World Bank Document · The World Bank FOR OFFICIAL USE ONLY Report No. 6140-ZR STAFF APPRAISAL REPORT ZAIRE OF AN EIGHTH IDA CREDIT FOR SOCIETE FINANCIERE DE DEVELOPPEMENT (SOFIDE)

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The World BankFOR OFFICIAL USE ONLY

Report No. 6140-ZR

STAFF APPRAISAL REPORT

ZAIRE

OF AN EIGHTH IDA CREDIT

FOR

SOCIETE FINANCIERE DE DEVELOPPEMENT (SOFIDE)

April 1, 1986

Projects DepartmentEastern and Southern Africa Regional Office

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents ma:- aot otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS

Currency Unit Zaire (Z)

On September 12, l183, Zaire introduced a transitional dual exchange rateregime, comprising an official rate and a free market rate. The two rateswere unified on February 24, 1984; thereafter the rate has floated on aweekly basis.

December 1985

Zaire 1.00 5 US$0.02US$1.00 = Z 55.1

WEIGHTS AND MEASURES

1 meter (m) = 3.28 feet1 kilometer (km) = 0.62 mileI sq kilometer (km2) 0.386 square miles1 metric ton (ton) 2,204 pounds (lbs)

FOR OFFICIAL USE ONLY

ACRONYMS AND ABBREVIATIONS

ADB = African Development BankBDZ = Banque du ZaIreCCA = Contribution sur le Chiffre d'AffairesCCCE = Caisse Centrale de Cooperation Economique (France)CEPETEDE = Centre de Perfectionnement aux Techniques de D4veloppementCIDA = Canadian Internetional Development AgencyE EDI = Economic Development InstituteEIB = European Investment BankFAC = Fonds d'Aide et de CooperationINS = Institut National de la StatistiqueKfW = Kreditanstalt fur WiederaufbauMNEI = Ministgre de l'Economie et de l'IndustrieOPEZ = Office de Promotion des Petites et Moyennes Entrepises

ZaIroisesOZAC = Office Zalrois de Contr8leSMEs = Small and Medium EnterprisesSOFIDE = Socifte Financiere de D6veloppement

FISCAL YEAR

January I - December 31

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

ZAIRE

EIGHTH SOFIDE PROJECT

Credit and Project Summary

Borrower: Republic of Zaire.

Beneficiary: Soci£tg Financigre de DGveloppement (SOFIDE) andCentre de Perfectionnement autx Techniques deD-veJoppement (CEPETEDE).

Amount: SDR 43.3 million equivalent to about US$50.0million.

Terms: Standard IDA terms.

Relending terms: The Borrower would onlend SDR 42.3 rnillion,equivalent to about US$48.8 million, to SOFIDE, at8.5 percent per annum (the IBRD interest rate ineffect at the time of submission of the projectdocuments to the Executive Directors), with aflexible amortization schedule that wouldsubstantially conform with the aggregate of theamortization schedules of subloans made by SOFIDEand financed under this project, subject to amaximum of 15 years, including a grace period notto exceed three years; SOFIDE would relend thefunds at a rate of 14 percent per annum to itssubborrovers, who will bear the foreign exchangerisk. The Borrower would also onlend to SOFIDESDR 567,000, equivalent to about US$700,000, at8.5 percent per annum for technical assistance,with a fixed amortization schedule of 15 years,including a three-year grace period, and wouldpass on SDR 433,000, equivalent to a:outUS$500,000, for training assistance needed byCEPETEDE, as a grant. The foreign exchange riskon the SOFIDE technical assistance component (SDR567,000)would be borne by SOFIDE.

Objectives and Project The project would represent a continuation ofDescription: IDA's support to an effective financial

intermediary in its ongoing assistance to theproductive sectors in Zaire, particularly privateinvestments in manufacturing and agro-industries.It complements the proposed Industrial SectorAdjustment Credit, which aims at assisting theGovernment in reforming policies affecting thedevelopment of the industrial sector. The

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investment component of the proposed credit(US$48.8 million equivalent) would cover about47 percent of the capital investment requirementsin foreign exchange of priority subvrojectsapproved by SOFIDE. The balance would be providedby other sources, including CIDA, KfW, ADB andEIB. The remaining US$1.2 million of the Creditwould finance (a) technical assistance to continuehelping SOFIDE cope with the increasing volumeand diversity of its operations and support itsongoing efforts to deal with its portfolioproblems (US$700,000 equivalent); and (b)equipment and other assistance needed by CEPETEDEto improve its effectiveness as Zaire's principaldevelopment training institution (US$500,000equivalent).

Benefits and Risks: The main benefits of the project would be toprovide the term investment resources needed toaccelerate growth and increase emplovment inZaire. It would help stimulate a supply responsefrom the economy and, thus, complement the policymeasures already taken or to be taken undar thepeoposed Industrial Sector Adjustment Credit. Theproject would also enable IDA to continue helpingSOFIDE to improve its portfolio quality andincrease its effectiveness in assisting therecovery of the productive sectors in Zaire.There are two risks in this project. The firstrisk relates to the possible deterioration ofZaire's economic situation which would, interalia, accelerate the depreciation of the Zairecurrency and make SOFIDE's foreign exchange loansunattractive to potential investors who have t'obear the foreign exchange risk. Such a risk is,however, limited in view of Zaire's continuedcomplia,ce with the IMF stabilization program andthe actions envisaged by IDA and other donors toincrease the resource transfer and accelerateeeonomic growth in Zaire. The second risk is thepossible deterioration of SOFIDE's arrearsposition. This risk is also limited because ofthe strong action SOFIDE has already taken toimprove loan collection and the additionalmeasures proposed in the context of this projectto contain any portfolio deterioration. Theseshould insure that SOFIDE will remain an effectiveterm lending institution that promoteseconomically iustified investment projects.

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Estimated Project Cost: January 1, 1986 - June 30, 1989Local Foreign Total

(US$ million)Total Financing Required forSOFIDE Operations 36.1 103.0 139.1Technical Assistanee 0.3 0.9 1.2

Total 36.4 103.9 140.3

Financing Plan

Resources Available forCommitment at SOFIDE 3.5 46.7 50.2Eighth SOFIDE Credit 0.3 49.7 50.0SOFIDE's Cash Generation 32.6 - 32.6Other Donors - 7.5 7.5

Total 36.4 103.9 140.3

Estimated DisbursementsTSDR million)

fiscal Year 1987 1988 1989 1990 1991 1992 1993 1994

Annual 1.0 5.0 8.2 8.8 8.1 6.3 4.2 1.7Cumulative 1.0 6.0 14.2 23.0 31.1 37.4 41.6 43.3

ZAIRE

STAFF APPRAISAL REPORT

OF AN EIGHTH ID.A CREDIT FOR SOCIETE FINANCIERE DE DEVELOPPEMENT (SOFIDE)

Table of Contents

Page No.

BASIC DATA ............ ***.,, I - iii

I. THE INDUSTRIAL AND FINANCIAL SECTORS .................... 1

A. The Industrial Sector ............... 1The Setting .......... ....... ................. Sector Background and Recent Pecformance 2Structure of Industry .. ****e***....**... .... 3Industrial Policies ............. 4

Trade Policies ............. ....... ........ *. 4Price Controls . ............ ....... 9 5Export Promotion .......... ...... 5Tax Reform ...... *.. ... ...... ........... 6

Bank Group Strategy in the Sector ................ 6

B. The Financial Sector ................... 7Credit Controls and Interest Rates 7

Il. THE INSTITUTION ................ .... 8

Objectives and Role 8...... ............ too. 8Performance under Previous Bank Group Projects 8Share Capital and Ownership 9Management, Organization and Staffing 9Staff Training .......................... ** * * *. .. 11Centre de Perfectlonnement aux Techniques de

D4veloppement (CEPETEDE) ..... ... .. ......... 11Operating Policies and Procedures ..... .............. 12

Policy Stateiaent .. ....... * ...................* . 12Appraisal ............ .. * ........... , 12Supervision .......... *o. ......... 0... . 13

Terms and Conditions of Lending ......................... 13Foreign Exchange Risk Coverage ........................ 13Interest Rates ... ....................... 13

Operations . .. . . . .. . .. . . . . * * .... ... .. 15

SOFIDE and Small and Medium Enterprises ................. 15Portfolio, Arrears, and Provisions ................ ...... 16Financial Results and Condition ........,46-4 ....... .... 18Financial Structure ..................... .... , 18

Lending Resources . ........ .... * . ... .I.... t.. 18Prospects .. .... 19Forecast Operations .............................. 19

Projected Financial Performance ...............,......... 19

This report is based on the findings of an appraisal mission to Zaire inNovember 1985. The mission was composed of Messrs. Chuong N. Phung,Philip Adoteye, and Xavier Legrain, all of Eastern Africa Projects.

Table of Contents (Continued) - 2 -

P&7e No.

III. THE PROJECT .......................... .***....*... 20

Project Objectives and Justification ...... 20Project Description 20The Proposed Investment Component 21Government Onlerding Terms ....... ,.........-- 21SOFIDE's Lending Terms ...... X . 21Free limi t *..a... .. . ..... *.. ... 21Commitment Period .... 21

Technical Assistance to SOFIDE . 21Terms and Conditions ........ ................ 22

Technical Assistance to CEPETEDE ...... ,s.*...-...... 22Terms and Conditions .....*..*...*.***.*....*..........., 22

Total Project Cost and Financing ....................... 22Project Implementation 23Procurement and Disbursement ......................... 23Special Account 4.... ...... 24Audits and Reporting 24

Project Benefits and Risks ........ ,.................. 24

IV. AGREEMENTS REACHED AT NEGOTIATIONS .................... 25

ZAIRE


BASIC DATA

Year of Establisherent: 1970

Ownership as of December 31, 1985

Z Million Percent

Government and Central Bank 104.0 40.0Zairian Private Sector 75.4 29.0DEG 19.5 7.5IFC 26.0 10.0Other Foreign Financial Institutions 35.1 13.5

Total 260.0 100.0

Resource Position as of December 31, 1985

Z MillionLocal Foreign Total

Share Capital, Reserves &Quasi Equity 635.6 - 635.6

Net Borrowings 133.9 7,056.2 7,190.1

Total Reso'irces 769.5 7,056.2 7,825.7

USES

Net Fixed Assets 161.4 - 161.4Loan Portfolio Net 312.9 2,469.2 2,782.1Equity Investments 36.7 - 36.7Other Uses 51.7 _ 51.7

Total Uses 562.7 2,469.2 3,031.9

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Resources Available forDisbursements 206.8 4,587.0 4,793.8

Undisbursed Commitments 14.9 2,012.3 2,027.2

Resources Available forCommitment 191.9 2,574.7 2,766.6

Uncommitted Approvals 22.3 1,016.6 1,038.9

Resources Available forApprovals 169.6 1,558.1 1,727.7

Foreign LocalInterest Rates and Other Charges Exchange Loans Currency Loans

Interest Rates 15.5 p.a. 1/ 30% p.a.Commitment Fee 1.5% 1.5%Appraisal Fee 2.0% 2.0%Penalty Interest on

Overdue Payments 6% p.m. 6% p.m.

Percentage of Portfolio Denominated in Foreign Exchange (9/85): 88%

Evolution of Arrears Situation

Loan PortfolioAffected

Arrears of by Arrears ofLoan Portfolio Over 3 Months Over 3 Months

Year End (Z Million) (Z of Portfolio) (%of Portfolio)

1981 148 13% 46%1982 211 7% 25%1983 804 4% 17%1984 1,312 9% 38%May 1985 1,637 17% 62%Dec 1985 2,809 12% 53%Feb 1986 3,584 11% 33%

1/ The foreign exchange risk on foreign currency loans is borne byclients.

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Collection Performance

Period Collections as % of Amounts Coming Due

Year 1983 67

I- 1984 35Il- 1984 57III- 1984 52IV- 1984 102

Year 1984 62

I- 1985 73II- 1985 73III- 1985 71IV- 1985 69

Year i985 71

Project Performance CR. 998-ZR CR. 1273-ZR CR. 1429-ZR

Date of Effectiveness: 1/22/81 3/15/83 1/30/85MAount of Credit: US$18.5 SDR19.4 SDR34.0Amount Committed (million)(.33/31/86) US$18.3 (99%)l/ SDR19.0 (98%)1/ SDR29.3 (86%)1/

Amtmjnt Disbursed (million)(03/31/86) US$17.8 (96%) SDR17.0 (88%) SDR16.5 (49%)

Closing Date

Appraisal: 6/84 12/86 12/90Current: 6/86 12/86 12/90

1/ This represents 100% of the investment component of the credits.

I. THE INDUSTRIAL AND FINANCIAL SECTORS

A. The Industrial Sector

The Setting

1.01 Zaire, the third largest country ii. Africa with an area of 2.3million ki 2 , has a population of about 30 million, of which approximatelyone third live in urban centers. Agriculture is the most important sectorcontributing 30 percent of GDP and employing more than 75 percent of theactive population. Mintng and mineral processing represent 33 percent ofGDP, are the largest source of public revenues, and account for more thantwo thirds of the country's export earnings. Industry accounts for aboutfive percent of GDP.

