AFRICAN DEVELOPMENT BANK

PROJECT COMPLETION REPORT

FIRST LINE OF CREDIT

EASTERN AND SOUTHERN AFRICAN TRADE AND DEVELOPMENT BANK

(THE PTA BANK)

Country Department East June 2000

CURRENCY AND ABBREVIATIONS4th Quarter 1999

The currency of The PTA Bank is the UAPTA

Currency

1 UA = 1 UAPTA1 UA = USD 1.358

Weights and Measures

1 metric ton = 2,204 lbs.1 meter = 3.28 feet1 meter = 1.09 yards1 kilometre = 0.621 mile1 hectare = 2.471 acres

ABBREVIATIONS

ADB = African Development BankADF = African Development FundCCFU = Credit Control and Follow-up UnitCFTC = Commonwealth Fund for Technical Co-operationCOMESA = Common Market for Eastern and Southern AfricaDBZ = Development Bank of ZambiaDFI = Development Financial InstitutionDRC = Democratic Republic of CongoEEC = European Economic CommunityIDB = Industrial Development Bank of KenyaITC = International Trade CentreLOC = Line of CreditLOC I = First Line of Credit to PTA BankPCR = Project Completion reportPTA = Preferential Trade Area for Eastern and Southern AfricaPTA Bank = Eastern and Southern African Trade and Development BankSADC = Southern African Development CommunityTAF = ADF Technical Assistance FundThe bank = The PTA BankTDFL = Tanzania Development Finance LimitedUA = Unit of Account of the African Development BankUA = Unit of Account of COMESAUNDP = United Nations Development ProgrammeUSD = United States DollarUS$ = United States DollarZDB = Zimbabwe Development Bank

FISCAL YEAR1st January - 31 December

CURRENCY AND ABBREVIATIONS, LIST OF REFERENCE, LIST OF ANNEXES,BASIC PROJECT DATA

1. INTRODUCTION 11.1 General Introduction 11.2 Project Background 1

2. PROJECT OBJECTIVE AND FORMULATION 22.1 Sector Goals 22.2 Project Objective 22.3 Project Description 22.4 Project Formulation 2

3. PROJECT EXECUTION 33.1 Effectiveness, and Start-up and Modification 33.2 Implementation Schedule 33.3 Reporting 43.4 Procurement 43.5 Financial Sources and Disbursement 4

4. PROJECT PERFORMANCE AND RESULTS 54.1 Overall Assessment 54.2 Operating Results 64.3 Sub-project Performance 74.4 Institutional Performance 84.5 Operational Performance and Results 104.6 Financial Performance 114.7 Economic Performance 13

5. SOCIAL, ENVIRONMENTAL AND SUSTAINABILITY 145.1 Social Impact 145.2 Environmental Impact 145.3 Project Sustainability 14

6. PERFORMANCE OF ADB AND PTA BANK 156.1 Performance of the Bank 156.2 Performance of the PTA Bank 16

7. OVERALL PERFORMANCE AND RATING 16

8. CONCLUSION, LESSONS AND RECOMMENDATIONS 178.1 Conclusion 178.2 Lessons Learnt 178.3 Recommendations 18

The Project Completion Report has been prepared by Mr. Busulwa Kayongo, Financial Analyst and Dr.Ebenezer Nyakotey, Industrial Economist (Consultant), following their mission to the PTA Bank inOctober 1999. Any questions relating to this report should be addressed to the officer on ext. 4611 or toMr. G. Mbesherubusa, Division Manager, OCDE.4, ext. 4131.

LIST OF ANNEXES

Annex No. No. of pages

1. Map of COMESA member States 12. Conditions of the Loan Agreement 13. Summary Status of Sub-project as at 30/09/1999 24. PTA Bank Capital Stock Subscription 15. PTA Bank Organisation Chart 16. Summary of PTA Bank’s Operations 17. Historical Financial Statements of PTA Bank 28. Financial Projections Made at Appraisal 29. Project Performance Evaluation and Rating 210. Sources of Information 111. Borrower’s and Executing Agency Comments on PCR 2

LIST OF TABLES

Table No. Page no.

3.1 Disbursement of LOC I 54.1 Geographical Distribution of Sub-projects 64.2 Sub-projects Affected Seriously by Arrears 74.3 Staffing Position 104.4 Highlights of Historical Financial Statements 12

PROJECT SUMMARY

A. BASIC INFORMATION

1. Country : Multinational2. Name of project : Line of Credit to the PTA Bank3. LOAN NUMBER : B/ESATDB/PTA/LC/94/14. LOAN AMOUNT : UA 15 million5. SECTOR : Industry, tourism, mining & agriculture6. BORROWER : The PTA Bank7. BENEFICIARY : The PTA Bank8. EXECUTING AGENCY : The PTA Bank9. LOAN INSTRUMENT : ADB10. APPROVAL DATE : 23 February 199411. DATE OF SIGNATURE : 13 May 199412. EFFECTIVE DATE : 14 March 1996

B. PROJECT DATA PrecedingEstimate at Supervision CurrentAppraisal Mission Estimate

1. Total project cost (UA) 15,000,000 15,000,000 15,000,0002. Project completion 31/12/97 31/12/98 31/12/984. Final disbursement 31/12/1997 31/12/1998 31/06/20005. Actual Closing Date 11/12/1997 31/12/1999 30/06/2000

C. STATUS OF DISBURSEMENTS

Amount - UA % of Loan1. Loan amount 15,000,000 100.0%2. Disbursement to date 12,370,000 82.5%3. Undisbursed balance 2,630,000 17.5%4. Outstanding claims Nil5. Loan balance 2,630,000 17.5%

D. PERFORMANCE INDICATORS

1. Time overrun 2 years2. No. of subprojects 173. Project implementation status Completed

E. MISSIONS

Type of Mission Composition Person-daysPreparation 0Appraisal (June 1993) 2 30Supervision (November 1998) 1 17Project Completion Report (October 1999) 2 30

THE PTA BANKProject Matrix: First Line of Credit

Project Team: Busulwa KayongoNarrative Description Verifiable Indicators Mode of Verification Assumptions1. SECTORAL GOAL:

(EAC)

To establish an export economyfor the member States andincrease trade link between themember States of COMESA.

12 subprojects are producingexportable goods within andoutside COMESA.

a. Country Annual reports& budgets.

b. Investment PromotionCentres’ reports.

c. ADB/World BankCountry Profiles

(Goal to Super Goal)

Enabling environment for theconduct of business by theprivate sector is providedthrough reform programs.

COMESA is strengthened andsustained.

2. PROJECT OBJECTIVE:

The objective of the line ofcredit is to provide financialsupport to the PTA Bank toenable the institution to extendterm lending to private sectorsub-borrowers in the productiveand service sectors of theeconomies of its memberStates.

UA 13.39 million disbursed to17 sub-projects in sevenmember countries ofCOMESA

a. ADB Portfolio Reports

b. The PTA Bank AnnualReports.

c. The PTA Bankinvestment portfolioreports

(Project Objective to Goal)

a. Environment is adequateto sustain the subprojects.

b. Management andprofessional capacity ofThe PTA Bank isadequate to monitor thesub-projects.

c. Sub-project managerialcapability adequate tosustain the sub-projects.

3. PROJECT OUTPUTS:

a. 17 subprojects establishedin 7 COMESA membercountries.

a. 17 sub-loans approvedby ADB, disbursed andimplemented by ThePTA Bank.

a. ADB (OCDE and FLADrecords) & The PTABank Portfolio reports

(Output to Project Objective)

The PTA Bank had the abilityto identify and select goodsub-projects.

4. INPUTS/ACTIVITIES:

a. ADB Board approvedLOC I of UA 15 million.

b. The PTA Bank fulfilledloan conditions.

c. 17 sub-projects approvedby The PTA Bank

d. 17 sub-projects approved.e. ADB disbursed UA 13.39

million. 17 sub-projectsimplemented

a. ADB Board approvedUA 15 million inFebruary 1994.

b. Loan Agreement signedin May 1994.

c. UA 13.39 milliondisbursed by December1998.

a. Summary records ofADB Board meeting.

.b. CLEG and OCDE

records.

c. FLAD and The PTABank financial recordsand audited accounts.

(Activities to Output)

a. The PTA Bank has theability the entrepreneur toimplement the sub-projects.

b. Sub-projects submittedare good.

Date: 10 January 2009

EXECUTIVE SUMMARY

1. The line of credit to the PTA Bank, in an amount of UA 15 million, was approved on 23February 1994. The initial deadline for final disbursement was 31 December 1997, which wasextended to 31 December 1998 and later to June 30, 1999. The line of credit was expected to beimplemented in three years, from June 1994 to June 1997. An implementation delay of about twoyears was due to inability of the PTA Bank to prepare on time, its Project Appraisal Guidelines,which was required as a condition prior to entry into force.

2. The line of credit was designed to support and enhance the bank’s project financeobjectives. The outputs of the project were to include a number of viable resource-based andexport-oriented projects. The line of credit was committed to 17 sub-projects totalling UA 14.9million and distributed in seven PTA Bank member countries. As at 30 September, 1999, totaldisbursements amounted to UA 12.30 million.

3. By September 30, eleven sub-projects, mostly export-oriented projects, were operatingsatisfactorily. Seven of the sub-projects were in serious arrears of UA 200,000 and above. Totalarrears accountable to LOC I sub-projects amounted to UA 4.77 million by 30 September 1999,which was about 17% of total project arrears of the bank and 34% of LOC I portfolio.

4. The performance of the sub-projects is affected by a number of factors, resulting from:(a) poor selection of sub-projects by the bank; (b) poor preparation of sub-projects; (c)international price instability for exportable goods, (d) geographical factors such as weatherconditions of drought and the “El Nino” phenomenon and (e) national insecurity and instability insome member countries of the PTA Bank. The performance of the sub-projects is also affected bythe poor investment climate in some of the bank’s member countries, which include depreciationof local currencies, high inflation rates and high cost of local borrowing.

5. Regarding the PTA Bank, the institution is facing a serious financial crisis, which isreflected in the poor performance of the bank’s portfolio. The financial viability of the bank is putat risk by an increasing number of non-performing projects in its portfolio and arrears, whichreached 37% and 48% of the portfolio, by end of September 1999 and December 1999respectively. Total arrears (including projects, trade finance and capital subscription) amounted toUA 43 million by end of September 1999, which is very high for a small institution, whose totalassets amounted to about UA 120 million and total equity of about UA 75 million. Thus, a quickeffort should be made by the bank to improve its financial viability. This might requirespecialised persons to restructure the portfolio of the bank.

6. The following are lessons leant from the line of credit:

a) Project promoters, particularly emerging-entrepreneurs have problems of mobilisingequity capital, mainly for buildings, civil works and initial working capital. In manycases, a project is approved, disbursement made and even equipment arrive on site,without the promoters having fulfilled their commitment to mobilise adequateresources for their project. Therefore, rigorous appraisal must be conducted to ensurethat the emerging entrepreneurs have adequate capital (at least 40% of project cost)before such projects are accepted by a DFI.

