The World Bank ; Public Disclosure Authorized. Document of FOR OFFICIAL USE ONLY. Report No. 2142a-RW. Public Disclosure Authorized RWANDA

Transcription

1 Document of Public Disclosure Authorized The World Bank ; FOR OFFICIAL USE ONLY F Report No. 2142a-RW RWANDA STAFF APPRAISAL REPORT OF A SECOND IDA CREDIT BANQUE RWANDAISE DE DEVELOPPEMENT (BRD) March 30, 1979 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Eastern Africa Projects Department. Industrial Development and Finance. Division This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS US$ 1.0 = RwF 92.8 RwF 1.0 USi RwF 1.0 imillion = US$10,775 GLOSSARY OF ABBREVIATIONS BNR Banque Nationale du Rwanda - Central Bank BRD Banque Rwandaise de Developpement CCCE Caisse Centrale de Cooperation Economique DEG Deutsche Entwicklungsgesellschaft KfW Kreditanstalt fur Wiederaufbau SOMIRWA Societe dess Mines du Rwanda FISCAL YEAR January 1 to December 31

3 FOR OFFICIAL USE ONLY RWANDA BANQUE RWANDAISE DE DEVELOPPEMENT (BRD) STAFF APPRAISAL REPORT Table of Contents Page No. BASIC DATA i - ii I. THE ENVIRONMENT A. The Economy.*...*... 1 B. The Industrial Sector C. Economic Prospects and Constraints... 3 D. The Financial System... 5 II. THE INSTITUTION A. Institutional Aspects... 7 BRD's Objectives Share Capital and Ownership... 7 Board of Directors Management, Organization and Staffing *...* 8 Policy Statement... 8 Interest Rates... 9 Procedures Auditors B. Operations... * Portfolio Financial Results and Condition Resources C. Prospects * Resource Requirements III. THE PROJECT A. The First IDA Credit to BRD B. Objectives of the Proposed Second IDA Credit C. Description of the Project The Proposed Credit to BRD Feasibility Study for Establishment of an Audit Firm.. 18 This report is based upon the findings of a mission consisting of E. Sawaya and P. Edmonds, that visited BRD in February 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 dismcsed without World Bank authorization.

4 Table of Contents (Continued) Page No. D. Project Costs and Financing.. 19 E. Project Implementation , 20 F. Benefits and Risks IV. AGREEMENTS REACHED AND RECOMMENDATION Annex No. LIST OF ANNEXES 1 Structure of Interest Rates 23 2 Summary Income Statements, Summary Balance Sheets, Forecast Income Statements, Forecast Cash Flow, Forecast Balance Sheets, Schedule of Disbursements 29 8 Selected Documents and Data Available in the Project File 30

5 .- i - RWANDA BANQUE RWANDAI';E DE DEVELOPPEMENT (BRD) Basic Data Date Established: 1967 Ownership (As of December 31, 1978) RwF million X Public Sector Domestic Private Sector Foreign Institutiors TOTAL Resources Position (As of December 31, 1978) RwF million Local Foreign Total Sources Equity Loans TOTAL ,217.3 ii s e.,, Net F;xed Assets Term Loans ETquity Investments TOTAL Undisbursed Commitments TOTAL Resources Available for Commitment

6 .1. RWANDA BANQUE RWANDAISE DE DEVELOPPEMENT (BRD) Basic Data Operations (RwF million) Approvals Loans Equity Investments Total Commitments Loans Equity Investments _ - Total Disbursements Loans Equity Investments _ Total Operating Results (RwF million) Net Profit Net Profit as % of Net Worth 2.0o% 4.3% 9.3-% 7.3% 4.5% Net Profit as % of Year-End Share Capital 1.6% 4.5% 10.5% 8.9% 4.7% Financial Position Net Worth Total Assets Term Debt/Equity O Interest Rates Medium-Term Loans (up to 5 years): 6.5-9%, including commissions. Long-Term Loans : 7.0-9%, including commissions.

7 RWANDA BANQUE RWANDAISE DE DEVELOPPEMENT (BRD) STAFF APPRAISAL REPORT 1. THE ENVIRONMENT A. The Economy 1/ 1.01 Rwanda had a population of about 4.3 million in 1977 and with an area of 26,340 square kilometers, is one of the most densely populated countries in Africa. It is estimated that per capita GNP in 1976 was about US$120, which is one of the lowest in the world. Real growth in per capita GNP (only an average annual of 1.2% during ) 2/ indicates some improvement in the living standards of the population in the early 1970s. Except land and a few deposits of cassiterite from which tin is extracted and wolfram from which tungsten is produced, Rwanda has no other known natural resources The economy is dominated by the agricultural sector, which remains largely subsistence in nature. It provided the livelihood for about 90% of the population and contributed about 57% of GDP in Agricultural exports, particularly of coffee and tea, accounted for about 70% of total exports in 1976, and provided a significant proportion of the Government's tax revenues. The secondary sector, which includes organized and artisanal mining, traditional and modern food manufacturing, construction and other industries, accounted for about 23% of GDP in Commerce and other services contributed about 20% of GDP Rwanda's economic development is hampered by several factors. Firstly, agricultural productivity has been declining due to severe soil erosion, the inferior quality of the new land being brought under use, inappropriate cultivation techniques, and the lack of use of modern agricultural inputs. Secondly, the increasing population (2.3% p.a.) has led over the years to the fragmentation of cultivable land into small holdings (about 1 hectare per farm family), a shift from cash crop production towards foodstuffs, and increasing underemployment and unemployment. Thirdly, there has been little effort, until recently, to train an adequate number of Rwandese in the skills vital to the country's development, particularly professionals (e.g., engineers, architects, managers, etc...) and technicians of various types. Consequently, there has been increasing reliance on expatriate technical assistance. Finally, Rwanda is a land-locked country located 1/ The most recent economic report on Rwanda (Report No RW) is dated July 27, An economic mission has visited Rwanda in February/March 1979 and its report is expected to be distributed in October / World Bank Atlas, 1978.

