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Report No.-FIJ-Ap:8

Report No. 5719-FIJ

7 his Report has beenprrdfoASIAN DEVELOPMENT BANK | ece use of theBank|

AA). 2698-Ed)

APPRAISAL

OF THE

SECOND FIJI DEVELOPMENT BANK PROJECT

May 1985

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CURRENCY EQUIVALENTS(As of 30 April 1985)

Currency Unit - Fiji Dollar (F$)F$1.00 = US$0.8382US$1.00 = F$1.1930

Since 4 April 1975, the exchange rate of the Fiji Dollar hasbeen determined daily in relation to a weighted basket of currencies ofFiji's ma,or trading partners. In this report, an exchange rate ofUS$1 = F$1.16 is used.

ABBREVIATIONS

AILB - Agricultural and Industrial Loans BoardBOMAS - Business Organization and Management

Advisory ServicesCMA - Central Monetary AuthoritiesDFI - Development Finance InstitutionDP - Development Plan (of Fiji)EDB - Economic Development BoardEIB - European Investment BankEIRR - Economic Internal Rate of ReturnFDB - Fiji Development BankFIRR - Financial Internal Rate of ReturnFNL - FDB Nominees LimitedFNPF - Fiji National Provident FundFSC - Fiji Sugar CorporationFY - Fiscal YearGM - General Manager (of FDB)CDP - Gross Domestic ProductIBRD - International Bank for Reconstruction

and DevelopmentMD - Managing Director (of FDB)NBF - National 'Uanr.k of FijiRBF - Reserve Bank of FijiSPARTECA - South Pacific Regional Trade and Economic

Cooperation AgreementSSEL - Suva Stock Exchange Limited

NOTES

(i) The Fiscal Year (FY) of the Government coi-Lcides with thecalendar year, while that of the Fiji Development Bankends on 30 June.

(ii) "Tons" in this Report refers to metric tons (mt);1 mt equals 1,000 kg.

PROJECT FOCUS, DESIGN AND RATIONALE

Fiji has a relatively high per capita income compared withother developing member countries of the Bank in the South Pacific.However, its economy is heavily dependent on sugar and tourism,and is highly vulnerable to adverse external factors and weatherconditions- Poor performance of these two subsectors aue to theworldwide recession combined with cyclones and a drought resulted innegative economic growth in 1982 and 1983. One of the primary goals ofthe Government is to diversify the economy and lessen the role of itsprominent subsectors of sugar and tourism.

In pursuing diversification and acceleration of growth of theFijian economy, the Government intends to utilize Fiji Development Bank(FDB) as a major instrument of economic development, particularly forthe promotion of private enterprises. In line with this policy, twoConsultants under Bank technical assistance (TA No. 506-FIJ) carried outan intensive study in early 1983 of the role and function of FDB with aview to enabling it to play a more active role in economic development.The technical assistance was completed in July 1983 and the Consultants'recommendations on the reorganization and amendment of the PolicyStatement of FDB were implemented.

The first Bank loan of US$2.0 million to FDB was approved inDecember 1973 and closed in January 1977 after an amount of US$1.9million was utilized. There has been no active operational relationshipbetween the Bank and FDB since 1977 besides the technical assistancegiven in 1983. FDB has now requested through the Government anotherBank loan of US$7.0 million.

As the only financial institution in Fiji, FDB providesmedium- and long-term loans for financing developmental projects invarious sectors. FDB is a well-organized development financeinstitution with capable management and staff and is financially sound.Its operations have been geared towards meeting the credit needs ofprivate sector enterprises and its operational performance has also beensatisfactory. FDB is a suitable vehicle for channeling the Bank's fundsfor financing sound development projects in the private sector.

The proposed Bank loan will be utilized by FDB for makingsubloans for financing developmental projects, mainly in the privatesector. The proposed loan will be utilized mainly for financingindustrial sector projects, while a limited amount may be utilized forfinancing service sector projects. Tn view of the estimated foreignexchange requirement of F$17.2 million (US$14.8 million equivalent) forindustrial sector projects during the two-year period FY1985/86 -FY1986/87, the proposed Bank loan of US$7.0 million for FDB isjustified.

IBRD has expressed its keen interest in co-financing theproposed FDB Project with the Bank. IBRD vili provide the Governmentwith a US$6.5 million loan, of which US$3.5 million (loan fund) will beonlent by the Government to FDB on the same terms and conditions asunder the proposed Bank loan and an amount of US$3.0 million (equityfund) will be used by the Government for making further equitycontribution to FDB. IBIRD will, for purposes of disbursement, blend theequity fund and loan fund so that both the sources are utilized on a prorata basis (46:54) while making subloans to industrial and servicesector projects and agricultural sector projects. IBRD has earmarkedUS$3.5 million out of its blended fund for subloans in the industrialand service sector and US$3.0 million for lending to agriculturalprojects. Considering FDB's foreign exchange requikements for thetwo-year period FY1985/86-1986/87, the proposed IBRD loan is alsojustified. Since the component of the IBRD loan relating to industrialand service sector projects has the same scope as that of the proposedBank loan, the Bank will administer that portion of the IBRD loan inaccordance with its agreement with IBRD on their operations in the SouthPacific.

In addition to the proposed Bank loan, it is proposed that theBank provide FDB with an equity line of US$250,000. The proposed equityline is expected to play a catalytic role in the development of privateenterprises in Fiji. In view of its satisfactory performance of itsequity investment operations, FDB is considered to be capable ofhandling the Bank's modest equity line.

The proposed Bank loan and equity line are likely to benefitabout 150 projects in the industrial and service sectors and generatesome 700 job opportunities.

TABLE OF CONTENTS

Page

I. INiTRODUCTION I

II. BACKGROUND 2

A. Economic Background 2B. Recent Performance of the Economy 2C. Development Planning and Performance 3D. Major Economic Sectors 3

III. THE PROPOSED PROJECT 8

A. Objective and Scope 8B. The Proposed Loan 8C. The Proposed Equity Line 12D. Benefits and Risks 15

IF. THE EXECUTING AGENCY 16

A. Organization and Management 16

1. History, Legal Framework, Share Capital andRelationship with the Government 16

2. Board of Directors, Organization andMa-nagement 16

3. Staff and Training 17

B. Operations 18

1. Activities 182. Policies 193. Procedures 204. Operational Performance 215. Projected Operational Performance 24

C. Accounting, Audit and Financial Controls 25

D. Financial Performance 26

1. Interest Rate Structure 262. Past and Current Performance 273. Portfolio Management 304. Projected Financial Performance and

Resource Position 32

E. Implementation of Previous Bank Loan 35and Technical Assistance

1. The Previous Bank Loan 352. Previous Technical Assistance 36

V. CONCLUSIONS AND RECOMMENDATIONS 38

APPENDIXES 39

I. I_ RODUCTION

1. Since December 1970, the Bank has provided four technicalassistance grants to Fiji amounting to US$327,000 for the purpose ofeffecting institutional improvements within the Fiji Development Bank(FDB). Under the technical assistance projects, seven experts haveprovided a total of 86 man-months of services to assist FDB in itsreorganization, formulation of policy statements and staff training.The Bank's tecbnical assistance projects have improved FDB's operationalcapabilities.

2. On 21 December 1973, the Bank approved a US$2.0 million loan(Loan No. 174-FIJ) from its ordinary capital resources to augment FDB'sforeign exchange resources. Of the US$2.0 million loan, US$1.9 Millionwas disbursed by 11 January 191k and at the request of FDB, the rest ofthe loan amount was cancelled.- FDB has complied with the covenantsof the Bank loan. Following a request from the Government, the Bankstarted the appraisal of a credit line of US$2.5 million in March 1976,but the loan was not made in view of the inability of the Government andFDB to agree to certain conditions proposed by the Bank.

3. Following the Government's request for Bank assistance inconducting an indepth institutional review of FDB to redefine FDB's roleand function for the 1980s, the Bank approved the fourth advisorytechnical assistance of US$100,000 (TA No. 506) on 16 February 1983. Ateam of two consultants was engaged for six man-months and the technicalassistance was completed on 15 July 1983. The Government and FDB weresatisfied with the report of the Consultants, and FDB has implementedmost of the recommendations made by the Consultants on thereorganization of FDB (see para 54) and the amendment of FDB's policystatement (see para 62).

4. With the support of the Government, FDB has requested a secondloan of US$7.0 million from the Bank to meet part of FDB's foreignexchange requirements. At the request of the Government, IBRD hasagreed to co-finance the proposed Project. An Appraisal Mission of theBank visited Fiji from 25 January to 7 February 1985. The Missionconsisted of K. W. Lee (Senior Development Bank Specialist/MissionChief), M. Davey (Financial e eyst), 0. L. Shrestha (Country Officer)and E. Suzuki (Senior Counsel)- . Mr. H. Murphy of the World Bankjoined the Mission in the field. This report is based on the findingsof the Mission and discussions with the Government, FDB and concernedagencies and industrial representatives.

1/ The Post Evaluation Report for the project (PE-29 (IN), L 174-FIJ)was circulated to the Board on 28 February 1980.

2/ Mr. E. Suzuki joined the Mission from 31 January 1985.

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II. BACKGROUND

A. Economic Background

5. Fiji comprises about 332 islands with a land area of 18,333sq km. The country has an estimated population of 690,000 (mid-1984)with an annual growth of 1.8 per cent. The per capita GNP in 1982 wasestimated at US$1,990 which is relatively high compared with otherdeveloping member countries of the Bank. HOY7ver, income distributionis highly skewed with the indigenous Fijians- having a significantlysmaller per capita income. Fiji has an open economy. which isrelatively advanced and broad-based compared with neighboring countries,but highly vulnerable to adverse external factors. The main source ofFiji's foreign exchange earnings and economic growth is sugar andtourism; these two sectors together account for about 90 per cent oftotal foreign exchange earnings and 19 per cent of Gross DomesticProduct (GDP). .luctuations in GDP growth rate generally reflectchanges in the earnings of these two sectors.

B. Recent Performance of the Economy

6. After experiencing negative economic growth in 1982 and 1983,the economy achieved a good recovery in 1984 with an increased GDP inreal terms of 7.7 per cent. The major impetus for this growth came fromthe sugar and tourism sectors. Production of sugar rebounded to 480,000tons in 1984 compared with 276,000 tons in 1983. The total number ofincoming tourists in 1984 increased by 20 per cent to about 230,000 withearnings from tourism amounting to about US$150 million compared withUS$133 million in 1983. However, real growth in GDP outside the sugarand tourism sectors in 1984 was minimal. Due largely to moderate priceincreases of imported goods, the rate of increase in consumer pricesdeclined from an annual average of 8.3 per cent during 1981-1983 to 5.3per cent in 1984.

7. On the external front, Fiji's current account deficit declinedfrom US$64 million in 1983 to US$38 million in 1984 as export earningsrecorded a growth of about 6 per cent after consecutive declines duringthe period 1981-1983. Despite low sugar prices, export earnings grewlargely because of higher receipts from coconut oil, forestry products,gold and other non-traditional exports. Payments for imports, on theother hand, remained more or less constant during the period larx elybecause of lower imports of petroleum products following thecommissioning of the Monasavu Hydroelectric Project in October 1983.Growth in receipts from tourism maintained the net surplus on theservices and transfer account at a high level in 1984. Fiji's foreignexchange reserves, as of 31 December 1984, amounted to US$118 millionwhich could cover its import requirements for about 3.3 months.External debt outstanding at the end of 1984 is about US$407 millionwith the debt-service ratio of about 14.8 per cent.

1/ All Fijians and Rotumans (ethnic group from Rotuma Island) who areregistered in the Native Land Owners Registers. The indigenousFijians constitute 45 per cent of total population in Fiji(mid-1984 estimates).

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8. Despite an impressive increase in goverment revenue of li percent, the fiscal deficit is estimated at about 6 per cent of GDP in 1984compared with 4.2 per cent of GDP in 1983. This was due primarily to a16 per cent increase in wages and salaries of government employees whichaccounts for more than half of current expenditure. The fiscal deficitshave been financed mostly by domestic borrowings (about 68 per cent)from the Fiji National Provident Fund (FNPF) and the banking system, andpartly from foreign borrowings (about 32 per cent). The 1985 budgetenvisages a reduction in the overall fiscal deficit to about 4 per centof GDP. To achieve this target, the Government imposed a freeze onsalary and wages as well as on new recruitment in 1985 and alsoincreased the rates of indirect taxes.

C. Development Planning and Performance

9. Fiji has had a series of development plans. The major aimsunder the ongoing Eighth Development Plan (DP8: 1981-1985) are toachieve a more equitable distribution of national income through theacceleration of agricultural development, improvement in rural livingconditions, and the creation of new employment opportunities, and tominimize the problems arising from rapid urbanization. The DP8 placesparticular emphasis on growth, diversification in agriculturalproduction, self-reliance, redirection of productive activities to outerregions, and a more balanced geographical and ethnic sharing of thebenefits from development. Despite large-scale public investments, thepace of economic growth during the initial years of DP 8 was adverselyaffected by unfavorable external factors such as low commodity pricesand a drought and a cyclone in 1983. The real GDP growth rate averagedonly 0.3 per cent per annum during the period 1981-1983 with consecutiveuegative growth in 1982 and 1983. The prospects of attaining the targetgrowth rate for GDP of 5 per cent per annum. in real terms during theperiod of DP 8 look extremely slim despite a good performance in 1984.The potential for a shift to non-traditional agricultural products suchas rice, ginger, cocoa and vegetables remains good; however, such ashift will take time and will need increased marketing and institutionalsupport from the Government.

10. The Government is currently engaged in the preparation of DP 9(1986-1990) which is expected to be ready before the budget presentationin November 1985. Based on presently available information, thedevelopment objectives enumerated in DP 8 are likely to be retainedduring DP 9. The basic strategy under DP 9 will continue to be thegeneration of more productive employment opportunities with an emphasison diversifying the economic base. The new Plan is expected to orientthe country's investment towards expanding primary sector output andtowards increasing industrial development linked with the country'sagricultural and forestry-related production.

D. Major Economic Sectors

11. Appendix 1 provides a detailed analysis of the recentperformance of major economic sectors. Key points are summarized be'o-w.

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1. Primary Industry Sector

12. Sugar constitutes about half of the value of Fiji'sagricultural production and contributes two-thirds of the value of totalexports. About 95 per cent of Fiji's total sugar output is exported.The area under cultivation increased significantly during the secondhalf of the 1970s and, as a result, annual sugar production increasedfrom 320,000 tons during the period 1970-1975 to 470,000 tons in theearly 1980s. At present around 250,000 tons are exported every year atfavorable prices under long-term contracts with EEC, Malaysia and USA,while the rest of the stock is sold in the free market at much lowerprices. The Government, therefore, no longer encourages the expansionof sugarcane fields.

13. Since 1981 the Government has encouraged diversification ofagricultural production away from sugar. This policy emphasizes thedevelopment of fruit and vegetable crops for export and increased riceproduction to replace imports. It is the aim of the Government to reachself-sufficiency in rice within three to five years. Livestockproduction is already at self-sufficiency levels. Cocoa and pineforests have both been identified as areas for rapid development. Outof 37,000 ha of pine forests planted to date, about 10,000 ha are nowreaching maturity. The second most important commercial crop in Fiji iscopra. However, the rehabilitation and maintenance of coconut landshave generally been neglected and these lands are generally low-yielding.

2. Industrial Sector

14. The industrial sector currently contributes around 12.2 percent of GDP and employs about 15 per cent of the work force. Sugarmilling accounts for around 35 per cent of industrial production. Inrecent years, the non-sugar industrial sector has registered stronggrowth, despite major constraints such as the small size of the localmarket, underdevelopment of related industries, the long distance frommajor export markets and a scarcity of trained manpower. Advantagesoffered by Fiji to industrial development however include a stablepolitical climate, relatively low labor costs, free access of Fijianproducts to certain South Pacific countries and raw materials availablefrom local agriculture and forestry. As Fiji is heavily dependent onimports for a varietv of consumer and capital goods, there are also goodopportunities for the development of import substitution industries.

15. In the past, industrial development in Fiji has mainly focusedon import substitution industries based on imported raw materials.However, to maximize the benefits accruing from industrialization on along-term basis, the Government has shifted its policy to give higheremphasis to linkages with other sectors of the economy, especiallyagriculture, forestry and marine resource developmient. Following thechange in its approach, the Government provides high priority (calledPriority A) to; (i) industries based on local primary commodities, and(ii) industries producing inputs required by primary and other sectors;and accords priority (called Priority B) to; (i) industries producingessential items from imported raw materials, and (ii) industriesproducing goods for export from imported raw materials. In order to

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maximize private investment in priority industrial sectors, theGovernment provides various incentives such as tax holiday up to eightyears, exemption from import duties on machinery and equipment,accelerated depreciation and tariff protection. The proposed Bank loanand equity line will be primarily utilized by FDB to finance thePriority A and Priority B industrial projects. For the promotion ofinvestments by foreign and local investors in non-traditionalindustries, the G-vernment created the Economic Development Board (EDB)in 1981. EDB serves as a one-stop contact point for providing potentialinvestors with information and for facilitating investors' dealings withvarious ministries of the Government.

3. Tourism

16. Tourism contributes about 13 per cent of GDP and approximately25 per cent of total foreign exchange earnings. While tourism providesdirect employment to only 6 per cent of the labor force, its indirectcontribution to employment is significantly larger. The year 1984 wasremarkably successful for tourism with a record number of 230,000visitor arrivals and a 19 per cent increase in earnings which reflecteda strong recovery from the setback caused by cyclone damage to tourismfacilities in 1983. The prospects of the tourism industry, in themedium term, are good and accordingly several new hotel projects haverecently been approved to expmnd the tourist accommodation capacity ofthe country.

4. The Financial Sector

17. The financial sector in Fiji is well developed and isrepresented by the Reserve Bank of Fiji (RBF), six commercial banks andthree non-bank financial institutions. The three non-bank financialinstitutions are Fiji Development Bank (FDB), Fiji National ProvidentFund (FNPF) and the Housing Authority. RBF enjoys a great degree ofautonomy from the Government and advises the Government on its monetaryas well as major economic policies. In addition to the usual functionsof a central bank, RBF is empowered to issue its own bonds, borrowexternally, and supervise the domestic and external borrowing of thepublic sector. Commercial banks are required to comply with thedirectives issued by RBF. However, FDB and FNFF are outside the directjurisdiction of RBF since they are established under special laws. Atthe end of 1984, total deposits with commercial banks stood at F$451.6million.

18. On account of its conservative fiscal policy during the 1970s,the Government required only limited financing during this period fromthe banking and non-banking financial institutions and the growth ofcredit was concentrated in the private sector. However, along with thegrowing fiscal deficit and the implementation of large developmentprojects in the 1980s, the public sector required significant financingfrom banking and non-banking sources. The credit demand of the publicsector increased further in 1983 for rehabilitation following thedamage caused by cyclone and drought during that year. As a reflectionof the upturn in the economy, private sector credit demand also remained

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buoyant during 1984. The expansioy/of credit put a heavy pressure onthe country's balance of payments - and foreign exchange reserveswent down to as low as F$84 million at the end of the second quarter of1984. In order to restrain credit ex!Tnsion, RBF increased theUnimpaired Liquid Assets Ratio (ULAR)- from 12.5 per cent to 15.0 percent on 6 June 1984 and further to 18 per cent on 5 September 1984. Thestatutory reserve deposit ratio for commercial banks was also increasedfrom 5 rtr cent to 6 per cent effective 5 December 1984. Following thetight monetary policy applied by RBF, the yield on securities increasedconsiderably during 1984 as shown in Appendix 2. At the same time, RBFhas continued to stress the need for commercial banks to give preferencein lending to priority sectors. The restrictions on commercial banklending are expected to result in the transfer of some credit demandfrom commercial banks to FDB.

19. Suva Stock Exchange Ltd. (SSEL) is a wholly owned subsidiaryof FDB with a paid-in capital of F$20,000. SSEL started operations inJune 1979 to provide a trading floor for shares. As of 31 December 1984only seven companies with a total issued share capital of F$37 millionwere listed at SSEL and share trade has not been active. The Missionconsiders that the growth of the share market in Fiji will be impededfor quite some time by several factors such as the preference of Fijiansfor holding savings in banking institutions rather than in shareinvestments, the relatively small size of the economy, and reluctance ofmost local companies to be listed on the exchange.

5. The Private Sector and Investment Climate in Fiji

20. Fiji maintains a basically private sector oriented economy.The Governmentts involvement in economic activity and development isfocussed mainly on the provision of infrastructure, and the limitedownership of resources considered essential for meeting socialdevelopment objectives. State-ownership and control of enterprises istherefore restricted to 68 statutory bodies, most of which are involvedin infrastructure activities such as electricity, ports, drainage andnon-profit oriented government services and financial institutions suchas RBF, FDB, FNPF, the National Bank of Fiji (NBF) and the HousingAuthority. Commercial non-banking operations owned by the Governmentare restricted mainly to Fiji Sugar Corporation, Fiji Pine Commissionand Pacific Airways. The private sector (as of 3?1 December 1984) has3,278 companies including 48 "tpublic" companies- , most of which areengaged in manufacturing and service sector activities.

I/ It is estimated that an expan.:ion of credit by F$1 creates onaverage an increase in imports equivalent of F$0.50.

2/ The ULAR is the ratio of commercial bank's holdings of specifiedliquid assets (such as cash, treasury bills, bonds issued by theGovernment and statutory bodies including FDB as designated by RBF)to its total deposits and similar liabilities.

3/ Companies with more than 12 shareholders are classified as publiccompanies according to the Companies Act of Fiji.

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21. Besides its policy commitment to a private enterprise economy,financial constraints limit the Government's further involvement in theownership of resources. Despite tight budgetary control, the Government'sfiscal deficit has increased in recent years (see para 8). Under suchcircumstances, the Government is not in a position to extend its capitalexpenditure activities beyond the key infrastructure and support areasfor which it is directly responsible. Accordingly, the private sectorincluding investors from overseas has been and will continue to be themajor source of industrial and commercial investment funds. In summary,the Mission has found that economic activity in Fiji is by and large inthe hands of the private sector which is assisted by supportivegovernment policies, incentives and activities. Fiji has a relativelyopen economy which encourages foreign investment and this situation isexpected to remain over the medium to long term.

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III. THE PROPOSED PROJECT

A. Objective and Scope

22. FDB is a multi-purpose development finance institution (DFI)which provides financial services to enterprises in the agricultural,industrial and service sectors. FDB has been a major instrument of theGovernment for economic development, particularly for the promotion ofprivate sector enterprises. The objective of the proposed Project is toprovide FDB with financial resources in the form of a loan and an equityline to enable it to expand its role in promoting developmentactivities.

