Document of

The World Bank

FOR OFFICIAL USE ONLY

FILE COPYReport No. 2456a-MAG

MADAGASCAR

STAFF APPRAISAL REPORT

OF A FIRST IDA CREDIT

BANKIN'NY INDOSTRIA (BNI)

January 10, 1980

Eastern Africa Projects DepartmentIndustrial Development and Finance Division

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

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CURRENCY EQUIVALENTS

US$1 = FMG210

FMG100 = US$0.48

ABBREVIATIONS

BCIM - Banque pour le Commerce et l'Industrie de MadagascarBDPI - Bureau de Developpement et de Promotion IndustrielsBFV - Banque Nationale pour le CommerceBNI - Banque Nationale pour le Developpement IndustrielBNM - Banque Nationale Malagasy de DeveloppementBTM - Banque Nationale pour le Developpement RuralCCP - Centre de Cheques PostauxCCCE - Caisse Centrale de Cooperation EconomiqueCNAPS - Caisse Nationale d'Assurances et de Prevoyance SocialeKfW - Kreditanstalt fur WiederaufbauIDA - International Development AssociationSNI - Societe Nationale d'Investissement

FISCAL YEAR

January 1 to December 31

FOR OFFICIAL USE ONLYMADAGASCAR

BANKIN'NY INDOSTRIA (BNI)

STAFF APPRAISAL REPORT

Table of Contents

Page No.

BASIC DATA ............................................. i - ii

I. THE ENVIRONMENT

L A*. The Industrial Sector . .............................Background ......................................... 1Changes in Economic Policy ......................... 1Recent Performance ... * ............. ........... ...... 4Policies ................... -- o .... . o ........... 5Promotion ...... o ................................. 5Prospects ., ............................ ........ 5Artisans ........... ....................... ....... 6Small-Scale Industries (SSI's) ........... 0.... ....... 6

B. The Financial Sector .... ........ ................ . 7The Banking System ................................ 7Credit Policy ................... .. ............. 7Inflation ................ . . . .... 8Int'erest Rates .... *......8

II. THE INSTITUTION

A. Institutional Aspects........ 9Background and Objectives ................ .... a ...... 9Ownership, Board ....................... . ...... ..... . 9Management, Organization and Staffing ... o ......... 10Operating Policies ................................. 10Procedures ............................. . ........ 10

(a) Appraisal . .............. . .... .. .............. 10(b) Follow-up ........... ........................ 11(c) Procurement .......................... - . 11(d) Disbursements ...................... ........... 11(e) Project Promotion ..... ........................ 11

Strategy ....................................... 11Interest Rates .... .................................. 11

< ~~~~~~~Audit ,...*.......... -......... ...... 0........... 12-

This report was prepared by Messrs. Philippe Beuzelin, Jose-Luis Mombruand Ben Lehbert on the basis of their visits to Madagascar in June andNovember 1978.

This docunwnt ha a restricted distribution and may be used by recipients only in the performanceof their oAciaW duties. Its contents may not otherwise be discioSd without World Bank authorinztion.

Table of Contents (Continued) Page No.

B. Operations ........................................ 13Main Features of Past Operations .......... *......... 13BNI's Operations ............. .. .. ......... ....... ..... . 13Economic Impact . ..................... .. . ........... . 14

C. Financial Condition ................. . ..... . 14Loan Portfolio ,.................................... ..... 14Equity Portfolio .... . ...... ............. . 15Provisions . ..... ......... .... . 15Resources ................................. . ...... . 15Financial Position ................... o ................. ....... 16Profitability ...o ..................................... 16

D. Prospects ...... ............................... 17Forecast Operations ................................ ... 17Resource Requirements . . . ..... . o..o. .o... . . .. o. . . . . . . . . . 17Projected Financial Condition and Performance .o..... 18

III. THE PROJECT

A. Objectives of Proposed First IDA Credit ... o...... 19

B. Description of the Project ........ oo ..... ........... 19

C. Proposed Credit to BNI ...... oo... -...-............ 20Terms and Conditions ..................- . ... 20Project Cost Financing ............................. 21

D. Project Implementation ... -oo ......-... ... 22Reporting Requirements ............... o. ...- o..... 22Procurement ........o............. -- . ....... . . 22Disbursement. .... . . . -. .......... ... 22

E. Benefits and Risks ...... o..... .... ......... 23

IV. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS ...... o..... 23

Table of Contents (Continued) Page No.

ANNEX NO.

1 Madagascar - Interest Rate Structure .......... ...... 25

2 BNI - Draft Statement of Rules of Operations**-...-. 26

3 BNI - Summarized Balance Sheet 1977-1979 ............ 29

4 BNI - Summarized Income Statement at 1977-79 ........ 30

5 BNI - Project Pipeline at End 1978 . ................ 31

6 BNI - Projections of Operations 1979-82 ............ 32

7 BNI - Projected Balance Sheets 1979-82 .... ......... 33

8 BNI - Projected Income Statements 1979-82 ........... 34

9 BNI - Projected Sources and Uses of Funds 1979-82 35

10 BNI - Schedule of Disbursements .................... 36

11 BNI - Selected Documents and Data Available in

the Project File . .37

MADAGASCAR

BANKTN' NY INDOSTRIA (BNI)

BASIC DATA

Date Established: 1977

Ownership (as of December 1, 1979)FMG (billion) %

Government 2.7 85Central Bank 0.2 10Social Security Fund 0.1 5

TOTAL 2.0 100

Resource Position (as of September 30, 1979)(FMG million)

Sources

Equity Funds Local Foreign Total

Share Capital (net of fixed assets) 694 - 694Reserves and Provisions 6,572 - 6,572Forecast Reserve from 1979 Profit 750 - 750

Total Equity Funds 8,016 - 8,016

Borrowings

Post Administration 1,000 - 1,000Treasury 1,233 - 15233Social Security Fund 450 - 450KfW - 260 260CCCE - 524 524

Total Borrowings 2,683 784 3,467

Other Resources

Term Deposits (more than 18 months) 332 _ 332Rediscounting Potential for Term-Credits ____0li - 2,031

Total 2,343 - 2,343

TOTAL RESOURCES 13,042 784 13,826

Uses

Term Loan Portfolio (net of rediscounting) 6,130 - 6,130Equity Investment 3,777 3,777

9,907 - 9,907

Resources Available for Disbursements 3,135 784 3,919Undisbursed Commitments 1,160 - 1,160

Resources Available for Commitments 1975 - 2759Uncommitted Approvals 748 - 748

Resources Available for Approvals 1,227 784 2,011

Approvals(FMG million) 197 1978 1979

(At 9/30)

Term Loans 400 2,909 1,832Equity Investments 200 469 512

Total 600 3,378 2,344

Operating Results(FMG million)

Net Profit (after provisions) 738.4 839.3 800.3Net Profit as % of Average Net Worth 12.2 13.5 11.7Net Profit as % of Year-End Share Capital 36.9 41.9 n.a.

Financial Position

Net Worth 5,952 6,478 7,221Total Assets 54,280 60,990 75,453Term Debt/Equity 0.7 0.5 0.5

Interest Rates and Other Charges

Interest Rates: 1/ 6.o - 8.o %

Commitment Fee: O.63- 1.50%

1/ Charged on the total outstanding of the loan during the]ife of the loan.

MADAGASCAR

BANKIN' NY INDOSTRIA (BNI)

STAFF APPRAISAL REPORT

1. THE ENVIRONMENT

A. The Industrial Sector 1/

1.01 Background. At Independence in 1960, Madagascar possessed very

little industry, mostly the processing of foodstuff and minerals for domestic

consumption or export. Industrial production accounted for only 5% of GNP.

The new Government actively encouraged industrial development whilst retaining

very close ties with France. It created favorable conditions for business by

means of the Investment Code (1961) and a system of protection against foreign

competition, whilst setting up new institutions such as the Societe Nationale

d'Investissement (SNI), the Banque Nationale Malagasy de Development (BNM),

the Bureau de Developpement et de Promotion Industriels (BDPI). Value addedby industry increased at 6% per annum in real terms from 1966 to 1971.

1.02 However, the industrial sector had several problems. A dispropor-

tionate part of business was in non-Malagasy hands. There were roughly 400

enterprises in 1974, but the largest 80, which accounted for 70 to 75% of

value added in the sector, were almost entirely owned or controlled by for-

eigners, mostly French. A very high proportion of smaller businesses were

owned by entrepreneurs originating from the Indian subcontinent and often

holding French passport. The industrial structure was not an integrated one,

but was mostly composed of simple industries, either catering to local con-

sumption or processing local raw materials for export. Much industry being

concerned with foodstuffs, output was restricted by the marketed agriculturalproduct and subject to severe fluctuations. The geographical distribution ofindustry was very uneven, most being concentrated around Tananarive 2/. The

high costs and difficulties of transport over most of the country, and the

greater poverty of other regions were the main reasons for

this lopsided distribution of industry.

1.03 Changes in Economic Policy. The political changes of 1972 brought

about a change in basic economic policy. (a) It became the declared policy toMalgachize business and a number of large enterprises were brought under state

control by a partial or complete acquisition of their capital. (b) The Govern-ment also declared that key industries would be reserved to the state.

(c) Madagascar left the Franc zone in 1973 and applied strict controls over

the import and the transfer of money abroad. (d) Foreign enterprises wereobliged to establish legal domicile in the country. (e) A new Investment Code

was promulgated in 1973.

1/ Defined to comprise manufacturing but not mining and energy, which in

some Malagasy statistics are included in the sector.

2/ There is now some concentration of industry in the port of Tamatave,mainly in petroleum refining and related products.

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1.04 With the advent of the present Government in 1975, the systematicrestructuring of the whole economic system began and the socialist aspectsof policy were formulated much more explicitly. All banks and insurancecompanies were nationalized in June 1975 and work started on preparing long-term plans for the economic development of Madagascar. The system beingcreated rests essentially on five basic features:

(i) The Charter of the Socialist Revolution of 1975;

(ii) The Law on Socialist Planning (December 1977);

(iii) The Charter of Socialist Enterprises of May 1978;

(iv) The program of decentralization;

(v) The Investment Code (originally of 1973, being revised).

