Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 8932

PROJECT COMPLETION REPORT

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1205-BD)

JULY 27, 1990

Resident Mission, BangladeshCountry Department 1Asia Region

Tis document has a restricted distribution and may be used by recipients only in the performance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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ACRONYMS

BMR - Balancing, modernization and rehabilitationBTMC - Bangladesh Textile Mills CorporationDCA - Development Credit AgreementGOB - Government of BangladeshNOT - Ministry of TextilesPA - Project AgreementPC - Planning CellPCR - Project: Completion ReportPIC - Project Implementation CellPU - Procurement UnitSFYP - Second Five Year PlanTA - Technical Assistance

FOR OvvICw" US ONLYTHf WORLD SANK

Washingo. D-C. 20433U.S.A.

Oke. nA Coiwctw.GiEWt

July 27, 1990

MEMORANDUM TO TEE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECTs Project Completion Report on BangladeshTextile Industry Rehabilitation Project

(Credit 1205-BD)

Attached, for information, is a copy of a report entitled "Proje^tCompletion Report on Bangladesh - Textile Industry Rehabilitation Project(Credit 1205.D)" prepared by the Asia Regional Office. No audit of thisproject has been made by the Operations Evaluation Department at this time.

Attachment

This document has a retre distribution Sd maY be used bY reipints o1y in tbhepefomanof thei offticia dutes. Its cotents ma notgotrwtie be diced without Word Bank autoritank

FOR OFFICIAL USE ONLY

PROJECT CrOtPETION REPORT

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1205-BD)

TABLE OF CONTENTS

Parte No.

PREFACE ....... iEVALUATION SUMMAY ................ ................................ iii

PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE ..................... I

X, Proiect Idntity .. #......................................... . .......... 1

2. Backaround .............. ........................ 1Link with sector and Macro Policy Objectives .... ....... ..... 2

3. Proiect Obiectives and DescriDtion ........................... 2Objectives .. 2................... 2Project Description .................. 2

4. Pro'.ct Desisn and Organization ............ ............... ... 3

5. Proiect Implementation ....... ................ 3Credit Effectiveness and Project Start Up ................. 4Project Scope ........ ... ..... **......... ....... 4Procurement .. .**.........**.....*..* ........... *..... . 4Implementation Schedule * . ................................. . 4Project Costs .......... e..... 0..... .................................... 4Disbursement ............. *. .....* *..*...*....** ........ 5Closing Date . .................... . ..................... 5Risk Identification .. .... ..... . *.. *... ....... *..*.... ... 5

6. Protect Results ........0. . * ............ ......... 5Physical Results * * * ....... *...* ...... .. . .. . ................ . 5Financial Performance . .... ....... *.. .. *........ ...... 7Institution Building ... * ........................ 9International Competitiveness * ............................ 9Yarn Distribution and Pricing Policy Reforms .......... *.... 9

7. Proiect Sustainabilitv ........ ................. 9

8. IDA's Performance ........... ............ .......................... . 10

9. Borrowers' Performance ......................... ........... 10

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

TABLE OF CONTENTS (cont'd.)

Page No.

10. Proiect RelationshiD .. ........... * ......... 11

11. ConsultinR Services .. ........ ...**.....ee**....... 11

12. Proiect Documentation and Data ............................... 11

13. Lessons from the Proiect ...... ... ....*... ..... 11Improving Performance of Public Enterprises ................ 11Project Design ....... . .... ............. ** ........... 12Other Lessons *......*.......... .... **......t 13

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE .......... ...... 14

A. Evaluation of the Bank's Performance .................. . .. ...* 14

B. Evaluation of Borrower's Own Performance .................... ... 15

C. Assessment of Effectiveness of the Relationship betweenthe Bank and the Borrower ... *..................* ....... 15

PART III: STATISTICAL INFORMATION ................................. 17

Tables:1. Related Bank Loans .........* .. *................. 172. List of the Project Mills ............**# ...... ........... 0 183. Project Timetable .............. 0 ...... 0................................. 194. Project Costs sad Financing .......... ..... ............. ....... . ........ 205. Credit Disbursement ..................... . 226. Project Implementation ............................ 247. Indicators of Project Achievement ............................ 258. Operational Performance of Project Mills ............ ......... 269. Financial Performance of Project Mills ....................... 2810. Financial Performance of all BTMC Mills ...................... 3011. Financial Restructuring ... .................. . ... ..... .... 3112. TA Studies ....... ##........... ..... O"".... ........ ................. 3313. Use of Bank Resources ....... # . ................o... ........ 3414. Status of Compliance with Covenants ................. .... 36

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PROJECT COMPLETION REPORT

BANGLADESH

TEXTILE INDUSTRY RERABILITATION PROJECT(CREDIT 1205-BD)

PREFACE

This is the Project Completion Report (PCR) for the Textile IndustryRehabilitation Project in Bangladesh for which Credit 1205-BD, in the amountof US$30.0 million, was approved on February 4, 1982. The Credit closed onDecember 31, 1986, after a one year extension. On closing, only US$7.7 mil-lion (26X) of the Credit had been disbursed and the balance of US$22.3 mil-lion was cancelled.

