Document of

The World Bank

FOR OMCUAL USE ONLY

LA)J.2-LI59- &6j-4r

Report No. 5030-EGT

STAFF APPRAISAL REPORT

ARAB REPUBLIC OF EGYPT

SMALL AND MEDIUM SCALE INDUSTRY PROJECT -

May 29, 1984

Regional Projects DepartmentEurope, Middle East and North Africa Region

This doaunet bas a restrcted distridbti and my be used by recipiets only in the perfonnmc oftheir official dute Its contets may nt otherwise be dislosed witout Wold Dak authouiztiom.

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CURRENCY EQUIVALENTS

Currency Unit = Egyptian Pound (LE)US$1.19 = LE 1.00US$1.00 = LE 0.70 (Central Bank Operations)USt1.00 = LE 0.84 (Authorized Bank Pbol)

(In this report $ refers to US$)

GROSSARY OF ABBREVIATIONS

AfDB African Development BankCBE Central Bank of EgyptCMA Capital Market AuthorityDIB Development Industrial BankEEC European Economic CommissionEIB European Investment BankEIDDC Engineering and Industrial Design and Development

CenterGOFI General Organization for IndustrializationFC Foreign CurrencyIDB Islamic Development BankILO International Labor OrganizationKfW Kreditanstalt fur WiederaufbauLC Local CurrencyLIBOR London Inter-Bank Offering RateMIDB Misr Iran Development BankNBE National Bank of EgyptSIDD Small industry Development Department (of EIDDC)SmI Small and Medium Scale IndustrySOE Statement of ExpenditureSSI Small Scale IndustrySSITD Small Scale Industries and Training DepartmentSSPIS Special Services to Private Industrial Sector

(Department within BOA)USAID U.S. Agency for international Development

FISCAL YEAR

Until December 31, 1979 DIB's fiscal year used to coincide with thecalendar year. Thereafter a six-month accounting period was observedfrom January 1, 1980 to June 30, 1980, and DIB's fiscal year now beginson July 1 and ends on June 30, thus coinciding with the Government'sfiscal year.

FOR OFCIAL USE ONLY

EGYPT

STAFF APPRAISAL REIDRTSMALL AND MEDIUM 9CALE INDUSTRY (SMI) PROJECT

Table of ContentsPage No.

1. INIRODUCTION .......... .. ............................ ...... 1

II. THE INDUSTRIAL SECTOR .................................. 2

A. Structure and Performance ............ ................. 2

B. Small and Medium Scale Industry ........................ 3C. Bank Assistance to the Industrial Sector ............... 6

III. THE BANKING SECTOR .................... : 7

A. Structure .......................................... 7B. Financial Resources and Application ....... ............. 8C. Financing of Industrial Sector ................. *...*..... 8

D. Cost of Capital * * ........................... * .......... 10

IV. DEVELOPMENT INDUSTRIAL BANK (DIB) ........................... 11

A. Institutional Aspects . ............................... 11B. Operations and Financial Aspects ....................... 15

V. TECHNICAL ASSISTANCE FOR SMI . ............................... 19

A. Background .............................. .... 19

B. Evaluation of Phase II Program ......................... 20C. The Proposed Program (Phase III) ....................... 21

Program Components .......... . ............. . ........ 21

Costs and Financing ................ ..... .6-0.. 23

Organization, Management and Staffing ............- 24

This report is based on the findings of (i) a preparation mission

composed of Messrs. Zafar Shah Khan (mission leader), Robert hant, AbhayDeshpande, Des Fitzpatric (consultant), and Richard Ryan (consultant) whichvisited Egypt in November 1983 and (ii) a mission composed of Messrs. ZafarShah Khan, Robert Hunt and Abhay Deshpande which visited Egypt in January 1984to complete the appraisal.

This dowment has a restrwted distnbution and rmy be used by rcpents only in the perfornc oftheir of ria duties Its contents may not otherwse be discosed witbout World lank authorizaon.

Table of Contents (Cont'd)

VI. THE PROJECT ....................... .... 25

A. Objectives .... . ........................... 25B. Financial Assistance. . . .... 26C. Technical Assistance for SMI through EIDDC ............. 26D. Use of Loan Proceeds ................................... 26E. Main Features of the Loan ................... ........... .. 27F. Project Benefits and Risks ............................ 29

VII. AGREEMENTS AND RECOMMENDATIONS .............................. 30

Annexes: 1-a Measures of Protection and Comparative Advantage ....... 331-b Public and Private Sector Industry - Performance Ratio . 342. DIB: Summary of Operations ............................ 353. DIB: Analysis of Term Loan Approvals .. ........ 364. DIB: Condensed Income Statements, 1980-1983 ..... . ..... 375. DIB: Condensed Balance Sheets, 1980-1983 ......... 386. DIB: Portfolio and Arrears of Principal ............... 397. DIB: Projected Operations, 1983/84-1986/87 ............ 408. DIB: Long-Term Resource Position as of June 30, 1983... 419. DIB: Projected Income Statements, 1984-1987 ........... 4210. DIB: Projected Cash Flow Statements, 1983/84-1986/87... 4311. DIB: Projected Balance Sheets, 1984-1987 .............. 4412. Technical Assistance Program for SNI

- Detailed Cost Estimates ........................ 4513. Technical Assistance Program for SMI

-Staffing Plan for SSITD ........................ 4714. Projected Disbursements Schedule .... ... .. 4815. Selected Documents and Data Available in the Project

File .............. o......... .. 49

ARAB REPUBLIC OF EGYPT

SMALL AND MEDIUM SCALE INDUSTRY (SMI) PROJECT

Loan and Project 3ummarv

Borrower: Arab Republic of Egypt

Amount: US$170.0 million equivalent, including capitalizedfront-end fee.

Terms: 20 vears, incluiding 5 vears of grace, at the standardvariable interest rate.

Relending Terms: The Government would onlend US$168.1 million out of

the proceeds of the loan to the Development IndustrialBank (DIB) at an interest rate equivalent to the Bankrate at the time of Board approval plus 1 percentagepoint for carrving the interest rate and foreignexchange risks. DIB would onlend these funds tosubborrowers for terms not exceeding 15 years,including three years' grace, at an interest rate ofnot less than 14% per annum. DIB would repay the loanto the Government substantially in accordance with theamortization schedules of the individual subloans.The Government would transfer US$1.5 million to theEngineering and Industrial Design Development CenterCEIDDC) as a grant to cover the foreign exchange costof the technical assistance program to SMI. TheGovernment would bear the foreign exchange riskbetween the US dollar and the currencies ofdisbursement; subborrowers would bear the exchangerisk between the US dollar and the Egvptian pound andwould repay their subloans at the highest exchangerate between the Egvptian pound and the US dollardeclared by the Central Bank of Egypt at the time ofrepayment.

Project

Description: The project is designed to support the program for thedevelopment of SMI through a line of credit to DIB andtechnical assistance to individual enterprises. Itwould (i) provide a part of DIB's foreign exchangerequirements over 1985-87 for onlending to SMI, withspecial emphasis on small scale industries (SSI); and(ii) finance the foreign exchange cost of continuingthe program of technical assistance to SMI begun underpreviouis loans (1533-EGT and 2074-EGT).

Benefits and Risks: The project would provide further support for theGovernment's "open-door" policy. By providingfinancial assistance to SMI, it would contribute to

the development of this important part of the privatesector, while the technical assistance component wouldincrease the productivity and efficiency of SKI. Theproject is expected to create about 71,000 new jobs.There are risks associated with DIB meeting itslending targets for SSI and delays in carrying out thetechnical assistance program; the experienice gainedunder previous loans and careful supervision ofprogress should minimize these risks.

Individual Subloanand Free Limits: Maximum subloan of US$5.0 million; free limit for

individual subloans of US$1.25 million.

Final Date forProject Submissions: June 30, 1987

Procurement: Througb international shopping procedures whichrequire comparison of offers from at at least threesuppliers.

Estimated BankLoan Disbursements: USS Million

FY85 FY86 FY87 FY88 FY89 FY90 FY91

Annual 0.4 20.4 44.2 47.6 32.1 17.4 7.9Cumulative 0.4 20.8 65.0 112.6 144.7 162.1 170.0

I. INTRODUCTION

1.01 The Bank has so far provided five industrial credits totalling $250million in Egypt to a special unit of the Bank of Alexandria (first and secondcredits) and later to its successor, i.e. the Development Industrial Bank(DIB) which was established in 1975. These industrial credits were designedto develop the institutional capability of DIB to promote primarily medium andlong-term financing to the private industrial sector. The last of thesecredits made in December 1981 was designed more specifically to assist mainlysmall and medium scale industries (SMIs). A sixth industrial credit of $30million was made by the Bank in May 1980 to Misr Iran Development Bank (MIDB),which is mainly assisting larger projects. The Bank has also provided directloans totalling $528.3 million for industrial public sector and mixedenterprise projects to improve capacity utilization and to increase productioncapacity and supply of essential commodities in resource based industries(cotton ginning, textiles, cement, steel, and fertilizer projects). IFC'sequity participations and lending commitments for projects in the industrialsector (including agro-industries) in Egypt totalled about $189 million as ofDecember 31, 1983.

1.02 In addition to financial assistance for the industrial sector, theEsnk's efforts have been also directed at introducing policy and structuralimprovements. Towards this end, the Bank has financed six sub-sector studiesin textiles, building materials, pulp and paper, food processing, metals, andengineering industries, in order to assist the Government in formulating apackage of poiicy and investment proposals. The Bank has also assisted theGovernment in a comprehensive study of the construction/contracting industry,an important industry faced with major problems. In addition, the Bank hasprepared in 1982 a study of Trade Strategy and Investment Planning whichfocused on the sectoral allocation and timing of Egypt's investment program inthe context of a viable foreign trade strategy. Finally, the Bank hasrecently completed a study on the development of manufactured exports. Thefindings and recommendations of the above three studies have been discussedwith the Government and two projects have been developed to supportinstitutional and policy reforms and financing of subprojects inconstruction/contracting and manufactured exports industries.

1.03 The last industrial credit to DIB (DIB V) of $120 million becameeffective on June 14, 1982 and its utilization is ahead of schedule. As ofDecember 31, 1983, total commitments and disbursements of the loan amount were82% and 24Z, respectively, compared to 671 and 21% forcecast at appraisal.The loan amount will be fully committed by mid-1984. The proposed project istherefore timely in providing continuity to the Bank's support of SMI in theprivate sector with greater emphasis on the SSI/artisan sector. It willfinance the foreign currency cost of imported machinery and equipment ofeligible enterprises. It will also support a technical assistance program forSMI, including extension services for improvements in productivity andefficiency. The design of the project takes into account the conclusionsreached in the Project Performance Audit Report of June 1983 in regard to theBank's first two industrial credits in Egypt (para 4.19).

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II. THE INDUSTRIAL SECTOR

A. Structure and Performance

2.01 The industrial sector (excluding petroleum) in Egypt is a large andfast-growing sector, but its share of GDP declined from 17% in 1975 to 14% in1981/82 because of the extremely rapid growth of the petroleum and servicesectors. In 1981/82, industry employed 1.38 million persons or about 12% oftotal employment, and generated 9% of total commodity exports.

2.02 As a consequence of the nationalizations of the early 1960s, thesector is dominated by about 250 mostly large public companies which accountfor about 80% of investment, 58% of employment and 66% of value added inindustry. Egypt's basic industries (iron and steel, aluminum, fertilizer,cotton yarn, heavy engineering, cement) are mostly in the public sector.Activities that can be carried out by small-scale firms - garments, foodproducts, leather products, cosmetics, wooden furniture, and fabricated metalproducts - are the important areas of private activity.

2.03 The shares of consumer goods, intermediate goods and engineering(capital) goods in manufacturing value added are 51%, 36% and 13%respectively. During the decade 1969-79, the share of the engineeringindustries increased from 11% to 13%, reflecting the rapid growth ofengineering goods production during this period.

2.04 Between 1975-81/82 industrial output grew at an annual average rateof 8.4%, somewhat less than the average GDP growth rate (about 10%). Thegreater availability of foreign exchange and relaxation of bureaucraticcontrols that followed the adoption of the Open Door Policy undoubtedlycontributed to revitalizing the private sector, which achieved an annualaverage growth rate of 12% during this period. As a result, the privatesector increased its share of total manufacturing output from 25% in 1974 to34% in 1981/82. Although not as striking as that of the private sector, theperformance of public industry during this period has also been favorable,with an annual average growth rate of output of nearly 7% accompanied byimproved capacity utilization and labor productivity. Despite the high growthrate of physical output, however, the financial performance of publiccompanies has been poor. This is essentially the result of insufficientcontrol over prices, wages and employment decisions at the enterprise level,as these rest mostly with the government, although there are also seriousinefficiencies and management problems.

2.05 Especially since nationalization, Egypt has pursued aninward-oriented industrial strategy and new investments have tended to augmentthe capital- and energy-intensiveness of industrial production. Theindustrial pricing regime (direct price controls, subsidies, tariffs andexchange rates) is the principal source of divergence between domestic andworld prices and thus contributes to both operating ine.ficiency andinvestment misallocation. The anti-export bias is reflected in the decliningshare of manufactured exports in total manufacturing production. The declinein exports has been larger in the private than the public sector mainly

because of the loss of Eastern European markets and the shift of the privatesector to the heavily protected and more profitable domestic market. Aparallel Bank assisted project will address the problem of increasingmanufacturing exports from both the public and private sectors.

2.06 Between 1977-1981/82, industrial investment (manufacturing andmining) increased from LE 561 million to LE 1,483 million comprising about26.5Z of total investment during the period. Private sector investment inindustry, which was at negligible levels in 1974, substantially increased inthis period and by 1981/82 constituted almost 20% of total industrialinvestment. Much of the new industrial investment by the private sector hasoccurred under the auspices of Law 43. Textiles, food, chemicals, metals andengineering industries represent the main areas of law 43 investment.

2.07 With the slowdown in the growth of foreign exchange earnings frompetroleum exports and remittances, the Government has been looking to theindustrial sector to generate new foreign exchange earnings. Also, industryis expected to become an important means for absorbing future increases in thelabor force because of the saturated employment situation in agriculture andthe service/distribution sectors and the levelling off of Egyptianemigration. The industrial sector in the new Five Year Development Plan(1982/83-1986/87) is projected to grow by 9.5% per annum. The Plan allocatesa large share of total investment to the industrial sector. Industrialinvestment is estimated at LE 8.6 billion or nearly 25% of total investment, aslight reduction from its share in the previous Plan. The private sector'sshare of total industrial investment during the Plan period is estimated at LE1.8 billion or 21X.