1.05 The process of nationalization began in 1973, but it was the Charterof the Socialist Revolution that gave, for the first time, formal ideologicaland economic meaning to actions that might otherwise have appeared haphazard.It includes among the objectives of the Government eventual control of theprincipal means of production and the nationalization of all mineral wealth.It also advocates reducing Madagascar's heavy dependence on foreign trade.The promulgation of the Charter of Socialist Enterprises in May 1978 clari-fied the new system which is designed to permit the state to determine theoverall direction of the economy by means of the enterprises and corporationsit controls, whilst granting the autonomy necessary for efficient management,

1.06 The Charter of Socialist Enterprises defines as socialist enter-prises those of strategic importance in which the state owns or controls,directly or through the holdings of other state enterprises, 51% or more ofthe shares (with the implication that the state will not seek to controlenterprises to which it does not attach key importance). Each enterpriseis to be managed by a committee composed of representatives of the state, oflocal institutions (when appropriate), of workers' representatives, and ofpartners of the state, meaning private investors and organizations belongingto other cooperating countries. In addition, the enterprise will have amanaging director nominated by the Prime Minister on the advice of the ManagingCommittee, and bound by a personal contract to the enterprise. Socialistenterprises are grouped into sectors, the industrial sectors being textilesand leathers; wood and derived products; foodstuffs; mechanical and electricalindustries and chemical industry.

1.07 Each sector will have a Policy Council (Conseil d'Orientation)responsible for deciding on the sector's policy in conformity with the Plan.This Council also proposes to the Prime Minister the state's representativeson the managing committees, the committees' chairmen (who cannot be managingdirectors) and auditors for the enterprises. The committees and the managingdirectors are jointly answerable to the Councils.

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1.08 Each Council is composed of state representatives; of membersof the national assembly; of representatives of managing committees of thesector; workers' delegates, and representatives, as appropriate, of thesector's socialist cooperatives. It is presided over by one of the staterepresentatives. The Councils are answerable, jointly and severally, tothe Supreme Council of the Revolution.

1.09 Profits, after a small allocation to the enterprise's reserves,are divided into four parts: the part Df the state, i.e., taxes; the partof the workers (mainly for their collective benefit); the part of the nationand the part of the entrepreneur. The nation's part can be reinvested inthe enterprise if the entrepreneur so invests his part, otherwise it willbe invested elsewhere or placed in a national loan fund to earn interest.

1.10 The Law on Socialist Planning and the Plans describes itself asthe legal instrument for translating the "fundamental options of the Charterof the Socialist Revolution" into operational terms. It prescribes thatplanning will be done with three kinds of plans: long-term, medium-term(3-6 years) and short-term. It also provides for a Supreme Council for theplan, sectoral committees and plan committees for the decentralized bodiesat all levels. The law describes some of the development targets to beattained and the evolution prescribed for the economic system.

1.11 The Program for Decentralization, which is not yet fully developed,envisages a system of decentralized planning with different tiers and inwhich the decentralized bodies will be able to undertake projects on theirown initiative.

1.12 The Investment Code of 1973 was promulgated in order to replacethe Code of 1962 which was felt to be unsuited to the policy of malgachiza-tion and to the greater part the state was expected to play in the economy.It offers two alternatives to investors:

(1) Agreement. Under this alternative,import duties on equipment,excise on products and taxes on profits can be reduced or waived.The enterprise can also be granted priority in the allocation offoreign exchange and in the sale of goods and services to the stateand its enterprises. The agreement which in the case of existingenterprises is referred to as "encouragement" cannot exceed 5 yearsand is not renewable.

(2) Participation. Here the state enters into the investment asa partner and the contract between the parties becomes law.

1.13 Eligible for these incentives are enterprises that promise to beof particular economic benefit, especially technically and financially,but purely domestic commercial enterprises are excluded. The beneficiariesundertake to fulfill a precise program of investment, production, prices,

4

training, malgachisation and plowing back of profits. The Code providesfor temporary relaxation of the process of malgachisation when necessary.This 1973 Code is presently being revised to include more explicitly thesocialist enterprise but its main provisions are likely to remain unchanged.

1.14 Recent Performance. Since 1972, industrial production has developedvery unevenly from one branch to the other and overall industrial growthhas been slow, as output increases up to 1974 were partly cancelled out bythe recession during 1975/76. Since then output has recovered and in mostbranches reached or exceeded the levels of 1974. As statistics on industrialproduction have been based on limited samples only since 1975, output figureshave to be interpreted with caution, but on the basis of the sample surveysand related data (electric power consumption) it can be estimated that overallouput increased by 2 to 3% per annum in real terms during 1972-77 and nowaccounts for about 10% of GDP. This average disguises wide differences inperformance. For instance, the two major industrial branches (textiles andfood and beverages) which each account for about one-third of industrialoutput fared quite differently: textiles grew by 5-6% per annum while theoutput of food and beverages declined by about 1% per annum. Some growth inoutput (between 1 and 5% per annum) was registered by the tobacco, leather,rubber, paper and chemical industries, while output of construction materials,transport equipment, petroleum products and wood products declined (alsobetween 1 and 5% per annum) 1/.

1.15 The reasons for declining or stagnating output in these industriesare varied: (a) shortage of domestic inputs (mainly food industry); (b) short-age of imported inputs (mainly transport, equipment, metalworking); (c) de-pressed demand (mainly construction materials) 2/.

1.16 Information on capacity utilization is available only for some indus-trial branches. It appears that the textiles, paper, cement, and chemicalindustries worked close to capacity, while capacity utilization in the foodindustry, construction materials (other than cement), transport equipment andpetroleum products was relatively low although, in many industries, capacityhas already been considerably reduced by the age and condition of plant,mostly because investment in industrial plant has remained low since 1972,partly as a reaction to the changing economic policy framework. On the basisof very global estimates, for instance, it appears that investments in industryin real terms in 1976/77 were less than half of those in 1972.

1.17 The low level of investments is not necessarily a reflection oflagging profits. Again, there appear to be wide variations, with some stag-nating industries incurring losses, but others -- mainly among the growingbranches -- making reasonable profits, although overall profitability in real

1/ Exact data are not available as the sample figures are in current pricesand volume data for output of industrial products are available only fora few items.

2/ The decline in the output of petroleum products was due mainly to theloss of markets in the Comoros and Reunion, which stopped purchasingproducts from the refinery in Tamatave.

terms has been limited in some sectors, largely because of strict controlover some sale prices (mainly consumer goods) exercised by the authoritiesand the increase in the cost of inputs including wages. There are no firmemployment statistics for the sector but manufacturing employment in 1976can be estimated at 45,000.

1.18 Policies. The Government's basic objective is to control theeconomic decision-making bodies and to define their activities on the basisof national needs and priorities. This is considered to be a necessarystep to overcome the colonial heritage and to achieve a socialist society.The present situation is characterized by the creation of new structuresin all economic sectors specifically tailored to achieve this objectiveand industrial policies are geared toward building-up a domestic industry tosatisfy local needs. Exports are seen as an added -- marginal -- possibilityat this stage. Employment creation is a priority objective but supersededwhen necessary by the need to create -- and develop -- strategically importantindustries which may require more capital intensive investment.

1.19 Promotion. The Bureau de Developpement et de Promotion Industriels(BDPI) was created in 1966 to assist Madagascar's overall industrial develop-ment. Its main activities have consisted in screening project ideas, preparingfeasibility studies for some projects, looking for potential investors andproviding technical and managerial assistance to entrepreneurs. However, onlya few of these projects were actually implemented. It is also responsible forproviding technical assistance to SSI's; however in practice its activities inthat field have been very limited due to a lack of adequate manpower resources,which in turn is mainly due to the low level of Government salaries.

1.20 Prospects. The new Government initially showed little interestin industrial development, other than to "Malgachize" the sector. The neweconomic system remains unclear in many respects but consciously leavesthe door open for substantial private activity in the industrial sector,principally in small- and medium-sized enterprises. Although there is alwaysthe question on how the private sector will react to the changes in economicpolicy (para. 1.03) there are increasing signs that show the positive sides ofthe Government's interest in and policy towards the industrial sector. Inturn, the private sector is increasingly ready to play by the rules of thegame. Indeed, and in addition to active -- sophisticated -- Malagasy privateinvestors, there is a group of people in Madagascar with very substantialinvestible funds -- which cannot be shifted out of the country because offoreign exchange regulations -- who have shown an increasingly keen interestin investing in industry as the best way to put their capital to productiveuse. These are the traders of Indian and Pakistani origins, whose commercialoperations were nationalized -- with compensation -- when the Governmentdecided to take control in the major sectors of the economy, including whole-sale trade.

1.21 The 1978-80 development plan aims at an industrial output growthof 10.77% per annum compared to 5.75% for the economy as a whole. The bulk ofthese investments is scheduled for various large industrial plants, but theresidual for small- and medium-sized industry still would amount to FMG17

-6-

billion for 1978-80, or about FMG6-7 billion for 1979 and 1980 each. Theseobjectives which do reflect the emphasis that the Government wants to put onindustry, are probably somewhat optimistic.

1.22 Artisans. Malagasy legislation defines the artisan as a manualworker working alone, with members of his family or with a few helpers.It is estimated that artisans in Madagascar number about 100,000i.e., 1.2% of the total population and 2.8% of the labor force. Although itis not possible to quantify the significance of the sector to the economybecause of the lack of production statistics at the artisan level, it appearsthat it provides a substantial amount of the country's consumer goodsand tools. Data on total exports of artisan products are not available,but the potential seems good. Indeed, CETA, an agency created by the Govern-ment in 1962 to develop the artisan sector, sold abroad FMG350 million worthof Malagasy handicrafts in 1977, 80% of which was basketry and the remaindermostly gemstone crafts. Artisan activity is spread throughout the countrywith a heavy concentration in the Hauts Plateaux, specially around the cityof Tananarive. Most private artisan workshops are located either inside oradjacent to the owner's house while cooperatives are often housed in make-shift quarters. The majority of artisans living in the rural areas tend toperform work on a seasonal basis, from May to September. During the rest ofthe year, they are small farmers. In the towns, one tends to find mostlyfull time artisans. Monthly salaries vary, according to profession andwhether the artisan works full or part time between an extremely low levelof FMG3-4,000 per month and FMG30,000. Constraints to the development ofartisans are: difficulty in obtaining local raw materials at reasonableprices and imported raw materials; lack of adequate technical and designknow-how; difficult access to the wider domestic market and to the exportmarket; difficulty in obtaining loans for the expansion and improvementof work facilities and for working capital. The Government which is awareof both the potential and the problems of the artisans is presently tryingto implement a National Development Plan for the sector. The World Bankwas invited to participate in the financing of this project and reviewedthe proposed Plan. It concluded that the Plan puts too much emphasis on theadministrative framework and not enough on production and marketing of artisangoods. The Bank suggested a modified approach and a dialogue is being pursuedwith the Government on the matter.