8 between Uganda, Zaire, Burundi and Tanzania, at a distance of at least 1,700 kilometers from the nearest seaport, Mombasa in Kenya. The long distances, the high cost of fuel and the bulky nature of most of Rwanda's imports (e.g., cement), have resulted in high transportation costs of imports. In addition, different transportation regulations between Rwanda and its neighbors and border problems, have led to irregular supply and frequent shortages of vital materials as well as severe price increases. B. The Industrial Sector 1.04 For a few years after independence (1962), the industrial sector in Rwanda did not register any significant growth or development. Even after the establishment of a separate customs regime from Burundi, only those new manufacturing activities that were based on the processing of agricultural products, such as tea, coffee and pyrethrum experienced some significant growth. The industrial policy at that stage aimed at providing an environment conducive to investors, emphasizing import-substituting and export-oriented projects that were based on local resources The available data indicates that, except for a large brewery, there are less than 100 modern manufacturing enterprises, all relatively small in size. Wage employment in industry (excluding mining) was estimated at 15,700 in Food manufacturing is the dominant industrial activity, accounting for 64% of the value added by the secondary sector. This activity, however, remains largely traditional and artisanal and modern food manufacturing activities account for only 18.5%, of the value added by this sector. Construction is second in importance (15.3% of value added by secondary sector), followed by mining (9%). Mining is scattered around the country and most modern manufacturing activity is located in or around Kigali, the capital. Gisenyi, Butare and Cyangugu are growing in importance. Foreign ownership of industrial enterprises is limited to some modern manufacturing enterprises, but is predominant in the mining and construction sectors. Government ownership is concentrated in the few 'Larger enterprises in manufacturing and mining Annual investment in manufacturing is estimated to have increased from RwF228 million in 1973 to about RwF800 million in 1977, for a total of about RwF2.3 billion during On its own, this represents rapid growth, but the starting point is a low base and the absolute amounts remain relatively small. The major reasons for the increasing investment in manufacturing are the local opportunities which were unexploited, the increase in transportation costs which made the local production cost of some goods attractive relative to imports, and the political stability that Rwanda offered relative to the neighbouring countries. Also well-to-do Rwandese who concentrated on commerce started to look for other investment opportunities.

9 - 3- C. Economic Prospects and Constraints 1.07 The problems and constraints facing Rwanda's economic development (para. 1.03) have been recognized in the Second Five-Year Plan 1/. The plan is centered around an integrated rural development program which aims to achieve, in 1± medium term, the necessary structural transformation of the economy to increase food production, train more and better qualified manpower, improve the living standards, particularly in the rural areas, and reduce the reliance on external sources of assistance. The other sectors, such as manufacturing, mining, construction, tourism, and transport are expected to play a strong supporting role. The plan's target for GDP growth is an annual average of 5.9%. The target growth rates for the sectors, as well as the changes in their shares in GDP are shown in Table 1. Table 1: Gross Domestic Product by Sector (billion RwF at 1976 prices) 1976! 1981 b/ Projected Average Amount % Amount % Annual Growth Rate Agriculture Industry Mining Commerce Other, Including Public Sector TOTAL (%) a/ Estimated. b/ Projected The total planned investment is about RwF54 billion (US$590 million). The share of the Government would be about 7%, the private domestic sector 23%, and the externally financed public sector at 70%. The share of industry, excluding mining, is roughly estimated at about RwF4 billion (about US$44 million), or about 7.5% of th-e total planned investment. This appears to be realistic given the level of investment that was achieved during Total wage employment, including expatriates, would increase from about 125,000 persons in 1976 to 166,000 in 1981, with expatriates increasing from about 2,900 to 3,850, respectively. Wage employment in industry (excluding mining) would increase by 8,600 persons, to 24,300 in / Second Five-Year Plan for Economic, Social and Cultural Development,