1.02 From 1967 to 1974, GD? grew at a rate of seven percent per yearin real terms, spurred by high copper and coffee prices, but decreasedthereafter. By 1979, GDP at constant prices was about ten percent belowits pre-crisis (1972-74) level. The Zairianization KGovernment-sponsoredtakeover of most foreign owned business, mainly by private Zairians) andRadicalization (nationalization of mDst large enterprises in all the majorsectors of the economy) measures of 1973-74, coupled with the severebalance of payments crisis resulting from a substantial decrease in copperprices and high debt service payments, were the primary reasons for thissevere deterioration of the economic situation. The demonetization measurein 1979 (when notes representing 73 percent of currency In circulation weredemonetized and replaced on a two for one basis for new notes) furtherworsened the situation as many individuals and companies were not able toexchange their notes within the specified tlme period. Severe cashshortages and liquidity problems resulted and affected much of the privatesector. Faced with a deteriorating economic situation, the Governmentsought to regulate economic activity. Prices of most agriculturalcommoditles and industrial products were controlled and mechanisms wereestablished to allocate scarce foreign exchange.

1.03 A slight economic recovery was registered in 1980 and 1981 when,aided by a recovery in copper production, there was a real GDP growth of2.4 percent in each year. In 1981, the Government freed most agriculturalprices and declared that the directly productive sectors would be reservedmainly for the private sector. These two years of moderate recovery,however, were followed by a further contraction (about 2.6 percent) of realGDP in 1982 a-id an increased shortage of foreign exchange due mainly to afall in copper prices. To address this situation, in September 1983, theGovernment adopted a broad and comprehensive program of policy reformsincollaboration with the IMF. 'Lhe program included (i) a devaluation ofthe Zaire by about 400 percent in local currency terms to the thenprevailing parallel market rate (i.e., from US$1.00 = Z 5.8 to US$1.0 = Z30);(ii) the introduction of a tr*usitional dual exchange rate regimeconsisting of an official rate and a free market rate. These rates wereunified on February 24, 1984. The exchange rate is now determined by an

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inter bank foreign exchange market In which all commercial banks and thecentral bank participate; (iII) liberalization and simplification of otherexchange and trade arrangements; (iv) a comprehensive revision of customsduties invoLving significant reduction in tariffs on essential foodstuffs,raw materials and intermediate goods and substantial increases in luxurygoods; (v) the freeing of virtually all commercial bank deposit and lendingrates; (vi) further decontrol of prices, including producer prices cf allagricultural commodities; and (vii) adjustment of petroleum prices to takefull account of the change in the exchange rate. Zaire successfullyimplemented the IMF program and another stand-by arrangement for theequivalent of SDR 162 million over 12 months was approved in April 1985.The Paris Club agreed to a new rescheduling in May 1985 and a new IMFprogram is under preparation. In addition, Zaire is eligible under theSpecial African Facility.

i.04. The econo.'- situation improved in 1984, aided by some favorableexternal developments. GDP grew by about 2.8 percent, compared to 1.2percent in 1983 and -2.6 percent in 1982. Export earnings increased bynearly 20 percent in nominal terms despite the sharp drop of copperprices, because of larger receipts from zobalt, diamonds, coffee, andpetroleum. The export gain has, however, been partly offset by the largerexternal debt payments which Zaire has been making in compliance with thedebt rescheduling agreement with the Paris Club. The budgetary deficitdecreased to three percent of GDP (as compared to four percent in 1983)and inflation dropped from a high level of 76 percent in 1983 to anestimated 34 percent in 1984.

1.05. In 1985, the performance of the economy was less favorable.Exports grew slower than anticipated because of weaker copper prices andlower oil production. The resulting shortage of foreign exchange wascompounded by inadequate disbursements of external capital and contributedto slow down the GDP growth to about 2.0 percent. The Zaire currencydepreciated faster than expected and inflation appears to be again on therise toward the end of 1985.

Sector Background and Recent Performance

1.06 Zaire's industrial sector (including manufacturing andagro-industries but excluding mineral processing and construction)contributed about US$200 million to GDP in 1984, and employed an estimated150,000 workers or ten percent of total employment in the modern sector.The five percent share of industry in Zaire's GDP is now among the lowestin Sub-Saharan Africa. As late as ten years ago, this share was wore thantwice as large and was comparable to the GDP industry share of suchcountries as Kenya, Zambia, and Ghana.

1.07 Between 1966 and 1974, industrial output grew at an annualaverage rate of about six percent, slightly below the seven percentoverall GDP growth rate. The faster GDP growth was spurred by high copperand coffee prices. Most of the industrial growth occurred between 1970and 1974, supported by expanding domestic demand due to rising incomesfrom mining, a favorable investment climate, particularly for foreignentrepreneurs, and protection of the domestic market.

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1.08 Since the beginning of the economic crisis in 1975 (para. 1.02),however, industrial output dec-eased without interruption until 1983, whenit stood at 31 percent below its 1975 level, a decline three times greaterthan that registered by GDP. The decline in industrial output startedwith the collapse of copper prices in the aftermath of the first round ofoil price increases. Tne resulting shortage of foreign exchange,together with the unfavorable investment climate due to domestic policymeasures, caused a sharp decrease in industrial capacity utilization and adeterioration of equipment. At the same time, the worsening situation inagriculture and transport led to shortages of local inputs.

1.09 Following the adoption of stabilization policies in late 1983(para. 1.03), there was a relatively modest reco"ery inindustrial output. In 1984, industrial output grew by nearly two percent,compared to a GDP growth of 2.8 percent. Preliminary estimates for 1985,however, indicate that, while GDP grew by about two percent, industrialoutput actually declined by just under one percent, mainly as a result offoreign exchange shortages for the importation of raw materials and spareparts.

Structure of Industry

1.10 Over the last ten years, there has been no significant change inthe structure of the sector or the location of enterprises. Zaire'smanufacturing industry is still closely linked to commerce, with manyenterprises having substantial commercial operations. Kinshasa, thecapital city, remains the main center of industrial activity, withLubumbashi, a major mining city, and Kisangani, located near areas ofsignificant agricultu.ral production, important secondary centers.

1.11 Agro-industrial enterprises account for about two-thirds ofindustrial value added in Zaire. The activities of these enterprisesinclude palm oil production and processing, sugar processing, cottonginning and textile production, coffee drying, flour milling and rubber andwood processing. Other subsectors include beverages, tobacco, the assemblyof transport equipment, chemicals and petroleum refining. Medium and largesize firms (employing more than 100 workers) dominate most branches andaccount for about 90 percent of total value added in the sector. Consumergoods account for over 70 percent of industrial output and are sold mostlyin the domestic market. Palm oil, wood, coffee and some cotton fibers arethe only processed products being exported.

1.12 Until 1973, almost all major industrial enterprises were owned byforeign and locally-based expatriate interests. The zairianization andnationalization measures of 1973-74 which transferred to Zairian handsownership of about two-thirds of manufacturing firms, had damaging effectson production. In 1976, Government rescinded these measures and decided toreturn 60 percent of the equity in zairianized and nationalized enterprisesto their former foreign owners. At present, ownership of the sector islargely back in private hands.

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1.13 Since late 1983, with an improved macro-economic framework,better incentives for exports, and returning confidence, there has been asubstantial increase in private investment as evidenced by the high volumeof projects approved under the regulations of the investment code (aboutUS$137 million in 1984 as compared to US$44 million in 1983). The increasein private investment, which has not yet translated into increased output,led to the rapid pace of commitment of the Seventh IDA credit to SOFIDE.While the maiority of these SOFIDE-financed investments were forrehabilitation and modernization of existing concerns, agro-industrialprojects for export accounted for about a third of the total, indicating achange in the investment pattern consistent with the improved environmentfor export-oriented projects.

Industrial Policies

1.14 Except for the zairianization period and its immediate aftermath,Government policy has been not to invest in manufacturing but to limit itsdirect investment mainly to the provision of basic infrastructure. Duringthe 1970s, the Government used a number of policy instruments to regulateand promote industrial development. These included (a) a cost-plus pricecontrol system; (b) an investment code under which enterprises couldbenefit from tax exemptions and guarantees for repatriation of capitalinvestment, profit, and interest; and (c) tariff protection and importprohibitions granted mostly on a case by case basis to shield selectedsubsectors or firms from foreign competition. In view of the deterioratingeconomic situation, the negative impact of some of its past policies onindustrial efficiency, and its determination to move toward a freer,market-based economy, the Government initiated, in 1981, a number ofmeasures aimed at increasing price incentives and encouragingrehabilitation/reconstruction of existing industrial plants as the mainpriority in the short to medium-term. Over the last five years, theGovernment partly decontrolled prices and eliminated impert controls. Theexchange rate regime, which until September 1983, had been characterized byincreasing overvaluation of the Zaire, is now functioning as an interbankmarket with the rate floating on a weekly basis. These policy measureshave improved the environment in which firms operate in Zaire. Otherimportant policy reforms needed to increase the sector's efficiency andproductivity will be implemented with IDA assistance through an IndustrialSector Adjustment Credit currently under preparation. The major policyreforms being discussed with the Zairian Government within the context ofthe industrial sector operation are summarized below.

1.15 Trade Policies. As a means of protecting local industry, tariffswere of little relevance until the macro-economic reforms of late 1983.With a serious external imbalance persisting since 1975 and a highlyovervalued exchange rate, the major limitation to imports was the shortageof foreign exchange and import licencing. Despite high nominal tariffs,the actual level of tariff protection was low because import taxes andduties were calculated on the official exchange rate (i.e., at only afraction of their real cost). Following the September 1983 devaluatiol andthe removal of quantitative restrictions on imports, a new tariff code was

introduced which substantially increased the tariff protection offered tolocal industry. The system is characterized by low duties on industrialinputs (three percent) and high rates on finished products (up to 150percent), resulting in very high and uneven effective protection for localmanufactures. This high level of protection is further reinforced by ahigher sales tax on imports of final goods (25 percent) than on locallyproduced goods (10-20 percent). In the context of the Industrial SectorAdjustment Credit, the Government would be asked to implement a program tolower over time the level of protection offered to the industrial sectorand reduce the disparity in effective protection rates that currentlyexists. This would be done by (i) introducing a basic minimum duty ofabout ten percent on most imports, including all industrial inputs andequipment; (ii) reducing tariffs on finished goods progressively to a levelof about 30 percent; and (iii) equalizing the sales tax on domestic andimported goods, so that they apply uniformly to all goods in the samecategory whether or domestic or imported origin. The EEC is providingtechnical assistance for the improvement of the administration of customs.Finally, a tariff commission would be established to implement the tariffreform measures outlined above.

1.16 Price Controls. The system of ex-post price controls is notconsistent with the Government's policy of liberalizing the economy. Inthe context of the Industrial Sector Adjustment Credit, the Governmentis therefore expected to discontinue the remaining controls on the pricingof industrial goods.

1.17 Export Promotion. Until recently, Government policies hadcreated an export environment characterized more by disincentives andadministrative obstacles than by encouragement. All ee -orts require alicense which' can be obtained through a commercial bank and which needs tobe validated by the central bank. Some goods require authorization fromthe Ministry of National Economy and Industry (MNEI) to ensure that localdemand is being met before export is allowed. The same Ministry has togive formal approval to all exports, generally a formality which cannevertheless cause delays for exporters. In addition, all exports requireauthorization of OZAC (Office Zatrois de Contr3le), an agency in charge ofquality control. This authorization is given in three different stagesstarting from an analysis of samples of items to be exported and endingwith a certificate verifying that the export has actually taken place.Most exports are subject to an export duty (four percent), in addition tothe normal sales tax of 6.75 percent.

1.18 The export climate has improved following the 1983 devaluationand the adoption of a realistic market-determined e:change rate which havealready begun to provide a potent stimulus to export. To further promoteexports and investments in export-oriented activities, the Government wouldbe asked to abolish all export duties and other taxes on manufacturedexports. The impact of this action on Zaire's business environment wouldbe profound and the expected loss of fiscal revenues would be outweighed bythe revenue increases resulting from the tariff reform and the corporatetaxes on expanding export activities. Furthermore, the Government wouldeliminate all the administrative bottlenecks faced by exporters, retainingonly registration procedures for statistical purposes.

1.19 Tax Reform. Rationalization of the tax treatment of industr'.alenterprises would also be tackled under the Industrial Sector AdjustmentCredit to address excessive and unpredictable levels of taxation. Besidescorporate income tax (50 percent of profit), industrial enterprises pay asales tax with an effective rate on local production varying between 10 and20 percent (para. 1.15). In addition, industrial enterprises are subjectto several parafiscal charges, the raost important of which is the FCD(Fondo des Conventions de DMveloppement) levy which varies from enterpriseto enterprise. Two studies financed under the sixth and seventh IDAcredits to SOFIDE (asset revaluation study and review of the FCD system)are underway to assess the incidence of curreat taxation and depreciationallowance practices on the competitiveness and investment behaviour ofindustrial enterprises. In addition, a joint Bank/Fund mission whichvisited Zaire in January/February 1986 also looked at a number of taxissues and is preparing recommendations for reforms. The adoption of a taxreform program satisfactory to the Bank would form part of the proposedIndustrial Sector Adjustment Credit.

