOLUTE POVERTY INCOME LZVEL (USS PER CAPITA) URBAN RURAL S ESTIMATED RILATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBN I3L ESTIMATED POPULATION LElON US4L0OTE POVERTY ENCOME LEVtL (?!RENT) RN RUtAL Not available Not applicable. NOTES /a te d5juated group averages for each indicator are population-weighted jeometr:: means, excluding :he extreme values of the indicator and the most populated country in each group. Coverage of countries amsong the indicators deoende on availability of data end Ls not uniform. /b Unless othervise noted, data for 1960 refer to any year betwetn 1959 and 1961; for 1970 beeween 1969 nd 1971; and for ost Rlecent Estimate, between 1974 end /c Africa South of Sahara; Id Low Tncome ($280 or less per capita, 1976); le Lower Middle Income 1T2S8-550 per capita. 1976); 7f lf2; L/ Registered, noc all practicing in che country; /h 1978; /1 1972; /j Labor force age years; /k urban only. Most Recent Estimate of GYP per capita as for Aust, 1979

26 ANNEX I: tj ten:ait hass the d.0. ar d-aa f-e souce g.nere.14 Jdged the meat.st&nrtiftan WAn relle.a It should al he meted toon they w not heiners t,maly o,aable berate of the lack of steaderded deflaitiods ad oeis9oet weed by differet cosatries im CoIlleting the data. The date ae, eothless, usefu to das-rtbooders of, mpltode indicate traode, Ad charoterioe etoset W., ifeene betve ocaemtsi.. The~ dacosaergs or no fdletrn.plopaatie-eeightad -o.tei mass e - diong the.etr- -I... of tt indictor mad th. moat poplatd oo,ntrw'i~jf&ij"'~i t jek o daa, rop avrege Of all india-tor for Capitol ftrplo Oil Zoperter med of indicator, of A.o.es to Water end Ieret. Dikposl, Hoosing, I-om Distribution end Povrty for other rountep porpe m p0oplation-weghtsd gsa-mtrio fe without esolcime of the.tmtre onions end the meat poplated rotry. Stern the oereo nnre the ls±ggjl= MM ad me em±lai of data p s etrefoerm. ration st be -serisd indicator at a I meate onry sod e-fernee coups. insari (toosd oq.ke.) Aoeen Tto ee. 7Disen (panatwiofpouai) 1Lt' obe9 Wf.ltrl tt r-rt ostinato of agiboultorl are used tera-rily perreatgee of thetr respettee poplations born. dieposni ooy teold. or perenetly for crops, pasiuro, maket end kitoha gardene or to the riolertio ad disposal, nith r sithout t-etasmt, of hsin srreto lie fllow. mmd vets-eater by ente-borne wysten or the sass of pit privias and s,ailr ilp ncaptaj.psl) - tip per capita estites at curret ashe pieto 7Po. g99g.po lemk a - Popluition dividedtby ooaher of praoitoiog pbysieisn adpe conerion method en World Desk Atlas ( basis); MaiL Sebhol at university _les. i960. i970, end 1978 data. Pouainer eina Porno. - Poploatio. dlvided by toter of practietog air A- Anua ogneumptim of oo-rna.1 en--d eaegrhaeram. prmettoal wosn,md ereistatnuss Jramelplij,tol6 PomaAd, aurlga ndhdo- e-ponulati_n Iosa le-total,t barks ad rura - Popsalation (total, orbo, thermal electricity) in kilogram of coa equivalet per ompiti; 1960 en ua ite yterraetv oie fbeia esanlbet 1970, and 1976 dais. publio and pr,ivate generl and eprtlloed hetyital and rebabilitetioc reters Hsapittela are eatblite.tnt psrmaoetls etaffe by at loaet one phymiiota. POPUIATION ANI VITAL STATISTICS tetabtishooets proiding prinipaly outodil car ar Oct inolded. Rura Total PomitThiCt Yl-Yea. llloo - As of ju1y i; i960, 1970, and hospitale, hb.e..r, include health end medioa1 oeoters not peresetip staffed 9rdata. by a pkysiiots (ot byr a medioa.. asistant, nus, midoife, eto.) whiok offer Irsthuatb ftta)-ptio Rorrt of urban to total popolatiob; io-patient aooindatto ad pr-id e limited rags of aedioal facilities, diffeot dfiniions f uran arao my affeot co.peraility of data A9ppaiasjo zitd - Ttria ouser of skinaioa. to or diaocnrgee f-o omog -oune,;e; 1960, 1970, sod 1975 data boepitasi bddy the oute.r of beds. Popoiatiosi rj.to ser... -Crrc ouaieprjcin r bsdc dj 1)05 toa population, by age n r an' thei mor'tality sod fertility Aesdieof ihosshd(esn pe bcehold-tal urban and ruea - ratre. Projeotfo prsetr fo eoralty rates rpise of titr.bhueodcnssso. ru ofidleid al to eh 1reivig qoerteen and ic-el aennlg ife, epectnstoy nt birth Iooreaeing tith rosatry, the:ir salt ed.. Abhoader or lodger -p or say not be lociudld In the for copitsconlvl and _finle life copeotano stabilinins ai houshold for statistical purpera 'f.) year...the parnter for fertility rate also. have then levels A-oere toae_ of peso per ro.'-' total, urban " end rura - Acerage oushe ass-ing dec1ioc in fertility nocoeang to irom leve and past of p-.sono per room I all urban, ed rurl or-pird ronvetico..l dwlotngo, fat ly oloins perfornno, Each ountry Is then assigned one of these repectively. Dcelings eoclude no-perunnet st-uture end uroorpied p-rto rte. oraintloca. of rartality aod fertility tren.de for projection Aorea tofetirity iperoen~t of d IInse) - wtotl, urbanod rural1 - Cotpurposco. entiooal etitegs ith electiciyi iigquarters as p-r-etge of Station,arypopulatio- - in a totatoony population there Is tor groth total, urban, and ruraldefio repetvep siornb brt rato us qol to the dleach rato, sod aso the age structure rena-eso.otant. This is thtevd ooly after fertility de-lite to~ the replacemet leo1 c ucit vet reprodootiro rate rtes. ben h. EItEATIONI ATjosted Dir1le-t Rtios eth -ccrtlon of v istiotn~i-eaoeatiated `e replaces itorlf..oactiy. The stationay popeor thc haei, of toe projected obrreito-et Pioy el- tot. aeed of dl ages at the priary fnale-gros total, male and fstle enrol- lee I as p-ereotage of repectiv primary of the popoltico it the yea 2O00, rod cth rate of devli.e of fertility school-age populations; normaly Inoludee ohild-e eged 6-il year btt rate to replcect_ le. adjueted foe different legth. of prim-y educatich; for rootrien nith f.ea etatirear sirehas here 1coltion Is reahed reached, - The year ten stationary poplatioc uivra ar heirs oduatioc enrollet or bove the official may...oed 100 percent achool age. blov som puuila fpculation De..it lecobr- sho b:irtotal te an, d femal - Crepst.d ain a.c;_recnuso Per ci. ke. - MAt-pea population per squarer LIeter (100 heotsea) of ed btonrqie s tleat fou yer of appr-ed Pr,sary Ictructioo; totalac Per o-..