-Documnt of

The Woid Bank

FORt OFFCIAL USE ONLY'

Rqo,MN& 8717

PROJECT COMPLETION REPORT

GWA

SECOND NATIONAL INVESTMENT BANK PROJ CT- (CREDIT 901-GH)

JUNE 6,A990\

Industry and "negy Operations Division\

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.,~ ~ ,eten Afic Dea\mn\~~~~~~e , -

InduskW try Its nergyf OpeayftionsW Divsi Oc\ ol

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CURRENCY EnUVALUs(period averages)

. Currency Unit: Cedi

Appraisals April 1979: US$1 - 2.75 Cedis

1985: US$1 - 54 Cedis'1986: US$1 - 106 Cedis1987: US$1 - 162 Cedis1988s US$1 202 Cedis

ACRONYMS

ADB - African Development BankBOG - Bank of GhanaDEC - .Geman Development CompanyflR - Rreditanatalt fur Wiederaufbau

NTB - National Investment BankPCR - Project Completion Report

FISCAL YEAR

NIB: January 1- December 31'Government: Ju}9 I - June 30

WORLD BANK -FOR OFFICIAL USE ONLY

\.SA.

;une 6, M0

~IDO1DUMTOTIE EXECUTVE DIU_CTORS AMT T1k PIESIDRRT

SUBJECTs -Project Completion Repor't on GhanaSecoand National Investment Bank Project:

-iCrediLt 901-OH)

w~ N

Attacbid, foT information, is. copy of a report entitled "ProjectCompletion Rleport on Ghana - Second Xat±onal Investment Bank 2Project (Credit901-GH)" prepared by the Af rica R.ggional Otff ce* No_audit of this projecthas been ma4e by the Operations Evaluation Departmant at th~is tine..

Attachment

Thisdocument a a tauirited distinbutio mna~ray beu~dby recspmnts only in htfoiPWWMA

C,

VRC)C COMPLETIN FOR OFFnCIAL USE ONLY< > < \ ~~~~PROJECT C9-MPETION A PORTl

GHANAC- N

SECOND NATIONAL INVESTMENT BANK PROJECT(CREDIT 901-GH)

TABLE OF CONTENTS

Pate No.

X PREFACE ....... ... .... .*..*.. ***. * .......... i\BASIC DATA SMET ; ..........*-iiA

EVALUATION SUMMARY ..... ................... ................. v

I. INTRODUCTION ...*

II. THE ECONOMIC CONTEgg mi 1................................ too I

A. Pre-1983 ... 2B. Post-1983 ......*.. 3C. Manufacturing Sector ................................... 4D. Financial Sector ..................... . 5

III. NATIONAL INVESTMENT BANK ............ ........ ...... ...... . 6

A. Financial Status of NIB .,.# ...... .......... 61. Profitability and Arrears .......to.............. 62. Foroegn-Exihange Losse-. . -.......... \83. Financial Restructuring *... 84. Joint Pprtfolio Review ... ............... ..... ... 9

B. Institutional Performance ............................ 101. NIB Management ......... ......................... .. 102. Organization * ,...................................... 103. Staffing and Training ........ ...................... 114. wccounting and Management Information ...... ....... 125. Loan Disbursements and Administration .............. 12

IV. THE PROJECT .......... ................ ... ...... 12

A. Project Components ......... .................. ........ .. 121. Term Lending ................... 122. Working Capital ....................................... 13

3. Revolving Import Fund for Working Capital .. ....... 134. Teqhnical Assistance to NIB ........ \135. Technical Assistance to the Government .............. \13

B. Appraisal ............... .. 13C. Credit Disbursement ..... .......... 15

1. Matching Funds ....to.. 152. Difficulty in Meetih8 Lendig Criteria . 163. Government and NIB Delays ........... 16

This document has a restricted distribution aAid may be.used by recipients only in {he performanceof their official dtuties. Its contents may not otherwise be disclosed without World Bink authorization.

i&6 -am (cont'di)

3M UZ4IW2 (Cont,d.) .

I. Loan Documentation, Disbursements* and Administration 1P. Status of Sub-Projects .. 1G. Impact on Export Promotionan Foreign 17hag

B. Repay~~ment ........ ~* 904*..beee0eOq.Oe.eOO .ee..OeeO e19

I. TecbnieslcaAssist-ance to 'NB ....................... \1J. Technical Assistance to t~Ae,Govarnment ........... **.~... 20-'R., Changes in thei Project Agreement 20L. CompliMnce viibhthe Project Agreement-**#. .**........21...

V. SUOAIMAN LESSONS LIRUD . . .' . . .4 . .. . . ... *A...... 21

A. -Overall Perforomace * .. * .. .... .. * a~ ..... .21

B.~~ Project Benefits04 22

~E. NIS Financial Perforac ~ X ;23\F. NIBs. Banki-ag Capabi-lities *O*.9********* -2S_

R .' Lessons Liarned ~$

k IncoIe Statemeant for the Years Ending i)6comber, 31,1980-87 *****.*..***........0....... 27

MI Summary of Balancew. Shoet for the Years\,EndingDecember 31,-1980-87 28'

Ins: Profit anA Lose Account, Years Ending December 31., 6 ~~~\1986-1987 ... *..... ... ..... ... ..... *s-* ...016 .. .. .\ ........ 2~9

IV: Summary of Loans in Arrears for the,t ear EndedDecemb-er 31, 1986'0000000OO0O 0 30

Vs Charaete ist4cs df\Sub-Projects 31.

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PROJECT C O RTiON REPOUT -

* ~~v ;AR PROBC '\ZS.aECmND NATIONAL INST B_A PROJEE

(CREDIT 901-GI1)

s \\N \ \ ~~~~PREFACE,

This-is the Project Completion Report (PCR) for the Second NationalInvestment Sank (NIB) in Ghbna, for which Credit 901-GiH if-the smount ofUS$19.0 million was approved on May 8, 1979. The credit'*as closed onD6*embopr 31, 1985, three years behind schedule. \xUS$190,WO of the credit wascancell 4; the last disbursemeunt w o'August 19, 1986.

Th. PCR was prepared by the Industry end Energy\Operations Division,Western Africa Department, Africa Regional Office, and is based*, inter alia,on data, provided by.NIB, the Statf Appraisal atid President's Reports, thelegal docouents,-suprvision>reports, correspondence betwen the Bank and theBorrower, and internal Bank memoranda. No 4ankmission'was dispatched forthe preparati6n of ,this PCR. - a s a

This PCR was- read by the ( erations Evaluation Department. The -draft\PCR was sent to the Borrower for comments, but none were received.

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-' ' ' E~~~~~ROJEcT COH II lON EPOI

'; SEC°0 NATOA MNT BANK PRO,JECT-(CREDIT 901-GH)

A . C ICDATA,SEK¢

(Amounts. in~ us$ minlion)

As Of Nu. 31. 1920Orizinal Dibu Caneo.led be,4 ~ n~

credit 901-GE -iJ#.o'o .~ fe A0.09 1.1

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Appraisal Estimate (S$ 14)', 8.70 18.40 19.00 19.00190 1901.0Actual (US$ H) ~0151-9 ' 51810.02 15.87. 18.64 18.81

Actual as of Apprai.sal. (zl1 1. .5.91 27.22 52.72 -I$.52 9".1Z 90.1ate of Lst Disburseaent:. Augot 19,s 18 9 .

Appraisal ~ ~ ~ ~ ~ ~~~.a. ~~04177loard Approval - 05108/79 05R08179Credit Sign81 10/261 79 18.79Credit gffectivem s 05(14180 05114/80Clos*ng Date 1213118 12131185Project Co'letion ' 123151/2 06I30/8

(staff, veekcs)

appratsal 1.2 0 - V . 1 1 . 1.2Apprelet 13.5 25.M 1 35.2 O 58 1 1 1 .8N.gottatfofis - - 4.4 -44 1 . . -.

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t 2. 1 2 -at -!

Appralsal ;' - -- .a 0*!77 -

no. of. staff Date 6fPerenil Weeks Weeks Rev6rt

*Appraisal nao&* n.ao n.e. 04112/77Re-appraisal 1 3.0 3.0 ,01126179Supervision I 2 1.8 '3.6' 8018Supervision U' 2 2.0 4.0O 07/07/81SupervlsiO4 III 2 1.6 '3.2 12122182Supervi.ionliv 1 2.0 4.0 o06104184'Supervieioz v I n.e. n.. 112i11184,

fortt '~~~1_ 1.0 11.0 09/05/85

PTHROAJCT

)o'r*ower: ipbkOf GhanaExecuting?Atency: National Izvestment Iank

L ollow-on Prlectss

In April 1983, the Ghanian' Government enbarke~d-on a co*reheneivestr~uctural adjustme4t p-rogran with full support tfrom,. tha ezikt -AndIMP. Since then, the Lank has lent -assistance for the £iPAor*Rehabilitati.on Project, the ,Second' Reconstruct ion Import Credit,'the Indu-st4l tcor Mdj4stment Czr.dit,, Structural AdjustmenCredit$#, a F"inancal Sector Adjustment .Credit aond'sector-sp:~ific

lending.*

A

SECOND HUM!M.L rML ' s i iROC ' ._

RCRT ITlO RE0O1ET -

The Proi,st

1,. Credit 901-GH provided a line of credit -to-Ghanols\K~3 totalingUS$19 Million, which was allocatedc for: a) term lendina (US$12 .2 m4liozi)for expansion and rahai6ilitation of qulfe xsig im n onhigh priority project\ idbshrem.credit for vorking capital (US$$u4lion) to financd ti mdttino pre parts and-raw aatlerials for

e4sittinig enterprises hi ebn<subect to foreign currency shortages;'C) technical agsistanLce to the Government (US$500,000 forformulation andimpleu"entation of an export and marketing program; 'and d) teSchnicalassistance tN (US$300,Q001 for iproving the intetual operations of,Ghana'ls primary develoirnen finance institution.

Ratiole for the Proect

2. etheAidustrial- ectpr was chlracieried Ibinreasing *4iftrutililation an eer0to o tyka frei~n

exclhange Allocations for raw materials and-spare parts vere greatlylimited. Industrial. ou%put doclingd from 14' percdnt ~f CDP lit the mid 19709,to about 8 pperent in 1982 (3 p*rcent in current priles.. Ghinaianindustrieu, were, therefore n dire need of ani injection of foreign excha goto improve the status of thir opeAt ions~ A ~n June 1978, the 04"roeruL,t.began a stabilization vronam-that Inifolved currency devaluation, budgetdificit reduction measures, removal of price,controls, monetary policychanges, and other positive steps to which the Bank sought to lend i-s

* ~~support in the fo'rm of Credit 901-GE.

Proiect Obi.t..! -\

3 ~ The objectives of the project "rne totprtvide fotl xh&1.ue to C sist, t01-GH develaopment. of Ghanac's iduttia-1ectort by

U8$lgmilliv, sist,h esalctiFfr ten ,ndinx(S^1.sllo)

-financgthe ianportd requirements, of TuB sub-borrowers. The goal was to._.ikb Ghaarl-induaties: to increase produckion feoports,kand foieig.

exchsigon earnings hs credit 901-Eo was to strensathen raw intitutionafo ~~caDabili'ties f Ianthreby transform it into,a ~uore effective

financial intermediary which hw d continue to be thl main source of-finace fo a the countrys tin4Gustrnl sector

ProdieCtR±sk9kV .