10 The Plan's overall objectives and priorities appear to be consistent with the present problems and future prospects of the Rwandese economy. However, except for manufacturing, the targets seem to be relatively ambitious. Firstly, there is heavy reliance on foreign assistance, since 70% of the required resources are expected from external sources, which in most instances is project specific. But many of the projects identified in the Plan are either at a very early stage of preparation or are not prepared at all. Secondly, the share of investment expected from the private domestic sector appears high. Finally, the adverse impact of the shortage of qualified manpower and the transportation problems (para. 1.03) seems to have been underestimated Industrial Development during the Second Plan. There are several explanations for the limited development of industry, so far, and particularly manufacturing. Firstly, the domestic market is small, the possibilities of exports to neighbouring countries are limited and the per capita income is low. Thus the potential demand does not justify, in many instances, the establishment of even minimum size plants. Secondly, investment costs are high largely due to the high transportation cost and the unreliable supply of imports, which force many enterprises to hold excessive stocks of raw materials and spare parts, with associated high carrying costs. Thirdly, the low domestic savings limit the possibilities of industrial investment by Rwandese nationals and the Government's tight fiscal situation hampers its involvement in this regard in any significant manner. Finally, the lack of local entrepreneurs and the shortage of skilled manpower has discouraged industrial investment The priority accorded by the Second Five-Year Plan to the development of industry is second only to agriculture. The approach to industrial development is consistent with the country's present situation and future potential. There is recognition of industry's ability to create jobs, although at a much higher capital cost than in agriculture. The Plan's objectives for this sector are to develop the agro-industries and the rural artisanat, encourage the labor intensive enterprises, concentrate on the production of necessary commodities, and encourage export-oriented industries and those aimed at import substitution. The target rates of growth for modern manufacturing is an average annual of 16.5%, modern construction 8.2%, mining 7.6%, while that for artisanal industry (including food production) is 2.8%, and traditional construction 4.6% Industrial policy during the Second Plan incorporates certain measures that would help achieve the above objectives and targets. These include the establishment of a guarantee fund to help small and medium-scale enterprises obtain credit from commercial banks which has been completed; a newly approved investment code that extends the same tax and customs duty concessions to the Rwandese investors that the previous code (1964) restricted to

11 - 5 - foreigners 1i; the creation of a technical school to train industrial and mining technicians is under way; and the reorganization of public enterprises to give them greater operational autonomy and better qualified managers and staff At the time of appraisal of the first IDA credit to BRD there were plans for the establishment by the end of 1976 of a UNDP-financed Bureau for Industrial Promotion at the Ministry of Finance, which would include 5 or 6 experts to help entrepreneurs undertake industrial projects. This project was delayed and because less funds are available now than originally anticipated, the scope of activities has been scaled down. As presently designed, the Bureau would include two experts who would mainly help promote among enterpreneurs an awareness of investment opportunities in industry. They would also undertake some limited sector work. Experts are being recruited. D. The Financial System 1.14 The most important institutions that comprise Rwanda's financial system are the Central Bank, two commercial banks, the Development Bank of Rwanda, the People's Bank, the Savings Association, and the Caisse Hypothecaire. The main offices of all these institutions are located in Kigali and their operations are conducted out of there. However, some of these institutions (the commercial banks, the People's Bank and the Savings Association) have branches in a few of the larger towns that offer limited service The Central Bank (Banque Nationale du Rwanda - BNR) is responsible for supervising the country's financial institutions, formulating monetary and credit policies, and managing the international reserves. BNR has at its disposal several of the tools traditionally used to influence credit and monetary developments, and has frequently resorted to changing the credit ceilings either on an overall basis or by sector. To reinforce its control of the country's credit situation it has issued a regulation that requires all loans over RwF5 million to be submitted to it for prior approval. BNR is active in financing the public sector: its share of the total domestic credit extended to the Government and public enterprises amounted to 38% in 1975 and increased to 46% in BNR also administers a system of import licensing which permits it to exercise selective control over the allocation of the available foreign exchange. In 1977, it issued a regulation that required deposit margins on imports ranging from 50% for corporations to 90% to individuals. 1/ The 1964 investment code has reportedly been applied in only one case. The new code is likely to be used more often because it covers the Rwandese nationals and includes exemptions, for varying periods of time, from customs duties on imported capital goods, spare parts and raw materials; income tax holiday for five years, starting with the first year of full operation; priority of access to foreign exchange under the foreign exchange licensing system; and, for foreign investors, the right of repatriation of dividend income.