1.23 Small-Scale Industries (SSI's). In Madagascar, SSIs are generallydefined as enterprises which employ from 5 to 30 workers, and have assets ofup to FMG15 million (US$70,000). In addition to greater size, one of theessential differences between the artisan enterprises and the SSI's is that,in the latter, ownership and management can be differentiated. Because oflack of statistics, it is not possible to ascertain the economic significanceof SSI's in Madagascar, but they seem to be considerably fewer than artisans.More than half of SSI's are concentrated in the Province of Tananarive. Themain activities of the sector include food processing, printing, transport,and construction. The production techniques they use are in general non-modern and their owners frequently lack required technical and financial know-how. Constraints to their development are basically the same as those of theartisans. There appears to be some potential for further SSI developmentin the context of a relative revival of the country's private sector (para.1.19).

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B. The Financial Sector

1.24 The Banking System. Until mid-1975, the banking system in Madagas-car consisted of the Central Bank, four commercial banks partly foreign-ownedand a development bank, BNM, owned by the Malagasy Government and the FrenchCaisse Centrale de Cooperation Economique (CCCE). At that time, the MalagasyGovernment assumed control of the entire banking sector by purchasing CCCE'sshares in BNM, by nationalizing the four commercial banks and by appointingMalagasy nationals as managers of the financial institutions. However, thestructure of the banking system remained unchanged. In 1977, the Governmentrestructured the system by merging the development bank and the four commer-cial banks into three sectorally specialized banks: the National Bank forIndustrial Development (BNI), the National Bank for Rural Development (BTM),and the National Bank for Commerce (BFV). Despite their sectoral specializa-tion, the three banks are in competition for collecting deposits and also tosome extent for extending credit to individuals or enterprises outside theirsector of specialization. Furthermore, because of imbalances of resources,the three banks must often pool resources in consortium loans to meet cor-porate financing needs. The following table presents some information onthe three banks:

As of 12/31/78(FMG billion)

BNI BFV BTM TOTAL

Total Assets 60.9 46.8 45.7 153.4

Short-term deposits from clients- FMG billion 32.1 20.9 22.7 75.7- % of total deposits in the

financial sector 42% 28% 30%

Loan portfolio- FMG billion 42.8 26.4 30.5 99.7- % of total lending in

the financial sector 43% 26% 31% -

Staff 963 1000 1,217 3,180Branch Offices 13 24 41 78

BNI is larger than BFV and BTM in terms of total assets and short-termdeposits from clients. Furthermore, BNI accounts for a larger share of credit(43%) than the other two institutions despite a smaller staff and less branchoffices. This results mainly from the transfer to BNI of all the industrialterm portfolio of the former BNM and, to a lesser degree, from the largerloans made recently by BNI to its industrial clients.

1.25 Credit Policy. In the context of a centrally planned economy likeMadagascar, the decision making process for the allocation of resources islargely centralized. Although market forces do play a role in this respect,they are only secondary. The main objective of the credit policy in Madagascar

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is to limit overall credit expansion to a level consistent with internaland external stability while increasing the share of credit for productionand credit directed to Malagasy enterprises. To fulfill these objectives,the Central Bank relies on quantitative and qualitative instruments. Quan-titative controls consist of an overall target on credit for consumption,production and exports and on monthly rediscount ceilings which are setperiodically for each individual bank on the basis of its liquidity positionand its expected needs. The qualitative instruments consist of advanceauthorization by the Central Bank for short-term credit to firms whose totaloutstanding bank credit is in excess of FMG100 million and minimum ratiosaccording to which banks are mandatorily required to devote 6.5% of theirdemand deposits to finance medium-term loans and 15% for short-term creditto Malagasy nationals.

1.26 Following the reform of the banking system, the Central Bank isassessing the effectiveness of policy instruments used until now. Pendingthe results of this evaluation, it has suspended the automatic applicationof most credit policies and operates on an ad hoc basis.

1.27 Inflation. Between 1975 and 1977, inflation in Madagascar, measuredby the cost of living index in Tananarive -- which is a weighted average ofconsumer price indices of low and high income households -- followed adecreasing trend and averaged 6.8% (9.4% in 1975, 6.7% in 1976, 4.2% in 1977and 6.8% in 1978) throughout the period. The decrease in the index in 1977was partly due to Government's decision to reduce the price of rice which hasa significant weight in the consumer basket. For the next few years, pricesare expected to increase somewhat faster (perhaps, 10-12%) due to inflationarypressures created by expansionary fiscal policies.

1.28 Interest Rates. Because of the centralized decision making oninvestments and the allocation of credit, interest rates do not play a sig-nificant role in resource allocation in Madagascar and the structure presentedin Annex 1 has remained practically unchanged since the end of 1974. TheCentral Bank's rediscount rate for short-term paper is set at 5.50% (exceptfor export bills for which the rate is 4%). The rediscount rate for medium-term paper stands at 5% except for small business credits of less than FMG5million extended to Malagasy nationals for which the rate is 3.75%.

1.29 On medium-term loans (2-5 years) that are rediscountable by theCentral Bank, the three banks (BNI, BTM and BFV) charge to enterprises,except small-scale enterprises, in all sectors, rates which vary between6.25 and 7.25% depending upon the risk associated with the specific lendingoperations. Loans to small-scale enterprises vary between 5 and 5.75%. Therate on consumer and housing loans is 7.50%. On medium-term loans that arenot rediscountable by the Central Bank, the authorized rates for loans toenterprises and individuals vary between 6.75% and 10%. In addition, acommitment fee of 0.5% to 1.5% is charged to the borrowers. On long-termloans (more than 5 years), the rates vary between 7 and 9% depending onthe cost of the resources. A. commitment fee of 1 to 1.50% is also charged.Interest rates on deposits range from 0.75% to 7.5% depending upon thematurity and the size of deposits.

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1.30 Present interest rates in Madagascar are low in relation to pro-

jected inflation and some upwards adjustments are probably in order to bring

the structure more in line with the expected inflation rate in the country

(para. 1.27). This matter was discussed during negotiations and the Govern-

ment's representatives agreed that in the event the inflation rate in Madagascar

would increase substantially in the future, the Government would consider

raising the interest rates.

II. THE INSTITUTION

A. Institutional Aspects

2.01 Background and Objectives. BNI, created in January 1977 as a

result of the 1976 banking reform, took over the term loans and equity 1/

portfolio of the former Banque Nationale Malagasy de Developpement (BNM)

in the industrial sector, and assumed the industrial loan portfolio of the

former Banque pour le Commerce et l'Industrie de Madagascar (BCIM), a

commercial bank nationalized in 1976. BNI is primarily responsible for

promoting the development of industry and handicraft through short, medium

and long-term loans, and equity investments. It also finances individual and

collective housing and provides loans to households for domestic equipment.

2.02 Ownership, Board. BNI is a socialist enterprise with a share

capital of FMG2 billion owned by the State (85%), the Central Bank (10%) and

the Social Security Fund (5%). BNI's Board (Comite de Gestion) which is

common to the country's three banks -- is chaired by the Minister of Finance

and Planning and composed of the General Managers of the Central Bank and

the Finance Ministry and of the former General Manager of the Ministry

of Economy and Commerce. This composition is likely to be modified to

include representatives of the staff and management of BNI but this should

not affect the Board's effectiveness. The Board meets on an ad hoc basis,

to examine and discuss projects submitted by BNI's management or policy

matters, but its members are informally available for discussion with

BNI's Management at any time and have been playing an effective role in

supporting and guiding BNI's management. BNI's General Manager is author-

ized to approve without consultation with the Board secured loans up to

FMGIOO million, unsecured loans up to FMG20 million and equity investments

up to FMG20 million per investment.

2.03 According to the Charter of Socialist Enterprises, a Policy Council

(Conseil d'Orientation) will oversee the activities of enterprises in each of

fifteen sectors of economic activities 2/ (para. 1.06). The Policy Council

1/ In 1973, BNM had itself absorbed the Societe Nationale d'Investissement

(SNI), an equity investment company.

2/ These sectors are: agricultural production, fisheries, cattle, water

and energy, transport, mining and extractive industries, public works

and housing, trade and distribution, textile and leather, wood products,

food industries, mechanical and electrical industries, chemical indus-

tries, services.

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for banks, to be created at a date not yet specified, should review theoperating policies of all banks in the country.

2.04 Management, Organization and Staffing. BNI is headed by a Malagasynational, the former General Manager of the Banque Nationale Malagasy deDeveloppement (BNM). He is assisted by managers formerly with BNM and BCIM.BNI's management is competent, experienced, and dynamic. BNI's organization,which includes nine departments reflects its dual role as a development anda commercial bank and is adequate for the institution's role and objectives.However, there is need to strengthen BNI's technical capabilities forproject preparation and appraisal. Management is aware of this deficiencyand is taking steps through staff recruitment and training to remedy thesituation. The technical assistance component of the proposed line of creditis intended to help management in its efforts (para. 3.02). BNI's staff,which is composed of Malagasys only, presently totals 963 persons, of whomabout 634 in Tananarive and 329 in the thirteen branch offices.

2.05 Operating Policies. At present, BNI applies the policies of theformer BNM for its industrial medium and long-term loans, as its Board ofDirectors has not yet approved formally a policy statement for the institu-tion. These policies are adequate, except that specific clauses dealingwith the following matters need to be adopted by BNI's Board: exchange riskon foreign borrowings not to be taken by BNI, limits on BNI's exposureoverall and in individual projects, more precise definition of BNI's roleand criteria for project selection. During negotiations, a draft Statementof Rules of Operations 1/ that consolidates all BNI's policies, including thenew clauses (Annex 2) was discussed and formally agreed upon. BNI's Board ofDirectors has now approved this document.

2.06 Procedures. BNI's procedures for project appraisal, follow-upprocurement and disbursement have not yet been spelled out in writing.There is a need to formalize procedures and to that end management is prepar-ing an Operational Manual.

2.07 (a) Appraisal. As BNI was born from the merger of a developmentbank and a commercial bank, the somewhat opposite influence of each of thetwo former institutions is being felt. While the former BNM staff and manage-ment want fairly detailed and analytical project appraisal reports, thosewho came from BCIM are in favor of short, commercial bank type reports.Appraisal reports, tend to be a compromise between these two attitudes andare not as comprehensive as they should be to justify investment proposals.In addition, they do not include in their economic analysis a calculation ofthe economic rate of return (EROR). BNI management has agreed that BNI'sfuture appraisal reports will be more comprehensive and a format includingEROR calculation for medium/large scale industrial projects was discussed andagreed upon during negotiations.

1/ During negotiations, at the request of the Malagasy delegation it wasagreed that BNI's Policy Statement would be formally referred to as"Rules of Operations".