4 * n. During the anxors and ma980s, Ghana as, eornomid *eXLan_c=e declinedairecipitously and aghed- its nfdir ,during the implnemt.,t of credit901-GH. As had been projected by Prpsident's Report, the f.LlxSto t'heproject was the uncertain and unfavo,able economic Cliuzt. -`he pdor

*^ scaR Zlctln orrwmaEllsadwpr arswreg tlA

~m0mic performance c7lrcumcribed NUl's abilty to successfully pursue-anticipate4 loan recovery objectives. Subsequent effortt at stg_tutaladjustment have been undertaken'with the support of the lank and are havis<some positive impact.

UtiliatAon of Credit 901-O.

S. The credit was meant to be a auick disbursing fgcilit yet therate of credit disbursement was sigificantly delayed salne the Governmentdid not provide itt share of matchbng funds. Also, the NIl's cuibersomeloan application process contributed to unnecessary delays. The Bank's'waiver of the matching fund requirment enabled the project to conttnue,and the pace of disbursement increased substantially.

Sub-Pro_ie t Status

6. Of the 70 grolects financed under Credit 9OX-GI, more than halfwere in agro-based industries and wood-4elated industties. The number ofjobs prqvided.under this credit is estimated at 5,021. As of $arch 1988.half lof the sub-borrowers were in arrears totaling'about US$4..1 millIon, ofwhich,VS41.7 million was-for principal and US$2.4 tillion was for intrerstanda'other cearges. Themaitor roblem thiat affected sub-projectperformance have been (a) poor sub-borroer managemnt; (b) lack ofworking capital; (c) 'tack of skilled personnel; and (d) overalldifficultios attributed to the poor business climate. The fu,l measure ofincreaset' output and foreign exchange earngipv has yet to-bso-determined -'

given that som p 6ojEcts are still under iplementation.

311 F"Binancial Performsnce

7. The fTinanial iterittit ofothe NIB was nearl" ieouardized durigthe course of isbursement of Creit 901-6UW. :Ns -net worth ~roded in\relatlpn to the major foreign cunrenc$es and led 31 to violate itsAEreemg t with the lank in which it -ws to limit Its debt-equity rtuio to5sl, The ank's fIcial restrwcturina proposal was accepted by t> fGovermment. Stringent, oversight measures need to be taken in the future toprevent the.reoccurrerste of a financially precarious NIB.

1A IWnstAtutional Performance

8. 315 made sa.so significant strides In. mp;oving its overalloperations. The level of arrears in NSB' portfolio reached a high of 68.7percent in December 1984. This figure ae\unacceptably high and exceeded the 30 nercent ceilina set in the Ptoject Agreement. Nonetheless, the-Nlevel of_arrears representk siftcsntpaz*5 to th2bAperiod iohen the Bank first began its associas,Lon with-IM in the ea4y19705 when virtually all of NIs portfolio wa ffected by arrears. AU4s=the establishment of a trlninw within NIB is a sign of constructive1 -prospects for building Nr'Bs h= capital.

_ 9. Nonetheless, during the early part of the project, NIl'Bt ;management was characteriized by a successio of different ManagingDirectors, which offered little opportunity to makp need-ad and substantive

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a 'se operations.' NenO, 4wring thii"riod, NIB m t djRot assume * ~.ead.rdsip role \regarding personnel. adminitratio, ;i d 'the.ky baki functions which"were gitical to NIB's solvency, Pooranagement was ibflected in ontl t weakuesses iA nrolect aooraikal.uu.tzrvision. loan recoverv. a c4 ccoutng...

Achi1evements of Technical Assistance

10. - The technical assistance component had a minAmal effect onImproving 323' a institutional capabilities. Cont ltants!chosen to adviseNIB did not meet NIB or Bank expectations. The disbursement of technicalassistance funds was significantly delayed, vith less than hAlf the fundsdisbursed as of December 1985. 'The use of funds for overseas training 4dnot always reflect the Irioritv needs of RIB. It is not evidont that NIBhas the staff capabilty to fully utilize-the capacity of the computersystem' rchased under the credit. The efficacy of the technical assistai ceprovided to the government' is uncertain. The potential for thetochnical a,sistand# provided to the- Government was faly modest, giventhe small sum allocsted for that purpose, #articutarly in light of thelarger\ efforts undertaken by the Bank and DMP, in conjunction *4i.h the \1Goveiet-, to make structural adjustments in Ghana's economy.

NuB as a Bankini,.Institution

11. While NIb-as made some ijportant improvements in its iiternaloperations, some of the ;ritical areas of development banking need to begreatly Improved. T1he l4an Unjraisal process was not sufficieatly well-fundedf to effectiveiy assess the merits of proposed projecta4 =-ub- _

project smeervisioue remained weak despite thekestablisAuent of designitedeupervision units itinlNIl. Inadequate lon a stratio somtimst*sulted in loan agreemts with the sa cliet bearitg contradictoryprovisia. Financial reports prepared by NUS for puwposee of this QCRwere- sajeW t to errors. The iability of NUB to perceive the.seriousnessof its financial precariousnrss illustrates the lack'ot sufficieat\bankingSkills within NIB.

WVold .ank's Role

12. In addition to the Bank Supervising the implementation of thecredit, it played a major role in maintaingin NIB as a vliable develaaent >ftnaince institution by the ezamination of NIB's entire portfo;io thatforestalled financial collapse. At issue is whether NIB's financialdifficulties could have been identified at an earlier date. Subsequentactivities 'by the Bak in ihan i the Structural AdjVstalnt Program Phichb_a in. ,, have b b t M'. a _, ._4ndustries ensga¶ In productive economic' activity.

Prodect's CoUtribution to Ghana's Economic Policy

13 ; The project was largely a ston-g a measure to provide imuediate ,assistance to Ghana's Industrial sec-tor that 'had been emsculated bytinappropriate Government polic s * As such, the project 4j not-.

incorvorate any comnonente that\oul hive had MM,silificant imnwat on

a alicy as itras o lm

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"~~~~ "f P'' _{\ 9t

* 'Ghana's econowk nulicv as it relates to improving -the outiput of theindustia1 sector. The component that provided some limited technicalassistance to the Government to assist it in developing export promotionstrategies had the potential to contribute to' policy changes, but theutility of that component was fsirly marginal.

^Lessons Learned

14. The most -imortant lesson learned from the implementation ofCredit 901-GH is the inherent limitation of project financing in the wcontest of financial and economic pol*cies that are not conducive toeconamic development. *eeded ecorl*ac policy reforms are beyond thepurvie* of individugl projects. 'The ba is of the structural adjustment

*lending, which is that the nolicv conte0t must cI8anae to enable individualprojetts and institutiq)s to develop, responds to\this fundamental point indevelodient -finance. In an inappropriate economic climate, RIB could not,function nrogerlv as a develogment finance institution. Hence, fundamegtalchanges that transcend project finance are absolutely critical to the ',

success of individual ;mojects.15. .~ g r.n ,, ,__,,_ ______,___

1ingthe project itself, the efficacy and- Asirability ofthe vorkina capital comoonent of the loan, which_had been debatedrLor to,thepproval the he credit, was borne out by the 4remendous need exhibitedby sub-projects for foreign exchange to purchase nicessary productioninputs. Al-so, continual su1Orvs4l§n of the financial status of DFIs t1atare operating in a precarloiis political and economic climate is, a n'eressary --

adjunct to the supervision of credlt implementation.- In additiop, the ') -am~ronriate 4esianati andje of -rtesaig;l astistance funds i a' criticalcomponent-t4jbuilding the institutional c4pacity _ecassary to suc essfullydisburse'development funds. Also, dynamic and effective managem_it is aprereq9isite for successful project and sgub-project perfo ance.

16. Given that Ghana's economy was at ito nadir at the time thec.redit was disbursed,; RIB performed reasonably'eell. Nonetheless, therewere significant shortcomings that prevliled: the sub-project appraisalprocess'lacked the npcessary rigor\to justify some leiding activity; sub-'project supervision and loan collection procedurep were we fk e the technical.assistance component was, largely activated after ;: bulk of the credit hadbeen dLsbursed and therefore had minimal Impact on improvig E's. 'B,

institutional capacity for purposes of Credit 901-QB; and NI staff did notperceive the seriousness of the financial situatioFm that preyailed at NIB,-which raisequestions regarding its financial management ca4abilities.

17. One of thW major, lessons learned in hindsight regards the_ ___

'effi yfl pes-ov adsWrsta ~ 1 fiscvinstltutlons as thesole term lenders to industry- lhile the preailing-)ank policy at the'time of credit Approval intorporated the rendering of assistapce todevelopment finabce institutions this policy has wtince been changed. Thecurrent f6cus of kaw& lending in thO financial sector 'An Ghana is anassistsnce'to the financiai sector generall*, ratier"than to individualinstitutions sXuch at NIB. This focus is evidenced by the Bank's 1988,Financial Sector Adjustment Credit, one -of'whoe obJectives is tofa-cllitat¶ fuadsmental.reform of the policiess overning the Pector. This

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view reflects the undesirability of i institutioz such as the NIS holdinga monopoly poetVlon aver term lendjng to the industrial sector.Deyelp,ment finance instituttons such as NIB should compete with commercialbanks in channeling credit-to the industrial sector. Hence, assistance tothe fipanclal sector as a whole, offers sianificantly greate= oqn§rtunitv toengendOr more viaorous and cgasble flnancial intermediatlon for Ghanal'industry.

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I. INTODU.CTION

1.02. The Second National Inveitment Bank Project '(Credit\\901 -GA)

consisted of an ID4k Credit of US$19 million and an EEC SpeciAl Actioncredit, equivalent to US$6 million. to the Republic of Ghan to assist inthe finncing of a Second National Investment Bank (NIB) project.

1.02 Trhe IDA c'redit p'rovided f?reign exchange for a),term loans(US$12.2 million) for capital Investments to Prand and rehabilitateIndustrial capacity; b) vorkinf capital loans (US$6 million) -to fiuncethe importation of spare parts and raw material to improve the utilizationof existing industrial capacity; and c) technical Bassn lance (US$0.8million) to marengthen Ghana's export program d aNIB'9 promotionalaappraisal activities. The EEC Special Action credit (US$6 million) wasall?cated for working capital-sub-loans.

1.03 The'\purose of the project was to stimulate increased productionand improve the capacity utilization In pri~rity manufacturing and agro-industries, with the objective of increasing foreign exc e earnings andsavings. i

2.\04 The credit became effective on May 14, 1980, six months After thecredit had been signed ot Octob~r 26, 1979, and approximately 12 monthsafter World Bank Board approval. The delay was attribited to politicaluncertainties sn4 changes in Government. '

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-I. THE. ECONOMIC CONTEXS

2.01 ' During the period in vh*ih the second line of credit to NIB wasdisbursed, Ghana's economy underwent a major restrctur # whose objectivewas- o forestall an otberwise inevitable period of \recipitous decline.Prior-to 1978, Ghana's GDP growth was largely stagpnt, Beginning in l*78 :GDP growth deqlined by an annual average of 2 percent through 1983. Withthe advent of the Economic Recovery Program in 1983, however, Ghana'seconomic performance improved i4th a 5 percent annual growtb rate in i984.Economic growth was estimated at 6 percent in 1988. Given that\1983 was awatershed sea' for thc.economy, the economic climate, prevasllng during theimplementation of Credit 901-GB is discussed accordiAg to, time periods pre-1983 and post-1983.