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b) The PTA Bank has accepted projects with high risks, which should have been avoided,if proper risk analysis had been made. A lesson from this is that DFIs should preparepolicies on commercial risk analysis of projects to be implemented by RiskManagement Units, whose responsibility would be to prepare sector profiles, countryrisk profiles and project risk analysis criteria.

c) Performance of the first line of credit would have been better if the project waslaunched and supervised at least once a year. It is a lesson that confirms what theBank is well aware of, and what it is supposed to do for all projects.

7. In view of the findings of the PCR, it is recommended as follows:

a) A diagnostic study should be conducted to provide information for restructuring thePTA Bank’s finances, organisation, management and operations, in the short-termand to provide a long-term operational strategy for its operations;

b) The diagnostic study should also consider streamlining the organisation structure byreducing the span of control of the President, along the lines of LOC I Agreement,and by incorporating a Monitoring and Evaluation Unit, and an Economic Planningand Research Unit, as well as Risk Management Unit; and

c) After the diagnostic study, the PTA Bank should prepare a short-term action plan thatwould improve the financial viability of the bank. Depending on the outcome of thestudy, a short-term plan might include: (i) restructuring the capital base; (ii) takingmeasures to restructure and improve the quality of the loan portfolio; (iii) measures toclean up the balance sheet, (iv) measures to re-capitalize the bank, and (v) measuresto collect subscribed and called capital in arrears.

1. INTRODUCTION

1.1 General Introduction

1.1.1 The industrial sector in most of the COMESA member states has, since the 1970s and1980s, experienced significant decelerating growth rates. Average industrial capacity utilisationin the majority of the COMESA member states declined significantly. For instance, in the 1980s,industrial capacity utilisation rates averaged only 20% to 30% in Tanzania and Uganda andaround 45% in Malawi and Zambia as a result of serious foreign exchange shortages, weakeningdomestic demand, declining investments and widespread inefficiencies in resource use in theindustrial sector. It was against this background that the LOC I was approved to the PTA Bankwith the objective of contributing to the promotion, rehabilitation, expansion, and modernisation,in the industrial sector. Since LOC I was approved most of the Member States of COMESA sub-region had embarked on Economic Recovery and Structural Adjustment Programs aimed at theirdeteriorating economic situation.

1.1.2 The PTA Bank was established on 6 November 1985 under the provisions of Chapter 9 ofthe Treaty (1981) establishing the Preferential Trade Area for the Eastern and Southern AfricanStates which was later transformed into the Common Market for Eastern and Southern Africa(COMESA). Currently the PTA Bank is the largest sub-regional organisation in Africa coveringvirtually all the Countries in Eastern and Southern Africa. The PTA Bank is a development andtrade bank, whose objective is to provide project and trade finance to private sector in the sub-region.

1.2 Project Background

1.2.1 The line of credit to the PTA Bank, in an amount of UA 15 million, was approved on 23February 1994, the Loan Agreement was signed on 13 May 1994 and the loan became effectiveon 14 March 1996. The initial deadline for final disbursement was 31 December 1997, which wasextended to 31 December 1998. The line of credit was designed to support and enhance theBank’s project finance objectives.

1.2.2 The Bank Group has to date approved three operations for the PTA Bank. The firstoperation started in June 1989, when the Bank approved a grant of UA 2.43 million for thefinancing of the Institutional Support to the PTA (now COMESA) Secretariat and the PTA Bank.UA 431,200 was allocated to the PTA Bank to finance the services of an Operations Advisor.The bank recruited an Operations Advisor who worked for the institution for a period of ninemonths, from September 1991 to May 1992, after which his services were terminated, due to hisinability to carry out the assignment. In 1995, ADB accepted a request by the PTA bank to utilisepart of the grant balance to finance an audit study for the whole management system of theinstitution. The study was completed in 1997 and the TAF grant balance was cancelled in 1998.

1.2.3 The second operation started in 1991, when the Bank Group subscribed to the PTABank's capital. The amount of capital subscribed by the Bank Group was UA 15 million, ofwhich UA 5 million was paid and UA 10 million is callable. ADB's paid capital represents 8.7per cent of total paid capital of the institution, as at 30 September 1999. The third operation is theline of credit approved in 1994.

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2. PROJECT OBJECTIVE AND FORMULATION

2.1 Sector Goals

The main sector goal of COMESA is to establish an export economy for the memberStates and increase trade link between the member States of COMESA. Thus, COMESA aims atpreparing an enabling environment for the conduct of business by the private sector, which aredone through establishment of specialised institutions such as the PTA Bank.

2.2 Project Objectives

2.2.1 The objective of the line of credit is to provide financial support to the PTA Bank toenable the institution to extend term lending to private sector sub-borrowers in the productive andservice sectors of the economies of its member States. The LOC I was designed to support andenhance the PTA bank’s project finance objectives to finance private industrial development

2.2.2 The key assumption for achieving these objectives was that the environment in which thesub-projects operate is adequate to sustain the subprojects. It was also assumed that managementand professional capacity of the PTA Bank would be adequate to monitor the sub-projects; andthat the sub-project managerial capability would be adequate to sustain them. As it may be notedfrom Chapter 4, some of the assumptions were too optimistic.

2.3 Project Description

2.3.1 The output of the project was to include a number of rehabilitated, resource-based as wellas new regionally and export-oriented projects. About 6 to 8 sub-projects had been anticipated tobe financed out of which the majority would have been regionally and/or export oriented.Basically, the line of credit was set up to finance private industrial development. Private sector-promoted tourist and small-scale mineral processing projects were also eligible for financing.

2.3.2 As a result, the line of credit provided the PTA Bank with foreign exchange resources tofinance a number of new as well as rehabilitation and expansion of existing industrial enterprises.While the main component for financing was capital equipment, the LOC I could also be utilisedto finance permanent working capital requirements. The sub-projects were to be selected,prepared and appraised by the borrower and approved by the Bank. Essentially, it was assumedthat the bank would have adequate capacity to identify and select viable projects within thestipulated objectives.

2.4 Project Formulation

2.4.1 The PTA Bank started full operations in 1993. The PTA Bank first invited the ADBGroup to participate in its equity capital in 1989. Following this invitation, the Bank Groupfielded an appraisal mission in April 1990 and subsequently joined the PTA Bank in 1991 as ashareholder. Following the latter's fulfilment of preconditions set for the Bank's participation init's capital, chief among which were a number of amendments to PTA Bank's Charter. At thetime, the PTA Bank invited the Bank Group to participate in its capital; it simultaneously made arequest for a line of credit of UA 40 million. Preparation of the line of credit was conductedsimultaneously with the appraisal of the equity investment.

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2.4.2 Appraisal of the line of credit was made contingent upon the PTA Bank preparing acredible pipeline of projects and a five-year Corporate Plan. These conditions were met by early1993 and in response to PTA Bank's renewed request for the line of credit, ADB launched a two-man preparation/appraisal mission in June 1993. The appraisal report was based on the PTABank’s 1993-1997 Corporate Plan and the pipeline of projects presented, from which it wasconcluded that a line of credit of UA 15 million would be adequate for a start.

2.4.3 The ADB Board of Directors approved LOC I in February 1994. The delay between thetime LOC I was appraised and when it was approved was due to long negotiations of the loanconditions. Chapters 3 and 4 discuss LOC I implementation and performance respectively.

3 PROJECT EXECUTION

3.1 Loan Effectiveness, Start-up and Modification

3.1.1 LOC I of UA 15.0 million, was approved by the ADB Board on 23rd February 1994 andsigned on 13th May 1994. The loan became effective on 14th March 1996. An implementationdelay of about two years was due to inability of the PTA Bank to prepare on time, its ProjectAppraisal Guidelines, which was required as a condition prior to entry into force. By the timeLOC I was appraised, the PTA Bank appraisal guidelines had not been prepared. As a conditionof the loan agreement, the bank was required to prepare the appraisal guidelines prior to entryinto force. It took about two years to fulfil the condition, which delayed the loan effectiveness byabout two years. The operational guidelines should have been in place prior to granting a linecredit to a DFI and should have been a condition to appraising the line of credit. Conditions ofthe Loan Agreement are presented in Annex 2.

3.1.2 In the beginning, the PTA Bank had difficulties in submitting sub-projects that were inline with the ADB’s policies and procedures. For instance, a number of subprojects submitted atthe beginning were rejected by the ADB due to problems ranging from proposals to procure fromineligible countries, sub-projects outside the sectors agreed upon, to large size of the sub-projects.This means that the PTA Bank had problem of conforming to the ADB conditions, whichrequired the bank to follow the ADB policy and procedures regarding preparation of sub-projects tobe financed under the proposed line of credit. After a poor start, the institution eventually picked upand started presenting sub-projects that were acceptable to the Bank. The early problems are alsoaccountable to the ADB’s failure to launch the project. It seems the ADB assumed that the PTABank had the adequate awareness and the ability to start LOC I without launching, which was awrong assumption. There were no modifications to the project design.

3.2 Implementation Schedule

3.2.1 During implementation of LOC I, the PTA Bank experienced a number of problems,including implementation delays, inability of certain project sponsors to fulfil the loaneffectiveness conditions and difficult and unstable economic environments affecting theimplementation of projects. These problems were exhibited in the number of project cancellationsrecorded and also on the arrears build-up on some projects as explained below.

3.2.2 The initial closing date was 31 December 1997. However, the deadline for finaldisbursement was extended for an additional year to 31 December 1998, which was to enable the

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institution to fully utilise the facility. The extension was made to compensate for the initial delaysexperienced by the PTA Bank in fulfilling the conditions for loan effectiveness. Despite theextension, however, LOC I was only 82.5% disbursed by the end of December 1998.

3.2.3 A slow and, in certain cases, cumbersome process of registering securities and delays infulfilment by the project sponsors of other loan pre-disbursement conditions was a major problemexperienced by projects funded under the LOC I. The bank recorded six cancellations of UA 8.7million for the following sub-projects: Bahari Mills Limited, Imperial Derby Refrigeration, CoralBeach Club, Waterfront Hospitality Ltd., GDC Hauliers (Zambia) Limited and Sembule SteelRolling Limited (Uganda). The main reason for these cancellations was the inability of promotersto satisfy principal terms and conditions of the facilities. GDC Hauliers and Imperial Derby sub-projects were cancelled because the promoters were able to obtain cheaper resources elsewhere.In certain cases, however, the cancellations were as a result of unpredictable fiscal and otherregulatory policy developments in their respective countries. These cancellations contributedgreatly to the delay in implementing the project.

3.3 Reporting

From the loan effectiveness the bank did not submit any single Quarterly Progress Reportas required under the general loan agreement. Until November 1999, the bank did not submit anyaudit report for the line of credit as required under the general conditions of the Loan Agreement.In November 1999, the bank submitted its first audited report to the ADB, following the previoussupervision mission request. In the absence of these reports, the ADB should have suspendeddisbursement.

3.4 Procurement

3.4.1 Procurement of goods and services with the proceeds of the loan was to be carried out inaccordance with principles and procedures satisfactory to the Bank. For procurement ofequipment, international shopping was to be used, i.e. at least three quotations from threedifferent member countries of the ADB was to be sought. However, for spare parts andreplacement of equipment, direct purchase was thought to be adequate.