- ci-ultura land - C-onpted ne nhoce for agri-u1turai lend proides severl voctional, unua lly of 12 to 17 yeses or teaher f aego-sooec trnioil itoaruticot oresoecnrl-ly for ppl. only, -ooludd. PopuLlatIn A.Ftrcueprcn)-Child,-c 0-14 years), -ceing-ege (15hiear), od retrdt 5t5 yerlo- 0c)n percetages 'f aid-yea otlo oolet(ecnto ehia,idsra, rohrporn eodr)-lctoa uboprt tic totio-o i-ci~dc ceedol ra population, igbo, 1970, and 1977 datu. depart-cto of -nodary lostitutione.. Po-uatinlon.ae pecn)- tota 4 -t- hopua-h -g croe.t th rates of total mid- Pupltahrrto-nr, ~ o eods Total otudentt r-rlid yerppolhos fo 95-0, l 7,-so pr,ay and seodr. eeadctdb.uneoo ecesic,orc ic PopulatinIro-t~h Rat perent)- utan- AnnuL! groth -otos of orbs polg ee populatiocs , for sot , tiult liteac rate (percent) - Literte adult, )1,lc to rosal - one) a Crude Birth Race(p pethoucad) - _no Ice 1,4rtos per th.ousad of sid- apercettge of total dadut populatioc aced 15 year nodovr Crude heath hate (pe thuan) - _ona detbo Per tho-sod t rid-per ONIoRflf peoaie 16,17, ro 197li. aane Car (ore tho.oend opulation) -Passeger -y copr ioe -turca, Grossrecrductoc vte - Ac-rsc o-te of uauht-r a ro, il boar -eaiog lees than eight peron;.incldes ancu.e-c, hearore an iino it her corlrproductio pertt if lie -operieces presert ago- eil. 1970, rot opcfcfriiy 1975 enes t -uualy fire-yea oceages -tditg In 1960, 05bpoloaprtcon RoaoaR- tor genra public ouain per thous1and l lof ppoltir ypaoreucrfrrtico lodef, uo dicea 19c7ior cf bii-on_ idcte rdrnaicoo nt...feiy fct data o eetyar ayntb codof peltie crc scicouctrlier.. Fiolio Proigran. tk _ th : ni dsed livtotg:.t-..r.b,. i ~Jee Psalo lanin - I poen of c,arriet roor Percentag og fmarrid itv eeivers ee thousand ppnlatio) - TV -eci-ee for br--tas to g"i'all coverof oilt-eario age'15-4 yens) oc ts b,bontn-r1 d-vive pblic pee thro.otd ppltc;nooe 0 ricr _oicnet to e.l mercvl rovc it sne ae drop. ad io yeaa oh.. registntion of TV act sn it efec. f'aiygeealeeeencp.pr, deine awprldc_ ulcno T.loeofroo..T'Pd-tuioc per Capito.' lW) - Indeo of per rapits eoe rsrl orcriggnrloc. It is ontettohp diy ancal production of allfoo coao-ditie-. Production -oiudes sed and lf,itd Poneare t leantfordtime g oe.n..1- t 'diy feet and ino aedar peroin. C,Iebdlot ir ove primary goodo le.doa Atttenac per. Caitaoe r ler-mcl teruhr fur o o. ucroo tcil of,uca_ I c tee cdible ad ocettoi -trirote soddrnih er uoaigoonic otir-cooeondnbl c. nodten offe rr clludd).aggregate Production of each counfry uits. r -md cc nationa a--rge protuce por weights. Per o p_ins supplyf orquireo.eptw) -ncis'ec - Computed fro l,aor PORCE c,lergy equicleo forot suple o-i bble in coon. try per,p cpta Toa.c orcelhoaul.looial coeprlr ldn er por Ocy.Roallace coyplio coeprte Iceeio production, imports Ileo foce ndusloyed hut r-1ldiog tooro.- a t,udecte,ric I leflii, ito tori, act ohgro :0 crci Ret p... colode.. anine feed, seeds, In _aio ouii _ta ecar cot cop-rble. cort -ic dur io food prc.rt-icg Ir oolit dinti'bution.. Retuire. nieeet -. Pellhu orea prcecage f.-tyna htior ford -tev 00 ttlcectd by FA0 bn.-ri ot ptyriloiaanedsornrml,:il~ut-nrep ),-ibrforei nno,fr,r utn n couch braid cocslcrivo c-ir -t.1ta teaora-turr lody sights, fishing co percentage of ttllbrfre ag rlor Iotibotoo-.f populot. c nod tho-ng lb perc-t for Industry (percet) - Lhorl foc in.. ntg, oteurrioc, eofact,rig o-d a.oc h... wblllr. dt.. ci.ttoty.eter ad gac nn prei,sgeo toallborfre ~rr capita of proteic luppy crw per Isp) - Prtb;roc-tet of per Paotiiintin Ra e -(rea) -tptal sale, and iremair-le atpaioo npit intt ouppy of food per dsp. Wet supply of food is dti-lod asaticltp eaten recomputed as total, wl,dact f.a. labor:forea perabcv.-pq.. eet oralcotri- cetablinhed by USDA provide for a -tages of trial, male and freale popslao onlagrspecticely; sioiuej ai1or-- of 60 oran of totn1 protic pee day and 20 gras of i96, 1970 and 1975 data. These e- 1C, pariirpt.io rates -efilting aical ant pulse pototo,f ohich 10 gron chould be anima protein. o -eotruture of the Population, ant lotg tine tred. A fear n,ioaten These stantrd ore lone tbso th.o. of 75 gra of trial protelo and are frcntioa souces i's trsa.l g-saw ri~tev f nsor acragefor the -lnd,,propoed by FAO reo- i inesdo Ratio- Patio C population toter 15 sod 65- not oceto the Cbirt World root Sur-ep. he1crfceit age grop of yearn. Per capita oron.tls l frcaia do pulse - Proteic -opply of food COl ae1-u) -I- tity Rate )p- thouand --Woon Iraths per t-cooad Peroea 1ta f Privatelonoer (both Ia ash end Alod)d - Peeve yriis itag gou 1-b yearn,to obild-e In thi, g goup; for east d-e- 5pretrichest 2pecet, poores.t 20percent, no pooret h percec opo,gt.. tcnoico.tac tr-ice fro. life tebler. of households. HEAWLTH POVERTY TAnIET GROUPS life loetan at Birthicne - crg utrof years of life intiate, Absolute F.crt In -leve (USOPl per 'P to) -uba act mrurl icfo,ttmortaliy Pateleer uhunand) -Arun 'i-aho of Infants under one cuiriti-ndly adequate tirt pluo eetial to-food...quicem ti is cot per f age per thootwan live hioths. ffordable. Ocosto Safe ater i per-to.f plpuilnto - tota, urban. and rurl - EimtdRltv oet noelrl(i e aia ra n ua Wobeofppl ictatl, orban n ua oith reas...abie aces truaretieparyncm eeiso-hirdof aeaepeept oa eter uclootacir supyi wae ochata ravtsr dlte fo ac Proedte or rutrete borholee, ht syringe, peronl Ieron cu ajutmntfor of the coutry. Orb lvrl is derivd fron the bigher cos t of living it webs areas. ual ee ant saiay- lo s1ecoae of their reopectice ppulatioa. In Estimated Poplati.a Peloo Absaun Povety Icm L""e lirctt)'ubaan anuranarn publi fountain or tandpoat 1-ted -ci mere thanrua - bpret of population )urban d rural) ho ar.eabolte pop' 200 t-trofro-a bower -y be oortitrceuas beiog cithia r_aonahi aceoof tint house. In rura areas re..sc.able acess. -ld Imply thnt tie houses ~fr or olehtr of thel tousehld dofnot have. to speed a pon-ic and S-ria1 Doin DlisIoIo dispoon-tto...tt pnrt of the tsp ic fetvhing, the feily' ae nolds E-ocomi Analysis and Projectio..nsepart-t Angusit1979 md rrel