The PCR (Preface, Evaluation Summary, Parts I and III) was jointlyprepared by the Industrial and Energy Unit of the Resident Mission,Bangladesh (RMB) and the Industry and Energy Operations Division of CountryDepartment 1, Asia Region, with Part II contributed by the Borrower.

This PCR was prepared during FY90 and is based, inter alia, on theStaff Appraisal Report, the Development Credit and Project Agreements, super-vision reports, correspondence between the Bank and the Borrower and internalBank memoranda.

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PROJECT COMPLETION REPORT

BANGIADESH

TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1205-BD)

EVALUATION SUMMYAR

Obiectives

1. Based upon detailed reviews of the technical operation of theBangladesh Textile Mills Corporation's (B3MC) in 1979-80 by UNDP/UNIDO-fundedtechnical advisors, the main objective of the project (para. 3.1) was to makea group of pre-selected public sector mills internationally competitive andfinancially viable through a program of equipment balancing, modernizationand rehabilitation (BMR). This BMR program vas supported by efforts toimprove overall performance of the sector and BTMC through provision of tech-nical aosistance to strengthen sectoral planning, improve management capaci-ties, implement financial restructuring, and change yarn pricing and dis-tribution policies.

2. The project included financing for the BMR of 15 mills, qualitycontrol equipment for all BTMC mills, and technical essistance to strengthenBTMC's management and Government sectoral planning capacity (para. 3.2).Total project costs were projected at US$43.9 million, of which IDA was tofinance US$30.0 million.

Imnlementation Exverience

3. Prom the outset the success of project implementation wasjeopardized by changee in Government policy and significant changes in theproject's physical structure. Within months of credit effectiveness theGovernment denationalized nine of the selected project mills. Althoughreplacement mills had already been identified through an earlier economicevaluation process, protracted GOB/BTMC delays in agreeing on the replacementmills and in obtaining subsequent approval from the Planning Commission toinclude the replacement mills in the project eventually reduced the projectscope to six mills (para. 5.3). Subsequently, because of inordinate procure-ment delays (para. 5.4), BMR programs of only three mills could becompleted by the extended closing date. Of the TA components, the financialrestructuring program (pars. 6.11) and the institution building component(para. 6.13) were suibstantially implemented. At closing, actual project costswere 271 of the appraisal estimates (para. 5.6) and only US$7.7 million wasdisbursed (para. 5.7).

Results

4. Overall the project achieved only marginal improvement in physicaloutput (paras. 6.2 to 6.6 and Table 7 and 8) and had little impact upon thereform of sectoral policies and procedures. Incremental yarn and fabricproduction for the project mills increased only 61 and 31, respectively.

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Despite massive equity infusions the financial performance of BTHC overa'l,and the project mills in particular, did not improve and the mills did notachieve viability. Five of the project mills had losses in five or moreyears (Table 9) during the first six years following the initiation of theproject. The institution building objectives, for the most part, were notachieved because of lack of Government/BTMC commitment to them.

Sustainabilitv

5. Although three mills have achieved some incremental improvement,given the continued policy, procedural and institutional constraints thatface BTMC and the rehabilitated mills, the project is unsustainable(para. 7.1).

Findinas and Lessons Learied

6. Overall, the project's impact was disappointing. The project failedto meet its objectives and did little to address the more pervasive elementsconstraining efficient performance by the sector i.e., the adverse policyenvironment and the lack of BTMClmills operating autonomy. IDA gave undueweight to Government's frequently stated commitment to the project and to theneed to introduce policy reform and, therefore, focussed too much on physicalrehabilitation of the industry and too little on the broader problems thatconstrained BTMC's ability to implement the project and operate commercially.The most important lesson (para. 8.3) learnt from the project is that inter-ventions in improving public sector performance have a high risk of failureunless actions have already been taken to ensure that: (a) a satisfactoryframework of autonomylaccountability exists through elimination of excessivegovernment controls; (b) enterprises are not used as vehicles of patronage;(c) the labor unions are not politicized; and (d) wage awards are based uponactual productivity improvement.

P_ROJECT COMLETION REPORT

BANGLADESH

TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1205-BD)

PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE

1. Proiect Identity

Name X Textile Industry Rehakilitation ProjectCredit No. : 1205-BDRVP Unit : Asia RegionCountry s BangladeshSector : IndustrySubsector : Textile

2. Background

2.1 At the time of project preparatiou in 1981/82, the textile subsectoraccounted for about 30% of national manufacturing value added, employed overone million people, and suipplied about 85S of the country's total cloth con-sumption. The entire modern spinning and veaving sector,1 comprising 60cotton and specialized fabric mills, was operated by the Government-controlled Bangladesh Textile Mills Corporation (BTMC). Private productionwas confined to weaving (mainly handloom) and, to a lesser extent, readymadegarments. The handloom sector provided around 90% of total textileemployment.

2.2 Because of age and inadequate maintenance subsequent to nationaliza-tion in 1972, machinery in the BTMC mills was in poor condition. A substan-tial program for balancing, modernization and rehabilitation (BMR) wasrequired simply to maintain the existing production levels. BTMC alsorequired significant improvements in management for its mills to beefficient.

2.3 In 1975, IDA undertook a detailed survey of the textile industry.The survey confirmed the significant physical and financial deterioration ofBTMC mills and proposed measures to improve the efficiency of the industry.