Bank Group Strategy in the Sector

1.20 In an effort to promote the development of the private sector,the Bank Group supported the creation of the Societe FinanciOre deueveloppement (SOFIDE) in 1970. IFC was one of SOFIDE's originalshareholders and IDA provided, in 1970, the first of seven credits, whichtotal US$111 millioa. In 1984, IFC made a further capital subscription inSOFIDE of US$576,000 equivalent. IFC has also been involved in an offshoreoil project, a textile company, a hotel project, and a cotton farmingoperation and has made a loan for studies related to the development of analuminium complex at Banana.

1.21 Since the mid-1970's, given the economic crisis and thedifficulties facing the industrial sector, IDA's main objectives in thelending through SOFIDE have been to provide the financial resources neededto help rehabilitate and maintain the productive capacity of the industrialsector and to develop SOFIDE into a strong, independent development financeinstitution. Despite the difficult economic conditions, SOFIDE has emergedas a respected and effective term lending institution with a good appraisaland supervision capability. IDA's continued support has been critical tothis achievement.

1.22 The September 1983 macro-economic reforms and the ZairianGovernment's determination to liberalize the economy have opened the wayfor specific policy reforms in the industrial sector. To help support thiseffort, the Bank Group lending strategy in the sector now consists of acombination of policy-based operations to improve the sector'sinstitutional and sectoral policy framework, while providing the foreignexchange required for the importation of inputs and spare parts, and ofcontinued assistance to SOFIDE to increase its effectiveness in providingthe term foreign exchange resources needed to support the investment plansof the private sector.

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B. The Financial Sector

1.23 The financial sector in Zaire consists of the Central Bank (BDZ),nine commercial banks and two development Banks: SOFIDE and theAgricultural Credit Bank. The non-bank financial sector includes insurancecompanies, a postal savings institution, and a social security fund. TheCentral Bank is responsible for regulating all the financial institutionsin the country and for establishing and administering national monetary andcredit policies as well as managing international reserves. Of the ninecommercial banks, seven have 50 percent or more participation by a foreignbank. Three of the banks have minority state participation. Thecommercial banks are mainly active in the provision of short-term credits.The main source of long-term finance and the only non-government source ofterm foreign exchange resources is SOFIDE, This situation, however, isbeginning to change. With a market-detert.ned exchange rate and easierconvertibility of the Zaire, the demand for term credit in local currencyis increasing and the commercial banks are starting to provide medium-termcredit (two to three years), although they remain constrained by the creditceilings imposed by the Central Bank.

Credit Controls and Interest Rates

1.24 Over the past few years, in an eifort to reduce inflation, theCentral Bank has progressively tightened credit to both the private andpublic sectors. The most important instruments used by the Central Bankare credit ceilings set on an annual basis in consultation with the IMF.Commercial bank credit as a tatio to GDP is now about half of what it wasin 1978. In real terms, commercial bank credit to the private sectordeclined by 50 percent in the six-year period ending December 1984. In1985, credit available to the private sector within the agreed ceilingsincreased considerably at the expense of the public sector and a furtherincrease has been agreed for 1986.

1,25 During the 1970s, Zaire followed a policy of administeredinterest rates. While commercial banks were free to set their owncommissions, both deposit and lending rates were regulated by the CentralBank, Thus, during that period, bank-customer relationships played a moreimportant role than interest rates in allocating credit to the privatesector, This situation has changed significantly as the Central Bank freedvirtually all deposit and lending rates (with the exception of those onloans for non-coffee agriculture) in September 1983 and more recentlycreated a market for Treasury Bills. Beginning April 1984, these TreasuryBills were sold to non-bank public at annual interest rates ranging from 40to 45 percent. With the slowdown of inflation, these rates decreased to30-35 percent in September 1985. In response to this competition,commercial bank deposit rates rose sharply and have become positive in realterms (about 30-35 percent for term deposits) in sharp contrast to earlieryears.

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1.26 On the lending side, limited availability of credit has keptinterest rates for short-term lending (including commissions) at about 35to 40 percent, despite a deceleration of inflation (down to about 30percent in 1985 from about 34 percent in 1984). As noted in para. 1.23,commercial banks have recently started to lend for two to three years,financing mainly equipment renewals. Commercial bank medium-term lendinghas to be approved by the Central Bank on a case by case basis. Given thelimited availability of credit and higher risks, this type of credit has sofar been given only to the commercial banks' best customers at ratesranging from 26 percent (non-coffee agriculture loans) to 35 percent,including commissions. This situation is expected to change, however, withthe increasing demand for term loans in Zaire, and as baniks move towardshigher interest rates.

II. THE INSTITUTION

Objectives and Role

2.01 SOFIDE was established as a limited liability company in 1970with IFC subscribing 18.75 percent of its initial share capital. SOFIDE'sobjectives at its inception were to foster the development of a capitalmarket and to finance investments in the productive sectors. Since then,it has successfully established itself as the main term lending institutionin Zaire and has been able to attract and retain the confidence of foreignshareholders and lenders. The World Bank Group's close and constantsupport through both financial and technical assistance was instrumental tothis achievement. Much of SOFIDE't investments over the past 10 years havebeen for rehabilitation and modernization of existing industrial capacityand for agricultural and transport projects. More recently, SOFIDE startedto increase its financing of small and medium enterprises (para. 2.26).Virtually all of SOFIDE's loans and equity participations hve been toprivately (or private majority) owned companies.

Performance under Previous Bank Group Projects

2.02 Two Project Performance Audit Reports (PPAR) covering the firstthree credits to SOFIDE were prepared by OED in 1976 and in 1982. Thefirst PPAR concluded that SOFIDE had succeeded in rapidly building up acompetent organization and in maintaining its independence in a difficultenvironment, but pointed out that there was scope for improved performance,particularly in appraisal and economic analysis of projects. The secondPPAR covering the second and third credits to SOFIDE (271-CK and 463-CK)commented positively on the institution building achievement of bothprojects but noted again the negative effects of the environment,particularly of inflation, on SOFIDEts profitability. It also concurredwith the views of IDA staff that SOFIDE needed to further strengthensupervision efforts and improve its organizational structure and accountingsystem to better cope with the increasing volume and diversity ofoperations. SOFIDE moved rapidly to address these issues by increasingsupervision and instituting better cost controls, by reorganizing its

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structure and by raising interest rates. In connection with the seventhcredit, SOFIDE made further efforts in improving arrears collection and itssupervision procedures. Progress to date has been satisfactory, but muchremains to be done, particularly with regard to the arrears situation whichis still above historical trends as a result of the adverse impact of theSeptember 1983 policy reforms on the financial situation of SOFIDE'sclients. The proposed credit aims at assisting SOFIDE further in thisarea,

2.03 As of March 31, 1986 all funds available to SOFIDE for onlendingunder the on-going IDA credits have been committed. Investment subprojectsfinanced by these credits were distributed as follows: 33 percent inmanufacturing (including agro-industry), 32 percent in agriculture,forestry and livestock, 26 percent in transport, eight percent inconstruction and one percent in mining. Twenty-one percent of thoseinvestment projects were new operations, and the rest wererehabilitation/expansion. They all had economic and financial rates ofreturn at appraisal in excess of 30 percent. SOFIDE plans to undertake aretrospective evaluation of its projects in operation to draw lessons forits future lending activities. The proposed IDA credit would help SOFIDEin this undertaking (para. 3.08). Results of this evaluation would also bean input into the next Project Completion Report (PCR) planned for FY87.

Share Capital and ownership

2.04 As of December 31, 1985, SOFIDE's authorized share capital, allof which was paid in, stood at Z 260.0 million (uSq4.7 million). It isheld as follows: public sector shareholders (Government and the CentralBank) 40 percent; local private shareholders 29 percent; IFC 10 percent;and other foreign shareholders 21 percent. In addition to its sharecapital, oOFIDE has substantial long-term, low interest subordinated loansfrom Government which have quasi equity characteristics. As of December31, 1985 these loans, together with accumulated reserves, amounted toZ 669 million (US$12.1 million). Since its establishment in 1970, threecapital increases have taken place at SOFIDE. The last increase, whichoccurred in September 1984, increased its loan limit (set at 20% ofSOFIDE's equity and quasi equity) to US$3.4 million. The debt to equityratio, which improved to 3:1 after the capital increase, stood at 8,1:1 onDecember 31, 1985, but the debt to equity and quasi-equity ratio remainedgood at 2.5:1 at the same date.

Management, Organization and Staffing

2.05 SOFIDE's Board consists of eleven members and is chaired bySOFIDE's Chairman and Managing Director, Six seats are held by Zairianpublic and private shareholders, and the remainirg five are held asfollows: IFC and DEG each hold one, Caisse Centrale (CCCE) and the BanqueFrancaise pour le Commerce Extgrieur (BFCE) share one, all other foreigninstitutions share another, and one is currently vacant. The Board meetson a quarterly basis to disculss major policy issues and to approve loansexceeding US$1.5 million. SOFIDE also has an Executive Committee, composedof the locally based directors, which meets more frequently than the Board

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and approves loans below Board limits. Both the Board and ExecutiveCommittee act in a sound and businesslike manner. IFC's presence on theBoard is importanit, as it brings to it IFC's wide experience and helpsprovide guidance and oversight. SOFIDE's Chairman and Managing Director, aZairian national, joined the institution in 1973. He is capable and wellrespected by the Government and business community in Zaire.

2e06 In mid 1984, SOFIDE restructured its organization in order torelieve top management of the day-to-day administration of the institutionso that it could concentrate on policy design and strategy planning, and toimprove SOFIDE's operational efficiency. SOFIDE's new organizationalstructure (Annex I) is relatively simple, consisting of three Divisionsresponsible for seven operational departments. SOFIDE also has fourregional offices. The three Divisions and the Departments reportingdirectly to them are (i) Operations with responsibility for the appraisal,supervision, and studies departments; (ii) Finance and Administration whichsupervises both the financial management and accounting department, and thepersonnel and general administration department; and (iii) GeneralInspection which coordinates and supervises the regional offices, andmanages the internal audit and organization department. Overall thisstructure is satisfactory. The senior managers appointed to head the threeDivisions also are competent and dedicated, and heve each been with SOFIDEfor more than ten years.

2.07 As part of the reorganization, the position of Deputy ManagingDirector, which had been held by various Bank staff on secondment until1981 and then by an expatriate on Bank contract, was abUlished when theincumbent became advisor to the Chairman and Managing Director. Thereorganization is working well -- decisions are made faster and there isbetter control of operations -- and the institution is functioningsmoothly.

2.08 As of December 31, 1985, SOFIDE had a total professional staff of73, excluding the Managing Director and his expatriate advisor. All thestaff are based in Kinshasa, except ten who run the regional offices.Typically, the staff have formal training in business administration,economics, engineering or agronomy and joined SOFIDE either directly fromuniversity following competitive examinations, or after 3-4 years workingexperience in the public or private sector. Some of this professionalstaff have benefitted from specialized courses in project finance andmanagement, in Zaire or abroad, and all of them have had on-the-jobtraining. Although SOFIDE's staff is, by and large, competent andhardworking, it includes a number of relatively new professionals whorequire additional training.

2.09 During 1985, SOFIDE transferred five experienced professionalsfrom the Appraisal to the Supervision Department to strengthen monitoringof its clients, many of whom were facing difficulties. An additional fourprofessionals are expected to be recruited and trained in 1986, mainly tostrengthen the Supervision Department and to reinforce the field offices inGoma and Kananga. Apart from these planned recruitments, no other increasein professional staff is foreseen in the near future. The proposed

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professional staff strength of 77 will enable SOFIDE to enhance its projectmonitoring activities and io improve its arrears situation.

Staff Training

2.10 Over the last three years, SOFIDE has lost several of itsexperienced and senior staff who were requested to join Governmentservices. Because of the high quality of its professional staff, SOFIDEhas in fact become a recruitment source of high-level Covernmentofficials. The current heads of the Banque de Crgdit Agricole, Fonds desConventions de D6veloppement, and CEPETEDE were all former SOFIDE staff, aswas the former Finance Minister. Recently, the Director of the OperationsDivision, who had been with SOFIDE since its inception, became DirectorGoneral/Administrator of a large public enterprise. As a result, SOFIDE'sprofessional staff, particularly those at the middle management level, arenow relatively new to the job and need additional training that SOFIDE isproviding on an ad hoc basis through in-house seminars and courses atCEP'ITEDE (paras. 2.11 and 2.12) or abroad. At the working level, trainingis particularly needed for the four professional staff appraisingagricultural projects as the more experienced ones have been transferred tosupervision (para. 2.09). SOFIDE intends to increase training and plan thedevelopment of its staff, taking into account the requirements and workprograms of the different departments. It has prepared a three-yeartraining program and has submitted it to IDA for review during negotiationsof this project. The program is very comprehensive and aims at upgradingthe skills of both support and professional staff to enable them to improvetheir efficiency and take advantage of opportunities that are offered inthe institution. Courses and seminars planned for the staff in Zaire andabroad include training in technical matters (financial analysis,management of development banks, project evaluation, etc.), as well as incommunications, languages (English), and personnel management. SOFIDE hasalso decided to establish a separate Human Resources Unit within theAdministration Department and has appointed an experienced unit chief whowill be responsible for managing the staff training and developmentprogram. SOFIDE's staff training program (available in the Project File)is well conceived and would be supperted under this project which includesfunds for staff training (paras. 3.03(b) and 3.09).