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2.08 (b) Follow-Up. BNI does not have a comprehensive data reportingsystem for projects under supervision which is made essentially through themonitoring of the short-term credit accounts of clients. There are no periodicvisits to projects being implemented or in operations. Although BNI managementbelieves the present system is generally adequate, it does need to be sig-nificantly improved, both in content and periodicity. The matter wasdiscussed during negotiations and appropriate supervision policies and pro-cedures were agreed upon.

2.09 (c) Procurement. As a normal procedure, BNI requires the borrowerto submit several pro forma invoices. However, as BNI does not have thenecessary technical staff, it relies on the selection of the project equip-ment and the supplier upon the judgment of the Industry Division of theMinistry of Economy and Commerce and on the opinion of the Bureau deDeveloppement et de Promotion Industriels (BDPI). The present systemis adequate but it will be improved once BNI will have recruited its owntechnical staff to supervise procurement matters.

2.10 (d) Disbursements are made against presentation of invoices. BNIstarts disbursements on its loans only after the promoter has used his ownresources. Long-term loans are utilized first, followed by medium-termloans. BNI's disbursement procedures are adequate.

2.11 (e) Project Promotion. Until now, BNI has not been very active inproject promotion for various reasons. First, it did not have the necessarymanpower resources to be seriously engaged in these activities; second,during the first two years of existence of BNI, management attention andresources were concentrated mainly in ensuring the success of the merger ofthe two institutions that formed BNI; third, the volume of operations was highenough to make the institution financially viable. Management believes thatthe time has now come for a more active role in industrial project promotion.The proposed IDA Credit would assist BNI in its effort by providing technicalassistance for the development of its Project Promotion Department.

2.12 Strategy. BNI strategy is essentially to assist the Government inits efforts to develop an industrial base that is geared toward Madagascar'spriorities and needs and that includes mainly local entrepreneurs. In apply-ing this strategy BNI is being increasingly called upon to act as a financialadviser to the Government on very large projects such as fertilizers (FMGIObillion investments), ferrochrome, railroads, etc. For medium-size projects,defined as those with investments up to about FMG400-500 million, BNI providesfinancial resources under the form of loans and/or equity investments.Finally BNI intends to provide increasing assistance for the development ofsmall-scale enterprises.

2.13 Interest Rates. BNI presently charges interest rates which varybetween 6 and 8% depending on the risk situation of the borrowers. In addi-tion, it charges a commission varying between 0.63% and 1.50%. This is infact a supplement to the interest rate as the commission applies to theamounts outstanding during the whole life of the loan. On that basis, the

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total interest charged by BNI on its loans is presently 8.50%, with someexceptions marginally above or below. Discussions during appraisal on thepossibility of raising interest rate for industrial lending through BNImet with opposition from BNI and the Central Bank. They stated that theGovernment intended to review the interest rate structure and that they couldnot agree at this stage to an across-the-board increase for industriallending.

2.14 Understandably, the Government does not want to increase overallrates at a time when it is debating on a new structure which could representlower rates for some activities and IDA's line of credit, representing asmall proportion of BNI's resources cannot be used as a leverage to proposechanges to the country's overall interest rate structure at this time.We recommend, however, that regardless of the changes that could be intro-duced in the rate structure, the Government should agree that BNI wouldcharge on medium- and long-term loans to its IDA financed industrial clientsa minimum rate of 8.5% and that the final borrowers would assume the foreignexchange risk, with the exception of artisans/SSE for which the Governmentwould take it against payment of a 1% fee. As the average cost of BNI re-sources is low (3.9%) and its commercial operations very profitable, a spreadof about 1% on the IDA credit would be adequate.

2.15 The proposed rate is in line with those charged by other financialinstitutions in Madagascar and by shifting to the final borrower the foreignexchange risk, the arrangement would bring the cost of borrowing by industrialenterprises more in line with the cost of capital on international markets.Furthermore, in relation to international inflation which is the key factorhere because the sub-borrowers would assume the foreign exchange risk, theactual rate is likely to be positive except for loans made to artisans/SSEswith the small proposed pilot SSE financing component (para. 3.02(b)) forwhich final rates -- at 9.5% including fees for foreign exchange risk coverage-- are likely to be marginally below positive rates. The amounts involvedare, however, very small and the impact of such distortion very marginal.Finally this first operation by IDA would permit the start of a dialoguewith the Government on industrial policies, including interest rates, at atime when the role of the industrial sector in the economy is going to begreatly enhanced.

2.16 Audit. Until recently BNI accounts were reviewed by externalaccountants "commissaires aux comptes" but they had not been audited yet.BNI management agreed that the institution's accounts would be auditedannually in the future, by a qualified Malagasy CPA firm, which has alreadyperformed satisfactorily audits for two projects financed by the Bank Group.The first audit report for the fiscal year ending December 31, 1978 has beensubmitted to IDA. The report which is satisfactory provides a clear pictureof BNI's situation.

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B. Operations

2.17 Main Features of Past Operations. Annual approvals of term financ-

ing operations carried out by the two institutions which formed BNI (para.

2.01) averaged about FMG2 billion per annum in the period 1966-76 1/. There

are no data available concerning the main features of these past operations

total interest charged by BNI on its loans is presently 8.50%, with some

exceptions marginally above or below. Discussions during appraisal on the

possibility of raising interest rate for industrial lending through BNI met

nor the annual level of equity investments and the overall level of commit-

ments and disbursements throughout that period. Consequently, in order

to ascertain the main characteristics of the operations financed before

BNI's creation in 1977, one has to rely on the analysis of BNI's term and

equity portfolio as it results directly from these past operations.

2.18 More than half of BNI's FMG8.1 billion term portfolio at December

31, 1977 was in industrial projects, the rest in housing (about 15%), public

works (10%) and transportation (6%) with tourism and agriculture representing

marginal proportions. Equity investments -- totalling FMG2.4 billion -- at

12/31/77 were overwhelmingly in the industrial sector. The overall industrial

portfolio, 2/ is well diversified, mostly among activities using local raw

materials (textiles and agroindustries represent about 60% of it, wood indus-

tries 20% and construction materials about 10%, the remaining being evenly

distributed between chemicals and metal working). The portfolio is also well

distributed geographically with about 60% of the amounts loaned and invested

being located outside Tananarive. As for ownership, close to 65% -- by

amounts -- of this overall financing to the industrial sector has supported

public enterprises but it is interesting to note that equity investments have

been made predominantly in the private sector. Indeed, close to 60% -- by

amount -- of the total equity portfolio at 12/31/77 was in private enterprises,

in most cases with substantial foreign participation but also with significant

private Malagasy participation.

2.19 BNI's Operations. During 1977, BNI's first year of operations, term

credit approvals totalled only FMGO.4 billion and equity investments FMGO.2

billion. This relatively low level of approvals was a result of the changes

and the restructuring involved in the creation of BNI. However, operations

picked up dramatically in 1978 when term loans totalling FMG 2.9 billion and

equity investments amounting to FMGO.5 billion were approved. At September 30,

1979 FMG 1.8 billion in term loans and FMG 0.5 billion in equity operations

had been approved. There is an increasing emphasis on manufacturing opera-

tions, which represented 70% of 1978 approvals, witnessing BNI's role in

1/ Considerable variations in this annual level of approvals, particularly

in 1972 and 1974, were the result of the country's political upheavals

in those years.

2/ Practically no information is available concerning the main features

of the non-industrial projects in the portfolio.

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industry following the reform. Tourism, housing and services accounted forthe remaining 30%. Fifty-three precent of approvals for 1979 (at September 30)were in manufacturing, 9% in mining, 7% in housing and 31% in services.Within the manufacturing sector, the distribution of operations follows asimilar pattern than in the past with agroindustries represenLing about 54% oftotal approvals during 1978 and 1979 followed by textiles 17%, wood industries15%, and chemicals 14%. Close to two-thirds of the projects financed areexpansions of existing units, and diversification away from Tananarive con-tinues also as in the past. Finally, concerning the ownership of the projectsfinanced, there is an increasing emphasis on private sector projects. Indeed,while in value, public sector projects represented slightly above 50% of totalfinancing, due to two big Government promoted projects - a refinery and asugar mill - in number, they represented only one-third of the projects fi-nanced by BNI in 1977/78. It is significant to note that during that two-yearperiod, foreign promoted projects (overwhelmingly private) represented 35% oftotal financing while projects controlled by private Malagasy investorsreceived above 10% of total BNI financing. This indicates the existence of arelatively lively private sector interested in industrial investment (para.1.20).

2.20 Economic Impact. Given the status of BNI's accounting and informa-tion system, it is not possible to give any information concerning the economicmerits of the projects financed before 1977. The industrial and tourismprojects financed by BNI in 1977 and 1978 are estimated to represent more thanFMG5.6 billion in new investments in fixed assets and generate close to 1,200new jobs. This rather high capital intensive situation results from: (i) thehigh proportion of expansions of existing units among BNI's latest approvals;and (ii) the existence of a few highly capital intensive projects -- partic-ularly a refinery and a paper mill -- in sectors which are considered ofstrategic importance. Most of BNI's industrial projects in 1977/78 substituteexisting imports and only two have a clear export orientation, but they areall based on the use of local raw materials, many outside Tananarive. Theseresults, which broadly are a reflection of the country's industrial policies(para. 1.18) and BNI's role in it, have to be interpreted with caution, how-ever, as they apply to less than two years of operations.

C. Financial Condition

2.21 Loan Portfolio. BNI's short-term portfolio at 9/30/79 totalledFMG45.6 billion, of which FMG1.5 billion (3.3%) was considered doubtful.Provisions made totalled FMGO.8 million (1.8% of the short-term portfolio).Medium/long-term portfolio totalled FMG8.9 billion and doubtful loans repres-ented 7.1% of it. Provisions made amounted to FMGO.78 billion or 8.7% of theportfolio, a rather large proportion but necessary considering the relativeimportance of doubtful loans. BNI's management has taken a rather conservativeand prudent attitude in evaluating its doubtful loans and the need forprovisions. In fact, only four projects in BNI's medium/long-term portfolio-- three industries and one hotel -- are serious problem cases (they representabout 60% of the outstanding doubtful loans), and adequate provisions have

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been made on each of them. Overall, BNI's loan portfolio is of acceptablequality. I/

2.22 Equity Portfolio. BNI's equity portfolio at 9/30/79 totalsFMG3.7 billion investments in 47 companies. Overall, it is of rather goodquality. Of the 39 operating companies, 25 are regularly profitable and havegood prospects to continue being so. Most of them distribute dividends(close to 7% return on equity portfolio). Twelve have losses of whichseven are in liquidation and fully provided for while the other five unpro-fitable companies have good prospects of recovery. 2/ Provisions made --totalling FMG35 million (0.9% of portfolio) are adequate.