S/ finning converts fibre into yarn. The production process comprises, BlowRoom Section (opening and cleaning of raw cotton), Carding and DrawingSection (straightening/parallelization of fibre), and Ring Frame Section(spinning of yarn). The ring frames contain the spindles. Weavingconverts yarn into unfinished (grey) cloth. The production processcomprises, Pre-Weaving Section (preparing of yarn for loom) and LoomSection (weaving of fabric). Finished cloth is produced after dyeingor/and printing and calendaring of grey cloth.

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Under the Sixth, Seventh and Eighth Import Program Credits, action was takenbetween 1975-80 to improve maintenance, increase availability of spares,strengthen management, improve finances and give limited pricing autonomy toBTMC. In 1979-80, a major technical assistance program was carried out byUNDP/UNIDO tot (a) prepare a detailed eight-year BMR program for 50 BTMCmills, of which the first four years formed the basis for this project (thelatter phase was to be im'lemented under a follow-on project, (Table 1));(b) develop a staffing plan based upon regional industry norms; and (c) iden-tify areas for productivity improvement and waste reduction.

2.4 Link with Sector and Macro Policy Obiectives. In its Second FiveYear Plan (SFYP), 1980-85, the Government of Bangladesh (GOB) envisaged sub-stantial improvements in the textile subsector's capital-output ratio throughincreased utilization of existing production capacity. Rehabilitationprograms in subsectors such as textiles, where capital stock had deteri-orated, offered possibilities for such improvements. GOB aimed to increaseyarn supply to the handloom sector, raise the supply and consumption ofdomestic fabric, and substitute for imports on a competitive basis.Rehabilitat'.on and expansion in textiles was also meant to increase employ-ment and improve income distribution in Bangladesh.

3. Proiect Objectives ani Des12ription

3.1 Objectives. The main objectives of the project were to: (a) improvethe productivity, quantity and quality of the output of selected BTHC mills;(b) upgrade the miangerial, administrative and technical skills of BTHCstaff; (c) improve BTMC's financial structure2 and increase its autonomy inpricing and yarn distribution; and (d) improve the Ministry of Textiles'(MOT) planning capabilities.

3.2 Proiect Description. The project was designed to provide fundingfor GOB/BTHC to rehabilitate selected BTMC mills, support BTMC's institutionbuilding efforts and carry out policy improvements by strengthening MOT'spolicy development capacity. The project had three components: (a) aninvestment component to fund, during PY82-85, the rehabilitation of 15 mills(Table 2) through BMR of spinning, weaving and finishing machinery, andupgrading the quality control in all BTMC mills through providing relatedequipment; (b) a technical assistance component to fund consultancyassistance for strengthening MOT's Planning Cell and for institutionalbuilding of BTMC by improving its organizational structure, upgrading itsmanagement system including marketing, production planning, financial manage-ment and quality control; and (c) a policy component to reform textilepricing and distribution policies.

3.3 Project costs were estimated at US$43.9 million, of which IDA was tofinance US$30.0 million. About 72% of the Credit was allocated for sub-project equipment, 8Z for quality control equipment, 6% for consultingservices to improve BTMC's management capability and study sectoral issues,

2/ Under the project, GOB was also required to complete BTMC's financialrestructuring program initiated under the Eighth Imports Program Credit.

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and 141 vas unallocated. IDA financing was for 1008 of the foreign exchangecosts of about US$25.4 million, and 251 of local coots of about $18.5million.

4. Proiect Desian and (raanization

4.1 The project design sought primarily to address the need to improvethe productivity and profitability of selected BThC mills by upgrading/reha-bilitating operating equipment. Using productivity data from the 1979-80UNDP/UNIDO review, supplemented by detailed financial analysis of mill opera-tions and estimated BMR benefits, the 50 BThC cotton textile mills wereranked in order of economic and financial viability. Fifteen mills which hadthe highest financial and economic rates of return were selected for rehabil-itation. A secondary objective was to secure operating autonomy for BTMC andits mills by seeking incremental liberalization of tight MOT controls whichconstrained efficient management. During project preparatior., GOB indicatedthat it was considering denationalizing some mills, initially proposing toreturn t: JIvz seized from Bangladeshi owners in 1972; however, it had notdecided upon numbers or timing.

4.2 BTMC was responsible for the mill rehabilitation component of theproject and for introducing changes in pricing and yarn distribution policyat the mill level. BTMC agreed to set up a Project Implementation Cell (PIC)to implement the project, while MO0 would set up a Planning Cell (PC) andhire an industrial Economist to study sectcral issues and help the Ministryformulate policies. Procurement was to be handled by a Procurement Unit tobe created within PIC. Local purchases would be made, as required, by millmanagement. Rehabilitation task forces were to be established within eachmill to dismantle obsolete equipment and carry out minor BMR tasks, while aroving BTMC OMR task force would assist with the more difficult elements ofeach mill's program. Implementation of the key elements of each mill'sprogram w-.* scheduled to maximize the benefits of the program.