27 A~~~~~~~~~~~~N Zcooaol Devoloy t etad tan hm i P r _ ,0 A. 7 8b CDPe. ro of 1077 A. atiotal Atosts (Million US$ At 1976 proi..) 1. GDP Gaits f-ro TT ? GDY , Import EIports - Volv_ ; U Szport - TT adjusted Roaource Cap - T dputod , Total Coeuosorti , tarotmnee Natirl S.v'gSa Doo-mtlt s vioa CDP at current J B. Sector OUtLut (Sh-Le of GDP at the 1976 p,iee.) 1. Mafiaeturigo Industry Agei..ltur Other C. Priee- 1. Export Nice lodet Dnport Itdon Torn, of Trade CDP Dsflator (US$) Ora-ge E-chooge Rute (US$/Kt) , D. Selected 7ndlc-tor ICOR Import El-stltity Oro_go D-tLc Savings Rate A=rgo N tioni Sa-iaga Rnte Margial NatIonal Savings Rate mporta/COP I-roatmaatu/CDY Roso-rce Cap/CDY Av. Annual Cr. Rate E. Imeluvunot lbor Force Total IA.ge Eploynrct ' (K9, '1,1,n0 1970/ / / / / , / oc -rrroc.r.eu D : 2ecurroot top-oditure erurroot Surplus We-elop-oot Fro7jot turlings & Other Nliocrllaoo... Ror.ipto Foroign Gra-tr Surplot Ar-tlabla fur Fioaaciag Osroirp-ent E.pooditro_ Develop-ent EOproditoron Or-rall Deficit Floaociog of tho Deficit i,tror-l LI-et D-tic Loog-ten Borrooing short-tern Borrortag ISounges n to Cuh lalaooao (Iocrrruot_) i / Booed re 1964 pfloaa. 06.AN CYIA October 23, 1979

28 UM Balance of Pavets and baternal Assistane (Mtillion 083$) AM=lE I Actual Pra4tinarT Preoected A. Sumnary of Balance of Payments 1. Export. (Incl. NFS) Inports (Incl. NFS) Resource Balance Net Factor Service Income , Net Interest Payments of which: : (Interest on Public M & LT Loans) (-20.2) (-22.1) (-25.0) (-26.2) (-30.7) (-38.8! (-39.4) (-52.5) (-65.6) (-147.8) (-193.4) 4.2 Direct Investment Incone (Net) 4.3 Workers Remittance (Net) ) other 'actor Service Income (Net) 5. Current Transfers (Net) Balance on Ibrrent Account Private Direct Investment Capital Grants Public M & LT Loans 9. Disbursements 1/ Asortization i7 2/ Net Disbursement I/ Use of IMF Resources Short-term Capital Transactions Capital Transactions, n.e.i Change Is Reserves (- - itcrease) * i B. Grants and Loane Co-mitments L. official Grants 3/ Public M & LT Leans IBRD IDA Multfiateral Governments of which centrally planned ecan-aies Suppliers Financial Institutions Bonds Public Loans, n.e.i Other M & LT Loans (where available) 4/ C. Memorandum Items 1. Grant Elemet of Total Comitnents 5/ Average Interest (Percent) Average Maturity (Years) Inocludes fin-ncing of projected balance of payments deficit ( )on medium/hard blend terns. 2/ Includes repayment on military leans. 3/ Exclodes technical assistance gr-eta. 4/ Represents a notional 50 percent of lean coamitments for RAC projects 5/ Represests grant element of loai s. RAN, CPIA October 23, 1979