A* Pre0*W 83-

2.02 At the time of the project's original appraisal in April 1977,the Ghanaian e.¢onomy had detertorated. Progress toward meeting theobjectives of Ome Five-Year Development Plan (1975176 - 197918o0 hAd beengreatly circumscribed by the slow growth in revenues and export earnings.The major concern regarding Ghana's economic ptospects ras the country'sforeian exchaihne Dosition. A large proportion of the invastaimt in the'country was in import substitution, which required the importation of rawmaterials at-the expense of maintainin8g investment in traditional export-earning agricultur&il projects. The result was that the actual productionof Ghana's main export comodities -`-tocoa, timber, and gold\-- dropped by25 percent between 1972 and 1975.

2.03 Also, because of-the lack of new exports in addition to thetraditional comnodities, severe limitations-on the availability of foreignexchange for the import o' raw materials greatly constrained industrialsector production. The limits on foreisk eschange, coupled with. a lack ofcltar and consistent economic priorities for the allocation of import1iclenses, aid overall inefficiencies in the licensing process, yiel edinef-ficient foreign exchange allocation in the manufacturing sector?.Hence, businesses sought to circumvent the limitatoios and increase their

-raw material!supply by purchasing ab onad on the black market.

2.04 \Meanshile, the inf lsion rate increased to over lOO percent in1977 and i988. as compared to kn annual rate of 30 percent in -975. Theinflation rate vas much highet than the rate in other lest African -countries and was eroding the 4bility of Ghimaian exports to compete bothin West AfrLcan -nd international markets.-

2.05 Whille manufacturing accounted for 14 percent of GDP in 1971,\ itdropped to 10 percent in 1977 because of a lack of foreign exchange topurcbase inputs. The majority of the pl~nts were operating at 30 percent

-capacity. In an effort to stimulate activities in thq nanufactuiing and- - - -ndus torial aactO.\ .nj2 uiuedL Ite f uaIan -of. for an exchange was

needed for essenti4l working capital. But given the poor ecenomic. positionaAd outlook for the\foreseeable future, and the absence of cqncreteGovernment moasures.to control inflation, the Bank postponed furtherlending. --

2.06 In June 19?8, however, the Government began a stabilizationorogrRm in which a) the currency was devalued by 58 percent against the-dollar as. part of an overall program of realigning the ce4i in relation tomajor currencies; b) budget deficit re4ction measures were undertiaken_ c)bank reserve iatiou were increased, along with depostit and lending rates-toreiuce liquidity and control inflation; and d) the treasury bill discountrate was raised from 7.75 percent to 12 percent; e) import licensingauthorities wert to channel foreign exdhange to agro-industries emphasizingfood and 14 al raw materia processing, export-oriented'enterprises, 'andprioriti~ companies sufftrng from underutilized capacity4 1) pricecontrols ot a1l but the mt ess 9itial consumer items were refmved. \

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2.07 The liberaltzation of the licensing program tesulted in licenses,Vbeing issued without sufficient foreign exchange. Hence, foteign banksrefused to ship goods to Ghana without a letter of credit from foreignbanks, which delayed shipments and vastly curtailed the availability ofshort-term import credit to Ghanaian Importers. In response to the seriousconstraints in the import licensing system, the government revoked'unnumbered' licenses which had allowed non-essential consumer goods to beimported by Ghanaians with foreigh exchange in exterzal banks.

2.0~8 The constructive steps undertaken by the Government bolstered theeconomy's prospects. Also, the low debt service ratio proved tW be afavorable factor that encouraged Bank support of the country's industries.The Government subsequently received the support of the IMF, which approveda one-year stand-by arrangement and Trust Fund Loan, which together totaledUS$102 million. Under these improved conditions, the second line of Credit901-GM to the NIB was approved.

B. Post'- 1983

2.09 In April 1983, during the course of the implementation of Credit901-Gl. the Government initiated the Economic Recovery Program, orStructural Adjustment Program. The objectives of the program were to: a)shift relative prices in favor of production, especially for exports andefficient import substitution; b) restore fiscal and mionettry discipline;c) help to restore infrastructure; and d) encourage ?tivate inveptment.The major component of the Economic Recovery Program was the introductionof a more realistic exehanie rate. In September 1986, the GovernmentIntroduced a second tier auction system, and in February 1987, the auctionand official-exchange rate were unified. Also, by February 1988,\ allinterest rates.had been liberalized.

2.10 The response of the economy to these reforms was initiallythwarted by the 1983 drought and lack of sufficient aid. Nonetheless, theachievements of the Economic Recovery Program from 1983 - 1986 have beenpromising., In 1984, economic indicators improved and.showed that growth&Veraged more than 5 percent a year, the trade balance improved, theg vernment's budget deficit was reduced substantially, and the growth inthe money supply was curbed.

2.11 In 1987-1988, Ghana entered the second phase of its structuraladjustment. The program had five main obj#ctivess a) liberalixing tradeand exchange rate policies by expanding the official foreign exchangemarket; b) maintaining cocoa production gains by providing incentives forproducers; c) improving tax policy and administration; d) reformingstate-owned enterprises through commercialization and undertaking adivestiture program; and e) reducing the number of public sectoremployees.

2.12 In summary, during the period of Lmplementation of Credit 901-GH, NIB weathered a period-in which the economy had reached its nadir. NIB

Jis to be credited with functioning as well as it did in the conttxt ofextraor"inarily challenging circumstances. As the performance of theeconomy gradually Impioves, NIB's performance in terms of its financialposition should also improve.

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C. Manufact .Sector

2.13 At the time of project Appraisal, the manufacturing sector-accounted for about 10 percent oi CDP and about 12 percent.of the' laborforce. 'The industrial base was largely fi4anced through 4A ambitiouspdblic sector investment prograi. The,large bulk of the investment duringthe post-independence period from the late 1950s to mid-1960s was in stateenterprises financed by suppliers' credits and budgetary deficits. Sincethat period. increased e6phasis has been given to developing indiSenous.small-scale enterprises

2.14 The idustrial sector's foundation was very weak. It wasboletere&d-by hX import tariffs and quantitative c&itrols andcha*acteiiaed by heavy relia xce on imports. Foreign exchange 'sbortage,sresulted tn mnder-utilization of capacity. Few inter-sectoral linkageswith otber sectors, such as agriculture existed. At the time of theorlginal appraisal for Credit 901-GE in 1977, capacity utilieation autedto only 30 percent. a ',

245 Prior to the approval of Credit 901-GE, the Government undertooka stebilizttion program In whic4 price controls were phased-out on all butthe most esWential consumer goods, Also, a set of-incentives including anexport bonus scheme was implemented, Out the high level of inflation andthe foreign \echange shortage virtually neutrali2ed the effects of thesemeasures.

2.16 More recently, a Bank assessment of Ghana's industrial sectorIndicates that: a) the available foreign exchange is insufficient to metofull "apacity utilization; b) the domestic market'is insufficient tokbsort the full capacity utilization production in some industrial sub-sectotss c) the lack of si?fficient availability of raw saterials precludes

\the full use of industrial \apacity; d4) public sector investqentsi can notbe adequateiy' manag6d to assure the required level of efficiency for goodsto be price pnd quality competitiveo and e) h limited qualitykofproduction capacity circumscribes the industrial sector's ability tocompete with imported goods.

2.17 Some positive signs are beginting to emerge as a consequence ofrecent reform efforts. n 19d5 i4pacit ut4lAzation increased to. 25percent from an estimated,18 percent ixFl984, and is likely to have risenfurther since then The adventWof the foreign exchange auction hasbenefitted the manufacturii* sector which can be more readily assured of asteady supply of raw materials and intermediate inputs. ,Varia*ions'inperformance exist among the subsector.s the production of soap, be4r, softdrinks, saw mill 'and wood products has exceeded previous production peaks.

eanwhile;, production of shoes, textiles, and gprments is -4till far'lbetowprevious levels of production.

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r Financial Secto r

2.18 The prolonged economic deterioration in Ghana and theinappropriate fiscal and monetary policies that contributed to the declinettsetbee reflected finthe lo level 'of'financial intermediation in th

.and he growing financial disintermediation.

2.19 The major source of liquidlty ezjinsion during Credit 901-GHdisbuErsement was central bank financing of public sector deficits. Theincrease in the money suppLy, in conjunction with a stagnant real GDP, led' -to an increase in the rate If inflation from 10 pereent in 1972 to 123percent 'in 1983. 'Due to the over-liquid economy, ba eldind not acceptint,*rest bearing deposits for eFtended periods and the BOG did not increaseinterest rates and hence, real deposit rates were negative over a prolongedperiod. Moreover,kbanks had little incentive to attract deposits sinceixvestment lending opportunities were greatly limited.

2.20 Public alstrust in the banking system grew with additionalGovernment measures that included the demonetization of the 50 cedi ba knote, compulsory payment by check for all transactions ekceeding 1,000cedis. and the freezing of all bank accoumts in excess of 50,000 cedis;The resulting disintermediation was charac erized by an increase in the useof the infoi a1 financial sector.

2.21 Also, Ghana's capital market was in its infancy, and wastherefore unable to prpvide a substantial contribution to mobilizing termresources. The National Insurance Trust Futd and Social Security fundswere requlired to purc4ase low-yilding Government stock to fi$anceGovernment deficits rather than :rivate sector investmentsi <

2.22 pecause the poor statue of the financial sector was a majorconstraint to economic expanston, the Government undertook *ome majorreforms. In addition to full interest ra4e4libetalization in;February1988, lending rates, which had been controlled by the BOG, were completelyliberaliaeu in September 1987. All aectoral lending targets have beenremoved, escept for agricultural lendlag.

2.23 Even with these changes, the banking system is stillcharacterized by* a) very largq non-performiAg loan portfolios; b)inadequate provisions for bank loans; c) inflated profits c) higho0erating costs; d) foreign exchange exposure: e) insufficient capital;and f) weak internal accouAting and management functions. Customersarvices are of poor quality and resource mobilization\continuei to beconstrained by* a limited range of financial instruments.

2.24 The Bank's 1988 financial sector adjustment credit is aimdatsupporting a comprehensive Government program for rebuilding the\financialsector. The objectives of the credit are tot a) reform banking begu1atioiand restructure distressed financial institutions; b) Imp;ove deposit4bilization and efficiency in credit allocation; and c) Aevelopsecurities and money markets. -

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-II. NATIONAL INVESTMENT BANK

3.01 The NIB is Ghana's primary development ftnance institution. Itlwis established in 1961 to finance and promote private and p4blic sectorinvestment. The purpose of the NIB is to assist in the financing of theagricultural, commercial, industrial and cooperative sectors of the economythrough term loans, issuance of guarantees and pubscription of shares. TheGovernment owns the vast majority of shares in NIB, with foreigninititutions and numerous small investors holding the remainder.

3.02 As other development finance institutions were established, suchas the Agricultural Development Bank and the Bank for Housing and -Construction, NIB focused increasingly on the industrial and commercialsectots. Current4y, NIB is the main Ghandian institution for the termfinancing of induttry. The NIB performs commercial banking functions inaddition to its development banking and investment activities. Commercialbanking account,s for approximately 25 percent of its portfolio assets. In1987, the NIB had 9 branches, which represents an increase from 6 branchesin 1980.