4.3 However, given the generally unsatisfactory experience of GOB/BTMCin implementation of the action programs under the Import Program Credits,insufficient consideration was given in the project's design to: (a) themerits of selecting fewer mills with more appropriate BMR; (b) the possi-bility of using the services of the UNDP/UNIDO Productivity Improvement Teamto supervise implementation; (c) inclusion of technical assistance (TA) forBTMC procurement services; and (d) the timing of measures concerning millautonomy, pricing policies and mill incentives.

5. Proiect Im_lementation

5.1 Overall the project did not meet its objectives and had littleimpact on the physical and policy environment of the sector. With its primaryfocus on rehabilitation it did not address the broader policy issuesimpairing BTMC's ability to operate in an efficient and commercial manner.Important implementation aspects are discussed below.

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5.2 Credit Effectiveness and Proiect Start up. The Credit was approvedon February 4, 1982 und signed on February 10, 1982. (Table 3). However, itdid not become effective until October 27, 1982 due to delays in approval ofProject Proforma by the Government, which was a condition of effectiveness.

5.3 Proiect Scope. The fifteen mills to be rehabilitated under theproject had been agreed with GOB/BTMC during project preparation (para. 4.1).However, through denationalization GOB removed nine of these units from theproject imamdiately after Credit effectiveness. Although IDA agreed to sub-stitute preidentified eligible mills (Table 2), it took about two years forBTMC to get GOB approval for the changes, by .nich time it was too late t.include them in the project without a full reappraisal of BMR viability and asignificant extension to the project closing date. As a result, theproject's scope was effectively reduced from fifteen mills to six mills. Thenine mills selected for substitution were eventually included in the SecondTextile Rehabilitation Project -- Cr.1477-BD/SF-022-BD -- which was appraisedin April 1984 and became effective in June 1985.

5.4 Procurement. Notwithstanding the existence of a sizable ProcurementDepartment within BTMC, it took up to four years to prepare draft bid docu-ments and award contrac:s, resulting in substantial implementation delays.This delay w.s compounded by frequent exchanges between BTMC and IDA onproposed amendments to procurement documents which geared procurement toproprietary lines of equipment. Pro-urement was also delayed by inadequatestaffing, inconsistent bid documents, poor bid evaluations, and protractedBTMC Board and MOT approval of awards.

5.5 Implementation Schedule. The project was originally scheduled to becompleted by June 30, 1985. However, by that date none of the project'scomponents had been completed. The main reasons for this were:

(a) the changes in the project scope and delayed PlanningCommission approval of substitute mills (para. 5.3);

(b) the frequent changes of management personnel in BTMC and in theproject mi 1 9s;

(c) the size of the BMR program, which taxed BTMC's implementationcapacity;

(d) slow procurement and the changes in the method of procurementfrom a mill-by-mill basis to a product basis to reduce procure-ment costs by bulking machinery orders. This procurement methodchanged the sequence of mill rehabilitation.

5.6 Proiect Costs. Actual costs of US$11.7 million (Table 4) were about27Z of the original appraisal estimates of US$43.9 million and weresubstantially lower than the appraisal estimates due to: (a) the reductionin the project scope from fifteen to six mills; and (b) the incomplete BMR ofthree mills (to complete the BMR, IDA agreed to finance the remaining sub-project costs of US$2.95 million under the subsequent Cr.1477-BD).

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5.7 Disbursement. At appraisal, the Credit was projected to be fullydisbursed by the end of FY84, whereas the first disbursement was not madeuntil early in FY85 and the last disbursement in FY88 (Table 5). Of thetotal Credit of JS$30.0 million, only US$7.7 million (25.81) was disbursedand the balance of US$22.3 million was cancelled (Tables 3A and 3B).

5.8 Closing Date. To accommodate the delays in project implementation,the original closing date of December 31, 1985, was extended by one year.GOB requested a further extension but this was not given because of thecontinued poor implementation performance under the project (and for BTHC asa whole) and GOB's reluctance to implement the actions required by IDA asconditions for extension, including inter alia granting autonomy to enter-prise managers to run their mills as commercial enterprises.

5.9 Risk Identification. The main project risks identified at appraisalwere: (a) ran-achievement of production and sales targets; (b) an unrealis-tically ambitious expansion plan for textiles under the Second Five Year Plan(1980-85); (c) lack of trained textile managers; and (d) negative workingcapital and equity affecting the liquidity of the mills. The project designaccommodated these risks by: (a) studying the textile sector with the helpof a UNIDO/UNDP productivity team to assess production levels and salestargets; (b) providing technical assistance to improve BTMC's managementcapability and reduce costs of production; and (c) requiring significantequity contribution to ensure adequate liquidity. However, greater con-sideration should have been given to: (a) BTMC's weak and untested implemen-tation capacity in managing multi-mill, multi-product procurement; and(b) the considerable political and trade union pressure on BTHC in therunning of the mills, which thwarted the sequential mill-by-mill BMR imple-mentation.

6. Project Results

6.1 Overall, the project objectives of improving operating efficiency,strengthening BTMC management capability, creating sectoral planningcapability in MOT and improving the yarn pricing and distribution system werenot met. However, the project did arrest the deterioration of the projectmills and improved certain operational and financial aspects of these mills.These improvements, however, were significantly less than the project targets(Table 6), even for the individual mills, and did not result in establishingcommercially viable mills.