12 1.16 The two commercial banks (Banque Commerciale du Rwanda and Banque de Kigali, established in 1963 and 1966, respectively) are majority foreignowned. As of December 31, 1977, together they had total assets of RwF7.0 billion, and total deposits of RwF5.2 billion, only 7% of which was in term deposits. The commercial banks are active in financing exports, particularly coffee, and imports. They also extend credit to the public sector, where their share of the total domestic claims on the Government and the public enterprises amounted to 47.5% in 1975, but declined to 33% in Of the term lending institutions existing in Rwanda, the development bank (Banque Rwandaise de Developpement - BRD) is the most important. It will be described in detail in the next chapter. Next is the Savings Association whose share of the total domestic credit is less than 5%. The Caisse Hypothecaire has been given the sole responsibility for financing all housing and building construction, whose costs exceed RwFO.5 million. In order to assist it in mobilizing the resources to carry on its activities, the Central Bank's 1977 regulations required the two commercial banks and the Savings Association to hold given amounts of medium-term notes issued by the Caisse Hypothecaire Inflation in Rwanda alccelerated during 1974 and Consumer prices increased by 9.5% in 1973, 31% in 1974 and 43% in This was the result of: (a) the rapid world inflation which increased the cost of most of Rwanda's imports; (b) the increase in money supply; and (c) the increase in domestic credit to the public sector, particularly in 1974, (after which it decreased slightly in 1975). The inflation rate was estimated at 8.5% in 1976, and at 13% in It is expected to be about 12% in 1978 and to decline to an average of 8% in Interest Rates (Annex 1) are fixed by BNR. Commercial bank lending rates for consumer loans, import credits and working capital for manufacturing enterprises are 11%, while those for export credits for coffee are 5%, and for tea 4% while the rate for marketing export crops is 8%. The Savings Association lending rate to the private sector on short and medium-term credits (up to 5 years) is 9%. BRD's lending rates for medium and long-term loans vary between 5.5% and 9%, depending upon the sector in which the project is being financed. The rate on the one-year treasury bills varies between 3% and 5%, while that for term deposits of more than one year is 3.75% This structure of interest rates appears to be low. The Government's interest rate policy aims to attract foreign investors into Rwanda by maintaining a generally lower level of interest rates than in neighbouring countries and to encourage both local and foreign investment in particular sectors, such as agriculture, through concessionary interest rates. The Government also believes that increases in interest rates will generate little additional savings and discourage investors in industry.

13 IDA has expressed the view that low interest rates may not be enough to compensate for other impediments to investment in industry such as the shortage of qualified manpower and that higher savings rates would help mobilize additional resources and reduce the reliance by the Government on deficit financing. The dialogue between the Government and IDA, which started in 1975, at the time of appraisal of the first IDA credit to BRD has continued and is being pursued at the occasion of the proposed second credit to BRD. It is worth mentioning that during this period, there has been an increase in the average of BRD's lending rates, from about 7.5% in 1975 to about 8.0% in 1977 and it is expected to average about 8.5% in II. THIE INSTITUTION A. Institutional Aspects BRD's Objectives 2.01 BRD was established in 1967 with a broad mandate as a limited liability company to encourage the creation and development of enterprises in Rwanda and promote the diversification of the country's economic structure and the regional balance of investments. To do so, BRD is authorized to grant term loans or guarantees and make equity participations in enterprises in the productive sectors of the Rwandese economy and to undertake the activities necessary for its operations. BRD is autonomous and its decisions are made on the basis of the results of its own appraisal of the technical, financial and economic merits of projects. Share Capital and Ownership 2.02 BRD's share capital consists of "A" shares which must account for at least 55% of the total and are reserved for the Government and other public agencies and institutions, and "B" shares for private and foreign shareholders 1/. There are no differences between the rights and privileges of either category of shareholders. On September 1, 1978, BRD's share capital was doubled to RwF416 million. RwF43.5 million of the increase consisted of a stock dividend while RwF164.5 million was in new subscriptions, of which RwF120 million (including RwF50 million Government loan which was converted into equity) was subscribed by "A" shareholders; the remaining RwF44.5 million was subscribed by "B" shareholders. Ownership of BRD's share capital is presently distributed as follows: the public sector 62.5%, the domestic private sector 15.8%, and the foreign shareholders 21.7%. 1/ The two most important "B" shareholders are DEC and CCCE who presently subscribe RwF41 million each to BRD's share capital.

14 -8- Board of Directors 2.03 BRD's Board of Directors consists of eleven members, of whom six directors represent the "A" shareholders, or the public sector, and five represent the "B" shareholders. The President of the Republic appoints the Chairman of the Board. The five directors for the "B" shareholders represent DEG, CCCE, the two commercial banks and the Brewery of Rwanda. The Board meets on a regular basis to determine BRD's policy and it approves all loans, equity participations and guarantees. It also takes an active interest in seeing that the BRD evolve as a sound development institution. Overall the Board's performance is very satisfactory. Management, Organization and Staffing 2.04 Management. The present Directeur-General of BRD is a Rwandese national who was appointed by the President of the Republic to this position in He is a capable manager and is well respected by all parties dealing with BRD. He has two capable expatriate assistants: a Burundi national, who joined BRD in 1973, is in charge of BRD's administrative and financial operations; and a German national, wh1o joined BRD in 1975 under the auspices of the German bilateral assistance, is in charge of investments and project evaluation. The latter's contract is likely to be renewed for two years in A technical/engineering advisor, also under German bilateral assistance, joined BRD in November 1977 for two years Organization and Staffing. BRD is organized in two major departments. The administration and finance department is responsible for project follow-up, disbursement and loana collection, as well as for maintaining BRD's accounts and administering the local and foreign resources. The investment department is responsible for project evaluation in all its aspects and for providing technical assistance to the enterprises that BRD has assisted. This organization has proven suitable and efficient so far. BRD's staff totals 44, of whom 15 are professionals, including three expatriates. The Rwandese nationals who are among the professional staff of BRD are university graduates who have been with BRD for varying periods of time and are being trained on the job. They include economists, financial analysts and a lawyer who are gaining experience and should start assuming additional responsibility at BRD soon. The staff is generally dedicated and hard working. BRD has a staffing plan based upon its own projection of its operations up to 1985, and a training program which mainly relies upon on-the-job triaining. BRD's training and staff development program are satisfactory. Policy Statement 2.06 BRD's policy statement is satisfactory. However, two exceptions to one provision, which restricts BRD's exposure in a single project to 20% of its net worth, were made in 1976 and 1977 when BRD approved two projects in which its contribution exceeded the normal limit of 20% of net worth. In both cases, BRD took adequate measures to protect itself by asking for either the