B. Proposed Loan

1. Loan Amount, Borrower and Guarantor

z3. On the basis of FDB's estimated foreign currency resourcerequirement of US$14.8 million for industrial sector projects during thetwo fiscal years from 1985/86 to 1986/87 (see para 91}, it is proposedthat a second Bank loan of US$7.0 million equivalent- be extended to7DB from the ordinary capital resourys of the Bank. The Loan will beguaranteed by the Government of Fiji- 3' and the Government will bearthe foreign exchange risk on the Loan-.

24. In addition to the Bank loan, the Government of Fiji hasapplied to IBRD for a loan of US$6.5 million equivalent, of which US$3.5million equivalent (loan fund) is proposed to be onlent to 4 PB on thesame terms and conditions as under the proposed Bank loan - . andUS$3.0 million equivalent (equity fund) is proposed to be utilized bythe Government for making a further equity contribution to FDB. FDBwill utilize up to US$3.5 million to meet the foreign currency resourcerequirement for its lending to industrial and service sector subprojectsand will utilize the remaining US$3.0 million for lending toagricultural subprojects. IBRD has indicated that for purpo.zes ofdisbursement it will blend the equity and loan funds and would for everysubloan disburse 46 per cent of the amount in foreign exchange from theequity fund and 54 per cent from the loan fund. This would ensure thatFDB utilizes both loan and equity assistance in a balanced manner.Since the IBRD loan for the industrial and service sectors will be

1/ Loan Agreement (L.A.) Section 2.01.2/ Guarantee Agreement (G.A.) Section 2.01.3/ L.A. Schedule 4, para. 11.4/ The loan fund will be onlent by the Government to FDB at a fixed

interest rate equivalent to the interest rate of the proposed Bankloan, while the Government will pay interest to IBRD at IBRD'snormal variable interest rate.

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utilized by FDB for identical purposes as those under the prToyosed Bankloan, the Bank will administer this portion of the IBRD loan- inaccordance with the agreement be0veen the Bank and IBRD on theiroperations in the South Pacific.-

2. Main Features

a. Purpose

25. FDB will use the proceeds of the proposed Bank loan to extendsubloans to finan the foreign exchange cost of specific devel,pmentprojects in Fiji.- The subloans will be made available mainly toprivately owned enterprises, while a limited amount (up to 10 per centof the loan amount) could be provided to public sector enterprises onthe merit R/of specific subprojects subject to the Bank's priorapproval.- The loan is proposed to be a general credit line and nospecific sectoral allocaticn is envisaged.

26. The proposed Bank loan is likely to be utilized by FDBprimarily for extending subloans for projects in the industrial andservvice sectors so as to ensure an adequate interest spread to cover thelending cost (see para 30). FDB's resource requirements for its lendingto the agricultural sector are expected to be met partly by the US$3.0million to be obtained as part of IBRD assistance (see para 24), theGovernment's additional equity contributions and local borrowings.

b. Utilization

27. The closing date for submission of subloan applications forthe Bank's approval/authorization for wH5}drawal will be two years fromthe effective date of the proposed loan.- The closing date forwithdowals will be four years from the effective date of the proposedloan.'

I/ IBRD has indicated its agreement that the administration of theIBRD loan for the industrial and service sectors would follow theBank's loan administration procedures regarding subloan approval,procurement and disbursement etc. IBRD requested that the proposedRank loan and this portion of the IBRD loan be disbursed at a rateof 2:1 for each and every subloan in the industrial and servicesectors when procurement is made from common member countries ofthe Bank and IBRD. This request is consilered reasonable andacceptable to the Bank.

2/ See ADB-World Bank Co-Financing in the South Pacific, Doc.In-149/80 dated 25 September 1980.

3/ L.A. Section 3.01.4/ L.A. Schedule 4, para. 1.51 L.A. Section 3.03 (c).6/ L.A. Section 3.05.

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c. Amortization

28. The proposed Bank loan will be for 15 years including a graceperiod of three years ad will be serviced on the basis of a fixedamortization schedule.- Since the loan is expected to be utilizedfor a large number of small subloans, the fixed amortization schedule ismore suitable than mirror type amortization. Sub-borrowers' repaymentterms to FDB will not " ceed 15 years including a grace period of notmore than three years.- The fund generated from the recovery ofsubloans, pending repayment to the Bank, will be utilized by FDB forfurther lining to development projects in accordance with its PolicyStatement.-

d. Interest Rates

29. The Bank will charge its standard lending rate of 10.25 pgycent per annum on the disbursed and outstanding amounts of the loan-and, in addition, its standard commitment fee of 0.75 per cent per annumon the undisbursed portion-.

30. The schedule of FDB's current interest rates on variouscategories of loans and the proposed changes thereon are given inAppendix 3 and summarized in Table 1. The proposed increase in interestrates on industrial loans and loans under the Joint Venture Scheme (seepara 59) was approved by FDB's Board in August 1984, and the newinterest rates are going to be effective from August 1985. The interestrate charged on subloans under the proposed Bank loan w11 be at a levelconsistent with FDB's prevailing interest rate structure. However, inview of the current and projected level of administrative expenses ofFDB's lending operations, the interest rate on each su:loan will hedecideg,at a level ensuring a minimum interest spread of 3 per cent perannum.- This envisages that the proposed Bank loan would be utilizedfor subloans to industrial and service sector subprojects at an interestrate of 13.5 per cent per annum.

Table 1: EDB's Interest Rates(As of 7 Febmnry 1985)

Inteest rate (per a Loan Categories zrentt Effective - ofnP 19g X

AgriMltlual lons 11.0-11.5 per ret 11.0-11.5 per centComercial and inatial

Iws to Fijims U.0 per cet .0 per cantJoint Venture S-ibee loan 12.0 per cent 12.5 per centIndustrial loans 12.5-13.5 per cent 13.5 per cent

Cc.merclal loans- 13.5 per cent 13.5 per ceot

a/ TTline loans to service setor projects.

1/ L.A. Section 2.06 (a).2/ L.A. Section 2.06 (b).3/ L.A. Schedule 4, para. 4.41 L.A. Section 2.02.51 L.A. Section 2.03.6/ L.A. Schedule 4, para. 2.

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e. Free Limit

31. In view of the size of the loans approved by FDB during thelast two financial years, FDB's project evaluation capability, and thesize of loans in its pipeline as of 31 De -mber 1984, it is proposedthat the free limit be fixed at US$80,000-.

f. Maximum Size of Subloan

32. To ensure the diversification of the Ink-financed subloans,the maximum size of subloans will be US$500,000- . PDB's PolicyStatement restricts its maximm commitment in any enterprise to 15 percent of its equity. This limit amounted to F$4.5 million or US$3.9million equivalent as of 31 December 1984.

g. Reimbursement of Expenditures

33. Reimbursement of expenditures incurred up to 120 days prior toreceipt of subloay application. Ly the Bank will be allowed as under thefirst Bank loan.-

h. Procurement

34. FDB will comply with the Bank's procurement guidelinesapplicable to the South Pacific DF s. PDB will have to satisfy the Bankthat the procurement procedures adopted by individual sub-borrowers,under the proposed Bank loan are appropriate in the circumstances.-

i. Withdrawals

35. Where procurement costs are less than US$75,000 and when theforeign exchange cost cannot be precisely determined, the Bank loan willprovide for the withdrawal of 75 per cent of the cost of machinery andequipment, and 5 90 per cent of the construction cost as indirect foreignexchange cost.-

j. Subproject Performance Data

36. FDB will compile relevant socio-economic and financialinformation for each completed subprojegy for which it has provided aloan in excess of US$50,000 equivalent.-

1/ L.A. Section 3.03 (b). Under the first Bank loan, approved in1973, the free limit was US$40,000.

2/ L.A. Schedule 4, para. 3.31 L.A. Section 3.04.4/ L.A. Schedule 3, para. 2.5! L.A. Schedule 3. para. 3.6/ L.A. Schedule 4, para. 5.

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k. Reporting Requirements

37. FDB will furnish to the Bank (i) a progress report on itsoperations on a quarterly basis within two mon 9s after the end of eachquarter according to an agreed standard format--; (ii) its projecteddisbursement schedule for the Bank lo e in the coming year (for everyquarter), by 15 December of each years- ; (iii) its updated financialprojections including income statements, fund flow statements andbaAye sheets for the succeeding five fiscal years by 1 September eachyear- ; and (iv) an audit report, in a format satisfactory to theBank&,within five months from the end of FDB's fiscal year (see para81).-

C. Pro-osed Equity Line

1. Justification

38. While PDB's operations in equity investments were not dynamicuntil FY1983/84 (see para 70), the return on its equity investments wasgenerally satisfactory and the quality of FDB's equity investmentportfolio was generally good (see para 91). In May 1984 FDB adopted amore active policy towards equity inve-tments than it had followed inthe past. FDB's new policy on equity investment is provided in Appendix7, page 60. Under its new policy it will allocate F$200,000 each yearfor equity investments. FDB has found in recent years that some goodprojects, mainly in the industrial/commercial sector, have not proceededfor want of adequate equity funds. In those cases, FDB was unable toprovide loans to worthwhile projects because their debt/equity ratioswould have been too high. FDBrs new equity investment policy will allowit to assist such projects through the provision of both loan andequity. As of 31 December 1984, FDB had pending equity investmentapplications totalling F$300,000 for six projects, four of which werein the agroprocessing or industrial sector and two in the tourismsector. The Bank has been asked to supplement FDB's equity investmentoperations through the provision of an equity line of US$250,000. Theprovision of such a facility would allow the Bank to play a catalyticrole in promoting the growth of the private sector in Fiji and also aninstitution-building role within FDB for its equity investmentoperations. In view of FDB's good performance in equity investmentoperations (see para 91), the Mission considers that FDB is capable ofhandling the proposed line of equity. Moreover, each and every equityinvestment under the proposed equity line will be reviewed and approvedby the Bank. Considering FDB's annual allocation of F$200,000 for itsown equity investments and its pending equity investment applications,the proposed equity line of US$250,000 is justified.

1/ L.A. Section 5.05(b).2/ L.A. Section 5.06(b)(ii).3/ L.A. Section 5.06(b)(i).4/ L.A. Section 5.06 (a).

13

2. Legal Framework

39. A Framework Agreement on Equity Investment Operations dated 15February 1985, setting out the privileges, Immunities and exemptionsapplicable to the Bank's equity investment operations 'n Fiji has beenentered into between the Bank and the Government (see Appendix 22).Under this Framework Agreement, the Bank: {i) will be immune from anyrestrictions and controls applicable to foreign investors; (ii) mayfreely sell participations in the shares agreed to be subscribed by it;(iii) may freely sell or dispose of its equity investments to domesticbuyers or foreign buyers; (iv) may repatriate freely, in a convertiblecurrency, at the then current exchange rate, any income, gains and selesproceeds of its equity investments; and (v) wlll be exempt from taxationon the income and capital gains arising from its equity investments.

3. Amount and Utilization Period

40. qy amount of the proposed line of equity is US$250,000equivalent.- FDB will submit all appraisals and investment proposalswithin two_2 ears from the effective date of the line of equityagreement,- and the Bank will not enter into any su1criptionagreement after three years from the effective date.-' The effectivedate of the proposed equity line will be synchronized with that of theproposed Bank loan.

4. Eligible Enterprises

41. The eligible enterprises under the proposed line of equitywill be economically and financially viable private enterprisesincorporated in Fiji engaged in the manufacturing, forestry, mining,transportation or tourism sectors, and of high socio-econemic priority.The enrerprises may be wholly owned by Fijifns or be joint ventures withforeign partners. Gover m t-owned corporations will ncr be eligiblefor the Bank's investment.-

5. Limits on Equity Investment

42. The maximum size of the Bank's equity investment in a singleenterprise will be US$100,000 and the ninimum size will be US$25,000subject to R upper limit of 20 per cent ownership of the shares of anenterprise.- For each project, at least 25 per cent of the projectcost wi} be financed by the local project sponsors in the form ofequity.-

1/ Line of Equity Agreement (L.E.A.), Section 2.01.-1 L.E.A., Section 3.06.3/ L.E.A., Section 2.03.4/ L.E.A., Schedule 1, para l(b).51 L.E.A., Section 2.02(b).6/ L.E.A., Schedule 1, para 5(c).

14

6. FDB's Role and Fees

43. Under the proposed line of equity, FDB will select and I/appraise projects for consideration by the Bank for its investment.-In selecting projects for Bank investments, FDB will give due attentionto the project's profitability and include in the appraisal reports thenecessary s2ysitivity tests with respect to variations in criticalparameters.- FDB will also supervise the investment projects andsubmit quarterly status reports on the Bank's investments, and syherinformation as needed and advise the Bank on necessary actions.-While the Bank will rely on FDB to a large extent in the selection,appraisal and supervision of Bank investments, the Bank will also playan active role in their appraisal and supervision where necessary andensure that appropriate criteria are applied. This is expected tocontribute to the strengthening of FDB's capabilities in equityinvestment operations. The Bank and FDB will consult each other onnominating and appointing the 4 Yank's representatives to the boards ofdirectors of the enterprises.- However, if so required by the Bank,FDB may represent the Bank on the board of directors of th eenterprises or in discussions with the other shareholders.~- FDB willalso provide advice to the eJnk with regard to disposal opportunitiesfor the Bank's investments.-

44. For these services, the Bank will pay to FDB a performancerelated fee of 3 per cent of annual dividend received, an annualadministration fee of 0.5 per cent of the Bank's outstanding investmentportfolio, and a disposal fee of 1 per cent of the disposal proceedswith proviso that the disposa}lof the shares was profitable and was madewith FDB's direct assistance.-

7. FDB's Parallel Investment

45. For each of the Bank's investments, FDB will make a parallelequitl,investment on a 1:1 basis unless otherwise agreed by theBank.-

8. Rate of Return

46. Each investment pr w osal will be expected to have EIRR andFIRR acceptable to the Bank.- It was indicated to FDE that animportant criterion to be applied by the Bank in evaluating aninvestment proposal by FDB is the ability to provide the Bank a returnequal in equivalent dollar terms to the Bank's OCR interest rate, plusan adjustment for the perceived risk of the investment.

1/ L.E.A., Section 3.01.2/ L.E.A., Schedule 1, para 3.31 L.E.A., Section 5.04.4/ L.E.A., Section 5.02.5/ L.E.A., Section 5.03.6/ L.E.A., Section 5.06.7/ L.E.A., Section 6.01.8/ L.E.A., Section 3.02(c).9/ L.E.A., Schedule 1, para. 3.

15

9. Disposal of Bank Investments

47. FDB will assist the Bank with regard to the sale of the Bank'sinvestments. The Bank investments will be sold, whenever possible, onthe open market. However, in view of the limitations of the sharemarket in Fiji (see para 19), the Bank will consider various possibilitiesin the disposal of investments such as buy-back agreements with localshareholders.

D. Benefits and Risks

'8. The first Bank loan of US$1.9 million (the amount disbursed)resulted in substantial economic benefits, such as creation of 1,100jobs, incremental investment of around US$2 million, and the developmentof local entrepreneurial skills (see para 101). In order to providemore up-to-date data on socio-economic benefits anticipated from theproposed Project, FDB recently undertook a survey of 39 industrialprojects with FDB's loans of over F$50,000 made between 1 July 1981 and30 June 1982. According to the survey, those projects, which had anaggregate loan amount of F$4.52 million, generated; (i) incrementalvalue added of F$2.3 million per annum, (11) net foreign exchangeearnings/savings of F$6.4 million, and (iii) incremental employment for250 people. The proposed Bank loan and equity line are expected tobenefit about 150 projects in the industrial and service sectors andgenerate some 700 job opportunities.

49. Project risks are related to the lack of internationalcompetitiveness of most Fijian enterprises, in terms of pricing, productdesign and quality. This problem is largely a result of the small sizeof the local market, long distance from major export market, lack oftrained manpower, and the underdevelopment of local industries supplyingcomponents and intermediate inputs. Since Fiji has maintained a freetrade policy and has relied heavily on imported consumer as well ascapital goods, such risks are well-known to local entrepreneurs.However, in order to miniTmze the risks, FDB should be careful in theselection of subprojects to ensure that the subprojects financed underthe proposed Bank loan have international comparative advantage.Industries based on agriculture and forestry are considered to havecomparative advantages.

50. In addition to the risks mentioned above, a risk associatedwith the proposed equity line relates to the disposal of the Bank'sinvestments. Since the local share market is yet to be developed asevidenced by small trade volume through the Suva Stock Exchange Ltd.(SSEL) operated by FDB (see paras 19 and 61), the Bank may havedifficulty in the disposal of its investments. In order to minimizesuch a risk, the Bank will seek buy-back agreements with local projectsponsors (see para 47) under the proposed equity line, wheneverpossible.

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IV. EXECUTING AGENCY

A. Organization and Management

1. History, Legal Framework, Share CapitalRelationship with the Government

51. FDB was established on 1 July 1967 under the Fiji DevelopmentBank Act. FDB is an autonomous statutory body with its own Board ofDirectors. Although FDB has been empowered to carry on bankingbusiness, the provisions of the Banking Act and the Companies Act arenot applicable to it; nor is it subject to the regulatory powers of RBF.FDB's authorized capital is F$50 million, of which F$20.5 million hasbeen paid-up and held entirely by the Government as of 31 December 1984.The Government will promptly inform the Bank of any proposal for theanendment of the Act in order for the Bank to Wve a reasonableopportunity to comment on the proposed change.-

52. In pursuing diversification and acceleration of growth in theFijian economy, the Government has been utilizing FDB as a majorinstrument of economic development, particularly for the promotion ofprivate sector enterprises. Accordingly, FDB enjoys the full support ofthe Government. The Government provides FDB's capital in full, assistsFDB in resource mobilization through foreign borrowings as well as bondissues in the local financial market, provides guarantee and foreignexchange risk cover on FDB's foreign borrowings, and grants exemptionfrom income-tax. FDB is under the general supervision of the Ministerof Finance. FDB's administrative budget is subject to the approval ofthe Minister of Finance, but FDB has been given full autonomy in itsoperation.

2. Board of Directors, Organization and Management

53. FDB's operation is controlled and closely supervised by itsBoard of Directors which has nine members, all of whom are appointed bythe Minister of Finance in accordance with the FDB Act. The privatesector is well represented on FDB's Board, contributing five directorsincluding the Chairman. A list of the members of FDB's Board ofDirectors is given in Appendix 4. The Mission is satisfied that all ofFDB's directors are well-qualified and provide relevant expertise toFDB's operations. FDB's Board meets regularly once a month to setpolicies and approve loans individually exceeding F$100,000. Based onFDB's Board papers and the minutes of Board meetings during 1984, theMission '.s fully satisfied that FDB's Board is functioningsatisfactorily and is providing proper guidance on FDB's operations.

54. The organization chart of FDB is given in Appendix 5. FDB'sorganizational structure had originally been revised and strengthened asa result of the remmmendations under the Bank's first technicalassistance in 1970- and the structure was maintained with no radical

1/ L.A. Schedule 4, para. 6.21 T.A. No. 42-FIJ, approved on 22 December 1970.

17

change until 1983. Following the recommendations of the consultantsunder the Bank's recent technical assistance (see para 3), effective 1April 1984, FDB introduced substantial reorganization. FDB'sorganization has been restructured into three functional groups:Operations Group, Finance/Business Development Group and AdministrationGroup. With a -iew to coping with its e;panding operations andincreasing its developmental role, several new departments were createdwithin the three functional groups such as; (i) the National OperationsDivision to coordinate the operations of branches and to provideadvisory services to new and problem projects; (ii) the Special LoanSchemes Division to consolidate processing and supervision of loanstinder special lending schemes; (iii) Electronic Data Processing SystemsDepartment; (iv) Policy and Planning Department; (v) Equity InvestmentDepartment (see para 65); and (vi) a separate department for stafftraining activities. In addition, effective 20 August 1984, a LoanRecovery Unit was established under the direct supervision of theGeneral Manager (Operations) in order to control hard core arrearaccounts (see para 66). The Mission is satisfied that FDB's neworganization structure provides a satisfactory framework for coordinationand control of its operating activities and is adequate to cope with theexpectat =n of a more active role to be played by FDB in economicdevelopment. Currently, FDB has nine branch offices in major towns andoperates ten agencies in smaller towns, visited by FDB staff from timeto time.

55. FDB's chief executive is the Managing Director (MD) who isassisted by two General Managers (GM). The MD and GMs are appointed byFDB's Board of Directors, in practice, for an indefinite period. Theincumbent tiZ, who had a long career in civil service, was appointed tothe position in March 1983 and both the GMs are long-standing FDBemployees. The Mission is satisfied that the incumbent MD and GNs are-apable and qualified for their respective positions. FDB through theChairman of its Board, will promptly inform the Bank of any proposed newappointment to the position of ND.-

3. Staff and Training

56. As of 31 December 1984 FDB's staff strength was 160, consistingof 101 professional staff and 59 supporting staff, compared with a staffestablishment of 42 as of 30 June 1973 when the first Bank loan wasappraised. Historically, FDB's staff turnover has been low (less than 3per cent per year with an exception of 8 per cent in FY1980/81) mainlydue to job security and competitive remuneration and benefits offered byFDB. FDB's professional staff is well-balanced in terms of academicqualificdtions, experience and potential in the context of the SouthPacific DFIs. Out of 101 professional staff, 42 staff have collegedegrees in accounting, economics, commerce, agriculture or businessstudies. However, there is no engineer on FDB's staff at present. Inview of the growing size and complexity of projects financed by FDB, itwould be essential for FDB to build up its staff capacity in thetechnical evaluation of projects. Recognizing its need, FDB will hire,

1/ L.A. Schedule 4, para. 8.

18

by 31 December 1985 or such other date as may be agrT7 d upon between theBank and FDB, an engineer as a regular staff member.- FDB'spersonnel policies and management are considered satisfactory to theMission.

57. FDB has been giving increasing emphasis to staff training. Inearly 1983 FDB appointed a full-time Training Officer. During the two-year period up to 31 December 1984, 114 staff members attended 11in-house training courses, 48 staff members attended 16 external coursesconducted by the local university or training institutes, and 22officers attended various overseas training courses including the Bank'sregional training programs for DFIs in the South Pacific. FDB alsoencourages, by paying tuition fees, its staff to study in universities.Currently, 11 staff members are taking part-time courses in the localuniversity and 2 are studying on a full-time basis in universities inthe United Kingdom and Fiji. The Mission is satisfied with FDB'straining program.

B. Operations

1. Activities

58. FDB's basic functions are to facilitate and stimulate thepromotion and development of natural resources, transportation and otherindustries in Fiji. To enable it to carry out its functions, it hasbeen authorized to grant loans, issue guarantees, underwrite loans andissues of capital, subscribe to stocks, shares, bonds and debentures,establish and manage projects, lay out estates for sale or lease, andprovide advice and assistance to industrial and other enterprises.However, FDB's main activities are at present confined to the provisionof assistance primarily to the private sector, mainly by extendingmedium and long-term loans and equity participation for develop-tentpurposes. As a multipurpose DFI, FDB extends its assistance to projectsin agriculture, livestock, fisheries, mining and quarrying,manufacturing and processing industries and service sectors includingtransport, communications and tourism.