2.23 A particular feature of BNI's equity portfolio is thatin the last two years it has been increased by a few companies transferredfrom the State to BNI following the role assigned to it after the bankingreform. BNI's performance in accepting only the good investments witnessesthe independence and autonomy of the institution in investment decisions;

indeed of the eight companies so transferred, six have book values abovepar values and, of the remaining two, one has already been profitable in1977 and the status of the other one is yet unclear following its national-ization by the Government but BNI's stake in it is marginal.

2.24 Provisions. BNI's accounting system does not allow for a classifi-cation of the arrears situation per type of loan (i.e., short, medium, andlong-term) but each loan is closely monitored. Accounts are classified asnormal or needing surveillance, and different degrees of control are estab-lished thereafter according to BNI's periodic review of the situation.This allows for an early detection of the doubtful cases and, when necessary,provisions are made which are tax exempted and have to be approved by thecountry's tax authorities. Overall, BNI's provisions policy is adequate,loans and investments are closely followed up and management is on top of thesituation.

2.25 Resources. In addition to its capital and deposits which it usesto finance equity investments and short-term credits respectively, BNI alsohas term resources both in local and foreign currency. Term resources inlocal currency, have been provided by the Treasury, the Post Office, Insur-ance Companies and other local financial institutions, generally rangingbetween 2 and 5 years, but with a few exceptions for 7, 8 and 10 years to

1/ Eleven loans (including short and term debts) have been rescheduled --mostly in connection with a Government takeover or a restructuringprogram following the political events of the early 1970s -- but BNIstill keeps the provisions made for nine of them, even after agreeingto the rescheduling.

2/ There is no information concerning the performance of two companies inBNI's equity portfolio. They correspond to investments recently trans-ferred by the State to BNI for which no information is yet available.Investments involved are, in any event, of marginal importance.

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finance specific projects. The weighted average cost of these resources was3.9% at the end of 1978. In addition, BNI has, under certain circumstances,rediscounting possibilities at the Central Bank for the financing of short andmedium-term credits (para. 1.25). Concerning foreign currency resources,all of them have, so far, been provided by CCCE (since 1963 to 1971) and KfW(granted in 1970), mostly for the financing of specific projects in housing(CCCE) and industry (CCCE and KfW). Terms range between 10 to 15 years forthe CCCE loans and 20 years for the KfW loans. The weighted average interestrate paid by BNI on these resources is 3.8% at the end of 1978. At the samedate, only FMG200 million were available for commitments in foreign exchange.

2.26 Financial Position. BNI's -- summarized -- balance sheet for

1977-1979 is shown in Annex 3. At 9/30/79 assets totalled FMG75.5 billion,of which loan portfolio represented FMG52.9 billion and equity portfolioFMG 3.7 billion. Capital, reserves and surplus totalled FMG7.2 billion andterm borrowings FMG3.6 billion. BNI's debt/equity ratio is thus 0.5:1, avery low proportion for a combined commercial and development bank allowingfor substantial additional borrowing capacity. BNI's financial position isvery sound.

2.27 BNI has been rather active in giving guarantees particularly inthe past two years. Most of them correspond to short-term operations, i.e.advances guaranteed by contracts obtained with the Government, but an increas-ing proportion represent BNI's guarantees for its clients' medium-term oper-ations financed by suppliers credit (between 3 and 6 years). At the end ofSeptember 1979, BNI had about FMG9.7 billion such guarantees outstanding.In principle, BNI uses its regular appraisal criteria to evaluate guaranteerequests which are, in most cases, submitted by companies well known to BNI.Given its expected role as sole provider of financing for industry in thecountry and the fact that the Government is very reluctant in directlyguaranteeing loans for industrial projects, BNI is likely to be more and moreinvolved in these types of operations. During negotiations, it was agreedthat these guarantees for suppliers' credits will be limited to twice theamount of BNI's equity resources and that they will be taken into considerationin limiting BNI's exposure in a single project. Clauses to that effectincluded in BNI's Rules of Operation.

2.28 Profitability. BNI's Income Statements for 1977-1979 are summarizedin Annex 4. In its first year of operations, BNI made a net profit ofFMG738.5 million which represented a return of 12.2% on average net worth.The results obtained in 1978 were still better with a net profit of FMG839.3million, representing 13.5% of average net worth. Gross income represented8.7% of total assets in 1977 and 8.3% in 1978, while administrative expensesrepresented 2.8% ofd total assets in 1977 and 2.6% in 1978. These resultsare satisfactory. Preliminary results for the first nine months of operationsin 1979 confirm BNI's good profitability.

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D. Prospects

Forecast Operations

2.29 Annex 5 shows BNI's pipeline of projects at the end of 1978. It

consisted of 18 industrial projects totalling more than FMG 25 billion ofinvestments, of which more than FMG17 billion in foreign exchange, and

requesting possible term/equity financing from BNI of about FMG6.9 billion(US$33 million); i.e., of total cost of the projects. Agroindustries, is by

far the leading sector followed by textiles and chemicals. The majority of

these projects are Government-owned, but more than half of them are joint-ventures with foreign partners. As in the past, half of the expected projectsare new, the rest being extensions and modernizations of existing units.Regional diversification continues and a substantial part of the projects areexpected to be located outside Tananarive or have some units throughout thecountry. BNI has also identified projects in housing and other activities

but not in new tourism activities as it realistically considers that themarket is already rather saturated. Overall, the projects in BNI's pipeline

provide a solid basis on which to support BNI's expectations of futurebusiness.

2.30 BNI's forecast approvals of operations for 1979-82 by sector andtype of activity are shown in Annex 6. This forecast does not take intoaccount the very large projects which BNI may be called upon to finance as aresult of its role in the industrial sector -- on a managed funds basis onbehalf of the Government -- and, to a certain degree, in the housing area(financing of the big housing companies). BNI expects to approve FMG2.2billion in 1979, 2.5 billion in 1980, 3.2 billion in 1981 and 3.3 billion in1982. BNI's projections are realistic and jugtified by reasonable prospectsin the industrial sector and by a solid pipeline of projects.

Resource Requirements

2.31 As a result of these business projections, BNI's commitments for

term and equity financing operations should evolve from FMG2.3 billion in1979 to FMG3.3 billion in 1982. At October 1, 1978, BNI had practically no

resources available in foreign currency and in January 1979, it obtained aFMG200 million line of credit from CCCE, mostly for the financing of SSIs/artisan operations. BNI has started negotiations with some foreign financialinstitutions and expects to sign a FMG1 billion tied line of credit from theItalian Government and renegotiate with KfW an additional line of credit ofFMGO.3 billion available by 1980. In addition, BNI's term operations couldcontinue being refinanced on a case-by-case basis by the Central Bank andCCCE.

2.32 BNI's resource needs through the period September 1979 to December1981 can thus be reasonably expected to evolve as follows (in FMG million):

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1979 (3 months) 1980 1981 Total

Commitments 577 2,410 3,090 6,077(of which in foreign exchange) 384 1,568 1,R88 3,840

Local 193 842 1,202 2,237

Foreign exchange resources:Italian Government - 500 500 1,000CCCE 200 400 400 1,000KfW - 100 200 300

Total 200 1,000 1,100 2,300

Excedent (gap) in foreignexchange (184) (568) (788) (1,540)

BNI would therefore, need FMG6 billion (about $29 million) of which FMG3.8billion ($18 million) in foreign exchange, to cover commitments throughoutthe period and BNI expects that, during the same period it would have avail-able for commitments only part of its new foreign exchange resources availableto it, as shown in the table above. Local currency needs could be coveredby BNI's ample internal cash generation and, if necessary, Central Bankrediscounting. These expectations are reasonable and would leave a resourcegap in foreign exchange of FMG1.5 billion ($7 million) part of which would becovered by IDA's proposed credit of $5 million. BNI should have no problem insecuring the additional financing from other sources and the proposed IDAcredit should play a catalytic role in that respect.

Projected Financial Condition and Performance

2.33 The basic hypotheses underlying BNI's projections are in the ProjectFile. Projected balance sheets, income statements and sources and usesof funds for the period 1979-82 are presented in Annexes 7 to 9. Totalassets will grow to about FMG92 billion from the FMG54 billion at end 1977.The projections show that BNI is capable of sustaining this expected growthin its operations while continuing on a sound financial basis. It willmaintain a satisfactory liquidity position of above 1 and keep its conven-tional debt to equity ratio at a rather low level around 2.2:1. BNI is alsoexpected to continue being a very profitable institution. Administrativeexpenses -- decreasing from 2.7% of average total assets in 1979 to 2.3% in1982 -- will be well controlled and kept at a reasonable level for a combineddevelopment and commercial bank. With financial expenses representing, onthe average, only 2.5% of average total assets throughout the period, profitsbefore taxes would be rather high (from 2.2% of average assets in 1979 to4.1% in 1982). At the same time, provisions at acceptable levels will bemade to cover risks in the portfolio -- representing 3.3% of total portfolioat the end of the period -- while dividends could continue to be distributedat the same level of 1977 (42% of net profit), representing a substantialreturn on average equity of 8.9% in 1979 to 9.9% in 1982.

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III. THE PROJECT

A. Objectives of Proposed First IDA Credit

3.01 The main objective of the credit is to support the country's growingindustrial sector and BNI's crucial role in it by providing the foreignexchange needed for capital investment and the technical assistance neededfor the training of the staff, the institutionalization of its proceduresand the setting up of a Promotion Department. Indeed, with important toolsat its disposal since the banking reform, the institution has already carvedout a significant position for itself, not only as direct financier but also --and increasingly so -- as a financial consultant to the Government both inproject and policy matters. The institution building impact of the proposedcredit should thus have a significant impact on the sector as it wouldstrengthen BNI, the main institution responsible for industrial financingin the country. Another objective of the credit will be to provide -- ona pilot basis -- financial assistance to artisan/small-scale enterprises.

B. Description of the Project

3.02 The proposed project would have the following five components:

(a) Medium and Large Projects Financing. US$4.0 million would be usedby BNI to finance medium and large industrial, agro-industrial, andtourism projects. This would represent about 15% of BNI's projectedcommitments for medium and large projects in these sectors duringthe period September 1979 to end 1981, and about 24% of BNI'sgap in foreign exchange needs during the period.