15 - 9 - Government's or the Central Bank's guarantee for that portion of its assistance that exceeded the normal limit. There is likelihood that such a situation will occur again since BRD's project pipeline (para. 2.27) includes a number of projects in which BRD's contribution is likely to exceed the normal exposure limit, even after BRD's capital has been doubled This situation raises questions about the impact on BRD of such overexposure in several projects. Several factors need to be taken into consideration. Firstly, in Rwanda, BRD is de facto the only source of medium and long-term financing, particularly by the private sector, for investments in industry, tourism, transport and agricultural product processing. It is roughly estimated that its contribution to investment during 1976 and 1977 amounted to 40% of the total invested in industry, 22% in tourism, and 15% in transport. Its contribution during the Second Five-Year Plan will at least be of the same order of magnitude, if not larger. Secondly, BRD remains the major, perhaps the sole Rwandese institution, that is capable, both technically and professionally, of properly evaluating investment projects. This will continue to be the case for sometime, particularly since the plans for strengthening the Bureau of Industrial Promotion have been scaled down (para. 1.13). Finally, the alternatives available to BRD to avoid exposure beyond the normal limit are either premature or pose problems to BRD. One alternative under which BRD would act as a leader of a financing syndicate could be possible, if other sources of financing were available. However, in Rwanda, virtually no other institution is ready to participate in medium and long-term lending. The exception is real estate, which is not of priority to BRD. Another alternative would be for BRD to undertake large projects which entail exposure above the normal limit on a managed fund basis. From BRD's point of view, however, direct financing coupled with Government/ Central Bank guarantees seems preferable to a managed fund approach because it guarantees BRD a greater degree of autonomy and independence in deciding upon projects. The managed fund approach might face BRD with the problem of having to supervise and follow-up projects, the design of which it may not be able to influence. During negotiations, agreement was obtained from BRD that in those cases where over-exposure is necessary, BRD would on a regular basis obtain adequate guarantees of loan repayment on at least that part of the loan that exceeds its normal exposure limit, either from the Government for public sector projects, or from other creditworthy sources for private sector projects. Interest Rates 2.08 As of March 1978, the interest rates charged by BRD varied between 5.5% and 9%. Commercial/industrial projects are charged an interest rate of 6-7% per year on medium-term loans (1-5 years) and 7-8% per year on long-term loans (longer than 5 years). In addition, a commission of 1% or 2% per year is charged on funds disbursed and outstanding. The majority of the mediumterm loans are for small or medium-scale projects, while the long-term loans are predominantly for large projects. For projects financed under KfW funds, the interest rate is % per year for medium-term and 6-7.5% per year for long-term, while the interest rates under the first IDA credit are 9% for

16 medium and large-scale enterprises and 7% for small-scale enterprises, with the exchange risk being borne by the Government at no charge. BRD has also recently adopted a new "commitment commission" of 3/4% to be charged to all loans and calculated on the undisbursed amount of a loan The forecasts of operations (paras 2.28 and 2.29) indicate that BR)'s administrative fixed costs would be increasing due to the need for more staff to handle the higher level of operations and to the depreciation of the new office building. Thus BRD would need to earn a spread of about 5% on its lending operations to cover operating costs and earn a minimal profit. Achieving such a spread early is particularly important in view of the possible delay in availability of new lines of credit for disbursement. If disbursements are slower than projected, earnings from the loan portfolio would be reduced, while fixed costs would continue to increase. This 5% spread is needed over and above BRD's cost of resources, which are expected to increase due to higher borrowing costs, both locally and abroad Both the Rwandese Government and BRD do not favor a large increase in BRD's lending rates. The industrial sector in Rwanda is still immature and fragile, and investment is only just beginning to grow due in part to the political and economic stability Rwanda presently offers. However, there remain many inhibiting factors (paras 1.03, 1.10 and 1.20), in view of which the Government and BRD feel that to promote and stimulate investment, BRD's interest rates should offer arn incentive to both local and foreign investors. A large increase in BRD's lending rates would be considered a deterrent, particularly by the few local Rwandese entrepreneurs who are considering term investments rather than short-term trading, even if Government continues to carry the foreign exchange risk. Thus, there is justification for raising BRD's lending rates to help it maintain a sound financial position, but there is need to keep this increase moderate so that the growth of industry and BRD would not be unduly slowed down (para (c)). Procedures 2.11 Appraisal. Since the appraisal of the first IDA credit, BRD has improved the quality and standard of its appraisal work, particularly the economic aspects. It is expected that through further association with IDA, BRD would continue to improve the quality of its appraisals. Also, BRD is already making a real impact on the design of projects during appraisal to make them more suitable to the Rwandese economy; this was evident in some of the projects that were submitted to IDA for approval under the first credit. A case in point is a project for producing plastic articles, where BRD convinced the promoter to divide the project into two phases, with the second phase beginning about two years after the first phase when market demand was expected to pick up Supervision. BRD's supervision procedures are generally adequate. Currently three staff undertake supervision of projects, which receive two or three visits each year, even outside Kigali. Projects encountering difficulties receive additional visits. Also, BRD requires client companies to stubmit quarterly reports which are then reviewed. Annual accounts are also