59. In April 1975 FDB began granting loan2under the Commercial/Industrial Loans to Fijians Scheme. The Scheme- was initiated with aview to developing entrepreneurship among indigenous Fijians andassisting their entry into the main commercial stream of the country.Under this scheme, loans up to F$100,000 are giyn by FDB for all typesof business, except for agriculture and fishing- , on concessionalterms with lower interest rate (11 per cent per annum) and with lesssecurity margin. The Government bears the full loss of loans up toF$50,000 suffered by FDB due to the relaxation of its lending guidelinesand provides an interest subsidy (of 1.5 per cent at present) to bring

1/ L.A. Schedule 4, para. 9.2/ Applicable to companies and partnerships which are 100 per cent

owned by indigenous Fijians and Rotumans.31 The interest rate charged for projects in these sectors is at

present 11 per cent per annum.

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the lower interest rate charged on such loans to the normal level. InFY1983/84 FDB introduced the Joint Venture Loan Scheme to increasethe participation of indigenous Fijians in commerce and industry, inaddition to the above mentioned Fijian Loan Scheme. To qualify for aloan under the Scheme, a company or partnership must have a minimum of25 per cent indigenous Fijian shareholding. Under the Scheme, themaximnm size of the loan is F$200,000 at a concessional interest rate of12 per cent per annum.

60. FDB's promotional activities in the agricultural sector aresatisfactory. Senior staff of FDB frequently visit various parts of thecountry and hold meetings with field staff of the Department ofAgriculture and Fiji Sugar Corporation (FSC) to explain the FDB'sfacilities to those who have the closest contact with farmers. Thisarrangement is working satisfactorily since the Department ofAgriculture field staff provide extension services and also assist FDBin screening loan applications and in following up assisted projects.For the promotion of industrial sector projects, FDB maintains a closerelationship with the Economic Development Board (EDB) (see para 15),which is the Government agency for industrial promotion. FDB alsokeeps the general public informed of its operations through the massmedia.

61. FDB has two wholly owned subsidiary companies, viz., SuvaStock Exchange Ltd. (SSEL) and FDB Nominees Ltd. (FNL). SSEL withpaid-in capital of F$20,000 started operations in June 1979 to provide atrading floor of shares. Since the stock trade volume is not enough tomaintain its own staff, SSEL is currently run by FDB staff on apart-time basis. The details of SSEL's operations are provided inAppendix 1, paras 21-24. PNL was incorporated on 30 July 1979 withpaid-in capital of F$20,000 in order to undertake activities beyondthose normally taken up by a DPI. FNL is empowered to undertakeinvestment banking activities such as underwriting, share placement, orrelated financing and securities operations. However, FNL's mostsignificant performance was limited to a one-time operation for thesale of six million Fiji Sugar Corporation shares in 1980. PNL isengaged in certain administrative and secretariat functions to the UnitTrust of Fiji (Management) Ltd. on a fixed management fee basis.Although both SSEL and FNL are not active in operations, theseinstitutions provide useful services to the economy. SSEL and FNL wereestablished with prior consultation with the Bank. FDB will consyltwith the Bank prior to establishing or acquiring any subsidiary.-

2. Policies

62. FDB's Statement of Operating Strategy and General BusinessPolicy, as revised in accordance with the recommendation of consultantsunder the fourth Bank technical assistance, is given in Appendix 7.The Statement, which lays down the scope of operations, general policiesand procedures, financial guidelines and policies regarding the creationof provisions and reserves, is considered satisfactory. It places

1/ L.A. Section 5.08 (d).

20

emphasis on the development role of FDB and provides satisfactoryguidelines for sound banking practices. FDB has generally adhered tothe guidelines set down in the Statement of its operations. FDB willchange the Statement only 1 7fter mutual consultation and agreementbetween the Bank and FDB.-

3. Procedures

63. FDB's current operating procedures are embodied in itsOperations Manual. The Manual has been supplemented by FDB taking intoaccount changes in its activities and operations. Together with a wideselection of training materials that have been developed by FDB over theyears, the Manual provides satisfactory guidance to FDB staff in loanprocessing, documentation, procurement, disbursement and supervision ofprojects financed.

64. Under the current loan processing procedures of FDB, branchoffices are responsible for loan processing as well as supervision ofprojects financed, and where the loan amount exceeds the discretionaryauthority of the Lranch manager (i.e.. F$3,000 to F$12,000 depending onthe size of the branch), the 2 7ppraisal reports are further reviewed andapproved by the head office.- Since the project evaluations areundertaken by branches, the quality of appraisal has not been even. Inthe absence of engineering staff, FDB has difficulty with the evaluationof the technical aspects of projects although technical expertise 'romgovernment departments is utilized from time to time. In order toOvercome this weakness, FDB will recruit 3? qualified engineer as aregular staff member by 31 December 1985- . There is also scope forfurther improvement in the evaluation of the economic and marketingaspects of projects. With a view to improving its project evaluation,FDB will follow a subproject appraisal report format formulated inconsultation with the Bank for the subloans under the proposed Bankloan. FDB will also prepare financisl projections for three years (fromthe time of completion of the subproject) for subloans above US$50,000equivalent and it will calculate the financial internal rate of return(FIRR) for subloans above the free limit. Where the subloan amountexceeds US$250,000 equivalent, FDB will calculate the economic internalrate of return (EIRR) and will also undertake a sensitivity analysis onthe FIRR taking into account the critical variables which could have animpact on project viability.

65. Following the recommendation of the consultants under thefourth technical assistance, FDB created an Equity Investment Departmentwithin its Industrial Division in April 1984 (see para 54). However, as

1/ L.A. Schedule 4, para. 7.2/ Under the current discretionary authorities of FDB, loans up to

F$12,000 are approved by Department Managers, up to F$20,000 by theDivision Managers, up to F$50,000 by the General Manager, and up toF$100,000 by the Y-anaging Director. Loan amounts exceedingF$100,000 are approved by the Board.

3/ L.A. Schedule, para. 9.

21

FDB's equity investments are normally made together with its loanfinancing and the volume of its equity investments still does notwarrant a scparate department, no staff has been assigned to theDepartment yet, and the evaluation and supervision of equity investmentsare still undertaken by loan officers in the Industrial Division. Thisarrangement is considered practical and reasonable at present. TheMission was satisfied that FDB's staff in the Industrial Division werecapable of handling the Bank's equity iuvestments under the proposedline of equity.

66. N& nmal project supervision is the responsibility of the loanofficers in FDB's branch offices who also conduct project appraisal.The control of accounts in arrears has been computerized and follow-upaction is adequate. Where loans in excess of F$50,000 have been inarrears of over F$5,000 for more than three months, the control ofaccouuts is passed on to the Loan Recovery Unit, which is responsiblefor effective control and further appropriate action. The Unit submitsdetaIled quarterly reports to the Board on control measures beingeffected. In order to assist small-scale borrowers with operationalproblems, FDB has been operating a Mnnagement Advisory ServicesDepartment since 1982. FDB also provides for the assistance ofextension officers from the Ministry of Primary Industries foragricultural sector borrowers and trainin by Business OpportunityManagement and Advisory Services (BOMAS)- for the commercial andindustrial sector borrowers.

67. While FDB's project supervision is considered adequate inmeeting its need of supervising a large number of small borrowers, itcould be further improved. Currently, FDB's project supervision istriggered only when its borrower falls in arrears. Considering thegrowing size and complexity of projects financed by FDB. its managementnow intends to orient sunervision towards ex ante problem preventionrather than ex post problem solving. FDB management indicated that FDBwould evolve its supervision of large-scale projects along this line.

4. Operational Performance

a. Overview

68. Highlights of FDB's lending during FY1980181-1983/84 and thefirst six months of FY1984185 are summarized in Table 2; details of loanoperations are given in Appendix 8. FDB's operations have continued tobe concentrated on providing loans for medium and long-term investment.

1/ BOMAS is an institution established under the auspices of theMinistry of Fijian Affairs in order to train potential businessmenamong indigenous Fijians and Rotumans.

22

Table 2: Summary of Loan and Equity Investment Approvals(FY1980/81-1984/85)

CE$1000) mg1980/81 1981/82 1982/83 1983/84 31/12/84=

EY exdiag 30 Jtm b. Ainit ND. Amt lb. Amt Nb. Ammt Nb. hmmat

Ag2ia.llture 1,473 7,918 2,069 8,660 1,590 6,647 1,950 8,367 629 3,148

kns 206 7,029 195 6,732 235 7,942 247 12,297 131 7,3361tda]lcmrdal

la to Fijians 403 1,918 410 1,403 342 1,562 328 1,981 2Q2 952EqityInvestmts 1 70 - - 1 45 1 100 4 4,318

Total 2,083 16,935 2,674 16,795 2,168 16,196 2,526 22,745 966 15.769

a/ Six ts fran 1 July to 31 Deeuber 1984.

69. FDB's loan and equity investment approvals were maintained ata constant level duing the three years till June 1983. DuringFY1983/84 a record level of approvals was achieved with a 40 per centincrease in approvals over the previous year's figures. This growth inoperations was a result of a more aggressive approach to identifying andpromoting new lending business that resulted largely from the leadershipof the current Managing Director following his appointment in March1983; an increase in investment activity in the industrial/commercialsector mainly in the area of new factory, warehouse and officebuildings; the advent of a few larger projects including the SavusavuOil Mill project; a demand for investment funds to rehabilitate damagecaused by cyclone Oscar in March 1983; and a general under-supply ofloan funds from commercial banks resulting from the tight money policyiz:posed by RBF (see para 18). This trend has continued during the firstsix months of FY1984/85, when there were record approvals amounting toF$.15.77 million.

70. FDB's equity investment operations were not dynamic in thepast. As of 31 December 1984, FDBts equity investment portfolioamounted to F$5.4 million or 5.4 per cent of its total portfolio. Thishas been partly the result of FDB's perception of its role as beingprincipally a provider of loan finance and partly because ofunwillingness on the part of FDB's Board to become involved in an areaof financing that is cousidered to be the sole preserve of the privatesector. Those equity investments that are currently held are detailedin Appendix 16. FDB's involvement in equity investment operationsescalated substantially during the first half of FY1984/85 following theadoption of a more clearly defined equity investment policy by FDB'sBoard. The purchase of 30 per cent of the shares in a brewery at a costof F$3.55 million on alyemporary basis, has resulted in a doubling ofFDB's share portfolio.-

1/ FDB's investment in the brewery was made with the objective oftaking over the management of the company from foreign investors.FDB will dispose of its investment in the company shortly (thecontract for the sale of the shares to a provincial government hasbeen signed).

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b. Sectoral Distribution

71. A detailed analysis of the sectoral classification niapprovals during FY1980/81-1983/84 and during the first six months ofFY1984/85 is presented in Appendix 9. During the period, FDB approved atotal of 10,410 loans amounting to F$49.15 million. FDB's lending wasevenly distributed between agricultural and industrial/ commercial loans,with agriculture receiving 74 per cent of approvals by number and 41 percent of approvals by value, while the industrial/commercial sectorreceived 26 per cent of approvals by number and 59 per cent of approvalsby value. During the last 18 months of the period the industrial/commercial sector received an increasing proportion of approvals (66 percent by value) reflecting the growing relative importance of theindustrial/commercial sector.

72. Of the industrial/commercial loan approvals, manufacturingindustries received the greatest share (22 per cent of total approvals)followed by transport (11 per cent), commercial including officebuildings (10 per cent) and the construction industry (6.8 per cent).Tourism accounted for only a minor share (2.7 per cent) of FDB'sapprovals during the four and a half year period. Significantly, mostof the growth in approvals pertained to the manufacturing sector whichincludes agroprocessing, and to a lesser extent the commercial sector.This growth in lending to commercial projects reflects FDB's policy ofbroadening its loan portfolio to include a higher proportion of loansthat, while having lower developmental merits, yield a higher return toFDB thus allowing lower interest rates to be provided to moredevelopmental projects, particularly in the agriculture sector.

73. Agriculture loan approval levels remaineu relatively unchangedover the period with sugarcane production receiving the highestproportion of total approvals by value (16.8 per cent) followed by rice,fruit and vegetables (10.8 per cent) and fishing (3.9 per cent). Thismix also remained relatively unchanged over the period reflecting thecontinued importance of sugarcane as Fiji's principal export crop.Efforts to diversify Fijian agriculture have been mainly in the areas ofincreased rice, fruit and vegetable and citrus production althougn theseefforts have not so far significantly decreased the proportion of FDB'sagriculture loans that have gone to assist sugarcane production.

74. The annual level of approvals under the Commercial andIndustrial Loans to Fijians Scheme has remained virtually unchangedduring the period reflecting the steady but low level of development ofentrepreneurship among indigenous Fijians. This category of lending, 76per cent of which has been to local transport or retail businesses, hasthe worst arrears record within FDB's loan portfolio (see para 89) andaccordingly, FDB's policy has been to follow a cautious expansion pathin that area of operation.

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c. Size, Maturity and Geographic Distribution

75. A breakdown of FDB's loan approvals by region, for FY1980/81-1983/84 and for the first six months of FY1984/85 is provided inAppendix 9. Appendix 10 provides an analysis of loan approvals by sizeand maturity for the same period. The regional distribution of FDB'slending has shifted somewhat over the four and a half year period inthat the Suva and East Viti Levu regions have been receiving anincreasing proportion of total loan value. This ls a direct result ofthe increasing proportion of FDB's lending that has been made to theindustrial and commercial sectors which tend to be centered on Suva.West Viti Levu, as the most important sugarcane growing area in Fiji,received the highest number of loans over the period (43 per cent oftotal loan approvals) reflecting the smaller average size of agricultureloans. While the annual value of loans approved to the Viti Levu areashas increased bctween FY1980/81 and 1984/85, the value of loans made toVanuz Levu each year has declined slightly. This is held to be a resultof ^ lesser degree of economic (particularly agricultural)diversification on that island, a trend which has become a matter ofsome concerna to FDB and the Government.

76. The distribution of FDB's loan approvals by size reflects thepredominance of small agricultural loans in FDB's portfolio. For theFY1980/81-1983/84 and the first six months of FY1984/85, the averagesize of agricultural loan was F$4.505. By number, 57.9 per cent of theagriculture loans approved during the period were less than F$5,000 eachand only 37.2 per cent were between F$5,000 and F$25,000. Only 16agricultural loans with a total value of F$4.68 million (5.6 per cent oftotal approval value) were F$100,000 or more each, reflecting the smallmedium sized land holdings of the country. On the other hand, theaverage size of industrial/commercial loans was F$18,211 during theperiod. FDB provided loans of F$100,000 or more each to 88 industrialor commercial projects to a total value of F$21.28 million (25.4 percent of total approval value) over the period with 57 per cent of theamount approved during the final 18 months.

77. The weighted average maturity of total loans approved was ;.2years forlyhe period, FYl981/82-1983/84 and the first six months oiFY1984/85- , consistent with FDB's role as a medium to long-termlender. There has been little change in the average maturity of loansbetween FY1981/82 and the first six months of FY1984/85. By number ofloan approvals, 58.5 per cent of FDB's loan approvals during the threeand a hal' year period were for periods of less than four years whichreflects the high proportion of small loans for the purchase of vehicles.

5. Projected Operational Performance

78. The projected loan and equity investment approvals of FDB forFY1984185-1988/89 are summarized in Table 3 and the details arepresented in Appendix 11.

1/ Data were not available for FY1980/81.

25

Table 3: PT)B's Projected Loan and Equity Investment Approvals- F!1986.185-1988189)

PT embd30 June9B4/85 1985/86 1986/87 1987/88 1988/89 Total Z

AgRicnl±uml 1T 7,380 11,300 12,900 14.800 17,000 63380 36.0

lcmxu 14,000 15,450 18,310 21,790 26,O0D 95,550 54.3himtdn]1lrdal

I to Fijio s 1,62D 1,780 1,950 2,140 2,350 9,840 5.6Fquity fnvesUmt 6,32D 200 200 200 200 7,120 4.1

Total 29,320 28,730 33,360 38,93D 45,550 175,890 100.0(US$ equiv.) 25,340 24.830 28,830 33.650 39,370 152.020

79. Of FDB's total projected approvals of F$175.89 million(US$152.02 million equivalent) during the five financial years ending30 June 1989, the industrial and commmecial sectors would account for54.3 per cent, followed by the agriculture sector (36 per cent). Equityinvestments would account for 4.1 per cent of total approvals although ahigh proportion of those approvals vere made during the six-month periodprior to 31 December 1984. The projected approvals represent an annualaverage growth rate of 15 per cent. These projections, which take intoaccount the envisaged capital outlays in the country, the operationalperformance of FDB during Ffl983/84 and the first six months ofFY1984/85 and its existing pipeline, would appear to be optimisticcompared with the approval levels achieved during FY1980/81-1982/83.However, considering FDB's active operational performance during the 18months up to 31 December 1984, lts more dynamic policy towards promotingits financial services and the restrictions on commercial banks' lending(see para 18), FDB's operational projections are considered reasonableand attainable.

C. Accounting. Audit and Financial Controls

80. FDB's accounts are maintained in accordance with the require-ments of the FDB Act and in line with generally accepted accountingprinciples. The accounting system is centralized at the head office andis computerized. Computerization has upgraded the quality of FDB'saccounting and management information systems, allowing the preparationof a wider range of reports, particularly with regard to arrearsanalysis. The Finance Division is managed by a qualified accountant whohas three qualified accountants reporting to him, each in charge of oneof the three departments: Accounting, Budget and Planning, and DataProcessing. The Mission found that good controls exist within FDB'saccounting system which processes 6,000-8.000 transactions each monthquickly and efficiently.

26

81. The FDB Act requires the accounts of FDB to be audited by acertified public accountant who is approved by the Minister of Finance.For the selection of auditor, FDB invites proposals from major auditingfirms every three to four years. Currently, the contract to undertakethe audit is held by the Fiji office of an international firm ofaccountants. FDB is required to submit annually to the Minister ofFinance, a copy of its audited annual accounts and report on itsoperations for the year. The format of FDB's audit report for FY1983/84and previous years has not provided sufficient information to meet theBank's requirements. The Mission discussed the required audit reportformat with EDB mnagement and its auditors, and was assured that therewould be no difficulties in providing future audit reports in the formatrequired by the Bank. FDB's future audit report will also include areview by the external auditors of the adequacy of FDB's provision fordoubtful debts, the auditors' opinion as to FDB's compliance with thecovenants of its long-term borrowings, and of the adequacy of FDB'saccounting and financial control systems. FDB will furnish this reportto the Bank not later than five months after the close of the fiscalyear to which they relate. The Bank will have the right to contactFDB's external auditor directly fgr a discussion of FDB's statement ofaccounts and financial position.- The proposed external auditarrangements are satisfactory.

82. FDB has an Internal Audit Unit consisting of two staffmembers. The internal auditor, who is a qualified accountant, reportsto MD. An audit of all branches and of the head office is carried outevery 18 months and the audit comprises a review of the staff'scompliance with operating and funds management procedures. Included inthis review is a check on the efficiency with which staff have handledloan applications and a full review of the procedures followed inhandling the arrears situations. The Mission found that the internalauditor's report to MD resulted in satisfactory follow-up action fromthe management and staff concerned.

D. Financial Performance

1. Interest Rate Structure

83. Appendix 2 provides the interest rate structure in Fiji andAppendix 3 provides details of FDB's current interest rate structure andof proposed changes thereon (see para 30). While FDB is not legallybound by the maximum lending rate determined by RBF, which has been 13.5per cent since 1981, FDB voluntarily follows the ceiling in setting itsinterest rates. FDB charges the same rate (i.e., 13.5 per cent) as thatof commercial banks for its commercial loans, and will increase itsinterest rate for industrial loans also to 13.5 per cent per annumeffective August 1985. This indicates that except for the lower rates

1/ L.A. Section 5.06(c).

27

for its agL;cultural loans and loans under special lending schemes forindigenous Fijians, FDB is competing with commercial banks on an equalbasis. FDB's interest ratas have remained positive compared with theinflation rates of 8 per cent in 1983 and 6 per cent in 1984.

84. An important feature of FDB's interest rate policy is thedecision by its Board to maintain the interest rate on agriculture loansand on industrial and commercial loans to Fijians at 11 per cent. Thisconcessionary rate reflects the high priority given to the agriculturesector by both FDB and the Government. Although the increasing interestrate paid by FDB on local bond issues has resulted in a reduced interestspread, FDB's profits have been maintained at an acceptable level bygood control of operating expenses, a steadily increasing loan portfoliovalue and the maintenance of a low debt/equity ratio through regularequity injections. FDB has agreed to review its interest rates annuallyand to consult with the Bank prior to making any changT? in its interestrate structure during the period of the proposed loan.-

2. Past and Current Performance

85. Table 4 summarizes FDB's financial performance for FY1980/81-1983/84 and the first six months of FY1984/85.

1/ L.A. Schedule 4, para. 2.

28

Table 4: Summary of Financial Performance(FY1980/81-1983/84)

(F$'000)1984/85

FY ending 30 June 1980/81 1981/82 1982/83 1983/84 (to 31 Dec.)

Total assets 53,279 58,710 70,099 96,712 106,679Loan portfolio 47,228 53,934 63,307 87,145 94,990Equity inv. portfolio 904 862 833 898 5,434Arrears 2,323 4,204 5,852 7,135 8,030Per cent to portfolio (Z) 4.92 7.79 9.24 8.19 8.45Collection ratio (Z) 77.86 67.97 59.70 60.28 53.63Income from loans 4,562 5,631 6,535 8,144 4,756Income from equity inv. 66 104 85 167 82Operating expenses 1,536 1,780 2,019 2,386 1,350Interest on borrowings 2,666 3,089 3,469 4,649 3,132Net income 636 800 878 894 889Equity 13,996 15,950 22,261 28,691 30,081

a /Ratios:-'

Debt/equity ratiob/ 2.62:1 2.48:1 1.95:1 2.16:1 2.24:1Debt servi e coverage

(times)' / 3.27 2.92 3.22 1.54 1.25Return on equity (Z - 4.83 5.34 4.60 3.51 6.05Return on eyity beforeprovision-' f/ 6.82 8.89 8.55 6.91 6.06pnterest spr:&2 2.57 3.02 2.78 2.00 0.77

Earnings spread& 2.03 2.59 2.75 2.44 1.89Operating expenses/averagetotal portf io (Z) 3.47 3.46 3.40 3.31 2.87

Current ratio- 6.90 8.44 2.45 2.58 2.68

a/ The ratios calculated for the first six months of FY1984/85 havebeen distorted by seasonal factors and the timing of annualrepayments.

b/ Total long-term debt to total equity.c/ Internal cash generation plus loan collections to total debt

servicing requirement.d/ Net income to average equity.e/ Net income plus provision for doubtful debts to average equity.f/ Income from portfolio as a percentage of average portfolio minus

interest on borrowings as a percentage of average borrowings.~/ Total income as a percentage of average total loans and investments

minus interest and operating expenses as a percentage of averagetotal loans and investments.

h/ Current assets/current liabilities.