B. Small and Medium Scale Industry _/

2.08 Structure and Performance: Nationalization of industry in the early1960s concentrated on large and, to a lesser extent, on medium scaleindustrial enterprises, leaving small and some medium scale industry (SMI),including artisan and handicraft production, in private hands. Thus SMI andthe private sector are almost synonymous. The private sector consists ofabout 250,000 artisanal establishments employing less than 10 workers and some7,500 establishments employing 10 or more workers 2/. This group employedabout 624,000 workers in 1981/82 equivalent to over 40% of total industrialemployment, with 901 of the establishments employing less than 50 workers.Private sector industry generated almost 51 of Egypt's total GDP and received5.3Z of total investment in 1981/82. SMI industrial activity is concentratedin building materials (25Z), engineering products (241), and textiles (21X);other significant areas of activity are leather products, food processing, and

1/ There is no strict definition of SSI or SMI in Egypt. For the purpose oftechnical and financial assistance under the proposed project, definitionshave been agreed with Egyptian authorities and are given in para 6.03.

2/ These numbers are based on an internal survey in Egypt which classifiedall private sector enterprises with more than 10 workers as SMIenterprises.

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chemicals. Artisans are engaged mainly in woodworking (34X), leather products(161) textiles (141) and metalurgy and engineering (101). About 751 of allSKI and artisan enterprises are located in Cairo and Alexandria.

2.09 Private sector industry has shown a much better performance than thepublic sector in the important areas of capital and labor productivity; andinvestment, output, labor costs and industrial imports per person employed.(Details in Annex 1-b). Private industry output per LE 1.0 of investment was1.8 times that of public industry in 1981/82. In the same year, the averageprivate sector wage was only 501 of that in the public sector, while outputper unit of labor averaged 751 of that in the public sector during the1976-1981/82 period. Based on industrial investment, the capital stock perunit of labor in the private sector appears to be about one third of that inthe public sector. This suggests that the productivity of labor in theprivate sector is far greater than in the public sector, despite the 50% wagedifferential. It also indicates that the cost per job created issubstantially lower in the private sector, particularly when public sectorover-employment is borne in mind. Imports per LE 1.0 of GDP in the privatesector are half of those in the public sector, while imports per unit ofemployment are about one third. The foreign exchange costs per LE 1.0 of GDPproduced, and the average foreign exchange cost of creating and maintainingemployment, thus appear substantially lower in the private sector. The moreeconomically rational managerial approach and a competitive outlook of theprivate sector are the likely reasons for the above differences.

2.10 Government Policy and Strategy for Development of SKI. The economicpolicies followed by the Government since 1973, aim at reinstating the privatesector in all areas of activity including industrial production, distribution,finance and foreign trade. The liberalization measures introduced so farinclude new investment laws and changes in trade and exchange controlregulations, but the transition from a largely centrally-planned system to amixed market economy has proved difficult and is still underway a decadelater. Issues related to the private sector include the need for (i) clearguidelines regarding the role of the private sector, (ii) reform of tariffstructure, (iii) upgrading the infrastructure support to industry,particularly the construction/contracting industry, which is a majorbottleneck for implementation of projects, and (iv) minimization ofbureaucratic controls.

2.11 In addition to the above more general issues, there are specificconstraints faced by the SSI sector in particular. One of the mostsignificant constraints is the limited access to institutional sources offinancing for fixed investment and working capital (para 3.07). Many ssrenterprises perform poorly due to lack of raw materials in adequate quantityand quality, shortages of spare parts, obsolete equipment for which partscannot be acquired, and aging equipment requiring continuous repairs. Anumber of the above problems arise from the difficulty many SSI enterpriseshave in obtaining foreign exchange, the lack of adequate information onsupplies and the inadequate working capital financing. Another constraint i6the location of most of the SSI enterprises in the heavily congested urbancentres where production space is usually cramped, unsafe and poorly laid

out. This has an adverse effect on productivity and limits expansionpossibilities. SSI enterprises are also faced with shortages of skilled labordue to emigration, though this problem is less severe with very smallSSI/artisan enterprises because they mainly utilize family labor. The lack ofassistance in project formulation is an important constraint related to theproblems associated with financial intermediation. Many entrepreneurs,particularly those with newer and smaller firms, have difficulties incollecting relevant information and properly formulating projects. Technicalassistance in the form of extension programs is still very limited. Smallestablishments need extension type assistance to improve the layout of theirproduction line, evaluate and select appropriate technology, and improve thequality of their products in order to increase their capacity utilization,productivity and quality standards. Also, SSI enterprises need up-to-date andcomplete technical information, particularly on new technology and processes.Another problem faced by many SSI enterprises is the management constraint.Many of the owners/managers lack the skills for maintaining financial records,planning and budgeting, marketing, and dealing with outside institutions. Animprovement in management skills is essential to improve productivity andefficiency. Another problem is the lack of institutionalized arrangements, topromote subcontracting relationship between larger and smaller enterprises.

2.12 An effective development strategy for SMI must take into account theabove issues together with the more general policy constraints. TheGovernment is aware of these problems and is taking steps to address some ofthese issues. In the macro policy area, the Government plans to study thetariff regime with a view to reducing protection rates and their harmonizationbetween the public and private sectors. Recently, the Government has alsotaken steps to provide to domestic private joint stock companies (under Law159) access to the same investment incentives as those available to Law 43companies. In addition, new support institutions are planned to beestablished and credit facilities and incentives are to be provided in thecontext of the Bank's two proposed projects for the promotion of manufacturedgoods exports and the construction industry (para 2.15). This should alsoassist the SMI sector. The Government is also addressing a number of SSIspecific problems through financial and technical assistance programssupported by previous Bank industrial credits (para 5.01) and the proposed SMIproject. A long-term policy for the development of SSI has, however, yet toemerge. The policy needs to cover, among others, the following majoraspects: (i) It should provide for the integration of SSI investment inoverall plans for industrial investment. (ii) It should promote theestablishment of close linkages between larger firms, particularly those inthe public sector, and small enterprises through sub-contractingrelationships. (iii) It should help to facilitate and expand institutionalfinancing (particularly from commercial banks) for fixed investment andworking capital in foreign and local currencies. (iv) It should provide for aprogram to develop industrial estates or other related infrastructure to shiftlocation of SSI enterprises away from the presently congested urban centres.In addition to the abo-re, the SSI division within the General Organization forIndustrialization (GOFI) should be strengthened with adequate staff andresources to prepare overall plans and policies for the development of SSI and

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to monitor its performance. It should be the focal point for all SSI relatedactivity in the country.

2.13 Although the above actions are important to promote SSI development,they are not critical to the successful implementation of the proposed SMIproject. Nevertheless, in view of the growing importance of the potentialrole of the SSI sector, it is necessary that the Government should initiatemeasures to introduce a long-term policy and administrative framework which isconducive to efficient and speedy development of SSI and addresses, interalia, issues mentioned in para 2.12. This matter was discussed with theGovernment during negotiations, and assurances were received on thepreparation and introduction of such a policy and administrative framework forSSI within the implementation period of the proposed project. The Bank wouldreview the above framework during the preparatory work for its next SMI sectoroperations in Egypt.

2.14 Future Prospects: The Government's Open Door Policy adopted in 1974has helped to revitalize the private sector. The current Five-Year Plan hasallocated 21% of total industrial investment to the private sector emphasizingits significantly expanded role. The private industrial sector in Egypt hasthe advantages of relatively higher capital and labor productivity, and lowerimported inputs. It also enjoys overall country advantages including aplentiful supply of low cost labor and domestic sources of energy, an alreadywell developed industrial structure and tradition, a strategic location anddefinite comparative advantage in a number of products. The recognition ofthese advantages by the private sector is reflected in data on approvals ofprivate sector industrial investments by GOFI, which shows an increase from atotal of 693 in number and LE 95 million in amount in 1976 to 949 and LE 1.1billion respectively by 1982/83. The applications are concentrated in food,textiles, chemicals and tanning and leather products (75Z by number and 66Z byvolume in 1983) showing recognition of Egypt's areas of comparative advantageby investors. The prospects of the private SMI sector are, therefore, highlypositive and the on-going and anticipated institutional and policy reforms bythe Government will provide further stimulus to the sector.

C. Bank Assistance to the Industrial Sector

2.15 Bank assistance to Egypt has focussed heavily on the industrialsector averaging 302-35% of the lending program. In the context of itsoverall operations in Egypt, the Bank contributes to policy formation throughmacroeconomic and indepth sectoral analysis and discussion at various levelsof government. Within industry, the Bank has had a number of subsectorstudies, to develop a basis for policy discussion and the design of a lendingprogram. As mentioned in para 1.02, the Bank-supported three recent studies1/, and the two resulting projects for the construction and export-oriented

1/ The studies are: (i) Arab Republic of Egypt - Construction/ContractingIndustry Study, Final Report, July 1981, (ii) Arab Republic of Egypt -Issues of Trade Strategy and Investment Planning. Report No. 4136-EGT,January 1983, and (iii) Arab Republic of Egypt - A Program for theDevelopment of Manufactured Exports, Report No. 4580-EGT, December 1983.

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industries would lead to institutional and policy reforms which would alsobenefit the private sector in general. The construction industry projectwould support the expansion of Egypt's construction capacity, throughon-lending by DIB and Bank Misr. It would also initiate policy reforms toimprove sub-sectoral efficiency and finance a technical assistance program toupgrade contractual and bidding practices. The export project, besidesproviding finaace for export-oriented industries, would lead to, inter aliascorrecting biases against exports, improving the complex and time-consumingexport and import control procedures, and overcoming a number ofinfrastructural deficiencies. The Bank's last two industrial creditssupported a technical assistance program for SMI specifically in the areas oftechnology and business management, including extension services and trainingcourses. The proposed SMI project would continue to support this program,while expanding it in scope, and adding a new facility for dissemination ofinformation and development of investment profiles for promising SMIprojects. The proposed Bank loan for the project will be channelled throughDIB. DIB has recently created specialized units in its headquarters andbranches to cater exclusively to the needs of very small SSI and artisans,while an increasing volume of its overall term lending is being directed toSSI enterprises. The Bank's present support to construction andexport-oriented industries and SMI through its lending program is, therefore,in line with Egypt's own priorities as set out in the current Five-Year Plan.

III. THE BANKING SECTORA. Structure

3.01 The Egyptian financial sector, including the money market for shortterm transactions and the capital market for medium and long-termtransactions, has expanded very rapidly during the last decade. In 1973, thebanking structure of Egypt was composed of the Central Bank of Egypt (CBE),four commercial banks, and three specialized banks--all in the public sector.The open door policy, introduced in 1974, substantially changed thecomposition and structure of the banking sector. The enactment of InvestmentLaw No. 43 of 1974 allowed several foreign banks to enter the Egyptian marketby forming joint ventures, as well as establishing branches. Subsequentamendments to Law 43, in 1977, allowed the establishment of new whollyEgyptian owned banks. At present, 50 banks are operating in Egypt under theauspices of Law 43. These are comercial banks authorized to engage in a fullrange of banking activities, both in domestic and foreign currencies, and maycompete with the four Government owned commercial banks. Foreign bankbranches, numbering 21, operate exclusively in foreign currencies and areprimarily engaged in investment or merchant banking. In addition, there arefour specialized banks (including DIB) in the public sector, which serve thespecific financial needs of the agriculture, industry, housing and socialsectors. The ron-banking financial intermediaries comprise eight insurancecompanies, two governmental social insurance organizations and somenon-deposit accepting private investment companies. The CBE monitors andcontrols all banks operating within Egypt and is actively involved inestablishing monetary policy, including interest rates, and credit flows.

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B. Financial Resources and Application

3.02 The main financial resources of the banking sector consist of timeand savings deposits. The efforts of the banking sector to mobilize savingshave been relatively successful. The total bank deposits have increased fromLE 4.3 billion at the end of 1978 to LE 15.9 billion as of June 30, 1983, atan annual real growth rate of about 15Z. The foreign currency deposits wereabout 38% of total deposits on June 30, 1983, and have increased at about 16Zannually in real terms. Successive increases in interest rates paid on timeand savings deposits (para 3.10), and the exemption of such revenues fromtaxation have yielded sustained growth in deposits. The average maturity oftime and savings deposits has not increased significantly and is estimated atabout 6 months for deposits in Egyptian pounds and about one month fordeposits in foreign currencies. Only about 20Z of deposits are for more thanone year. To lengthen the maturity of deposits, a better structured interestrate favoring medium and long-term deposits and a more innovative approach bythe banking sector would be required. The recent introduction of ten yeargovernment investment certificates and similar commercial bank savingscertificates, paying 13% annual interest, is a definite improvement.

3.03 Besides deposits, other sources of funds are loans from the CBE(local currency) and capital inflows from commercial, bilateral andmultilateral development agencies (foreign currency). These development fundsare available mainly to specialized banks for channelling to agricultural,industrial, housing and social sectors.

3.04 The loans and advances offered by the banking sector have increasedfrom LE 2.5 !illion at the end of 1978 to LE 13.4 billion on June 30, 1983;the average real rate of increase being 25% per year. The share of theprivate business sector in total loans and advances has increased very rapidlyfrom 23% to 48% during the 4 1/2 year period, vhile the volume of credits tothis sector increased in real terms at an annual rate of 50% over the period.Private business has now become the single largest beneficiary of bank credit,receiving LE 6.5 billion or 48.5% of total loans and advances as of June 30,1983. About one third of total loans and advances to the private businesssector were in foreign currency. A breakdown into major economic sectorsindicates that, out of total loans and advances as of June 30, 1983, 33.4%were received by trade, 27.0% by industry, 18.1% by services, 5.9% byagriculture and 14.7% by others. A study of the banking sector's operationsin Egypt in 1978-81 indicated that private business sector term lendingincreased from LE 97.1 million in 1978 (14% of total private business sectorloans) to LE 530.8 million in 1981 (13% of total private business sectorloans). This is an average annual rate of growth in real terms of 48%, but itis lower than the 54% increase in the volume of short-term loans. The abovetrend has continued and reflects inadequacy of long-term resources with thebanking sector, and its reluctance to commit funds on long-term basis (para3.05).