A. Financial Status of NIB

1. Profitability and Arrears -i

.03 One of the main objectives of Credit 901-GH was to reduce thelevel of NIB's arrears by,providing credit for imported inputs for NIBclients, thus increasing their.production levelvsand improving their debttservicing capabilities.. As part of the Arrears Recovery Program ii theProject Agreement, the NIB agreed tot \ \

inform the Bank of any rescheduling of loans during any quarterthat exceeds 5 percent of M'B s total outstanding loans\ inarrears for 3 months or more, and to furnish a quarterl.statement o£ rescheduling that describes each projectrescheduled, the amount, and reasonsl

b. allow only those borrowers 'that fall into akrrears du; to genuinedifficulties arising from exogenous economic factors to havetheir loans rescheduled; other delinquent borrowers-were to beinduced into loan repayment through lqga1 remeuies, .

c. create more regional branches to asspre more.effective cov&rage\.and supervision of borrowers; undertake regularly scheduledsupervision visits;

Implement a tiaiely billing systei.

.3.04 NIB has had a long-standing problem with arrears. ID 1973, 99percent of 'loans' to agriculture and P2 percent of loans to in-4stry were.affected by arrears\ of over three motiths. The Government repaid all,arrears outstaAding an NIB's public, lending, and in *975, the Bank

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subse untly' appr ved.Loaa 1180-GH upon tuB establishing a special arrearsreview committee.

3.05 During the implementatikn of Loan 1180-GH, arrears had reached ahigh of 68.8 percent in March 1978, primarily due to a few large public and"private enterpd.ses whose payments had fallen behind. By September 1978,the exposure rate was reduced to 22.2 percent. The reduction in the levelof exposure was achieved through two major means: 3. by rescheduling 4.number of loans to a few large public and private enterprises; and 2) bypursuing clients in arrears.

.06 For purposes of Creait 901-GB, NIB was to ma1tain the amount of

.ts arrears outstanding at below 30 percent of its aggregate loanportfo.io. In January 1983, the level of arreara outstanding had not beenreduced, largely because of the considerable delays in credit diobursementand poor loan recovery. In June 1984, about 53 percent of NIB'99portfoliowas affected by arrears, far in excess of the 30 percent.ceiling. Thepercentage of NIB's-portfolio affected by arrears increased to 68.7xpercentas of December 31, 1984. .

3.07 Several factors contributed to arrears: a) a shortage of foreignexchange to purchase imported spare parts; b) weak management in the NIBand in sub,borrowers' insti'tutionst c) poor weather conditionG, as theyrelate to agro-Andustrial projects; and d) weak market conditions due tothe general economi;"climate that was deteriorating rao4dly.

3.08 NIB made some efforts to improve the quality of its loanportf4lio througp intensified loan collection, rescheduling, managementadvice to sub-borrowers., and other forms of assistance. Yet little couldbe done in those cases where projects operated at low capacity.-ue to lackof imported raw materials, which the Bank's line of credit sought toaddress. Moreover,.INB.encountered difficulty in,pursuing lega} actionag4inst those companies in which it or the Gove X nt had equity holdings.

3.09 Although NSB had committed itself to the Arrears Recovery Programas part. of the Project Agreement, it was- not implementod - -had beene-agreed. for example, in some instances, ? B did not inform the Bank of its.rescheduling of l6ans. Moreover, because rescheduling has the;inherentlimitation of addressing immediate concerns, and not the underlyingprotle Nthat leaa to.. loan default, NIB was to plan a rehab#litationprogram for the oajr problem fub-borrxwers and a liquidatidn plan forthose companies Which were unviable. About 1 large firms accounted forabout 70 percent of Nil's recovery problems. 'Yet NIB did,not have thefinancial ov human resources to engage in such operations. The Bank agraedto realloca\e US$300,000 of the credit to the technical assistancecomponent of the project to finance feasibility studies for therehabilitation of larger pro3ects for which NI1 had a high exposure.. Itwas antidipated that this proclss would lead to a consolidat4on of NIB'sportfolio ani financial positidn. ,While some rehabilitation-efforts',havebeet undertaken, the full-fledged tLmplementation of project rehabilitationhas yet to be forthcoming.,

3.10 espite difficult economic conditions and high levels of arrears,NlI lreported profits during the courss of the credit disbursement. Yet the

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Bank considered 1IB's forecasts of its profitability to be unaccep8ab1e.The 1981 audit report prepared by NIB'f auditors did not coument o4portfoliq quality, rescheduling practites, the adequacy of provisions, andresource position. Moreover, the confidential management report alluded tothe problem of high overdue loans and insufficient securities, but therewas no discussion in the management report of these major issues.

3.11 NIB's piofitability was overstated because of its accountingpractices. NIB accrued as income uncollected interest on loans which werelong past due and which should have been considered as non-pp rformingassets. Hence, actual financial results were substantially different fromthose reflected i! the accounts despite the Bank's recommendation that if'NIB recognized the,interest\income in the year of accrual, a counter-entryhad to be made to increase the level of provisions each year by the entireamount of interest accrued but not received.

2. Foreian _xchanae Losses

3.12 T#e 1984 Bank supervision missions noted that NIB was carry"hgsubstantial;foreign exchange risk exposure dating back for several years.The purpose of the missions was to determine the degree to which NIB wascarrying foreign exchange risk, and to help NIB avoid future exposure toforeign exchange risk, which was especially needed given the recentdevaluations of the cedi. The NIB exchange risk resulted from sub-loansfrom Bank Loan 1180-GH and a KfW line of credit, which clients had alreadyrepaid to NIB. The average maturity of the sub-loans was substantiallyless than the maturity of NIB's foreign loans which finsaced the short-term loans to sub-borrowers. Instead of repaying the foreign loafs as thesub-loans were repaid, NIB held onto the proceeds to revolve them. Thispractice violated NIB's agreement with the Bank under Loan 1180-GH and wasattributed tot 1) an error in interpretation of the agreement; an! b) alack of understanding of the implications of the risk exposure.

3.13 NIB's audited accounts for December 1983 did not includeprovisions fogi foreign exch_nge losses arising from the devaluation of thecedi. The Bank estimated tbaat the amount of NIB's excha*ge losses exceededits net wo;t. Ioreover, NIB could not iithstand the burden of additionalprovisions riquired to ccdunt for NIB' portfolio losses. The erosion ofNIB's net worth in relation to-the majot foreign currencies led NIB toviolate its credit agreement with the Bank which-limited NIB's debt-equityratio to 5:1. Immediate action to financially restructure NIB wasnecessary, particularly in the context of NIB needing to attract foreignshareholders like DEG.

3. Financial RestructurinA

3.14 C*tinuil supervision of the financial status of NIB, which was'operating in a precariouw political and economic climate, was a necessaryadjunct to the supervision of credit implementation. The Bank prepared anAide Mtmolre-in which a financial restructuring was proposed, The Bankdiscussed the restructurina plan with NIB in October 1984. It identifieda) the need to raise NIB's equity b8se to a level to enable it qo sustainits lending. activities during the n6xt several years while maintaining areasonable debt-equity ratio; b) the need for NIB to obtain a mix of -N

rlsources compatible with the maturities of its projected lendingo0erations; and c) the desirability of modifying NIB's ;urrent ownershipstructure with a view to inFrease shareholding by private domestic andforeign shareholders.

3.15 The Central D*k and the Ministry of Finance accepted thefinancial restructuring proposal suggested by the Bank. The proposal;included the following changes regarding NIB: a) assuring Government 'provision of an interest-free, long-term subordinated loan from the BOGtotaling 880 million cedis which was to redress NIB's immediate liquidityproblem; b) requiring BOG to\ bear losses due to foreign exchange qxposureby NIB, which totaled 1,100 million cedis arisgng from earlier AfricanDeyelopment Bank UADR), IBRD, and Kreditanstal. fur Viederaufbau (Rf)loans; c) increasing NIB's author*zed share capital from 40 million cedisto one billion cedis; d) opening part of NIB's capital to externalinstitutional investors; and e) increasing NIB's debtlequity limits to10X1. While the latter ratio is indeed high, it was justifild by the factthat it was not inconsistent with ratios prevailing,in other developmentfinance institutions abd nonetheless represented an improvement in NIB'sdebtlequity ratio at the time, which was 22:1 if the ADB loan was takeninto account.

3.16 Given the overament's commitment to uindertake these measures.the Bank began to initiate informal contacts with potential foreigninstitutional investors to attract foreign shareholders for NIB. Indeed,the restructuring was a critical antqcedent to NIB obtaining neededadditional resources, mainly foreign currency. At-that time, Cridit 901-GU had been fully committed, and to enable \NIB to maintain its lendingcapability, additional resources were urgently needed.

4. Joint' Portfolio Review

3.47 As part_of the financial restructuring, the Bank undertook ajoint portfolio review of all NIB accounts in June 1985,in conjunction withNIB and its external auditors. Among the fi#dings of the joint review werethe followings

(a) only very, inima1 provisions had been made, despite NIB's long-standing problem with arrears; it was recommended that NIBsubstantially increase provisions;

(b) of the 215 outstanding loans, 134 or 62.3 percent were affected== by arrears; it was recommended that NIB vigorously pursue loan

recovery.

The joint portfolio review recommended close sUpervision and technicalassistance in NIB's fiMancial r1structuring and institution building. TheBank strongly recommended that IDA should couple its assistance withpressure on NIB to itqprave its loan recovery. It was further recommendedthat IDA should info tNIB, and the BOG that unless improvements'were uade,

- IDA may ftnd~ it necessay #to exclude NIB from participating in futurelending operations. - '

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B. Institutional Performance

1. tIBmaB ient3.18' NIB's Board of Directors did not play a striag role in expressingthe concerns and views of IB within the Government and in supporting anddirecting NIB?s managSemnt. The rather.-recessive role of.the Board can bepartly attribtted to its recomposition which was stipulated by the,Government in 1983. An Interim ;Janagement Commaittee was established vhich.effectively replaced the prior BoWrd. The eleven-member Committeeconshajted of three Government officials (representing the BOG. toe Ministryof IndVustries, and, t4e Ministry of Finance), four NIB senior staff, threeuemployee representat4ves, and one privte shareholder representative. Of-major concern was the degree to which a*more -internally-cosmosed Committeedetracted from NIB's ability to meet its requisite needs for additionalcapital fro* private foreign and domestic invest.ort. In 1986, the InterimManagement C6mmittee membeCip' was changed and reconstituted as the Boardof Directors. The three NIB employee representatives were dropped fromboard membership and among those a4ed were a representative from the,=Ghns aCommercial Bank and from thp Bank f*zk Rousng ant Construction.

3.19 NIB's managemevt'was subject to significant upheavals during.the,cou se olf credit implementation. Trom 1978 to. November 1983# three, Acting s.aniging DireetoLs had been successively appointed. A very competentManaging Director was appointed in November 198,3i but l8. te4ire wasin.eterrupted by his un'timely death in March 1985. \-uring,.the, largely-disruptive period it NIB.management, supervision missions reported that theprofessioftry skills of some sectnd line\managers did not coincide with jobrequirements. Overall, NIB dnagement 4±4 not assume 8 leadership role-regarding personnel, administrat ve, and financial problems which werecritical to NIB's solvency. 'The relatively poor management petformance maybe partially attributed to the unstablo political, coditions prevailing-inthe country.