(b) Artisan -- SSE Financing. US$0.5 million would be used tofinance artisans -- small-scale industrial enterprises,including transport, and semi-industrial services, defined asthose with fixed assets below FMG15 million (about US$70,000).This component, which would be a pilot and experimental effortin this sector would complement the technical assistance to beoffered to artisans under the National Artisan Development Plan,which does not include funds to satisfy the artisans' creditneeds, when the Plan becomes operational. However, the componentshould be available to all artisans irrespective of whether theyare part of the National Plan or not. BNI will use a simplifiedappraisal format -- to be agreed with IDA -- for these projects.IDA will review extensively the first five projects submittedunder this component to ensure the adequacy of BNI's appraisal,which will be monitored thereafter by Bank supervision missions.

(c) Feasibility Studies. US$0.3 million would be allocated to thefinancing of feasibility studies for special industrial, agro-industrial and tourism projects selected by BNI. This wouldsupplement BNI's efforts to set up its project promotion andevaluation departments at a time when BDPI is going througha much needed restructuring and should thus benefit both BNIand the overall industrial sector. Consulting companies selected

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to carry out these feasibility studies would be chosen by BNIafter consultation with IDA from among capable foreign andMalagasy consultants. BNI should submit for approval theobjectives of each study, its detailed terms of reference anda short list of the consultants envisaged to carry it out witha detailed explanation of their expertise in the particularfield of study.

(d) Training of BNI's Staff. US$0.1 million would be used to financethe training of BNI's staff specifically in project promotionand appraisal at other experienced development banks and rele-vant training institutions. This should allow about 10 to 15BNI's staff members to benefit from training programs throughoutthe period.

(e) Technical Assistance. US$0.1 million would be allocated to thefinancing of up to two man-years of foreign experts' servicesto set up BNI's Promotion Department and improve its ProjectPreparation Department. These experts would not be permanentlystationed at BNI but would conduct their assignment in phasesof 3 to 6 months.

C. Proposed Credit to BNI

3.03 The US$5 million line of credit to BNI will finance the foreign-exchange component of the fixed capital investment of large, medium and smallsubprojects approved by BNI in the industrial, transportation and tourismsectors. It will also provide BNI with the technical assistance required tostrengthen its project preparation and appraisal capabilities.

3.04 Terms and Conditions. The proposed first line of credit to BNIwould carry the following terms and conditions:

(a) Limit per Project. To avoid that the line of credit be usedonly for a few large projects the IDA funds would be usedonly to finance projects with total costs up to FMG500 million(US$2.4 million) and the maximum credit granted by BNI to asingle project with the IDA credit would be limited toUS$750,000. These limitations are considered within BNI'sdefinition of medium size enterprises (para. 2.12) and theywould concentrate IDA financing on projects of total costsbetween FMG300 million and FMG450 million (US$1.4 million-US$2.1 million).

(b) Onlending Rate to BNI. To provide BNI with an adequate 1%spread on the IDA funds,the credit will be onlent by theGovernment to BNI at 7.5% with the normal rate commitmentfee except for the technical assistance/ training/studiescomponent of US$0.5 million which would be passed on by theGovernment to BNI at the IDA service charge but without anycommitment fee.

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(c) Onlending Rate by BNI. BNI would charge a minimum rate of

8.5% to its IDA financed clients.

(d) Foreign Exchange Risk. The foreign exchange risk should be

passed on all medium and large-scale borrowers. For small-scale enterprises (defined as those with fixed assets belowFMG15 million or about US$70,000), the Government will carrythe foreign exchange risk at a 1% fee. The Government shouldalso assume the foreign exchange risk on the technicalassistance/training/studies component. This should be agreed

upon during negotiations.

(e) Free Limit. The free limit for projects in all sectors should

be US$150,000 and the aggregate free limit US$1.5 million. IDAwould also review the first five subprojects submitted under theproposed SSE component. This would allow IDA to review most ofthe projects likely to be submitted by BNI.

(f) Economic Analysis of Subprojects. BNI will be required to

provide a complete economic analysis, including calculationof the economic rate of return on all medium/large scale

industrial subprojects submitted to IDA for financing.

(g) Amortization Schedules. The US$4.0 million component tofinance medium/large scale industrial enterprises wouldhave a flexible amortization schedule conforming to theaggregate amortization schedule of BNI's subloans, noneof which should in principle exceed a maximum period of15 years The US$0.5 million to finance artisans -- SSIprojects and the US$0.5 million technical assistancecomponent would be repaid under fixed amortization sched-ules to be agreed between BNI, the Government and IDA.

3.05 Other customary conditions and covenants would be included in the

credit and project agreements.

3.06 Project Cost Financing. The total cost of projects that BNI islikely to finance from September 1, 1979 to December 31, 1981 is expected to

total about FMG25 billion. BNI's contribution to these projects wouldamount to FMG6 billion of which the foreign exchange component is estimated atFMG3.8 billion.

3.07 BNI's financing plan for the period September 1979 to December 1981

is as follows:

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Financing Plan September 1979-December 1981(FMG billion)

Local Foreign Total

Total Commitments 2.2 3.8 6.0

Resources available for commitment 9/1/79 - - -

RESOURCE GAP 2.2 3.8 6.0To be financed by Local CurrencyCash Generation 2.2 - 2.2

Foreign CurrencyCCCE - 1.0 1.0KfW - 0.3 0.3Italian Government - 1.0 1.0IDA - 0.9 0.9Other - 0.6 0.6

TOTAL 2.2 3.8 6.0

IDA would, therefore, cover about 24% of BNI's foreign exchange requirements or15% of the total resource requirements between September 1979 and December 1981.

D. Project Implementation

3.08 Reporting Requirements. BNI would be required to submit quarterlyreports which would include financial statements, resource position, statement

of arrears and notes on subprojects encountering serious operational difficul-ties. BNI would also be required to submit annual audit reports in accordancewith IDA guidelines for audits of DFCs, prepared by qualified accountantsapproved by IDA along with BNI annual report.

3.09 Procurement. Procurement for the subprojects financed under thecredit would be in accordance with the standard IDA practice for developmentbanks.

3.10 Disbursement. The proceeds of the proposed first credit would bedisbursed on BNI subloans as follows:

(a) 100% of the c.i.f. cost of imported goods or services foreligible subprojects;

(b) 85% of the cost of previously imported equipment which ispurchased locally for the subprojects;

(c) 70% of the cost of equipment produced in Madagascarsubstantially from previously imported components or rawmaterials;

- 23 -

(d) 55% of the cost in Malagasy Francs of construction worksincluded in subprojects and carried out by Malagasycontractors;

(e) 100% of foreign expenditures or 80% of local expendituresfor experts and consultants' services and training of BNI'sstaff.

3.11 The credit component is expected to be fully committed by December1981 and to be fully disbursed by March 1984.

E. Benefits and Risks

3.12 After a period of stagnation that was in part related to politicalfactors and also to a reassessment of the country's general orientation,the industrial sector is showing signs of revival. While the new Governmentinitially showed relatively little interest in the sector, its attitudehas been changing recently in that respect, as demonstrated by the searchfor foreign partners to launch several industrial projects and its requestfor assistance from the Bank Group to the sector. An IDA credit for thatpurpose at this juncture would permit the Bank Group to participate in thedevelopment of an important part of Madagascar's economy. The credit wouldfinance projects with total cost of about FMG25 billion and create about 6,000jobs even on the pessimistic assumption that past cost per job of about$20,000 is maintained (para. 2.20). Employment generation will in fact,become considerably larger as BNI moves increasingly into project promotion,mostly SSEs.

3.13 Despite the generally positive attitude of the Government, thereremains still some uncertainties as to how the sector will evolve in thecoming years, particularly in the context of the transition toward a systemof socialist enterprises, and this may create a climate not conducive toprivate investment, particularly foreign. Although this may result in asomewhat reduced industrial growth, it should not materially affect theutilization of the proposed credit as: (i) its amount is reduced in compari-son with BNI's expected needs; and, (ii) private investment has been givenlittle weight in evaluating BNI's financial needs in the near future. Theserisks, thus, should not detract from the validity of the main objectives ofthe proposed credit, particularly concerning the strengthening of BNI andthe IDA support of the overall industrial sector and the artisan/SSE activities.

IV. AGREEMENTS TO BE REACHED AND RECOMMENDATIONS

4.01 This report recommends an IDA credit of US$5 million for BNI throughGovernment to be retroceded to BNI on the terms and conditions specified inparas 3.03 to 3.07.

4.02 During negotiations, agreements satisfactory to IDA were reached onthe following:

- 24 -

(a) With Government, that:

(i) the minimum lending rate for BNI's IDA financed projectswill be 8.5% (para. 2.14);

(ii) BNI's medium/large borrowers will carry the full foreignexchange risk and the Government will carry such riskfor artisan/SSE lending at a 1% fee (para. 2.14);

(iii) Government will carry the foreign exchange risk andwill pass to BNI the $0.5 million technical assistance/feasibility study component at the IDA service chargebut without any commitment fee (paras 3.04(b) and (d)).

(b) With BNI:

(i) a Statement of Rules of Operations that BNI's Board ofDirectors has approved (para. 2.05);

(ii) that adequate project appraisal and supervisionprocedures will be implemented (paras 2.07 to 2.08);

(iii) that the economic rate of return of medium/large scaleindustrial subprojects will be calculated (para. 2.07);

(iv) that the auditor acceptable to IDA will carry out theyearly audit of BNI's accounts (para. 2.16);

(v) satisfactory appraisal format for artisan/SSI projects(para. 3.02(b)).

- 25 - ANNEX 1

MADAGASCAR

Interest Rate Structure

(In per cent per annum)

Central bank rates EffectiveOctober 1, 1974

Rediscount of: Short-term paper 5.50Export bills 4.0oBills secured by products undercontract with stabilization funds 4.75

Medium-term paper 5.00Long-term paper 1/ 6.oo

Advances 6.50 - 8.oo

Commercial bank rates on credit operations 2/

Credit secured by: Commercial paper 6.75 - 8.00Government contracts 6.75 - 8.50Stocks of coffee 6.75 - 7.25Stocks of other crops 7.125 - 9.25Stocks of other merchandise 8.00 - 9.25

Overdrafts 8.00 - 9.25

Commercial bank rates on deposits

eMinimum depositSight deposits tthousands of FMG)

Private sector 0.75Public sector 3.00Insurance companies - 3.00

Time deposits

At least 2 months 75,000 4.90At least 3 months 50,000 4.75From 6 to 12 mohths 500 4.75From 1 to 2 years 300 5.65From 2 to 2-1/2 years 300 5.8C

Certificates of deposits

From 6 months to 1 year 500 3.70From 1 to 2 years 50 4.25From 2 to 3 years 50 5.30From 3 to 4 years 50 5.80From 4 to 5 years 50 6.80From 5 to 6 years 50 7.50

Source: Central Bank of Madagascar1/ Rediscounting of long-tern paper was introduced in August of 1974.2/ Refers to credit that is rediscountable with the Central Bank; non rediscountable

credit bears, on the average, a rate that is 0.75 to 2 percentage points higher.