C. Financing of Industrial Sector

3.05 Overall: Up-to-date data on financing patterns in the industrialsector in Egypt is not available. During the last Five-Year Plan

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(1977/78-1981/82) a total capital investment of LE 18.2 billion was made inthe industrial sector, of which about LE 3.5 billion was in the privatesector. The public sector industry relied on budgetary allocations,suppliers' credits, bilateral and multilateral sources of assistance andinternal resources for financing of projects. Private sector industry alsoutilized these resources, except that instead of budgetary allocations, itutilized bank credits. Bank loans and advances to the private industrialsector increased from LE 269.8 million in 1978 to LE 1,161.1 million in 1981,or 37Z per year in real terms. During the sam period, the increase in termloans (more than one year) to this sector was from LE 49.9 million (includingLE 24.1 million in foreign currency) to LE 202.1 million (including LE 69.0million in foreign currency), or real growth rates of 40% annually for totalloans and 202 annually for the foreign currency component. The term loanswere, however, only 17.41 of total loans to the private industrial sector in1981 despite the phenomenal growth. A considerable part of short-term loans(estimated at about 40Z of total in case of a major public sector bank) wererolled over to finance long-term needs. This is not in the best interest ofsound investment planning and carries risks for both the enterprises and thecommercial banks. Commercial banks' lending in Egypt is highly conservativewith loans made primarily to well-known customers with a high credit-standingand on the basis of a rigid collateral policy. These banks neither have thecapability nor a desire to take risks on the basis of an objective analysis ofa project's financial viability. Consequently, the commercial banking sectoris not fully serving the needs of the private industrial sector for termfinancing. DIB and MIDB are the major institutions providing, on the basis ofsound appraisal, medium and long-term loans to the private industrial sector.DIB is emerging as the main institution to meet foreign currency needs of theprivate industrial sector and its total term lending during the currentFive-Year Plan (1982/83-86/87) would be about 25Z of the total investment inthe private industrial sector.

3.06 The capital market is rather inactive in Egypt. The two stockexchanges at Cairo and Alexandria list 22X of the registered enterprises andserve only as secondary markets. The trading activity is very small becausemost of the companies are closely held. The primary source of equityfinancing, besides family and friends, are subscriptions invited throughnewspaper advertisements and underwritten by commercial banks. The CapitalMarket Authority, established in 1979 as a regulatory body, is trying topromote the development of the capital market and to broaden the equityownership of enterprises.

3.07 SSI: Commercial and joint venture banks have not been keen todevelop an SSI and artisan portfolio due to the relatively higher risk andcosts involved. Their procedures and requirements in terms of loanapplication details have been cumbersome and out of proportion to the loansizes involved. On the other hand, small enterprise managers have beenskeptical and wary of banks and reluctant to respond to their complicated andonerous requirements. As a result, the financial needs of the lower end offirms at the scale of private enterprises have been poorly serviced. The twospecialized banks which attempt to address the financing needs of the groupare DIB and the Nasser Social Bank.

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3.08 DIB is charged, within its development financing operations, with aspecial objective to meet the capital investment needs of small scaleindustry. In 1978, about 25X of DIB's term lending approvals were to SSIs; in1982/83, this had risen to 301 and is expected to reach 50X in 1986. In viewof the large number of SSI and artisanal enterprises (para 2.08), DIB's 7040loans to date to SSIs and artisans account for only a small part of the SSImarket.

3.09 The Nasser Social Bank is a non-interest charging bank, preferring,in the case of productive loans, to accept a share of the profits (usuallyabout 121) from the investment. However, loans for productive purposes are avery small part of its loan portfolio, 5Z in 1980/81 and less than 1Z in1981/82. As its name suggests, it lends mainly for social needs, includingautomobiles, weddings, vacations etc. This comprises 70-75Z of its loanportfolio. Since its total credits in the banking system are about 0.5Z, andits lending to SSI is less than 1Z of DIB's loan portfolio, it is quiteinsignificant in the overall pictitre.

D. Cost of Capital

3.10 Interest Rates. Interest rates are established by the CBE for alllocal currency (LC) operations, while foreign currency (FC) rates forcommercial funds are set by market forces and are generally at a par withEurocurrency rates. At present LC time deposit rates range from 8.5Z up to amaximum of 13Z for five-year deposits and 101 for savings. Since 1977 allinterest earnings on deposits have been tax free. To grant preferentialtreatment to agriculture and industry, a maximum interest rate of 15Z wasestablished for loans to these two sectors in July 1982, while a minimum rateof 16% was imposed on loans to the commercial (trade) sector. Thisdifferential led commercial banks to make the more profitable loans to thecommercial sector; these loans have the added attraction for banks ofgenerally being of shorter duration. The CBE feels that this tendency will becontrolled by rigorous enforcement of the commercial credit ceiling now inplace. Lending rates for LC loans to agriculture and industry are currentlyset at a minimum of 10% and a maximum of 131, down from the 13 - 151 range of1981/82. FC short-term deposits earn a rate equivalent to about LIBOR less0.51 handling charge. Premiums for long-term deposits are negotiable, but thevolume is insignificant. The FC lending rate for commercial funds is LIBORplus 1-2% margin, while onlending rates for funds received from officialdevelopment assistance are subject to CBE guidelines and are generally equalto those for LC long-term loans, with some exceptions. For example, DIBpresently charges 15% interest on sub-loans made out of the World Bank loanproceeds. Controlled prices of major goods, including energy, food andhousing, make inflation estimates difficult. Nevertheless, the annualinflation rate is estimated to decline from 18% in 1982 to 141 in 1984 and 12%in 1986. Consequently, DIB rates, including the interest rates on theproposed Bank loan, as well as the mix of foreign and local currency loans tobe received by DIB sub-borrowers, would be positive in real terms.

3.11 Foreign Exchange Risk. There are currently three different foreignexchange pools in Egypt - the Central Bank pool, the commercial bank pool and

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the free market - each with its own sources and uses of funds and withseparate exchange rates. All transactions in the Central Bank pool are at theofficial rate which has been set at 70 piastres per dollar since 1979. Thispool is supplied by receipts from Suez Canal dues, petroleum and someagricultural exports and funds are used primarily to service externalgovernment debt and to finance imports of basic supply commodities. Thecommercial bank pool is supplied mainly by cash remittances from Egyptiansworking abroad, tourism receipts and the remaining non-oil exports. Alltransactions in the commercial bank pool are at the official commercial bankexchange rate, which was introduced as a separate rate in August 1981 and hasremained fixed at 84 piastres to the dollar. The "free" or own exchangemarket is supplied by remittances from Egyptians working abroad, foreigninvestment within the Law 43 framework and some tourist receipts. Privateindividuals and companies can buy foreign exchange at a freely floating ratein order to finance imports or to invest in dollar-denominated assets. Overthe past year, the free market rate has fluctuated between 110 and 125piastres to the dollar.

3.12 The Government has been, since the second half of 1982, engaged in adialogue on the exchange rate regime with the IMF. In April 1983 theGovernment introduced an important reform, allowing exporters to receive themost favorable exchange rate, i.e. the free market rate. Although theofficial commercial bank rate remains fixed, many other transactions,including remittance transfers and import payments, now occur at rates thatare intermediate between the official commercial bank rate and theown-exchange rate.

IV. DEVELOPMENT INDUSTRIAL BANK (DIB)

4.01 DIB, the intermediary under the last five industrial credits, willalso utilize the proposed industrial credit. Its institutional and financialaspects are reviewed in the following paragraphs.

A. Institutional Aspects

4.02 Establishment and Ownership. DIB was established by a decree in 1975and commenced operations in 1976 by taking over the functions and part of theportfolio of the SSPIS Unit (Special Services to Private Industrial Seztor) ofthe Bank of Alexandria. DIB's paid-in capital of LE 34 million (US $ 40million equivalent) is held entirely by the Government, and DIB is subject tosupervision by the Central Bank of Egypt (CBE) under Egyptian banking law.DIB's annual budget, salary structure, financial statements and appropriationsof profit are subject to CBE approval.

4.03 Organization. DIB operates from its head office in Cairo and threebranches located in Cairo, Alexandria and Tanta. The Tanta branch wasestablished in early 1979 and DIB plans to open the next branches at the cityof 10th of Ramadan and Port Said in the Canal area during 1984.

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4.04 DIB's headquarters organization was changed in mid-1983 to cope withsubstantially enlarged operations. Now there are 17 departments at the headoffice which reporr to 11 General Managers who are members of the ManagementCommittee. The Management Committee meets eve.y week under the chairmanshipof the VLce Chairman of DIB to deal with all management issues involving morethan one department. The management committee does not deal vith loanoperations which are handled under DIB's existing system of delegation ofauthority for loan approvals.

4.05 DIB has been very active in providing assistance to SSI andartisans. It has provided so far more than 7,000 loans to such enterprises.However, in view of the increased emphasis given to lending to very small SSIand artisanal enterprises under the proposed project, DIB has created recentlya special division to handle loans to such enterprises in the SSI departmentat the head office and in each branch. DIB has also obtained the services ofan advisor for two years, under EEC funds, to assist in DIB's promotional workincluding SSI development.

4.06 DIB has an established system of delegation of loan approvalauthority from the Board to the branch managers. Until recently, brancheswere authorized to approve loans in local currency up to LE 200,000 for termsup to 5 years. As these approval limits had substantially eroded in realterms due to inflation, DIB after discussions with the appraisal mission, hasincreased the approval limit of branches to LE 300,000. It has alsoauthorized the branches to approve foreign currency loans within the abovelimit, and has streamlined the procedures for review of branch cases at thehead office to avoid delays. The branches also perform their normal functionsof customer relations, disbursement and collection of loans and maintenante ofcustomer deposits and accounts. The head office handles all appraisals forloans in amounts exceeding the authority delegated to the branch managers.

4.07 Board, Management and Staff. The number of DIB Directors is seven;this includes two outside members. The five internal Directors consist of theChairman, Vice Chairman and three General Managers. The present two externalDirectors who have been on the Board since DIB's inception, are a Professor ofEconomics at Alexandria University and an Advisor in the General Authority forInvestment and Free Zones. These external members have provided valuableadvice to DIE.

4.08 As the legal provisions governing the composition of the Board limitDIB's ability to draw further on the experience and expertise of externalDirectors, the Government, at the urging of the Bank, has set up an advisorycommittee to the DIB Board consisting of five prominent persons with wideexperier-ce in private industry and finance. The committee will continue tofunction during the utilization of the proposed loan.

4.09 The Board meets about once a month or more often as necessary todecide on loan applications for amounts exceeding LE 500,000 or its equiva-lent in the case of a foreign currency loan. All cases submitted to the Boardare screened by a loan committee consisting of the Vice-Chairman and the threeGeneral Managers.

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4.10 DIB's senior and middle management team has remained virtuallyunchanged since its inception. As the team has gained experience, there hasbeen considerable improvement in the delegation and communication ofinformation between departments. This process should accelerate further as aresult of the formation of the management committee. There has beenimprovement in the performance of the management also, due to training ofsenior managers in foreign institutions during the last four years and theprovision of extensive advisory services. The entire management team, havingbeen drawn from the Bank of Alexandria, does still have, albeit decreasingly,an inclination to follow commercial bank practices concerning collateral forloans, amortizat-on periods and loan supervision. Rapid changes in outlookand quality of DIB's middle management cannot be realistically expected as DIBhas to operate within an institutional framework, being a public sector bank,which prevents direct recruitment of senior staff at competitive salaries.

4.11 As of December 31, 1983, DIB had a total of 484 employees including262 professional staff (including top management). DIB's salary scales makeit difficult to recruit top quality experienced staff especially as theemergence of the large number of merchant banks in Egypt has created increaseddemand for individuals with experience or knowledge of project analysis, andhas pushed salary levels well beyond DIB's permissible scales. DIB's salarylevels, which are fixed by the Government, for a typical appraisal officerwith about two to three year- experience are only one third of salaries paidby the merchant banks. However, DIB has brought about improvement in staffquality by recruiting fresh graduates and training them with the help ofadvisors, and by sending its appraisal officers to training courses abroad.Professional staff turnover at about 15S per annum has resulted in thedeparture of experienced professionals which has slowed down improvement inappraisal and supervision work. The Bank's preparation mission for theproposed project had discussed this issue with the concerned Governmentdepartments, CBE, and DIB. Following the mission's advice, DIB has decided,with the approval of CBE, to increase its annual bonuses to double theirpresent level, thus, raising total staff emoluments by about 50S. DIB hasalso agreed to continue to review these emoluments on an annual basis and tomake further upward adjustments in financial incentives. This should help toreduce staff turnover and recruit better staff.

4.12 A substantial program of management technical assistance, funded byUSAID, commenced on October 1, 1981. The scope of the program, which wasreviewed by the Bank at USAID's request prior to finalization, covered 12tasks relating to areas largely within the authority of DIB management. Themajor areas were (i) review of organizational structure including improvementof services to clients, improvement of economic research and SSI operations,(ii) accounting, management information systems (MIS) and internal audit and(iii) future development plan. The contract to provide the services wasawarded to a consortium of companies - Price Waterhouse and R. Robert NathanAssociates. The consultant's report with specific recommendations wascompleted in October 1983, and it has been reviewed by Bank staff. DIB has(a) accepted the recommendations relating to computerization of its loan andcentral accounting system and is in the process of acquiring and installing acomputer in its head office; (b) accepted the recommendations regarding MISand computer software to produce data for MIS is being acquired; and (c)implemented the recommendation to establish a client service department.

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There are two major areas in which further action is required based onconsultant's recommendations. First, the internal audit department should bestrengthened by preparation of a 3-year work proeram for inspection ofdepartments in a systematic manner, introduction of a manual for internalinspection and transfer of responsibility for follow up on findings to theinternal audit department. Second, the economic evaluation of projects shouldbe improved by more extensive use of shadow prices for inputs, and applicationof more realistic assumptions on variables (including capital cost, exchangerate, debt servicing, project implementation schedule, unit production cost,and unit profit margins) to be used in the sensitivity analysis. Duringnegotiations, agreements have been reached with DIB to carry out abovemeasures by December 31, 1984.

4.13 Policies. DIB's Policy Statement, originally adopted in 1978, wasamended and expanded in 1980. The Policy Statement provides, inter alia, thatDIB's financial assistance will be available mainly for enterprises in theprivate and cooperative sectors, including artisans and persons providingprofessional services. DIB will particularly assist projects which willresult in increased utilization of existing capacities and will endeavor tospread its assistance among different regions in accordance with the broadeconomic objectives of the Government. Normally, DIB limits its lending sothat the beneficiary projects' debt/equity ratio does not exceed 2:1, exceptin the case of projects whose fixed assets excluding land and building do notexceed LE 200,000 and in the case of hire-purchase operations, where up to 80%of the project cost may be financed. Regarding equity investments, DIBusually will not take up more that 251 of the equity of an enterprise andDIB's total equity portfolio will not exceed its own equity. Financialexposure of DIB, in all forms of assistance (loans, equity participation andguarantees) to a single borrower shall not exceed 20Z of DIB's equity, whichmay be relaxed up to 25X in exceptional cases. DIB follows ratherconservative collateral policies, although there is a trend towards arelaxation in this respect.