17 required, but due to the lack of auditors in Rwanda, these accounts are not audited by outside auditors and are often delayed. With the expanding portfolio, BRD's supervision would need to be strengthened, and efforts are underway to recruit two additional staff for the supervision unit Procurement and Disbursement. BRD's procedures for procurement and disbursement are satisfactory. For the larger projects quotations are obtained during appraisal, and in cases where substantial construction is involved, BRD may require competitive bidding. BRD expects equity funds to be disbursed first and loan funds are disbursed against invoices. Auditors 2.14 Under the first IDA credit, it was agreed that an independent auditing firm acceptable to IDA would verify BRD's accounts. The cost of three such audits, starting with the 1976 accounts, was covered under the first credit. The 1976 and 1977 accounts have been audited by the private firm of Pannell, Kerr, Forster and Co. which is located in Nairobi and has French speaking staff and were found satisfactory and acceptable; the 1978 accounts are being prepared. The lack of auditors in Rwanda, and the shortage of qualified French-speaking auditors in the region have led to difficulties and delays in auditing BRD's account:s because of the need to resort to foreign auditors At the time of the appraisal of the first IDA credit, a proposal to finance a feasibility study on the need for and the nature of an audit firm in Rwanda was included in the project. During negotiations, this proposal was deleted at the Government's initiative. Later, however, the Government changed its position and requested that such a proposal be revived. The proposed second IDA credit, therefore, includes funds for undertaking a feasibility study on the need for auditors, and for establishing an audit firm in Rwanda, if the results of the study are positive (paras 3.01 and 3.05). B. Operations 2.16 BRD's total loan approvals increased from RwF163.2 million in 1974 to RwF367.4 million in The growth in approvals has essentially been in long-term lending to large projects. Most of the medium-term lending has been to small and medium-scale projects. Commitments have increased rapidly, from RwF1O million in 1974 to RwF112 million in 1978 and disbursements followed the same pace and pattern During , BRD approved loans to 95 projects, for about RwF1.3 billion. The distribution of the amount of the approved loans by sector over this period was 62% for industry, 31% for transport (including a large number of small loans for passenger vehicles), 2% for tourism, 1% for agriculture, and 4% for other activities. No short-term loans were approved during Projects granted medium-term loans accounted for 74% of the number

18 of projects approved during this period, but for only 36% of the amount, while long-term loans accounted for 26% of the number and 64% of the amount. The number of projects requiring loans of RwF5 million or less (about US$54,000) was 71 (75% of the total) and accounted for 10% of the aggregate amount. The number of projects witn loans larger than RwF5 million was 24 (25% of the total) and accounted for 90% of the aggregate amount. The sectoral mix of the projects financed by BRD has changed. In 1974 the transport and tourism sectors were the main focus of BRD's lending; in 1975 the industrial sector became the most important with significant amounts still being lent to the transport sector. However in the last three years the industrial/mining sector investments have become predominant. Most of the projects have been for processing of local resources, including some export oriented projects or for import substitution Because BRD is the only non-government source of foreign exchange term finance in Rwanda, it has been involved in financing all sizes of projects from the SOMIRWA mining project requiring a loarl of RwF150 million to small scale projects requiring about RwF0.5 million. Whenever possible BRD has attempted to keep the size of its investment within 20% of net worth in order to spread the risks over its portfolio. The selected projects which BRD has financed since 1976 have estimated financial rates of return that range from 18% to more than 40%, and economic rates of return of 20% or more. The estimated investment cost per job created, including working capital, ranged from about $3,000 to $53,200. In the case of the loan to SOMIRWA (Societe des Mines du Rwanda), the number of new jobs created would not be significant, but the rehabilitation of the mining operations will prolong the employment of about 6,000 wage earners as well as that of several thousand artisan miners who sell the ores they extract to SOMIRWA. Portfolio 2.19 Loan Portfolio. As of December 31, 1978, BRD's loan portfolio outstanding amounted to RwF565 mi:llion, which is distributed as follows: industry (including mining) 83%, transport 5%, tourism 6%, agriculture 2%, and other 4%. Long-term loans accounted for RwF459 million (81% of the portfolio), and debts considered doubtful or bad accounted for RwF14.3 million. The projects have a diverse range of ownership. Some totally owned by Rwandese entrepreneurs, foreigners or Government, while others have joint ownership between private and Goviernment interests. Most of the projects have been approved since 1974; therefore the portfolio is generally quite young with many projects still under construction or just starting operations. Those projects that are in operation, appear to be quite profitable and earning attractive rates of return on investment As of June 30, 1978, the portfolio affectecd by arrears above three months amounted to about 2% of the total. Over 50% of the arrears occurred in the transport sector which only accounts for 6% of the overall portfolio. Some of the loans in arrears are small loans for vehicles made under the