Centre de Perfectionnement aux Techniques de Developpement (CEPETEDE)

2.11 CEPETEDE is a management training institute set up jointly bySOFIDE, Government, and Banque du Zaire in 1981 to train professional staffof the public and private sectors in banking, administration, and financialand economic analysis of projects. It is managed by a former Director ofSOFIDE's Studies Department who is assisted by an expatriate Director ofStudies and two other expatriates. All three expatriates are financed byFAC (Fonds d'Aide et de Coop6ration). CEPETEDE has also three full-timeZairian counterpart staff and recruits on a part-time basis foreign expertsand professional staff from local institutions and enterprises to runseminars in their respective field of expertise. Since its creation,CEPETEDE has made substantial progress in its efforts to become financiallyautonomous. Participants' tuitions and fees now cover about a third of its

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budget which was mostly funded by foreign assistance in 1981-82. Recently,CEPETEDE diversified into consultancy business to further decrease itsdependence on external aid.

2.12 CEPETEDE has performed well and has enabled SOFIDE, Governmentinstitutions, and private enterprises to offer their staff a morecomprehensive training program than they could provide with their ownfacilities and resources. Since 1981, 134 participants from 32 public andprivate enterprises/institutions have taken CEPETEDE's four-month basiccourse and the three-month specialization in project evaluation ormanagement ot enterprises. CEPETEDE has also organized 30 seminars onvarious subjects, including inventory management, cost accounting,personnel management, restructuring of enterprises, etc., for 616participants from 101 local enterprises. EDI has approached CEPETEDE witha view to associating it to its training seminars in Africa. The serenthIDA credit to SOFIDE included US$250,000 to enable CEPETEDE to recruitexperts to run high-level seminars such as those described above. As ofend March 1986, about 80 percent of these funds have been used and it isexpected that CEPETEDE will exhaust the balance before September 1986. Theproposed project would continue to support CEPETEDE (paras. 3.03(c)and 3.11).

Operating Policies and Procedures

2.13 Policy Statement. SOFIDE's operating and financial policies areset by the Board and documented in a formal policy statement. Thisstatement sets, inter alia, the financing of economically and financiallyviable projects as SOFIDE's main objective, establishes a maximum exposurelimit per client (20 percent of SOFIDE's equity and quasi-equity), andguidelines for equity investments (generally up to ten percent of SOFIDE'sequity) in viable enterpriscs. The policy statement also requires thatSOFIDE be managed on sound and businesslike principles, and to makeadequate provisions for possible losses. Loans in arrears of more than sixmonths are classified as doubtful and legal action taken against thepromoters (generally within a year) when SOFIDE's efforts to collect fail.SOFIDE's policy statement was reviewed and approved by IDA in conjunctionwith the previous lines of zredit and remains a sound basis for operationsunder the proposed credit.

2.14 Appraisal. As part of the 1984 reorganization, the twodepartments responsible for appraisal (agriculture and industry) weremerged into one. SOFIDE's new Appraisal Department is responsible for bothproject promotion and project appra'sal. It currently has a staff of 14professionals, including the department head, most of whom are experiencedin project work. The appraisal staff is somewhat overstretched as a resultof the transfer of five professionals to the Supervision Department inOctober 1985 (paras. 2.10 and 2.16), but will be strengthened through thetraining pro-ided under this project. The project will also make fundsavailable to recruit consultants for appraisal, if needed. SOFIDE'spromotion efforts have been extensive and successful. Projects areselected on the basis of the following criteria: (i) improvement of thebalance of payments; (ii) satisfaction of basic needs; (iii) increased

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exploitation of local raw materials; (iv) employment creation; and (v)improvement of transport conditions in the interior. SOFIDE's InvestmentStrategy (Annex II) gives priority to the financing of export-orientedprojects, rehabilitation of existing enterprises, projects using local rawmaterials, labor intensive projects and agricultural forestry and transportoperations. The institution has a strong pipeline (para. 2.36).Procedures for appraisal are systematized and documented in a projectmanual, SOFIDE's methodology for project appraisal is satisfactory. Acommittee comprising all SOFIDE department heads reviews all appraisalreports before they are submitted to top management and the Board.

2.15 Supervision. Following the reorganization of September 1984,*nen the supervision function became a separate Department under theOperations Division, the vigor and extent of supervision efforts iave beenconsiderably reinforced. SOFIDE increased the number of professionals insupervision from nine to 14, instituted various new measures and stepped-upprevious ones to improve the quality of its 334 project portfolio(paras. 2.27 to 2.31). The loan recovery unit, established in 1983 toimprove loan collection, was strengthened and the ten professionals in theregional offices now devote about 50 percent of their time to supervision.Projects under supervision are visited at least once a year and those whichare in difficulties receive additional visits. SOFIDE's supervisionpolicies and procedures are satisfactory.

Terms and Conditions of Lending

2.16 SOFIDE's loans have maturities typically ranging from four totwelve years, depending on the type of project being financed. The averageloan maturity is about eight years. SOFIDE takes adequate security anddoes not accept subordinatton to any other lender. It also requires thatclients satisfactorily linsure equipment financed under SOFIDE loans overthe life of the loan. SOFIDE's interest rates are not regulated by thecentral bank but set by its Board, subject to the limitations imposed bysome foreign lenders on their credit lines. Annex III gives details on theconditions of SOFIDE's foreign borrowings.

2.17 Foreig Exchange Risk Coverage. Prior to 1979, Government borethe foreign exchange risk on all f,reign loans to SOFIDEe In 1979,however, Government informed SOFIDE that in future it would no longer bewilling to carry the exchange risk on the latter's foreign debt, other thanon an exceptional basis. Since then, SOFIDE has passed on the foreignexchange risk to its borrowers and agreed with Government on a mechanism toprotect SOFIDE against the residual foreign exchange risk where repaymentsby sub-borrowers are earlier than SOFIDE's repayment schedule to outsidecreditors. This arrangement has worked well and adequately protectsSOFIDE.

2.18 Interest Rates. About 88 percent of SOFIDE's present portfoliois denominated in foreign currency and the rest is in Zaires. On foreigncurrency loans, SOFIDE charges an interest rate of 15.5 percent per annum,a commitment fee of 1.5 percent on the undisbursed committed amount and anappraisal fee of two percent, with .he full foreign exchange risk being

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passed on to the clients. Since January 1985, SOFTDE's clients are alsosubject to a 18 percent tax on the interest paid (CCA sur les prestationsde service". This tax effectively increases the interest charges to 18.3percent, a very high rate given that SOFIDE's clients bear the foveignexchange risk under a floating exchange rate system.

2.19 During the late 1970's and early 1980's, the interest ratescharged by SOFIDE on foreign currency loans were periodically increased (upto 20 percent in 1982), and the spreads between SOFIDE's borrowing andlending rates were also high. The high interest rates in real terms,however, were not sufficient to compensate for the impact of domesticinflation on SOFIDE's costs as the exchange rate was not ftully adjtisted tocorrect for differential inflation. As a result, SOFIDE's profitabilitywas poor (negative in real terms) in spite of its general efficiency.

2.20 The 1983 devaluation and the adoption of a floating exchange ratesystem has significantly improved SOFIDE's income from foreign currencyloans as well as its profitability and has allowed it to operate withlower interest rates and smaller financial spreads. Over the last twoyears, the increase in interest income resulting from the depreciation ofthe Zaire outpaced the rise ia administrative expenses and other costs andenabled SOFIDE to show a return on average equity of about 17 pe2rcent in1985. Projections made on realistic assumptions regarding the level ofoperations, interest rates charged, and loan collections also show thatSOFIDE would be highly profitable in real terms during the period 1986-89(paras. 2.37 and 2.38). This will allow SOFIDE to redace intermediationcosts and operate profitably -with a 5.5 percent spread, which is 1.5percentage points lower than the spread under the seventh IDA credit,Therefore, SOFIDE agreed to reduce its interest rate on foreign currencyloans to 14 percent (para. 3.06), a rate which is in line withinternational interest rates for term credit and still highly positive inreal terms, as world inflation is expected to be between 6.8 and 7.2percent over the next few years. Further reductions of SOFIDE's interestrate are expected in the future as its efficiency increases and a smallerspread can ensure its continued profitability. To encourage investment,the Government also agreed to waive the CCA tax for borrowers who bear theforeign exchange risk. Submission by the Government to Zaire's legislatureof measures aiming at the suppression cf the CCA tax for borrowers who bearthe foreign exchange risk would be a condition of effectiveness of thisCredit.

2.21 SOFIDE's interest rate on local currency loans is 30 percentp.a. with commissions and fees similar to those on foreign exchange loans,This rate is positive in real terms as Zaire's inflation is projected to bein the range of 20-25 percent in 1986-89. It is also comparable to ratescharged by commercial banks for term credit in Zaire (para. 1,26),However, given Zaire's continued tight credit policy and the increasingdemand for local currency loans generated by the convertibility of theZaire into foreign curreacy, these rates, which are freely set bycommercial banks since September 1983, are expected to increasesubstantially. SOFIDE will change its rate if conditions require and keepit in line with those charged by commercial banks.

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2.22 To efoqire tLhat SOFIDE's lending terms continue to remeinadequate, Lhr covenant uindet the previous credits requir't.- SOFIDE tomaintain ren't positivP interest rates on its free resources (foreignexchange and local currency), to exchange views regularly with IDA on chesuitabilitp' io s onlending rates and to adiust them it conlitionsrequire, would be maintained.

Operations

2.23 As of December 311, 198-5, SOFID)E had approved 815 loans andequity invegtw,ntg totalling Z 4,0 billion, equivalent to aboutUSS315 r.illion 3/. During 1980-82, approvals hovered around US$22 tillionper vear, but have since then rebotnded to abouit UI$33 million in 1985 dueto tncreasing investor confidence.

2.24 're number of SOFIDE's operations has increased steadily over thepast few years from 58 in 19B1 to 76 in 1985. This was partly due toSOFIDE's more active lending to SMEs (para. 2.26). In 1985, manufacturingand agro-industries accounted for 47 percent of approvals, transport 23percent, construction and public works 12 percent, and mining iO percent.Agriculture, livestock and forestry made up the remaining eight percent.The average size of SOFIDE's loans is 1TSS435,000, or about the same levelas in the recent past.

2.25 Since the late 1970s, SOrIDE has Prngressively increased theregional diversification of its investments. With the exception of 1984when three large turban transportation projects in Kinshasa were approved,loans to companies in or around the capitaL only represented about 29percent of SOFIT)E's approvals by anount in the 1980s, as compared to morethan 40 percent in 1978-80. SOFIDE's loans cover the ten regions of Zairewith the most active being Shaba, Bas-Zaire, Kivu and Equateur.

SOFIDE and Smail and Medium Enterprises

2.26 Over the last five years, SOFIDE has increased its assistance tosmall and meLum enterprises (SMEs), which are for a large part owned andmanagod by Ln'rian nationals. Duting 1982-85, loans to SMEs accounted for80 to 85 peroent of approvals by number and about '0-55 percent by value.SOFTDE'S important lending to SMEs reflects both its own conviction that astrong SME sector is essential to Zaire's economic devalopnent, and theavailability of resources provided by several foreign lenders to be usedexclusi.vely for financing SMEs. However, this type of lending is costly toSOFIDE because of the highi relative cost of preparing SMr projects, thetransport costs involved in supervising them, inadequate spread on FXFfinancing and the high arrears rates associated with such lending. SMEshave also found it more difficult than larger enterprises to adjust to thepost-1983 reform period. To help them gc through this difficult transitionperiod, in the future, SOF'IDE intends to reserve local rescurces to financeSMEs as they are more vulnerable to exchange rate deprectacion. It has

li At the average exchange rate for each 'year,

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also obtained technical assistance from CIDA and KfW to help defray thecosts of SME operations and strengthen its capabilities to apprai:3e andmonitor such operations. Finally, SOFIDE is considering renegotiating withsome of its lenders an increase In the financial spread allowed on theirlines of credit.