2. Orsanizatioan

3.20 Since the project appraisal in 1979, MI! has undqrtaken a numbhr'of positivet=4eps to-re6rganize.its operations by eitablis*ingt, a) a loanrecovery unit in the Finance Dpspatetztt b) a unit for project supervisionof loans and a separate unit\--for project supervision of jolft ventures; c)

- a-Research and Statistics Division and an Ixternal Loan-and Axpopt Advisorytivision; and d) 'unit thatŽ consolidates various administrative servicesinto one adfinistrative division. The purpose of NIB's resear(o,divisionis to perform project-velated and industrial studies. Its first task wasto prepare a survey of 80 companies to determine the level of operations,.,,constraints, export potential, foreign exchange needs, and-othercharactiristics, which wpuld asseit NIB in its subsequent appraisal and'lending operations.,

3.21 Although tiese organizational.changes were consttuct ve, thenecessary follow-up to the drganiz4tional restructuring, which includes theest4blishmenk and zpi4entation o$ appropri^tepolicies and procedures,.* wtsk'acking. Also, the t*o supervision units lacked sufficient staff toassure full-fledged operation of the project supervision:. Moreover, NIB's

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organizational structure needed to be revamped, so as to groupoperationally-related activities on a regional or functional basis toausure more efficiency and coordination. NIB requested assistance from IDAto develop a five year institutional development itrategy. The disruptionsin tenure of the Managing Directors, however, led to a hiatus in theimplementation of the action plan that incorporated needed institutionalreforms. Hence, NIB's institutional structure improved but remained weakduring the course of the project.

3. Staffing and Training

3.22 As of December 1982, NIB iad 72 professional staff. In 1983, NIBadded 9 new professional staff (3 economists, 4 agriculturists, 1 lawyerand 1 statistician). During this same period, NIB lost 12 otherprofessionals, including 2 engineers, resulting in a total of 69professional staff at the end of 1983. Many of the staff departures weredue to the availability of more attractive opportunities outside Ghana.Hence, NIB needed to recruit additional engineers, accountants, economists,and financial analysts. The Bank recoumended that NIB undertake a review

iof its employee compensation structure as a means -.o attract more qualifiedstaff. Such a review is necessary since NIB's salary structure andconditions of employment are less desirable than those of institutions withwhich NIB must compete for a pool of talented professionals whose numbershave decreased with the flight of many professionals from the country.

3.43 The total number of NIB staff and total administrative expensesappeared very high "s compared to other development finance institutionswith a similar voluuee of operations. Also, the number of highly skilledprofessionals is relastively small in relation to support staff. Areduction in the number of non-professional staff would offer NIB theopportunity to increase benefits and thereby attract more qualifiedpersonnel.

3.24 Tn 1985, NIB established a training section. As of 1987, NIB wasusing the BOG as a training facility and-was in\the process of establishingits own facility to accommodate 24 traiaees. The following courses have'been among=those organised jointly with the DOG: supervision, basic andadvanced project analysis, finincial restructuring and bookkeeping. Also,the NIB training department sponsored a basic banking and lon-administration course. Overall, the training program focuses tore onclerical activities than on increasing the banking qualifications of theprofessional staff. The training programs lack sufficient emphasis onproject appraisal, loan recovery, and advanced project supervision, whichare the main areas where NIB performance has been deficient.

3.25 -During the one-year period from October1986 - October 1987,approximately 2?0 of the 750 staff (which includes 630 operational and 1201,non-operational' staff) attended some form of training course. Totalexpenditures on training increased dramatically from 200,000 cedis in 1983to 9,100,000 cedis budgeted for 1987. From 1983 - 1986, however, actualtra,ning expenditures were as 14w as one-third of the training budget.

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4. Accounting and Management Information

3.26 During the disbursement tf the credit, NIB's AccountingDepartment deteriorated, in part because of the loss of the competentdepartment head. The activities of the department consisted primarily ofrecording transactions. Delays occurred in NIB closing its year endaccounting, which hampered the timaly preparation of audits. A November X1987 study found that significant wvaknesses still characterized the NIB'saccounting department.

5. Loan Disbursements and Administratio

3.27 NIB's loan disbursement proces,9did not incorporate systematicreview of each disbursement request to determine the progress of sub-project itplementation or to certify sub-borr9wers' disbursement requests.NIB did not send out payment notices to sub-borrowers at regular intervais,and hence, some of NIB'1 sub-borrowers took advantage of the lax approkAhto prompt payment, even if they had sufficient cash flow to make regular-payments. More recently, the NIB reports that the billing system has since

-improved, and is continuing to improve with the ongoing conversion froii amanual to computer programed billing system.

IV. TH! RLO_JCT

4.01 Credit 90i-O4 provided a line of credit to NIB tot&lling US$19million, which was allocated fors (a) term lending (US$12 2 miiion) forexpansion and rehabilitation of qualified existing-firms and new highpriority projects; and (b) short-term credit for working capital (US$6million) to finance the Isportation, of spare parts and raw materials ferexisting enterprises that Were subjict to.foreign currency shortages; (c)technical assistaice to the Government (US$300,000).Ior formulation andImplementation of an export and marketing program for non-traditionalexports; and (d) technical assistance to NIB (US$300,000) for improving theinternal 4perations of NB a-ni Improving 1ts=project pomotional efforts.The goal was to enable Ghana's industries to improve capacity utilizationin priority manufacturing and agro-industries with the objective ofincreasing exports and foreign eAchange earnings. It was furtheranticipated that the credit would reduce the level of NIB'3s arrears byproviding nee-ded financing for NIB clients. In this way, tke credit was toplay an instrumental role in strengthening NIB to make it a more effectivefinancial intermediary that would continue to be the main source of fiiancefor the country's industrial sector.

A. Project Com onents

1. Term Lendina

* 4.02 US$12.2 million of the IDA credit was allocated for, term lendingby the NIB to finance the full direct and estimated4 indirect foreignexchange capital cdsts of manufacturing and agro-industrial projects. Itwas estimated that foreign exchange costs would represent aiout 65 percentof the total sub-project investment costs. I

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2. Wor tal.4.03 US6 on fro the-Acr eit and US$6 million from the EEC t

4.03 US$6 aliU4-IDArocthe ICft ility was on-lent by the Goversment to NIB to finance short-term creditsinvolving the importat-ion of spare pa;ts and raw materials for sub-borrowers,. The credit would cover abolt 80 percent of the foreign exchangerdquixetnts of'the sub-borrowers; in turn, sub-borroWers would contribute20.percent in cash which the,Government would conwert to foreignexchange.

3. Revolvins Imort Fund for Workina Canital

4.04 The Govornment was to establish a Revolving Import Fund from .the\repayent proceedi of the first round of working capital lo ims. It wasanticipated that the funds would revolve four additional times. Therevolving funds would be on-lent by NIB in coordination with the.CentralBank. It was estimated that during the eight-year life of the fund, theinitial allocation of US$12 million should have financed'imported goods ofabout.US$75 million in foreign exchinge. The Government's contribution offoreigrr exchange was to be made available through t4e foreign,exchangeearned from the exports of supported proiects.

4. TechnicalAssistance NI

4.05 theKUS$100,009 technical assistance component was to ke used to,strengthen NIB's projeet identification capabilities and improve.its .-project pipeline. A.sAcond objective Was to increase NIB's appraisal andsupervision capabilities. In that regard, the technical assistance=:;cohnent was to finance staff training and consultants. to improve internaloperations. .

5. Technical Assistance. tO he Government

4.06 The. US$500,000 technical assistance co6pone"t to the Governmentwas to be used to review and make recomuendations to improve its export

g poi 9 wo pogra T, ani msttu t; os

B, A#wraisal

4.07----- The following inveetwent criteria were,to be applied in 'anlysisof proposed-projects: = ,

-(a) expoot-oriented oro1ects in which increme l foreignexchange earnings are proven to beDsigalfibantly in exces of foreign exchange used in production;'

(b) projects that tse indiaenous raw materials, with preferenceiven to projects using at least 40 percent local raw

m aterials in production;

(c) projects that maximize the use of inst'alled Industrial

capacity; '

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(d) import substitution schemes that ensure net foreignexchanae saviez a

4.08 For sub.,oans exceeding VS$50,600, a financial\rate of return wasto be dalculated. 'For sub-loans exceeding-US$200,000, the Aconomlc rate ofreturn was to b# calculated.

4.04 Tho quality of loan appraisals perfbrmed by NIB revealed a needforNIx to imorove ats a2graisal grocess. In a number of instances, the-ioan analysis did not sufficiently justify the loan amount, the repaymentperiod-, and special featE#re% of the sub-loan. In particular, additionalAtthtaton was needed in.

-p ) assessi*g market cofditLons zontrontig indivifual firms through .

demand analysis; -

(b) ITa*at* g firmsf 'tapaciZy 'to Irvlce thir debt Obligatlons .'

-c) deteiimning the conomic e6n technicai viabilIty of proposed5, '. projects;*

(d) assessing the qualifications and performance of the sub-borrower's management;

,e) idqntifying the degree of foreign exchange savings through importsubstitution;

(f) analyzing the comparative costs ad benefits\between processing* Qlcally versus directly importing the final product;-

(g) deter*ning the impaqt on capacity utilization of access toforeign exchanges

(h) assessing the availability oT.raw materials necessary forproduction;

(i) performing detailed sensitivity analysis b sed on anticipatedNrisks;

4.10 In sum', NIB's aaoraisal ctivities ware.no Ufficient well-founded to effectively assess the merits of proposed projects according todesighated criteria.

4.112- For example, NIB proposed'a sub-project whi h would have expandedthe capacity for boapmai,afacturing, but Bank staff noted thai thecountrts .soap production reached only\ 69 percent lo capacity. Also, R Bappraisals were sosetimes performed vit4(qut the benefit opf financ,al-statements from loan appl#cants. -Bahk staff requested-.NIB to obtain* financial statements from potential borrowers, in light of the serious

. ,financ 41 condition of many loan applicants. In the absence of fianacialrecrdts, the Bank requestd\ NIB to prepare basic financial statements.forloan applications using infbrmation a ilable. Also, in scmb appraisals,NIB did not difforentiate'.ohether poor performance of applicants was due.toforeign exchange restrictions or poor management.s

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44..2 It was evident that at least in the initial stages of the credit\disbursement, sub-borrawers seek*ug asaistarce were unaware of the termsand conditions of applying for tetm and working capital components'> inpartikular the interest rate, maximum repayment period, the prohibitionagainst prepayments, the client's obligatory contribution in',localcurrency, and the procedure for changing local contributions into foreignexchange. ?or example,'some perception existed that firms that hadpreviously.qualified for NIB loans could be eligible automatically underthe credit. \Hence. there was a need to communicate the terms andconditions of the credi* to NIB staff and Potential borrowers.