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86. During the period FY1980/81-1983/84 FDB achieved a return onequity of between 3.51 and 5.34 per cent. The major constraint onprofitability has been the relatively low interest spread of between 2.0per cent and 3.02 per cent (see para 84). However, given the obligationto maintain a 'arge number of small agriculture loans and tne high costsassociated with supervising these loans, it is considered that PDB hasmaintained a reasonable profit position over the period. The financialposition of FDB remained comfortable throughout the period with a debtservice coverage of not less than 1.54 times and a debt/equity ratio ofnot more than 2.62:1, well within the proposed covenanted maximum of 3:1for the proposed loan. FDB's return on equity before provisions fordoubtful debts was at a reasonable level throughout the four-year perlodFY1980/81-1983/84 falling to 6.91 per cent during FY1983/84 followingreturns of 8.89 per cent and 8.55 per cent respectively in the twopreceding financial years. The Mission considers that the covenantedlevel for the proposed loan of 6.0 per cent return on equity beforeprovisions for Jpubtful debts should be readily achievable in the lightof this record.-

87. FDB's sources and application of funds during FWs1980/81-1983/84 are detailed in Appendix 14 and sumarized in Table 5. Detailsof FDB's borrowings as on 31 December 1984 are given in Appendix 19.During the period, loan disbursements contributed the bulk of total fundrequirements accounting for 77.91 per cent. Debt service was relativelylight (20.5 per cent) due mainly to the long-term nature of PDB'sdomestic borrowings, most of which have lump sum repayment terms. Internalcash generation provided half of the total source of funds with the restcovered by borrowings (39.19 per cent) and share capital increases (10.45 percent).

Table 5: Summary of FDB's Sources and Application of Funds(FY1980/81-1983/84)

(F$O000)

FY ending 30 June 1980/81-1983/84 Z

Sources of Funds:Internal Cash Generation 20.97 22.08Loan Collections 26.30 27.69Borrowings 37.22 39.19Share Capital Increase 9.93 10.45Increase in Current Liabilities 0.56 0.59Total 94.98 100.00

Application of Funds:Loan Disbursements 74.00 77.91Equity Disbursements 0.22 9.23Debt/Service 19.47 20.50Acquisition of Fixed Assets 0.37 0.39Increase in Current Assets 0.92 0.97Toia.L 94.98 100.00

1/ I.A. Schedule 4, par. 10.

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3. Portfolio Management

a. Loan Portfolio

88. A detailed sectoral analysis of FDB's loan portfolio at yearend over the period FY1980/81-1983/84 and the first six months ofFY1984/85 is given in Appendix 15. An analysis of FDB's arrears andcollection performance is given in Appendixes 17 and 18. Between theend of FY1980/81 and 31 December 1984, FDB's portfolio increased in linewith its lending operation. The share of agricultural loans by amountin the total portfolio increased from 48.7 per cent to 57.1 per cent,industrial and commercial loans declined from 39.5 per cent to 34.8 percent and industrial and commercial loans to Fijians declined from 11.8per cent to 8.1 per cent. The share of industrial and commercial loansin the total portfolio began to increase from FY1982/83, however, andwith the recent upsurge in approvals this increase will continue.

89. The loan arrears situation of FDB has somewhat deterioratedsince FY1980/81 although it is still at a manageable level. Totalarrears increased from F$2.32 million or 4.92 per cent of total loanportfolio on 30 June 1981 to F$8.03 million or 8.45 per cent on 31December 1984. Total arrears as a percentage of loans in repaymentstage increased from 5.68 per cent to 9.93 per cent between the twodates. Sectorally, the industrial and commercial loans to Fijians werethe worst affected loan category with total arrears to total portfolioincreasing from 18.62 per cent on 30 June 1981 to 21.84 per cent on 31December 1984. Over the same period, arrears on industrial andcommercial loans increased from 2.88 per cent of outstanding to 11.23per cent and those on agriculture loans increased from 3.40 per cent to5.16 per cent. As principal and interest repayments on all sugarcaneloans are made direct to FDB by FSC prior to paying growers the proceedsfrom cane purchases, FDB has been able to maintain very good control ofarrears in that category of lending, thus _ducing the arrears to totalportfolio ratio for agricultural loans. Total collections as apercentage of total dues decreased from 77.86 per cent during FY1980181to 60.28 per cent during FY1983f84.

90. The deterioration of FDB's arrears situation has arisen from anumber of factors including the effect of cyclone Oscar in 1983. thegeneral downturn of the economy since 1981, inadequate attention to loansupervision by branch mtyagers and staff, and problems with two largeservice sector projects- that have been ongoing since FY1981/82. Themajor single cause of the deterioration in the arrears situation has,however, been the relatively low priority afforded to loan supervisionactivities by staff. Particularly during the one year period up to 31December 1984, the volume of loan applications being processed hasincreased substantially and the processing of these applications hastaken a higher priority than supervision activities. FDB's managementhas recognized the problem and has instructed loan officers to devote

1/ They relate to an interisland shipping service and the funding of atourist hotel. Both projects had cost overruns and subsequentlyencountered management and marketing problems.

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more time for supervision activities as well as establishing a LoanRecovery Unit at the head office responsible for collecting past duesfrom larger arrears clients (see para 66). In addition, considerationis being given to increased specialization of loan officers in mattersrelating to agricultural and industrial/commercial sectors to facilitatebetter focussing of effort on project supervision and improved loanappraisal quality. The Mission considers that FDB has reacted well tothe changing arrears situation and has re-established good control ofdelinquent accounts. Generally, the Mission considers that FDB'sarrears are manageable and collection performance is adequate and thatthis situation will continue. The current provision for bad anddoubtful debts amounted to F$4.6 million or 5.2 per cent of total Iganportfolio and 50.06 per cent of total arrears on 31 December 1984.-The Mission confirmed the adequacy of this provision with FDB's externalauditors who review the quality of FDB's loan portfolio on a six-monthlybasis.

b. Equity Inwestment Por:'olio

91. An analysis of FDB's equity investment portfolio at 31December 1984 is presented in Appendix 16. Earnings on equityinvestment through dividends and capital gains on the sale of shareshave given a satisfactory return to FDB. During the periodFY1980/81-1983/84, the annual income including capital gains from equityinvestment as a percentage of total equity investment portfolio reacheda high of 18.6 per cent in Fl1983/84 and a low of 7.3 per cent inPY1980/81. Of the equity investment held in 12 companies on 31 December1984, 6 were in companies operating profitably and making regulardividend payments, 5 were in projects still under implementation, and 1was in financial difficulties. Shares in two companies were sold duringNovember 1984 for a total capital gain of F$306,151. The shares werepurchased during 1978 and 1979 at a total cost of F$234,473. TheMission considers that FDB has followed a sound and prudent equityinvestment policy. Some investments have been made (particularly inFiji Co-operative) for social development and these are not expected toyield a high return to FDB. FDB maintains close supervision of itsequity investments and is represented at all board meetings of investeecompanies, usual-ly through its own director. The Mission considers thatFDB has adequate expertise in equity investment in terms of bothappraisal and supervision capabilities to handle satisfactorily theBank's equity investments.

1/ Excluding loans under the Commercial and Industrial Loans to FijianScheme, for which no provision is required as they are guaranteedalmost in full by the Government. In accordance with its PolicyStatement, FDB provides annually to the provision for bad anddoubtful debts so that such provision is equivalent to 5 per centof its loan and equity investment portfolio.

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4. Projected Financial Performance and Resource Position

92. A summary of FDB's projected financial performance for FY1984/85-1988/89, which is considered realistic and attainable, is given in Table 6and details in Appendixes 12, 13 and 14. The major assumptions of theseprojections are given in Appendix 20.

Table 6: Summary of Projected Financial PerformanceFY1984/85-1988[89

(F$'000)FY ending 30 June 1984185 1985/86 1986/87 1987/88 1988/89

Total assets 116,180 127,180 141,360 153,976 170,903Loan portfolio 100,650 112,436 124,894 138,893 156,794Equity portfolio 7,019 7,189 7,349 7,499 7,639Arrears 8,052 9,394 10,391 11,511 12,863Per cent to portfolio (Z) 8.00 8.35 8.32 8.29 8.20Collection ratio (Z) 62.79 67.19 69.30 68.51 69.41Income from loans 10,370 12.597 14,030 15,743 17,828Income from equity 172 124 135 147 161Operating expenses 2,878 3.294 3,130 3,619 3,759Interest on borrowings 6,229 7,159 8,130 9,208 10,884Net income 1,169 1,475 2,085 2,479 2,717Equity 36.360 39,835 42,920 47,399 53,116

Ratios:-

Debt/equity ratio 2.02:1 2.02:1 2.11:1 2.07:1 2.03:1Debt service coverage

(times) 1.33 1.99 1.98 2.13 1.46Return on equity (Z) 3.58 3.86 5.04 5.49 5.41Return on equity beforeprovision 6.98 7.23 7.73 8.13 7.94

Interest spread 1.94 2.51 2.32 2.10 1.50Earnings spread 2.33 2.43 2.54 2.63 2.57Operating expenses/averagetotal portfolio (Z) 2.94 2.90 2.68 2.60 2.42

Current ratio 5.70 4.85 7.22 2.99 3.09

a/ Ratios calculated on the same basis as for Table 4.

93. FDB is projected to maintain reasonable profitability over theperiod with its return on equity slowly increasing in line with thevalue of its loan portfolio. A reasonable profit situation is expectedto occur despite relatively tight interest spreads that are projected toincrease to 2.51 per cent in FY1984/85 gradually falling to 1.50 percent in FY1988/89. The initial increase in interest spreads will resultfrom the growing proportion of FDB's portfolio composed of higherearning industrial and commercial loans and the subsequent decrease willresult from the gradual repayment of existing lower cost funds to be

33

replaced by higher cost FDB bonds. A current problem encountered byFDB has been the relatively high cost of its local currency funds whichare sourced prismarily from the issuance of FDB bonds. The yields on FDBbonds have recently reached a high of 11.5 per cent on 14-yearmaturities and 10.5 per cent on 6-year maturities. These high rates arebelieved to have resulted from tight monetary policies (see para 18).It is anticipated that, as a result of the significant improvement inthe balance-of-payments position as at the end of 1984 and RBF'ssubsequent decision not to tighten its monetary policy, the cost offunds from the bond market is not expected to increase further. Theprofit projections have been made on the assumption that yields on FDBbonds will continue at levels of 11.5 and 10.5 per cent. FDB's abilityto diversify its sources of funding away from the domestic bond marketis somewhat constrained. However, any success in such diversificationor any easing in domestic interest rates would improve the projectedprofit position. Also critical to FDB's future profitability is themaintenance of strong control of operating expenses which are projectedto increase at around 5 per cent each year. Income from equityinvestments has been projected on a very conservative basis because ofthe recent substantial increase in the value of FDB's equity investmentportfolio and the long gestation period of the larger projects investedIn. FDB will maintain a minimm return (before provisifys for bad anddoubtful debts) of 6 per cent on its average net worth.-

94. Loan collection rates are projected to improve from theE71983/84 figure of 60.28 per cent to 69.41 per cent for FY1988/89 asthe recent and planned moves to improve loan supervision procedures takeeffect. The projected debt/equity ratio, which reaches a high of 2.11:1in FY1986/87 and then declines to 2.03:1 in FY1988/89, remains withinthe proposed debt/equity ratio ceiling of 3:1 under the proposed Bankloan. The proposed debt/equity ratio of 3:1, which reduces the averagecost of funds, is an important element in 1DB mantaining reasonableprofitability in the face of its high cost of borrowings. The necessarycapital injections from the Government to maintain the debt/equity ratioare consistent with the level of equity injections provided in the pastand also consistent with the Government's strong support to FDB.Projected debt service coverage figures indicate that FDB will be ableto comply with the covenant under the proj?sed loan to maintain aminimum debt service cover of 1.25 times.- The generally long-termmaturity of FDB's current borrowings will be of assistance in achievingthe projected debt service performance.

95. FDB's projected financing plan for the period FT1984/85-1988/89 is rsunmarized in Table 7 and detailed in Appendix 14.

1/ L.A. Schedule 4, para. 10.2/ L.A. Section 5.09(ii).

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Table 7: FDB's Financing Plan for FY1984/85-1988/89

(F$'000)

FY ending 30 June 1984185-1988189 Z

Sources of Funds:Internal Cash Generation 66.99 27.92Loan Collections 68.23 31.24Borrowings - L.C. (FDB Bonds) 58.57 26.81

- F.C. (ADB/IBRD/EIB) 16.15 7.39Share Capital Increase 14.50 6.64Increase in Current Liabilities 0.02 -

Total 218.46 100.00

Application of Funds:Loan Disbursements 138.27 63.29Equity Disbursements 7.12 3.26Debt Service 74.21 33.97Acquisition of Fixed Assets 1.20 0.55Increase in Current Assets ( 2.34) C 1.11)

Total 218.46 100.00

96. The major sources of finance are projected to come from loancollections (F$68.23 million), internal cash generation (F$60.99million) and local currency borrowings (F558.57 million). The majorapplications of funds are projected to be for loan disbursements(F$138.27 million being 63.29 per cent of total funds applied) and debtservicing (33.9 per cent of total funds applied). Debt servicingrequirements as a ratio of total funds applied are projected to increasesignificantly at the same ratio as was seen in the preceding four and ahalf year period up to 31 December 1984, partly as a result of higherinterest costs and partly as a result of the growing maturity of FDB'sliabilities.

97. The proposed Bank loan will be utilized by FDB mainly forlending to industrial and service sector projects (see para 26). Basedon its operational projections, FDB's lending to industrial and servicesector projects are estimated to be around F$26.6 million (US$22.9million) for the two-year period FY1985/86-1986/87 on a commitmentbasis. Assuming 70 per cent of those committed loans are eligible forfinancing under the Bank and the IBRD loans, the foreign exchangerequirements of such eligijie projects are estimated to be around F$17.2million (US$14.8 million).- As of 31 December 1984. FDB had anavailable foreign currency resource of only 4 million European2 ;urrencyUnits (US$2.5 million) from the European Investment Bank (EIB)- and

1/ FDB finances only up to 65 per cent of project cost and the foreignexchange component is estimated to be around 60 per cent of projectcost.

2/ The EIB loan was approved by EIB in November 1984 and becomeeffective in February 1985. The loan will be utilized forfinancing industrial, fishing and tourism projects. Repayment ofthe EIB loan will be over a 12-year period including a four yeargrace period and interest rate is 6.85 per cent per annum. Foreignexchange risk will be borne by the Government for which FDB willpay a fee of I per cent per annum.

35

the estimated foreign exchange resource gap is around US$12 millionduring the two-year period. The resource requirement of this orderjustifies the proposed Bank loan of US$7.0 million and the IBRD loan ofUS$3.5 million. FDB's local currency resource requirement would be metprimarily from the issuance of FDB bonds and partly by the Government'sadditional equity contributions.

E. Implementation of the Previous Bank Loan and 'fecbnical Assistance

1. The Previous Bank Loan

a. General

98. The previous Bank loan of US$2.0 million to EDB (Loan No.174-FIJ) was approved on 21 December 1973 and became effective on19 March 1974. By the closing date for disbursements on 11 January1977, US$1.9 million had been disbursed. The undisbursed amount of theloan was cancelled at FDB's request. The loan was utilized to finance145 subprojects, five of which were above the free limit of US$40,000.The sectoral distribution of the loan was as detailed in Table 8.

Table 8: Sectoral Distribution of Previous Bank Loan(Loan No. 174-FI)

($ '000)

Sectors No. Z Amount z

Agriculture 35 24.1 334.3 17.7Industry 20 13.8 619.3 32.8Service:Transportation 74 51.1 585.8 31.0Construction 6 4.1 168.6 8.9Others 10 6.9 180.2 9.6Sub-cotal 90 62.1 934.6 49.5

Total 145 100.0 1,888.2 100.0

99. While it was expected that the manufacturing sector vrould bethe main beneficiary of the Bank loan, in reality 49.5 per cent ofdisbursements went to service industries, 17.7 per cent to agricultureand only 32.8 per cent to the industrial sector. Almost the entireamount of the loan was utilized on a reimbursement basis for "off-theshelf" purchases made in Fiji by the sub-borrowers.

b. Nature of Subloan

100. The subprojects had the following characteristics: theagricultural loans were mainly for procurement of tractors to assist themechanization of sugarcane farming, the transportation loans financedthe purchase of buses and small trucks, and the industrial loansfinanced the acquisition of plant and equipment and the construction of

36

new factory buildings. The subloans were distributed throughout thethree major islands of Viti Levu, Vanua and Ovulan. The average size ofaujbloans from the Bank's credit line was about US$13,000. The repaymentperformance of the sub-borrowers was satisfactory.

c. Sccio-Economic Impact of Bank Subloan

101. According to the Post Evaluation Report on the first Bank loanto FDB, it was estimated that: (i) the 145 subprojects generated atotal of 1,100 Jobs; (ii) each Fiji dollar of Bank assistance hadmobilized another dollar of investment in the private sector and; (iii)the average EIRR of 16 sample subprojects was about 25 per cent. Inaddition, there were non-quantifiable benefits such as the developmentof local entrepreneurial skills. In general, the subprojects assistedby the Bank loan appeared to have satisfactory financial and economicperformance.

d. Complwance cith Bank Covenants on the First Bank Loan

102. Appendix 21 contains a summary of FDB's compliance with thecovenants under the first Bank loan. All conditions relating to theloan were complied with.

2. Previous Bank Technical Assistance

103. The Bank has provided four technical assistance grants for thepurposes of institutional improvement within FDB as shown in Table 9.

Table 9: Bank Technical Assistance Grants to FDB

TA No. Approval Date Amount Purpose

42-FIJ 22 December 1970 US$ 90,000 To assist in reorganizationand management training.

70-FIJ 8 August 1972 US$ 37,000 Extension of TA No. 42-PIJ.

102-FIJ 21 December 1973 US$100,000 To strengthen FDB's trainingprograms and develop itseconomic evaluationcapabilities.

506-FIJ 16 February 1983 US$100,000 To assess FDB's pastperformance, redefining FDB'srole and functions, anddevelopment of operationalstrategies and guidelines.

37

104. A Post Evaluation Missionts RevieviY of the first twotechnical assistance grants concluded that they had successfullycontributed to the transformation of FDB from a rural-orientedgovernment-department type institution to a Pdern and effectivedevelopment bank. The same Mission's review- of the third technicalassistance concluded that the intensive efforts of the consultants havefully met FDB's needs for staff training at the time. The fourthtechnical assistance was successfully concluded and the majorrecommendations including amendment of the Policy Statement (see para62) and reorganization of FDB (see para 54) were accepted by FDB andhave been implemented.

11 Post Evaluation Report on the Bank's first loan to FDB, page 8.2/ Post Evaluation Report on the Bank's first loan to FDB, page 9.

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V. CONCLUSIONS AND RECOMMENDATIONS

105. FDB is the only financial institution in Fiji providing mediumand long-term finance for developmental projects in the agricultural,industrial and service sectors. It has played a major role in theeconomic development of Fiji. Following the successful implementationof the recommendations of the consultants under the Bank's technicalassistance in 1983 including the reorganization and amendment of itsPolicy Statement, FDB is expected to become more development-orientedand play a more active role in the economic development of the country,particularly in the development of private sector enterprises, inaccordance with the Government's expectations.

106. FDB's institutional and operational aspects continued to besatisfactory. Its management and staff are qualified and competent.Its operational policies and procedures are sound and satisfactory. Itsoperations are development-oriented and have shown a substantialincrease since FY1983/84. Although its profitability has slightlydeteriorated recently following the increasing cost of its borrowingsfrom the local financial market, FDB maintains a sound financialposition. The quality of its portfolio is generally satisfactory as itsarrears are at a manageable level and are adequately covered with itsportfolio provision.

107. The Mission considers that FDB continues to be a suitablechannel for Bank funds to private sector enterprises in Fiji. Based ona projection of FDB's lending activities over the next three years,which is considered realistic, and in view of FDB's foreign exchangeresource requirement, it is proposed that the Bank approve a loan in theamount of US$7.0 million equivalent from the Bank's ordinary capitalresources to FDB.

108. FDB has performed satisfactorily in its equity investmentoperatioii. In view of its experience, FDB is considered capable ofprocessing and supervising the Bank's equity investments. FDB hasagreed to handle the Bank's equity investment on behalf of the Bank. Itis therefore recommended that an equity line in the amount of US$250,000equivalent be provided to FDB.

109. In addition to the standard loan covenants, FDB has agreed tothe following: (i) a maximum debt/equity ratio of 3:1, (ii) a minimumdebt service coverage ratio of 1.25 times, (iii) a minimum return onequity before provision of 6 per cent per annum, (iv) annual review ofits interest rate structure, and (v) recruitment of a qualified engineerby 31 December 1985.

110. The proposed loan and equity line are likely to benefit about150 projects in the industrial and service sectors and generate some 700job opportunities.

39

APPENDIXES

No. Page

1 Review of Major Economic Sectors in Fiji 40

2 Structure of Interest Rates in Fiji 49

3 Schedule of Current and Proposed Interest RateChanges 50

4 List of Members of the Board of Directors 51

5 Organization Chart 52

6 Staff Analysis by Division and Grades 53

7 Statement of Operating Strategy and GeneralBusiness Policy 54

8 Sumary of Operations 63

9 Analysis of Loan Approval by Industrial Sectorsand by Region 64

10 Analysis of Approval by Loan Size and Maturity 65

11 Actual and Projected Operations 66

12 Actual and Projected Income Statements 67

13 Comparative Balance Sheets 68

14 Actual and Projected Cash Flow Statements 69

15 Analysis of Loan Portfolio by Induistrial Sectors 70

16 Analysis of Equity Investment Portfolio 71

17 Analysis of Arrears 72

18 Coliection of Loans 73

19 Details of Borrowings as of 31 December 1984 74

20 Major Assumptions for the Operational and FinancialProjections, FY1984/85-1988/89 75

21 Status of FDB's Compliance with Loan Covenants 80

22 Framework Agreement on Fquity Line 81

40

Appendix 1Page 1

REVIEW OF MAJOR ECONOMIC SECTORS IN FIJI

A. Primary Industry Sector

1. Sugar

1. Sugar accounts for about half of the value of Fiji'sagricultural production and contributes two-thirds of the value of totalexports. Sugarcane is grown on about 60,000 ha by about 21,000 farmers.The b,lvested cane is purchased by the Fiji Sugar Corporation Limited(MSCW- for crushing at its four mills . These mills engage about4,000 workers during the crushing season (May - December). About 5 percent of the total output is consumed locally and the rest is exported.