Portfolio, Arrears and Provisions

2.27 As of Februarv 28, 1986, SOFIDE had a small equity portfolio ofZ 37 million (US$0.7 million) in fifteen companies and an outstanding loanportfolio of Z 3,384 million (US$65 million) in 334 projects. Until theadoption of the comprehensive stabilization package by the ZairianGovernment in late 1983, SOFIDE's portfolio was remarkably sound,especially considering the difficult environment in which SOFIDE and itsclients operated. For example, total arrears of more than three months atthe end of 1983, represented four percent of the outstanding loan portfolioand affected 79 projects, the total of which accounted for 17 percent ofthe value of the loan portfolio. Given the massive devaluation ofSeptember 1983 and the ensuing shock waves throughout Zaire's economy, itwas expected that several of SOFIDE's clients who bore the foreign exchangerisk would have difficulties honoring their debt and that special actionswould have to be agreed between SOFIDE and its clients. Thus, under theseventh IDA Credit, SOFIDE prepared and agreed with IDA on an Action Planto tackle this situation. The Plan was detailed and listed all the actionsto be taken for each project considered risky. Essentially, it called forloan reschedulira and additional security to be agreed with and/or obtainedfrom borrowers, reduction of project scope, legal proceedings against baddebtors, foreclosure, and sale of security in a few cases.

2.28 SOFIDE moved fast to implement this Action Plan. During 1984,SOFIDE rescheduled 24 loans, obtained additional security from fourborrowers, reduced the scope of four projects, reorganized two enterprisesand sold security to recover arrears from two clients. In spite of thesemeasures, however, arrears of over three months climbed to 17 percent ofthe portfolio and affected projects representing 62 percent of total loanportfolio by May 1985. Since then, SOFIDE took the following additionalmeasures to improve the quality of its portfolio:

(i) loan rescheduling for 13 borrowers with repayment periodsextended from 12 months to four years, depending on thesituation of the project;

(ii) establishment of a new schedule for payment of interestarrears for 15 clients by use of promissory notes (payableover three to nine months) with instructions to banks tohonor SOFIDE's notes in priority. Notes presented bySOFIDE have been honored except for two cases;

(iii) reporting of eight bad debtors to the central bank toprevent them from receiving bank credit. Two such clientshave since nmade partial payments;

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(iv) threat of legal action for 18 clients and legal action forsix more; and

(v) foreclosure of eight projects, two of which have beensuspended pending fulfillment of their promises to pay.

2.29 These actions have already started to show their positive impacton SOFIDE's portfolio as arrears of over three months fell, at the end ofFebruary 1986, to 11 percent and affected 134 projects representing 33percent of the loan portfolio. As noted earlier, SOFIDE also traraferredfive experienced professionals to the Supervision Department which now has14 professionals working full time on the arrears problem. Finally, SOFIDEincreased provisions to a level of 12 percent of portfolio at the end of1985. In absolute terms, these provisions amounted to Z 331 million(US$6.0 million) and represented 84 percent of total arrears of more thanthree months at the end of February 1986. Under the previous IDA credits,SOFIDE agreed not to distribute any dividends until the amount of generaland specific provisions for risk constituted at least four percent of thetotal outstanding loan and equity portfolio. This covenant will bemaintained under this project.

2.30 Like other financial institutions, SOFIDE's approach to theportfolio problem has been to deal with its clients on a case-by-casebasis. The various measures taken were tailored to the needs of eachparticular project and reflected SOFIDE's judgement regarding theborrower's repayment capacity. Such an approach makes sense, and themeasures taken to date have been satisfactory. In addition, SOFIDE isconsidering more general measures such as reduction of interest rates forcertain groups of clients (SMEs and small agricultural projects), some ofwhom pay very high interest rates (18 to 20 percent plus the CCA tax) ontheir foreign currency loans.

2.31 SOFIDE's efforts are commendable. However further actions arerequired as the level of arrears is still high by SOFIDE's standards and amajor objective of this project is to continue supporting SOFIDE in itseffort to improve its portfolio. The technical assistance to be providedunder this project is designed to help SOFIDE recruit short-term local andforeign experts to assist clients in improving the viability of theiroperations and undertake special audits and management reviews of some ofits important existing and prospective borrowers (para. 3.09). Duringimplementation of this operation, IDA will also closely monitor SOFIDE'sprogress in improving the quality of its portfolio. To this end, thefollowing actions and quantitative targets have been agreed with SOFIDEduring negotiations:

(a) SOFIDE will continue to implement the Action Plan prepared with IDAto deal with its portfolio problems. This Plan has been updated toinclude specific measures envisaged for all loans with arrearsexceeding Z 1.0 million (about US$18,000) at the end of February1986 and targets for quarterly collection ratios (defined as allamounts collected during the quarter, including collection ofarrears, over new billings during the same quarter) for CY1986

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increasing gradually from an average of 71 percent in 1985 to 95percent in the last quarter of 1986. Thereafter, quarterlycollection targets will be agreed with IDA depending on the resultsachieved. A copy of this Plan is available in the Project File;

(b) as part of its reporting requirements, every quarter SOFIDE willsubmit to IDA a note showing (i) the collection ratio targeted andthe result obtained; (ii) the measures taken; (iii) the arrearssituation at the end of the quarter, and (iv) the collection ratiotarget and measures proposed for the next quarter.

Financial Results and Condition

2.32 SOFIDE's income statements and balance sheets for 1981-1985 andthe relevant financial ratios are summarized in Annexes VII to IX. Thefinancial statements reflect the changes that the economy underwent in late1983. After an exceptional performance in that year, mainly due to aUS$0.9 million windfall foreign exchange gain arising from the devaluation,SOFIDE's return on average assets and on average equity declined in 1984because of the major equity increase at the end of year. In 1985 SOFIDEmade a net profit of US$0.85 million, up only marginally from theUS$0.7 million of 1984 because of very high provisions (Z 215 million, orUS$3.9 million in 1985). On an accrual basis, profits before provisionsincreased from US$3.2 million in 1984 to US$4.7 million in 1985. Totalincome went up from 17.8 percent of average total assets in 1984 to 20.1 in1985, but record provisions (up from 6.3 to 8.2 percent of average assets)combined with an increase in interest payments (from 4.5 to 5.8 percent)left net profit at about the same level as in 1984 (1.8 percent of averagetotal assets).

2.33 On a cash basis, SOFIDE's performance is less satisfactorybecause of its arrears position (paras. 2.29 to 2.31). The collectionratio, which had fallen to 62 percent in 1984, improved to 71 percent for1985 but still fell short of the 100 perczent needed to stabilize theabsolute amount of arrears in the portfolio. Despite this, SOFIDE'sliquidity position is good because most of its debts are of much longerduration than its loans. Furthermore, SOFIDE is taking additional measuresto improve its arrears position and would be assisted under this project toincrease its loan collection.

2.34 Financial Structure. SOFIDE's overall financial structureremains sound. As of December 31, 1985, the term debt to equity ratio was8.1:1 and the term debt to equity plus quasi-equity ratio 2.5:1.

Lending Resources

2.35 As of the end of December 1985, SOFIDE had the equivalent ofUS$50.2 million available for commitments and US$31.4 million forapprovals, of which US$28.3 million in foreign exchange. Seventy-sixpercent, or US$21.5 million, of SOFIDE's foreign resources available fornew approvals is accounted for by recent loans from the African DevelopmentFund (US$12.1 million), CIDA ((US$2.0 million) and the EIB (US$7.4 million)which are intended to finance fertilizers and trucks for farmers, SME

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projects in the Kivu region, and the second phase of the Shaba Cementfactory, respectively. Only US$6.8 million of SOFIDE's foreign resourcesw:ere therefore available for untied loans.

Prospects

2.36 Forecast Operations. SOFIDE's operations forecast (Annex XI) isbased on a strong pipeline which, as at December 31, 1985, includesrequests totalling US$120 million to finance 54 percent of the costs of 168projects in manufacturing, agro-industry, agriculture (including forestryand livestock), transport, and mining. Seventy-five percent of theserequests are for rehabilitation/expansion and the rest are new operations.Thirty nine percent of the amount requested is from firms based inKinshasa. Small enterprises account for 40 percent of the number and 15percent of the amount of loan requests. Loan approvals for 1986-1989 areexpected to grow about five percent p.a. in real terms. Commitments anddisbursements for 1986-1989 are expected to follow the pace of projectapproval and will grow from US$35.5 million to US$47.3 million and fromUS$34.3 million to US$41.9 million, respectively. As in the past, it isexpected that the level of SOFIDE operations would be constrained more byresource availability than by demand. The projections and underlyingassumptions are realistic, given SOFIDE's past growth in operations,increasing demand for investment credit in Zaire, and projected resourceavailability.

Projected Financial Performance

2.37 SOFIDE's financial projections for 1986-89 (Annexes XII to XV)assume a decrease in SOFIDE's lending rate for new foreign currency loansfrom 15.5 to 14 percent per annum. Despite this reduction of SOFIDE'slending rate, interest and commission income is expected to outpace thegrowth in financial and administrative expenses (due primarily toanticipated continued depreciation of the Zaire), so that SOFIDE canmaintain provisions at least at 12 percent its loan portfolio, the levelreached in 1985, and still earn a satisfactory return on its averageequity. Net income is projected to grow from about US$2.6 million in 1986to US$5.9 million in 1989 when it is expected to represent about 44 percentof average equity, as compared to 12-17 percent in 1981-85.

2.38 The projections show that SOFIDE's financial structure willremain sound, with the debt to equity and quasi-equity ratio rangingfrom 3.3 in 1986 to 4.4 in 1989, thus remaining within the prudent 5:1limit agreed with IDA. This limit will be maintained under this proposedoperation. SOFIDE's asset/liability maturity structure is also expected toretain its present characteristics (i.e. loan assets having a much shortermaturity than debt liabilities), and would allow it to maintain asatisfactory liquidity position while dealing with any problems in itsportfolio.

- 20 -

III. THE PROJECT

Project Objectives and Justification

3.01 The proposed credit would represent a continuation of IDA'ssupport to an effective financial intermediary assisting the productivesectors in Zaire, particularly the development of private sector investmentin manufacturing and agro-industries, which are needed to achieve a highergrowth performance. It complements the Industrial Sector Adjustment Creditunder preparation, which would assist the Government in reforming policiesaffecting the development of the industrial sector. Specifically, theobjectives of this project are (i) to provide the term credit and foreignexchange needed for rehabilitation of efficient existing enterprises andfor new priority investment promated by private entrepreneurs; (ii) tocontinue supporting SOFIDE in its efforts to deal with its portfolioproblems; and (iii) to strengthen SOFIDE's institutional structure to copewith the increasing volume and diversity of operations. The project willalso continue IDA's ongoing support to CEPETEDE, Zaire's principaldevelopment training institution.

3.02 The rationale for IDA involvement in the project is to assist theZairian Government in its efforts to stimulate economic growth, promoteexports, and increase employment. The foreign exchange resources providedby this project would help support the investment plans of the privatesector and facilitate the supply response from the economy to the policyreforms already taken and to be taken shortly. As in the past, continuedIDA support would enhance SOFIDE's capabilities to mobilize additionalforeign exchange resources from other external donors and enable it to playa more significant role in promoting private investment in Zaire.

Description of the Project

3.03 The proposed IDA Credit of SDR 43.3 million (about US$50.0million equivalent) would be made to the Republic of Zaire, which wouldonlend SDR 42.9 million (about US$49.5 million equivalent) to SOFIDE undera Subsidiary Loan Agreement satisfactory to IDA, the signing of which wouldbe a condition of credit effectiveness, and would pass on SDR 433,000(about US$0.5 million equivalent) to CEPETEDE as a grant. The credit wouldinclude the following components:

(a) Investment component (SDR 42.3) to finance the foreignexchange costs of SOFIDE's subprojects;

'lb) Technical Assistance to SOFIDE (SDR 567,000) tofinance the total cost of local and foreign experts tostrengthen SOFIDE's appraisal and loan collectioncapabilities, the training of SOFIDE staff, and thepurchase of about SDR 87,000 of data processing equipment;

(c) Technical Assistance to CEPETEDE (SDR 433,000) to financethe total cost of local and foreign experts to runhigh-level courses in project appraisal and relatedsubjects, and the purchase of a limited amount of equipment(SDR 87,000 maximum, mainly for data processing).

- 21 -

The Proposed Investment Component

3.04 This component would finance the foreign exchange Cost8 ofcapital investment, including initial working capital, in subprojectsapproved by SOFIDE. All projects that are within SOFIDE's scope ofoperations would be eligible, provided they are selected by SOFIDE inaccordance with its investment strategy (Annex II) and justified on thebasis of a full economic analysis, including calculation of an economicrate of return for all non-service sector projects,

3.05 Government Onlending Terms. Consistent with the Bank Grouppolicy for IDF operations, IDA funds would be passed on by Government toSOFIDE at 8.5 percent per annum (IBRD's interest rate prevailing at thetime of distribution of the credit documents to the Executive Directors),with a flexible amortization schedule that would substantially conform tothe aggregate of the amortization schedules of subloans made by SOFIDE andfinanced under this project (subject to a maximum term of 15 years,including a grace period not exceeding three years). In addition, SOFIDEwould pay to Government a commitment fee of 0.75 percent per annum on theundisbursed amounts of sub-loans from the date of their approval by IDA.