3.4.2 The PTA Bank in most cases complied with these requirements. However, some of thegoods and services (for Torito Roses and Gatoka Roses) were procured from non-membercountries in contravention of the Loan Agreement. The PTA Bank was therefore in December1998 requested to refund the sum of US$ 1,633,701, which was used to finance goods from non-eligible countries. The amount in question was fully refunded by October 1999.

3.5 Financial Sources and Disbursement

3.5.1 The ADB contributed UA 15.0 million to the financial requirements of the bank. ThePTA Bank was able to negotiate other lines of credit from other financial institutions. TotalProject Finance lines of credit secured by the bank from the Export and Import bank of India,Exim-Bank of USA and Nedbank of South Africa amounted to UA 15.06 million. The bank hasalso successfully negotiated for new lines of credit with Exim-Bank of China (USD 20.0 million)and Small Industries Development Bank of India (USD 10.0 million).

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3.5.2 For its Trade Finance activities, the bank has mobilised short-term lines of creditamounting to UA 11.3 million from Afrexim-Bank and Nedbank of South Africa. The banklaunched the pre-shipment finance facilities (SPFF) and the commercial paper program whichtogether mobilised UA 86.3 million over the 1994-1998 period which assisted exporters fromMember States of the PTA access credit facilities for their operations. In March 1999, the bankissued a floating rate bond instrument on the Kampala Stock Exchange and raised USD 5.0million in local currency. Hence, the bank has had some success in mobilising resources.

3.5.3 With regard to disbursement, the line of credit was projected to be disbursed in threeyears from about June 1994 to about June 1997. Thus, the final disbursement was set on 31December 1997. However, due to the initial implementation delays mentioned above, firstdisbursement was made in May 1996. As indicated in Table 3.1 below, disbursement was carriedout in three years. Reimbursement method of disbursement was used, which facilitated speedyphysical implementation of the subprojects. By end of December 1998, total disbursementamounted to UA 12.37 million, or 82.5% of the line of credit. The balance is due to be disbursedto the committed sub-projects approved by the ADB.

Table 3.1: Disbursement of LOC IIn million UA

Year ofDisbursement

ProjectedDisbursement

ActualDisbursement

1995 5.00 Nil1996 5.00 5.0611997 5.00 4.8721998 Nil 2.437Total 15.00 12.370

4 PROJECT PERFORMANCE AND RESULTS

4.1 Overall Assessment

4.1.1 Specific conditions of the Loan Agreement are presented in Annex 2. Two otherconditions, viz. (a) recruitment of an internal auditor and (b) appointment of directors for ProjectFinance and Trade Finance were fulfilled. However, the fulfilment of these conditions came at amuch later date than specified in the loan agreement. The Internal Auditor was recruited in 1997contrary to the Loan Agreement, which required recruitment within six months of the loansignature. The Director for Trade Finance was recruited in 1998 contrary to the Loan Agreement,which required recruitment within twelve months of loan signature. The loan was signed in May1994. The PTA Bank failed to give satisfactory reasons for the delay in fulfilling theseconditions. The other conditions, which were fully fulfilled required the PTA Bank (a) to ensurethat environment impact of sub-projects is properly assessed; (b) not to commit more than 25%of the line of credit in one country; and (c) to charge a minimum spread of 2% on sub-loans.

4.1.2 One condition that was not fully fulfilled was the requirement of the PTA Bank to reviewits organisation structure and propose within 12 months of loan signature, a new structure thatwould reduce to a maximum of four department heads required to report to the President. Such

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new structure was to include an Internal Audit Unit. Contrary to the Loan Agreement, the 1999organisation chart (Annex 4) has five departments and three organisational units. The PTA bankalso failed to submit quarterly reports as required under the general loans Agreements. The firstaudited report was submitted in November 1999.

4.1.3 Hence, overall the PTA Bank had shortcomings in fulfilling the conditions of the loanagreement and implementing the line of credit according to the agreed principles.

4.2 Operating Results

4.2.1 The outputs of the project were to include a number of viable resource-based and export-oriented projects. About 6 to 8 sub-projects were anticipated to be financed. However, by end of1998, the line of credit was committed to 17 sub-projects totalling UA 14.9 million anddistributed in seven PTA Bank member countries. It was originally expected that the bank wouldfinance relatively large projects, with an average loan amount for each sub-project of about UA 2million, given that the PTA Bank is a regional institution. However, as it turns out, the bankconcentrated on SME that it found to be more commercially acceptable. As at December 31,1998, total disbursements to 17 sub-projects amounted to UA 12.30 million.

Table 4.1: Geographical Distribution of Sub-projects

Country No. of Sub-Projects Value in UA 000's

1. Eritrea 1 2772. Malawi 1 4483. Kenya 2 2,3024. Sudan 2 2,5005. Uganda 5 2,5466. Tanzania 3 3,3667. Zambia 3 3,473

Total 17 14,912Sectors No. of Sub-Projects Value in UA 000's

1. Floriculture 7 4,0672. Manufacturing 4 3,2253. Agro-process 3 4,0374. Tourism 2 2,2455. Mining 1 1,338

Total 17 14,912

4.2.2 Of the sub-projects financed, seven (7) are in agriculture, three (3) are in agro-industry,four (4) are in manufacturing, two (2) are in tourism and one (1) is in mining. The sectoraldistribution by value indicates that agriculture; agro-industries and manufacturing are the mainbeneficiary sectors accounting for 27%, 22% and 22% of the total intervention respectively.Tourism accounts for 15% of the total intervention, while mining and textiles account for 9% and5% respectively. The sectoral distribution indicates that the objectives of the line of credit tofinance SME in the sectors agreed upon were achieved.

4.2.3 LOC I was to finance export-oriented projects, with preference given to regional orientedprojects. As it may be noted from Annex 3, of the 17 sub-projects financed, 12 are export-oriented; which substantially achieve the main objective of the line of credit of financing export-oriented projects. However, the achievement of the objective of financing regional projects has

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not been realised since there is no regional project with joint ownership among member states ofthe PTA sub-region. In spite of the fact that the line of credit did not finance any direct regionalproject in terms of ownership, a number of sub-projects have some regional impact in terms ofmarket sources, raw materials and, in certain cases, employment.

4.3 Sub-project Performance

4.3.1 LOC I supported 17 sub-projects in seven Member Countries in the tourist, agri-business,manufacturing and mining sectors. It supported 12 new enterprises and 5 existing enterprises forexpansion, rehabilitation and modernisation. It created 1,830 job opportunities, of which 947(52%) are for women. Of the LOC I loans approved to the 17 sub-projects, 13 were co-financedwith other development finance institutions, including EADB, IDB of Kenya, TDFL of Tanzania,DBZ of Zambia and ZDB of Zimbabwe. The sub-projects are also contributing to regionalintegration of member countries through exports of some goods as the case for Kenya andUganda, whereby some of the sub-projects are exporting to neighbouring countries. Some sub-projects are importing construction and raw materials required by some sub-projects from thesub-region, particularly from Kenya and Zimbabwe.

4.3.2 By September 30, 1999, eleven sub-projects (Annex 5), mostly export-oriented projects,were operating satisfactorily. Seven of the sub-projects were in serious arrears of UA 200,000and above, and one of them, Graphtan, being a non-performer had been sold. Arrears accountableto LOC I sub-projects amounted to UA 4.77 million by 30 September 1999, which was about17% of total project arrears of the bank and 34% of LOC I portfolio. Four sub-projects (Sapco,Graphtan, Packaging House and Paraa Lodge) account for 73% of LOC I arrears. Arrearsaccountable to the seven poor performing sub-projects amounted to UA 4.26 million or 89% ofLOC I arrears. Sub-projects affected by serious arrears are presented in Table 4.2.

Table 4.2: Sub-projects Affected by Arrears as at 30/09/1999

Name of Subproject Amount ofArrears

(UA Million)

% of totalLOC Iarrears

Summary Reason for Arrears 1

Sapco (Zambia) 1.34 28% Local demand affected by depressed economyGraphtan (Tanzania) 1.35 28% Poor quality product due to inappropriate technologyPackaging House (Sudan) 0.44 9% Shortage of imported raw materialsParaa Lodge (Uganda) 0.40 8% Past insecurity in the area reduced number of touristsTansales (Tanzania) 0.32 7% El Nino followed by dry weather reduced cottonEritrea Foam (Eritrea) 0.22 5% Have a problem of importing raw materialsEquator (Uganda) 0.19 4% Initial marketing difficulties of its floriculture products

Sub-total 4.26 89%Others (10 subprojects) 0.51 11%Total LOC I arrears 4.77 100%

4.3.3 The performance of the sub-projects is accountable to a number of factors. In some casesthe PTA Bank selected projects which were not well prepared. For instance, Graphtan would nothave been selected if the bank had used expertise in mining and processing operations. Graphtanfailed from the start to produce the quality and quantity of the intended graphite, because themachines imported were second-hand, which was known at the time of appraisal. Thus,technology of Graphtan was inappropriate for the quality of products required.

1These problems are discussed in paragraphs 4.3.3 – 4.3.5. See also Annex 7.

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4.3.4 In addition, the PTA Bank failed to assess the capacity of some project promoters tocontribute their committed capital to their projects. A number of promoters had difficulties tomeet their capital contribution obligations. Most affected were those new projects that were beingpromoted by emerging entrepreneurs, such as MK Flora. Some of the project sponsors were unableto raise additional local funds required to implement the sub-projects due to inflation. The situationmight have been aggravated by the fact that many promoters may not have disclosed their financialpotential honestly before their sub-projects were approved. This caused delays in implementing theprojects, and in some cases the operations of the sub-projects were scaled down due to inadequateworking capital.

4.3.5 In some cases, however, the problems were beyond the PTA Bank and the projectpromoters due to the environment in which those sub-projects operated. For instance, Tansales inTanzania has operational difficulties caused by El Nino, which was followed by dry weather inthe area. This means that for two seasons the area failed to produce adequate cotton for the sub-project. In other instances, insecurity in the areas in which the sub-projects operate or in theexport markets has affected the sub-project operations. This was the case for Paraa Lodge inUganda and Eritrea Foam in Eritrea have local insecurity, and Britannia Foods which is facingproblem of export market due to insecurity in the DRC. Local economic environment is alsoresponsible for the poor performance of some of the sub-projects. For instance, Sapco in Zambia,which is local resource-based company producing building materials for local market, is facingproblem of depressed Zambia market, because of declining purchasing power in the country dueto inflation and poor performance of local industries. Instability of international markets is alsoaffecting some of the export-oriented sub-projects, especially floriculture.

4.4 Institutional Performance

4.4.1 The institutional framework in which the PTA Bank is operating has not changed sincethe line of credit was granted. The PTA Bank’s legal framework allows it to operate throughthree windows, which are Project Finance, Trade Finance and Special Operations. SpecialOperations represent specific projects and programs, outside the Bank’s core business, initiatedinternally or externally, which the Bank implements as part of its wider role of institutional andcapacity building in the region. Since the line of credit was granted, the PTA bank has beencarrying out these same activities, with the exception of the travellers’ cheques, which werestopped in December 1996 due to declining demand.

4.4.2 Authorised capital stock of the PTA Bank has been maintained at UA (SDR) 400 million,of which one-third (UA 133 million) is payable and two-thirds (UA 267 million) is callable. As atSeptember 30, 1999, membership of the bank comprised 15, out of the 23 member States ofCOMESA and the African Development Bank. This is an increase by two member countries(Eritrea and Sudan) since the line of credit was granted. Eritrea and Sudan joined the Bank duringthe period 1994-1998. Egypt and the Peoples’ Republic of China have been admitted as amembers of the PTA Bank.