2. The area under sugar cultivation increased significantlyduring the second half of of the 1970s. This was basically due to theGovernment's provision of better extension services, increased drainagefacilities, subsidized fertilizers, legislation extending the leaseperiod of cane lands from 10 to 30 years and the Seaqaqa sugarcanedevelopment project in Vanua Levu. As a result, annual sugar productionincreased from 320,000 tons during PY1970-1975 to 470,000 tons in theearly 1980s. Currently, around 250,000 t "y are exported per year at afavorable price under long-term contracts- , while the rest has to besold in the free market at a price which is less than one-third of thelong-term contract price and even less than the cost of production.Therefore, the Government no longer encourages the expansion of canefields.

3. The sugar industry experienced one of its most difficult yearsin 1983 as sugar production declined to 276,000 tons due to cyclonedamage and drought. Owing to favorable weather condition in 1984 andthe measures taken by the Government for rehabilitation following thedamages in 1983, sugar production recovered to 480,000 tons in 1984.Good weather conditions that prevailed during the 1985 planting seasonhad led to the projection of 490,000 tons of sugar production in 1985.Damages caused by the recent two cyclones are likely to result in actualproduction levels being lower than this figure by up to 5 per cent.

2. Other Primary Sector

4. As a result of the low sugar price that has prevailed since1981, the Government has been trying to diversify agriculturalproduction.- Copra is the second most important commercial crop in Fiji.The rehabilitation and maintenance of coconut lands, however, have

17 FSC is owned by the Government (81.6 per cent), Fiji NationalProvident Pund (9.9 per cent), Unit Trust of Fiji (1.4 per cent)and other small shareholders.

2/ Fiji has long-term sugar sales contract with EEC, Malaysia and USA.

(Reference in text: Page 3, Para. 11)

41

Appendix 1Page 2

generally been neglected. More than half of the coconut palms are over-aged and yields are low because of lack of weeding and fertilizing.

5. With a view to replacing imports of rice (constituting about50 per cent of domestic consumption), the Government has been providingincentives to grow rice. Due to favorable weather conditions and thecompletion of irrigation schemes, rice production increased to 23,000tons in 1984 compared with 16,000 tons in 1983. In addition, depressedlevels of sugar prices have resulted in some shift of cultivation fromsugar to paddy. While currently only about 400 to 500 families growrice as their main crop, the number is expected to increase with thecompletion of several drain?,e and irrigation schemes, one of whicn isbeing assisted by the Bank.- It is the aim of the Goverment toraise rice production to self-sufficiency within three to five years.Cacao is still not an important crop in Fiji but Government policy isgeared towards its rapid development. Its annual production in 1984 was250 tons but should increase over the next several years as the largeacreage planted during the late 1970s reaches bearing age. Government'sexport diversification policy emphasizes the development of fruits andvegetables. Price fluctuations and market restrictions in importingcountries, however, tend to discourage production and investment.Fiji's livestock production is close to self-sufficiency. After severalyears of continued growth, the commercial fish catch in the Fijian waterhas declined in recent years. The forestry sector is considered to havea great potential for development. Pine forests planted duringthe mid-1960s (around 10,000 ha out of the total plantation area of37,000 ha.) are now reaching maturity. The output from this sourceshould increase rapidly.

B. Industrial Sector

6. In Fiji, the industrial sector accounted for 12.2 per cent ofGDP and employed 15 per cent of the estimated work force in 1982. Sugarmilling was the most important industrial sector in Fiji and accountedfor 37.3 per cent of total industrial production in 1982. Thecontribution of industrial production to GDP decreased to 11.3 per centin 1983 from 12.2 per cent in 1982 because of a 43 per cent decrease insugar milling production following the disastrous sugarcane harvestduring the year. However, in 1983 the manufacturing sector excludingsugar realized a 9.3 per cent growth over 1982. This indicates that thegrowth of the non-sugar industrial sector is not necessarily dependenton the performance of the sugar industry.

7. With a view to promoting non-traditional industries in Fiji,the Government in 1981 created the Economic Development Board (EDB)under the Ministry of Economic Planning and Development. EDB has beenassigned a central role towards promoting foreign and local investment.It was intended that EDB would serve as a one-stop contact point forproviding potential investors with information and extension services as

I/ Loan No. 703-FIJ, Agricultural Development Project ($3.2 million)approved on 6 November 1984.

42

Appendix 1Page 3

well as facilitating investors' dealings with various ministries. Sinceits inception, EDB has approved a total of 132 projects. The Governmenthas also instituted a number of incentives for potential investors withno discrimination between foreign and domestic investors (see para 9).

8. In the past, industrial development in Fiji has mainly focusedon import substitution industries based on imported raw materials.However, to maximize the benefits accruing from industrialization on along-term basis, the Government has shifted its policy to give higheremphasis to linkages with other sectors of the economy, especiallyagriculture, forestry and marine resource development. Following thechange in its approach, the Government has formulated the followingpriority listing unJar DP 8:

- High Priority Industries (Priority A)

i) Industries based on local primary commodities

ii) Industries producing inputs required by primary andother sectors

- Priority Industries (Priority B)

i) Industries producing essential items from imported rawmaterials

ii) Industries producing goods for export from importedraw materials

- Low Priority Industries

Industries based on imported raw materials producing non-essential items.

9. In order to maximize private investments in priorityindustrial sectors, the Government provides various incentives dependingon the priority given to an industry. For high priority projects, theexemption from income-tax is granted for up to five years from the startof production and the Minister of Finance can approve a furt~prextension of income-tax concessions for another three years.- Importduties on plant and machinery are generally low in Fiji. However,exemption of import duties can be granted by the Government depending onthe degree of expected contribution to local value added and exports.New industrial projects are qualified for accelerated depreciationallowances when substantial capital expenditure is involved. For non-traditional industries, the Government also provides protection throughlicensing and tariff.

1/ Currently the income-tax rate is 45 per cent for non-residentcompany and 37.5 per cent for other companies.

43

Appendix 1Page 4

10. To be eligible for the concessions mentioned above, apotential investor submits its application to EDB (see para 7) which isa one-stop secretariat for coordination with various govermentministries and departments. EDB appraises the proposal in consultationwith other ministries and department and submits its recommendations tothe Business and Industrial Development Committees (BIDC) for decision.BIDC has representation from most government ministries and relevantstatutory bodies including RBF, PDB and EDB and is empowered to grantthe various concessions mentioned above.

11. There are major constraints on industrial development in Fiji.The small size of the local market, underdevelopment of relatedindustries, the long distance from major export markets and the scarcityof trained manpower are considered to be important factors affectingindustrial development. However, Fiji has several advantages too forindustrial development. It has a stable political climate, relativelylower labor costs compared with its major trading partners (i.e.,Australia and New Zealand), various incentives offered by the Governmentfor new iW estments. free access of Fijian products to certaincountries- and raw materials available from local agriculture andforestry. Therefore, there are reasonable prospects for the developmentof labor-intensive and resource-based industry. As Fiji is heavilydependent on imports for a variety of consumer and capital goods, thereare also good opportunities for import substitution. For example, anumber of garment factories were established recently tocater to markets in Australia and New Zealand and are operatingreasonably well. A large-scale coconut oil mill is under implementationin Savusavu. A large-scale saw milling and woodchip complex will beestablished in the near future as a joint venture between the Fiji PineCommission (holding 51 per cent equity) and-foreign investors withproduction expected to commence in 1987. This project could bringexport earings of F$8 to F$10 milliorL per annum at current prices.

C. Tourism

12. Tourism contributes about 13 per cent of GDP and approximately25 per cent of total foreign exchange earnings. In terms of foreignexchange earnings, tourism is a close second to the sugar industry.While tourism provides direct employment to only 6 per cent of thelabor force, its indirect contribution to employment is significantlylarger. The year 1984 was a remarkably successful year for tourism witha record-breakinig 230,000 visitor arrivals and earnings of F$161 millionrepresenting a 19 per cent increase which reflected a strong recovery

1/ Under the South Pacifie Regional Trade and Economic CooperationAgreement (SPARTECA) of July 1980 among Australia, New Zealand andthe South Pacific Forum Countries including Fiji, certain goodsproduced in Fiji have unrestricted duty-free access to theAustralian and New Zealand markets.

44

Appendix 1Page 5

from the Retback in 1983 caused by cyclone danage to tourism facilities.The prospects of the tourism industry, In the nedimv-term, are good andaccordingly several new hotel projects have recently been approved toexpand the tourist accommodation capacity of the country.

D. The Financial Sector

13. The financial sector in Fiji is well developed and consistsof the Reserve Bank of Fiji (RBF), six comuercial banks and threenon-bank financial institutions. The cnmmercial bAnks include theGovernment-owned National Bank of Fiji (NBF) and five branches offoreign banks: Bank of New Zealand. Westpac, AustraiUa and New ZealandBanking Group, Barclay's Bank International and Bank of Baroda. Thethree noa-bank finmcial institutions are Fiji Development Bank (CDB),Fiji National Provident Fund (FNPF) and the Housing Authority. RBFenjoys a great degree of autonomy from the Government and advises theGovernment on its monetary as well as major economic policies. Inaddition to tLe usual functions of central bank, REF is empowered toissue its own bonds, borrow externally. supervise domestic and externalborrowing of the public sector and fix minimum deposit rates and maximmloan rates for commercial banks. Commercial banks are obligated tocomply with the directives issued by RBF. However, FDB and FNPF areoutside the jurisdiction of RBF since they are established under speciallaws.

-14. Among the six comercial banks operating in Fiji, Westpac andthe Bank of New Zealand are by far the largest followed by the NationalBank of Fiji which accounts for 15 per cent of total commercial bankdeposits and loans. Most of the private sector credit demandessentially for wholesale and retail trade is provided by the commercialbanks which maintain branches and sub-branches throughout the country.At the end of 1984, total deposits with commercial banks stood atF$453.6 million while loans outstanding. advances and bills discountedby commercial banks amounted to F$327.0 million. Maximum lending ratesand minimm deposit rates to be charged by commercial banks are adjustedfrom time to time by RBF on the basis of the liquidity position of theeconomy. The ceiling on lending rates, as of 31 January 1985, was 13.5per cent per annum and the minimum deposit rate of savings accounts was6 per cent per annum.

15. Apart from commercial banks, the Fiji National Provident Fund(FNPF) is the most important institution for domestic resourcemobilization. FNPF was established in 1966 to provide benefits to itsmembers on retirement, death or incapacity. All employers and employeesof the public as well as private sector contribute 7 per cent of theirwages and salaries to FNPF. As of 30 June 1984, FNPF had 73,799 membersand FNPF's total .ssets amounted to F$49.2 million during FY1983/84.Since the current pension payment obligations remain small, FNPF isexpected to remain as an important source of funds. Contributions toFNPF have in_reased by about 66 per cent since 1980 and now represent5 per cent of GDP.

45

Appendix IPage 6

16. FNPF's investment policy is to allocate 50 per cent of itsinvestible surplus to the Central Government and the Housing Authority,20 per cent to public enterprises and 30 per cent to the private sector.FNPF lends directly to private sector enterprises in amounts more thanF$250,TY0 for 10-15 years at an interest rate of 13.5 per cent perannum.- However, due to a recent shortage of suitable investmentopportunities in the private sector, FNPF's investments i¢ loans to theGovernment and public enterprises increased significantly to 63 per centas of 30 June 1984 as against 50 per cent permitted by the guidelines.FNPF is the most important investor in FDB bonds.

E. Financial Policy and its Implications to FDB's Operation

17. On account of its conservative fiscal policy during the 1970s,the Government required only limited financing during this period fromthe banking and non-banking financial institutions and the growth ofcredit was concentrated in the private sector. However, along with thegrowing fiscal deficit and the implementation of large developmentprojects in the 1980s, the public sector required significant financingfrom banking and non-banklng sources. The credit demand of the publicsector increased further in 1983 for the rehabilitation of damage fromthe cyclone and drought during the year. For example, the total publicsector borrowing from FNPF increased from F$108 million as of end 1979to F$325 million as of 30 September 1984. As a reflection of the upturnin the economy, the credit demand of the private sector also remainedbuoyant in 1984.

18. Because of the high elasticity of imports in Fiji, theexpansion of credit put heavy pressures on the country's balAnce ofpayments; and the foreign exchange reserves went qywn to as low as F$84million at the end of the second quarter of 1984,'- which is thelowest since 30 June 1979. The rapid increase in commercial lending in1984, particularly to the non-priority sector has been causing concernin view of the outlook for the balance of payments in 1985 and beyond.RBF therefore introduced a tight money policy from the second quarter of1984. RBF increased the Unimpaired Liquid Assets Ratio (ULAR) from 12.5per cent to 15.0 per cent on 6 June 1984 and further to 18 per cent on 5September 1984. The statutory reserve deposit ratio for commercialbanks was also increased from 5 per cent to 6 per cent effective5 December 1984. At the same time, RBF has continued to stress oncommercial banks the need to give preference in lendinglyo prioritysectors like export-oriented industries and agriculture- . Theserestriictions on commercial bank lending are expected to result in thetransfer of credit demand from commercial banks to FDB.

TT Unlike FDB's loans whose average size is F$20,000, the usage ofof FNPF loans is mostly for large-scale real-estate development.Therefore, FDB and FNPF are addressing different markets/customersand thus supplement each other in meeting the credit requirementsof various sectors.

2/ The foreign exchange reserves increased to F$118 million as of31 December 1984.

46

Appendix 1Page 7

19. In the past few years, the Government has taken several stepsto broaden the country's financial structure with a view toaccommodating the increased financing needs of the public sector. InMarc7h 19£' the system of Treasury bill issues was changed from a fixedprice quotation to a market auction, which resulted in more attractiveyields. In April 1982, two non-financial public enterprises, viz., theFiji Electric Authority (FEA) and FSC, 4=ich had traditionally obtainedloans from RBF, were authorized to issue promissory notes to raise thenecessary funds. In 1984 this authority was extended to the HousingAuthority. To encourage purchases by the commercial banks, taesepromissory notes were made eligible in meeting their unimpaired liquidassets requirements. RBF encourages the flotation of bonds by publicenterprises to help meet their capital needs. FDB, PEA and Air Pacificare public enterprises which have issued bonds. Most of these bondsissues and short-term notes are purchased by FNPF and the commercialbanks.

20. The increasing credit demand from public sector enterprisesand the commercial banks t tightened liquidity position have putpressures on domestic interest rates. The interest rates on savings andtime deposits were increasing by 1.0 to 1.5 per cent and the yields onmost public sector securities increased by more than one percentagepoint between 1982 and 1984. The interest rate on time deposits forF$250,000 or over is negotiable between commercial banks and depositorsand the rate reached nearly 13 per cent which is close to the maximmlending rate of 13.5 per cent in 1984. The maximum commercial banklending rates were raised by 1.5 percentage point to 10.75-13.5 per centin December 1981. This increase was also extended to non-bankinstitutions with the exception of FDB's loans to the agriculturalsector which are still lent at a somewhat lower rate with a subsidyprovided from the Government budget.

F. Suva Stock Exchange Ltd.

21. Suva Stock Exchange Ltd. (SSEL) is a wholly owned subsidiaryof FDB with a paid-in capital of F$20,000. SSEL s.arted operations inJune 1979 to provide a trading floor for shares following the successfullaunching of a Unit Trust in 1978. SSEL has its own independent Board,and maintains its own accounts; however, it is managed by FDB staff onthe basis of a fixed management fee adjustable on an annual basis sincethe limited trade volume does not warrant employing its own staff.

22. The listing requirements of shares at SSEL were modelled onthose adopted by the Australian Associated Stock Exchanges and needsufficient disciosure of accounts of listed companies. Currently.

1/ RBF issued a guideline to commercial bank in January 1982 toallocate 7.5 per cent of their loans to the agricultural sector.

47

Appendix 1Page 8

SSEL's activities are limited to the management of the Exchange. SSELmaintains files of annual reports and releases of listed companies,which are available for perusal by the public; however, it does notoffer any investment advice to potential investors. SSEL's stockquotations are reported daily in two major newspapers published in Suva.

23. The volume of SSEL's share trade for a period of fivefinancial years and six months ended on 31 December 1984 is detailed inthe table below.

IY 9E1ft 30 Jime 1979/80 1981/81 1981/82 1982/83 1983/84 1M84/85'

No. of cmIanflisted 7 8 9 8 7 7

Nb. of sbares issin milicm 34.5 35.1 39.7 35.6 34.0 37.0

No. of sbares tradedin'O00 211.9 61.6 64.8 36.4 35.4 59.0

Value of sbares taedIn F$'00O 190.2 54.5 53.7 40.0 24.3 70.0

a/ Six s from 1 July to 31 Deer 1984.

24. As of 31 December 1984, only seven companies with total issuedshare capital of $37 million were listed at SSEL. SSEL's trade volumehad shown a downward trend up to FY1983/84. During the first six monthsin F!1984/85, there was a sudden increase in trade volume although thevolume of trade was still not more than F$70,000. The Mission considersthat the growth of the share market is impeded by two major factors.First, the public still prefers holding savings with financialinstitutions to share investments. This is largely because of theirunfamiliarity with share investments and the relatively high interestrates offered by commercial bAnks on deposits. Second, most localcompanies are not interested in listing their shares on the Exchange.As of 31 December 1984, there were 48 public companies (companies withmore than 12 shareholders according to the Companies Act of Fiji)registered in Fiji. Some of the public companies could be listed at theExchange if the Government offers adequate incentives in taxation.However, it will take quite some time to see an active stock exchangedevelop In view of the relatively small size of the economy.

F. The Private Sector and Investment Climate in Fii

25. Fiji maintains a basically private sector-oriented economy.The Government's involvement in economic activity and developmentmainly consists of provision of infrastructure, direction of economicgrowth through the establishment of indicative sectoral growth cargets,establishment of incentives to assist the private sector iu meetingthese targets and limited ownership of resources considered essentia'l inmeeting social development objectives. State-ownership and contwr.

48

Appendix 1Page 9

of enterprises is therefore restricted to 68 statutory bodies, most ofwhich are involved in infrastructure activities such as electricity,ports, drainage and other non-profit oriented government services. TheGovernment owns financial institutions such as RBF, FDB, NBF, FNPF andHousing Authorities although the banking sector is dominated by theactivities of the five foreign owned commercial banks. Commercialnon-banking operations owned by the Government are restricted mainly toFiji Sugar Corporation, Fiji Pine Commission and Pacific Airways. Ineach case, there exists some strong market or social justification forthese enterprises retaining Government ownership. The private sector onthe other hand controlled as of 31 December 1984 3,230 private companiesand 48 public companies, most of which are engaged in manufacturing andservice sector activities.

26. Apart from its philosophic comnitment to a private enterpriseeconomy, the Government faces an important finAncial constraint on itsfurther involvement in the ownership of resource. Despite tightbudgetary control, the Government's fiscal deficit has followed agrowing trend during the last several years (see para 17) and underthese circumstances, it is not in a position to extend its capitalexpenditure activities outside of the key infrastructure and supportareas for which it is responsible. Accordingly, the private sectorincluding investors from overseas has been and will continue to be themajor source of industrial and commercial investment funds. TheGovernment provides a range of incentives to private investors in theindustrial sector (see para 9).

27. It has been the Government's policy to maxim-ie foreigninvestments. Fiji maintains an open economy to the extent that foreigninvestments are allowed in various sectors which exclude those whereforeign investment is considered socially undesirable. Foreigninvestors are treated on an equal basis compared with local investors interms of provision of the concessions. There is no celing on theproportion of foreign shareholding in companies; the Governmentencourages joint ventures in order to stimulate local entrepreneurship,however, foreign investors can hold up to 100 per cent of shares withoutany disadvantage. Repatriation of capital which has been introducedfrom overseas sources through the local banking system or recorded withRBF is assured and there are no restrictions on the remittance ofdividends, profits, interest or royalties provided local tax clearancehas been obtained for such remittance.

28. In summary, the Mission has found that economic activity inFiji is led by the private sector in accordance with supportivegovernment policies, incentives and activities. Fiji has a relativelyopen economy which encourages foreign investment and this situation isexpected to remain over the medium to long term.

49Appendix 2

Structure of-Interest Rates in FijiDuring the Period 1979-84

(In per cent per annum)

1979 1980 1981 1982 1983 1984

Central Monetary AuthorityMinimum lending rate 6.50 7.50 9.50 10.50 10.50 11.00Deposit rate a, 3

Commercial banks- 3.00 3.50 3.50 3.50 3.50 3.50Other depositors

1 - 3 months 4.50 4.50 6.00 6.00 6.00 6.003 - 6 months 5.00 5.50 6.50 6.50 6.50 6.506 months or more 5.75 6.25 7.25 7.25 7.25 7.25

Commercial BanksLoan ratesMaximum 10.50 12.00 13.50 13.50 13.50 13.50Average (estimate) 9.50 9.75 11.95 12.84 12.87 u.a.

Deposit ratesSavings deposits 4.50 4.50 6.00 6.00 6.00 6.00Time deposits

1 - 3 months 4.50 4.50 6.00 6.00 6.00 6.003 - 6 months 5.0c 5.50 6.50 6.50 6.50 6.506 - 12 months 5.75 6.25 7.25 7.25 7.25 7.251 - 2 years 6.50 7.00 8.00 8.00 8.00 8.002 - 3 years 7.25 8.00 9.00 9.00 9.00 9.003 years and longer - 8.50 10.00 10.00 10.00 10.00

-blPublic sector securities (yield)-'Treasury bills 5.32 5.57 6.44 6.07 6.63 7.00Three-year bonds 7.00 7.60 9.00 9.00 9.00 9.00Five-year bonds 7.40 8.50 9.40 9.40 9.40 10.00Ten-year bonds 7.90 9.10 10.45 9.45 9.45 11.00Promissory notesFiji Sugar Corporation - - - 7.17 9.45 10.00Fiji Electricity Authority - - - 6.98 7.73 8.00

a/ Paid on statutory reserve deposits of commercial banks.b / End-of-year data.