6.2 Physical Results. Of the six project mills, one was comprehensivelyrehabilitated using Government of India funds as well as the IDA Credit whileBMR was completed in two others. For the remaining three, about 802 of therehabilitation work was completed before the Credit closed;3 however, themodernization of ring frames, the key subprocess which determines yarnoutput, was incomplete negating the benefits gained from BMR in other areas

3/ Although IDA agreed to finance the balance of the BMR under Cr. 1477-BD,this was not to be done because of continued unsatisfactory implementationunder that project.

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of the mills. Noted below is the comparison of actual vs estimated improve-ments in spinning and weaving and a comparative analysis of project mills,amongst themselves, and with those BTMC mills which did not have a BMRprogram.

6.3 In S2inning, it was envisaged that through BMR, the spindle capacityin the 15 mills would increase by 52,500 spindles. The actual increase incapacity in the six project mills was 1000 spindles or . of overall target;however had the BMR been completed for the remaining three mills, (para. 6.2)spindle capacity would have increased by about 16,000 or 32% of the overalltarget. Capacity utilization declined from 841 prior to BMR to 801 atpresent,4 as a result of raw material shortage, power failure, absenteeismand machinery breakdown (Table 7). The attained capacity utilization wasalso much lower than the appraisal target of 95%. While spindle productivityand yarn production for the six mills increased after BMR, the increase fellfar short of anticipated improvements. Actual increase in spindle produc-tivity was only 8% whereas it was expected to increase by 52%. Because ofinability to reach the target productivity, capacity utilization and spindlecapacity, yarn production increased by only 6% in comparison to a targetedincrease of 91%. About 50%, 27% and 23% of the shortfall in yarn productionwas due to shortfall in productivity, lower capacity utilization and reducv4number of spindles, respectively.

6.4 In Weaving, the delays in procuring spares resulted in thecannibalization of about 51 of the looms in the six project mills. In thesemills, the number of looms decreased from 1,890 in 1981 to 1,795 in 1989(Table 4). Capacity utilization, productivity and output of the weavingsection was also significantly lower than the SAR targets (Table 7). Theproject mills are presently operating at a capacity utilization of about 80%,as against a utilization target of 96%; however utilization was higher thanpre-BsR levels of 77%. This increase in capacity utilization was mainly dueto: (a) the balancing of spinning facilities; (b) modernization and replace-ment of some preparatory weaving machinery; and (c) repair of some looms.Loom productivity increased by 6.2? compared to a targeted increase of 15%.Because of decline in looms and lower than anticipated increase in capacityutilization and productivity, weaving production increased by only 3.21compared to targeted increase of 85%. About 45%, 30% and 25% of the short-fall in production were on account of shortfalls in capacity utilization,number of operating looms and pro.'uctivity respectively. Two noteworthyachievemets were reduction in wastage by 221 and improvements in quality offabric. As a result of balancing of the spinning section the quality of yarnimproved which resulted in enhancing fabric qual'ty.

6.5 The Intra-Mill comparison (Table 8) of the six project mills givesconfusing results. The mills with incomplete BMR have a higher spinningcapacity utilization and production and greater reduction in wastage, thanthe mills with completed BMR, although the latter mills achieved largerproductivity gains. In weaving, the incomplete BMR mills also performed

A/ Post-BMR (or Present) results are the average operating results achievedduring the two year period FY88-89.

better than the completed project mills. This suggests that performance ofproject mills did not depend on whether or not BMR has been completed, butthat other factors contributed more to performance than the physical condi-tion of machinery. These included: (a) quality and efficiency of millmanagement and its autonomy to operate the mill on a commercial basis;(b) continuity of length of service of the Chief Executive of a mill and hisability to deal with higher management; (c) appropriate production planning(to produce different yarn counts and types of fabric) based on marketdemand; (d) availability and quality of raw cotton; (e) skill of operatives;(f) type of maintenance; and (g) low absenteeism and good labor relations.

6.6 The Inter-mill Comiparison (Table 8) shows that the operationalperformance of the project mills was generally better than BTMC's other non-BMR mills. In spinning, the operating performance of the project millsexceeded that of non-BMR mills as follows: capacity utilization was 51higher; production was 21% higher; productivity was 92 higher; while wastagedecreased by 22% or more. Except for some increase in capacity utilization(about 7Z), the weaving performance of the project mills was not much betterthan that of non-BMR mills. However, the spinning BMR improved the perfor-mance and output quality of weaving and finishing sections. It is difficultto conclude that the difference in performance between the two sets of millswas solely the result of BMR. While BMR would certainly have made a positivecontribution, other non-quantifiable factors (para. 6.5) were equally, ormore, important.

6.7 Financial Performance. Financial performance has beer. analyzed inthe following manner: (a) financial performance of project mills and theircomparison with non-project mills; (b) overall financial performance of BTMC;(c) impact of financial restructuring; and (d) financial rates of return ofthe project mills.