4.14 Procedures. There has been improvement in DIB's project appraisalwork as a result of internal training courses conducted by advisors forappraisal staff and attendance at courses conducted by various institutions,including the EDI. Continuous input has also been provided by Bank staffduring supervision missions and during review of sub-loans submitted by DIB.The feasibility studies of subprojects are generally comprehensive, butsometimes the quality is inconsistent mainly due to loss of experiencedappraisal officers. Besides, there is room for further improvement ofeconomic and market evaluation of projects. A project advisor, engaged inMarch 1984, under EEC funds, has started to provide guidance and furthertraining to staff in appraisal and supervision work. (Para 4.15). He willalso assist DIB in the preparation of a five-year plan for the employment ofprofessional staff for project appraisal and supervision. Duringnegotiations, agreement has been reached with DIB to increase the number ofappraisal officers to a total of 20 by June 30, 1985.

4.15 Project supervision is essentially focussed on the financialaspects. DIB lacks an organized project supervision system and adequate

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technical staff (now only 8 at the head office) to provide a systematicproject-oriented follow-up assistance. The large number of loans in DIB'sportfolio (5,000 at the end of 1982) makes periodic contact with all borrowersdifficult. To formulate a project supervision system specially suited to itsoperations, DIB would use the services of the project advisor who has beenalready engaged under EEC funds for a one-year period. During negotiations,assurances were obtained from DIB with respect to the preparation andintroduction of an improved project supervision system acceptable to the Bankby December 31, 1984 and the increase in the number of project supervisionstaff to 16 by June 30, 1985. During supervision missions, Bank staff willgive special attention to the progress on preparation and implementation ofthe project supervision system.

B. Operations and Financial Aspects

4.16 Overall Operations. DIB's loan and equity investment operations haveshown a rapid decline in short-term operations and a significant increase inmedium- and long-term foreign currency operations in the last 3-4 years (Annex2). In 1982/83, foreign currency loan approvals amounted to LE 68.4 million($85.5 million) and were 651 of total term loan approvals during the year.DIB has thus become mainly a provider of medium- and long-term foreigncurrency investment funds to industry in Egypt although the local funds stillcontinue to be important. About two-thirds of the loans in 1982/83 were foracquiring machinery and 431 of them had maturities ranging from five to tenyears. (Details in Annex 3)

4.17 Bank-Financed Operations. DIB has so far received two IDA credits(Credit No. 412 - $15 million and Credit No. 576 - $25 million) and threeloans (Loan No. 1533 - $40 million, Loan No. 1804 - $50 million and Loan No.2074 - $120 million) during the last ten years. The closing date for DIB Iwas extended by 2-1/2 years and that for DIB II by 1-1/2 years. It appearsthat these delays were caused by DIB's initial inexperience with term lendingoperations. DIB III was fully committed on schedule. Disbursements insubsequent loans have been on or ahead of schedule. DIB's improvedperformance in utilizing Bank funds has been further demonstrated during theimplementation of DIB V. As of December 31, 1983, loan commitments totalled$98.0 million and disbursements amounted to $29.1 million against theprojected levels of $80.0 million and $25.2 million respectively. DIB is alsoone of the banks responsible for channelling loans under the Bank'sagroindustrial projects (Credit No. 988-EGT and Loan No. 2243-EGT).

4.18 DIB has made 652 subloans out of Bank funds up to December 31, 1983,for a total of $225.4 million. These loans have generated a total investmentof $800.3 million 1/, as per estimates made at the time the projects wereappraised, and have created about 98,800 jobs, i.e., at a cost of $8,100 1/each (1982 prices). The major industrial subsectors which have been

1/ Computed at the exchange rate of LE 0.84=$1.00.

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beneficiaries of Bank-funded loans were chemicals and paper 262, foodprocessing 182, engineering 15%, building and construction 132, and textiles142.

4.19 DIB's performance in utilising the first two industrial credits wasaudited by OED. While Project Performance Audit Report (No. 4531 of June 7,1983) recognized the significant contribution made by DIB for the promotion ofprivate industrial sector, particularly SMI, and the satisfactory utilizationof Bank industrial credits, it drew the following major conclusions in regardto DIB's institutional aspects: (i) DIB's institutional development has beenhampered by constaints imposed upon it as it has to operate as a public sectorfinancial institution; (ii) salary scale limitations make it difficult torecruit highly qualified and experienced staff at senior levels; (iii) projectappraisal has room for further improvements, particularly with respect tomarket and economic evaluation, and supervision needs to be strengthened; (iv)budgeting, accounting, financial control and management information systemsneed improvement; and (v) DIB needs to mobilize funds from the local andinternational markets to establish its financial independence. Remedialactions required in the light of these conclusions are being taken by DIBmanagement, where actions lie within its authority, i.e., in all areas except(i) above. As mentioned in para 4.11, DIB has agreed to mitigate the salaryconstraint by increasing the level of bonus payable to its staff. The projectappraisal and supervision work will be further strengthened with the help ofthe advisor funded by EEC and the employment of additional staff (paras 4.14and 4.15). Improvement of budgeting, accounting and management informationsystems was a major part of the technical assistance program (para 4.12) whichis under implementation. In regard to mobilization of resources from thedomestic capital market, DIB is already reducing its dependence on the CBEsubstantially and is borrowing from other banks. DIB management feels thatDIB should not attempt to compete with commercial banks for funds by enteringinto retail deposit mobilization, which appears to be an appropriate policy;such an activity would require to deal with a large number of depositors anddistract DIB from its long-term lending objective. As regards mobilisation offoreign currency resources, DIB has beer. approached on several occasions forproviding lines of credit of short-term funds, which would not fit thematurity profile of DIB loans. During negotiations, assurances were receivedfrom DIB to make its best efforts to raise long-term foreign currency fundsfrom commercial sources to meet a part of its resource gap (para 4.28).

4.20 Profitability. DIB's income statements for 1979-1983 are attached asAnnex 4. DIB's profits have been adequate. Before-tax return on averageequity ranged between 142 and 302 p.a. Return on equity has increased despitelarge increases in DIB's paid-in capital between the years 1979-83. Thisillustrates DIB's ability to deploy funds in a remunerative manner. Return ontotal assets has been adequate (between 2.62 and 3.2S) and DIB has enjoyed anadequate average spread on borrowed funds excluding current deposi.s.

4.21 As provided in its statutes, 252 of DIE's profits are set aside aslegal reserves and 752 of the profit remaining after appropriation to reservesis distributed as a dividend to CBE, being DIB's shareholder. The remaining252 is distributed to DIB's employees. However, in the past only about LE 75

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has been paid to each employee in cash; the rest has been credited intovarious social security schemes on their behalf.

4.22 Financial Position. DIB's balance sheets for 1979-1983 are providedin Annex 5. DIB's total assets have grown at an average annual rate of over40X during the 1979-1983 period. As of June 30, 1983, 95Z of DIB's assetswere accounted for by outstanding loans, reflecting a high degree of resourceutilization, and indicating a need for further resource mobilization. DIB hasmaintained a satisfactory liquidity situation, its current ratio being above1:1. Despite the high rate of growth of assets and debt, DIB has a verysatisfactory financial structure after the doubling of its paid-in capital toLE 20 million in 1979 and further increasing it to LE 35 million by1983/1984. The long-term debt/equity ratio was 7.3:1 as of June 30, 1983,which is within the limit of 8:1 fixed under the loan agreement for DIB V.Overall, DIB has a strong financial position and is well placed to continueexpanding its operations.

4.23 Quality of Portfolio. As of June 30, 1983, DIB's loan portfolioamounted to LE 316 million having more than doubled in two years, and nearly70% being in the repayment stage. Total arrears of principal, on the samedate, amounted to LE 8 million (2.5% of loan portfolio) and affected 13.01 ofDIB's loan portfolio, which is acceptable (Annex 6). Projects as yetuncompleted accounted for 27% of the arrearsi. The repayment performance ofDIB's SSI clients is almost the same as that of medium and large scaleenterprise clients. Overall, considering the rapid growth of DIB's portfolioover the last four years, the portfolio is of sound quality. DIB has agreedto strengthen its staff in the loan follow-up department to help prevent anincrease in arrears and has agreed to develop a supervision program tomaintain the soundness of its portfolio. (Para 4.15).

4.24 Provisions and Reserves. DIB has consistently followed a very pru-dent provision policy for doubtful loans. An elaborate procedure requiresthat a review of each loan in arrears be made each year, after which DIBauditors make their detailed review. As of June 30, 1983, total accumulatedprovisions for doubtful loans were LE 23.2 million in addition to reserves ofLE 2.2 million. Together, provisions and reserves were a substantial 81 ofthe loan portfolio and about double the total amount of principal and interestin arrears. Moreover, DIB follows a fairly conservative collateral policy.In view of the sound quality of the loan portfolio and the collateralavailable, provisions and reserves appear to be fully adequate.

4.25 Audit. DIB's financial statements are audited by Z. and H. Hassanand Co., a reputable firm of chartered accountants associated with Messrs.Peat, Marwick, Mitchell and Co. The audit is carried out in accordance withBank requirements and the performance of the auditors has been satisfactory.

4.26 Projected Operations. DIB's operational projections for the period1983/84-1986/87 are provided in Annex 7. The projections assume an averageannual increase of about 101 in nominal terms in both foreign and localcurrency loan approvals. The rate of increase assumed is lower than thehistorical rate of growth of DIB's total loan approvals and represents, infact, no real increase

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given the expected inflation rate of 12-14% in 1984-87. It is, however,considered appropriate in view of the need to consolidate operations, to trainstaff and maintain the quality of the portfolio. Long-term local currencyloan approvals are expected to rise from LE 55.5 million in 1983/84 to LE 76.8million in 1986/87. Long-term foreign currency loan approvals are projectedto increase from LE 78 million ($91 million) to LE 104 million ($124 million)during the same period.

4.27 Resource Requirements. In view of the projected portfolio expansion,DIB's requirements for new resources are rising rapidly. DIB's major sourceof local currency funds is a loan discounting facility provided by CBE. Thefacility was originally approved for a total of LE 57 million at an interestrate of 9.5% p.a. CBE agreed in 1981 to increase the facility up to LE 100million at the same interest rate. However, DIB has already begun to reduceits dependence on CBE and has begun to increase borrowing from othercommercial banks as inter-bank deposit rates are lower than the CBE's rate inthe present situation of high liquidity in the banking system. DIB is notexpected to experience difficulty in covering its local currency commitmentsestimated at LE 203 million over the 1984/85-86/87 period.

4.28 Foreign currency resources made available to DIB totalled LE 313million ($371 million) by June 1983, of which $267 million has been providedby Bank/IDA and the remaining came mainly from USAID, KfW, EIB, AMDB, and OPECFund. DIB has not yet been able to raise foreign currency funds fromcommercial sources because such funds have been offered to DIB for short termonly and do not fit in its lending program. During 1984/85-1986/87, DIBexpects to commit foreign currency loans totalling LE 276 million ($329million) including about LE 90 million ($112 million) for SSI projects andplans to mobilize funds from following sources:

Sources of Foreign CurrencyFunds, 1984/85 - 1986/87

($ million)

Proposed Loans from the World BankSMI Project 168.1Construction Industry Project 50.0Export Industry Project 30.0

Total: 248.1

Proposed Loans from Other Sources 59.9

Existing Resources as on 6/30/84 21.0

Total of all sources 329.0

As shown above, DIB would use $248.1 million out of three proposed Bank loansand $80.9 million from other sources including KfW, EIB, and AMDB. In orderto ensure that all the necessary funds are available to DIB in a timelymanner, assurances were received during negotiations that DIB will commit atleast $25 million each year during 1985-1987 from sources other tnan theBank. DIB's resource mobilization activities will be reviewed by the Bank at

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the end of each year and further commitments under the proposed loan will becontinued only if DIB meets the above requirement. Also, in order to reduceDIB's dependence on official sources of financing and to diversify itsfinancial sources, DIB will make its best efforts to mobilize funds fromcommercial sources to the maximum extent.

4.29 Projected Profitability and Financial Position. Projected incomestatements, cash flow statements and balance sheets are provided in Annexes9-11. DIB is expected to maintain adequate profitability with net profitbefore taxes rising from LE 12.7 million in 1983/84 to LE 21.8 million in1987/88, and return on equity ranging between 26% and 31%. Appropriations toreserves will be equal to 25% of profits, and 75% of remaining will be paid toCBE as dividend. Provisions for doubtful debts and resources will bemaintained at 6% of outstanding portfolio. DIB will maintain satisfactoryliquidity with the current ratio expected to be above 1.0. DIB's financialstructure will continue to be sound. Its debt/equity ratio would become 7.7:1on June 30, 1984 and would cross the present 8:1 limit in 1985. It isproposed to increase the debt/equity limit to 9:1 under this project (para6.18) considering substantial expansion in term loan operations andsatisfactory quality of portfolio of DIB.

V. TECHNICAL ASSISTANCE FOR SMI

A. Background

5.01 The Bank's support for technical assistance to SMI was initiated witha pilot program included in the DIB III project. 1/ Based on experience ofthe pilot program, an enlarged technical assistance (TA) program for SMI wasestablished under DIB V 2/ (now referred to as Phase II). It comprised thefollowing components: (I) technical extension services to SMI, to be providedby six mobile teams of extension officers in Cairo and Alexandria, (ii)financial and management services to SMI, (iii) training of SNI managers andowners, (iv) establishment of a subcontracting exchange and (v) training ofstaff implementing the program. The foreign currency cost of the program wasestimated at $1.0 million including contingencies and administration costs andthe local currency cost was estimated at LE 355,000. The entire foreigncurrency cost was funded out of loan No. 2074 while the local cost was to beprovided by the Government. The program was due to run from June 30, 1982 toDecember 31, 1984. The Government agency responsible for implementing theprogram is the Engineering and Industrial Design Development Centre (EIDDC) inCairo. EIDDC subcontracted the provision of foreign experts and importedequipment, vehicles, etc to the International Labor Office (ILO), under aformal agreement which had been reviewed by the Bank.

1/ For details, see Supplemental Letter dated April 12, 1978, Loan1533-EGT.

2/ For details, see Supplemental Letter dated January 12, 1982, Loan2074-EGT.