29 ANNEX I KENYA Debt l/and Creditworthiness Actual lsw^ A. Medium and Lone-term Debt (nisbursed Only) (US$ Million) 1. Total Debt Outstanding (DOD: End of Period) Including Undisbursed 2/ Public Debt Service 3/ Interest Other M & LT Debt Service.... B. Debt Burden 1. Debt Service Ratio Debt Service/GDP Public Debt Service/Government Revenue C. Terms 1. Interest on Total DOD/Total DOD Total Debt: Service/Total DOD D. Dependency Ratios for M & LT Debt 1. Gross Disbursements/Imports (incl. NFS) Net TransEer/Imports (incl. NFS) Net TransEer/Gross Disbursements E. Exposure 1. IBRD Disbursements/Gross Total Disbursements Bank Group Disbursements/Gross Total Disbursements IBRD DOD/Total DOD Bank Group DOD/Total DOD IBRD Debt Service/Total Debt Service Bank Group Debt Service/Total Debt Service F. External Debt *edisbursed Only) Outstanding Dec. 31, 1977 Amount Percent (US$ Million) 1. IBRD Bank Group Other Multilateral Governments of which centrally planned economies Suppliers Financial Institutions Bonds Public Debt, n.e.i. 9. Total Public M & LT Debt 1/ Other M & LT Debt 2/ 11. Total Public Debt (incl. Undisbursed) Total M & LT Debt (iacl. Undisbursed) 1/ Includes Kenya's share of a notional 50 percent of EAC debt. 2/ Excludes military debts. 3/ Includes repayment on military loans. EAN, CPIA April

30 ANNEX II THE STATUS OF BANK GROUP OPERATIONS IN KENYA A. Statement of Bank Loans and IDA Credits as of January 31, 1980 US$ Million Loan or AT?unt (Less C a7cellations) Credit # Year Borrower Purpose Bank TW IDA Undisbursed Eight (8) Loans and fourteen (14)Credits fully disbursed Kenya Road Maintenance Kenya Nairobi Airport Kenya Highways Kenya Population Kenya Livestock Kenya Tea Factories Kenya Group Farm Credit ) Kenya Group Farm Credit ) Kenya Site and Service ) Kenya Agriculture - Forestry / Kenya Transportation - Pipeline TRDC Hydroelectric Development IDB DFC II Kenya Mombasa & Coastal Water Supply Kenya Education III Kenya Integrated Agri. Development ) T 1976 Kenya Integrated Agri. Development ) T 1976 Kenya Wildlife and Tourism Kenya Rural Access Roads ) Kenya Rural Access Roads ) Kenya South Nyanza Sugar Kenya Agricultural Credit III ) T 1977 Kenya Agricultural Credit III ) IDB DFC III Kenya Bura Irrigation Settlement ) Kenya Bura Irrigation Settlement ) Kenya Small Scale Industry NCC Second Nairobi Water Supply Kenya Second Urban ) Kenya Second Urban ) Kenya Education IV S KPC Olkaria Engineering Loan Kenya Sugar Rehabilitation Kenya Rural Water Supply Kenya Narok Agricultural Development Kenya Telecommunications Kenya Highway Sector / 1979 Kenya Smallholder Coffee Improvement / 1979 Kenya Second Integrated Agri. Dev / 1979 Kenya Baringo Pilot _ Total of which has been repaid Total now outstanding Amount sold 11.8 of which has been repaid TOTAL now held by Bank and IDA 1/ TOTAL undisbursed / Prior to exchange adjustment. 2/ Includes US$3.8 million undisbursed grant participation. 3/ Not yet effective. 4/ Not yet signed.

31 ANNEX II B. Summary Statement of Bank Loans for Common Services Guaranteed by Kenya, Tanzania and Uganda as of January 31, 1980 Amount (less cancellations) Loan No. Year Borrower Purpose Bank 1/ Undisbursed US$ million----- Five loans fully disbursed EA 1969 EAHC Harbours EA 1970 EARC Railways EA 1972 EAHC Harbours EA 1972 EAPTC Telecommunications EA 1976 EADB Development Finance Total of which has been repaid 55.2 Total now outstanding Amount sold 24.4 of which has been repaid Total now held by Bank 1/ Total undisbursed / Net of exchange adjustments.

32 ANNEX II C. Projects in Execution 1/ (As of January 31, 1980) There are currently 33 projects under execution in Kenya. AGRICULTURAL SECTOR Loan No. 993-KE - Tea Factories: US$10.4 million Loan of June ; Effective Date: September 23, 1974; Closing Date: June 30, 1980 Although international tea prices have dropped from the extraordinarily high figures in 1976/77, growers continue to show considerable interest in tea as a cash crop. Yields continue to rise, and from 1979/80 onward the appraisal projections are likely to be exceeded. The project factory building program is behind schedule and, due to cost escalations, funds from the Bank and Commonwealth Development Corporation (CDC) loans will cover only 12 of the 17 factories included in the project. However, the OPEC Special Fund has agreed to finance the foreign exchange cost of 3 factories under the project, and CDC has agreed to provide additional financing for the remaining 2 factories. CDC has also advanced financing for their Fourth Plan covering factories outside the project, and by June 1980 a total of 15 factories (12 under the project and 3 others) will be operative. The standard of Kenya Tea Development Authority's management continues to be high, and institutional improvements together with strengthened staffing should further improve performance. An economic analysis of the project indicates that despite substantial cost increases the economic rate of return on investments in new tea factories is over 40%. Credit No. 477-KE - Livestock: US$21.5 million Credit of June 5, 1974; Effective Date: December 2, 1974; Closing Date: December 31, 1980 Project implementation has been slow and recruitment of ranches is very much behind appraisal estimates. In spite of the satisfactory livestock price structure which was adopted in early 1978, removing the most serious constraint to ranch development and viability, recruitment of ranches continues to be slow. Some progress has been made in organization of the pastoralists in the range development components. In addition, Government services in ranch water development planning and in the company ranch sector have been improved. Only two commercial ranch loans and eight company ranch loans were approved in 1978/79, and the Agricultural Finance Corporation's disbursements for coast company ranches are being held up pending agreement on satisfactory 1/ These notes are designed to inform the Executive Directors regarding the progress on projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