3.06 SOFIDE's Lending Terms. SOFIDE would lend to subborrowers at anannual interest rate of 14 percent. This rate would yield a spread forSOFIDE of 5.5 percent, which would be adequate to cover administrativecosts, make adequate provisions, and allow for satisfactory profitability.SOFIDE's interest rate would be reviewed with IDA at least once a year andadjusted if necessary to ensure its adeq.acy and competitiveness comparedto alternative sources of finance. The foreign exchange risk would beborne by SOFIDE's subborrowers.

3.07 Free Limit. The individual subproject free limit would beUS$500,000 equivalent as under the seventh IDA credit. The aggregate freelimit would be US$17 million equivalent, or 35 percent of the total amountof the line of credit, i.e., the same percentage as in the seventh IDAcredit. With this free limit, it is estimated that about 20 subprojectswould require IDA review prior to approval. This is sufficient for thepurpose of effective subproject monitoring by IDA.

3.08 Commitment Period. The funds would be available for commitment bySOFIDE until June 30, 1989.

Technical Assistance to SOFIDE

3.09 The SDR 567,GOO provided under this component would be madeavailable to SOFIDE to finance (i) short-term local and foreign experts(management consultants, engineers, agronomists, etc.) to more effectivelyassist clients in difficulty in improving the viability of theiroperations; (ii) consultants to help appraise large and complex projectsand conduct a post evaluation of its on-going operations; (iii) specialaudits and management reviews of some of Its important existing andprospective borrowers; (iv) the training of its stiff in Zaire and abroad;and (v) computer equipment to improve its information processing system(about SDR 87,000).

- 22 -

3.10 Terms and Conditi,-ns. Funds under this component would be onlentfrom Government to SOFIDE at Zhe same rate as the investment component,i.e., 8.5 percent per annum, and would have a fixed amortization scheduleof 15 years, including a grace period of three years. The foreign exchangerisk would be borne by SOFIDE. The funds would be available for commitmentuntil June 30, 1989. Each request for financing would be submitted to IDAfor review and approval along with 8 brief justification and costestimates.

Technical Assistance to CEPETEDE

3.11 The SDR 433,000 provided under this component, amounting to abouta third of CEPETEDE's budget during 1986-89, would enable it to (i) financelocal and foreign experts to run h'gh-level courses in project appraisal,financial and portfolio management, accounting and related topics forofficials and executives of the public and private sectors; and (ii)purchase a limited amount of training materials and equipment (dataprocessing and related equipment and pedagogical material).

3.12 Terms and Conditions. Funds allocated for this component would bepassed on as a grant from Government to CEPETEDE and would be available forcommitment until June 30, 1989. Each request for financing would besubmitted to IDA for review and approval along with a brief description ofthe course and the qualifications of the experts. To facilitateadministration of the component, SOFIDE has agreed to manage it on behalfof CEPETEDE and to sutmit disbursement requests to IDA. SOFIDE wouldreceive, as an administrative fee, a commission of 3.5 percent of theamount available under the component. Such fee woull be paid in threeequal yearly tranches of SDR 5,000 out of the Special Account (para. 3.18),the first tranche to be paid on the effectiveness date of this Credit.

Total Project Cost and Financing

3.13 SOFIDE's subloan commitments during the period January 1986 toJune 1989 are estimated at US$139.1 million, of which US$103.0 millionwould be in foreign exchange. The investment component of the proposedproject (US$48.8 million) would cover about 47 percent of the foreignexchange needs and the remainder would be secured from other sources(CIDA, KfW, EIB and ADB). Assuming that SOFIDE would finance, as in thepast, about 55 percent of the total investment costs, the US$139.1 millionforecast commitments would result in about US$253 million in totalinvestments.

3.14 The financing plan of SOFIDE's operations and for the t'- :nicalassistance provided under this project would be as follows:

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Financing Plan

January 1986 - June 1989(US$ million equivalent)

Local Foreign Total

SOFIDE's Subloan Commitments 36.1 103.0 139.1Technical Assistance 0.3 0.9 1.2

Total Financing Required 36.4 103.9 140.3

Financing Plan

SOFIDE: Resources Available forCommitment as of January 1986 3.5 46.7 50.2

SOFIDE: Cash Generation 32.6 - 32.6Proposed IDA Credit 0.3 49.7 50.0Other Possible Lenders (Kfw, EIB, ADB) - 7.5 7.5

Total 36.4 103.9 140.3

Project Implementation

3.15 Procurement and Disbursement. Procurement for subprojectsfinanced under the investment component of the credit, as well as goodsfinanced under the SOFIDE and CEPETEDE technical assistance componentswould be on the basis of competitive quotations from at least threedifferent suppliers (including foreign), a procedure acceptable to IDAwhich has worked well under previous IDA credits to SOFIDE. Given therelatively modest size of procurement packages, there is litt'e scope forinternational competitive bidding. Selection of consultants would be madein accordance with Bank Group Guidelines.

3.16 The proceeds of the propose4 credit would be disbursed as follows:

(a) on the SOFIDE and CEPETEDE technical assistance components: (i) 100percent of the cost of consultants and training; and (ii) 100 percentof the foreign exchange cost of equipment and supplies bought bySOFIDE and CEPETEDE;

(b) on SOFIDE subloans: (i) 100 percent of the c.i.f. cost of goods andservices; (ii) 80 percent of the cost of previously importedequipment purchased in Zaire and of equipment produced in Zaire frompreviously imported components and raw materials; and (iii) 55percent of the cost of construction works included in subprojects andcarried out by locally-based contractors.

- 24 -

3.17 The projected disbursement schedule is based on the disbursementprofile for DFC projects in Eastern and Southern Africa. Disbursements areexpected to be completed over eight years, by December 31, 1994.

3.18 Special Account. As under the sixth and seventh IDA credits, toexpedite disbursement of funds, a special account would be set up at afinancial institution acceptable to IDA into which IDA would make aninitial deposit of US$2.1 million equivalent from the proposed creditimmediately after credit effectiveness. This amount represents anestimated average disbursement of funds over a four-month period. TheSpecial Account would be used to finance all stbproject componentexpenditures under $25,000. Replenishment of the Special Account for theseitems wotuld be made on the basis of Statements of Expenditures (SOEs). Thedocumentation for withdrawals made under SOEs would be retained by SOFIDEfor ten years and would be reviewed by supervision missions. The SpecialAccount could also be used to finance expenditures for the technicalassistance components and subproject component expenditures in excess of$25,000. Replenishment of .he Special Account for these items would bemade on the basis of fully docuT.ented applications. Applications forreplenishment of the Special Account for a minimum of US$100,000 would besubmitted on a monthly basis or whenever funds are oelow US$1 million. TheSpecial Account would be audited annually by independent auditors and theaudit reports would be submitted to IDA within six months of the end of thefiscal year.

3.19 Audits and Reporting. Since its inception, the Brussels-basedfirm of Berger, Block, Kirschen and Schellekens and Co. has auditedSOFIDE's accounts. The quality of the audits has been satisfactory and inline with IDA's requirements. As under previous IDA projects, SOFIDE willcontinue to have its accounts and financi. P-tements, as well as thespecial account and SOEs (para. 3.18), aia the accouutt of the CEPETEDEcomponent that it has agreed to manage, au-.Lted by independent auditorsacceptable to IDA and will furnish to IDA certified copies of its auditedfinancial statements and its annual reports within six months of the end ofthe fiscal year. SOFIDE wil'l also submit to IDA quarterly reports, whichwould include, inter alia, financial statements, resource position,statement of arrears, loan collection targets and results obtained andmeasures taken to improve the arrears situation.

Project Benefits and Risks

3.20 The proposed project would provide term resources to theproductive sectors in Zaire to rehabilitate industrial and agro-industrialenterprises, develop manufactured exports, improve transport facilities andincrease agricultural production. It would thus help accelerate growth andincrease employment in Zaire and would complement the positive impact ofthe policy reforms already taken or to be taken with the su?port of theIndustrial Sector Adjustment Credit. The investment compc.aent of US$48.8million is expected to support productive investments totalling about US$90million and would help rehabilitate or improve production capacity of amuch higher value. As in the past, subprojects financed are expected toshow high economic and financial rates of return (par 2.03). The project

- 25 -

would also enable IDA to continue helping SOFIDE, the main term lendinginstitution in Zaire, to increase its effectiveness and institutionalstrength. The action program for portfolio improvement and monitoringwould enable IDA to assist SOFIDE in improving its loan collection andarrears situation. As in the past, continued IDA support would enhanceSOFIDE's capability to mobilize additional foreign exchange resources fromother lenders and enable it to play a more significant role in assistingthe recovery of the Zaire's productive sectors.

3.21 TIere are two risks in this project. The first risk relates tothe possible deterioration of Zaire's economic situation which would, interalia, accelerate the depreciation of the Zaire currency and make SOFIDEX'foreign exchange loans unattractive to potential investors who have to bearthe foreign exchange risk. Such a risk ia, however, limited in view ofZaire's continued compliance with the IMF stabilization program and theactions envisaged by IDA and other donors to increase the resource transferand accelerate economic growth in Zaire. The second risk is the possibledeterioration of SOFIDE's arrears position. This risk is also limitedbecause of the strong action SOFIDE has already taken to improve loancollection and the additional measures proposed in the context of thisproject to contain any portfolio deterioration. These should insure thatSOFIDE will remain an effective term lending institution that promoteseconomically justified investment projects.

IV. AGREEMENTS REACHED AT NEGOTIATIONS

4.01 This report recommends an IDA credit of SDR 43.3 million (US$50.0million) to the Republic of Zaire. SOFIDE would receive SDR 42.9 million,of which SDR 42.3 million for relending to its subborrowers and SDR 567,000for technical assistance and training, The remaining SDR 433,000 would bepassed on to CEPETEDE for technical assistance. During negotiations, thefollowing agreements were reached:

(a) From Government that it will:

(i) onlend to SOFIDE the investment and the technical assistancecomponents on the conditions specified in paras. 3.05 and 3.10including an onlending rate of 8.5% per annum;

(ii) pass on to CEPETEDE as a grant SDR 433,000 million to helpstrengthen its training capabilities (para. 3.12);

(b) From SOFIDE that it will:

(i) exchange views regularly with IDA on the adequacy of itsinterest rates (paras. 2.22);

(ii) distribute dividends only when general and specific provisionsfor risk constitute at least four percent of its loan andequity portfolio (para. 2.29);

- 26 -

(iii) implement the Action Plan aimed at improving the quality of itsportfolio (para. 2.31(a));

(iv) as a part of its quarterly reporting requirements, submit toIDA a note showing the collection ratio targeted and theresults obtained, the measures taken to improve arrearscollections, the arrears situation at the end of the quarter,and the collection ratio target and the measures proposed forthe next quarter (para. 2.31(b));

(v) maintain its debt/equity and quasi-equity ratio below 5:1(para. 2.38);

(vi) reduce its interest rate on foreign currency loans to 14.0percent p.a. and pa3s on the foreign exchange risk to itssub-borrowers (paras. 2.20 and 3.06); and

(vii) bear the foreign exchange risk on the technical assistancecomponent of SDR 567,000 (para. 3.10).

(c) Conditions of Effectiveness:

(i) Submission by Government to Zaire's legislature of measuresaiming at the suppression of the CCA tax for borrowers who bearthe foreign exchange risk (2.20);

(ii) Signing of the Subsidiary Loan Agreement (para. 3.03).

- 27 -

LIST OF ANNEXES

1 Organization Chart ............................... 28

2 Investment Strategy Statement ............................. 29

3 Borrowings as of September 30, 1985 ...... 30

4 Analysis of Loan Arrears as of February 28, 1986 ...... 31

5 Summary of Operations, 1981-85 .... ,.................... 32

6 Approvals by Sector, Type of Project and Location,1981-1985 ..................... 33

7 Past Income Statements, 1981-1985 ...... .34

8 Past Balance Sheets 1981-1985 35

9 Past Financial Ratios, 1981-85 36

10 Main Assumptions Underlyina the Financial Projections ..... 37

11 Projected Operations 1986-1989 38

12 Projected Income Statements, 1986-1989 39

13 Projected Balance Sheets, 1986-1989 40

14 Projected Sources and Uses of Funds Statements, 1986-1989.. 41

15 Projected Financial Ratios, 1986-1989 42

16 Schedule of Disbursements ................................ 43

17 Selected Documents Available in the Project File .......... 44

-28 -

Anuex I

SOCIETE FINANCIERB Ot DEVgLOPPENZNT (SOFIDE)

Organu±ation Chart(As of December 31, 1985)

|Boad of Director&

I~~~~~~~~~~President and General Manager

Finance and Administration Operation J eneral Iaspectioni

j Financemini|ratio

_ ~~~~~~~~~Internal Audit F~~ and Organization

Appraisal Supervision Studies n r

ALUbuiBbashi Branch|

_FRananga Branch

EAPIDApril 1986

- 29 -

Annex II

SOCIETE FINANCIERE DE DEVELOPPEMNT (SOFIDE)

INVESThENT STRATEGY STATEMENT

Criteria for Selectolonof Projects bySOPIDE

Selection of projects shall taken Into account economicconditions, the major problems facing the country and national priorities,while also bearing in mand the limited resources at SOFIDE's disposal.