6.8 The Prolect Mills were unprofitable before BMR and have continued tolose money after BMR (Table 9). In FY89, only one mill had an operatingprofit and four mills have had losses in five or more years during FY82-89.While there have been improvements in certain key financial ratios (sales toasset ratio, cost of sales to sales ratio) after BMR, and losses have alsodeclined, overall the improvements were not enough to make these millsprofitable on a sustainable basis. Moreover the reduction in losses waslargely a result of significant and un-4sual reduction in raw cotton prices inFY89. The three key determinants of profits are raw material, labor andother direct conversion (utilities, maintenance and depreciation) costs.Analysis of performance over the last decade suggests that mills turnprofitable only when these three costs together are less than 90%. As high-lighted below, a combination of factors makes it unlikely that, in future,the mills can attain this breakeven point:

(a) labor costs during FY88-89 were about 31% (of sales), or about4% higher than the pre-project level. At appraisal, laborcosts were projected to decline through retrenchment and wage

freezes to 10X (of sales). However continued excess employ-ment, and unwarranted increases in public sector wages inrecent years, makes it unlikely that labor costs will declinesignificantly in future;

(b) other conversion costs were projected to decline from 19% ofsales to 7% after BMR. During FY88-89 these costs were about16Z; the significant reduction anticipated at appraisal did nottake place due to inadequate improvements in productivity andcapacity utilization; and

(c) raw material costs have averaged about 56% (of sales) duringFY79-89. With labor and conversion cost of around 47% (ofsales), the raw material costs must be less than 43% (of sales)for mills to be profitable. However, in 7 out of the last 10years, the raw material costs to sales ratio has been over 55%and it is highly unlikely that a ratio of 43% can be achievedon a sustained basis.

Thus, unless there is a significant labor rationalization, substantialincreases in productivity and product quality and a quantum increase inmanagerial autonomy (to buy raw material, have free sales and adjust productprices according to market demand), it is unlikely that BTMC or theindividual mills will emerge as profitabla entities on a sustained basis. Asin the past, project mills may show profits in those unusual years when rawmaterial costs are less than 43% (of sales).

6.9 An inter-mill comparison of key financial ratios (Table 9) gives apicture of mixed and confusing performance with "incomplete" BMR mills, sur-prisingly, showing a better financial performance than completed BMR mills.This suggest that the relationship between financial performance and BMPr isat best tenuous and that other factors (para. 6.5) are equally important.While the intra-mill comparison (Table 9) suggests that the project millshave better performance than non-BMR mills, this improved performance cannotbe fully attributed to the BMR program.

6.10 Review of the Overall Financial Performance of BTMC (Table 10)indicates that only one mill has consistently made profits in the last eightyears (FY82-89), while 22 mills have had losses in five or more years(Table 10). As in the case of the project mills, most BTMC mills madeprofits those years when the three key cost items (para. 6.8) added to lessthan 90% of sales. As discussed above (para. 6.8) it is highly unlikely thatthis breakeven cost to sales ratio would be achieved in future except whenraw material price are less than 43% of sales. Thus most BTMC mills willcontinue to operate unprofitably.

6.11 The only activity implemented as planned was the Financial Restruc-turin_ Protram (para. 3.1), but it did not improve the financial viability ofBTMC. By June 30, 1986, GOB provided Tk 1.6 billion against the target of Tk1.2 billion through fresh equity infusions and conversions of loan to equity(Table 11) to improve the financial position and capital structure of the

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BTMC mills. Despite the financial restructuring program, continuingoperating losses of BTHC mills contributed to the further worsening of BTHC'sfinancia'. performance, leading to their failure to meet the 60:40 debt/equityratio by FY86 as projected.

6.12 The ex-post Financial Rates of Return have not been estimatedbecause the project mills continue to show losses. While for some projectmills, there has been a reduction in net losses (para. 6.8) it is difficultto conclude that much of this reduction in losses was directly a result ofthe BMR ,rogram. Moreover, the reduction in losses is unlikely to be sus-tained on a permanent basis in future. It is likely, however, that the BMRarrested further deterioration in some areas and reduced downtime due tomachinery b.:eakdown. Also, as mentioned in para. 6.4, BMR has reducedwastage and improved quality of the fabric.

6.13 Institution Building. About 96% of the budgeted TA manmonths wereutilized, but employment of management and technical consultants in BTHC andthe Industrial Economist in MOT was delayed by almost three years. As aresult, the final reports of the BTMC consultants were submitted seven monthsafter the Credit's Closing Date and the recommendations were not implemented(Table 12).

6.14 International Comyetitiveners. The project was intended to assistBTHC in meeting GOB's sector objectives, which included increasing importsubstitution through competitive price and quality of domestic textiles(para. 2.4). Although ex-factory wholesale prices of BTMC yarn are now inline with CIF prices of imported yarn, imported yarn sells at a premiumbecause of its much better quality. While, import restrictions restrain yarnimports to about 10 to 15% of the domestic consumption, this level, however,provides competition to discourage full cost-plus pricing by BTHC and otherlocal producers. Given the current cost structure of BTMC products and itsinefficient operations, BTMC mills are unlikely to be internationally com-petitive without fundamental changes in BTMC's operations.

6.15 Yarn Distribution and Pricing Policy Reforms. While some changeswere made in the yarn distribution system, it is still not based on soundcommercial grounds and is used as a source of patronage. GOB reluctantlyprovided BTMC and the mills with partial autonomy to adjust yarn pricesaccording to market conditions; however, the impact of this change wasmarginal because the autonomy was limited and mill management did not fullyexercise the autonomy available to them.