(Reference in text: Page 5. Para. 18)

50

Appendix 3

Fiji Development Rank

Schedule of Current and Proposed Interest Rate Changes(As of 7 February 1985)

Present (Z) Proposed (f)-/

Agricultural:- Land Development 11.0 11.0

(Subsidy up to $20,000 5.5 5.5- Tractors and Implements 11.5 11.5

(Subsidy up to $8,000) 3.5 3.5- Trucks 11.5 11.5- Housing 11.5 11.5

(Subsidy up to $6,000) 3.5 3.5- Land purchase 11.5 11.5

(Subsidy up to $10,000) 4.5 4.5- Drainage Boards 10.75 10.75- Fishing 11.0 11.0

(Subsidy up to $20,000) 5.5 5.5

Commercial Loans to Fijians Scheme 11.0 11.0.(Subsidy) 1.0 1.0

Industrial Loans (excluding those bclow) 12.5-13.0 13.5

Buses, Trucks and Heav7y Equipment 13.5 13.5

Commercial Loans to Others 13.0-13.5 13.5

Joint Venture Scheme 12.0 12.5(Indigenous Fijians and Non-Fijianspartners, up to $200,000)

Discharge of Agricultural Debts 11.5 11.5

al As per recent decision of FDB's Board of Directors. However,the new rates cannot be charged until the expiry of Governmentprice control regulations in August 1985.

bl The Government provides a subsidy direct to agriculturalborrowers to reduce the real interest cost of FDB developmentloans.

(Reference in text: Page 10, Para. 30)

51 Appendix 4

Fiji Development Bank

List of Members of the Board of Directors(As of 31 December 1984)

Date of First Expiry Date ofName Appointment Appointment Background

L. N. Cupit 1/12/82 30111/85 Previously Chief(Chairman) Executive of Fiji

Ltd., a multi-nationaltrading corporation.Owner of a large privateagricultural develop-ment company.

L. Qarase 3/03/82 2/03/86 Civil Servant in(Managing Director) Co-ops; Finance.

Commerce & Industries& Public ServiceCommission.

Ratu 0. Bokini 13/04/82 12/04/86 Field SuperintendentFiji Sugar Corporation.

K. Buksh 1/04/83 31/03/86 Civil Servant inNinistry of FinanceBudget Division.

T. J. Cornish 12112180 11/12/85 Retired Civil ServantIn District Adninis-tration, now Cobrafarmer and Chairman ofAir Transport LicensingBoard.

N. Drauna 1/10/83 30/09/85 Land Agent with theNLTB. Currently isDeputy General Managerof NLTB.

K. G. Hari 1/06/76 31/05/85 Managing Director offamily diversifiedbusiness group.

E. D. Khan 1/10/82 30/09/85 Business Consultant.Previ"usly worked withCitibank in Fiji andBank of British Columbia.

N. P. Singh 13/04/82 12/04/86 Director of EconomicDevelopment Board.Previously Civi'Servant in Commerceand Industries Department.

(Reference in text: Page 16, Para. 53)

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FIJI DEVELOPMENT BANK

Staff Analysis by Division and Grades(As of 31 December 1984)

I II III IV V VI VII VIII IX X TOTA;

Managerial 1 2 1 1 5Audit & Inspection Division 1 1 2Loan Recovery Unit 2 2National Operations Division 1 1 2 3 2 9Administration Division 1 4 2 1 2 12 22

m Business Development Division 1 2 4 3 10Finance & EDP Division 1 3 1 4 5 14

rt Special Loans Scheme Division 1 I 1 6 2 11R Securities Division . 1 1 2 5 900 Industrial Division 1 1 4 2 8

Agricultural Division _1 2 4 _1 _ 8Sub-total 8 2 9 22 9 32 - 100

Branches::4 Suva I 1 2 5 3 12

iLautoka 1 1 5 3 10Labasa 1 2 2 5

* Seaqaqa 1 3 2 6Ba 1 2 2 5Rakiraki 1 3 2 6Sigatoka 1 4 2 7Nausori 1 3 2 6Savusavu 1 2 2 5Trainees 2 2Sub-total - - 9 2 2 31 - 20 - 64

TOTAL 1 2 8 24 4 11 53 9 52 164

54Akppeni 7Page 1

FMuDVWPE~T BANK

SLATEMET OF OPERATING SUWAEGY AN) CENERAL BUSINESS POLICY

I. THE BAK

1. The Fiji Development Bank (CEB) was established in accordancewith the pvisions of the Fiji Developmnt Bank Arct approved inDecmer 1966, as amrded, as a development financ institu for thedirect support of Fiji's ecncic development. E)B is aa autnrustatutory body with its oawn Board of Directors, whose nbers areappointed by the Minister of Finance. It conducts its activities within

the framwork of the Govemi3t's economic plans, policies and priorities.

II. BASIC OPERATIf S]AIY

2. FDB's operating strategy includes the following primary elmnts:

a. To provide loa financing primarily to agricultral andindustrial enterprises operating in Fiji iu a marier thatwill su t the realizatimn of official natimal econic planinggoals and establish a well balanced lending program in the majorecC%Cic sectors;

b. To take equity participati in business enterprises and jointveures with the aim of eventully disbting of suchparticipatin in suppo of wide participation of the generalpub-lic and institutnal investors i3'. the ownership of business

terrie in Fiji;

c. To contribute to and paratx in the G's econcndcplaning processes;

d. To contribute to the natimnal developmnt process tbroughincreased activity in project itific.tion, detmnation ofproject feasibility and assistance in project 3zpltaticn;

e. To promote the planning and developnt of supervised lendingsches;

f. To review the need for and, where appropriate, to prcxtedevelopmnt of auxiliary financing facilities in Fiji, suchas capital equpxLxent leasing;

g. To fiish constructive business development and businessmanagemnpt counsel to actual and prospective entrepreneUrsand managers in Fiji;

1/ The Policy Stateient was originally adonted by FDB Board in Mrch 1974and was iended on 21 Decenber 1983 folo the rec atis ofthe consultants under the fourth Bank tecical assistance.

(Reference in text: Page 19, Para. 62)

55 Appendt 7

Page 2

h. To collaborate ith and assist other statutory bodiesin the planning and financing of development projectsand enterprises; aid

i. To establish specific sbort and medium term objectives eachyear by major economic sector.

III. SCCE OF OPEPAaTIONS

3. FDB will provide financial assistance to private sector and publiCsector enterprises, i each case against security and/or guaranteeSacceptable to EDB .nagemit, in the following forms:

o Mediun and Iong term loans.

a ShorL term ulrking capital advances inassociatian with medium and lcng term loans.

FDB will also provide guarantees to all classes of enterprise as itcsiders approprate T ad f-hancially sound.

FDB will take equty positi ns in all classes of enterprise with theexpress purpose of subsequantly distributing shares tbus acqpired to thegeneral public and institutional investors. In association with equityinvestmat, FMJB will also underwrite equity issues.

Other related support and assistance that FDB will provide includesassistance to entrepreneuTs and managers in asceining projectfeasibility, in selecting appropriate acconting and contmrl systems,in assessing operating perfo e and in ident appropriate sourcesof furtber external advice and assistance.

FB will actively promte the estlish t of new projects and thefonilation of enterprises iJn collabration th the Economc DIvelopzentBoard (EDB), other statutury bodies or subsidiaries thereof, Governmstagencies and private o anizations.

FlB's operations will be based oa the followig setoral considerations:

A. Agriclre

4. FDB w3ll make loans to individual farmers, farmers' cooperativesand corporate entities. In extending such loans, FDB will give priority todevElo!mental projects in agriculture and to supervised lending scbemes.

5. FDB may provide fmance to assist in the acquisition of agr-cultural land where this is in support of agricultural developmentprojects. FDB wkill give priority in relation to the purchase of fishingvessels and eqmipnint to those projects which have good prospects forexpansion and development in the fisheries field.

56

B. Industry and CamSexce

6. FDB will make mediun and long term loans for ivesmmt in fixedassets and to meet pernent worldng capital requiret-s in industrialenterprises. It my s t such assista by providing short temadvaces to cover t y w g capital requiremnts.

7. FDB will make loans to al enterpies for the acquisitimnof fixed assets only.

C. Industrial and e ia loans to Fijians

8. To give those of Fijian race better pornity to engage inindustrial and camril activities, FDB will extend medium and longtem loans to Fijians in catectici with viable indistrial and camlrcialprojects and will provide workdg capital adances for such projects.These loans will be exteded mn a cncessioay ts and, in cases whereGwerrmit guarantees are applicable, with reduced sec=rity reutiremts.FDB Wil aso finance ca the sme terms joint ventures betwe Fijiansand no-Fijians where Fijians are the effective beficaries of not lessthan 25 per cent of the equity of such venes.

IV. WHERM POLICIES

9. In providing assistance, the Bank sball give preference toentrises which will:

(a) ccute effectively to b dg the basis of local,

(b) reduce ince d ties;

(c) utilize doeEstic raw materials;

(d) have a high export potential of inprt substitutio;

(e) make use of labr intensive tecbnologies;

(f) introduce new tecnologies;

(g) cotrP to a diversifiatim of the econony; and

(h) create opprtuities for the small emerging eitrepreneUrs.

57 7Page 4

V. GENERAL }PICIES AND

10. Financial assistance wil be provided cly for projects whichappear to be ec a ally and ially viable and finnAllyprofitable. Special attenti will be given to the quality of ameno the ente and mwrket prospects of the f project.

11. Applicants requesting financial ass ce form FDB shal berequired to suhnit the project appication in writing. FDB may provideassistance to loan aplicants as follws:

a. Assistance in the E tion of project speficatand feasibility studies;

b. Referral of applicant to acperts ond/or soumes ofinfortimn relating to teir projects;

c. Advic and assistance in the selectio and installation.of appropriate accunting books and recrds and related.oeting controls; and

d. Initial gidancein the atia i of periodic statentsand reports.

12. Applicants shall be reqired to finance a reasonable porticn ofthe total project cost fr ther am resouces to ensure that the totalfinancial ie ts for the successful imlemetationn of the projectare available.

13. Ioas wi be disbursed taldg into accont the prcmter's aufinancial contribution against proper doctwtatim and in line with therequireamits of the iuvesammt schedule of the project.

14. FDB shall appropriately servise the use of its funds, theprogress of the project financedr and the perface of the enterpriseand ensure that remedial action is prap-tly taken if andwhen problemarise. When necessary, FDB will endeavor to provide the necessary servicesto such enterprIses or it will refer them to oth appropriate and availablesources of assistance.

15. The repayment period of loans, including grace period, will bede in accord with the nature and individal circamtaices ofthe projects.

16. Th1e financial assistance frmn DB may be used to cailt thatof other lenders. ln cases wbere the requested financi assistancee,reeds the limits of the Bank's lending capacity, the Bank may considerjoint financing ar ents.

58 Appendix 7

Page 5

VI. FINACIAL DEN

17. The rates of interest applicable to the various types of loanswill be determined and reviewed by FDB from tinme to time, in the lightof development in the capital market with due consideration to the costof the FDB's cwn borrowxrbgs from dcmestic and other sources.

18. FDB will secure its loans by appropriate collateral coverageand guarantees from its borrowers, in accordance with sound bankingpractices, but in doing so the Bank will have due regard to its develop-mnntal functions in tne Fiji economy.

19. The Bank wi not carry the foreip exhang risk on its debtsrepayable in foreign debts repayable in famign currency. In the eventthe Governmeet or its agEncies are not prepared to bear the fc!reiga

ehang risk relating to its (FDBs) repayment of dabts in fozei4p currencysuch as a risk will be passed on to the Bank's borrowers.

20. Except for the purpose of safegparding its irwestment, EDB wilnot seek a controllin interest in any enterprise in which it basinvested. FDB will not nally papate directly ca a daily basisin the - at of an enterprise in which it bolds equity interest,but it woud expect to nrionate repstative as members of the Boardof Directors of the terprise to safeguad its interests and to contri-bute to the success of the entrprise. As a rule, the FDB's equity parti-c:ipaticx shall not exceed twenty-five percent (25%) of the paid up capitalstock of an enterprise. In the case of joint ventures and seleted projectsdeemed to be of naticnal inportance, FDB my invest in equity participationup to 49% of the paid up capital stoDck tbereof.

21. FDB's equity investamnt shall serve mainly as a catalytic agentfor the establisibmat of new enterprises and will normally dispose ofsuch equity investzits as soon as this becomes ferasible and a fairprice caa be obtanied tberefrm. In all cases, FDB wi nmke every effortto dispose of such equity inwestnts vithin five years of its date ofacquisition tereof."

22. FDB will not norlly caoit to a single enterprse, in the formof share capital more than ten per cent(lOZ) of its unipaired paid-incapital, earned surplus and resermes. The total equity ivestents ofthe Bank shall not exceed, at any tinre, the aggregate am. mt of its oamuni=paired paid-in capital, earned surplus and free reserves.

23. The BVnk's total conuitments in any single entrpise in whateverform, i.e. loans, equity participations guarantees or a conb,inatimnthereof, will not normally exceed fifteen per cent (15%) of the s.um ofits uiinpaired paid-in capital, earned surplus and free reserves.

24. The total ccxntmEntt of the Bank in any single non-agriculturalenterprise will not exceed at any time 65Z of the total assets of the

59

App& 7Page 6

etrise inluding tbe Banik's Om investment. This limit may go up toeighty per cent in t projects Meritng speCal considertn. Foragricultural projects the Bank's total conmtment will not exceed eigbtyper cent of total assets exept for projects meritig special consideratimwbere an leale ase of land is an essential feature. These limitmay be exceeded in cases where the loan will be adequately secured becamseadditional securities over assets not foniing part of the project areavailable.

- 25. In the case of o rial Loans to Fijians, there will be nolimitatin on the loan to be provided, the sole detning factor beingthe Bank's assessment of the nc, tecical and ma t viabilityof the project.

26. In view of the risks inuolved in long-term financing the Bankwi exercise prudence im debt so as to uintnain at all ts awell-balanced financ-ial strutUire. The Bank Wil limit its bo ng toensure that its outstandi long-tr debts at ay time shall not exeedthe e alent of three (3) tinzs the sum of its inpaired paid-incapital, earned surplus and free reserves.

27. In mnagim its portfolio, the Bank will endeavr to diversifyits loa and imes in terms of type of industries, location andsectors of industries being financed.

VI. ACCOT ING

28. The Bank will meit accunting records adequate to reflect itsbusiness operations and affairs in ac e with generally acceptedaccountig principles and standards.

29. The Bank will engage a qualified and e ptiblic accountanto audit its books and accomts every year.

30. Tie Bank wil anually make appropriate allocations to a provisionfor protectio against bad debts and iesets in line with sie andqualit of the Bank's loan and equy portfolio until such provision equalsfive per cent (5%) of the Banik's portfolio. PDB shall transfer all its netportrolio or reserv fund until such reserve equals 50% of FDB paid-in capital.

VI. REVISIM, OF POLICE

31. Tiis Statement of General Dusiness Policies has been approved by theBank's Board of Directors; any revision of the Statezt sball reauire the priorapxnmrl of tw thirds of the MEimbers of the Board of Directors of the Bank.

60 7Fage 7

FM rI ZEUPEN BARK

POEICIES C(N ~3E!D] FS=A1

GEL POLICIC

1. The Fiji Deveo nt B Act prowides autiority for the Bak toinvest in stocks, sbares, bonds and debentres issued by ccmpaniesand other specified institutions. In general it is Bak policy totake up equity in new and e3dstirg projects ihh cbaiealeeccmic benefits for Fiji and wbere the proponents cannt raisesufficient equity capital es. n addition the Bank basprchas.ed share held by foreign itexrests in Fiji-based capanieswhich are of national oac.

2. As a general rule the Bank's equity would not exceed25 per cent of the paid-up capital of the recipient cpy.

3. The Bank's assesmet criteria for equity ints are the sameas for loan proposals: finanial viality and ecaarmic benefitsare the inportant factors.

I" TJEIE3 HED BY FIJI rEVEMR BA AS AT 31.03.84

4. The Aex of tbis paper gives details of shares held by the Bark.Tn additign to this list, the Bank has recently a U,419shares in Barns Philp (SS) Ccxpy Limited at 1-80 per sbare.

5. The Bark made its first equity inut i iji Indhtries Limitedin 1969. Since that time, the Bank has not been particlarly activein this area of ivestnmt. it is also cleth thatresources rave not bena allocated to support a virus equityinvestu~t programz. This aspect was h by the 1983AIM review of the Baik.

6. Based am our erice to date, equity fnacing, prticully in- private has been kept on a fairly low profle for the

following reasons:

(a) FJOB could lose its indepedence as a 1 to the ccalpnyi.e. having committed equity partica in the capany,the Bank could be swayed to assist the capany with new oraditional finance aginst its better judgut. Also, irdiffiult times, the coany could leaa beavily am the Bankto solve its financial probles.

Cb) MB may need to appoint an e ren d officer to the company'sBoard and this could create a lot of mcessary iuvolvementand.perbaps result in p ctive tie being lost to the Bank.

1/ Adopted by FMB's Board of Directors an 31 May 1984.

(Reference in text: Page 12, Para. 38)

61 _

page

(C) Being a minor sbareolder, FM wil bave little control overthe ccpaay in so far as decision makidng is cocxerned and aswil as the day-to-day ruming of the business.

(d) The prospects of dividend payments is usUlly lw and it isndezrstood that FDB wvoulddispose of its in t once the

caip my beccms profitable. Hence, guaranteed steady returnon i !es1t is doubtful unli.ke pridingloan finance forwbich we are assured of a definite reu o invetment.

I1PCKrANCE OF E(=Y INVESDM

7. Equity investnent is considered an essential finction of a develnpmentbank. There are ocs wh ere it is not sfficient to provide loanfinance only becamue the caipany is ime d-capitalised. Pence, amixture of equLty and loan finance May be the appropriate answer to aproductive development project in such economic sectors as manufacturirng,forestry, miniTg, tmrism, engineering and agro-industries.

8. Ur re, the Bark's equity imIestts can assist to bring togetherdai~stic and foreign investors in joint ventures, as w1 as helptransfer the man and tectlvical skills bich uslualy accompaydirect fori4a ines ts. In additim, a nnre active role ineqity imwet by the Bank wil faci1itate th de ofdcmestic capital matrets and assist in iuzroving the investmentclimate in Fiji.

1NVES~FI WDRCAST

9. The ADB forecast of MEB's equity iuvestment activity over a fiveyear period is gLven as ruder:

Fiscal Year 1984 1985 1986 1987 1988

Opening Balance (F$'000) 790 900 1200 1500 1800

New Equity bnvestmnt 210 400 400 400 500

Disposal (at cost) 100 100 100 100 100Closing Balance 900 1200 1500 1800 2200Realised Capital Gain 100 100 100 100 100

The above figures suggest mxch r actime role by the Bank inequity investments.

EQUIT

10. Manag t supports the AEB view that the Bak sbould be unre activein the field of equity istmen t. Directors will recall that intbe recent re izatio of the Back a new Equity Tnvesmnt Depatmhas been established within the Ind-til tivisiv . Thei1 BakTs

62 7Pageg

general policy on equity inestwent is broad enough and has theflexibility to allaw it to be mure active in this area of activity.However, some glidelinps need to be establisbed.

11. It is, therefore, reccxuiwded that the Bank should have a uDreactive role in equity invest under the foll.uing guidelines:

- a,jectives

* To provide equity funds not otherise available for new andexisting EijiLbased companies engaed in ecanczdc sectorssuch as na tn, forestry, tolri, engine andagro-nistries. The projects must be financilly viableand eccmdcafly beneficial to Fiji.

* To acquire shares beld by foreign interests in Fiji-basedventures which are of national inpoance.

Fuind

* An a.int of $200,000 will be avaiable annually to financethe scbeme.

= The Bank's total IlveME:t in equity investme= be linnitedto 10 per cent of the Bank' s paid-up capital oiatedprofiEs and free reserves.

* Normally, nDt re than $25,000 will be inuvested by way ofequity in any one venture.

= Ioans wil be avalable in additim, in acordance with ouresting policy.

FMB's equity wold not normally exceed 50 per cent of thetotal equity and preferably not i re tban 25 per cent.

* l;vestments beyond 25 per cent would generally be acaniedby insistence on Board reprsent.

* A chartered aconant acceptable to the Bank mist be egagedin al cases to handle the books of the terprise and report6 monthly on the business. klm2al accomts mst be adted too.

* The Bark's equity would be available for sale to the othershareolders or their naninees (or in cases 'were a widershaeholding is considered, to outsiders) at our valuationonce the cany is establisbed.

* The Bak's approval would be required for all salary, dividendand other payments/benefits to sharebolder or their famiies.

12. The purchases of shares held by foreign interests in existing Fiji-based cczpanies be assessed on. a case by case basis.

63 Appdix s

Fiji &B_lcom Bf

smmiww of Qmeram

_ _ tF~~~~~~~~~~~~~~~~~~cS'000)NGeas: 199di1d 30 .1ate _ 196O8 1982 1982/83 * 913/84- 15..)Year ~ ~ ~ N /ra 30i Jun li - N. hwh

-~ u

,pp l 11 * 1.473 7,9I1 2.059 8.665 1.590 6.646 1.950 8.367 629 3.149I Xmbaruuutu - 8,003 - 71SO - 6,536 - 5,839 - - 2,858aMts 2/ - 5,311 - 4.978 - 5,38B - 5.493 - 2,187

: ?inadfrg~/ 4,563 22,S56 5.093 27.55 S3 3L.416 5.810 35.26 5.964 53.189

206 7.029 195 6,732 235 7.943 243 11.779 329 7.266Fd1aLarasutn - 5,33} - 4.113 - 7,270 - 7.472 - 5,614Iincpmmnt 2/ - 5.1R8 - 5.584 - 5.894 - 7.336 - 3.506Owutruidiz3[j 529 18.447 573 20.326 622 24.656 679 27.895 7,5 32.445

srdaL Tn.. to F1j1iAppcOvnls 403 1.938 410 1,403 342 1.562 332 2.499 205 1.021DLdru. w _ ,.--- 1,430 - 1,177 - 1,501 - 1;199 - 878Rpaymines 2/ - 1.S23 - 1,313 - 1r545 - 1.639 - 368orrkrAnalnif 1.114 S559 1.057 5,617 2.029 5,884 1,035 7.033 1.113 7.499

Staff iT.wApptoval 240 408 217 555 239 464 268 459 162 533rmabzm n,ct - 398 - 565 - 358 268 452 - 316Fgpa)mmt 21 3/ - - - - - - - - - -

165 726 180 936 206 1,351 210 1,577 328 1.857

TotaBl e-w %mcat ry- PLVMUS 2.322 17r273 2,881 17,3S5 2.406 16,615 2.793 23.104- 1.25 11.968

- 15.164 - 13.005 - 15.665 - 14,962 - 9.666- 11,942 - 11.880 - 12,827 - 14.468 - 6.S61

Otatuadfry/ 6,370 47,228 6.903 53,934 7.179 63.307 7.734 71,761 8.160 94.990

4Snxrnsl - 70 -- - 45 - 100 4 4,318DL- *-bu _rs mtc 70 - 45 - 100 3 4;Z3Dlvidoru and sale prcm - 10 - 28 so - 3 2 541OsCbSntaig 14 ES696 3 868 11 833 U 930 - 5.466

1i bdig principal. hteut md otlw durgs./ ktg 1983/84 ma addltinl S185.2 .&Illn mm admcud to Fiji S* m

ru assit w.rd zbLlcatim of cm P3 ad _ednwy dC llm Oww C wing 198k3

.3/ Rqaa).ncs Incle in mcml of _da1 loMui to F1jai.