4.13 NIB's project appraisal reports wete submitted to the Bank forconcurrence after approval by the NIB. The, ub-pra3ects, howevvrX,'wereusually subject to a veappraisa I by tie B3*, ;which led to queries bein8.;raise# by the snk-. 'he NI aseerted that. it.. deci ion en qvO-projectsshould be. acc*pte4 by the Bank, since as a evel t:bank.'It hdaidequate locil kinowieg! of the protlems -encountered by the ilddstries inGhban,-al,;hough it,s wlcomed cowmmsts that ixuld improve its. appraisalcapabilities. It ta not evident that NIB sonraisat c-aabilitleswarranted the deAree of indeen_dent iudLement that it 9ouiht.

C. Credit Disbursement

4.14 The second line of credit was originally con6eived as a ouickd4ifarsic facilit to assist Ghanaian-entrepreneurs in solving their acutefozeign exchange problems.; The original closing date of the second line ofcredit was December 31, l98i. There were three extensions, and the actual-closing date was December 1985. As of July 1981#\ virtually nodisbursements had been made, although the credit had been in effect formore than a year. By 1984, significant improvements in the' rate ofdisbursements of credit had been achieved, with about 50 prrcent 4fcumulative d4sbursements having been made by the end of fiscal year 1984.The final disibursehent was ma4e on August 19, 1986.\ With the ful.cowmitment of the credit, the hI had virtually ruz-out of foreign exchahgeto continue its lending operations.

4.15 Severai factors accounted fo\ the slow disbursement of credit:

1. Matchint Funds

4.16 Under the terius of the Project Agreement, .9he Government was tomake available 20 percent foreign \exchange matching .unds. In February1982, the new Government chose not to contribute -As@ matching shre and theBank held back approvals and disbursements., The Government subsequentlyrequested t it the Bank finance 100 percent of NIB's foreign exchange -working.capital loan's

4.17 The Bank subsequently agreed to el Lunate the matching \ . -requirement. The basis for the Bank's decision to provide 10( perc:nt ofN- B's foreign,exchange working capital was that a) NIB's pipeline ofptojects contained projects worth assisting; b) NIB's-management and staff

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capacity, although considerably deteriorated, was still able to select andappraise the relatively better projects; and c) NIB's loan portfolio wouldbe subject to increased arrears without additional funds. With the adventof this waiver, loan disbursements accelerated significantly.

2. Difficulty in Meeting Lendina Criteria

4.18 Sub-borrowers were slow in meeting equity requirements on termloans, in part because the priority criteria stipulated in the ProjectAgreement required that sub-projects must have.positive balance df paymentseffects and maximize the utilization of domestic raw materials. Compliancewith these conditions was difficult for some businesses, largely because ofthe overv4lued.currency.

, 3.~ Government ............and .NhBdelays '; ...................

Cumbersome pro edures'were employed by NIB and Governmentagencier in issuing import lJcenes,s title deeds, certificates of-incorporat,on, and other documents necessary for processing of the loans.which caused delays in project Implementation.

D. Sub-Proiect Su!eMgision

4.20 In 1977, subsequent to the original appraisal mission for thesecond line of credit, the Bank recognized that NIB needed to improve thequaBty o0 its sub-project supervision. NIB's supervision missions were-not scheduled according'to the degree of operating problems beingencountered by sub-projects. Also,' the lack of sufficient quantitativedata precluded NIB from-making adequate assessment of sub-projects.Training of supervisory staff was acutel -needed.

4.21 \ Weaknesses in NIB sub-project follow-up were evident in theduration of the credit. NIB's follow-up consisted mainil of loanXcollection that was ineffective. Lacking was (a) the monitoring of projectimplementation; (b) close supervision of disbursements vis-a-visImplementation progress an# costs; and (c) regular post-implementation,upervision. Organizatio ly, project follow-up was the responsibility oftie area departmints within NIB, although this arrangement provedineffective.

4.22 Hence, there was a need to establish a separate unit responsiblefor systematicalIy and aggressively *ositorlpg projects utring the critic 1impZ mentation and post-implementation periods. This need was particularlyevident in light of the large number of problem projects and the ,substantial volume of arrears. As indicated above, such units wereestablished in NIB but remained handicapped due to lack of adequate staff.

E.Loan Documentation. Disburseients. and Administration

\4.23 NIB's .oan agreements withiits borrowers were sometimescharacterized by contradictions betwe4n relevapt provisions in separate

*~~~~~~~~~~~~~~ C

. t ~ ~~~~~ 17 - ,.

agreemenAs pertaining to the same client. Also, in the absence of anactive project follow-up unit, the loan disbursement process was weak. Thedisbursement process wg ld have been\more effective if NIB had \a) analyzedeacq request'for disbursement; b) detenmined the degree of progress madein the physical components of sub-projects; and c) certified each client'sdisbursement request prior to disbursement.

F. Status of Sub-Proiects

4.24 The efficacy and desirability of the working capital component,which had been debated prior to project approval, was borne out by firms'need for working capital. Of the 70 sub-prQjects financed under Credit901.4B, 21 were In agro-industries; 4 In c4nsotruction; 8 in garments; 6; in..metal, products; in paper p;oductAs 20 in wood-related indastries; and8 i n£ o:thr 0#cto4s. here wre, 52 *ub-projIcts whos. total costa. were. lessthan US$ -million; only 2 were over US$3 million. Annex V provides a listof sub-projects that received.loans under.Credit 901-GH and their-chira6teristics.

4.23 For tho*e project's that have be*e completed, project comoletiontimes were generaliy longer than had been proj3cted. In five projects,however, the estimated time period Was also the actual time period requiredf6r implementation., Some projects had especially long period ofimple e tation, with one project in particular haviug an overrun of 51months.

4.26 Projected average finaEciil rates of return raned from 17.0percent to a high of 50.6 per ent. The projected average economic rates ofreturn for sub-projects ranged from 10.8 percent to a e\ih of 50 percent.

4.27 Some inconsistencies exist In NIB data. Bioticesmetie, Ltd,.reported an actual capacity utilization of 5 percent and 50 jobs havingbeen created. Yet appraisal projections\anticipated 60 percent capacityutilization and only 46 jobs being created. It is not clear how thecompany-could have\created as muMy jobs when-it is operating at only 5percent capacity, given that the projections anticipated fewer jobs being-created at a higher levrl of capacity utilization.

4.28 Tht concerns cited by NIB fir probl~ms encountered by sub-borr wers include a) lack of working capital; b) poor mXnage*ent; c) lack'of skilled personnel; and d) overall poor business climate. For some ofthe projects that have been abandoned, NIB is pursuing court action torecover the loan. In otheZt abandoned projects, company assets were sold toredeem the loan.

4-i~ In some cases, the reasons for project failure are not evident.A.E. Soud Ltd., Logs and Lumber, and Clear Type Press sub-projects werereported to be operating normally, although--in another analysis. thecompanies were report d 4s not performing due to foreign exchangeadjustments. The Pom .ds Poultry lnterprises is reported to have failed(but is being rehabilitated) because of the lack of wvrking capital andpoor manageusent, but another report from NIB notes that the sub-project didnot perform )ecause of foreign exchange adjustments.

_ 18 -

4.30 Analysis of the status of implementation of the sub.projectsindicates that some of the problems currently being encointered should 'havebeen anticipated at-the te of loan aniraisal. For example, Bibiani MetalLtd. received US$943,210 under the second line of credit. The NIB reports,however, that the company ii affected by poo7 management and lack ofworking capital and the company has yet to replace most of its old plantsrequired for production. It is not clear whether the company has not yetrbplaced its old plants because of delays in construction or because oflack of sufficient working capital. If the 'latter is the reason, then theproject scale in relation to available funds should have been moreappropriately ascertained *t the time of appraisal.

4.31 In another case. the Tano Soap Limited sub-project was reportedlyabandoned because of the companzy's iLnability to compete with bigger soapinduatries.- The reasons for the lnbility of the company to compete are -not evideut, i.e. vihether it is not competitive on the basis of price,market share, or quality. If the company cannot compete with the largercompanies, it vould seei that ith appropriate wArket analysis, this,problem could have been foreseen,at the tioe of loan-ppraisal.

4.32 The Edo Zip Fastener fanufacturing comapnyfs project wasabandoned in 1984 due to lack of funds to purchase raw materials to startoperations. This implementation status report does not account for the-manner in which the company used the loan of US$74,000 granted under thesecond line of credit. Also, Oti Rice Ltd. was reported to be likely tofail because of poor geographic location. Clearly, this deficiency couldhave been forestalled through proper marketing and input s%urce analysis inthe loan appraisal.

4.33 Given that some of the projects have been reported to be non-performing due to exchange rate adju\stments, it is uncertain from theinformation provided whether the sub-borrowers were utilizin4 term loans,in which case they would have had an option to assume the full foreignrxchange risk or pay a for"ign exchange risk premium of 10 percent perAnnum on outstanding sub-loan balances, with the Government assuming thefull foreign exchange risk. Alteruatively, if the funds were for workingcapital, sub-borrowers would assume the full foreign exchange risk. to theextent that sub-borrowers bore the risk, at issue is whether, in theabsence of exposure to foreign exchange risks, the sub-borrowers conld havemore successfully Liuplemented their projects and repaid their loan, Alsoat issue, is wliether vorking capital sub-bortowers would have benefittedfrom the availability of foreign exchange 'insurance' and whether theywould have purchased it in the event it had been offered.

G. Imoact on Exoort Promotion and \Foreln Exchanae Generation

4.34 The degree to which the project lncreased e*ports and generatedforeian exchange is untertain. The slow dsburs6ment\of the credit wouldhavelpostponed repayment and the eventual re-uie of the funds for furtherexport and ¶orei$n exchange generation.

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-' l. Retasme~~~~~n' N /

4.35 As of March 1988, half of-the sub-borrowels were In arrearstotaling about US$4.1 million, of which US$1.7 million was for principaland US$2.4 million for interest, and other charges.'

I. Technical Assistance to NIB

4.36 The purpose.of the technical assistance.component was to a)improve NIB's appraisal capacity\and introduce more engineering andtechnical expertise into the appiaisal process; b) reorganize andstrengthen,NIB's project i#etiiification and promption efforts to rea\tivatea;d improve 'its project pipeline which had diminished at the time Qf,;;p;; tib je¢*p ai ; cC) mprove the couec tion an4 u*e of data at. each stage/"- r ott cycleb£4orgeniza t ia,doperation al planning: and d)onprovid . tf i for ove r%ta cour . otte. .in- .

4.''7 ,'.; bulV# 4 the teehi~4'a eittM ce ' duds w:he diebured in theiatter patt o h cred t peSiod. As t , the te8hnical assistancecomponeit had not had any positive #ffect. '^Th two advisors chosen toprovide assistance to NIB totaling two staff years, were not successful in.meeting expectations. to the extent that the Bank recalled the firstadvisor. As of De*vember 1985, US$327,qOO. in technical assistance funds hadyet to be disbursed, out of a total of Ussao$0ooo. ''Hence, the sub-projectappraisal process apparently did not benefit from the technical assistancecomponent, although the assistance provided could have contributed to NIB'slong-run institutional catpacity.