33 ANNEX II security arrangements. Group ranch loan processing also remains slow, and unless there is a substantial improvement in extension services in the pastoral areas, particularly in Masailand, the project goals of adoption of more commercial and efficient livestock production will be difficult to achieve. The project continues to be kept under close review. Loan No KE/Credit No. 537-KE - Group Farm Rehabilitation Project: US$7.5 million Loan and US$7.5 million Credit of March 26, 1975; Effective Date: September 30, 1975; Closing Date: December 31, 1981 The Project faces major problems. Few new farms have come under rehabilitation in the past two years for a variety of reasons: legal, social, political, and financial. Physical rehabilitation work on participating mixed farms and coffee estates is satisfactory. Coffee estates are achieving recoveries in yields, and mixed farms are generally expanding areas cropped and improving grazing. However, achievement of a satisfactory rate of financial rehabilitation on most mixed farms is in doubt. The recommendations of the Large Farm Sector Study (financed under the Project) have prompted Government to make a major review of its policies, and although reaching a consensus has proved difficult, Government expects to take a position on the large farm sector in the near future. Upon clarification of Government policy, the Bank and the Government expect to undertake a joint review to see whether the original project objectives can still be attained. Pending this review, no further recruitment of mixed farms will take place. Loan No KE/Credit No. 565-KE - Second Forestry Plantation ProJect: US$9.9 million 1/ Loan and US$10.0 million Credit of June 27, 1975; Effective Date: September 25, 1975; Closing Date: December The Project is a continuation of the first Kenya Forestry Plantation Project (Loan 641-KE), to complete the Government's target long-term afforestation program of 130,000 ha of sawlog and 24,000 ha of pulpwood plantations by The planting program is proceeding steadily; the cumulative total to date is 25% below target, due to a variety of reasons, including bad weather and poor management. The building and labor housing programs are both considerably behind schedule. There has been little progress in the implementation of most of the covenants of the Credit Agreenment, particularly regarding the sawmilling sector, the national land use study, the gazetting of nature reserves and the study of stumpage rates for sawlogs. Government is now providing very adequate budgetary allocations. Procurement is proceeding normally. Disbursements and total Project expenditure are both ahead of schedule. The Credit is now fully disbursed and the Loan should also be fully disbursed before the end of / Net of cancellation; an amount of US$0.1 million was cancelled on July 20, 1979 since items which were to have been financed under the loan were not procured in accordance with Bank guidelines.

34 ANNEX II Loan No. 1303T-KE/Credit No. 650-KE - Integrated Agricultural Development Project: US$10.0 million Loan and US$10.0 million Credit of July 9, 1976; Effective Date: March 15, 1977; Closing Date: December 31, 1981 The changed focus of the project towards assisting lar-- numbers of subsistence farmers rather than progressive smallholder farmers has led to a number of difficulties, but the objective of improving the productivity and incomes of smallholder farmers continues to be met. Late release of credit funds in the past led to delayed application of farm inputs and expected yield increases were therefore not achieved; measures have now been taken to ensure availability of credit funds at the appropriate time. Steps are also being taken to improve the low rates of credit repayment and loanee reparticipation. The overall balance between numbers of loanees and infrastructural support-- staff, storage and transport--at cooperative union level has been improving, and active efforts continue to be made to improve input supplies and marketing systems. Loan No KE - South Nyanza Sugar Project: US$25.0 million Loan of April 15, 1977; Effective Date: November 3, 1977; Closing Date: March 31, 1983 Agricultural development has advanced well; land clearance has been completed in about 51% of the area, and 3,725 ha have been planted. Yields from outgrowers cane have been higher than anticipated, probably because of excellent and well distributed rainfall and heavy fertilizer applications. About 20% of the drainage component has been completed, and the benefits can already be seen. Although several components are slightly behind schedule, progress is generally satisfactory. Building works have been delayed, and the first crushing trial of the factory is now expected to take place in December 1979/January Road construction has also been delayed, and an effective sugar research program has yet to be established. Proposals for a training program are now being produced, and the delay in completion of the factory will allow more time for staff training. The standard of management of the sugar company continues to be good, and coordination among the various agencies involved in the project is improving. Loan No. 1390T-KE/Credit No. 692-KE/ - Third Agricultural Credit Project: US$5.0 million Loan and US$20.0 million Credit of April 15, 1977; Effective Date: September 14, 1977; Closing Date: December 31, 1980 Disbursements have been delayed because of a backlog in updating loan reimbursement requests by the Agricultural Finance Corporation (AFC). The lack of consolidated information on AFC's lending trends toward different categories of farmers and the current high arrears situation also pose problems. However, the disbursement situation is improving, and cumulative commitments in the smallholder and medium-scale farmer categories now account for almost all funds available for on-lending under the project. Consultants are preparing proposals for the introduction of an improved management