7. Proiect Sustainability

7.1 Because of continued poor performance and lack of sustained effortand commitment of GOB/BTMC to policy reform there is no assurance that theproject mills can become financially sound and commercially viable entitieson a sustained basis. When the raw material costs to sales ratio isabnormally low, project mills may be marginally profitable, although innormal years they are likely to incur losses and continue to be a significant

- 10 -

drain on the budget. However, the timely procurement of raw cotton and a yarndistribution system free from political patronage (para. 6.15) could signifi-cantly improve BTMC's overall financial performance.

8. IDA'S Performance

8.1 During the 51 months between effectiveness and closing of theCredit, IDA supervised the project nine times (Table 13). However, theeffectiveness of project supervision was significantly reduced bys

(a) inadequate technical staffing: Five out of nine missions didnot include technical staff. On the other four missions, tech-nical staff only participated for part of the supervision;

(b) IDA's reluctance to use the legal remedies available to ensurethat GOB complied with key covenants and implemented remedialmeasures suggested by supervision missions. Two noteworthyexamples are: (i) standard bid documents, agreed between IDAand the BTMC, for procurement of machinery and equipment werechanged without IDA approval; and (ii) BTMC did not set up aProcurement Unit (PU) with a Procurement Specialist within PIC.Failure to set up a PU, resulted in procurement through BTMCCentral Purchase and Sales Directorate, which delayed procure-ment significantly. In both instances, IDA should haveexercised its legal right and stopped disbursement, which mighthave had the effect of ultimately speeding up procurement; and

(c) undue reliance on the detailed UNDP/UNIDO technical appraisals.During tha supervision missions, the technical design and millcost structures should have been updated and monitored moreclosely, although this would have required additional super-vision resources.

9. Borrower's Performance

9.1 BTMC's performance was mixed. During project preparation andappraisal it was good, with BTMC cooperating effectively in providing tech-nical and financial information. GOB/BTMC's performance was unsatisfactoryin re8ards to compliance with covenants (Table 14). Thus key covenants oninstitution building, policy changes and financial aspects were largely notcomplied with. During project implementation the Borrower made organiza-tional changes recommended in the project; the PIC in BTMC and the PC at theMinistry of Textiles were established in a timely manner. However, due toshortage of adequate and trained staffs, these Cells did not perform asexpected and their capabilities did not develop sufficiently to implement theproject. GOB's reluctance to use IDA funding for TA resulted in delayingconsultant hiring by almost three years, and there is little evidence thateither BTMC or the Ministry made serious efforts to implement the TA results.This suggests that the Borrower was more interested in the project's hard-ware, while the importance of the institutional strengthening efforts was notappreciated.

- 11 -

10. Project RelationshiD

10.1 The relationships between IDA and GOB/BTMC were cordial duringproject preparation and for most of the implementation stage. This relation-ship deteriorated over the last few months before the closing of the Credit,when IDA indicated to GOB/BTMC that it vould terminate the Credit unlesscertain key reforms, such as greater managerial autonomy, were undertaken.GOB/BTMC felt that IDA was unreasonable and had imposed new conditions whichwere difficult for BTMC to meet given the issues involved and the remainingtime available.

11. Consultina Services

11.1 Consultants studied the marketing, production planning and financialissues and management of BTHC and performed their responsibilities satisfac-torily. However, the local industrial economist engaged as a consultant inthe MOT did not adhere to his TORs and did not produce any reports.

12. Proiect Documentation and Data

12.1 Both IDA and BTMC's Project documents were adequate for projectimplementation. While the covenants in the Project Agreement (PA) and theDevelopment Credit Agreement (DCA) were adequate for the implementation ofthe project's hardware components, they should have been more specific inareas of actions and timing for addressing the broader project objective ofmaking BTMC a competitive and viable enterprise. More specific covenantsaddressing the issues of managerial autonomy and accountability would havefocused early attention on these important issues. However, while covenantsare important, it is the Borrower's commitment to implement which is muchmore important; unfortunately the latter was lacking.

13. Lessons From The Project

13.1 Implementation of this project and its successor, the Second TextileIndustry Rehabilitation Project (Cr. 1477-BD), highlighted a number oflessons.

13.2 Improving Performance of Public Enterprises. A very importantlesson from this project (and possibly other IDA projects focusing on publicenterprises reform/restructuring in Bangladesh, including the on-going SecondTextile Project) is that machinery upgrading and financial/technical restruc-turing of public sector firms is not likely to be successful unless there isa strong commitment at the political and senior bureaucratic levels toimproving the performance of public sector enterprises throughs

(a) reduction in excessive and misdirected controls and interven-tions by Government;

(b) minimizing the use of enterprises as vehicles for patronage;

- 12 -

(c) provision of full autonomy to managers, concomitantly withestablishment of effective management accountability system andreward/penalty-based compensation package for managers andlabor;

(d) reduction in politicization of labor unions and vage awards,and excess labor;

(e) establishment of a competitive environment; and

(f) strengthening of management.