In view of the particular difficulties facing Zaire and theestablishment of a floating exchange rate svstem, SOFIDE shall givepriority to projects meeting the following criteria:

(a) lmprovement of the balance of payments;

(b) satisfaction of basic needs;

(c) rehabilitation and modernization of industrialenterprises;

(d) increased exploitation of local raw materials;

(e) employment creation; and

(f) improvement of transport conditions in the interior.

Specifically, SOFIDE shall assist the following projects:

- export-oriented projects;

- rehabilitation and moderni.zation projects;

- projects using local raw materials;

- labor-intensive projects;

- comercial agriculture and forestry projects; and

- transport projects.

The above areas of activity constitute the criteria for thepre-selection of projects. Appraisal of all projects will then iaclude aneconomic analysis, on the basis of which the decision to finance any givenproject will be taken. Among the projects meeting the above criteria,SOFIDE will select foi its financing those with the highest economic ratesof return.

EAPIDApril 1986

SOCigis nttUoezgn tf IOvZLoPP3T (307w!)

For-lgo borrowl!HLa. of Soptber 30. 1985

P o. ot C0'.0. at o noot ".turitY cl..o Partod tL.00.0t Rate CoItt_Pt 64t.00 b00t. SOr71S Vo-lg. Sp000OAen.ot btroaiwq .00 (J..r.) (yJ rs) (t p...) 0S . (7 p.*.) Diebortwd Nt.otwtding oo0odioo ft.h0.g. Lo0

('000 (00 01 VCO0 00o81ad:2o00_____ __ _ __________ Oonroool 0.11.) Cam 9 L. KUO) (X - 8nrn -

1DA S (I 90O-) 5/28/70 VS9 5,000 vo,iobi. v.rtab.. 7.00 0.75 5.000 - 9.0 Co..rnn tIDA 11 (271i-M 9/24/71 U2S9 10.000 variable ... table 7.25 0.75 IO,000 - 9.0 £-O,ern0ntWAk Xll (463-0) Z2/0/74 US) 9,800 0er bl. vatrible 7.2S 0.75 9,0d0 - 12.5 Cov.Co.ntIDA 1i (710-Ul) 4/19/77 US5 9.7t0 .&..b7. variable S. 8 50 0.75 9, 80 b70 12.5 SSE: Covroe.-ot

Uther.: W 0rotWA V (9-Uit!) */l6/80 07 18 0 SOO f.bl. va0riable 8.25 0.75 05,045 8,223 20.0 Cll StrepiA TX (12715-80) 8/06/02 so0 19.400 o.allbl* art0bl0 S0.3 0.75 11.274 10,752 20.0 Wrote, t

IDA 71 (4t92-2V) 8/07/64 S0l 34,000 *rt1bl. variable *.50 0.15 3,040 3.448 s5.5 toot. _-DV I V511/75 Dl 6.500 70 10 2.50 0.25 6,500 161 7.S C0vrent.t SSS oet.14, 0.000_.gm it 6/06/78 Dll 5.00 30 10 *.0/9.5 0.25 4,077 1,005 9.5 0o0rawrnt or 00 oot.2d. f;fr0hn.

C11n -

0.1 III 2727/b0 Dll 10.000 70 10 e.0/9.5 0.25 15528 5,220 15129 ClOteat. 1t0t0.0.00 o0t0004rWanbo

r.V IV 10/171/0 am1 7.000 5 10 b.0/9.55 0.25 6,407 12014 19/20 Ct l. 0t. or.I0g Capital|11 I 22/02/71 50 1,500 20 * t.5 0.75 I,400 l.,bO 9.5 oeo0.0t 0(va proj.ct:10 I 10/15177 gCD 1,096 2S0.5 5 .5 0.75 1,094 94 12.5 C1308 I pr.o.lec1i n0 09/00/03 to 6.000 ... 2 ibia var.ble 8.0 0.50 I5799 5,234 I5/20 C010.t.bD1V 12/1961/t ox 12.000 15 9.0 O.5S - - 15.5 Cltool C0ISI8 i1 PiovtoSal (00t40 eel" 01/26/75 ST 297,011 *.1b1 9..Vrt0bl. 7.25 0.30 292.011 - 12.5 Cov.ro.o1t "Ovd; P to 502 .00. 00.00 00nt -0n9th

d8 00 0t.o. e_n) C.ad op to 52 of 50at9W o6000 n*l1th

60000. G8c00.r1- 02/21/77 TV 19,911 I5 3 Aidfta7t.o.:4.5 - 19,318 I.905 9.0 C4o.tMt or Ti.d t. F-oo pTo.000otIodoatry: 5.5 0If.0000

( CZ - Avmce Clnool.tt0086 01Ws/So n 9.500 5 I 20.5 0.s0 1,394 - 25.5 Ultn 0td to f0r.oh pr7r0re0 et

02 or l 0r/r0/00 Pr 7.700 5 I 10.5 0.s0 7,007 - I5.0 02.a0.. T710 00 1o pr<- -t.nLTISA I 10/29/0 n 7.090 4 2 b.0 0.30 I,070 3.07e (5.2 O 00att1 .ied to Irrocb prorC nmotUILTZO 77 L0/29/$0 V 4.620 6 2 13.9 0.s0 4,061 4.05 25.0 1 I-C0.0 Tt.4 Cd *o .t pr.o maroontt888o10 I 03/02121 1 4.100 8.5 1.5 S.0 0.50 4,070 3.254 25.0 C01t.01 T77d to Ir7.cb procr...ot1a0SA0 11 11/02/83 n 4.100 4.5 1.5 14.75 0.S0 4,070 1.256 25.0 02l03s 0.A0 to Wfooth pffoe.C*CttUII 70703780 10/24/78 r7 9,700 15 s 7.0 0.30 18.070 12,254 10.40 Ci0t0n T7d to ftarOb pr..,m.ot

0a30 06/7I/78 US5 S.OCO IS s 7.1 0.75 3,271 1,2,4 Agr0-.t0.-:U.5 2cl:.0.. Te.ti0 goadstt02 d.. o Lo l0001.400.0.: 25.0 0100 200.00t20 004 00.0

AOl 02/03/02 6 0.000 20 5 - 0.75 275 I87 12.5 c0000o0 Atr, l. ttn0.An t 1212U78 06 5.000 13 5 7.5 1.75 4,512 27184 22.5 02(0t2 f*0.0. 0 00. t100.t 402 2.trtnnas 11 09/50/r, 0A 1o,o00 is 5 7.s 7.75 2,345 1,912 20.0 Ct.to n soattiory 4900.0 0t 2tot 447 2Ulrichc16 09/14/82 1908 SA.00 s0 10 - - - - 0o/1s a20i.nt 7.s"a0 n8.0AW Ii 02/18/5 (l6 9.t,eC 20 5 - 0.75 - - 2.5 C00.0t0 Vpe.tUtr 0o4 tr0c.0 for frfrt.ACCD 09/10/90 P 200.020 0s 5 5.75 0.75 - - 15.5 020o0. Tied X. 909d n procretf

Annex IV

SOCIETE FINANCIERE DE DEVEIOPPEM8NT (SOFIDE)

Analysis of Loan Portfolio Arrears of more than Three Months as of February 28. 1986

1. Overview

Portfolio affected by arrears Amour of Percentage of Percentage Arrears as Arrears asTotal Portfolio of more than three months Arrears more Projects of Portfolio Percentage of percentage of

Number of Number of than 3 v>nths Affected Affected Portfolio Total PortfolioZ million Prolects Z million Projects (Z million) Affected(A) (B) (C) (D) (Ej (D/8) (C/A) (E/C) (£7/A)

As of February 28, 1986 3,583.5 334 1,185.9 134 397.9 40.1 33.1 22.4 11.1

11. Arrears Situation by Sector and Status of ProjectsTotal Arrears (Z million)

of which: Portfollo Affected by Arrears0-3 months 4-12 months more than Total Arrears of of More than Three Months

12 months more than Number otThree Months 2 million Projects

Agriculture and Agroindustrtes

In Operation 77.6 93.2 67.2 238.0 160.4 474.6 59Under Implementation 32.1 26.2 14.9 73.2 41.1 286.2 26

Total Agriculture 109.7 119.4 82.1 311.2 201.5 162.8 85

Industry

In Operation 75.1 94.8 4t7.1 210.U 134.9 139.2 28Under Implementation 17.2 22.6 1.2 41.0 23.8 154.4 9

Total Industry 92.3 117.4 41.3 251.0 158.7 293.6 37

Services

In Operatio6 23.6 25.1 3.9 52.6 29.0 11S7Under Imlrementation 5.2 8.3 0.4 13.9 8.7 13.8 3

Total Services 28.8 33.4 4.3 66.5 '7.7 129.5 12

GRAND TOTAL 230.8 270.2 127.7 628.t '.9 1,185.9 '134

SAPIDApril 1986

- 32 -

Annex V


Summary of Operations 1981-1985(Z million)

1981 1982 1983 1984 1985

Approvals (net of cancellations)

Loans 134.9 100.4 416.0 941.6 1,589.9Equity Investments - 3.1 - 3.2 -Total 134.9 103.5 416.0 944.8 1,589.9

Commitments

Loans 143.3 83.2 520.9 563.8 1,900.0Equity Investments - - - 3.2 -Total 143.3 83.2 520.9 567.0 1,900.0

Disbursements

Loans 48.4 93.8 617.3 751.5 1,795.0Equity Investments - - - 5.4 -Total 48.4 93.8 617.3 756.9 1,795.0

Number of Loans Approved 58 63 59 70 76Number of Loans Committed 50 47 57 73 80

EAPIDApril 1986

- 33 -

Annex VI

SOCIETE FINANCIERE DE DEVILOPPMENT (SOFIDE)

Approvals by Sector, Type of Project and Location, 1981-84

(Z million and percent)

1981 1982 1983 1984 1985Sector of Activity Amount 2 Amount I Amount X Amount I Amount 2

Agriculture, Livestockand Forestry 28.8 21 36.2 35 95.2 23 405.3 43 126.9 8

Manufacturing(incl. agro-industries) 76.8 57 47.9 46 221.5' 53 221.1 23 745.3 47

Mining 9.8 7 1.1 1 27.4 7 1.9 - 193.7 12Construction and Public Works 8.0 6 4.2 4 36.7 9 24.6 3 162.2 10Transport 10.2 8 11.3 11 34.0 8 283.5 30 359.1 23Other Services 1.3 1 2.8 3 1.2 - 8.4 1 2.7 -

Total 134.9 100 103.5 100 416.0 100 944.8 100 1,589.9 100- - - -___

Type of Project

New 12.6 9 12.0 12 70.9 17 222.7 23 332.2 21Expansion 57.1 43 63.1 61 319.7 77 697.8 74 1,202.4 76Working Capital 22.0 16 8.5 8 25.4 6 24.3 3 3.3 -Supplementary loans 43.2 32 19.9 19 - - - 52.0 3

Total 134.9 100 103.5 100 416.0 100 944.8 100 1,589.9 100- - - - - - m

Project Location

Kinshasa 49.1 36 18.2 18 99.4 24 407.9 43 482.3 30Bas Zaire 12.3 9 10.0 10 80.7 19 48.7 5 53.8 3Bandundu 11.4 8 13.0 12 20.7 5 211.7 22 20.1 1Shaba 14.4 11 27.0 26 57.9 14 42.6 5 326.3 21Kivu 5.3 4 16.1 15 45.8 11 45.5 5 292.2 18Haut Zaire 5.7 4 1.9 2 30.9 7 21.0 2 233.2 15Vasai Occidental 14.9 11 4.9 5 23.6 6 25.8 3 104.3 7Kasai Oriental 4.7 4 8.3 8 16.9 4 15.1 2 40.9 3Equateur ±7.1 13 4.1 4 40.1 10 126.5 13 36.8 2

Total 134.9 100 103.5 100 416.0 100 944.8 100 1,589.9 100__ _ _ _- _- -

EAPIDApril 1986

- 34 -

Annex VII


Past Income Statements, 1981-85(Z million)

1981 1982 1983 1984 1985

INCOME

Interest and Commissions 22.8 35.5 99.5 220.7 460.0on Loans

ST Investment Interest 0.3 0.5 7.0 15.0 30.7Other Income 1.3 2.1 30.2 15.8 34.3

TOTAL INCOME 24.4 38.1 136.7 251.5 525.0

EXPENSES

Financial Charges 9.5 15.4 41.1 63.1 150.5Administrative Expenses 8.9 15.0 28.9 65.7 94.9Depreciation 0.7 0.7 5.9 9.6 18.0Provisions for Bad Debts 1.4 2.4 20.9 47.7 157.9

TOTAL EXPENSES 20.5 33.5 96.8 186.1 421.3

Profits before Provisionsfor General Risks 3.9 4.6 39.9 65.4 107.3Provision for General Risks 2.3 2.5 25.3 41.3 57.0