4.4.3 UA 226.80 million has been subscribed, of which UA 151.20 million is callable and UA72.56 million payable. As at 30 September, 1999, the amount due for payment was UA 74.40million, of which UA 62.68 million, or 86.4%, was paid in and the balance of UA 9.88 million(13.6%) was in arrears.

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4.4.4 By the time of granting the line of credit, UA 51.4 million (94.6% of the called amountdue) had been paid and UA 2.9 million (5.4%) was in arrears. This means that, although paidcapital has gone up by 22% since the line of credit was appraised, overdue capital payments havegone up by 240%, from UA 2.9 million in 1993 to UA 9.88 million in September 1999. BySeptember 30, 1999, six countries, which were facing economic hardship, were in capitalsubscription arrears: Comoros, Djibouti, Eritrea, Somalia, Sudan, and Tanzania. Apart fromADB, the bank has not managed to attract other non-member countries to join the bank. In 1997,the bank launched a general capital increase, which aims at attracting all COMESA members andnon-COMESA countries within and outside the region. This is an initiative through which capitalexporting countries and all COMESA countries, which are not yet members, could join the bank.A list of current shareholders of the PTA Bank as on 30th September 1999 is provided in Annex 4.

Management

4.4.5 Since its inception, the top management of the PTA Bank has not undergone anyfundamental change. As at appraisal of LOC I, the statutory policy organs of the PTA Bankinclude a Board of Governors and Board of Directors. Each member of the PTA Bank appointsone Governor and one alternate Governor. The position of Board representation has not changedeither. The Board of Directors consists of not more than seven directors, of whom five and theiralternates are appointed by the Member States and the remaining two by Members of the PTABank, other than Member States. The members of the Board of Directors are appointed for termsof three years. The current Board of Directors consist of six members from the background offinance (central banks, DFIs and commercial banks). For its equity investment, ADB isrepresented on the Board and attendance has been satisfactory. The President of the PTA Bankwho is elected for a five-year term by the Board of Governors is its Chief executive.

4.4.6 Since granting the line of credit, the PTA Bank has had a high turnover of its middlemanagement staff. For instance, 1994, there has been three Directors of Finance, two of themhave been removed from office and one of them resigned. Thus, the position of Director ofFinance has been filled three times in five years, which implies instability. There has also beeninstability in the position of the Director of Legal Affairs. In addition, the former President of thebank had, on several occasions, been accused of mismanaging the institution and beingresponsible for several financial irregularities. The Board of Governors renewed his second termof office one-year in advance and without the renewal being discussed by the Board of Directors.He was dismissed in February 2000.

Organisational Structure

4.4.7 At the time of appraisal, the PTA Bank was organised in seven departments, all of whichreported to the President. It was recommended to the PTA Bank at the time of appraisal to reduceits span of control to four departments, excluding the Internal Audit Unit. As a condition of theLoan Agreement the PTA Bank was required to review its organisation structure within 12months of loan signature, and come out with a new structure that would reduce to a maximum offour department heads required to report to the President. Such new structure was to include a Unitfor Internal Audits. The current organisation structure (Annex 5) has five departments and threeorganisational units all reporting to the President. The number of departments and units that reportdirectly to the President has thus expanded the span of control of the President to eight.

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4.4.8 Since the approval of the loan in 1994, the PTA bank has made four major changes to itsorganisational structure. They include the (a) creation of an Internal Audit Department; (b)creation of the Credit Follow-up and Control Unit; (c) appointment of separate Directors for theTrade and Project Finance departments; and (d) elevation of the Management InformationSystem Unit into a fully- fledged Information Services Department. The Internal Audit wasestablished as a fulfilment of the condition of LOC I Loan Agreement.

Staff and Training

4.4.9 At the time of appraisal, the total staff strength of the PTA Bank stood at 38, of which 16,(42%), were classified as professionals and 22 (58%) as general service staff. By that time, theexisting staff was not adequate for the projected operations of the institution. For instance, thebank had only three project officers in the project department, which was not adequate to coverits member states. However, by September 30, 1999, the total number of staff was 62 of which 33(53%) were professional and 29 (47%) supportive staff. The ratio of professional staff tosupportive staff improved from 0.73 in 1993 to 1.14 in 1999. The same applies to the ratio ofprofessional staff to loan, which improved from UA 1.34 million per professional staff in 1993 toUA 5.80 million per professional staff in 1999. Most of the professional staff has post-graduatetraining. Table 4.3 shows the ratio between professional and support staff at appraisal and at thepreparation of the PCR.

Table 4.3: Staffing Position

CATEGORY1993

at appraisal1999

at PCRProfessionalsSupport Staff

1622

3329

TOTAL 38 62Ratio: Professional to Support staff 0.73 1.14Loans to professional staff (UA million) 1.34 5.80

4.5 Operational Performance and Results

4.5.1 Operations of the PTA Bank for the period 1994-1999 are summarised in Annex 6. At thetime of appraisal, the PTA Bank was financing mostly trade finance activities. The bank starteddealing with project financing activities in 1993. As indicated in Annex 6, cumulative approvalshave grown from UA 68 million in 1994 to UA 155 million in 1999, a cumulative growth of128% in five years.

4.5.2 The bank’s project loan portfolio, which stood at zero in 1992, before appraisal of theLOC I, has grown to UA 75.23 million as at 30th September 1999 Annex 6. However, the numberof the non-performing assets has negatively affected the quality of the portfolio. Total arrears hadrisen to UA 27.8 million or some 37% of total arrears as at 30th September 1999, of which 47%was more than nine months old. Trade finance arrears amounted to UA 5.5 million, or 19.4% ofportfolio. The level of arrears has grown from 8% of the portfolio in 1994 to 37% of the portfolioin 1999, which indicates that the bank is facing serious operational problems.

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4.5.3 Analysis of arrears indicates that UA 9.6 million, or 34% of the arrears was accountableto seven non-performing private sector projects. In addition, UA 8.3 million, or 30% of thearrears was accountable to four government-owned projects, for which repayment is guaranteedby their respective governments. This means that about 18 million, or 64% of the arrears wasaccountable to only 11 projects, out of a total of 75 projects in the portfolio. Causes of arrears aredescribed as (a) poor selection and appraisal of projects; (b) unfavourable investment climate incertain countries (inflation, foreign exchange fluctuation, etc.); (c) poor weather conditions (e.g.El Nino impact on agriculture and tourist projects in Tanzania, and floriculture sub-projects inKenya and Uganda); and (d) insecurity which has affected export markets in DRC. Slackness onthe part of the PTA Bank in selecting and preparing some of the sub-projects is also responsible.

4.5.4 In order to address the problem of arrears, the PTA Bank established in 1997 a CreditFollow Up and Control Unit (CFCU) with three staff members. The Unit is responsible formonitoring and following up the loans in arrears. In addition, in 1999 the PTA Bank establishedan independent Arrears Recovery Committee. The Committee, which is chaired by the President,monitors, on a weekly basis, implementation of action plans for collection of arrears as presentedby the CFCU and the operations departments. The Committee consists of top management fromnon-lending departments. The bank is currently taking legal actions to recover overdue accountsfrom non-performing assets. The PTA Bank is also taking steps to recover arrears fromgovernment guaranteed loans. However, given the current situation of arrears, the actions takenso far have not born results. In order to improve its viability, the bank has to prepare a realisticaction plan to bring down the arrears to at least 10% of the portfolio. The plan should include,among others collecting arrears from government guaranteed loans and other good projects,restructuring the portfolio, and cleaning the balance sheet2.

4.5.5 In the past, the bank relied more on its staff, using more or less a rule of thumb, to assesscommercial risks of projects. This led to accepting several projects with high risks, which shouldhave been avoided. To minimise potential project risks, the bank should prepare a policy oncommercial risk analysis of projects. For instance, the bank should start preparing sector profiles,which should strengthen the risk analysis policy. Initially, the PTA Bank should recruit a riskanalysis expert, and as the bank grows a Risk Management Unit should be established. Theresponsibility of the Risk Analysis Expert would be to prepare sector profiles, country risk profilesand project risk analysis criteria.

4.6 Financial Performance

4.6.1 Since the ADB granted a line of credit to the PTA Bank in 1993, total income beforeexpenditure increased by 135% from UA 4.72 million in 1993 to UA 11.11 million in 1998.Project financing activities (mainly by ADB LOC I) accounted for most of the increase,registering a growth in income from UA 1.0 million in 1993 to UA 6.0 million in 1998. Duringthe same period, trade finance income increased from UA 1.45 million to UA 2.32 million. As aresult of these increases, operational income as a ratio to total assets improved from 7% in 1993to 9% in 1998.

2 By end of December 1999, project arrears had reached UA 32.2 million, or 48% of the project portfolio. however,information received from the PTA Bank (Annex 11) indicate that arrears had been reduced to UA 21.9 million byMarch 2000 and to UA 19.0 million by end of May 2000. This was due to clearance of arrears by the Government ofUganda on its guaranteed loans.

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4.6.2 Historical financial statements of the PTA Bank are presented in Annex 7 and summarisedin Table 4.4.

Table 4.4: Highlights of Historical Financial StatementsIn million UA

Period (End December) 1994 1995 1996 1997 1998

Project loan income 2.21 3.90 5.21 6.09 5.90Total income 6.16 8.37 8.30 9.62 11.11Financial costs 0.94 1.57 1.94 1.59 2.43Admin/staff expenses 4.02 3.30 3.48 3.66 4.37Operational profit 1.20 3.50 2.88 4.16 4.09Provision for doubtful a/c 4.72 3.26 1.61 2.60 2.18Net Profit (loss) (3.53) 0.20 1.27 1.56 1.90Project finance portfolio 24.18 37.09 54.35 62.34 61.26Trade finance portfolio 33.87 20.86 18.69 21.52 28.00Current assets 28.77 25.07 24.82 27.29 31.02Long-term debts 3.01 2.82 10.46 18.31 20.07Paid Share capital 57.59 57.59 61.01 61.93 63.93Total equity 63.56 63.97 69.25 72.17 74.98Total assets 86.50 81.32 95.27 109.79 118.95

Some Ratios:Current ratio 1.5 1.7 1.6 1.4 1.3

Debt/equity ratio 0.4 0.3 0.4 0.5 0.6

Equity to total assets (%) 73% 79% 73% 66% 63%

Loan portfolio/total assets (%) 72 78 78 76

Return of equity (ROE) % (5.5) 0.3 1.9 2.2 2.6

Admin expenses/total assets (%) 4.8 3.9 3.9 3.6 3.8

4.6.3 As a result of the growth in the loan portfolio, total assets increased from UA 83 millionin 1993 to UA 119 million by end of 1998, an increase of 43% in five years. During the sameperiod, a significant growth was recorded in project financing activities, with loan balancesincreasing from UA 10.7 million to UA 61.2 million, 22% of which was accountable to LOC Iportfolio. Trade finance loans increased from UA 50.22 million in 1993 to UA 225.87 million in1997. Equity participation amounted to UA 1.64 million during the period.