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B. Evaluation of Phase II Program

5.02 The Phase II program has made generally satisfactory progress despitesome delays in the commencement of two of its components, namely financial andmanagement services and sub-contracting exchange. The commencement of variousactivities under the technical assistance program has been staggered, to someextent, to allow time to EIDDC to employ necessary additional staff and toachieve some momentum in activities already started before taking up newactivities. The advisor for technical extension services arrived in September1982 and has played an effective role in the selection and training ofextension officers. Four teams of extension officers have been alreadyestablished and the remaining two will be in place before the end of 1984.The number of SMI units contacted by extension teams has increased from 39 to65 per month and it appears that the target of 600 units per year will bereached within 1984. Seven training courses for owners/employees of SMIestablishments have been held with a high degree of participant response. Thenumber of training courses as well as course-hours exceed the projectedlevel. The overseas training of EIDDC staff is proceeding smoothly and so far8 extension services staff have been trained. The advisor for financial andmanagement services arrived in September 1983 for a two-year term. He hasalready organized one team for extension services and another team will beorganized within 1984. The advisor for sub-contracting exchange is expectedto join in September 1984 for a six month period. The two delayed componentsof the program are now expected to be fully completed by March 1985 and August1985 respectively.

5.03 EIDDC is required to evaluate the results of services provided undervarious components of the Phase II program on a sample basis and following anagreed upon criteria. The first such excercise, relating to technicalextension services, was completed in April 1984. It showed that 32enterprises, out of a sample of 84, had already obtained positive results andanother 30 had potential for improvement in their performance. A se' ctedreview of EIDDC client files and discussions with a few of the assistedenterprises by the appraisal mission, had indicated that advice and assistanceoffered by extension services teams was practical and appropriate and theenterprises were pleased with the services. Also, the number of enterprisesseeking EIDDCs' assistance on their own initiative is increasing and now about40X of the team visits are in response to such initiatives.

5.04 Shortcomings in the implementation of the program have appeared in twoareas: (i) The Federation of Egyptian Industry has not been very effective indisseminating information to its SMI members about the activities undertakenunder the TA program despite the protocol of cooperation with EIDDC. This ismainly because of the Federation being quite inactive vis-a-vis its SMImEmbers. However, EIDDC is making its own direct efforts to make its programknown to SMI through news media and increasing visits of extension serviceteams to enterprises. (ii) While the extension service has been highlyappreciated by its SMI clients for its practical, trouble-shooting on-the-spotapproach, it has yet to result in use of more modern technology and productionmethods by the SMI clients. This weakness is expected to be corrected whenthe financial and management services component becomes fully operative.

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Overall, the experience gained during the Phase II program establishesadequate ground for continuation and expansion of the program under theproposed project.

C. The Proposed Program (Phase III)

5.05 Under the proposed project, the Phase II program will be extended fora period of three years commencing from January 1, 1985 and expanded inregional coverage and scope of services. The Phase III program will also beimplemented by staff of the Small Scale Industries and Training Department(SSITD) which is the new title of the SSI Development Department after itstaking over EIDDC's training activities. The manager of SSITD hasconsequently been elevated to the rank of Director General and will beresponsible for the entire program. The proposed program aims to increase thenumber of extension teams; increase regional coverage by opening extensionbases at Ismailia and Tanta; continue financial, management and trainingservices; fully streamline the operations of subcontracting exchange; and toset up a new project development and implementation unit. The foreigncurrency cost of the program is estimated at $1.5 million (para 5.13) and thelocal currency cost at LE 1.6 million. The ratio of local cost to foreigncost will now be almost 1:0.75 as compared to 1:2.4 under Phase II. Thischange in proportion is evidence of the greater self managed operations andgradual phasing-out of foreign advisory support. As under Phase II, DIBclients will receive priority in assistance, which will be formalized byextension of the protocol of cooperation between EIDDC and DIB signed underPhase II.

Program Components

5.06 The Phase III program will have the following components:

Ci) Technical Extension Services - to be expanded from six teams to13 teams, eight based at Cairo, three at Alexandria and one eachat Tanta and Ismailia.

(ii) Management and Training Services - to be continued and expandedin terms of management advisors, to be based at Cairo.

(iii) Project Development and Information Services - to be provided bya new unit to be set up at Cairo.

(iv) Subcontract-ng Services - to be continued from a subcontractingexchange planned to be set up at Cairo under Phase II.

(v) Training for EIDDC and SSITD staff through training coursesabroad.

(vi) Provision of short-term consultants for specific industrialproblems.

The details of the above components are given below:

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5.07 Si) Technical Extension Services: Under the Phase II program, theCairo unit is expected to be expanded to four mobile teams by December 1984.This unit will be expanded in stages to eight teams by December 1985 and serveSMI units in Greater Cairo. The Alexandria unit, which became operational inMarch 1983 will have two operational teams by December 1984 and will beexpanded to three teams under Phase III. Two new units will be started; oneat Tanta, to serve SMI units in the Lower Nile Delta and one at Ismailia tocover the Suez Canal area. The Tanta and Ismailia units will be set up in1985 and 1986 respectively. Each unit will be headed by a national expert andeach team will be composed of two extension offices. The output levelexpected of each team will be 100 visits per year. On this basis it isexpected that 1,300 SMI units will receive at least one visit per year uponthe completion of the proposed Phase III program. Under Phase II about 34companies (about 5Z of those visited) required further technical assistancefrom one or more of EIDDC's technical departments. If this proportion ismaintained, about 65 SMI units will need assistance each year from EIDDCtechnical departments. EIDDC has adequate capacity to handle this projecteddemand. The Phase III program includes provision, under terms of referenceacceptable to the Bank, of a foreign advisor for 12 staff months up toDecember 31, 1985 after which the national expert recruited earlier will takeover the operation of the program.

5.08 (ii) Management and Training Services: Under this component, themanagement and financial services and the training programs for SKI set upunder Phase II will be merged. The management advisory service will bestaffed by 7 specialists qualified in financial management, marketing, andproduction management. The advisors will be able to provide a broad range ofservices including market counselling, sales promotion and advertisement,accounting and cost analysis, financial counselling and credit management,production management, plant studies, personnel management, etc. The trainingservices would be manned by a training officer who would work closely with thetechnical extension teams and the management advisors to design short (2-3week) training programs in the following areas:

- Shop-oriented courses - machine shop, foundry and tool roompractices

- Trade-oriented courses - tool maker, fitter, carpenter, welder,mechanic and turner

- Process-oriented courses - heat treatment, tanning and fruitpreservation

- Product-oriented courses - footwear, garments and plastics

- Technical subject courses - preparation and reading of blueprintsetc.

- Management courses - general management, marketingfinancial management, production andpersonnel management and creditmanagement.

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The unit will have the services of a foreign advisor for 15 staff months underterms of reference acceptable to the Bank.

5.09 Project Development and Information Services: The collection anddissemination of information is an important aspect of SMI technicalassistance. Besides furnishing timely information to SMI entrepreneurs fortaking investment decisions, availability of information is essential forpreparation of industry profiles and feasibility studies. The services willalso provide information on export marketing opportunities, market studies ondemand trends, general statistical information on size of market, availabilityof raw materials etc. Specifically, the information unit will performindustry outlook surveys, feasibility studies, market surveys, identificationof new SMI opportunities. The services will also collect and disseminateinformation regarding legislation, regulation and taxation affecting SMIs.The unit will be staffed by four information specialists including onenational expert to head the unit, and economist and research assistants.

5.10 Subcontracting Services: The establishment of subcontractingexchange proposed under Phase II will commence in September 1984 with thearrival of foreign advisor for a 6-month period. Under Phase III, theexchange will fully streamline its operations and receive 6 staff months ofadvisory services under terms of reference acceptable to the Bank, possiblydivided into three two-month visits by foreign advisor, who will be assistedby three local counterparts. The arrangement for exchange of informationbetween EIDDC and the Federation of Egyptian industries (established underphase II) will be brought into operation for the implementation of thiscomponent of the program.

5.11 Staff Training: In order to build up a group of competent advisoryand extension staff, a program of staff training by deputation of staff toselected training courses abroad will be continued. During Phase II, 8 SSITDand EIDDC staff were deputed abroad for training and study tours for a totalof 28 weeks. This program, which proved to be useful in acquisition ofknowledge of advanced extension and development techniques will be continuedand about 16-18 staff are expected to attend courses abroad under Phase III.

5.12 Short-term consultants: In order to enable study of specificindustry-related problems, it is proposed to provide for recruitment of shortterm experts for periods ranging from 2 to 3 months either locally or fromabroad in various areas such as footwear and leather industry, plasticsproducts, food products, ready made garments, ceramics, etc. These expertswill be recruited on an as-needed basis up to a total of 45 staff mo.nths,including 27 staff months of foreign advisory services.

Cost and Financing:

5.13 The total estimated cost of the proposed program for the three-yearperiod 1985-87 is given below:

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Component Total CostForeign Local (LD)

(i) Technical Extension Services 240,000 431,000(ii) Management & Training Services 128,000 162,000

(iii) Project Development & InformationServices - 60,000

(iv) Subcontracting Exchange 60,000 90,000(v) Staff Training 300, 000

(vi) Short-term Advisors 204,000 90,0000

Subtotal 932,000 833,000

Administration and Contingencies 537,000 444,000Costs of Existing Staff - 300,000

Total 1,469,000 1,577,000

5.14 The foreign currency cost includes Ci) 60 staff months of foreignadvisory services, (ii) equipment and vehicles (iii) computer hardware andsoftware, training equipment and office equipment, and (iv) support andoverhead costs for the foreign experts. Detailed cost estimates are shown inAnnex 12.

5.15 The foreign currency cost will be met by an allocation of $1.5million made out of the proposed loan. This amount will be provided by theGovernment to EIDDC as a grant because EIDDC is not yet in a position to fullyrecover the cost of its services from SSI enterprises. The Government willalso provide the local currency cost to EIDDC by augmenting its budget to therequired extent. In addition, DIB will credit a sum equivalent to 0.42% ofthe outstanding sub-loan amounts out of its interest spread under the proposedloan (para 6.11) to a special account within DIB. The accumulated funds willbe used to support the cost of EIDDCs' extension service to SMI, especiallyborrowers of DIB. The annual allocations from the fund will be agreed betweenDIE and EIDDC in consultation with the Bank. The Government's obligation tomeet the local currency requirements of the Phase III program would be reducedby the amounts transferred from the fund by DIB.

Organization, Management and Staffing:

5.16 The program will continue to be implemented by the SSITD of EIDDCunder the direct supervision of the Director General of the departme-t. As inthe past, each of the four technical extension services units (Cairo,Alexandria, Tanta and Ismailia) will be headed by national experts who will bepersons with at least 10 years' experience. The remaining units - managementservices, training, subcontracting and project development - will also beheaded by national experts recruited at competitive salaries on contractbasis. The bulk of the technical staff will be recruited from within EIDDC.The total staff involved in the program is expected to increase from 22 (byend of 1984) to 45 by end of 1987, which can be accomplished, given theexpected degree of local currency support. The staffing plan for SSITD by end1987 is attached as Annex 13.

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5.17 Under Phase II, EIDDC subcontracted with ILO to recruit experts andprocure equipment and vehicles. This arrangement worked successfully andEIDDC will have the option of continuing the arrangement under Pbase III.Otherwise the foreign experts can be recruited by inviting proposals fromconsulting firms and equipment procured directly by EIDDC. In either case,Bank guidelines for recruitment of consultants and for procurement ofequipment will apply.

5.18 Cooperation between EIDDC and DIB: EIDDC and DIB signed a protocolof cooperation specifying the services to be provided by EIDDC to DIB clientsand DIB's obligation to provide lists of its SMI borrowers to EIDDC and torefer their problems to EIDDC. This protocol has resulted in closecooperation between DIB and EIDDC staff implementing the Phase II program.Under Phase III, the protocol between DIB and EIDDC will be extended up to theend of 1987.

5.19 Monitoring and Evaluation: EIDDC has submitted quarterly reports onimplementation of the program regularly providing details of firms surveyed,firms availing of technical services from EIDDC's technical departments andtraining courses conducted. The same system of reporting will be continuedunder Phase III. A detailed system of evaluation of results of the program,calling for a survey of lOX of the firms assisted under any of the programcomponents was also prescribed under Phase II. The benefits derived from theprogram by the assisted firms are, as far as possible, to be quantified andtranslated into cost savings achieved. Other non quantifiable benefits suchas quality improvement, introduction of new production methods were to beassessed in general terms. The first such evaluation under Phase II wascompleted in April 1984 and the same system is proposed to be continued bothfor monitoring and for evaluation of the Phase III program.

VI. THE PROJECT

A. Obiectives:

6.01 The proposed project would support the program for the development ofsmall and medium scale industries in Egypt. More specifically, its mainobjectives are:

(i) to help the development of SMI and thereby contribute to theGovernment's objectives of encouraging the private sector andfostering employment creation;

(ii) to improve productivity and efficiency of SMI through a comprehensivetechnical assistance program; and

(iii) to further develop the institutional capacity in Egypt foridentifying and financing viable and priority industrial projects.

6.02 The above objectives are in line with the Government's five year planand are consistent with the Bank's sector strategy and lending objectives in

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Egypt. The various project components which would help to meet the aboveobjectives are described below:

B. Financial Assistance

6.03 The proposed Bank loan of $170 million will include $168.1 millionfor on-lending to eligible enterprises in the private industrial sectorthrough DIB. This would meet about 71 of total investment and about 20Z offoreign currency investment in the private industrial sector during1984/85-1986/87. DIB would use at least 701 of the loan proceeds to financeSMI which are defined as enterprises with fixed assets, excluding land andbuildings, not exceeding LE 2.75 million in 1983 prices. Although the projectplaces special emphasis on the financing of SSI, no separate allocation of theloan amount is proposed for this sector. In line with the agreements reachedunder DIB V, DIB will increase its overall term-loan approvals for SSI to 401in 1984. These targets will be further increased to 451 in 1985 and 501 in1986 and subsequent years. Within the above targets, DIE's term loanapprovals for "small" SSI will be at least 20% of the total approvals. As theproposed loan will meet about one-third of DIB's long-term resource needsduring 1984/85 to 1986/87, a substantial number of SSI projects would befinanced out of Bank funds. Under DIB V, SSI and "small" SSI enterprises weredefined as enterprises with total fixed assets (excluding land and buildings)not exceeding LE 300,000 and LE 150,000 respectively in 1981 prices. Theseceilings have to be revised annually to reflect increases in the wholesaleprice index in Egypt and work out to LE 420,000 and LE 210,000 in 1983 prices.

C. Technical Assistance for SMI through EIDDC

6.04 As elaborated in paras 5.05 to 5.12, the proposed project willinclude a phase III program for technical assistance to SMI. The foreigncurrency cost of the program is estimated at $1.5 million (paras 5.13 and5.14) and will be financed under the proposed loan.