EAPID

December 1979

-26 - ANNEX 2

Page 1

BANKIN' NY INDOSTRIA (BNI)

Draft Statement of Rules of Operation(To be approved by BNI's Board of Directors)

1. Objectives and Operational Criteria

(1) The Bank's general objective is, within the framework of adeveloping socialist economy, to promote the growth of industryand handicraft, to help improve housing, as well as domesticand collective equipment and to mobilize national savings. Tothat end, the bank will assist in the creation and developmentof enterprises in Madagascar in all productive sectors of theeconomy.

(2) The Bank shall extend its assistance in accordance with theobjectives of the National Development Plan and on the basis ofeconomic and financial criteria only. Enterprises that submitprojects to the Bank shall be required to have efficient management,be technically sound, have satisfactory market prospects fortheir production, be able to guarantee a financial return onthe investment and generally to contribute to the economic growthof the country. The Bank shall take all these different aspectsinto consideration when appraising the projects submitted to it.

(3) The Bank shall extend all kinds of assistance. The Bank shallinvest in the capital of enterprises and shall subscribe to issuesof shares and other securities. It shall grant short-, medium-and long-term loans, for periods depending on the type ofproject involved, with an appropriate grace period. The Bankmay also furnish guarantees in certain cases. Normally, theBank will not be engaged in refinancing operations. It shallendeavor to actively promote the establishment of new and theexpansion of existing enterprises. It shall give its clientstechnical assistance and advice on the planning, layout andexecution of their projects. These loans and participationsmay be granted for construction work, purchase of plant andequipment and for the constitution of working capital.

2. Investment Policy

(4) Short-term loans shall not exceed two years, medium-termloans five years and long-term loans ten years. However,the ten year limit can be exceeded whenever the Bank isable to borrow locally or abroad resources for a longerperiod. In such a case the maturity of the loans madewith these resources shall not exceed their repaymentperiod by the Bank.

ANNEX 2

- 27 - Page 2

(5) As a general rule, the total amount of medium and long-termloans granted by the Bank at its own risks together with itsparticipations and any other medium and long-term commitmentsin favor of a single enterprise may not exceed 25% of the Bank'sequity.

(6) The Bank shall normally limit its share participation to 35%of the share capital of any given enterprise. However, inspecific circumstances such as insufficient participationof other shareholders to the share capital of an enterpriseoperating in a priority industrial subsector or whenever theBank will consider appropriate to assume a majority positionin a company, its Board may decide to exceed the 35% limit.In no case, however, such participation shall exceed 51% of theshare capital of the enterprise. Furthermore, the Bank's totalinvestments in the form of equity participations may not exceed theBank's equity.

(7) The Bank may guarantee the fulfillment of assistance commitmentby other credit institutions or suppliers; it may also provideguarantees in favor of physical or moral individuals in chargeof implementing public projects. However, the guarantees shallbe only in favor of physical or moral individuals that havereceived or are receiving one or several loans from the Bankwith maturities at least equal to the duration of the guarantee.The total amount of medium and long-term guarantees by the Bankmay not exceed two times its equity.

(8) The Bank shall join with other financing institutions, whetherlocal, foreign or international, in financing projects whosefinancial requirements exceed its capacity.

(9) When deciding upon the amounts and form of financial assistanceit shall provide, the Bank shall take into account all thefinancial requirements of the project and the financial situa-tion of the enterprise in question. In principle, the financialassistance granted shall not all together exceed 75% of thetotal cost of the project.

(10) The Bank shall endeavor to maintain a balanced portfolio by dis-tributing its loans, participations and other commitments amongall the sectors of industrial and economic activity within therange of its objectives.

3. Financial Policy

(11) The general aim of the Bank's financial policy is to main-tain the value of its own capital, to manage its funds in

ANNEX 2

-28 - Page 3

such a way that it is at all times able to honor its obliga-tions on time and to achieve a profit margin that enablesit to cover its operating costs, form adequate reserves anddistribute reasonable dividends to its shareholders. To thisend the Bank shall:

- maintain a satisfactory balance between thematurities of its own obligations and those ofthe loans and other financial assistance it grants;

- not incur debts of more than one year of term includingterm guarantees in excess of four times the amount ofits equity;

- not incur exchange risks in respect of those ofits borrowings that are repayable in foreigncurrencies;

- generally require appropriate guarantees for theloans it grants;

- fix its interest rates, commissions and othercharges at a level that will enable it to obtaina satisfactory return;

- make adequate provisions against potential lossesand build up reserves to a level consistent withsound financial practices.

4. Special Provisions

(12) The Bank shall supervise the execution of projects it financesto protect its interests and contribute as much as possible totheir implementation.

(13) The Bank's own accounts shall be kept in accordance withgenerally accepted international standards. The Bank shallengage the services of an independent firm of professionalaccountants of international repute to audit its annualaccounts.

EAPIDDecember 1979

- 29- ANNEX 3

BANKIN' NY INDOSTRIA (BNI)

Summarized Balance Sheet(In FMG million)

Year Ended December 31 1977 1978 1979(Audited) (Audited) (As of 9/30)

(Provisional)ASSETS

Current Assets 1/Cash and Banks 2,367 2,924 2,365Accounts receivable 1 786

14,153 5,9091 ,8

Managed operations on behalf of Government 1,743 1,770 2,045Miscellaneous debtors 295 3,465 4,587Other accounts 3,663 3,894 4,643

PortfolioShort-term portfolio 34,429 36,027 44,807Medium/Long-term portfolio 6,478 6,799 8,142Equity Portfolio 2,335 2,638 3,742

43,242 45,464 56,691Net Fixed Assets 1,184 1,303 1,306

TOTAL ASSETS 54,280 60,990 75,453

LIABILITIES

Current LiabilitiesBanks 1,327 745 585Short-term deposits (up to 2 years-) 25,321 32,107 37,358Central Bank refinancing for short-term

credits 3,338 187 596Miscellaneous creditors 5,738 7,133 12,149Other accounts 4,832 5,908 8,137

40,556 46,080 58,825

Term deposits (more than 2 years) 109 255 218Miscellaneous term creditors 811 1,054 1,376

BorrowingsMedium and Long-term borrowings 2,792 2,o64 1,570Central Bank refinancing for medium-term

credits 1,103 1,349 2,0113,895 3,413 3,581

General provisions for loans and investments 1,389 1,814 1,895Managed operations on behalf of the Government 1,568 1,896 2,337

EcluityShare capital 2,000 2,000 2,000Reserves 2,213 2,629 3,o69Advance from Treasury 1,000 1,000 1,000Undistributed surplus 739 849 1,152

5,952 6,478 7,221

TOTAL LIABILITIES AND EQUITY 54,280 60,990 75,453

* Out-of-balance sheet commitments 3/Guarantees 7,917 15,872 17,761Letters of credit 6,702 10,534 13,973Others 3,146 - 3,212

17,765 26,406 34,946

l/Includes a FMG170 million short-term investment.i/Net of provisions for losses.3/Of which FMG9,746 are term guarantees.

EAPID

December 1979

30- ANNEX 4

BANKIN' NY INDOSTRIA (BNI)

Summarized Income Statement(In FMG million)

Year Ended December 31 1977 1978 1979(Audited) (Audited) (As of 9/30)

(Provisional)

Interest Income 3,644.8 3,976.4 3,666.9Income from other commercial operations 789.0 683.7 559.8

Dividend Income 143.9 167.9 91.2Other Income 149.3 252.5 21.6

Total Income 4,727.0 5,o80.5 4,339.5

Expenses

Personnel Expenses 1,052.4 1,096.4 917.3Other Administrative Expenses 444.5 514.2 523.7

Total Administrative Expenses 1,496.9 1,610.6 1,441.0

Financial Expenses 1,274.7 1,172.5 994.6Depreciation 95.1 136.5 120.0

Total Expenses 2,866.7 2,919.6 2,555.6

Profit Before Tax and Provisions 1,860.3 2,160.9 1,783.9

Provisions for Loans 544.6 453.5 350.0Provisions for Future Equity Investments 150.0 300.0 100.0

Profit Before Tax 1,165.7 1,407.4 1,333.9

Taxes 427.3 568.1 533.6

Net Profit 738.4 839.3 800.3

EAPIDDecember 1979

181111I i!Y INDOSTIA (BCI)

Project PiPeline at cnd 1978

BNI spcected fiac ice Project' expcted i0nt1 -J.tiocTotal cost of pro-Jct Year of expected Start of Start of Probbillty

ProRiecr/Octoo Nature of Project Proter- (of which foreign exchanRe) Loan Equity approval inveetaeot Oeeraolone (I to 5) Rearks(to HgF. nillfoo) (in MgFr. million)

SOh-os-o - litiug Rtopo-iog and Publto sector! 260 (130) 75 10 1979 - 1980 2nd half 1980 let half 1981 3 Feceibility tu.dy redy.oodnrulouccoo pr--o e forelgn study nor ype dOe by 8NI.

Jlrami - Pcblc- otilLties E--cni-on PnbliC -eccoo 6,800 (5,100) 500 - 19S0 to 1984 1980 to 1984 1980 to 1984 5 Peaxibility tudy redy.Study under prepartio by BNIt.

I/Solinu - Ch-emcals Extc0i00 Ptblic soctor no cu. 300 - 1980 to 1984 1980 to 1984 1981 te 1984 5 Projeot under atudy by MinIstry cf

Industry with p-rtctpatioo 881.

Cenot Antsirabh Now Ptblic ccoonpi-vato foreign 3,800 (2,390) 600 - 1979 1979 1981 5

Sopreu- Che-iculu New Public -e-oor/ 1,050 (650) 725 83 1980 1980 1981 to 1982 5 8Bth feaaibiltry and oNl studies redy.private M l-afuy/ Looking for finencing in foreign axohasge.privt rtcorni

somacoreo - Totiles Ette...on p-blictcocoon 700 (525) 390 100 1979 1979 1980 5 Both feasibility and 8INI' studina ready.procaco foroign Firuteg up local ftD eolng

Co-tcn Tl or - Toxtle- New Public s-c-or/ 4,500 (3,375) 1.250 . 1979 1979 19H0 5 P-oJect under s-ady t Ministrypnivato forrign of lIdnautry.