(Reference in text: Page 21, Para. 68)

64 Appendix 9

Fi.i lvkt UiAulysl of Lam Apwrals by Sectors and by PagIai

(F$'(XD)

1980/81 1981182 1982/83 1983/84 1984I85(6Bws)Year Bided 3D Jie No. h No. hAmmt No. Amut No. A ,zazm No. Aont

Beef 86 812 92 946 48 294 62 526 21 156Dairy d Pip 32 310 34 254 45 707 38 408 16 204Fruits and vegetables and rice 216 1,732 429 1,813 545 2,111 520 2,433 156 1,002Poultry 14 175 20 199 14 451 16 256 5 78Sugarc - Seaq pa 189 1,255 76 999 74 494 i36 891 262 1,142

- otber arm 578 2,150 1,062 2,710 5B4 1,669 829 2,761Fiskhn 237 426 261 930 232 600 320 825 150 1,70Otbers 116 778 91 697 46 291 36 234 19 96ner= o Bond 5 290 4 112 2 30 3 33 - -

9ub-Tota1 1,473 7,918 2.069 8.660 T1,90 6,647 1,950 8,367 629 3,148

Ixxhzstdal/Service Sector T a/

Thibbr, MBnfdng & QuErrySsg 31 2,045 14 227 21 729 23 767 10 95684 2,753 74 3,327 85 3,389 78 6,051 63 3,136

* }nstruedax 36 973 28 1,122 20 994 19 1,498 8 1,135Turism 17 519 14 210 11 839 12 398 6 300t _B I;! I gm 245 1,997 233 2,203 200 2,270 179 2,216 74 539

InanmU ll T 195 635 185 922 231 1,264 262 3,334 170 2,211investment 1 25 57 124 9 19 2 14 2 11Su-Total 609 8,947 605 8,135 577 9,504 575 14,278 333 8,28Total ftpwu3ls 2,082 16,86 2,674 16,795 2,167 16.151 2,525 22,645 962 11,436

C401we_cial loans to PL UM

Thtler. Minlgmd f4m=yft 12 342 4 50 6 152 4 134 3 259 126 5 20 6 164 9 140 12 ,L525 85 7 59 - - 4 161 - -

Tawim 7 6 8 19 5 11 3 9 2 2174 699 171 604 111 401 90 419 52 243195 635 158 527 205 815 216 1,104 131 519

Ilvestiiat 1 25 59 124 9 19 2 14 2 11Su-Total 403 1,918 4110 1.403 342 1,562 328 1,981 202 952

Suva and East Viti levu 592 5,165 713 7,063 729 7,561 704 10,621 363 4,686West Vii laew 787 6,920 1.459 6,269 925 5.142 1,075 7,695 271 3,937Vam Ievla 703 4,780 592 3,463 478 3,327 600 3,698 248 2,282Outer Is s - 35 121 146 631 80 531

Total Aprovals 2,082 16,865 2,674 16,795 2,167 16,151 2,525 22,645 962 11,436

a(Referelc i /n te t: age 275

(Reference in text: Page 23. Para. 71; Page 24, Para. 75)

Fiji Development Bank

Analysis of Loan Approvals by Loan Size and Maturity

WF$000)6 mos. to

Year ended 30 June 1980/81 1981/82 1982/83 1983/84 31 Dec.1984No. Amount No. Amount No. Amount No. Amount No. Amount

t Agriculture

2 Up to 1,000 479 286 686 411 616 378 693 425 225 134m 1,000 - 5,000 581 1,599 1,036 2,520 674 1,666 825 2,191 220 561

5,001 - 10,000 236 1,665 207 1,424 180 1,296 266 1,881 106 75310,001 - 25,000 158 2,355 109 1,670 96 1,543 140 2,105 67 1,018

rt 25,001 - 50,000 12 434 11 485 14 560 16 549 6 21250,001 - 100,030 4 339 3 230 6 409 8 498 5 470Over 100,000 3 1,240 7 i,925 4 795 2 718 _ -

Total 1,473 7,918 2,059 8,665 1,590 6,647 1,950 8,367 629 3,148

n~ Industrial & Commercial

W. Up to 1,000 192 113 208 157 148 107 132 81 70 381,001 - 5,000 147 405 162 446 180 464 192 517 117 3405,001 - 10,000 103 761 87 633 97 731 80 610 40 309

* 10,001 - 25,000 85 1,403 89 1,021 67 1,028 61 953 41 694> 25,001 - 50,000 49 1,871 28 1,035 35 1,308 46 1,682 25 960

50,001 - 100,000 24 1,891 26 1,739 32 2,315 35 2,574 23 1,679Over 100,000 9 2,503 15 3,099 18 3,551 29 7,861 17 4,268

Total I09 8,947 615 8,130 577 9,504 575 14,278 33 8,288

By Maturities

1 year 323 513 300 649 298 497 - -1 - 2 years 423 733 404 793 398 774 311 5613 - 4 ye.irs 819 3,133 596 3,451 712 3,204 287 2,681S-_ 9 yeatrs 920 4,899 715 6,378 851 8,100 247 2,584 mJvLer 10 years 189 7,517 152 4,880 266 10,070 117 5,610

Total 2,674 16,795 2,167 16,151 2,525 22,645 962 11,436

Source: FDB

66 Appendix 11

Fiji Development Bank

Actual and Projected Operations(1983184-1988189)

(F$'000)Actual Projected

Year Ended 30 June 1983/ 1984/85 1984/ 1985/ 1986/ 1987/ 1988/1984 (6 mos.)-= 1985 1986 1987 1988 1989

Loan Approvals (Net)Agricultural loans 8,367 3,148 7,380 11,300 12,900 14,800 17,000Industrial/Commercialloans 11,779 9,415 13,000 14,400 17,200 20,600 24,700

Industrial/Commercialloans to Fijians 1,981 952 1,620 1,780 1.950 2,140 2,350

Joint Venture 518 70 1,000 1,050 1,110 1,190 1,300Total Approvals 22,645 13,585 23,000 28,530 33,160 38,730 45,350

Loan CommitmentsAgricultural loans 7,065 3,112 6,358 9,786 11,178 12,807 14,706Industrial/Commercialloans 9.219 7,200 12,865 12,096 14,482 17,316 20,754

Industrial/Commercialloans to Fijians 1,707 931 1,522 1,572 1,724 1,891 2,077

Joint Venture - - 720 936 988 1,055 1.150Total Commitments 19,816 11,243 21,465 24,395 28,372 33,069 38,687

Loan DisbursementsAgricultural loans 5,839 2,858 5,915 9,264 10,620 12,155 13,945Industrial/Commercial

loans 7,472 5,598 12,019 11,395 13,367 16,011 19,298Industrial/Commercial

loans to Fijians 1,199 878 1,558 1,561 1,693 1,856 2,039Joint Venture - - 576 892 977 1,041 1,131Total Disbursements 14,962 9,334 20,068 23,112 26,657 31,063 36,313

Staff LoanDisbursements 452 316 400 150 160 170 180

Equity InvestmentsApprovals 100 4,733 6,318 200 200 200 200Commitments - - - - - - -

Disbursements 100 - 6,318 200 200 200 200Total 200 4,733 6,318 200 200 200 200

a/ From 1 July to 31 December 1984.Source: FDB

(Reference in text: Page 24, Para. 78)

!!j.L.p~~~velo sent DanokActual 4a 4i1~iZi1a t&mntts

-etual Proeceted P--j-c--

(6 sooto

Year ended 30 June 1980/81 1_81/82 1982/83 953/154 19S4JS5 1934/8; 1985|96_ 1986/87 1987/68 19681/9

IneovIneerei - client loans 4,523 5,576 6,452 8,055 4,709 10,230 12,U 6 13,876 15,586 17,667

- staff l:^an 39 55 83 s9 47 140 151 154 157 161Fee and comissiocu 112 146 149 152 72 211 199 232 271 317Divideands 66 104 a5 167 32 172 124 135 147 161Roets 291 286 290 298 141 282 258 258 258 258other Incose 60 33 63 35 322 351 40 50 60 70

Total. IAcoNe 5,0 6 7,122 El!! 5.311 l l3,16 li,705 17[aRiO L.

IV ri Interest 2,666 3,069 3,469 4,649 3,132 6,229 7,159 8,130 9,206 10,584p n Salaries 966 1,054 1,283 1,510 857 1,806 2,167 2,200 2,400 2,500

.,. Depreciation 78 77 76 162 as 192 198 193 189 184Directors nees 4 12 14 16 e 17 Is 19 20 22

0 Advertiaina 5 4 9 e 30 25 30 33 35Professional services and unit 17 25 L 24 20 40 43 4S 52 55

> WB ttilitiea 13 i5 17 15 15 32 35 40 42 46iotor vebicle. "lpense 44 56 70 52 23 56 60 62 65 69

rt Raparsr and Kaintenance (includiag properties) 55 66 61 75 S! 99 103 110 ils 1230 Travel and entertanaeUt 56 72 72 52 46 92 99 106 109 113r t EDP/Coupucer/Word processing 26 2S 26 30 38 55 50 46 46' 8

Publicaticoes printing and etaticoary 29 29 31 37 16 47 49 52 56 62Studies 3 7 4 4 9 32 42 46 49 51

I'd lasurance I7 24 22 23 14 27 30 32 34 37Telepbone, poetage and cables 45 45 47 56 29 13 75 78 60 G2 eJDSC - electricity 75 97 82 67 40 104 105 108 112 115 4

- repair and *i ntsaesne 36 21 39 19 21 32 33 35 36 36w - I au ance an4 othere 62 8? 81 94 43 97 96 100 105 106II General (othero) 63 62 70 91 14 57 63 67 69 71

Total expencse 4,0 s 3|No8 7,015 , D0 E 1TU 12,826 14.61i

Surplus of lacoe over enpenee. 599 1,331 1,634 1,761 691 2,279 2,763 3,201 3,672 3,991'1 Lees: Provision for doubtful debts 263 531 756 867 2 111O 1.290 1.116 1,193 1 274

HoYt operating Iacone o 6 0 0 J S 94 U0 1 -- "I 2 S 10 Patios

Return eo aquity (%)1/ 4.53 5.34 4.60 3.51 6,05 3,58 3.86 5.04 5.49 5.41Recurn oan qutty tefore provioti1s (S)/ 6.82 8.69 6.35 6.91 6.06 6.96 7,23 7.73 8.13 7.94Raturn oo lons term capital (%)&/ 7.07 7.27 7.13 7.10 8.4 7.37 7,50 8.05 6.37 6.47Return an lendlna operationa (f-fl 10.53 11.13 1ill) 10.83 10,45 11,04 11.82 11.82 11.94 11.95Neturt or overall operttions (2)1 11,53 12.05 11.95 12.!0 11.- 11.64 11,63 11.67 11.34 11.99Cost of botrowins (2)'/ 7.96 8.11 8.37 8.53 9,66 9.20 9.31 9.50 9,75 10.56Cross argin from lending operationst ()/ 2.57 3.02 2.73 2.00 0.77 1.64 2.51 2.32 2.19 1.39.et KergIt froM oeerall operations ()- 2.03 2.59 '.75 3.44 1.89 2.33 2.43 2,56 2.63 2.57

Opeetings expeuses to average loam and investentportfolio (U) 3.47 3,46 3,40 5.31 2.67 2.94 2.90 2.68 1.60 2.A2

A/ Net Inct:e to azterse *q4Ly.i/ Net incese plus not provision for doubtful debt to averase vqsity.cl Scc incoze plus I!ceresc paiJ to averase long term debt and lveras;c eclty.

71 Income from lertUsr opersttUns to avernae loan pcrtfoE1'.c! inc::* fr,n lezL:d oper !:ns and inv,n?vnt snd c:her Inc4e to &Iv:%ac can knd e;uI" Invest:enc r W:aola.T, interest on bItrrvirgs co . Ver3e bOrrWvs,.,A.

1, nc- : pceo.| iar fe po?ticl:e -. zncert: .n ?rrr:wt-n. (V!lCC :'!' 4T.h1. ?.s:a: i.::-.e, a^ t pilrcs.t: ..eof c earjba t: :. I.n .J :,w.,:n: :J:e:t: ..Gd zt13tir.1 apontes 39 a par:ar:ijo :! everJge

68 Appendix 13

rSu DeaILGment Sam

30 un (ACtuA) 31 Dnc. 30 Jut'. (Crnolactuu)

As of 1910 1291 16"2 1963 1SM 194 196 1981 1987 1958 1969

Currnt Asset.C_h and 1epait 2.29 2.506 1.40 421 3,052 - 2.150 1.376 2.796 1.396 511Ltw_ reeivable. within

one yewr 6.369 9.345 12.452 13.357 14515 17.54 20.570 24.650 27.352 31.355 35.396Sundry 102 319 214 152 26* 931 3S0 400 450 460 470

Sub-total 1 WS i.i- .13.930 17.33 1.4 23.070 26.426 31.09B 33.211 36.377Portfolio

Agriculturai loan. 15.563 22.556 27.255 31.416 35.256 37.6B9 39.U43 45.507 51.494 57.877 65.798LOdmtri and Corceal

loan 14.967 1347 20.126 24.656 27.895 32."S 3X.02 41,96 49.430 57.893 68.669Loa. under iji. Schiem 5.375 5.509 5.617 5.U84 7.033 7.499 6,344 10,330 12.421 14.623 16.680Loam under FSC - - - - 15.200 15.50 15.50 12.700 9.400 6.500 3.400Staff loae 519 716 936 1 351 1 7*1 1 857 1 .1 1 911 * 9 1. 995 2 067

Sub-totl 39@ 53T= ZWff W.W i7,fI3S 9 rWWi 110.60 112436 1r24.594 136.893 156.794Less: Seceivable

wLthin one yer 8.369 9.246 12.452 13.357 16.515 17.542 20.570 24.650 27.852 31.355 35.396Loam rcelvablw. afterone yeur 31.075 37.380 41.652 49.950 72.630 77.44 80.0o0 *7.786 97.042 107.536 121.398

Equity Invaatuants 867 04 a62 33 96 5.434 7.019 7.189 7.349 7.499 7.639flnad hAats 2.23 2.320 2.279 5,3U6 5351 5.3Zl 6.011 6.019 S,571 5.728 5.4e9

TOtal a U9S S3,79 S6.710 70.0M 96.712 106.679 116.180 127,420 141,160 IS3.97b 170.903

LIABILMTES

Currat Liabil utl.Craditerno ad acicwa

dharou 810 U3 622 1.039 1.297 4.037 550 *50 300 S0S 1,300Term borrwlnp due

wilthin oea yer 263 734 69 4.356 5.lbl 2.403 Z.755 4.156 3.056 9.856 10.009Dne to oubaidiarLu 6 37 27 22 35 27 27 30 3J 36 35leuegve for _zchUng

Iluctuatlins 244 95 51 120 248 245 248 248 248 248 248Amm_l ad long ervice 65 37 106 140 We7 167 16 170 173 176 179

S tatal 1.350 1.536 1.67 5b.79 6.903 b6.U2 4.047 5;4S4 4.30i Il.12i 11.i74Lo,,-Te abil tiaM

Borrowlngm ftur AM 1.076 1,034 695 749 6O3 604 S48 2.172 5.531 7.058 6.850Sarrowvtig frm LORD .2.77 3.029 3.06b 3.107 Z.969 2.850 2.731 3.448 5.235 5.584 5.155FIU Sonde 16.000 21.000 24.000 2 *.00 41.232 47.350 53.011 56.911 60.903 65.235 75.755Borrowing. fru UIB - - - - - - 400 1.600 2.800 4.000 4.09DBorroing. ftroam F 7.150 9,60 9.650 9.650 15.650 1S.650 15.650 15.060 15.650 15l.50 15.650Othar: 9EEC 167 361 726 751 604 604 604 604 604 604 604

C/lDank I.663 1 .78 1.207 650 04.4 441 438 12 2S 17 9Sub-tOtdl 30.333 36.52 9.54' 43Y307 6.962 b7.499 fj;J32 10.417 90.7411 9e.151 IB.;OZiLess: Men within 263 736 659 4.35 5.161 2.403 2.755 4.156 3.056 9.856 10.009

one yuerProvision for daubtful debts 1 I" 1.S29 2.201 3.210 4,31 4.b20 5146 I JBL b 7' 161 7.96

sub-total 3i1 23; 7.47 41V93 6O2.159 61.1)1 69.71* 7S 773 i2.131 94.130 VI.GS6 IOb.Ol

CANITAL AIID VSKIVS

Capital IO.SS7 11;557 12.711 14.ffl 20.4118 20.9S8 26.986 20.9W1 z9.9"6 31.iS11 14.911rrptLy rvelmaLlw r_e 441 4"4 41 3,516 1.515 1.5nA 3.8IS V1.78 3.51w 3.115 3.5J8Centing_ey r 743 963 963 96 3 963 9b 3 9 63 9 63 963 9e3Retained earnip 620 1.035 1.635 2.769 l. 2 4.5 4.631 ,0 8.9I 10.870 13.581

Total Capital ad Uasrv1 13.990 l .S 22.261 2.10.01 3 .160 19.J51 42.920 47.199 S3.116

Teal IubilIti. nd Snqilty ".945 53.279 5S.710 70.099 96.71Z 100.679 116.150 127.420 141.310 153.976 170.903

RationDebt:Equity! 71:29 72:26 71:Z9 b6:34 68:32 69:31 67:33 67:33 b18:3Z 67:33 67:33

2.45:1 2.62.1 2.48:1 1.95:1 2.16:1 2.24:1 2.02:1 2.02:1 2.11:1 2.07:1 2.03:1Curret 7.97:1 6.90:1 5.44:1 2.45:1 2.5:1 2.68:1 5.70:1 4.85:1 7.22:1 7.99:1 3.09:1Provislon for doubtful dabts/Total eutatnniug leone (2) 2.95 3.24 3.40 5.07 4.95 4.8b 5.11 5.22 5.15 5.15 5.10

a/ A)er Table 4 in remt.

(Reference in text: Page 32, Para. 92)

Fiji Develot BhnkActual and Projected Cash FlLw Statennt

(F$'cE0)

Actual } ,, -rowitedYear ale 30 Jue 1980/81 1981/82 1982/83 1983/84 198485-' 1984/85=' 1985/86 1986/87 1987/88 1988/89

Sourcest Net profit before payig interest 3,302 3,889 4,347 5,543 4,021 8,338 10,022 11,273 12,433 13,901m Increase in provisicos foro - depreciation 78 77 76 162 88 192 198 193 189 184n -doubtful debts 365 679 1,056 1,102 308 834 724 568 723 835m E- hcri*c c/ (49) (44) 69 128 - - - - - -0 Sale of euty investment 33 42 74 35 197 197 30 40 50 60rt Cient loan repsymets / 7,380 6,299 6,292 6,324 2,80M 6,963 11,476 14,359 16,741 18,692

Available for debt serviclng (A) 11,109 10,942 11,916 13,294 7,419 16,524 22,450 26,433 30,135 33,672Increase In capital 1,000 1,154 2,240 5,537 5C0 6,500 2,ao0 1,000 2,000 3,000Dr&*awn of loag-tezm debt

S - foreig 260 332 346 - - 400 3,890 6,696 4,440 724m _ ^inoatic 6,793 3,222 3,650 22,629 8,337 16,230 5,900 7,792 7,630 21,025w Increa9e in current l1iabllitles 63 ( S0) 244 298 2 732 ( 455) 6 (.4) 11 5O

Total Sources i19,-2 15,600 18,396 41,758 1 39,199 34,246 41,877 44,1 58,921

Applicatio 0%

Repayment of borzwizip- forelg 42 139 146 424 175 347 349 350 1,364 2,374- dbmustic 692 523 87 3,550 2,625 4,863 2,406 3,807 2,800 9,500Interest on bonacKigs 2,666 3,089 3,469 4,649 3,132 6,229 7,159 8,130 9,208 10,994Debt servicing reiirm t (1) 3,400 3,751 3,702 8,623 5,932 12,379 11,302 13,345 14,118 23,058Didxrsemmts- lone 15,164 13,005 15,665 30,162 9,650 20,468 23,262 26,817 31,233 36,493-eqsuty investments 70 - 45 100 4,733 6,318 200 200 200 200Acquisition of flied assets 160 51 31 128 60 852 206 45 46 45Increase In liquid aasets . 431 (1,207) (1,047) 2,745 (1,387) t 818) ( 724) 1,470 (1.390) ( 875)Total Applications 19,225 15,600 18,396 4:1 ,758 3 31 34,246 41,877 44,217 58,921Debt service coverage (tines): A/B 3.27 2.92 3.22 1.54 1.25- 1.33' 1.99 1.98 2.13 1.46

a/ From I July to 31 Dwc*er 198BK (6 nos.)b/ Frm July 1984 to 30 June 1985 (12 me.)c/ Provision for the increase in value of EE: loan (EMWO0,000) due to de aluation of Fijian dollars.

/ Due to FDB's accotmting procedures, unpaid interest balances at year end are not able to be differentiated from unpaid principalbalances on FDB's loan portfolio. Accordingly it has been asumed for the purpose of this calulation that all interest psymntsBhave been made and the reminder of repaymnt amomts have been applild to reducing principal balances.

e/ The relatively kw debt service coverage projected for the year ended 30 June 1985 reaslts f rn repaymnt of threeF iD i xtotalling F$4.85 mudlion due for repaynt in that year and fruo interest payable on the relatively high wunt of now Bondissue nude during the year ended 30 Jwu 1984.

Fiji Development Bank

Analysis of Loan Portfolio By Industiral Sectors

(F$'000)30 June 31 December

As of 1981 1982 1983 1984 1984

Agricultural LoansBeef 2,886 3,043 3,397 3,720 3,802

X Dairy and Pigs 1,805 2,052 2,371 2,465 2,747'1 Fruit and Vegetables and Rice 3,094 3,915 5,842 7,436 8,431r) Poultry 1,279 1,403 1,785 1,931 1,9660 Sugar Cane - Seaqaqa 7,142 7,548 6,837 6,683 7,023

- Other Areas 3,850 5,878 6,828 8,138 8,732Fishing 1,229 1,623 2,133 2,429 2,430Others 650 1,017 1,463 1,661 1,738Drainage Board 621 776 760 793 820Fiji Stigar Corporation - - - 15,200, 15,500

A Sub-total 22 556 27,255 31,416 50,456 53,189

Industrial/Service Sector Loans 0

Timber, Mining and Quarrying 1,403 2,223 2,102 1,888 2,088Manufactuirng 6,908 7,348 10,398 11,774 14,212Construction 2,801 2,665 3,060 4,054 4,278Tourism 3,184 3,144 3,453 3,960 3,853

co Transportation 3,409 3,664 4,268 4,634 4,930Commercial loans 338 575 845 1,430 2,217Investment 404 507 530 155 867

Sub-total 18,447 20,126 24,656 27,895 32,445

Commercial/Industrial Loans to FijiansTimber, Mining and Quarrying 439 430 479 632 632Manufacturing 330 310 322 548 713Construction 275 353 295 283 359Tourism 84 92 90 92 81Transportation 1,976 1,872 1,899 1,597 1,593Commerce 1,790 1,824 2,054 2,679 2,946Investment 615. 736 745 1,202 1,175

Sub-total 5,509 5,617 5,884 7,033 7,499TOTAL 46,512 52,998 61,956 85,384. 93,133

Fii Deeopent Uk

Amlvsis of Equittv !hist.t Portfolio

1h. of Total Cost O.wCt DWvided ReceivedmuSha fr Cont of Av. Cost Hs%Mt .