4.6.4 In spite of the operational growth, the financial performance of the PTA Bank has beenwell below expectation since the ADB first invested in the bank in 1991. For instance, projectincome was projected to peak-up from UA 1.5 million in 1993 to UA 12.2 million in 1997.Actual project income in 1997 amounted to UA 6 million. Besides, while the bank has madeprofits through the years since appraisal (except in 1994), the profits generated have been farbelow the level projected at the time of appraisal. Actual net profit in 1997 amounted to UA 1.6million, which was far below the forecast amount of UA 10 million. Project portfolio in 1997amounted to UA 62 million, which was 69% of the projected amount of UA 90 million.Projections made at appraisal are presented in Annex 8. Besides, given the high level of arrears,the provisions made seem to be on a lower side, which means that losses on portfolio could bemuch higher than what is actually provided in the income statements. The Bank's book value pershare had increased by about 18% as at the end of 1998, which is low given that the bank hasnever paid any dividend since it started operations in 1990.

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4.6.5 As stated in section 4.5, the quality of the portfolio has been deteriorating since the firstline of credit to the bank was appraised in 1993. As indicated, total project arrears as at 30September 1999 amounted to UA 27.8 million. The trade finance in arrears amounted to UA 5.5million as at the same date, which brought total project and trade finance arrears to UA 33.3million by end of September 1999. Bearing in mind that at the time of appraising the first line ofcredit in 1993, total project arrears amounted to only 8 per cent of the project portfolio, thecurrent situation demonstrates a considerable deterioration. Besides, capital subscription inarrears was UA 9.88 million (14 per cent of called capital). Thus, overall overdue accountstotalled UA 43 million, by end of September 1999. Therefore, given the high level of arrears andthe large number of non-performing projects in the portfolio, it can be concluded that the viabilityand sustainability of the PTA Bank is uncertain.

4.6.6 Besides, while the current ratio as at 31 December 1998 was 1.3, the liquidity position ofthe bank is very weak given that current assets included 42% of loans due for collection,including those in arrears. This implies that the bank will soon face a liquidity crisis and that itmay need bridge financing in short-term, re-capitalisation in the long-term. Therefore, given thepoor performance of the bank, the proposed second line of credit should be delayed.

4.6.7 In the new development, special auditors appointed by the Board of Directors of the PTABank reported in January 2000 that by end of December 1999, the financial position of the PTABank had worsened further, as the arrears had increased to about 48 per cent of the loan portfolio.After reviewing the loan portfolios, and the adequacy of provisions for bad and doubtful debts,the special auditors found out that the 1998 accounts had been inflated by UA 29.4 million.Indeed, after a critical assessment of the loan portfolio, the bank made specific provisionsamounting to UA 14 million for 1999, which is high compared to UA 2.17 million made in 1998.As a result of these massive provisions, the bank incurred a loss of UA 12 million in 1999,compared to a profit of UA 1.9 million in 1998. This implies that the PTA Bank may need to bere-capitalised in the near future, if adequate measures are not taken to improve the financialviability of the bank.

4.7 Economic Performance

4.7.1 The LOC I was approved at a time when most of the member states of the PTA wereundertaking Structural Adjustment Programs involving economic liberalisation policies andemphasising private sector development as an engine of growth and development of their variouseconomies. Consequently, there was a high demand for direct private sector project financing.The provision of the LOC I at favourable interest rate provided the needed resources for projectfinancing. The line of credit also provided a catalyst for the mobilisation of private domestic andforeign capital for project financing in the sub-region.

4.7.2 The sub-projects financed under the line of credit are contributing to the generation offoreign exchange, as most of the projects are export-oriented establishments. It is estimated thatin 1998, the sub-projects financed under LOC I generated foreign exchange in excess of USD 10million (excluding Graphtan, which has been sold), which is expected to increase once all thesub-projects, come on full stream. The use of local raw materials inputs by some sub-projects hascreated significant forward and backward linkages between national economic sectors andregional integration through supplies across borders and enhanced technology transfer. The LOC

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I is also contributing to enhancing the investment environment within the sub-region. The PTABank estimates that the sub-projects created 1,830 direct jobs and if it is assumed that there aretwo indirect jobs for every direct job created, then it could be said that some 5,500 direct andindirect jobs were created by LOC I. However, poor performance of some sub-projects mayresult in less economic benefits than what is anticipated at present.

4.7.3 Besides, recent macroeconomic performance of the PTA member countries has impactedunfavourably on subprojects particularly import-substitution subprojects that source most of theirinputs from external sources. Instability of their national currencies, high rates of inflation andhigh interest rates are factors affecting projects financed under LOC I.

5 SOCIAL, ENVIRONMENTAL AND SUSTAINABILITY

5.1 Social Impact

The LOC I created direct and indirect jobs. The LOC I has therefore contributed to theenforcement of social cohesion and alleviation of poverty. It has also contributed to addressinggender issues. As at 30th September 1999, a total number of 947 jobs or 51.7% of total direct jobscreated were for women. The sectors that have been especially supportive of women employmentinclude Agribusiness (Floriculture) and Tourism (Hotels). Besides, agri-business sub-projectsfunded by the LOC I are located in the rural areas and have therefore contributed to rural income.The social impact is considered significant considering the fact that a loan of only UA 15 millionhelped to create 1,800 jobs. The social benefits will depend on the overall performance andsustainability of the sub-projects.

5.2 Environmental Impact

The Loan Agreement requires the PTA Bank to follow the Bank Group’s guidelinesregarding impact assessment of the sub-projects on the environment and to provide an EIA reportto the Bank for review for each sub-project with significant potential adverse effects on theenvironment. All the 17 sub-projects comply with ADB’s environmental guidelines. Theirproduction and business processes are environmentally safe, considering that most of the sub-projects are floriculture, agro-process and hotels. Thus, no sub-project so far funded by the LOC Ihas been of any environmental concern to the local and national authorities. No significantnegative environmental effects were noted at the sights of the sub-projects visited.

5.3 Project Sustainability

5.3.1 Overall the impact of the LOC I could be said to be positive despite difficultiesexperienced by some sub-projects reflected by 34% arrears of LOC I portfolio. Indications arethat the positive impact of the sub-projects will be sustained. Most of the sub-projects which areexport-oriented are not only earning foreign exchange but are also embarking on diversificationof their export markets and promotion of their products in neighbouring countries therebypromoting intra-regional trade and integration. The sub-projects are also contributing to industrialgrowth and development in their national economies.

5.3.2 The sustainability of the sub-project benefits will, to a large extent, depend on themacroeconomic and investment environment in which they operate. The sub-projects are now

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operating within a restructured macroeconomic and investment framework favourable to privatesector initiative and development brought about by the pursuit of the Economic Recovery andStructural Adjustment Programs in the Member States of the PTA Bank. The economies areliberalised and private sector development and industrialisation is emphasised as a strategy ofeconomic growth and development.

5.3.3 The general economic environment in the COMESA has experienced some positivechanges, however moderate, since the 1990s compared to the stagnation and deterioration in thepast two decades characterised by external imbalances, falling export revenue and low levels ofinvestments. Since the 1990s, the sub-region has made significant improvements. There has beenappreciable growth in the number of its trained labour force and major improvements have alsobeen made in its infrastructure: roads, ports, telecommunications, and power. COMESA recordedan average GDP growth of 4% over the 1990-1997 period. Thus, overall the sustainability of thesub-projects will depend very much on the investment climate in which they operate.

5.3.4 It must be noted that the sustainability of the PTA Bank is important to the sustainabilityof the line of credit. Therefore, given the poor performance of the overall portfolio of the bank,there is a risk that the viability of the bank may not be sustained, unless actions are taken tosalvage the bank.

6. PERFORMANCE OF THE BANK AND BORROWER

6.1 Performance of the ADB

6.1.1 The intervention of the Bank Group was timely. The LOC I was granted to the PTA Bankat a time when most of its member countries were implementing economic recovery andStructural Adjustment programs. The Line of Credit therefore assisted the bank meet theincreasing demand for project financing by its member states. During project implementation, thebank adopted the reimbursement method of disbursement. The use of this method reduceddisbursement delays. As a result, physical implementation progressed smoothly for most of theprojects.

6.1.2 However, the ADB did not launch the line of credit, even when it was known at the timethat experience of the PTA Bank in project finance was limited. Besides, LOC I was the firstADB line of credit to the bank. The combination of these two factors meant that the line of creditshould have been launched. Further, overall performance on the part of the ADB in respect ofproject supervision was very weak. Throughout the project implementation period, there wasonly one supervision mission involving one-person 17-day field mission at the last stages of theimplementation period (November 1998) when about 80% of the project funds had beendisbursed. Besides, by the time of PCR, only two sub-projects had ever been visited by an ADBmission. The procurement of goods from non- member countries, which was undertaken by theborrower, could have been avoided if ADB supervision of the LOC I was undertaken at earlystages of the implementation of the project. Non-compliance of one loan condition, and a delay infulfilment of two other conditions mentioned in section 3.2, on the part of the PTA Bank, wentunchecked because of lack of supervision by the ADB. The ADB should have insisted onproducing the quarterly reports, by suspending disbursement.

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6.2 Performance of the PTA Bank

6.2.1 After an initial delay of two years, the PTA Bank implemented the LOC I within threeyears, which was acceptable. The bank submitted twelve export-oriented sub-projects, which wasin line with the concept of the line of credit.

6.2.2 However, the PTA failed to comply with various conditions of the Loan Agreement. Thebank failed to comply with the condition requiring it to review its organisation structure to reducethe span of control of departments that report to the President to a maximum of 4 within 12months of loan approval. As already stated, until November 1999, the bank did not submit anyaudit report for the line of credit as required under the general conditions of the Loan Agreement.Besides, the bank did not submit quarterly progress reports since loan effectiveness. Furthermore,the bank made procurements, in some cases, from non-member countries, which is contrary to theconditions of the Loan Agreement. Hence, in a number of cases, the performance of the PTABank has been lacking, as far as implementation of LOC I is concerned.

7. OVERALL PERFORMANCE AND RATINGS

7.1 As earlier noted, the objective of the LOC I include (a) the promotion of new and supportexisting viable resource-based; (b) promote export-oriented projects in the member Countries ofthe PTA Bank; (c) provide term lending and other development services to industrialinvestments, particularly those with regional impact in the Member states of the institution.

7.2 Viewed against the context of the objectives of LOC I, the impact it has had, on enablinga significant number of sub-projects to modernise their equipment and machinery as well asexpand their operations, the line of credit has made an important positive contribution to meetingthe sector’s objectives. The LOC I supported a number of new and expansion projects that havemade important contributions to the foreign exchange earnings and employment generation andhave been an important medium for acquisition of technological skills.

7.3 However, the impact the LOC I operations have had on regional integration and thepromotion of intra-regional trade have been weak. No appreciable inter-regional trade have beenrecorded as attributable to the direct operation of the sub-projects and no significant regionalintegration impact has been created, except that some cross-border positive benefits are traceableto market and raw material sources and in some cases to creation of jobs. In addition, overallperformance of the LOC I is negatively affected by a high level of arrears, whereby 7 subprojectsdisbursed were in arrears of more than UA 200,000 each by end of September 1999.