19 Swiss loan, which was specifically for transportation equipment. Of the RwF14.3 million loans which were considered doubtful or bad, BRD has made specific provisions for RwF12.4 million.. Additionally there is a reserve for general risks amounting to RwF23 million (4.1% of loans outstanding). Thus BRD's loan portfolio was generally in a good condition, and generous provisions/reserves had been set aside for possible losses Equity Portfolio. As of Decetmber 31, 1978, BRD's equity portfolio was about RwF140 million and included investments in 11 projects. BRD has minority holdings ranging from 0.3% to 21.4% in the projects in which it has equity investments, except for a la,rge storage project "Magerwa", where BRD's holding is 68.8%. This project is also BRD's largest equity investment (RwF55 million), and has been providing BRD with significant and secure income (para. 2.22); it paid a dividend of 232 in Two other projects have paid dividends, but six of the investments have been made since 1975 and have only recently begun operation or are still under construction. Financial Results and Condition 2.22 Financial Results. BRD's inc:ome statements and balance sheets for are shown in Annexes 2 and 3. The 1978 unaudited statements indicate a profit of RwF19.6 million, a small increase from RwF18.6 million in Revenues from the loan portfolio (RwF37.6 million) showed some increase over the previous year. Increased earnings from an expanded long-term portfolio were offset by a reduced medium-term portfolio. Dividends earned on the equity portfolio decreased slightly in 1978 to RwF22.4 million, but nearly all dividend income was from the project Magerwa, which has regularly paid such dividends over the past six years. In 1978, income from loans as a percent of average total assets was 5.0% and that from dividends was 3.0% Total expenses rose from RwF38.2 million in 1977 to RwF45.5 million in Financial charges as a percent of average total assets increased from 1.3% in 1977 to 1.4% in 1978, while administrative expenses rose from 2.8% to 3.2% respectively. Personnel costs increased in 1978 by RwF4.5 million, to RwF16.4 million, as more staff were hired to handle the increasing level of operations. Specific provisions are made each year against doubtful and bad loans, but none was necessary in Additionally, a charge of 3.0% of the increase in the normal loan portfolio outstanding is made each year against income to maintain a reserve account for general risks. This charge of RwF5.7 million together with the increase in personnel costs and the increase in the share capital of BRD late in the year resulted in a decline in the 1978 return on average net worth to 5.6%, as against 7.3% in This level of profitability is reasonable for a young small bank entering a significant growth phase Financial Condition. As of D)ecember 31, 1978, BRD was both sound and creditworthy. BRD's term debt/equity ratio is about 1:1, well within the 3:1 limit. Of the medium and long--term debt totalling RwF400 million, RwF247.5 million was in foreign exchange borrowings on which Government

20 carries the foreign exchange risk. The remainder was local currency borrowings from the Government, Central Bank and local commercial banks. Given its conservative provisions policy (para. 2.23), BRD is adlequately protected against losses on the portfolio. BRD does not have liquidity problems as Goverrmuent/Central Bank will make available local currency resources as necessary. Resources 2.25 As of December 31, 1978, BRD's local currency resources totalled RwF612 million, including local currency borrowings of RwF153 million. Foreign currency resources totallecl RwF605 million. The local currency term borrowings have maturities ranging from 3 to 25 years with low interest rates from 3% to 4.5%. Only RwF20 million of these local currency borrowings were provided by a local commercial bank, the remainder being on-lent by the Government and Central Bank from loans made by Swiss F'und and Arab League. As of December 31, 1978, about RwF234 million of BRD's local currency resources were uncommitted BRD's foreign exchange resources include two loans from KfW totalling about RwF127 million, a loan from CCCE of RwF11O million and the first IDA credit of RwF368 million. The interest rate paid by BRD to Government for the IDA credit on-lent to it and on CCCE loan is 4%. The first KfW loan has a 0.75% interest rate and the second KfW loan an interest rate of 4% for funds used for long-term lending and 1.5%' for medium-term lending. Government carries the foreign exchange risk on all these loans/credits. The CCCE loan is tied to French procurement, and BRD has had difficulty in committing these funds as most investors in Rwanda have sought to use generally Belgian or South Asian equipment with which they were familiar. BRD is intending to discuss with CCCE some relaxation of the procurement requirement. As of December 31, 1978, about RwF248 million of BRD's foreign resources were uncommitted. C. Prospects 2.27 Projects Pipeline. As of December 31, 1978, BRD had a substantial pipeline of projects, which included 25 projects of various sizes involving total investments of about US$30 million, for which assistance of about US$10 million was being sought from BRD. The projects were being promoted by Government, private Rwandese and locally--based foreign groups, in some cases with joint Government and private ownership. The majority of these projects were in the industrial sector and included manufacture of batteries, metal products, textile, matches, pyrethrum refining, fruit juice, metal workshops, tea factories, plastic pipes and photographic processing. There were also many small projects which were not included in the pipeline. Four of the large projects included in the pipeline would require assistance in excess of BRD's present normal exposure limit, which is about RwF83 million (US$900,000). BRD's intervention in the projects under study will be predominantly foreign exchange financing. Based on the above pipeline and additional projects arising