N of 4MW UN of hIu ss Hold 1eld 1vstqnt n2r &uc ValUG 1982/83 1983/84 1984 Operatm St -tue-

Blue Lwim STw1 12,813 1.70 9.7 0.76 I.96 1 3 2 Profitable opeatanD M?1 Im Nteas Znwst Co. 20,000 100.00 20.0 1.00 1.00 - - - NM-actiw

*,, Fiji Citrus 1tccts Asrclturs 224,239 22.40 224.5 1.00 1.00 -ider _U p1m tatim> Fiji Air Ltd. TraSport 1,100 0.40 1.3 1.16 1.50 - - fitabk opatinrt Fiji Coopeativ II3las 70,000 19.50 70.0 1.00 1.00 - - - FYn dLfficultiL

Flotr lIlls of Fij Food MWg. 290,673 9.80 229.6 0.79 1.65 44 4U - Pfitable opatiuva Stock Eh Stock e:han 20,000 100.00 20.0 1.00 1.00 - - - rk-n opertim

Unit Trst of Fiji Tzwsbt Cm. 106,250 6.90 100.0 0.94 1.15 6 12 6 Profitable opatioiQB hnks I'tPilp(SS) Co. td. rade 11,419 0.11 20.5 1.80 1.10 - - 1 Profitable operatimD hly Big Hsfturer Plastic Ws. 40,000 20.00 40.0 1.80 1.10 - - - Uhdir 1lcntation

Carlton BrsAr! Brm.xy 600,000 30.00 3,550.1 5.92 5.92 _ _ 60 Profitable opera'imFEbos Paific Ibod MXg. 50,000 31.00 50.0 1.00 1.00 - _ _- Feati

> Basic 1rAistries Concrtu 500,000 16.67 500.0 1.00 1.00 34 100 13 Profitable operationBula IlMya Corporation Hotel 500,00n - 500M0 1.00 1.00 - - - Uider Implentati

P* Copra H&ller(Fij) Ltd. Food WS. 132,000 66.00 132.0 1.00 1.00 -ider impluatat$5,467.7 85 167 82

ALesrn PoVuicin for losses 33.5

a/ Uhdr iametatio, profitable articn, awerimc1g finsncial ortecljical difficulties, wdr UiqAdatLin.

72

Appendix 17

Fiji Development Bank

Analysis of Arrears

(F$'000)

As of 30 June 31 December1981 1982 1983 1984 1984

By Industrial Sector

Seqaqa Sugar Cane Scheme 10 11 12 16 23Agricultural Loans 756 1,226 1,722 2,506 2,724Industrial & Commercial Loans 531 1,654 2,500 3,040 3.645Industrial & Commercial Loans

to Fijians 1,026 1,313 1,618 1,573 1,638Total Arrears (A) 2,323 4,204 5,852 7,135 8,030

By Region

Suva & East Viti Levu 1,532 2.456 2,673 3,100 3,552West Viti Levu 535 1,123 1,997 2,206 2,779Vanua Levu 257 625 805 1,082-. 1,012Outer Islands - - 377 747 687

Total Arrears 2,323 4,204 5.852 7,135 8,030

By Age of Arrears

One Month or less C ) 930 1,270 1,063Two to Three Months 5 ) 335 506 651Four to Six Months N.A. ) 431 492 637Six to Twenty-four Months ( ) 4,156 4,867 5,679

Total Arrears 5,852 7,135 8,030

Total Loan Portfolio (B) 47,228 53,934 63,307 87,145 94,990Loans in Repayment

Stages (C) 40,899 46,168 54,127 74,160 80,836Provisions for Bad &

Doubtful Debts (D) 1,529 2,208 3,210 4,312 4,620Loan Portfolio excluding

loans under Fijian Scheme (E) 41,719 48.317 57,423 80,112 87,491

Ratio

A/B 4.92 7.79 9.24 8.19 8.45A/C 5.68 9.10 10.81 9.62 9.93D/B 3.24 3.40 5.07 4.95 4.86DIA 65.82 52.52 54.85 60.43 57.53D/E 3.66 4.70 5.59 5.38 5.28

(Reference in text: Page 30, Para. 88)

Fiji Dvelopmt BankOollectim of Lam

0 ~~~~~~~~~~~~~~~~~(F$tio0)

-tual ProlectedYear enled 30 June 1980/81 1981/82 1982/83 1983/84 1984/85a/ 194/85 1985/86 1986/87 1987/88 1988/89

I. Arrears at the beg^nIing of the period

interest l 1,683 2,323 4,204 5,852 7,135 7,135 8,052 9,394 10,391 11,511

II. QCrrent dhes durzig the period

Interest ) 13654 15,156 17,283 18,149 8,667 21,220 28,809 32,815 37,077 41,322Pr1cApal)

II. Total dues for collection (I.+ II)

Inter ) 15,337 17,479 21,487 24,001 15,802 28,355 36,861 42,209 47,468 52,833

V. Ltwo pte_hled

E1reiwApl 1 1,072 1,395 2,808 2,398 1,211 2,500 2,700 2,900 3,100 3,300

JA V. Cash Collction

eJ Ex 4rApal )11,942 11,880 12,827 14,468 6,561 17,803 24,767 28,918 32,857 36,670

VI. Arrears at the end of the perlod

Pr wivaY l )2,323 4,204 5,852 7,135 8,030 8,052 9,394 10,391 11,511 12,86300

'-' \VI. Pertage (Cash coflecti0vtotal dues for collectfm)

nldtrpels) 77.86 67.97 59.70 60.28 53.6J 62.79 67.19 69.30 68.51 69.41

VIII. Arrears aS peroentage of total portfolloElnterpal )t ) 4.92 7.79 9.24 8.19 8.45 8.00 8.35 8.32 8.29 8.20

XI. Ead debts, written-offInterest ) 133 140 297 318 77 275 550 550 550 550

P ) c~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~o

a/ For six wunth period ended 31 Decewber 1984.b/ Anallzed,

74 Appendix 19

FIJI - -

IbAdi of B ourm d of 31 cInbw 1984

_ FS'OW)

nOriizml Race Rq8dewt BaIlera±t.d of Tona AMMlt AMonEt hmaCO-cAt Yew brtetca) (Year) Drm Repaid d1i RumkF

L BorrW for OEffe bflldln

SwhWp Bdc of Fiji mm) 80 1974 8.5 15 so 39 41

IL B _nmu for Reladirm

Fiji N11aml Provldtnt IWd 300 1969 6.75 20 300 - 300AuI k 1,600 1974 7.5s8.75a8.25 15 1.119 516 603

400 197W4 7.9 10 400 - -

MacaNa. 15B.d of FIJI. 400 1975 8.5 10 500 -0

Fiji NatImial YIvC ibid 350 1975 6.5 13 350 - 350Scnd 1 2.000 2976 7.0 10 2,000 - 2.000Bond 2 1.000 1976 7.1 -14 1,OW0 1,000IanatLMOMM1 BUk of

Recawcr" ctalm a D1v. 1976 8.5 30 3,73S 886 2,850Band 3 1,000 1977 7.1 14 1.0CO - 1,000FLJI RtAcll Prvidnt r.md 2.000 1977 8.3 20 2.000 - 2.000Boid 4 2,22S 1978 6.B 7 2,225 - 2.225Bd 4 1,775, 2978 7.1 14 1,775 - 1.775fludS 1576* m97g 8.5 11 1,575 - 1S7SBand 6 2 S225 2979 7.U5 5 2,22S - -fid 6 775 L979 8.2 13 775 - 775Fiji Notta=l Prd=Ict EPkMd 3,000 2979 8.8 20 3,000 - 3.000&rnern KFcansumiyc a Lmr 604 2979 LO 40 604 - 604vd7 1.400 2980 7.65 7 1.400 - 1,400Band 7 600 2960 8.25 14 600 - 600kand 8 2,350 2980 8.B 7 2,350 - 2,350

Bmd a 650 2980 9.5 14 650 - 650Fiji MaCniOI PrvidMt Fumd 2.000 2960 8.8 20 2,000 - 2.000Bnd 9 2,L00 2961 9.45 5 2,400 - 2,400Bid 9 600. 1961 2.35 14 600 - 600Fiji Natdmol Prcvident Fund 2,000 298n 10.05 20 2,000 - 2.000Band 10 3)510 2992 9.6 6 3.500 - 3,500Bandl1 50GS 29S2 11.3 14 500 - 5OBand U 2.000 1963 9.6 6 2.000 - 2.000Bcid 1U 1,000 293 U.3 14 1.000 - 1,000Band 12 3.000 l983 9.4 5 3.000 - 3,000Bod 13 3,000 2983 9.4 5 3,000 - 3,000FijL NacInnal Pzwkldt Fmnd 6.000 l983 10.35 7 6,000 - 6.000Iund 14 3.150 2964 9.6 b 3,150 - 3.150Bod 14 850 2984 21.1 14 850 - 850land 15 1,775 21984 9.6 6 1,775 - 1,775Bamd 15 2.225 1964 11.3 14 2,225 - 2.225BOnd 16 75 1984 10.1 6 75 - 75Bond 16 3,925 1984 U.3 14 3.925 - 3.925Eand 17 850 l984 10.5 6 850 - 850Bond 17 3,150 2984 I.5 14 3.150 - 3.250

111. ScaUdia Owwdraft Wilth

Natlcoam Duk of Fiji 4.99 1967 13.5 - _ _ _Feacwlet oankf FiJi 8,000 1964 13.0 - - - -

67-499

Source: FDB

(Reference in text: Page 29, Para. 87)

75

Appendix 20Page 1

Fiji Development Bank

Major Assumptions for the Operational and Financial ProjectionsFY1984/85-1988/89

A. Lending Activities

1. Loan Approvals

a. Approvals for the FY1984/85 are based on the operationalperformance for the six-month period ending 31 December 1984 andextrapolated for the year taking into consideration existing pipalineprojects.

b. Approvals of agriculture loans are based on an annualgrowth rate of 15 per cent with FY1984/85 the base year. A projected12 per cent decline in agricultural loan approvals between FYs1983/84and 1984/85 is the result of the slippage of one large project (SigatokaRice Project) from FY1984185 to 1985/86 with the major cause of thedelay being the cyclones experienced during January 1985. Accordingly,the projected approval level of agriculture loans during FY1985/86 hasbeen increased. The foreign exchange component of agriculture loans isestimated at 33 per cent.

C. As the actual industrial/commercial loan approvals duringFY1983/84 represented a relatively high figure when compared to previousyears, the growth of approvals In that loan category is projected torestricted to 15 per cent for FY1984/85 and 10 per cent for FY1985/86.However, during subsequent years, industrial/commercial loan approvalsare projected to increase at an annual rate of 20 per cent. The foreignexchange component of industrial/commercial loans is estimated at 75 percent.

d. Approvals of industrial/commercial loans to Fijians areprojected to increase at an annual rate of 10 per cent. The foreignexchange component of this category of loans is estimated at 75 percent.

2. Disbursements

Based on past experience, the following assumptions areapplied:

a. For agriculture loans, 85 per cent of approvals willresult in commitments and 60 per cent of those commitments will bedisbursed in the first year. The balance of the disbursement will bemade over the subsequent two years with the total disbursementrepresenting 82 per cent of the approved amount.

Source: FDB(Reference to text: Page 32, para. 92)

76

Appendix 20Page 2

b. For industriallcoumercial loans, 85 per cent of approvalswill result in commitments with 70 per cent of commitments beingdisbursed in the first year and the balance of disbursements in thesecond year. The total disbursement will represent 80 per cent of theapproved amount.

c. For loans under the Industrial/Commercial Loans toFijians Scheme and Joint Venture Scheme, 90 per cent of approvals willresult in commitments and all disbursements, representing 85 per cent ofapprovals, will be made in the first year.

3. Loan Collections

Collections of principal and interest have been estimated asfollows. Due to FDB's method of accounting, all unpaid interest isthereafter treated as principal and it is not possible to differentiatebetween principal and interest payments.

Amount Collection Rate-i(F$'000) (x)

FY1984/85 17,803 62.791985/86 24,767 67.191986/87 28,918 69.301987/88 32,857 68.511988/89 36,670 69.41

a/ Total collections to total due.

B. Equity Operations

1. Approvals

FDB's current equity investment policy states that new equityinvestments of F$200,000 per annum will be made. This level ofactivity is an indicative level only and could be revised in the lige.tof experience. Total new equity investments of F$6.229 million durl.agFY1984/85 resulted from exceptional circumstances and that level ofequity operation will not reoccur during the projection period. It isassumed that all equity approvals will be disbursed in the same year.

2. Sale of Shares

As FDB expects to hold each equity investment for minimum fiveyear period, relatively modest forecasts of sales proceeds have been madeover the projection period that are consistent with FDB's experience todate.

77

Appendiz 20Page 3

C. Income Statements

1. Interest Revenue on Loans

FY1984/85 FY1985/86 onwards(Z -pa.) (% p.a.)

Agriculture 11.0 11.0Commercial/industrial

loans 12.5 13.5Commercial/industrial

loans to Fijians 11H0 11.0Joint Venture 12.0 12.5

Currently, price control regulations in Fiji have precludedFDB form increasing its interest rates in line with a recent decision by2DB's Board of Directors. The price control regulations are due toexpire in August 1985 and FDB will accordingly increase all interestrates at that time.

2. Fees and Commission

These are calculated at the rate of 0.7 per cent of loanapprovals in each year.

3. Income from Equity Investments

Dividends at an annual rate of 2 per cent have been assumedreflecting the expected long gestation period of one major equityproject (hotel-conference centre) in which FDB will have a F$1.5 millionequity holding. Other equity investment are assumed to yield an averagedividends of 5 per cent. On the basis of conservatism, no gains havebeen assumed from the sale of investments.

4. Personnel and Administrative expenses

Future staff requiremets bave been based on an additionalstaff requirement each year of six professional and one non-professionalstaff member. An annual cost of living adjustment to salary levels of 5per cent has been allowed for. Other expense items are expected toincrease at an annual rate of 5 per cent. The current reorgan5zation ofPDB is held to be an Important element in maintaining personnel andadministrative costs at close to current levels.

78

Appendix 20Page 4

5. Interest on New Borrowingsw-

Interest RateCredit Line (% p.a.) Repayment Terms

ADB 10.25 Fixed Amortization- 15 years

IBRD 9.25 Fixed Amortization- 15 years

EIB 9.00 Fixed Amortization- 15 years

FDB Bonds 10.5 Lump Sum 6 yearsFDB Bonds 11.5 Lump Stu 14 years

6. Provision for Doubtful Debts

This is estimated at a minimum of 5 per cent of theoutstanding loan portfolio.

7. Bad Debts

Bad debts are written off directly against FDBts Provision forDoubtful Debts and are therefore not explicitly shown in the incomestatement. Assumptions made are detailed in Appendix 17 and show aconstant annual bad debt figure of F$550,000 for FYs1985/86-1988/89.

8. Tax

FDB is exempt from Corporate Tax.

C. Balance Sheet

1. Share Capital Contribution

The Government has agreed to provide an equity injection toFDB during FY1984/85 totalling F$6.5 million. Share capital increasesprojected for subsequent years are similar in amount to such injectionsprovided in the past and are consistent with the Government's statedpolicy toward FDB.

2. Borrowings

Details of FDB's existing borrowingz: are provided in Appendix 18.The proposed Bank's second loan and the proposed IBRD loan are expectedto be available for disbursement during FY1985/86. It has been assumedthat all domestic borrowings will be in the form of FDB Bonds.

1/ Appendix 18 provides full details of interest rates and repaymentterms of existing PDB borrowings.

79

Appendix 20Page 5

3. Purchase of Fixed Assets

The high capital expenditure figures for FYsl984/85-1985/86reflect the capital items required for the current reorganization of FDB.including purchase of a new computer, new vehicles and necessaryrenovations to premises.

80Appendix 21

Status of FMB's Cupangec with Tam coumtsUadeIC= RD. 174-CFJ

Refere to Stats of~~~mts ~~~~mm Dotmsi

A. Obligtiom of the Borr5ur CM)

1. EDB to aiply to the Beak all LA Sectin 5.02(a) Omliad withisafonti rDgck to la ad

2. FDM to wintain adeqe records of LA. Section 5.02(b) Cpllsed withpm;sm of Prject In a xrdm withwith aud -

3. EDB to fmns iits axited amml accauts L.A. Sectkm 5.02(c) CuplI withto the BP.

4. EDB to umintaiu a dbt/equty of LA. Sectim 5.05 Coied with3:1.

5. BDB tD seek the Bazk's priw apprval to L. Section 5.07(:U) Ckhled wthestablih any mbsidlary.

6. BlB to adopt a Policy Statt satis- "L Sectin 7.01(b) CuPlied Wmtfactory to the BR.

7. DES to cmalt Bak frn tur tD tir S.L No. 2 Coliae idtha Interest pollry ad appainb. tE fam 3

MauIg Direcor and Depty YhagDirector.

8. ElB to uwnitain a provisdu for bd aId S.L. No. 2 OMPlid withdoubtful debts at lasat eq1l tD 5 per pm 4eant of aU cutstaiag lowns.

9. HEZ to set aside profits as rqi.redl tD S L. No. 2 CaWliedwithmnntaifn its resves equal to 50 per aM 5can of its paid-in caitaL

10. EDB to adopt pzomUt pzocduri In SL. No. 1 Comaled ihaccarde with Bak arldeI . Pam 2

B. Oblgations of th#e Qrmtor (the G)

1. The Govent to proide IDB with lol G.1L Sectio 3.06 0omplHied dthurrey fids _ r fr tk

2. The to estd,l:1A the mitxutzed S.L No. 3 OQdwith Mcadtal ofa HEby 30 Jtm 1974. pm 2

3. p- G(veet to asm tihe fareiui SL. ND. 3 ('mplied witheabne risk of the BE.C loi. pm 3

OW(e in tert: Pape 36, Par 102)

81 Appendix 22

ASIAN DEVELOPMENT BANX Page 1

15 Februxy 1995

Mr. J. Y. Kububola Pemnle lt Secretary fbr FinancP. 0. Box 2212Stwa, FPii

Dear mr. Rxhuabola:

Be: Euity Invesrbt Operatios by

smian 1 Ban

1. The Asiam -Ieln Bank (the Bank) is eumprmed by ArticleU riii) of its Qhrter to C l a*t eity IlNMit -erIt I isafter the Board of Gr a of the Bank hall tdh-the Bak is in a wdtis n to e m such cpeatoMs. On 18 Nardh1983, the Board of G r .die muh a de_dnation

2. Purmmt to ach deLscisi of the Gors, there is apossibtlity for the Bac to c e equity iEsnt atijns InFiji. At the Bark's epticm, suc aperatims may include i invest-nunts in the equity of nabi and 3 -u M e p s for specificproic-mts (ii) ints in the eqity of 4aenOpwit financeinstifutiaisn CWs) and sidlar entitiesy .md ii) i s t in theeqtity of smaller entmypies to he extei&d tb1Lgh DFrs under lirsof eqity. The eigible enterpriss 'wcud be in the private sertor,but med enterpiss y be wasigeed In qiLcial no RI s. uBak wold not sek ty asm n etiy rseek ct li interst in it eloept where necessar to sfeguadi intt On t othr hand, the fan win not ame an equityinvesbut if the Goeimt bas my cbiectim to it.

3. Before cmwnng its equity Investmint opeations in Fiii,the Bawkl would libe to d,tain fza the Governmt cF piji certainasairar~suconsisten with the Bank's dirter proision Bsuch asArticles 51, 53 and 56) relating to the privileges, I=mmities and_,amptions of the Bark. Thes assuarms are:

(a) 'he Bankc viLl be i e fra auw restricties ardcontrols am1icable to 1 i s and theirinvesbmit. It is uaerstood that this izumityp will

xtend cnly to the Ban and not to any other investor orthe invested czw.

(b) The Bank my freely sell parrtIc tions in the sharesagreed to be subcribed by it.

(c) The Bank or its Pts nag freely selor otherwiedispoe of its equity i _s t to dicuestic buyers.

(Reference in text: Page 13. Para. 39)

333. R.._. IN__, P .... i rd. Pr. O.. s_u

-LI..a.v a-,-__. m*C&.M.._SASr)JUAW.ip..?. -. RMm ~BPIUfhmAS Y.. S5p

82 'Appendix 22Page 2

-2-

The Bank or its agets my also sell or otherwisedisps of its equity to foreign bfverssubect: to the ini aroval of the CapitalInvwesnt rd-Mtim Board.

(d) 1te Bak cr its agents acting in the mie of andl anbehal of the Bank may re-t-rate frely, in acmetible L at the the aet exdiae rate,

ny at and gains frcm, and sale prooees of, itsequity irluesbIes (incl;ing capital gains and

mxbsoriptian rights).

(el M fak wil be exapt fra any and all tmticn, andfrom the withholding or oLlectnm of twaes, an awirxze and gains arising t of its equitr _e;;and the sale tbezsof. It is idxsr-o t1hat this

esiptiai wrM als ap1l to any fee cw oth i ereoeivl bv the BaW's des acting in the a of

and cm behalf of the Bank an the- Boad of Di=ecor ofan iavested oaanW.

ff) C Besexve Bank Fiii dll, if so recuste by, theBank, act as deo si toy for the sluri Eiftes ardany I*ber related doamwnts -is.uec in respecnt of or incomction with the Bank's equity invest2unt-s in Fiji.

It is ui PrItood, bcmwe that mtajec to these assncs. the Bankwin, fow eadb equity hMset,wply with the cxssary prmr!ural

.Mitiles u;1vBCozaliie uze the- amMicab3e local Lots.

4. We luz3d be grateful if yen vmld cmnfirm the m e ofW Iernt to the assuIs set a*t in pagraph 3 abore bo

enable the Bank to process equity psals i Fiji.

Y tOM

\tep

Director, oF

1{br the Govu:Li of Fiii)