7.4 From the point of view of the operational performance of the PTA bank, however, theresources made available under the Line of Credit contributed to the operational performance ofthe bank and have had an impact on its revenue. The line of credit has also had a positive impacton the training of the PTA Bank staff in project operations, especially since LOC I was the firstline of credit to the bank. However, given an increasing amount of arrears in both capitalsubscription and investment portfolio, there is a growing concern that the overall performance ofthe PTA Bank is deteriorating. Overall rating of the project is 1.9, which is unsatisfactory. Thisreflects poor performance in several areas as indicated in Annex 9.

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8. CONCLUSION, LESSONS LEARNT AND RECOMMENDATIONS

8.1 Conclusion

8.1.1 Financing 17 sub-projects has completed the implementation of the First Line of Credit tothe PTA Bank. Twelve (71%) of the number sub-projects funded are export-oriented enterprises,which substantially achieves one of the main objectives of the line of credit, which is to financeexport-oriented projects. LOC I has contributed to the creation of new direct and indirect jobs.

8.1.2 The sustainability of the sub-projects will depend on their respective management, as wellas on the investment environment in which they operate. The sub-projects are operating within arestructured macroeconomic and investment framework favourable to private sector initiative anddevelopment. The economies in most member countries of the PTA Bank are liberalised andprivate sector development and industrialisation is emphasised as a strategy of economic growth.Hence, the environment in which most of the sub-projects operate is suitable to sustain them.

8.1.3 On the other hand, given that 34% of LOC I portfolio was in arrears in September 1999,the performance of the line of credit could be said to be unsatisfactory. Thus, the level of arrearsraises the question of sustainability of the sub-projects.

8.1.4 The PTA Bank itself is facing a serious financial crisis, which is reflected in the poorperformance of the bank’s portfolio. The financial viability of the bank is put at risk by anincreasing number of non-performing projects in its portfolio and arrears, which reached 37% ofthe portfolio, by end of September 1999 and 48% by end of December 1999. Total arrears(including projects, trade finance and capital subscription) amounted to UA 43 million by end ofSeptember 1999 and UA 54 million by end of December 1999, which is very high for a smallinstitution, whose total assets amounted to about UA 120 million and total equity of about UA 75million. Thus, serious and quick efforts should be made by the bank to reduce its present level ofarrears to an acceptable level. This might require technical assistance to finance specialisedconsultants to restructure the portfolio of the bank. A diagnostic study to review the managementand operations of the bank could be useful as the first step.

8.2 Lessons Learned

8.2.1 The following are lessons leant from the line of credit

a) Working capital: Project promoters, particularly emerging-entrepreneurs haveproblems of mobilising equity capital, mainly for buildings, civil works and initialworking capital. In many cases, a project is approved, disbursement made and evenequipment arrive on site, without the promoters having fulfilled their commitment tomobilise adequate resources for their project. Therefore, rigorous appraisal must beconducted to ensure that the emerging entrepreneurs have adequate capital (at least40% of project cost) before such projects are accepted by a DFI.

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b) Risk analysis of projects: The PTA Bank has accepted projects with high risks, whichshould have been avoided, if proper risk analysis had been made. A lesson from this isthat DFIs should prepare policies on commercial risk analysis of projects to beimplemented by Risk Management Units, whose responsibility would be to preparesector profiles, country risk profiles and project risk analysis criteria.

c) Launching and Supervision: Performance of the first line of credit would have beenbetter if the project was launched and supervised at least once a year. It is a lessonthat confirms what the Bank is well aware of, and what it is supposed to do for allprojects.

8.3 Recommendations

8.3.1 In view of the findings of the PCR, it is recommended as follows:

a) A diagnostic study should be conducted to provide information for restructuring thePTA Bank’s finances, organisation, management and operations, in the short-termand to provide a long-term operational strategy for its operations;

b) The diagnostic study should also consider streamlining the organisation structureby reducing the span of control of the President, along the lines of LOC I Agreement,and by incorporating a Monitoring and Evaluation Unit, and an Economic Planningand Research Unit, as well as Risk Management Unit; and

c) After the diagnostic study, the PTA Bank should prepare a short-term action planthat would improve its financial viability. Depending on the outcome of the study,a short-term plan might include: (i) restructuring the capital base; (ii) taking measuresto restructure and improve the quality of the loan portfolio; (iii) measures to clean upthe balance sheet, (iv) measures to re-capitalize the bank, and (v) measures to collectsubscribed and called capital in arrears.

Annex 1FIRST LINE OF CREDIT TO THE PTA BANK

PROJECT COMPLETION REPORT

MOROCCO

ALGERIA

WESTERN

SAHARA

MAURITANIA

TUNISIA

LIBYA

EGYPT

CAPE VERDE

SENEGALGAMBIA

GUINEA BISSAU

MALI

GUINEA

SIERRA LEONE

LIBERIA

COTE

D’IVOIRE

BURKINA FASO

GH

AN

A

TO

GO

BE

NIN

NIGERIA

NIGER

CAMEROON

CHADSUDAN

ERITREA

ETHIOPIACENTRAL AFRICAN

REPUBLIC

SOMALIA

KENYAUGANDA

EQUATORIAL

GUINEA

GABON

CONGO

D.R.C.. RWANDA

BURUNDI

TANZANIA

ANGOLA

ZAMBIA

MALAW

I

MOZAMBIQUE

NAMIBIA

BOTSWANA

SOUTH AFRICA

ZIMBABWE

SWAZILAND

LESOTHO

COMOROS

MADAGASCAR

MEMBER COUNTRIES OF THE PTA BANK

SEYCH

ELL

ES

INDIANOCEAN

DJIBOUTI

MAURITIUS

This is intended exclusively for the use of the readers of the report to which it is attached. The names used and the bordersshown do not imply on the part of the Bank and its members any judgement concerning the legal status of a territory norany approval or acceptance of these borders.

ANNEX 2FIRST LINE OF CREDIT TO THE PTA BANK

PROJECT COMPLETION REPORT

Conditions of the Loan Agreement 3

The First Line of Credit to the PTA Bank was subject to the following specific conditions:

A. Conditions Precedent to Entry into Force

Prior to entry into force, the Borrower would have:

1. Prepared Project Appraisal Guidelines acceptable to the Bank.

B. Other Conditions

The Borrower would:

1. Conform to the Bank policy and procedures regarding lines of credit in preparation ofsub-projects to be financed under the proposed line of credit.

2. Review its organisation structure and propose within 12 months of loan signature anew structure that will reduce to a maximum of four department heads requiredreporting to the President. Such new structures would include a Unit for InternalAudits.

3. Ensure that it follows the Bank Group's guidelines regarding impact assessment of sub-projects on environment and to provide an EIA report to the Bank for review for eachsub-project with significant potential adverse effects on the environment.

4. Recruit a suitably qualified internal auditor acceptable to the Bank within 12 months ofloan signature.

5. Appoint qualified directors, for departments of Project and Trade Finance, within sixmonths of loan entry into force.

6. Ensure that not more than 25 per cent of the line of credit is committed in one country.

7. Ensure that a minimum interest spread of 2 per cent is charged for the proposed line ofcredit.

3 Source: Loan Agreement between ADB and the PTA Bank.

Annex 3Page 1 of 2

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

Summary Status of Sub-projects as at 30/09/99

Sub Project Country Sector and/ Products AmountApproved

(SDR)

DateApproved

Status Employment #s(women inbrackets)

ExportOriented

AnnualisedForex

Earnings

(USD’000)

Sub-project Summary Statusas at 30-09-99

1 Graphtan Tanzania Mining/Graphite mining

1,338,000 06-09-95 Operational 0 Yes 0 The project has been sold and salesproceeds shared out amongst theLenders.

2 Tansales Tanzania Textile/Cotton ginning

737,265 26-09-95 Operational 75 (15) Yes 867 The project is operational but iscurrently experiencing problemsrelated to poor cotton harvests,which are attributable to the el-ninoweather effects.

3 Hotel See Cliff Tanzania Tourism/Hotel

1,290,000 09-05-96 Operational 363 (125) No 1,696 The hotel is operational andperforming well. Some expansionactivity is currently beingundertaken. However, loanservicing is satisfactory.

4 Sapco I & II Zambia Agro-industry/Fibreboard

2,814,572 13-02-95 Operational 162 (1) Yes 486 The project is operational, but hasboth operational and marketingproblems. Lenders are addressingthese problems in order torestructure the project,

5 Paraa Lodges Uganda Tourism/Hotel

955,000 21-03-95 Operational 65 (25) Yes 240 The lodge was commissioned in1997. The operations have howeverbeen beset by occupancy problemsassociated with perceived insecurityin the national park. These problemsare waning and operations areexpected to improve.

6 Packaging House Sudan Manufacturing/Paper packing

2,000,000 25-03-96 UnderImplementation

N/A No 0 The client is still shopping forappropriate machinery andequipment.

7 Equator Flowers Uganda Floriculture 435,000 09-05-96 Operational 110 (75) Yes 1,000 The project is fully implemented andoperations are satisfactory.

8 Britannia Foods Uganda Agro-industry/Fruit beverages

485,000 26-09-96 Operational 36 (15) No 0 The project is fully implemented andoperations are satisfactory.

Annex 3Page 2 of 2

Sub Project Country Sector and/ Products AmountApproved(SDR)

DateApproved

Status Employment #s(women inbrackets)

ExportOriented

AnnualisedForex

Earnings

(USD’000)

Sub-project Summary Statusas at 30-09-99

9 Eritrea Foam Eritrea Manufacturing/ 277,000 18-11-96 Operational N/A No N/A As a result of default on the servicingof the loan, the Bank has taken legalaction aimed at disposing off theassets of the promoter.

10 Gatoka Kenya Floriculture 1,430,000 17-03-91 Operational 560 (420) Yes 4,000 Production commenced in February1999 and is expected to increasesatisfactorily.

11 Ugarose Uganda Floriculture 335,714 16-12-97 Operational 96 (54) Yes 600 Production commenced in February1999 and is expected to increasesatisfactorily.

12 MK Flora Uganda Floriculture 335,714 16-12-97 Operational 90 (60) Yes 600 Production commenced in February1999 and is expected to increasesatisfactorily.

13 Nsengu Estates Zambia Floriculture 457,143 16-12-97 UnderImplementation

No 0 The project is under implementation.

14 Torito Roses I & II Kenya Floriculture 460,714 19-04-95 Operational 126 (59) Yes 690 Production commenced in November1997. Loan servicing has beensatisfactory.

15 MMPD Sudan Manufacturing/Match production

500,000 27-10-97 Operational 80 (44) No 0 Production commenced in 1998 andthe business performance issatisfactory.

16 Lavent Agricultural Zambia Floriculture 471,000 12-06-98 Underimplementation.

67 (54) Yes N/A Production will commence inOctober, 1999

17 Arkay Plastic Industries Malawi Manufacturing/Plastic products

448,036 16-12-97 Cancelled 0 No The sponsors failed to meet conditionsprecedent and the loan has since beencancelled.

TOTAL 14,911,587 1,830 (947) 10, 179

Source: Prepared by ADB Project Team from PTA Bank Portfolio Reports Employment numbers in brackets represent number of women employed.