. .~~~~~~~~~~~~~~~~o4.38 A portion of funds was used for overseas train ' for NIB staff.Some NIB staff from the legal oepartment also received staff'training inoverseas law courses. 'While NtU personnel may have benefitted from thetraining, some concern arises regarding th; priority use.of limitedttain gg funds. NIB is mrimarily a banking institution.- nd hence. thebenefli tto 1IB of lesal trai is not evident, particularly in hight ofvery pressing needs for staff training in appraisal and supervision and inbasic accounting and loan administration, which are ditectly related to NIBactivities. Another concern is the rather significant sums, up toUS$12,000 - US$14.000, that were allocated fo*i-training for indLvidual NIBstaff members. The fuMds could have been used to\benefit a broader ranR.of NIF staff. N;B reported that the overseas training "went a Iong waytowards strengthebing NIB operational capabilities,' although therelationship between the overseas training and the objectives of thetechnical assistai~ce, i.e. improving prd\ ect identification and supervisionprocedures,.was not clearly indicated.

4.39 The senior advisor to the lana~ing Director, ho 8s_to serve aSSenior Director of Finance and Administration, was hired\in February 1986,long after the credit became effective. A number of reasons may haveaccounted for this delay, 'in- luding changes in'top management at NIB in theearly years of the credit dilbursement,.and the difficulty of finding anappropriate candidate for the position. Moreover, the terms of referencefor the 18-month assignment were too broad. A.id. fro:R responsibili ies '

associated with reorganizing and managing the finance aidoaccounts

* A

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departuantC, the senior advisor was to formulate and implement'a plan tocorrect NIB's iastitutional weaknesse. No information was provided by NIBon the performance of the senilor advisor.

4.40 NIB also used technical assistance funds to purchase a computerin 1985 #ith the advice of Bank staff. It is not evident that NIB had thestaff capability to 'fully utilize the capacity of the equipment. Nor is itevident that the consultancy services provided yielded the opportunity forNIB staff to develop the proficiency to do so.

4.41 Hore recent assessment of NIB's computer capabilities suggeststhbt existing computer vystems in NIB are incompatible, which results inless than optimal benefits being reaped by NIB from the equipment putchase.,Also, the NI -aUks a sti*xtgy for computeri;$nj ita ope*ations- The

applicability of curreit4htwrwrresd *otwre systems for, '4i-apraisalcicivities has not been explored. Long-term benefits, however, may be

forthcoming if NIB' dbvelolp the protictency to fully utilize the purchasedequipment. Q:+

3. Tecical Assutne tth o'rmn

4.42 The poor export performanceiin Ghana was attributed to acombination of an overvalued exchange rate and the lack of viable exportpromotion policies. Rence, the Government retained US$500,000 of the IDAcredit to hire consultants to review and make recomendations for exportpromotion policy revisions and to establish markets for exports. Theoperations of the Ghana Export Company and the Ghana Export Pr= 'tionCouncil were to be reviewed. There is no indication, however, o the rolethat this technical asgistance component played in redefining andredirecting export policy. Juxtaposed to the simultaiieous effoFts made byboth the Bank and IIF during the cour#e of the line of credit,iwhose aimwas to promote overall stabilization and commensurate policies to increaseikxvestmevt and export growth, the efficacy of this technical assistancec6mponent would likely have been fairly modest by comparison with thelarger efforts.

K. haes in the Project Agreement

4.43 Three significant changes were made during projectImplementations a) the Bank waived the requirement for 'the Gove mment toprovide 20 percent matching funds, as discussed above; b)a relat4velynovel component of the second line of credit was its incorporation of fundsor working capital. At the time of appraisal, there was considerable

debate regarding the efficacy of, including suc4 a component; yet workingcapital appeared to be the most deeded source 6f funds among sub-borrowers.During tIe course ~f disbursement, workilng cap*taAl funds had\been fullycommitted prior to the full counitment of term loins,l A'potentiaibottleneck was created since the majority of sub-projects required bothtirm and working capital loans to increase productior. The Bank agreed toNIB's request' to use remaining tenm loan funds also for working capital.Menco, in pzoviding a *orking capital component in the cred#t at the outsetof the project, the Bank correctly anticipated NIB sub-borrbwerse mostp'essing requirement, although changes in the al4ocation of funds betweenterm loans i d woriing capital needed-to be madeO and c) the NIB was

,' '' ,' =,'A,

I _ ~~~21-

Ro1ped to increase its debt-j quity ratio from 5:1 to 10sl, as wasrecimmende by the Bank as part of the 'NIB financial restrulcturing. -

4.44 KlB.sought to change the provlsians in the project agreementwhereby projects had to 1ave at least 40 perqent local raw materials toqualify for oupport. NIB wanted to consider those industries which were100 percent dependent on imported raw materlals. This proposal was nottccepted by\he Bank.

L. Comoliance with the Prolect Agreement

4.45 Three areas where NIf's compliance with the pr8ject agreement waslacking were;g £f f. . . -.

- , .as to submit sudited *ccountm t t later than five moth.*.omr the closing o f the fiacal year. AIl's 1982 and 1983

.- . accounts ere prepRted aftetw the 4u* date;

(ii) NUB was to mag tait the Imot of its arieats outstanding atbelow 30 percent o the aggregate of its outstanding lin-portfolio. As of December 31, 1983, the relevant percentage was32*5 percent, although the more appropriate indicator, portfolioaffected by arrears, stood at 52.8 perFent;

(iii) Data provided to the Bank by NIB were lacking in completeness,consistency, and accuracy.

l SURY AND LESSONS LEARNED

A. Overall Performance

5.01 Credit 901-G8 was disbursed at the nadir of Ghana's econ my.Nonetheless, NIB nerformed reasonably well. Indeed, the President's Reporthad correctly a&ticipated that the uncertain economic environment posed thesole risk to NIB sub-borrowers and, hence, ihe succe4s of the project.

5.02 The close associatio* between the Bsank and NIB has resulted inimnortant institutional develonments within NIB. In the early 1970s,almo8t all of the NIB's loans were In arrears, whereas the relatively lowerlevel arrears accrued during the credit disbursement represents a vastI vpromweast, despite very difficult eircumstancls. Moreover, theestabli-shmentlof a training unit within the NIBIis a sign of constructivepkospects for building &ad solidifying NIB's human capital.

5.03 Credit 901-GI served as an interim steo to assist industry untillonger-tern refonms that address the fundamental flaws in the econoicincentive structure could be un#ertaken. By itself, it did not have anysignificant 2olicy 1m=lication for Ghana's export promotin or foreignexchange policies. Subsequent Bank projects that assist the

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Government in pakig the transition to growth and export-oriented pol.eies -

through stzuct*rai adjustment, however, have included the ingredients for-successful policy reforms.

'B. Proiect Benefits

5.04 -The imediate benefits of the second line of credit includeincreased employment in the industrial sector, foreign exchange savings forbusinesses, and *reater use of existing industrial capacity.. The benefits -from increased output, including foreign exchange earnings,.have yet to befully reaped given that many projects are still under Implementation. For -

those projects that have been fully implemented, it is not evident from thedata provided by NIB the degree to which foreign exchange was earned fromexpots -

$ .~5+sffi The credit was 4uccessef in tt *rU n fog ,*xcbgn:;reteourcs to bitLinst*o to fuce iabla r.et te. S¢a* eub-.sprojt -.*-;eve, ,hAve encountered moderate to severe -problims dutixz the ecwrse of

imt aplementation. About half of the sub-projects are In arr*at£.

$.06 Government nolicies that imposed restriciions that precluded theimportation of raw materials wvxe partly responsible for sub-projeetproblems, and hence, were beyond the control of UIB or the sub-borrower.Also, the Goverwnment's delay and ultimate decision not to mke the i0percent miatching funds available precluded the project from meeting itsobjective of being a quick dispensing facility.

5.07 Other factors responsible for sub-project problems and project-bandoneent are within the control of sub-borrowers" maManement. Improvedsupervisory activitiee by NIB staff cofld have forestalled some of theproblems attributed tO poor management.

5.08 Improved ammraisal by SIX of sub-projects and analysis of theattendant demand, market condit-ions, supply of imported rai materiils, -anOother conditions affecting pr4spective project performanqe, could have

-prevented some of-the problems encountered by sub-projects. Somv.,sub-projects may have not been approved if more stringent appraisal ictivitieshad been performed.

D. -NIB Institutional DevelovMent

5.09 The NIB has made some constructive changes in its organitationand operations. Yet the performance of certain operational areasproject-supervision, appraisal, acco nting, and logn administration -remains below the level needed for NIB to maintain lts financialI integrityas-a development finance 'institition. Some of the co#cerns arise fromfictoreslbeyond NlB's control. The flight of talented professionals fromGhana, and the succession of Managing Directors handicavged some of--IB'sefforts to prove internal operations. Other factors, however, were -within NIB'sg control. Internal qorgaiai.ations that occurred for reasonsother than for achieving substatwive reforms ate a-case in point. Also=the use of technical a8sistance funds to finance overseas training in

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t \ - a --.

_ 23' -

courses that are not first priority in the context of 3IXB pressing needsfor qualifled b personnel, reflects a concern within NIB's control.

5.10 The techbical assistance provided to IB proved to be of-limitedvalue. The majoi roles of the technical assistance experts provided to NIBwere to a) prepare detalled guidelines.for project appraisal andsupervision; b) identify theocontents of appraisal and supervision reports;and c) identify decision criteria and detailed guidelines for marketanlysis, technical analysis, fin"nisl and econamic analysis. The

inefficacy of the techbical assistan'ce provided to NIB would appear to haverendered the terms of reference for the consultant unfulfilled an NIBberekt of the assistance it needed to improve its critical bankingfunctions.

aTh ppropristenesw of h, locus of thedeci.ioncnk$ng processin UZI shoUld be re-evo4a"ted* M 'a gouse C*m=iteta did not appear to betho most Suitable body for a*iag decis ios n sub-ptojacts. Analternative body, such.ao, smaller Loan Comittee staffed by operatina-ldsp"tm*4tmeDtmber#j zey hav ",be"b more appropriate* .

-5.12 hSB internal-procedures were-often cumbersome and slow. RIB doesnot yet have an efficient internal-audit, budgeting, and planning system.The preparation of an operational manual and a staff training anddevelopment program has been postponed.

B. NIB ?inanc.al Performanc;

5.13 MIB's overall financa l performance was difficult to determine inthe early part of the credit disbursement, in part tecause of theinadeauacv of NIB' audit reogrts In assessing NIl's portfolio quality andrescheduling practices. While in 1984 bank staff ldentified the financialproblems that threatened NIB's finqncial Integrity, at Lseue S whether theevents that led up to NIl's precarious condition coild have ben observedat an earlier.date by the Bank. Also,. the inability of NIB staff topercoive the seriousness of the financial sLtuation that prevailed callsiato-question the quality of the overall banking capabilities that prevailsat NI.