21 from the development plan, BRD is forecasting a steady growth in approvals of 15% per annum, with total approvals rising from RwF406 million in 1979 to above RwF600 million by On current estimates of inflation (12% in 1978 falling to 8% in the period ) the forecasts indicate a significant growth in lending in real terms by BRD Financial Forecasts. Annexes 4 to 6 include BRD's financial forecasts for the period The forecasts reflect the fact that BRD is entering into a significant growth period, where in 1979/80 the increased staff necessary to handle the increased operations, would depress net income. In 1980/81 the interest revenue generated by the rapidly growing loan portfolio would be partially offset by the increased depreciation resulting from the investment in the new office building 1/. Net profit as a percent of average net worth will gradually decline from 5.3% in 1978 to about 3% in 1981, but will rise to 5.4% in However, due to the increasing spread that would be earned on the loan portfolio following interest rate increases (para (c)) and the rate of growth of lending, BRD will show strong earnings growth thereafter. The growth in lending operations is essentially financed by foreign currency borrowings and net cash generation of local currency. Long-term debt to net worth would rise from 1.6 in 1979 to 2.9 in 1982, which is just within BRD's present long-term debt/equity limit Because of the increasing fixed costs due to increased staff and depreciation of the new office building, it is important that BRD generate the forecast revenue in order to operate profitably. To achieve the forecast revenue targets requires that BRD aggressively pursue not just the appraisal and commitment of new loans, but also their subsequent disbursement on schedule. Equally it is important that BRD have the second IDA credit and the third KfW loan available for commitment in 197'3, otherwise forecast lending levels will not be achieved and the growth in interest revenue will be delayed. Given the small profit margins forecast in the next two or three years, such interest revenue generation is clearly important for profitable operation. 1/ BRD is presently occupying rented premises, which have become inadequate for the increasing staff. Due to the shortage of office space in Kigali, BRD is planning to construct an office building, which would adequately meet BRD's need for space until about After completion BRD will occupy at most half the space available and will rent out the remainder. The preliminary cost estimate of this building is about RwF180 million. However, BRD has not taken a final decision on this matter. The forecasts have taken into consideration only the depreciation of the building and assumed that the part of operating costs attributable to BRD would be about the same as the rent BRD presently pays. No additional net income has been included because the financing plan for this building is not reasonably defined and at least over the projection period any additional income is not likely to be significant.

22 Resource Requirements 2.30 As of December 31, 1978, BRD had foreign resources available for commitment amounting to RwF248 million or US$2.7 million. Foreign exchange commitments by BRD during are forecast at about RwF937 million or US$10.1 million. Thus BRD's foreign exchange resources gap during this period is RwF689 million (US$7.4 million). This forecast assumes that the existing loan from CCCE, which is tied to French procurement, can be fully committed within this period. BRD is seeking to cover the forecast resource gap with further credits from IDA (US$5 million) and KfW (US$2.4 million). The local currency resource requirements will be met out of net cash generation. III. THE PROJECT A. The First IDA Credit to BRD 3.01 The first IDA credit to BRD (No. 655-RW, US$4.0 million) was approved on July 15, 1976 and became effective on March 2, As of February 28, 1979 US$2.5 million has been committed and US$2.3 million disbursed. BRD has submitted to IDA for approval another two projects, which together with the amount already approved would fully commit the first IDA credit The sub-projects submitted to IDA for financing included three projects above the free limit and one project below the free limit. These projects were well designed and appraised and fully justified on technical and financial grounds and would contribute significantly to the country's economic development. The largest project (subloan of US$1.7 million) was to assist SOMIRWA in rehabilitating its mining operations (para. 2.18), in preparation for a following phase when mining operations would expand and a refining plant would be constructed. Another project assists a soap factory in diversifying its operations by adding a line for the production of sweets. The third large project was for the creation of a factory to produce plastic articles for household use and plastic packaging materials. A project below the free limit would assist a qualified Rwandese mechanic in equiping a garage for automobile repair. B. Objectives of the Proposed Second IDA Credit 3.03 The proposed project would support Rwanda's efforts to develop the productive sectors of the economy in line with the strategy of the Second Five-Year Plan (para. 1.07). Thus the proceeds of the proposed second IDA credit would provide the foreign exchange needed to help finance capital investment. It is estimated that the proposed project would help finance projects, with a total investment of about US$15 million, and would help create about 400 new jobs. Another major objective of the proposed second credit is to continue to reinforce the efforts to strengthen BRD, which were