ANNEX 4FIRST LINE OF CREDIT TO THE PTA BANK

PROJECT COMPLETION REPORTPTA Bank Capital Stock Subscriptions 30/09/1999 4

Members Shares Percentage Callable Payable Instalments Instalments Capital inSubscribed of total Value Capital Capital Due Paid as at Arrears as

UA UA UA UA UA UA

Burundi 615 2.71% 6,150,000 4,100,000 2,050,000 2,050,000 2,050,000 -Comoros 135 0.60% 1,350,000 900,000 450,000 450,000 90,000 360,000.00Djibouti 156 0.69% 1,560,000 1,040,000 520,000 520,000 88,997 431,003.00Eritrea 600 2.65% 6,000,000 4,000,000 2,000,000 600,000 400,000 200,000.00Ethiopia 2,670 11.77% 26,700,000 17,800,000 8,900,000 8,900,000 8,900,000 -Kenya 2,670 11.77% 26,700,000 17,800,000 8,900,000 8,900,000 8,900,000 -Malawi 660 2.91% 6,600,000 4,400,000 2,200,000 2,200,000 2,200,000 -

Mauritius 783 3.45%7,830,000 5,220,000

2,610,000 2,610,0002,610,000 -

Rwanda 624 2.75%6,240,000 4,160,000

2,080,000 2,080,0002,080,000 -

Somalia 789 3.48%7,890,000 5,260,000

2,630,000 2,630,000526,000 2,104,000.00

Sudan 2,460 10.85%24,600,000 16,400,000

8,200,000 6,560,0002,874,355 3,685,645.19

Tanzania 2,607 11.49%26,070,000 17,380,000

8,690,000 8,690,0005,589,897 3,100,102.54

Uganda 1,800 7.94%18,000,000 12,000,000

6,000,000 6,000,0006,000,000 -

Zambia 1,941 8.56%19,410,000 12,940,000

6,470,000 6,470,0006,470,000 -

Zimbabwe 2,670 11.77%26,700,000 17,800,000

8,900,000 8,900,0008,900,000 -

African DevelopmentBank 1,500 6.61%

15,000,000 10,000,0005,000,000 5,000,000

5,000,000 -

22,680 100% 226,800,000 151,200,000 75,600,000 72,560,000 62,679,249 9,880,750.73

4 Source: 1999 Third Quarter Report of the PTA Bank.

ANNEX 5

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

PTA BANK ORGANISATION CHART

INTERNAL AUDIT MANAGEMENTINFORMATION

SYSTEM(MIS)

CREDITFOLLOW-UP

AND CONTROLUNIT (CFCU)

PROJECT FINANCE TRADE FINANCE FINANCE LEGAL AFFAIRS PERSONNEL &ADMINITRATION

PRESIDENT

ANNEX 6FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

Summary of PTA Bank’s Operations

I. Project Approvals

Approvals by Country1994 1995 1996 1997 1998 1999

September

Comoros - - 0.24 - - -

Eritrea - - 0.28 - - -

Kenya 6.10 0.76 7.03 3.76 6.90 1.24

Malawi 6.43 0.48 0.00 1.89 0.97 0.00

Mauritius 1.87 - - - - -

Multilateral - - 0.77 1.97 0.00 0.00

Rwanda - - - - 1.50 0.50

Sudan 0.00 4.12 2.48 1.00 4.82 0.00

Tanzania 5.37 11.36 1.79 0.00 3.09 2.14

Uganda 1.55 8.94 0.49 1.60 5.31 5.21

Zambia 2.50 0.17 0.86 1.67 0.97 0.25

Zimbabwe 2.05 0.34 - 1.75 - -

Total 25.87 26.15 13.93 13.63 23.56 9.34

Approvals by Sector

Agribusiness 6.79 7.73 6.56 4.18 7.78 1.56

Infrastructure 6.35 15.40 0.41 1.43 1.85 0.50

Tourism 0.50 2.52 2.69 0.00 3.37 1.68

Manufacturing 8.58 0.00 3.26 3.82 5.55 3.46

Other 1.87 0.34 1.01 4.20 5.00 0.00

Mining 1.79 0.17 0.00 0.00 0.00 2.14

Total 25.87 26.15 13.93 13.63 23.56 9.34

Cumulative Approvals 68.07 94.22 108.15 121.78 145.34 154.68

II. Portfolio Growth - 1994-1999

Year 1994 1995 1996 1997 1998 Sept. 1999

Projects Loans 24.18 38.13 56.29 62.34 61.26 62.77

Trade Facility 0.00 20.86 18.69 21.52 28.00 28.33

Total (Project & Trade) 24.18 58.99 74.98 83.86 89.26 91.10

Project Loan Performance

Interest arrears 1.42 2.81 4.59 7.29 10.33 12.46

Instalment arrears 0.51 1.95 8.97 13.35 11.94 15.23

Total Loan Arrears (1) 1.93 4.76 13.57 20.64 22.27 27.69

Projects Loans 24.18 38.13 56.29 62.34 61.26 62.77

Project interest arrears 1.42 2.81 4.59 7.29 10.33 12.46

Project loans and interestarrears

25.60 30.94 60.88 69.63 71.59 75.23

Arrears/Outstanding Loans (%) 8% 15% 22% 30% 31% 37%

ANNEX 7Page 1 of 2

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

PTA Bank Historical Financial Statements(In million UA)

I. Historical Financial Statements

Year ending 31 December 1991 1992 1993 1994 1995 1996 1997 1998

Revenue:Project Loan Income 0.02 0.21 1.00 2.21 3.90 5.21 6.09 5.90Trade Finance Income 1.35 0.91 1.45 2.92 1.91 1.75 2.01 2.32Investment Income 3.18 3.49 2.19 1.01 2.55 1.31 1.50 2.87Other income 0.80 0.08 0.02 0.01 0.03 0.02 0.02

Total income 4.73 5.41 4.72 6.16 8.37 8.30 9.6211.11

Operating expenses:Interest on borrowings 0.85 0.37 0.20 0.94 1.57 1.94 1.59 2.43Staff benefits 0.73 1.00 1.32 1.60 1.75 1.94 2.40 2.76Administration expenses 0.42 0.81 1.14 2.42 1.55 1.54 1.26 1.61Depreciation 0.21 0.22Total operating expenses 2.00 2.18 2.66 4.96 4.87 5.42 5.46 7.02

Operation profit 2.73 3.23 2.06 1.20 3.50 2.88 4.16 4.09

Foreign Exchange Gain (loss) 0.11 0.10 -0.01 -0.04 0.00 0.00 -0.01Provisions for Credit Losses (gains) -0.17 -4.72 -3.26 -1.61 -2.60 -2.18

NET PROFIT 2.84 3.23 1.99 -3.53 0.20 1.27 1.56 1.90

Operation ratio 42 40 56 81 58 65 57 63Return on income 60 60 42 -57 2 15 16 17Return on equity 9.9 5.5 3.2 (5.5) 0.3 1.9 2.2 2.6Return on equity plus quasi 5.5 3.2 (5.5) 0.3 1.9 2.2 2.6Return on investment 8.0 4.3 2.4 (4.2) 0.2 1.4 1.5 1.7Administrative exp. as % of revenue 24 33 52 65 39 42 38 39Administrative exp. as % of average assets 3.2 2.4 3.0 4.8 3.9 3.9 3.6 3.8Provisions as % of income 0 0 4 77 39 19 27 20Provisions as % of Av. portfolio 0 0 2.4 27.1 10.6 3.5 4.5 3.5

ANNEX 7Page 2 of 2

II. Historical Balance Sheet Statements

As at December 31 1991 1992 1993 1994 1995 1996 1997 1998

Bank balances 4.72 8.25 2.34 4.72 4.01 2.69 4.33 1.74Term deposits with banks 40.00 45.00 14.02 10.40 7.75 1.43 1.98 5.19Financial investments 1.06 1.06 10.31 9.77 8.48 12.61 11.77 8.89Sundry debtors 2.30 0.90 1.17 3.88 4.27 5.91 8.46 13.02Other current assets 4.73 2.94 0.36 0.56 2.18 0.75 2.18Total current assets 52.81 58.15 28.20 28.77 25.07 24.82 27.29 31.02

Project loan portfolio 0.69 3.35 10.66 24.18 37.09 54.35 62.34 61.26Trade finance portfolio 17.13 18.97 41.69 33.87 20.86 18.69 21.52 28.00Equity investments 0.14 0.97 0.97 1.50 1.640.96Provision for credit losses -0.17 -4.89 -6.75 -8.36 -10.96 -13.15Fixed assets (net of depreciation) 0.14 0.52 1.92 3.60 4.08 4.27 7.96 10.86Total long term assets 17.96 22.84 54.24 57.73 56.25 70.45 82.50 87.93

70.77 80.99 82.44 86.50 81.32 95.27 109.79 118.95

Sundry payables 1.79 2.23 1.35 2.17 0.57 1.33 2.11 4.13Short-term borrowings 11.54 18.21 15.63 17.58 13.78 14.02 16.99 19.54Total current liability 13.33 20.44 16.98 19.75 14.35 15.35 19.10 23.67

Long-term borrowings 0.12 3.01 2.82 10.46 18.31 20.07

Special reserve 0.12 0.14 0.18 0.18 0.18 0.21 0.21 0.23

Shareholders' Interest:Share capital 51.29 51.40 54.51 57.59 57.59 61.01 61.93 63.73General reserve 6.03 9.01 11.20 7.67 7.87 9.11 10.67 12.56Currency translation reserve -0.47 -1.70 -1.49 -0.87Total equity 57.32 60.41 65.24 63.56 63.97 69.25 72.17 74.98

70.77 80.99 82.52 86.50 81.32 95.27 109.79 118.95

Current ratio 4.0 2.8 1.7 1.5 1.7 1.6 1.4 1.3Debt/equity ratio 0.2 0.3 0.3 0.4 0.3 0.4 0.5 0.6Loan portfolio as % of total assets 25 28 64 74 81 87 88 87Equity/total assets (%) 81 75 79 73 79 73 66 63Equity + quasi equity/total assets 81 75 79 74 79 73 66 63!Par Value per share (UA) 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000Book value per share (UA) 11,176 11,753 11,968 11,037 11,108 11,351 11,653 11,765Book value gain per share (%) 12% 18% 20% 10% 11% 14% 17% 18%

ANNEX 8Page 1 of 2

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

Financial Projections Made at Appraisal

I. Income Statements

Year ending June 30 1993 1994 1995 1996 1997

Revenue:a. Project income 1.5 2.8 5.2 8.5 12.2b. Trade Finance income 3.6 7.6 10.1 12.3 15.2c. Equity investment income 0.0 0.0 0.0 0.0 0.0d. Short term investment income 2.6 3.4 4.4 5.7 7.7e. Other income 0.0 0.0 0.0 0.0 0.0Total revenue 7.7 13.8 19.7 26.5 35.1

Finance expenses 1.9 4.7 8.0 11.9 16.1Depreciation 0.1 0.2 0.3 0.4 0.4Personnel expenses 1.3 1.6 1.9 2.2 2.6Administration expenses 1.0 1.0 1.1 1.3 1.4