* F. KUB's B an am Canabilities

5*14 While NIB has made substantial progress since the lank has beensupporting its operations, NB still lacks many basic bank4ng attributes.In addition to the operational areas discussed above, the following area!of banking activity need to be Amprovedt

(a). s sasures for insurlina aEainst e.osure to avoidable foreignexchunge risks; whileW the 1984 restructuring plan responded toNIB's imdiate needs, additional action is needed to monLtor,NIB's financial Otatus and to develop a strategy for preventing,slnlbr situations in the future;

(b) sub-urolect follow-un after completion of project construction tofacilitate quick responses to potential problems; changes In

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0 \ _ ~~~~~~~~~24

masageuent, capital reconstruction, or marginst amounts ofadditional working capital could forestall a financial decline:

-Ac) sub.pr6ject Iehalilitation efforts for projects already In aprecipitous decline; they need to be considerably strengthened aspart of a more stringent loan recovery proce,st

(4) a project monitorins syntem to eliminate the lengthy delays insub-project applications moving through the loan approvalprocess;' although the credit disbursement was very slow due toGovernment policies regarding provision of matching funds, MIRcould streamline and.iuprove its loan administration procedures;

(-e) continued offorts at resource Moblitation they are required.partkculary-)in light-of the atructural *^justmet ,tFocess whichprovidi8se cUmat more. conducive to. attracting farign and

-ie ~ ~ 0 .110aI . g ' ;*domestic fundtetatti t f4sn it- * ~t~ te nhanced ecgrutiny of NIB acco nti anid gnia1d^ urfecticeisa BiBs

is reported to be relyng on' short-term depodts to fdnance it.development lending activities. These and otber practices shouldbe reviewed and corrected where needed. Also, the quality ofauditAN Land finanial reortins needs to be substantiallyupgraded. Some of the renorts grentred by for gUrp$ise4 ofresaratiLon of this Protect 9oMoletion Renort contained

incog&istencies and mathematcal errors.

.15 - In oua, the U) needs to develop a requisite focus o4 bankina asits urimary function, which Is clearly compatible with and wbhch wouldfacilitate the performance of its dev lopment functions.

5.16 Despite these dr**tacks to Ni1's operations, NIB has been the keyinstitution responsible for the estiblisebment of wortwhile Industrial andcommrcial projects. Moreover, it shows prudence -in spreading its riskthrough Joint ventures.\ Yet many steps need to be taken to improveinternal cottrol and assure financial stability.

G. The lank's Role

5.17 In addition to supervising actlvities performed under credit 901-GO, the Bank played a major role In undertakitg a detailed joint review ofNIB's entire portfolio. Indeed, the unfvorable econmic conditions In

|Ghana, in conjunction with disruptions h the tenure of NIB management,warranted more intensive supervision actirities by the Bank. In helpingNIJ to assure its financial integrity, the lank played a major role in -maintaining NIB as a development finance institution. MoreovT, theamenabilLty of the Obanaian Government to the lank's suggested -

restructuring solidified NI' s financial standing. Tbe untenablealternative would have been tq il 0 w NIB to collapse. which would have

'served as an extraordinarlly negative precedent in the ChanaUln financialcovmmnity, and hlich would have reverberated throughout that community inthe form of additional institutions succumbing to the poor economiccircumstances.

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5.18 During the period of ivplementation of the second line of credit,the lank's emphasis in its overall assistance in Ghani changed. Since 1983tho Bank's strategy has been redirected toward structural reforms of theteconomy thats

(a) improve the incentives for production and investment, and

(b) promote long-term growth and development of the economyby support structural adjustment lending

5.19 Among the projects undertaken have been the Structural AdjustmentCredits, the Structural Adjustment.Institutional Support project, theIndustrial Sector Adjustment Credit, pnd a Financial Sector Adjustment

- Credit. These structural reforms told promise for long-term changes, asthey -ave altered the incentives with which ind4stry engages in productlve

* .. economic activity. -- ..

' 5.20 AS haa8 economic evironment coutinues to improve with these. nitiatiqV, M's p.rformancq abould also sprove. To th extent that*IBL's performance do8s not improve, factore internal to NIB. operationswould likely be responsible for less than optimal performance.

H. Lessons Learned

5.21 The implementation of Credit 901-GH suggests t4e potential asweli as the limitations of project finance in the context of an economicenvironment that is not conducive to development. Economic issues thatneed to be' addressed are generally beyond the purview of individualprojects. Indeed, the basis for the Bank's structural adjustment programis the recognition that only the fundamental reform of fiscal and monetarvanolicies can offer the opportunity for sustained development and viablefinancial intermediaries and sub-projects.

5.22 The o#1jectives of Credit 901-GH weve fairly m19dest--to provideworking capital and term lending in response to an immediate and pressingproblem. Essentially, the credit served as a 9=-Sa measure. As such,the credit itself did not ensure sustainabilitq of NIB, although the Bank'soverall supervision of NIB's portfolio at least restored its financialintegrity. Instead, by use of the credit, NIB servqd a basic function a;trans#4 rring resources to the industrial sector. This;function wasexecuted successfully.

5.23 The importance of thelworking capital component, which had beenanticipated prior to the approval of the credit, was borne out by sub-projects' need for foreign exchange to purchase necessary inputs. *lso,the Bank's continua1k supervision of the financial status of NIB was aAecessary adjunct to the supervision of credit implementation. Inaddition, the technical assistance component was necessary to improve tIrefinancial manageienf capabilities of NIB.

5.24 Wale NIB's efforts to engage in effective banking operations4ere hampered by the deterioration qf the economic climate, the project wastacking in several important respctczs thlt did not pertain to economicconditions. Economlic analysis of the rate of return that 'was required for

-26.

certain projects was not performed since NIB did not have the capacity tocalculate shadow pricest. Sub-project 5upervision and loan collectionprocedures were very weak. The technical assistance funds were largelyallocated after the bulk of the credit had been disbursed. Mostimportantly, RIB lacked the financial management capabilities to understandthe precariousness of NIB's financial position. Moreover, NIB's ties withthe Government precluded a necessary degree of independence. This isevidenced by NIB being unable to collect repayments from loans in itsportfolio that were granted to industries in which it or the Government hada stake in ownership.

5.25 In the context of Credit 901-GM, NIB's effective monoi3o overlong-term lending remained intact. Such a status granted to NIB does notenhanve thp 'ov6rall vigor of the financial sector, and, it could be argued,retard any potential vigor. These considerations are consistent with -aemerging view at the Bank that-ths support of development financeinstitutions alone, may not be justifLed. Moreover, analysis of Banklending to small and medium-sized enterprisei V4gst, that in oountdeswhere the banking system is relatively doveiop*d, comm2rcial:tb04*, could bemore effective in channeling credlt than development finance institutLons.Hence., efforts to develoo a strona financial sector through f nanclsrefoms, without a focus on a nArticlar financial institution, may lendthemselves to gteater success. This view is evidenced by the Bank's,support of the Ghana FLiancial Sector Adjustment Credit in 1988, which willoffer greater opportunities to undertake the sector reforms that willengender a wore capable and vigorous financial Intermediation for theIndustrial iector.

N~~~ -~ . -

. ~ ~~~~~~~~~~ ~~ .. ji.

04 ~ ~ ~ ~ ~ =-

_1 , rX * X , r, ' _- A >Ns

$Wine lo, r,I ?'-~ wl- M" as ( ,N e u tl it t o

ows W ,"f - gw .W as' .w $W ,It at' fol m,", net

> ~ ~ a -il ^e' Net (60 "I, ; t I -- a . lt

| p _ # < ; ' s ~~~~~~$WO;

two* slo na md* gp nee WIS eto

O _ '~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~%w5 .:

Kr e - Q . l ; ~~~~"Is

__ _ * _ o - * _ *"M *A

/ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ g .

mmm -- 07M owl Wm =w~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~--

fmo, MW AM I£a iI' .q a a.a ~ rn*bhm.~ wo

mseuo UlmeW *Wu W W ~ ~.1ua~~~~q~t

WE'! -I wolo"rm 'i 11w ITmwTdt6uo'geeul atow m"s -i MIN OWN mtu .I

LWWS ~~am Ut ~ MIN *rWI .% l 8 'a **W1. au - -Mn

-. I - - ~~~~~~VW I -

ANNEX III

RTOAL UIVEiINT?

MlDPT hD LOS S\

* YIAjS MSOl; D 3R 31. 1986+198t

S ~~~(CUDIS)' 198 1986

\ \ S

not Protit For T,e Year efore ?aatia 214.423,\843 369,014.870

Provision for Taatiq 150.000.000 215.00O.O040

Net Profit After tio 66,425.843 154,014,070

Transfer to Special Reserw* (120,000,000)

Transfer to Office RuIldiftVaul (65,000,000) \t30,000O0)

!zanfer to Geeral Reserve (1.425843). (k.0i4.870)

Balance at 31 December 1987 -0- -0-

.~~~~~ = .

\ ~~~~~~~~~~~\

.. ~ ~ ~ ~ ~ ~ ~ ~ - , 0

X * a ' 'S 'R ,

\ ' , ' . ' R~~~~~~~

\ ¢ ~~~~~ANNEX IV

A/J . . .

\ - \ , \d if "t e* 1-

-T . l' xi. ' II|\\ \ 11 X ;; a 11 a

4\~~~~f !i3 i}\ i

\ . , I ,0|..-\

et r \ -S i 0 z i Nl >

~~~~~~~~-- .X ioE 9 6 ° 'j,.- Fi

NATIOAI IESTMENT .DM-~~~~~~~~~~~ ~~~~PROJECT COWI.ETISN 0EPT

- RfoIT 001-09o-c dAIRSTICS O _.&UOCTS

Tauta Total Projoot4d Proj liroj Proj '

Subp-Proj NO. Of Sub-Proj IDAA Avg. ov No. ofCoot. roecte ~c CredI AAv. VJlus

Agro4a.d " - 1. 12 8,000740 1,58,68 24,727 42.0 10.6 414l,~ictr1.e 1.1 - 2.0 S 10,606,808 $560,886 .e 44.0 80.0 S01--

2.1 - ' - -. - --

- ~~~~~~~~~Over 8.1 1 4,140,689 1,864,044 5,080 21.4 V.6 41

Co-.trutioe, 0 - 1.0 4 902,111 420,07 ". 4 22.8 ITObuilding 1.1 -4.0 ------ pmt.rials 2.1 - 8.0 -

over - - -C , '

ar" woda, 0 - 1.0 I 1 ,278,71 192,870 240,244 40.0 22.e0 20ootear, 1.1 - 2.0 1 120,64004 '809,276 . , 80.0 ao. Go

_-.thersorko 2.1 - $.0 - - -O _ _ .

bgildOve1 1.0 - - - - - - - 1

mew prdct. 0, - 1.0 4 8",783 622,112 108 24.0 A.e. 2101.1 - 2.0 I 1,410,2so 048,210 a.*. 50.0 60.0, 0

_o 2.1- J.0 1 2- 0P:267 07,280 -a. 50.0 50.0_ 66 Ove 8. -, - - - -

Pp preoduct - 1.0 4 - 2-1. - 2.0 1 1,428,400 940,1U0 0 17.0 6.0 02.1 - 8.0 2 4404,t 1,42,844 n.e. 60.0 I.. 11Ovor 8.1 - ~'- _ -_ _-

Wood-roleted 0 - 1.0 20 0,066,080 2,762,910 11,681 46.7 12.6 1.902InductriaS 1.1 - 2.0 -_ _ _ _

2.1 -8S.0 - : _ . _ " _ _

Over 3.1 - - - - - - -

Other. O - 1.0 rS 1,786,694 1,061,480 n.e. 60.0 14.0 104-- 1.4- 2.0 2 2,018,0U 04,1 n.e. 60.0 n.r. 21t

2.1 -. 0 - - - - - - -

-v, 8.1 .j 4 667 82i 9,2D9 Q 0 28.380 0.0 n._. 64 ; 4

jtg1.al -70 48,944,9B0 ' 17,41#iP21 81,688 41.0 12.C 6,021

- : ~~~Source: NSB.5'n.a. - not. itvi labi.

.- -