D. Use of Loan Proceeds:

6.05 The proposed loan will include the capitalized front end fee of$423,940. The credit line component ($168.1 million) of the loan w_ll be usedto finance industrial projects exclusively in the private sector. This wouldinclude enterprises estabiished under Law 43 with public sector participationbecause all such enterprises are legally private sector enterprises. Even ifthey have a majority of public sector participation, they are exempt fromregulations applicable to public sector enterprises and have full autonomy intheir operations and decision-making.

6.06 The sub-loan proceeds will be used to finance the foreign exchangecost of fixed assets and associated working capital of eligible enterprisesincluding those engaged in mining, manufacturing, tourism, and otherservices. On the basis of past operations and project pipeline of DIB andoverall financial needs of SSI/artisan sector, it is anticipated that most ofthe sub-projects to be financed under the credit lines are likely to be forthe manufacture of food products, textiles, read-made garments, furniture,

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plastic products, leather products, engineering goods, and buildingmaterials. The technical assistance component of $1.5 million for SMI will beused to import equipment, to engage the services of advisors, and foreigntraining of EIDDC staff.

6.07 On the basis of experience under earlier industrial credits to DIBand its resource requirements during the next three years, the last date forsubmission of sub-loan applications to the Bank will be June 30, 1987; thelast date for submission of applications will not apply to the technicalassistance component. The closing date of the loan will be December 31,1990.

E. Main Features of the Loan

6.08 Lending and Relending Arrangements. The Government will be theborrower for the proposed loan of $170 million. The repayment term of theloan will be 20 years including a five-year grace period. The Government willonlend $168.1 million as a line of credit to DIB and will transfer thetechnical assistance component of $1.5 million to EIDDC as a grant. DIB willonlend the line of credit to eligible enterprises (paras 6.03) for terms notexceeding 15 years including a grace period of up to three years. The loanrepayment by DIB to the Government will be according to the aggregateamortization schedule of individual sub-loans. The Government will beresponsible, on behalf of EIDDC, for the repayment of technical assistancecomponent of $1.5 million. Execution of a subsidiary loan agreement betweenthe Government and DIB and acceptable to the Bank will be a condition of loaneffectiveness.

6.09 Interest Rates and Foreign Exchange Risk: The last industrial credit(DIB V) had a fixed interest rate. DIB wishes to continue to borrow and lendat a fixed rate, because its small and medium sized borrowers are reluctant toborrow long-term at a variable rate and DIB is not prepared to accept theinterest rate risk. The Government will, therefore, carry the interest raterisk and will repay the Bank according to the applicable interest rate duringthe lifc of the loan. The Government will onlend the credit line ($168.1million) to DIB at a fixed interest rate equivalent to the Bank rate at thetime of the approval of the loan plus 1 percent point for carrying interestrate and foreign exchange risks. The Government will bear the foreignexchange risk between the US dollars and the other currencies owed to theBank. The sub-borrowers will bear the exchange risk between the US dollarsand the Egyptian pounds and will repay their sub-loan in local currency at thehighest exchange rate between the Egyptian pound and the US dollar declared byCBE at the time of repayment.

6.10 DIB will onlend the loan proceeds to sub-borrowers at a minimuminterest rate of 14%. The compensatory deposits of around 20% of foreigncurrency commitment required by DIB from its sub-borrowers and the commitmentcharges would increase the effective cost of these funds to more than 16% perannum. The above interest rates will be positive in real terms consideringthe expected inflation rate of 14% in 1983/84 and an estimated decline to 12%by 1986/87. The interest rate structure will be reviewed on an annual basis

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to reflect changes in the cost of similar alternative funds to Egyptianborrowers, and the new rates will be applied to the uncommitted portion of theBank loan.

6.11 The maximum interest spread of DIB on the proposed Bank loan would be3.5X; any margin over this limit will be transferred to the Government DIBwould also transfer a spread of 0.42% per annum to a special fund (or LE696,000 at the peak period of loan outstanding) to be established within DIBfor financing the local currency cost of the technical assistance for SMI tobe implemented by EIDDC and subsequent extension services by EIDDC to SKI,particularly for the clients of DIB.. The Government would still have theprimary responsibility for meeting the local currency cost of the technicalassistance component of the proposed project but its obligation will decreaseby the amounts accrued under and made available through the above fund. Theannual allocations from the fund to EIDDC will be agreed between DIB and EIDDCin consultation with the Bank. DIB will show the funds as a separateliability item in its balance sheet and would submit an annual statement ofall credits and debits to the fund and its opening and closing balances ineach year.

6.12 Maximum Sub-Loan Size: On the basis of DIB's policy statement, itcan finance individual sub-loans of up to $8.5 million size. In order toensure that a large number of sub-projects would receive assistance, thesub-loan size under the proposed loan will not exceed $5 million. On thebasis of past experience with DIB and its planned operations, it is expectedthat only a few sub-loans would have a size of above $2 million and that 450to 50) sub-projects would receive financial assistance under the proposed loan.

6.13 Free Limit: The free limit for sub-loans is proposed to be $1.25million. It is estimated that about 45 subprojects representing about 60% oftotal amount of credit line would be above the free limit.

6.14 Debt/Equity Limit: Under the last industrial credit to DIB, itsmaximum debt/equity limit was agreed to 8:1. On the basis of financialprojections of DIB, it would reach this limit in 1985. It is proposed thatthe limit should be increased to 9:1 considering the substantial expansion interm loan operations and satisfactory quality of loan portfolio of DIB.

6.15 Economic and Financial Rates of Return: DIB will calculate economicand financial rates of return for all sub-projects receiving term-financingand having total investment-cost of above LE 800,000. The eligiblesub-projects will have a mir.imum economic rate of return of 121 and a minimumfinancial rate of return which will not be less than the interest rate of DIBapplicable to foreign currency sub-loans (minimum of 14X).

6.16 Procurement and Disbursement: The procurement procedures will beconsistent with those provided under previous industrial credits. DIB willrequire its sub-borrowers to follow normal international shopping procedureswith comparison of offers from at least three different suppliers. A reviewof DIB's procurement procedures during sub-loan review has shown that theseprocedures are satisfactory and result in procurement of suitable equipment ata reasonable price.

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6.17 Disbursements will be made to finance the foreign exchange cost ofthe goods or services. As agreed under DIB V, the sub-loan proceeds willfinance 100% of the cost of direct imports by eligible enterprises. In thecase of "off the shelf purchases", which may be required by some smallSSI/artisans, 60% of the local purchase cost of imported products will beeligible for financing as "indirect" foreign exchange cost. The estimateddisbursement schedule of the loan is given in Annex 14. This is based ondisbursement profiles of IDF projects in EMENA region but assumes thatdisbursements would be completed one year earlier in line with the pastperformance of DIB.

6.18 Under DIB V, about 1,500 withdrawal applications, many with smallpayments, are expected to be received. The number of withdrawal applicationswill be larger and more small payments will be involved under the proposedproject because of a bigger loan amount and an increasing number of smallersub-loans to be financed by the participating banks. In view of the above andconsidering the need for expeditious payments to suppliers, the Statement ofExpenditure (SOE) will be used for reimbursements of contracts below $20,000equivalent. DIB will submit a monthly SOE giving information on amounts ofindividual sub-loans, amount of payment, purpose of loan, name and address ofmachinery supplier and the country of origin of the machinery. All thesupporting documents for disbursements covered under SOE will be madeavailable on request, to the Bank's supervision missions. Also, anindependent auditor will verify all SOE and the Special Account within fourmonths after the end of each financial year of DIB and his report will besubmitted to the Bank.

6.19 Reporting: DIB will submit to the Bank periodical reports, as underprevious industrial credits. These reports will include suimmary ofoperations, progress on utilization of loan and annual accounts and auditreports. EIDDC will submit quarterly reports on the progress onimplementation of various components of the TA program for SMI. DIB and EIDDCwill also submit a report on the completion of the project.

F. Project Benefits and Risks:

6.20 The project's main benefits steu from its support to the promotion ofsmall and medium scale industries in the private sector. In line with thepast experience, the private sector would contribute to the development ofmore competitive and efficient industrial enterprises. The project's emphasison financing a growing number of SSI enterprises would result in greateremployment at lower average capital investment. As SSI/artisan enterprises donot normally require a well-developed infrastructure, remote areas of thecountry can also experience gradual industrialization, and obtain a share innew economic opportunities. The project would also contribute to furtherins,.itutional strengthening of DIB which should result in more efficientresource mobilization and allocation. The technical assistance componentwould help in better productivity and efficiency of SMI through extensionservices and in more effective coordination between large industries and SMIthrough sub-contracting services. It is estimated that about 450-500subprojects would receive financial assistance and about 1,300 SMI units will

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receive extension services per year. On the basis of experience under theearlier industrial credits to DIB, the project is expected to create about71,000 new jobs.

6.21 The risks with respect to the project mainly relate to the meeting ofoverall targets for assistance to SSI by DIB and timely implementation of thetechnical assistance program for SMI by EIDDC. DIB has to increase its termlending to SSI to at least 50% of total loan approvals bv 1986. This targetis high but takes into account past performance of DIB as well as the scopefor financing of SSI/artisan sector in Egypt. It is also recognized that, tofoster its assistance to smaller SSI and artisans, DIB has taken specialinstitutional measures including the appointment of an advisor for promotionof SSI, introduction of more simplified loan processing procedures, andcreation of specialized operational divisions at the head office andbranches. The technical assistance program for SMI carries the risks ofdelays or inadequacy in the availability of local currency funds throughbudgetary allocations to meet administrative costs. A provision has been madeto allocate a part of the interest spread of DIB on the proposed loan to aspecial fund which will be used to finance the local currency cost of thetechnical assistance program. Also, assurances have been received from theGovernment that it would have the prime responsibility to meet the localcurrency cost, if the fund is not adequate. Furthermore, the Bank wouldprovide more extensive supervision to the technical assistance program toensure its successful implementation. She project risks are manageable andsatisfactory safeguards are built in the project to overcome the risks.

VII. AGREEMENTS AND REWOMMIENDATIONS

7.01 The Bank has reached agreement during negotiations with theGovernment and DIB on making a loan of $170 million, including the capitalizedfront end fee. The Government will (i) onlend $16& 1 million to DIB foronlending to eligible enterprises in the private industrial sector in Egypt(para 6.03), and (ii) transfer $1.5 million to EIDDC as a grant to meet theforeign currency cost of the TA program for SMI (para 6.04).

7.02 Agreements and understandings were also reached with the Governmenton the following points;

(i) The Government will implement the TA program for SNI throughEIDDC, commencing from January 1, 1985 (paras 5.05 to 5.19).

(ii) The Government will finance the local currency cost of the TAprogram for SMI estimated at LE 1.60 million, and make thenecessary funds available to EIDDC through annual budgetaryappropriations (para 5.15).

(iii) The repayment term of the loan will be 20 years including a graceperiod of five years (para 6.08).

(iv) The Government will bear (i) the foreign exchange risk between theUS dollar and other currencies payable to the Bank, and (ii)

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interest rate risk arising from the variable rate applicable tothe proposed Bank loan (para 6.09).

(v) The Government will onlend the loan proceeds to DIB at one percentabove the Bank rate at the time of the approval of the proposedloan (para 6.09).

(vi) The Government will sign, before loan effectiveness, a subsidiaryloan agreement with DIB, acceptable to the Bank (para 6.08).

7.03 Agreements and understandings were reached with DIB on thefollowing points related specifically to the proposed loan:

(i) The following definitions will be used for various categories ofSMI (para 6.03):

(a) Very Small SSI - Fixed assets excluding land and buildings, upto LE 210,000.

(b) SSI - Fixed assets, excluding land and buildings up toLE 420,000.

(c) SMI - Fixed assets, excluding land and buildings, up toIE 2.75 million.

All value are in 1983 prices and would be adjusted according toannual movements in the wholesale price index in Egypt.

(ii) DIB will onlend the loan proceeds to eligible enterprises forterms not exceeding 15 years including a grace period of up tothree years (para 6.08).

(iii) The loan repayment by DIB to the Government will be according tothe aggregate amortization schedules of the individual sub-loans(para 6.08).

tiv) DIB will charge sub-borrowers a minimum interest of 14% subject toany possible changes as a result of review of interest ratestructure on an annual basis. The maximum interest spread of DIBon the proposed loan will be 3.5X. Any interest spread accruingto DIB over and above the ceiling of 3.5Z will be transferred tothe Government. DIB will also transfer a spread of 0.42S to aspecial fund to be used for financing the local currency cost ofTA program for SMI and extension services of EIDDC. TheGovernment's obligation to meet the local currency cost of theprogram will be reduced accordingly. DIB will show the fund as aseparate liability item in its balance sheet and would submit anannual statement of all credits and debits to the fund and itsopening and closing balances in each year (paras 6.10 and 6.11).

(v) DIE will use at least 70X of loan proceeds to finance SMI and themaximum sub-loan size will be $5 million (paras 6.03 and 6.12).

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(vi) The free limit for DIB under the proposed loan will be $1.25million (para 6.13).

(vii) The sub-borrowers will carry the foreign exchange risk between theUS dollar and the Egyptian pound (para 6.09).

(viii) SOE procedures will be used by DIB for reimbursement of contractsbelow $20,000 each (para 6.18).

(ix) The last date for submission of sub-loans will be June 30, 1987and the closing date will be December 31, 1990 (6.07).

(x) ERR and FRR will be calculated for all subprojects with totalinvestment cost of above LE 800,000. The minimum ERR will be 121,and minimum FRR will be not less than the interest rate of DIBapplicable to foreign currency sub-loans (minimum of 14X) (para6.15).

7.04 The following agreements and understandings were reached with DIBin regard to its overall institutional and financial aspects:

[i) DIB will increase its annual term loan approvals to SSI to atleast 451 of the total by 1985 and 501 of the total by 1986 and infollowing years. Within the above limits, DIB will approve atleast 20% of total term loans for very small SSI and artisans(para 6.03).

(ii) DIB will take measures to further strengthen its projectappraisal, particularly by improving the economic evaluation ofprojects taking into account the recommendations of PriceWaterhouse report and increasing the number of professional staffto 20 by June 30, 1985 (paras 4.12 and 4.14).

(iii) DIB will use the services of its project advisor, funded by EEC,to prepare and introduce a project supervision system acceptableto the Bank by December 31, 1984. DIB will also increase thenumber of project supervision staff to 16 by June 30, 1985 (para4.15).

(iv) DIB will strengthen the internal audit department taking intoaccount the recommendations of Price Waterhouse report (para 4.12).