Operating expenses 4.3 7.5 11.3 15.8 20.5

Operation profit 3.4 6.3 8.4 10.7 14.5Provisions 3.1 2.3 2.8 3.5 4.1

Profit before tax 0.3 3.9 5.6 7.2 10.5less tax 0.0 0.0 0.0 0.0 0.0

NET PROFIT 0.3 3.9 5.6 7.2 10.5

Cashflow 3.5 6.4 8.7 11.1 14.9

Rations:Operation ratio 55.7 54.5 57.4 59.7 58.5Interest spread (1.0) (2.3) (2.0) (1.7) (1.4)Administration expes asAdministration exp as % of portfolio 5.4 3.1 2.2 1.8 1.5

% of total income 29.7 19.1 15.4 13.2 11.5Return on equity 0.5 5.0 5.8 6.0 7.1Return on total assets (ROI) 0.2 2.0 2.1 2.0 2.2Average loan portfolio 42.0 85.0 136.0 198.2 273.5

ANNEX 8Page 2 of 2

II. Balance Sheet Statements

Year ending June 30 1993 1994 1995 1996 1997

Current assets:Bank bal & deposits 74.2 86.3 98.5 114.2 130.5Short term investments 1.2 1.3 1.5 1.6 1.8Sundry debtors 1.6 4.7 11.3 20.8 33.6

Capital in arrears 2.9 2.5 2.0 2.0 2.0Others

Total current assets 79.9 94.9 113.3 138.6 167.8

Portfolio investment:Project investment 15.1 31.9 49.9 69.6 90.3Trade finance investment 45.9 75.6 113.1 162.4 223.3Equity investment 0.7 0.7 0.7 0.7 0.7

- - - - - -Total portfolio 61.7 108.3 163.7 232.7 314.4Less provisions 3.1 5.4 8.2 11.6 15.7

- - - - - -Net portfolio 58.6 102.9 155.5 221.1 298.6

Other investments 0.0 0.0 0.0 0.0 0.0Fixed assets (net) 1.9 3.1 5.5 7.8 7.6

Total lt. assets 1.9 3.1 5.5 7.8 7.6

140.5 200.8 274.3 367.5 474.0

Current liability:A/c payable 2.4 2.7 2.9 3.2 3.5Current maturity 0.0 0.0 0.0 0.0 0.0Short term borrowing 42.2 73.0 100.9 135.4 174.3

Total current liability 44.6 75.6 103.8 138.6 177.8

Long-term borrowing 28.7 41.9 60.5 83.6 109.5Other borrowings 0.0 4.4 13.7 25.2 38.2

Total long-termborrowings

28.7 46.3 74.2 108.8 147.7

Equity capital:Share capital 54.5 59.8 68.5 81.2 94.7Reserves (incl depr) 3.3 5.8 8.9 12.7 17.2Retained prof 9.3 13.3 18.9 26.1 36.6

Total equity 67.2 78.9 96.3 120.0 148.5

140.5 200.8 274.3 367.5 474.0

RATIO ANLYSIS:Current ratio 1.8 1.3 1.1 1.0 0.9Debt/equity 1.1 1.5 1.8 2.1 2.2Project portfolio to total assets % 10.7 15.9 18.2 18.9 19.1Capital to total assets (%) 47.8 39.3 35.1 32.7 31.3

ANNEX 9Page 1 of 2

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

Project Performance Evaluation and Rating

I. Implementation Performance Rating

No Component Indicators Mark(1 to 4)

Remarks

1 Adherence to time schedule 1 About two years of delays in the effectiveness; anddelay caused by suspension of disbursement due toprocurement from ineligible countries.

2 Adherence to cost schedule 2 18% of the approved loan un-disbursed;3 Compliance with covenants 3 Delays in the conditions precedent to entry into force,

and some of the other conditions of the loans are stillbeing fulfilled.

4 Adequacy of supervision &reporting

1 Reporting by PTA Bank was inadequate and ADBwas not informed on the progress of implementingthe subprojects.

5 Satisfactory operations 2 Seven of the seventeen sub-projects are facingoperational problems and are in serious arrears.

Overall assessment ofimplementation performance

1.8 Unsatisfactory

II. Bank Performance Rating

No Component Indicators Mark(1 to 4)

Remarks

1 At identification N/A2 At preparation of project 2 Made conditions prior to appraisal. However, ADB

did not prepare a preparation report. It also failed toinclude preparation of the PTA Bank’s operationsguidelines as condition prior to appraisal.

3 At appraisal 2 Should have turned appraisal into pre-appraisal toallow time for preparation of operational guidelinesbefore appraisal.

4 At supervision 1 The Bank made one supervision mission towards endof the project implementation. Hence, it was not ableto recognise the operational and financial problemsof PTA Bank.

Overall assessment of BankPerformance

1.7 Unsatisfactory.

ANNEX 9Page 2 of 2

III. Project Outcome Rating

No Component Indicators Mark(1 to 4)

Remarks

1. Relevance and Achievement ofObjectives

2.7 Satisfactory

i. Macroeconomic Policy 3 Support the export sector.ii. Sector Policy 3 Strengthen the export sector in the region.iii. Financial 2 Financial resources made availableiv. Poverty Alleviation & Social and

Gender3 Social and gender issues incidental but acceptable

v. Environmental 2 No serious environmental issues recorded.vi. Private Sector Development 3 16 sub-projects are private owned enterprises.

2. Institutional Development 1.7 Unsatisfactoryi. Institutional framework 1 Not functioning as it should beii. Financial and MIS 1 Very poor financial managementiii. Staffing by qualified persons and

Training3 Qualified personnel are recruited and trained.

3. Sustainability 1.6 Unsatisfactoryi. Continued Borrower

Commitment1 Loan recovery is poor and growing concern over the

financial situation of PTA Bankii. Environmental Policy 2 National Environmental Policies are being developed.iii. Institutional Framework 1 Improvement will depend on Board decisions.iv. Technical Viability & Staffing 2 Reasonable.v. Financial Viability 1 High level of arrears indicates poor financial position

of subprojects.vi. Economic Viability 2 Acceptable, but will depend on financial sustainability

of the subprojects.vii. Environmental Viability 3 Acceptable.viii. O & M facilitation (availability

of recurrent funding, forex)2 Inadequate working capital for some subprojects

caused by depreciation of local currencies.

Overall Assessment ofOutcome

1.9 Unsatisfactory.

ANNEX 10FIRST LINE OF CREDIT TO THE PTA BANK

PROJECT COMPLETION REPORT

Sources of Information

1. Charter of the Eastern and Southern African Trade and Development Bank2. ADB’s Line of credit, Approvals and Disbursements as at 30th September 19993. PTA Bank’s Project Completion Report4. PTA Bank’s Annual Reports 1994 – 19985. PTA Bank: Diagnostic Review of the Management System (1997)6. Appraisal Report – Line of Credit to Eastern & Southern African Trade & Development

Bank (1994)7. First Five-year Corporate Plan (1993 – 1997)8. Second Five-year Corporate Plan (1998 – 2002)9. Back-to-Office Report Supervision Mission (1998)10. ADB Mission Aide-memoire (October 1999)11. ADB Mission Back-to-Office Report (November 1999)

ANNEX 11Page 1 of 2

FIRST LINE OF CREDIT TO THE PTA BANKPROJECT COMPLETION REPORT

Borrower and Executing Agency’s Comments on PCR (16/06/00)

1. In your project summary, please correct the actual closing date to 30 June 2000.

2. In paragraph 1.1.2 last sentence, the description of the PTA Bank should include the fact that theprimary target for our lending is the private sector.

3. Your conclusion in paragraph 3.2.3 that the cancellation of sub-projects after approval was due toa lack of experience on the part of staff of the Bank is incorrect. GDC Hauliers (Zambia) Limitedand Imperial Derby Refrigeration were both cancelled because the promoters were able to sourcecheaper funds that the Bank could offer them. Coral Beach Hotel in Tanzania was cancelled dueto the inability of the promoters to get a reputable management company to manage the hotel aswas required by the Bank.

4. Your assertion in 4.3.3 in relation to the Graphtan sub-project is in our opinion incorrect. As youmay recall, this project was co-financed with the ADB PSDU who in fact used a mining engineerin the evaluation whose report we relied on in our appraisal.

5. As an update to 4.5.4 please note the following: -

i. The Credit Follow-Up and Control Unit was established in 1997 and currently has 3 staffmembers.

ii. The Arrears Recovery Committee was established in 1999 initially with members ofManagement from non-lending departments with the CFCU acting as its secretariat.

iii. The arrears situation of all government guaranteed loans have been regularized. Thearrears for Kinyara Sugar works have been cleared by the Government of Uganda and wehave entered into a repayment arrangement with the Government of Malawi in relation tothe two loans to utility companies in that country. As a result, arrears on the portfoliohave been reduced from UAPTA 32.21 million as at 31 December 1999 to 21.9 million asat 31 March 2000. The above figure has been further reduced to UAPTA 19.0 million asat 1 June 2000.

iv. The Bank has classified the portfolio into the following categories: -

Regular Accounts - regularSub-Standard Accounts - underlying investments soundDoubtful Accounts - underlying business non-operational

Bad Accounts - Chances of recovery throughforeclosure slim

ANNEX 11Page 2 of 2

Under this classification, 60% of the Bank’s portfolio is classified as regular and anadditional 18% classified as Sub-Standard as at 31 March 2000. The Sub-Standardaccounts are normally those that are operating and are facing temporary cashflowproblems and hence delay in making payments on their loan accounts. They normally pay30 – 45 days past the due date.

v. Management also submits a quarterly report to the Board on the status of loan repaymentsto enable the Board to measure the progress achieved in arrears collection.

6. Your conclusion in 4.6.5 questioning the viability and sustainability of the PTA Bank due to thearrears on the portfolio needs to be re-looked at in light of the substantial improvement incollections sighted in (4) above. You will also note that in the annual report and accounts for 1999we have undertaken an exercise to clean-up our balance sheet by making a provision for creditlosses amounting to approximately UAPTA 14 million against our profits for the year.

7. As a rejoinder to 4.6.7, please be advised that the People’s Republic of China was admitted intothe membership of the Bank at the AGM held in Bujumbura, Burundi in May 2000. PR Chinatakes up approximately 6.49% of the Bank’s authorized capital. We have also worked out anarrangement with the Government of Sudan (GoS) for clearance of their arrears on capitalsubscriptions amounting to US$ 8.3 million. Management is confident that the GoS arrears oncapital subscriptions will be settled by July 31 2000.

8. Our comment in (6) above applies to paragraph 6.1.4 as well.

9. In terms of the project outcome rating in Annex 9, we feel that you need to review some of yourratings. Specifically,

i. On achievement of the Macro-Economic policy objective given that an overwhelmingmajority of the sub-projects approved were export oriented we feel that the LOCobjectives were sufficiently met;

ii. On institutional framework, the presence of inter-alia an Internal Auditor who reports tothe Board, a Board that meets quarterly to consider and approve Management reports anda Credits Committee composed of Senior Management that approves or recommendscredits for approval indicates presence of a sound institutional framework;

iii. On Environmental rating, none of the projects approved under the LOC had any negativeenvironmental impact to our knowledge; and

iv. On Staffing by qualified persons and training, the qualifications and experience of ourstaff is of the standard that you will get in comparable institutions such as ADB, IFC andCDC.