NET PROFIT 1.6 2.1 14.6 24.1 46.7

Allocated to:Dividends 1.1 1.1 1.2 14.8 31.0Staff Bonus 0.3 0.5 - - 4.8Retained Earnings 0.2 0.5 13.4 9.3 10.9

EAPIDApril 1986

- 35 -

Annex VIII

SOCIETE FINANCIERE DE DEVELOPPEIIENT (SOFIDE)

Past Balance Sheets 1981-1985(Z million)

1981 1982 1983 1984 1985

ASSETSCash and Bank Deposits 3.2 42.2 100.0 161.4 163.2Other Current Assets 57.0 67.4 419.1 292.0 587.9Total Current Assets 602 109.6 519.1 453.4 751.1

Medium and Long TermLoans 123 2 172.3 509.5 1,311.8 2,809.3less provisions (7.8) (10.3) (53.9) (115.6) (330.5)

Net mi160 ZN. 1,196.2 2,4783TOther Loans 0.3 0.8 2.3 4.8 20.5

Eq'iity Investments 2.0 2.3 25.2 30.3 36.7Fixad Assets (net) 5.4 7.7 53.8 83.1 162.3

TOTAL ASSETS 184.3 282.4 1,056.0 1,767.8 3,449.4

LIABILITIESDividends Payable 1.4 1.7 2.0 15.3 31.4Payables & Prepaid Income 26.3 43.0 74.5 71.6 203.8Current Liabilities 723.2

Medium and Long TermDebtsADB 26.8 25.6 140.3 179.6 503.2EIB 5.9 15.6 132.3 189.1 310.5KfW 23.3 44.9 264.1 318.9 580.3CCCE 31.3 28.5 146.6 193.5 360.1IDA - - - 281.3 982.6Other 9.2 25.5 45.6 51.5 40.3

(less f/x risk adjustment) (28.5 (20.3) (232.6) (247.7) (491.8)80.1 123.5 501.0 947.4 2,285.2

Quasi EquityLong Term Loan 6.0 6.0 6.0 6.0 6.0Rolled Over IDA 56.2 93.3 376.0 437.3 641.9

62.2 99.3 382.6

EquityPaid In Share Capital 12.0 12.0 12.0 260.0 260.0Reserves 2.3 2.7 71.9 3.3 3.3Retained Earnings - 0.1 11.9 6.9 17.8Total Equity 295.8 270.2 281.1

TOTAL LIABILITIES 184.3 282.4 1,056.0 1,767.8 3,449.4

EAPIDApril 1986

- 36 -

Annex IX

SOCIETE FINANCIERE DE DEVELOPPEMENT (SOFIDL)

Past Financial Ratios

1981 1982 1983 1984 1985

Incone Statement Elements as Zof Averae Total Assets

1. Total Income 16.4 16.3 20.4 17.8 20.1of which: Interest on Loans and

Dividends (15.3) (15.2) (14.9) (15.6) (17.6)others (short-termInterest:s, commissions (1.1) (1.1) (5.5) (2.2) (2.5)

2. Interest payments 6.4 6.6 6.1 4.5 5.83. Administrative expenses 6.0 6.4 4.3 4.7 3.64. Provisions 2.5 2.1 6.9 6.3 8.25. Depreciation 0.4 0.3 0.9 0.7 0.76. Total Expenses 15.4 15.4 18.2 16.2 18.37. Net Profit before provisions 3.6 3.0 9.1 7.9 10.08. Net Profit after provisions 1/ 1.1 0.9 2.2 1.6 1.8

Profitability Indicators

9. Net Profit (after provisions) 11.6 14.4 26.4 13.2 16.9as X of Average Equity

10. Income from Loans ts Z ofAverage Loan Portfolio 14.4 16.4 19.6 23.4 22.3

11. Cost of Debt as 2 of Average Debt 7.8 8.4 7.5 8.7 9.312. Average Spread 8.4 9.3 11.5 16.5 15.0

Financial Structure Indicators

11. Term-Debt/Year-End Equity 5.6 8.4 5.2 3.5 8.112. Term-Debt/Year-End Equity and

quasi-equity 1.0 1.1 1.0 1.3 2.5

1/ SOFIDE is not subject to profit tax.

EAPIDApril 1986

-37-

Annex X

Main Assumptions Underlying the Financial Projections

1. Inflation and Exchange rates

Exchange RatesInflation (X) Zaires Per US$

Taire World Depreciation Beginningof the Zaire Year Average End-Year

1986 25 7.2 16.6 53.5 58.0 62.41987 20 6.8 12.4 62.4 66.3 70.11988 20 6.8 12.4 70.1 74.5 78.81989 20 7.0 12.1 ;3.8 83.6 88.3

2. Mperations

Approvals: Foreign currency loans : 52 p.a. in real terms from 1985-89.

Local currency loans: based on resources generated byoperations.

Commitments: Foreign exchange: 50% year of approval, 50% following year.Loans and equity in Zaires: 100% year of approval.

Disbursements: Foreign exchange: 202 year of commitment; 40% second year;40% third year.

Local currency: 100% year of commitment.

3. Interest rates and commissions

Foreign currency loans: 15.5x-20% on loans outstanding and undisbursedcommitments.

14% on new loans.Local currency loans: 30%.Appraisal fee: 2%.Commitment fee: 1.5%.

4. Expenses

Borrowing Costs: 9% on new term debt.Roll over IDA: 2% IDA I to IV; 8.25% IDA V.

Administrative Costs: Actual level in 1985, increasing at 5% in real termsfrom 1986 to 1989, in line with operations.

Provisions: At least 4% of outstanding portfolio.

5. Collection Ratios (aefined as all amounts collected during the year,including arrears, over new billings during the sameyear):

1986 88%.1987-89 100%.

EAPIDApril 1986

-38 -

Annex XI


Pro1ected OPerations 1986-1989(Z uillion)

Actual Projected1985 1986 1987 1988 1989

Approvals

Loans 1,590 1,730 2,433 3,126 4,116(of which foreign currency) (1,250) (1,530) (1,983) (2,526) (3,216)Equity Investments - 10 14 18 26Total 1,590 1,740 2,447 3,144 4,142

Commitments

Loans 1,900 2,050 2,316 2,977 3,925(of which foreign currency) (1,491) (1,443) (1,866) (2,377) (3,025)Equity Investments _- 10 14 18 26Total 1,900 2,060 2,330 2,995 3,951

S----

Disbursements

Loans 1,795 1,971 1,998 2,"40 3,480(of which foreign currency) (1,009) (1,771) (1,548) (2,040) (2,580)Equity Investments - 10 14 18 26Total 1,795 1,981 2,012 2,658 3,506

EAPIDApril 1986

- 39 -

Annex XII


Projected Income Statements, 1986-89(Z million)

Actual Proiected1985 1986 1987 1988 1989

INCOME

Interests & Commissionson Loans 460 839 1,193 1,604 2,077Interests on short-terminvestments 31 14 19 44 70Other Income 34 18 26 36 40

Total Income 525 871 1,238 1,684 2,187

EXPENSES

Financial Charges 150 288 437 616 853Administrative Expenses 95 121 155 194 244Depreciation 18 10 30 43 54Provisions 158 203 250 307 347

Total Expenses 421 622 872 1,160 1,498

Profits before Provisionsfor General Risks 104 249 366 524 689

Provision for GeneralRisks 57 86 110 140 170

NET PROFIT 47 163 256 384 519_ ~~ - _=

Allocated to:Dividend and Bonus 36 40 46 55 68Retained Earnings 11 123 210 329 451

EAPIDApril 1986

- 40 -

Annex XIII

Projected Balance Sheets, 1986-89


ASSETSCurrent Assets 751 600 1,546 1,983 4,033Medium and Long Term Loans 2,809 4,832 6,626 9,256 11,853Less Provisions (331) (620) (980) (1,427) (1,944)

Net 2,478 4,212 5,646 7,829 9,909Other Loans 21 20 36 54 72Equity Inver.tments 37 49 63 81 107Fixed Assets (net) 162 307 293 275 253Total Assets 3,449 5,188 7,584 10,222 14,374

LIABILITIESCurrent Liabilities 235 335 467 400 1,032Medium and LT Debt 2,285 3,737 5,689 8,005 10,872

Quasi EquityLong-Term Loan 6 6 6 6 6Rolled over IDA 642 706 808 868 1,070

648 712 814 874 1,076

EquityPaid In Share Capital 260 260 260 260 260Reserves & Ret. Earnings 21 144 354 683 1,134Total Equity 281 404 614 943 1,394Total Liabilities 3,449 5,188 7,584 10,222 14,374

EAPIDApril 1986

- 41 -

Annex XIV


Projected Sources and Uses of Funds Statements, 1986-89


Sources

Profits 47 163 256 384 519Provisions 215 289 360 447 517Depreciation 18 10 30 43 54Loan Collection 288 649 826 867 883Drawdown on Loans 1,473 1,771 1,471 1,836 2,193

2,041 2,882 2,943 3,577 4,166

Uses

Dividend and Bonus 15 40 46 55 68Debt Repayment 122 180 272 308 380Disbursement of Loans 1,795 1,971 1,998 2,640 3,480Equity Disbursements - 10 14 18 26Fixed Assets 71 168 18 25 32Change in Working Capital 38 513 595 531 180

2,041 2,882 2,943 3,577 4,166

EAPIDApril 1986

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Annex XV


Projected Financial Ratios, 1986-89


Income Statement Elements as Zof Average Total Assets

1. Total Income 20.1 20.2 19.4 18.9 17.8of which: Interest on Loans and

Dividends (17.6) (19.4) (18.7) (18.0) (16.9)Other (short-terminterests, commissions (2.5) (0.8) (0.7) (0.9) (0.9)

2. Interest payments 5.8 6.7 6.8 6.9 6.93. Administrative expenses 3.6 2.8 2.4 2.2 2.04. Provisions 8.2 6.7 5.6 5.0 4.25. Depreciation 0.7 0.2 0.5 0X5 0.46. Total Expenses 18.3 13.3 11.8 11.3 10.07. Net Profit before provisions 10.0 10.5 9.7 9.3 8.48. Net Profit after provisions 1.8 6.9 7.6 7.6 7.6

Profitability Indicators

9. Net Profit (after provisions) 16.9 47.6 50.3 49.3 44.4as % of Average Equity

10. Income from Loans as % ofAverage Loan Portfolio 22.3 22.0 20.7 20.1 19-6

11. Cost of Debt as % of Average Debt 9.3 9.5 9.0 9.0 9.012. Average Spread 15.0 14.5 13.1 12.4 11.6

Financial Structure Indicators

13. Term Debt/Year-End Equity 8.1 9.3 9.3 8.5 7.814. Term Debt/Year-End Equity and

quasi-equity 2.5 3.3 4.0 4.4 4.415. Debt Service Coverage ratio 2.4 2.7 2.5 2.4 2,2

EAPIDApril 1986

- 43 -

Anuex XVI

SOCIETE FINANCIERE DE DEVELOPPEMENT (SOPIDE)

Schedule of Disbursements

Amount in SDRCumu-

IDA Fiscal Year Technical Assistance Credit lativeand Quarter Ending Component Component Total X

FY87March 31, 1987 85 285 370 0.9June 30, 1987 170 845 1,015 2.3

FY88September 30, 1987 210 1,350 1,560 3.6December 31, 1987 300 2,850 3,150 7.3March 31, 1988 375 4,340 4,715 10.9June 30, 1988 500 5,500 6,000 13.9

FY89September 30, 1988 580 7,440 8,020 18.5December 31, 1988 710 9,345 10,055 23.2March 31, 1989 830 11,350 12,180 28.1June 30, 1989 1,000 13,150 14,150 32.7

FY90September 30, 1989 1,000 15,400 16,400 37.9December 31, 1989 1,000 17,580 18,580 42.9March 31, 1990 1,000 19,780 20,780 48.0June 30, 1990 1,000 22,000 23,000 53.1

FY91September 30, 1990 1,000 24,010 25,310 57.8December 31, 1990 L,000 26,000 27,000 62.4March 31, 1991 1,000 28,020 29,020 67.0June 30, 1991 1,000 30,050 31,050 71.7


FY93September 30, 1992 1,000 37,420 38,420 88.7Dezember 31, 1992 1,000 38,50 39,530 91.3March 31, 1993 1,000 39,600 40,600 93.8'une 30, 1993 1,000 40,600 41,600 96.1


RAPIDApril 1986

- 44 -

Annex XVII


Selected Documents Available in the Project File

1. SOFIDE's 1985 Accounts.

2. SOFIDE's 1984 Annual Report and Audited Report.

3. SOFIDE's 1984 Management letter.

4. SOFIDE's Updated Action Plan.

5. SOFIDE's Three-year Training Program.

6. SOFIDE's Retrospective Analysis of Arrears. November 1985.

7, SOFIDE Management's Proposition to its Board for a Reduction ofInterest Rates on Foreign Currency Loans.

8. SOFIDE's Operational Manual.