(v) DIB will mobilize at least $25 million per year during 1985-1987to meet its foreign currency resource gap and commitments underthe proposed Bank loan in each year will be conditional to theutilization of above amouncs. In this regard, it will make itsbest efforts to mobilize funds from comunercial sources to themaximum extent (para 4.28).

(vi) The debt/equity ratio of DIB will not exceed 9:1 during the lifeof the loan (para 6.14).

7.05 The proposed project is suitable for a Bank loan of $170 millionon the terms and conditions outlined above.

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Annex 1-a

EGYPTSMI PROJECT

Measures of Protection and ODmparative Advantage

Effective Rate of Domestic ResourceProtection (ERP) Cost (DRC)

Sector Public Private Ptublic Private

Textiles

Cotton -28.10 42.2 (Spinning) 0.63 0. 92

Other 35.47 63.8 0.99

Food 38.9 0.58

Edible oils -93.97 - 0.57

Mnfg. food -6 9.73 0.31

Alcohol & Tobacco 4.61 - 0.40 -

Metals -253.8 - 1.62

Basic Metals -2923.73 - -27.56

transport Equipment 354.91 - -6.43

Electrical Machines 9.3 - 0.59

China & Glass -633.63 - -3.93

Building Materials - 95.4 - 1.62

Source: World Bank Report No. 4136-ECT: Arab Republic of Egypt Issues of

Trade Strategy and Investment Planning.

- 34 -

Annex 1-b

EGYPTSMI PROJECT

Public and Private Sector IndustryPerformance Ratios

(LE in constant 1975 terms)

1976 1978 1980/81 1981/82

Pub. Priv. Pub. Priv. Pub. Priv. Pub. Priv.

GDP per LE 1 of Investment 2.09 6.9 1.46 3.7 2.04 2.03 1.67 3.0

GDP per LE 1 of Wages &

Salaries 1.84 3.20 1.71 2.98 2.14 2.86 2.06 3.06

GDP per Person hployed 849 699 900 765 1056 696 1089 779

Wages & Salaries per Person

Employed 462 218 527 256 492 243 528 253

Imports per Person

Employed 2671 1038 2690 1607 na na 3631 12 93

Imports per LE 1 of GDP 3.15 1.48 2.99 2.10 na na 3.33 1.66

I=ports per LE 1 of

Investment 6.57 10.20 4.36 7.83 na na 5.57 5.00

Exports per LE I of GDP 0.99 0.43 0.76 0.30 na na 0.34 0.06

Exports per LE I of

Investment 2.06 2.98 1.32 1.11 na na 0.56 0.19

Exports per Person

Employed 837 303 682 229 aa na 368 50

Source: Ministry of Planning, Cairo; and World Bank Rerart No. 4498-EGT,Arab Republic of Egypt - Current Economic Situation and GrowthProspects.

Note: Imports exclude consumer goods.Both imports and exports are in US$.

Data are based on domestic prices and various exchange rates and are not validfor international comparisons.

- 35 -

EO!T A 2

NB: nary of Operatims (LE' 000)

Years EIit,g Jame 30 (six !Xths) 1980 1981 1982 1983

Approvals No h1W NO AfINM Din Arm r NO AMW

Siore-Term Icons(local Qzrirzy) 239 9644 518 26591 540 34,542 329 36449

6diom and Iong-Tem Loslocal QOsrry 455 12884 942 36744 910 30465 653 36599Forign Qwrecy 94 20764 185 51839 213 44659 254 68440

Tbtal Medim and IorR-Tarm 549 33648 1127 88583 1133 75124 907 105039

Short-Term loans(Local O rmy) 293 8102 526 15201 598 257 373 35509

1*dium and lbong-Tezm loamslocal Oirrna:y 407 15263 889 27272 928 34847 570 27052Foreign Owrewy 68 2190 168 30718 237 45761 236 47800

Total Medium ndI-l 475 37053 1057 57990 1165 80608 806 84852

Disbursements

Short-Term lams(local Cbrrercy) 8636 28054 49658 44106

1mdium and lon-Term Ioanslocal OQ rr-y 15479 27175 32904 25782Foreign Owrery 9195 24477 36334 53144

Ibtal Medium and Iore-Tm 24674 51652 69238 78926

Bpt J rstets

Approvals 2 500 5 3552(azuu.tamnts 2 500 5 3552DisbursezAnts 471 167 1238 1406

- 36 -

VMF-T Annex 3

DID: Analysis of Teem Loan fppromal (in LE 000)

Year ElDing June 30 1980 1981 1982 1983NO AD MU NO AMOUNT NO AMOUNT I30 AMOUNTTin, .vnr - - -

Dv Geographical Distribution

Cairo Zone 169 15958 339 30531 336 31043 316 57622Alexandra Zne 113 D034 209 105n 216 16656 268 14243Lower Egypt 212 4597 470 22437 471 17752 229 16637Upper Egpt 47 5696 94 14706 87 4366 102 13019CAnal Zone 8 365 15 10338 13 7529 12 3518

Total 569 33646 1127 88583 1123 75124 907 105039

By Size of baa

LIE I To 160D0 369 2176 697 4140 616 4075 433 3238L.I 16001 To 51000 89 2681 199 6176 269 7295 188 6314LE 51001 To 1ODO 35 3250 85 5753 90 6328 102 63141E 100001 To 500000 67 10062 116 32945 122 241121 151 33551Over LA 500000 9 15477 30 39571 26 33305 33 52063

Total 519 33648 1127 88583 1123 75124 907 105039

Sw Teims of Lons

Up to I YearI to 3 n 61 412 121 1677 142 5707 115 93203 to 5 n 392 7245 866 21665 927 31284 762 47694S to 10 n 96 1599 133 54222 54 38133 46 45213Over 10 Tears 7 11019 3 2S12

Total 549 33648 1127 88583 1123 75124 9D7 105039

Dv Punroae of Lans

Land and Buildings 22 537.3 50 15789 37 9255 53 6334Machinery and Iquipmert

A. imported 117 20433 213 49627 205 40856 240 651513. locally Purchaaed 21! 30O0 533 8835 565 11089 370 15883

Working Capital 191 4802 315 10528 3C0 12670 233 13514Others 16 020 7 1076 11 4022

Total 569 33648 1127 88583 1123 75124 907 105039

= Some loana can be offernd to nre than one pumpo.e.

av Site of Assets of forroera

Leas than LAE 500O 432 5541 811 9952 786 10360 491 7488over LI. 500DO To 1OODO 30 1606 60 2143 92 3982 96 4393over LE. 100000 To 200000 23 1935 69 4243 n 4841 73 5517Over LE. 200000 To 500D00 27 3853 55 4748 70 7363 109 14365Over LE. 5s0o0o To 1000000 21 4605 64 7388 41 7745 59 13556Over LE. IO0DO 16 16106 S5 60109 63 60833 79 59720

Total 549 33648 1127 88583 1123 75124 907 105039

By Sector

Priwate Sector: 551 496 10631 999 22242 1013 25654 777 31354Others 48 17336 124 60770 110 49470 130 73685

Co-Operatives 2 291 - - - - - -Public Sector 3 5192 4 5571 - _ _ -

Total 549 33648 1127 88583 1123 75124 907 105039

By Industrial Sub-Sector

Mineral and Engineering 198 2909 379 10111 322 10122 232 1579bPrimting and Paper 13 231 56 2433 41 823 42 5265Ocemicals 30 6010 61 11459 72 8773 118 27835Building and Canstructions 38 7224 75 25836 52 7973 54 14038rood 57 68-2 109 8859 137 19248 134 18786Spinning and Weaving 73 3207 144 10551 179 16481 126 14388wood 59 1892 91 3925 178 2692 59 1323laCther 19 205 17 79 9 140 12 531Tourim and Notels 10 2336 54 11878 24 4367 18 3312Othera 52 1842 140 3452 109 6505 112 3766

Total 549 33648 1127 88583 1123 75124 907 105039

D, Jobs Created

1 - ! Vorkers 323 2521 726 8586 769 12102 503 99S210 - 24 102 3934 167 8480 140 7999 172 1283625 - 49 64 5728 93 6624 105 14099 93 1279450- " 33 2515 60 14732 63 13974 70 16415

100-more ' 27 18950 81 50161 46 26950 69 46312

Total 549 33648 1127 88583 1123 75126 907 105039

- 37 -

Annex 4EGYPT

SMI PROJECT

DIB - Condensed Income Statements, 1980-1983(LE'000)

For Years Ending 6/30/80 6/30/81 6i30/82 6/30/83(6 mos.)

INCOMEInterest on Deposits 153.9 192.2 873.3 568.2Interest on Local Currency Loans 3,347.3 10,803.5 16,372.6 21,170.1Interest on Foreign CurrencyLoans 1,730.4 4,853.4 7,741.8 14,430.9

Other Income 660. 9 1,684.4 2,632.1 3,67 9.9Total income 5,892.5 17,533.5 27,619.8 39,849.1

EXPENSESInterest On Local Currency Debts 1-204.2 4,380.9 6,628.7 8,439.5Interest on Foreign CurrencyDebts 1,196.1 3,340.7 5,641.3 8, 935.8Other Charges 63.5 436.8 498.4 1,022.6Administrative Expenses 761.7 1,770.6 2,740.4 2,780.9Provisions for Doubtful Debts 1,085.0 3,117.0 6,269.0 8,836.0Other Provisions 171.9 144.8 582.5 1,179.6

Total Expenses 4.482.4 13,190.8! 22,360.3 31,194.4

Net Profit before Taxes 1,410.1 4,342.7 5,259.5 8,645.7Taxes 815.1 2,858.7 3,759.5 5,695.7Net Profit 595.0 1,484.0 1,500.0 2,950.0

AppropriationsReserves 148.7 463.7 426.9 738.0Dividends to CBE 334.7 765.2 804.8 1,65 9.0Dividends to Employees 111.6 255.1 268.3 553.0

595.0 1,484.0 1,500.0 2, 950.0

RatiosProfit before tax/Av. Equity (Z) 13.8 18. 9 20.0 30.5Profit before tax/Av. TotalAssets (X) 2.8 3.2 2.6 3.2Admin. Expenses/Av. Total Assets (Z 1.6 1.2 1.4 1.2Average Spread on Borrowing

(Excluding Current Deposits) (Z) 5.3 6.3 4.4 4.2

- 38 -

Annex 5EGYPT

SMI PROCT

DIB - Condensed Balance Sheets, 1980-1983(LE'000)

As of June 30 1980 1981 1982 1983ASSETSCurrent AssetsCash and Banks 4,726.7 5,077.8 9,843.8 10,104.3Other Current Assets 5,724.9 7,421.0 7,254.1 3,626.2Total Current Assets 10,451.6 12,498.8 17,097.9 13,730.5

PbrtfolioLoans Outstanding 101,139.6 153,348.4 234,375.6 316,171.8(Less: Provisions fordoubtful debts) (4,933.0) (8,127.6) (14,520.6) (23,230.0)Net Loans Outstanding 96,206.6 145,220.8 219,855.0 292,941.8Equity Investments 1,370.7 1,567.1 2,864.8 4,474.0(less: Provisions for likelylosses) (15.9) (16.2) (2.4) (81.3)Net Equity Investments 1,354.8 1,550.9 2,862.4 4,392.7Net Loans and Equity Portfolio 97,561.4 146,771.7 222,717.4 297,334.5

Net Fixed Assets 15.9 19.4 18.9 18.9Total Assets 108,028. 15 9,289.9 239,834.2 311,083.9

LIABILITIES AND EQUITYCurrent LiabilitiesDemand Deposits 1,411.7 1,041.0 2,038.3 3,013.4Ti-ue Deposits 955.6 1,6,91.1 1,099.6 1,224.3Other Current Liabilities 1,261.4 3,972.0 4,884.5 8,041.9Total Current Liabilities 3,628.7 6,704.1 8,022.4 12,279.6

Long Term DebtDeposits 5,065.1 9,002.9 14,135.8 20,167.5Central Bank of Egypt 37,574.6 54,284.5 66,053.7 40,641.6Other Banks 2,555.0 2,509.8 17,979.3 57,924.3

.Foreign Currency Loans 34,908.6 54,193.2 90,599.7 132,330.9Total Long Term Debt 80,103.3 119, 990.4 188,768.5 251,064.3

Administrative Provisions 520.2 558.7 1,000.4 1,324.8Taxes & Dividends Payable 3,222.5 6,013.7 15,593.0 14,214.7

EQUITYPaid-inrCapital 20,000.0 25,000.0 25,000.0 30,000.0Reserves 554.2 1,023.0 1,449.9 2,200.5Total Equity 20,554.2 26,023.0 26,449.9 32,200.5

TOTAL LIABILITIES AND EQUITY 108,028.9 159,289.9 239,834.2 311,083.9RATIOS:Current Ratio (times) 2.3 1.9 1.3 1.1Debt/Equity Ratio (times) 3.8 4.4 6.7 7.3Provisions and Reserves/Portfolio (X) 5.4 5.9 6.7 7.9

- 39 -

EGYPT Annex 6SMI PROJECT

DIB: Pbrtfolio and Arrears of Principal(LE '000)

As of June 30 1980 1981 1982 1983

Pbrtfolio

Loan Outstanding 101140 153621 234375 316172

Loans Affected by Arrears 22989 13980 22601 41585

Principal Arrears

3-6 Months 1063 1923 1667 1888

6-12 Months 152 666 3581 4063

12-24 Months 453 1638 1221 1384

Over 24 Months 293 382 579 664

Total Arrears 1851 4609 7048 7999

Ratios

Loans Affected byArrears/Pbrtfolio (Z) 23 9 10 13

Principal Arrears/Portfolio (Z) 1.8 3.0 3.0 2.5

- 40 -

EGYPT Annex 7SMI PROJECT

DIB: Projected Operations, 1983/84-1986/87(LE '000)

For years ending June 30, 1984 1985 1986 1987Approva i8

Medium and Long tern loans:

Foreign currency 78,705 86,576 95,234 104,757

Local currency 55,544 63,498 6 9,848 76,833

Total Approvals 134249 150,074 165,082 181,590

Couitment s

Medium and long term loans:

Foreign currency 81,134 83,428 91,770 100,948

Local currency 49,981 60,790 67,828 74,612

Total Commitments 131,115 144,218 159,598 175,560

Disbursements

Medium and long tern loans:

Fore ign Currency 58,247 72,675 85,169 92,813

Local Carrency 3 9,888 56,750 65,6 91 72,645

Total Disbursements 98,135 129,425 150,860 165,458

Increase in short term

loan balances 9,810 11,773 14,127 16,952

Equity Investments

Approvals 3,000 3,000 3,000 3,000

Commitments 3,000 3,000 3,000 3,000

Disbursements 2,668 3,493 3,000 3,000

- 41 -

EG:YPT Annex 8SMI PROJECT

DIB: Long Term Resources Positionas of June 30, 1983

(LE and $000)