35 ANNEX II accounting and information system. In addition, a review of AFC's salary structure and organization is nearing completion. Both of these measures should strengthen AFC's performance. Loan No KE/Credit No. 722-KE - Bura Irrigation Settlement Project: US$34.0 million Loan and US$6.0 million Credit of June 22, 1977; Effective Date: June 27, 1978; Closing Date: June 30, 1984 Despite a slow start-up, project implementation is proceeding satisfactorily. However, a detailed review of cost estimates indicates that the Project will experience serious cost overruns; the revised estimate is about 65% above the appraisal figure, and there seems to be little scope for reduction. The Government has indicated that it will proceed with the Project despite the significant burden on its finances. A revised financing plan is under review by the co-financiers. No supplementary IDA financing is proposed. Loan No KE - Sugar Rehabilitation Project:_ US72.0 million Loan of December 20, 1978; Effective Date: September 20, 1979; Closing Date: March 31, 1985 Progress has been made in equipment procurement, and selection and appointment of consultants for factory rehabilitation, road works, drainage and irrigation is in progress. Coordination of project activities has improved considerably, but a proposal, now under Government consideration,, to withdraw executive power from the Kenya Sugar Authority could have a negative impact on project implementation if brought into effect. Credit No. 858-KE - Narok Agricultural Deveiopment Project: US$13.0 million Credit of December 20, 1978; Effective Date: June 28, 1979; Closing Date: December 31, 1983 Early stages of implementation are proceeding satisfactorily, although slow progress in land adjudication will limit the number of farmers eligible for loans during the first season. Engineering consultants are being selected for the roads component, and terms of reference for baseline studies are under preparation. Credit No. 914-KE - Smallholder Coffee Improvement; US$27.0 million Credit of June 11, 1979; Closing Date: March 31, 1984 EDUCATION SECTOR This Credit is not yet effective. Loan No KE - Third Education Project: US$10.0 million Loan of December 31, 1975; Effective Date: March 17, 1976; Closing Date: June 30, 1982 Physical implementation is about two years behind the appraisal schedule, basically due to delay by the Ministry of Works in completing the

36 ANNEX II tender documentation for certain project institutions. Action has been proposed to alleviate the problem. The total cost of the project has increased by about 6% in terms of US Dollars. Implementation of educational objectives continues to be satisfactory. The views presented in the project-financed report of the National Committee on Educational Objectives and Policies have been incorporated in the Fourth Five-Year Development Plan Evaluation of the efficiency of educational broadcasting has started, as has the revision of primary school examinations to make them more work-oriented. However, the Government continues to be reluctant to finance technical assistance specialists from the loan proceeds, and this may lead to delays in implementation of the project's educational objectives. The dialogue with the Government regarding the hiring of required specialists is continuing. Credit No. 797-KE - Fourth Education: US$23.0 million Credit of June 7, 1978; Effective Date: August 25, 1978; Closing Date: December 31, 1982 Physical implementation of the project is proceeding in line with appraisal estimates. Implementation of the project's educational objectives is also satisfactory. A five-year plan for revision of the Basic Education Curricula has been prepared by the Kenya Institute of Education, and subject review panels have started their work. The Kenya Institute of Administration and the Faculty of Agriculture are also well on their way in the preparation of courses and the planning of staffing and staff training. Steps are being taken to recruit specialists needed for the Education Planning, Education Facilities and Examinations Research and Development Units in the Ministry of Education. Final information on the selection of the 30 Craft Training Centers to be assisted under the project is expected shortly. WATER SUPPLY SECTOR Loan No KE - Mombasa and Coastal Water Supply; US$35.0 million Loan of October 15, 1975; Effective Date: January 13, 1976; Closing Date: June 30, 1980 Project completion is now forecast about 21 months behind schedule, and it is unlikely that lost time can be recovered. However, some major components may well be operational by Spring 1980, several months ahead of the overall completion date (now estimated to be 11/80). Although there is a substantial cost overrun, this is not seen as a major problem since Government is fully committed to earliest project completion. Regarding key personnel vacancies requiring the Ministry of Water Development's (MWD) attention, MWD is fully aware of this situation and, while progress is slow, remedial action is being taken. Loan No KE - Second Nairobi Water Supply; US$30.0 million Loan of March 27, 1978; Effective Date: December 20, 1978; Closing Date: December 31, 1982 Implementation started on schedule but completion is now forecast about 18 months behind schedule due to difficulties with tender evaluations and delays by the Borrower in contract administration and in concluding satisfactory arrangements for construction supervision. Most supply contracts

37 ANNEX II financed by other donors and the construction contracts being financed by the Bank now have been awarded. Good progress is being made on detailed design and tendering for the remaining contracts. Bid prices to date have been favorable, but due largely to the delays there is an estimated increase of 50% In local currency costs and 12% in total costs. Water supply and sewerage operations are in sound financial condition. However, the Borrower has been slow in fulfilling financial covenants pertaining to external audits. Loan No KE - Rural Water Supply Project: US$20.0 million Loan of December 20, 1978; Closing Date: July 1, 1985 This loan became effective January 24, New tariffs have been introduced, and management consultants are assisting with implementation of the first phase of the program to strengthen the organization and management of the Ministry of Water Development (MWD). Key project staff have been appointed. Preparation for construction of schemes is about eight months behind schedule, but MWD is planning to revise the implementation schedule to compensate for delays. TRANSPORT SECTOR Credit No. 224-KE - Road Maintenance: US$12.6 million Credit of December 28, 1970; Effective Date: March 18, 1971; Closing Date: December 31, 1979 The project was substantially completed in early 1977, about a year and a half behind schedule. The delay was primarily caused by a slow start in construction of the regional workshops and camps due to unforeseen difficulties in the location of sites,, acquisition of land, and procurement of steel. The Credit included US$2.2 million for headquarters and field staffing and consultant services, but Government obtained most of these services through bilateral arrangements. There was consequently a saving of US$1.8 million under the project, which the Government requested be used to purchase additional workshop equipment and tools. Since this would assist in achieving the project's goals, IDA authorized using the remaining funds for this purpose. With this revision, total project costs are expected to be as appraised. Loan No. 826-KE - Nairobi Airport: US$29.0 million Loan of June 2, 1972; Effective Date: July 7, 1972; Closing Date: December 31, 1979 Construction of the new Nairobi Airport was essentially completed in December 1977, and it has been open to traffic since March 14, The loan is 98% disbursed. The airport is performing up to expectations.