Ti-coc - Textiles New Prioate M-gasy/ 1,200 (900) 600 - 1979 1979 1980 5 Pe-ibility study ready.private foroige INI r-vine underw.

0il Ma-tge - Ag-oird-try Nw PNbli t*ecotor 220 (120) 70 10 1979 1979 1980 3

3 nuga- mills - tNe Public nertor 315 (215) 100 - 1980 1980 1981 4

s-rums - Ag-ofodustr tooy Peloc Nublic *ecto- 650 (550) 520 _ 1979 to 1984 1979 1984 5 881 study ready and .ent to Centrl lak.

SN8ct - Agroicdust-y Etonsion Public sector/ 2,800 (1,540) 300 - 1979 1979 1980 5 ,pofoate foroLgo

star- Ag-riodu-trly E-to ione Public -ector/ n.- na 500 - 1980 1979 1980 to 1981 4 Project under study *t Ciiefetypniv-et foroigV of Industry

Br-adowking - Agroird. Nec Pe1lic SectOr 414 (360) 125 - 1979 1979 1981 3

SID - Agro-idustry Exte-sion Public -ctor 270 (140) 152 - 1979 1979 1981 4 t81 so dy ready. satig fr Gner--eto- ispleset BleN scedatcs

Hsc V-o - Agroiod. Nco P0bli,c ctoo! 250 (1501 50 70 1979 1979 1979 5 rNI -tody ready, to b presentedpriv-to for-igc to Board shortly.

bata - Shoo- tention Ptivat- foroign/ 914 (685) 40 135 1980 1980 1980 to 1981 5 Fea-ibility study ready.public sector Under di .oss on vith IFC and BNT

8uts - T;onnry Nev Private foreign/ 882 (485) - 100 100 198O 1980 1982 5V Per -vvm public ector_

EApIr 24c765 17,315 6.397 508Dec-ober 1979

- 32 -AZOIEX 6

BANKIN' NY INDOSTRIA (BNI)

Projections of Operati6ns 1979-82(In FMG million)

1297 1980 1981 1982APPROVALS

Medium and Long-Term loansIndustry 1,500 1,700 2,000 2,000Tourism - - 150 150Housing 150 150 250 250Others 300 300 300 300

Total 1,950 2,150 2,700 2,700

Equity InvestmentsIndustry 250 300 500 600Tourism - _ - _

Total 250 300 500 600

COMMITMENTS

Medium and Long-term loansIndustry 1,560 1,660 1,940 2,000Tourism 31 - 120 150Housing 150 150 230 250Others 320 300 300 300

Total 2,061 2,110 2,590 2,700

Equity InvestmentsIndusty 250 300 500 600Tourism - _

Total 250 300 500 600

Short-term credits(outstanding beg. of year) 40,578 46,664 53,445 58,790

Guarantees, letters of creditsand others (outstanding atbeginning of year) 21,300 24,175 28,405 28,405

DISBURSEMENTS

Medium and Long-Term loansIndustry 1,241 1,620 1,828 1,976Tourism 120 13 72 138Housing 148 150 198 242Others 320 308 300 300

Total 1,829 2,091 2,398 2,656

Equity investmentsIndustry 250 300 500 600Tourism _ - - -

Total 250 300 500 600

Short-term credits(outstanding beg. of year) 40,578 46,664 53,445 58,790

EAPIDDecember 1979

-33 - ANNEX 7

BAANKIN' NY INDOSTRIA (BNI)

Projected Balance Sbeets - 1979-82(In FMG million)

1979 1980 1981 1982ASSETS

Current AssetsCash, banks and foreign correspondents 1,140 1,097 1,000 920Managed Operations on behalf of Government 1,120 1,120 1,120 1,120

Miscellaneous debtors and other accounts 4,510 4,961 5,457 6,002

PortfolioShort-term portfolio 46,664 53,445 58,790 64,669Medium/long-term portfolio 9,876 11,004 12,341 13,765Equity portfolio 2,954 3,254 3,754 4,354

59,494 67,703 74,885 82,788

Net fixed assets 1,315 1,262 1,207 1,149

TOTAL ASSETS 67,579 76,143 83,669 91,979

LIABILITIES

Current LiabilitiesBanks and foreign corref7'ndents 2,680 4,448 4,820 4,692Short-term deposits 26,620 29,282 32,210 35,431Central Bank refinancing for short-term credits 4,413 4,856 5,342 5,876Managed operations on behalf of Government 1,420 1.420 1,420

35,133 40,006 43,792 47,419

Term deposits 9,900 10,890 11,979 13,176Miscellaneous creditors and other accounts 4,510 4,961 5,457 6,002

BorrowingsMedium and long-term borrowings 6,696 7,620 8,094 9,338Central refinancing for term loans 1,975 2,200 2,468 2,753

8,671 9,820 10,562 12,091

Provisions for loans and investments 1,584 1,684 1,819 1,880Other provisions 872 872 872 872

EquityShare capital 2,000 2,000 2,000 2,000Reserves 2,213 2,213 2,213 2,213Undistributed surplus 2696 3697 4975 6326

6,909 7,910 9,188 10,539

TOTAL LIABILITIES AND EQUITY 67,579 76,143 83,669 91,979

STRUCTURAL RATIOSTerm Debt/Equity Ratio 1/ 1.3:1 1.3:1 1.2:1 1.2:1Term Debt/Equity Ratio 2/ 2.2:1 2.2:1 2.2:1 2.2:1.Current Ratio 3/ 1:1 11 1:1 1:1Provisions as % of Portf°lio 4.2 3.o 3.6 3.3

p/ Excluding liabilities corresponding to term guarantees.2/ Including liabilities corresponding to term guarantees (assumed to represent 100% of BNI's year-end equity every year).3/ Considering all term deposits as included in current liabilities.

EAPIDDecember 1979

BANKIN' NY INDOSTRIA (BNI)

Projected Income Statements 1979-82

(In FMG million)

1979 1980 1981 1982

IncomeLoan and other income 5,469 6,282 7,151 7,686Dividends 221 253 438 . 496

Total 5,690 6,535 7,589 8,132

ExpensesPersonnel Expenses 1,199 1,257 1,318 1,382Other Administrative Expenses 525 567 612 661

Total Administrative Expenses 1,724 1,824 1,930 2,043

Financial Expenses 1,548 1,813 1,976 2,281Depreciation 100 103 105 108

Profit before tax and provisions 2,318 2,795 3,578 3,700

Provisions 93 100 135 61

Profit before tax 2,225 2,695 3,443 3,639Taxes 801 970 1,239 1,310Net Profit after taxes 1,424 1,725 2,204 2,329Dividends 598 724 926 978Net Profit 826 1,001 1,278 1,351

Ratios

Income Statement Items as % of Average Total AssetsGross Income 8.9 9.1 9.3 9.4(less) Financial Expenses 2.4 2.5 2.5 2.6(less) Administrative Expenses 2.7 2.6 2.4 2.3Gross Profit before tax and Provisions 3.6 3.9 4.2 4.2

(less) Dividends 0.9 1.0 1.1 1.1

Net Profit 1.3 1.4 1.6 1.6

ProfitabilityProfit before tax as % of average equity 34.2 36.4 40.3 37.0Profit after tax as 7, of average equity 21.9 23.3 25.8 23.7Dividend payments as % of average equity 9.2 9.7 10.8 10.1Income from loans and other income as % of

average loan portfolio 10.3 10.4 10.5 10.4Dividend income as % of average equity portfolio 7.8 8.1 12.5 12.3

EAPIDDecember 1979

BARKIN1 NY INDOSThIA (BNI)

Projected Sources and Uses of Funds 1979-82(In FMG million)

1979 1980 1981 1982SourcesNet Profit 1,424 1,725 2,204 2,329Provisions 93 100 135 61Net Increase in term borrowings 2,489 1,149 742 1,529Increase in current liabilities 3,411 5,863 4,875 4,824

7,417 8,837 7,956 8,743

UsesNet Increase in short-termportfolio 6,o86 6,781 5,345 5,879Increase (decrease) in othershort-term assets (200) - - -Net Increase in term portfolio 933 1,128 1,337 1,424 UEquity disbursements 250 300 500 600Dividend payments 598 724 926 978Increase (decrease) infixed assets (50) (53) (55) (58)

7,617 8,880 8,053 8,823

Excedent (shortfall) ofsources over uses (200) (43) (97) (80)

Accumulated cash, banks 1,140 1,097 1,000 920

EAPIDDecember 1979

- 36 - ANNEX 10

BANKIN' NY INDOSTRIA (BNI)1/

SchedUle of Disbursements

Amount in CumulativeFY81 us$'ooo %

First Quarter 50Second Quarter 50Third Quarter 100Fourth Quarter 200

Sub-total 400 8%

FY82

First Quarter 300Second Quarter 400Third Quarter 400Fourth Quarter 500

Sub-total 2,000 40%

FY83

First Quarter 500Second Quarter 600Third Quarter 600Fourth Quarter 500 _

Sub-total 4,200 84%

FY84

First Quarter 400Second Quarter 300Third Quarter 100

TOTAL 5,000 100%

1/ Assuming that the credit became effective in November 1979.

EAP-ID

December 1979

-37 - ANNEX ll

BANKIN' NY I-DOSTRIA (BNI)

Selected Documents and Data Aveilable in the Project File

Direction Generale du Plan - Structure de l'Industrie a Madagascar,(Juillet 1978)

Direction Generale du Plan - l'Emploi dans l'Industrie a Madagascar,(Janvier 1977)

Direction Generale du Plan - Analyse de la Performance de l'Industriea Madagascar (Mai 1977)

Central Bank - Monthly Statistics Bulletin - May 1978

Ministere des Finances et du Plan - Bulletins mensuels de statistique

Ministere des Finances et du Plan - Les options fondamentales pour laPlanification Socialiste

Ministere des Finances et du Plan - Analyse de la Performance de l'Industriea Madagascar (Mai 1977)

Ministere des Finances et du Plan - Basic Social and Economic Data

on Madagascar (1950-1975)

Ministere des Finances et du Plan - Rapport sur les Projets IndustrielsStrategiques (1975)

Ministere des Finances et du Plan - Situation economique au ler janvier 1977

Ministere de l'Economie et du Commerce - Plan National de Developpementde l'Artisanat malgache (June 1977)

BNI - Annual Report 1977

BTM - Annual Report 1977

BFV - Annual Report 1977

BNM - Annual Report 1976

BNI - Organization Chart

BNI - Assumptions for projections 1978-1982

EAPID

December 1979