Local Currency (LE'000)

Share Capital 30,000

Reserves and Retained Earnings 2,200

Provisions 24,523

Local Currency Borrowing 133,340

Total Local Currency Resources 190,063

Less:

' ^al Currency Loans Outstanding 120,875

Equity Investments 4,449

Fixed Assets 19

Resources Available for Disbursements 64,720

Less:

Undisbursed Commitments 4,456

Resources Available for Commitments 60,264

Less:

Uncommitted Loans 11,923

Resources Available for Approvals 48,341

Foreign Currency ($ 000)

Total Lines of Credit 379,350

Less:

Total Loans Disbursed 227,050

Resources Available for Disbursements 152,300

Less:

Undisbursed Commitments 48, 930

Resources Available for Commitments 103,370

Less:

Uncommitted Loans 40,370

Resources Available for Approvals 63 000

- 42 -Annex 9

EGYPT

SMI PROJECT

DIB: Projected Income Statements, 1984-1987(LE '000)

For Years Ending June 30 1984 1985 1986 1987

INCOMEInterest on local loans 24,582 28,830 32,954 38,521Interest on foreign Loans 21,213 26,407 35;246 42,008Other Income 4,482 5,020 5,423 5,745Total Income 50,277 60,257 73,623 86,274

EXPENSESInterest Paid to local banks 9,160 10,496 12,551 14,744Interest paid on foreign loans 14,926 18,922 26,162 31,476other expenses 303 318 334 350Administrative Expenditure 3,794 4,523 5,398 6,448Admin. Provisions 436 451 466 483Provisions for Loan losses 8,957 9,631 10,343 11,014Total Expenditure 37,572 44,342 55,255 64,515

Profit before Taxes 12,705 15,915 18,368 21,757Taxes 8,705 9,915 11,368 13,757

Net Profit 4.000 6,000 7,000 8,000

- 43 -

EGYPT Annex 10SMI PROJECT

DIB: Projected Cash Flow Statements, 1983/84-1986/87

INFLOW 83/84 84/85 85/86 86/87

Profit before Tax. 12,705 15,915 18,367 21,757

Provisions 9,387 10,082 10,809 11,497Depreciation 150 150 150 150Foreign Borrowings 58,247 72,675 85,169 92,813

Collections

Foreign Currency Loans 24,381 26,630 33,972 47,386Local Carrency Loans 25,372 29,913 38,558 45,211Borrowing from CBE - 5,548 1,557 3,299

Borrowing from Local Banks 19,575 20,000 20,000 20,000Increase in deposits 4,268 4,392 4,622 5,073Increase in other Cr. Balances 1,113 1,169 1,227 1,288Increase in Capital 5,000 - 5,000 5,000

Total inflow 160,200 186,474 219,431 253,474

OUTFLOWDisbursements

Foreign Loans 58,247 72,675 85,169 92,813Local Loans 39,888 56,750 65,691 72,645Increase in short termloan balances 9,810 11,773 14,127 16,952

Repayment of foreigncurrency debt 24,381 26,630 33,972 47,386

Repayment to CBE 12,829 - - -Increase in deposit 312 327 344 361Equity Participations & Bonds 2,818 3,694 3,300 3,350Increase in fixed assets 210 210 210 210Taxes 8,705 9,915 11,368 13,757Distribution of Profits 3,000 4,500 5,250 6,000

160,200 186,474 219,431 253,474

- 44 -

Annex II

EGYPTSMI PROJECT

DIE: Projected Balance Sheets, 1984-1987(LE '000)

As of June 30 1984 1985 1986 1987

ASSETS

Current AssetsCash and Banks 10,416 10,743 11,087 11,448Other 3,626 3,626 3,626 3,626Total Current Assets 14,042 14,369 14,713 15,074

PortfolioOutstanding loans 1/ 374,364 459,019 551,477 641,29DInvestments 6,779 10,273 13,273 16,273Provisions (32,454) (42,391) (53,040) (64,360)Net Portfolio 348,68 426,901 511,710 593,203

Government Bonds 387 587 887 1,237Net Fixed Assets 79 139 199 259Total Assets 363,198 441,997 527,509 609,773

LIABILITIES AND EQUITY

Current LiabilitiesDeposits 4,437 4,658 4,891 5,136Other 9,664 10,124 9,148 7,297Total Current Liabilities 14,101 14,782 14,039 12,433

Long Term DebtBorrowers Deposits 24,224 28,395 32,784 37,612Central Bank of Egypt 27,813 33,360 34,917 38,216Other Banks 77,500 97,500 117,500 137,500Foreign Currency Debt 166,197 212,242 263,439 308,866Total Long Term Debt 295,734 371,497 448,640 522,194

Administrative Provisions 1,457 1,602 1,762 1,939Taxes & Dividends Payable 11,705 14,415 16,618 19,757

EQUITY

Capital 35,000 35,000 40,000 45,000Reserves 3,200 4,700 6,450 8,450Total Equitz 38,200 39,700 46,450 53,450

Liabilities and Equity 363,197 441,996 527,509 609,773

1/ Including short term working capital loans.

- 45 -Anne x 12

hdmical MAistme piagam for SHC - IDtailed Oet EFtt.es

3ERM ODK J 1985 1C9D86 198 7 TOTAL____________________ . US$ ir- um ust LI .Is us IE WI!E 133 LE

A. F0ZNS1N 0 1'31E

Fare Nip Mvir 90,000 90,CSO

L Cliro thitHaqr, Extesion Service 12 1I,000 12 10,000 12 10,000 36 30,000bEmnion Officers 48 16,000 72 24,000 96 32,0DO 216 72,0009qppst Staff 36 9,000 36 9,000 36 9,000 W8 27,000Drivers (8) 16,000 16,000 16,000 48,000Vehicles 30,000 60,000 90,000Ainistrative Dpeae 6.00 6,000 6,0100 L1800

Sub,total: 120,000 57,000 65,000 60,000 75,000 18,00 195,000

2. Alexankia WtitChief, Nationa1 Expect 12 8,00D 12 8,00D 12 8,000 36 24,000Beteion Officers 24 8,000 36 12,000 36 12,000 96 32,00Szppst Staff 24 6.000 24 6,000 24 6,000 72 1,0o0Drivers (2) 4,000 4,000 4,000 12,00Vehicles 15,00D 15,000 30.0DOArinistreive Dlpeam 6,000 6,000 6,000 18,00

Sub-total: 15,000 32.000 36,000 15,000 36,000 30.000 104.,000

3. lm.ilia WltChief. tGwil Expert 12 8,00D 12 8,000 12 8,00D 36 24,000Extension Officers 24 8,000 24 S,000 24 a,c0a 72 24,000Sqppt Staff iwL Driver 3,00D 5,000 5,000 13,000Vehicles 15000 15,000Mministrative EKPDqe 3,000 6,000 6,00D0 1500

Sib-coatl: 22.000 15,000 27,000 27,000 15,0 76,000

4. Matea UetChief, National Expet 12 12 8,00D 12 8,000 24 16,00DFetension Offic 24 8,000 24 8,000 48 16,000Sqprt Staff iwcL Driver 5,00D 5,000 10,000Vehicles 15,0D 15,000A ministrtsive ExPenSe 6,000 6,000 12,000

9ib-ctal 15,00D 27,000 27,00O 15,00 54.000

C0W IVAL 135.000 111,000 30,000 155.000 75.000 165.000 6 431,.O0

B. ?cUWDT & ERC= DENEIE fr SWCES

Fbm iWp Advir 22,500 90.000 112,500Ibuqers 12 10,00 12 10,000 12 1O,00o 36 30,000

L Ibat & Tainiz8 unit1kd, National Expect 12 8,000 12 8,000 12 8,000 36 24,000E6m=ial iet. Sp-iahist 12 4,000 12 4,00D 12 4,000 36 12,000lhiketirg M4t. Specialst 12 4,000 12 4,000 12 4,000 36 12,000rad'1 Err. (Prod'nvW.t.) 12 4,000 12 4,00D 12 4,000 36 12,0C0ra inng Officer 12 4,000 12 4,000 12 4,000 36 12,000

Mainir Assistnt 12 3,000 12 3,0r(0 12 3,000 36 9,000Suppaot Staff 36 9,000 36 9,000 36 9,000 1o8 27,000Driver (1) 2,000 2,000 2,000 6,00OVehicle 15000 15w,0

inistative 1e3ue 6,000 6,0D0 6,000 18,000SJb-Ibtal 37,500 54,0w0 90,000 54,00D 54.000 127,500 162,000

2. Poject Drelqanr & lafoetion WitHkm, Natiomi Expet 12 8,0w 12 ,0o0 12 8,C00 36 24,000Eosemit 12 4,000 12 4,00D 12 4,000 36 12,0O0

bfo IaUblation Spwcialist 12 4,000 12 4,000 12 4,000 36 12,000lseareh Maistat 12 4,000 12 4,000 12 4,000 36 12.000

Sjb-Tdal 20.000 20,000 20,000 60.=00

CDW IW T1UW 37,500 AM 90,o0 74,000 4000 127.500 222,000

- 46 -

Annex 1 2fte 2 Of Z

B U D G E T

FROGRDIHWMIW 1 985 1 966 1 987 TOTALVA_ iE ux QiV Us s L l 5 U'I US 15 iE K LE

C. S9UTRiC EWIS

Foeim Adviow 45000 45.OW

Oide, N?tiorml f,pett 12 8,000 12 8,000 12 8.000 36 24.ODOP mofesiml Staf 24 B.O0D 24 8.000 24 8,000 72 24,000

Suyoxt Staff 24 6,000 24 6,000 24 6.00 72 18,00

Driwr (1) 2,000 2,000 2,OW0 6,000lhicle 15,000 15.000MA'ini'tative p_mm 6,00D 0oo 6,000 60D10

NhIT L 6J 3060 OOD000 30, 60.00 D 0WA

D. STrF nImlC

Fellmiwdiis 80,00D 80,000 80,000. 240,000Sttjy Twrs 20,000 20,000 20,000 606000

CKm M MtJ: lDO,IOO M%OMe W%D4a 3l00600

E S3L AU_Nt

9iott-te, cunsgtart 6,00W 30,000 68,000 30,00D 68400 30,0W 206,000 3,6000

WftowT IU: 68,0DD 30.000 68,000 30.000 68.00 30WO 2W4.WD ODO

F. 1MuM AIDXIMMN

Auinaative offficer 8,0O s000 8,a0 24,00Pmction & RIbqiity Q(ts 10,000 10.000 106000 30,000Advnis=ti'e gjppoLt Cbts 1O,000 10,00 lO,o 30,000

Tra1 Expsus 5,000 5,000 5,00 5,000 5.00 5,000 u1,0o 15.000Fquipimt 50o,w 50,000 50,000 150,00

eMicle Mbinteace 8,000 ,000 15,000 35,000Bhildi.gs & Rentals 20,000 30,0W 30.0M a80,00

awott Staff for Foriga Mit ma 15,000 5,O0 15,000 45,000Hisellmim PrNogrm Suppot 10,0WD 10,000 10,0W 30,000lecture Fees & Sevices, SHE 15,000 20,000 20.000 5,aOo

afifztg ateriaIz si 10,000 5,OOD 15.000 40,00

Miwellan.us for SIC Tr"ainiu 3,000 3,O00 3,000 %,000

(DK ON) MrUA1 8aaOO 8M000 80, l300 80W0_ 116,W0_ 24L000 318,000

ITOMOF D E. 480,50D 334,OW0 368aoo 402.000 323,000 41500 L171.500

l1al curWey for existizg localstaf fs of Decr la IrOO1,000 1000 00,000 300,000

Eatiated support ccotsto the csultitg fims I/ 57,295 43,882 38,518 139,6S5

TOTAL PROJECT COST: 537,795 434,000 411.882 502.000 361,518 515.ODO 1,11195 1.45LODO

Pnnisims for clti,eies

1996 57,664 40, 160 57,6" 40,1601987 99,778 85,696 99,778 85,6%

GRAND TOTAL: 537.7% 43,00 "9.546 5U,160 461.2ff G66 1.468,6371,576856

I/ ^Qulated at 13Z of toul prect cost,. t for punise.s of vitles dhch is caculated at 7. S9we EXDC

- 47 -

Anmfex 13ErM

SMI ERo.R=

lbdmical Assistance Prpom for SMWStaffing Plan for SSEID

Hse II Biase III1982 1983 I98 15B5 1986 1MB-7

1RICAL EMENSID 9N CE

L aixo Unita Planned number of tesns 3 4 4 6 7 8b. Ogized umrber of teaus 2 3 3c. Still to be ozganLzed

within the project phase II 1

2. Aleandria Ibita. Plazed number of teams - 2 2 3 3 3b. Oanised uxmber of tems - 1 1c. Still to be oganimzed

within the project phase II - - 1

3. Ismailia UhitPlammed number of teas - - - I 1 1

4. lanta UhitPlam-ed nudber of tea - - - - 1 1

-MYENI T & EIRnOT DBEEIL0RfIT SRICE

1 Management Services & Training Unita. PIanned nudber of managmit specialists - 6 6 10 10 10b. Auailable itaber of nurgant specialists - 2 4c. Still to be recruited

within the project phase II - - 2

2. Project Develqpunet & Infolmation UhitPlanned number of professional staff - - - 4 4 4

SUBNRACrQ SEWICE

a. Planned number of professional staff - 3 3 3 3 3b. Available umber of professional staffc. Still to be recruited

within the project phase II - - 3

- 48 -

Annex 14

EGYPTSMI PROJECT

Pro'ected Disbursement Schedule(in US$ millions)

Year Quarter Amount Cumulative

1984 July-December 0.4 0.4

1985 January-June - 0.4July-December 6.8 7.2

1986 January-June 13.6 20.8July-December 20.4 41.2

1987 January-June 23.8 65.0July-December 25.5 90.5

1988 January-June 22.1 112.6July-December 17.1 129.7

1989 January-June 15.0 144.7July-December 10.6 155.3

1990 January-June 6.8 162.1July-December 7.9 170.0

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Annex 15

EGYPT

SMI PROJECT

Selected Documents and Data Arailable in the Project File

A-1 Arab Republic of Egypt. Issues of Trade Strategy and InvestmentPlanning, World Bank Report No. 4136-ECT, January 1983.

B-1 Cbnsultant's Report on Present and Pbtential Role of EIDDC.

C-1 Detailed Operational and Financial Projections of DIB.

D-1 Miscellaneous Working Papers for the SMI Project.