38 ANNEX II Establishment of a commercial accounting system is now underway. The principal problem areas are in hiring and training sufficient staff for operation and maintenance, both of which are constrained by a Kenya-wide shortage of skilled personnel. A training program is being prepared by UNDP, but its~ execution depends greatly on the effectiveness of recruitment efforts. Little progress has been made to date, and a further postponement of the Closing Date to cover the period of implementation of the training program and to permit completion of disbursements for this component is under discussion. The project completion report is under preparation. Loan No. 932-KE - Fifth Highway Project: US$29.0 million Loan of September 6, 1973; Effective Date: November 9, 1973; Closing Date: June 30, 1980 Implementation started 18 months behind schedule due to changes in design standards by the Ministry of Works and financial constraints. Construction of 593 km of roads has been completed, and work on the Kisiani- Bondo road is continuing. In view of heavy cost overruns, tenders for the construction of two roads were delayed; agreement was ultimately reached to delete the Thuchi-Nkubu (51 km) road from the project. The Closing Date, which was postponed from December 31, 1977 to December 31, 1979, has been postponed further to June 30, 1980 to allow time for completion of the Kisii- Mogonga road where construction has recently begun. Loan No KE - Mombasa-Nairobi Oil Product Pipeline Project: US$20.0 million Loan of June 27, 1975; Effective Date: December 31, 1975; Closing Date: March 31, 1980 Construction was completed in October 1977 and commercial operations commenced in January 1978 as originally planned. The final project cost overrun is only US$9.5 million or 11%, the increase being primarily due to escalation in construction costs. KPC's long-term financial prospects are quite satisfactory although there could be cash flow problems in the initial few years of operation because of the preponderance of short and medium-term loans in the financing package. About 99% of the loan has been disbursed. The Closing Date has been postponed to March 31, 1980 to allow time for completion of procurement of equipment related to the operation of the pipeline. Loan No KE/Credit No. 651-KE - Rural Access Roads Project: US$4.0 million Loan and US$4.0 million Credit of July 9, 1976; Effective Date: October 7, 1976; Closing Date: June 30, 1981 Progress on the Rural Access Roads Program was reviewed in depth by all donors and discussed with Government during the annual review meeting held in June The project is about 15 months behind schedule but is now progressing satisfactorily. All eight Bank-financed construction units are fully equipped and are now operational. By March 31, 1979, 304 km of access roads had been constructed, of which 16 km were gravelled. Annual output

39 ANNEX II averages 41 km per annum for all units, about 4 km below the appraisal estimate. Output had declined due to shortage of laborers, particularly in Kiambu District, and poor work organization in Nakuru District. To resolve these problems, the Ministry of Works will request local governments to supply more labor to construction units, and will assign a SIDA-financed engineer to supervise works in the Nakuru area. Loan No KE - Highway Sector Project: US$90.0 million Loan of April 30, 1979; Effective Date: June 18, 1979; Closing Date: June 30, 1985 Implementation of the Government's Highway Sector Plan may be delayed because a critical shortage of funds has caused a reduction in the highway work program. While this has not yet affected the project appreciably, the continuation of this trend in FY81 could touch projects included in the Sector Loan. In general, detailed engineering has been completed for road construction and upgrading scheduled to start in FY80, and the designs for roads to start in FY81 are completed or under preparation. The road maintenance program for FY80 is in line with appraisal estimates except for a 30% reduction in resealing of paved roads; however, the Ministry of Works is planning to request funds this year from the loan to help clear the backlog of resealing. POPULATION SECTOR Credit No. 468-KE - Population: US$12.0 million Credit of April 1, 1974; Effective Date: July ; Closing Date: December 31, 1979 The four-year population project forms an integral part of Kenya's Five-Year MCH/FP program, FY All of the IDA-financed components of the project are proceeding satisfactorily. Nearly 99% of the construction has been completed (only two out of 36 facilities are still in the final stages of construction), and more than 75% of the equipment and furniture has been procured. Some delays in furnishing, equipping and staffing of facilities in rural areas are occurring, but arrangements to improve the situation, including hiring of a hospital secretary or commissioning engineer, are being explored by the Ministry of Health. All other elements of the project have been completed. The program components financed by other donors and the Government are moving ahead and, with a few exceptions, are expected to be completed as planned.

40 ANNEX II POWER SECTOR Loan No KE - Gitaru Hydroelectric Project: US$59.5 million Loan 1/ of July 25, 1975; Effective Date: January 29, 1976; Closing Date: June 30, 190 Construction of the project was completed satisfactorily in June 1978 on schedule and within estimated cost. On the basis of contracts awarded for civil works and electrical and mechanical equipment, present estimates show that the project cost in Kenya shillings is likely to be about 1% lower than the appraisal estimate. Due to the devaluation of Kenyan currency in October 1975, however, the project cost saving expressed in US dollar equivalent will be about 15% of the appraisal estimate. This will result in a saving in the Bank loan of about US$4.0 million, in spite of the increase made on June 15, 1977 in the percentage of civil works expenditures to be financed under the Bank loan from 60% to 80%. At the request of the Borrower, US$3.5 million of the loan has been cancelled. A further cancellation of US$1.9 million has been made along with a postponement of the Closing Date to June 30, Loan No. S-12-KE - Olkaria Geothermal Engineering Project: US$9.0 million Loan of December 1, 1978; Effective Date: April 30, 1979; Closing Date: June 30, 1981 Drilling is proceeding on schedule; specifications for the new drill rig and accessories have been completed and tenders are being evaluated. Miscellaneous supplies and equipment have been purchased under International Shopping procedures. INDUSTRIAL SECTOR Loan No KE - Second Industrial Development Bank Project: US$10.0 million Loan of July 25, 1975; Effective Date: October 9, 1975; Closing Date: June 30, 1980 The second Bank loan of US$10.0 million became effective on October 9, The loan was fully committed in August 1978 and US$9.7 million had been disbursed as at December 31, The Closing Date has been postponed to June 30, Loan No KE - Third Industrial Development Bank Project: US$20.0 million Loan of June 22, 1977; Effective Date: November 10, 1977; Closing Date: July 1, 1982 This loan was declared effective on November 19, Twelve subprojects have been approved. As at December 31, 1979, US$12.2 million had been committed and US$3.7 million had been disbursed. 1/ Net of cancellation; US$3.5 million of the original US$63.0 million Loan was cancelled on October 19, 1978.

41 ANNEX II Credit No. 750-KE - Small Scale Industry Project: US$10.0 million Credlt of November 28, 1977; Effective Date: June 26, 1978; Closing Date: December 31, 1982 Kenya Industrial Estates (KIE) continues to make progress in institutional development, particularly as regards financial discipline, project appraisal procedures and operating performance. KIE's management is determined to implement agreed policies to improve profitability, but continued attention is required in a number of areas; a comprehensive plan of action for reducing arrears is particularly important. Eight subloans totalling US$244,000 have been committed, but no funds have been disbursed as yet under the line of credit. A small amount has been disbursed, however, under the technical assistance component. TELECOMMUNICATION SECTOR Loan No KE - First Telecommunications Project: US$20.0 million Loan of April 11, 1979; Effective Date: August 16, 1979; Closing Date: June 30, 1983 This loan became effective on August 16, Initial delays in procurement of goods are likely to cause about a year's delay in project completion. URBAN SECTOR Loan No KE/Credit No. 543-KE/ - Sites and Services Project: US$8.0 million Loan and US$8.0 million Credit of May 6, 1975; Effective Date: September 25, 1975; Closing Date: June 30, 1980 Overall project execution continues to be satisfactory but there are mounting delays in implementation. Infrastructure has been completed for the first 1,000 plots and most beneficiaries have constructed satisfactory houses. Infrastructure for an additional 2,700 plots is about 30% complete and construction of infrastructure for the remaining 2,300 plots is expected to begin soon. Cost recovery continues to be good. One primary school is now operational, but designs for the remaining schools are behind schedule and tendering is not expected to take place before December One health center is under construction; however, the Bank does not plan to disburse against its costs as its design was too expensive and was not approved by the Bank. The design of the other health center should be submitted for approval soon. Tenders have been invited for all other community facilities. Technical assistance components are completed or scheduled for completion in conjunction with the project. Project costs for the first phase remain close to appraisal estimates but are expected to exceed original estimates for the remaining components because of delays incurred.

42 ANNEX II Loan No KE/Credit No. 791-KE - Second Urban ProJect: US$25.0 million Loan and US$25.0 million Credit of May 5, 1978; Effective Date: October 3, 1978; Closing Date: December 31, 1983 Progress in implementation of physical components of tne project is generally satisfactory. Consultants for detailed design and engineering of Phase I sites in all three cities (Nairobi, Mombasa and Kisumu) are making good progress. Appointment of consultants for Phase II sites has now been completed and design work is underway. The Housing Development Departments are operational in all three cities with most key posts filled. Recruitment of other staff is underway. Progress in meeting disbursement conditions for the Nairobi component is slow, and progress on studies included in the project is also slower than expected. Municipal finance reforms have been delayed pending Cabinet approval of a paper on the subject. WILDLIFE AND TOURISM SECTOR Loan No. 1304T-KE - Wildlife and Tourism Project: US$17.0 million Loan of July 9, 1976; Effective Date: November 10, 1976; Closing Date: June 30, 1982 After initial delays, project implementation is accelerating. Officers for the Project Management Unit have been appointed, and six key Wildlife Planning Unit positions have been filled. The Ministry of Works has appointed various consultants for the design and construction of all physical project components. The draft final report of the Tourism Pricing Study has been reviewed with Government and consultants in the field, and the final report is expected to be submitted soon. The Very Large Herbivores Study is in progress. Satisfactory agreements have been reached with the Amboseli ranchers on guaranteed minimum returns, thus meeting the disbursement condition relating to this component. The anti-poaching units are fully staffed and deployed, and initial effectiveness of the units appears satisfactory. Draft amendments to the Wildlife (Conservation and Management) Act of 1976 to fulfill the requirements of the supplementary letter giving detailed proposals for antipoaching operations have been approved by the Ministry of Wildlife and Tourism and are now in the final stages of processing.

43 ANNEX II East African Community There are currently five projects in execution in the East African Community. 1/ Loan No. 638-EA - Second Harbours Project: US$35.0 million Loan of August 25, 1969: Date of Effectiveness: December 16, 1969; Closing Date: December 31, 1977 Loan No. 865-EA - Third Harbours Project: US$26.5 million Loan of December 18, 1972; Date of Effectiveness: April 16, 1973; Closing Date: June 30, 1978 The Second Harbours project included financing for five general cargo berths and a single buoy tanker terminal for the Port of Dar es Salaam; two general cargo berths and a bulk cement wharf for Mombasa; tugs, lighters, cargo handling equipment, offices, housing and general improvements for both ports. The Third Harbours project included three new deep water berths, modernization of two berths and a lighterage quay, a training school building and central repair area for Dar es Salaam; modernization of several berths and a lighterage quay, construction of a tug berth, cold storage facilities and a training building in Mombasa and improvement of a lighterage quay in Tanga. Construction of all major project elements has been completed and a joint project completion report was issued in January Because of shortage of funds under both loans, the following minor project elements have not been submitted for Bank financing: the second phase of modernization of the lighterage quay and a training school for Dar es Salaam; and modernization of the lighterage quay and a training school for Mombasa. Locally financed contracts have been awarded for these project elements with the exception of the modernization of the lighterage quay in Mombasa. General cargo throughput has increased above appraisal forecasts for Dar es Salaam, and cargo handling productivity has generally improved with increasing throughput; however, port labor productivity has stagnated in Mombasa where general cargo throughput has declined considerably. Legislation to establish a Tanzania Harbours Authority and a Kenya Ports Authority has been enacted. Management of ports in both countries is competent. Some US$34.5 million of Loan 638-EA and US$25.6 million of Loan 865-EA has already been disbursed. The agreed allocation of undisbursed funds at October 1, 1977 between the countries concerned is given below: 1/ Since October 1, 1977, the East African Community loans (excluding the East African Development Bank) have been disbursed on the basis of separate national guarantees. The agreed allocation of undisbursed balances for each loan, as proposed in a report to the Executive Directors dated December 29, 1977 (R77-312) and approved on January 12, 1978, is given in this Annex. The Closing Dates for Loans 638-EA, 674-EA and 865-EA have passed. However, since the amount allocated to and guaranteed by each Partner State is clearly identified under the terms of the agreement signed on January 25, 1978, as proposed in the above report (R77-312), we are continuing disbursements.