13.3 Before embarking on a public enterprise restructuring project theGovernment's commitment and willingness to implement the measures noted abovemust be assessed carefully during project preparation, and firm agreementreached on the details and timing of the measures. If there are any doubtsabout Government's long term commitment to take the necessary actions,projects should include significant up-front actions rather than studies andagreements on changes at some future date. Thus, public enterprise reformprojects would typically require a combination of policy/institutionalmeasures as well as investments. The alternative of supporting reform throughadjustment or hybrid operations rather than an investment project should becarefully considered.

13.4 An important related lesson is that any gains from making marketsmore competitive (through trade reforms, privatization, etc) are likely to benegated by losses elsewhere, unless the public enterprises operating in thesemarkets, are able to function in a fully commercial manner. If this does nothappen (as in the case of BTMC), the performance of public enterprises willdeterioratvi, as markets become more competitive, and the enterprises wouldbecome a larger drain on the budget and the banking system.

13.5 Profiect Desipn. In retrospect, it is evident that the BMR programwas overly ambitious relative to BTMC's weak managerial capabilities, lack ofadequate authority and inexperience in implementing large BMR projects. In asituation of untested implementation capability, it would be preferable toconcentrate resources and supervision efforts on a few mills to which goodmanagers are posted and which are isolated, as far as feasible, from thepublic sector operating environment. In this way, successful "Model" publicsector mills might have been established under the project, and this strategycould have been extended to other public sector mills.

13.6 Another design weakness was the failure to provide for a formalreformulation of the original project concept to reflect any major physicalchanges or to include the BMR of machines which became obsolete during theproposed five-year implementation period.

13.7 The failure of BTMC to achieve the enJisaged operational and finan-cial targets, reinforces the need to review very critically the assumptionssupporting the targets, particularly in those instances where the past recordhas been consistently unsatisfactory. Thus:

/

- 13 -

(a) The assumptions that spindle productivity would increase by 552after BMR (based on norms in India, Hong Kong and Thailand) andthat there would be a significant improvement in machinerycapacity (Table 7) were also optimistic. The target produc-tivity (3.42 oz/spindle/shift) was much higher than thatachieved (around 3.3 oz) either during the 19609 (when themills were relatively new and under private ownership) orbetween FY72-81 for new BTMC mills.

(b) In the absence of actual autonomy to change prices and controlwage costs, the financial forecasts for the mills wereoptimistic. Assuming retrenchment, pricing freedom and volumeincreases, it was projected that sales in PY81 (first year offorecast and before BMR) would be 1002 higher than FY80 sales(Table 12). All project mills were projected to be profitablefrom FY81 onwards. (In fact, 12 of the 15 mills had incurredlosses of varying amounts in each of the four preceding years.)A key cost factor (labor) was forecast to decline from 302 ofsales, between FY72-80, to 10% of sales in FY81 and, based uponplanned attrition of labor, was assumed to remain at thatlevel. These assumptions yielded a rosy financial picture.

13.8 Other lessons. Subsequent events have reinforced the need to:

(a) Ensure that procurement packaging is appropriate to thespecific needs of the project. Although it was agreed atnegotiations that all of the machinery for each mill would beprocured in a separate packages, the machinery bids wereactually packaged by subprocess across mills. While the sub-process method was justified to IDA as a cost savingalternative, it carried the risk that delays in procurementwould result in incomplete BMR. The experience under theproject -- substantial number of incomplete mills -- clearlysuggest that procurement for each mill should have beenpackaged separately.

(b) Reflect career perceptions in establishing TA policy unitswithin implementing agencies. The project attempted to buildup capacity within the MOT to analyze policy issues. Theresult was disappointing. The Ministry did not give importanceto policy work, and most career staff did not consider assign-ment to the policy unit favorably. Thus, unless greater careerincentives and higher importance is placed on this type ofwork, efforts in this direction will not have significantreturns.

(c) Carefully examine the on-lending arrangements. Under theproject, IDA funds were onlent from GOB directly to BTHCthrough administrative agreement. Unless there are accentu-ating circumstances, it is not a good idea to lend to publicenterprises directly by government, rather than through the

- 14 -

banking system. The former has the dravback of diluting thefinancial discipline and financial scrutiny that is imposed onfirms when they borrow from banks. Also, unlike banks, govern-ments generally do not have the capacity to monitor loanrepayments.

PART II: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE5

A. Evaluation of the Bank's Performance:

The bank officials and Mission members involved with supervision ofimplementation of the TIRP-Phase-I under finance of IDA Cr.1205-BD were foundto be professionally qualified and experienced in their respective field.The Cr.1205-BD was signed on 10.2.82 which was made effective from 27.10.82.The project was programmed for implementation in four years but it took eightmonths to made the Credit effective after fulfilling certain requirements.Preparation of appraisal and re-appraisal reports as per different methodolo-gies suggested by the different missions during initial period of implementa-tion invited some unnecessary and delaying exercises. Subsequent delay inimplementation of the project occurred due to denationalization of ninesubprojects from the approved original project and their substitution,repeated imposition of conditions by the IDA caused unusual delay in imple-mentation of the project resulting in suspension of the project leaving themajor part of the project incomplete. The TIRP Phase-I Was a project firstof its kind in the textile sector of Bangladesh and the officials of BTMCinvolved with implementation of the project were not exposed to the proce-dures and formalities of the IDA credit earlier. IDA could have arrangedappropriate training for the officials on the programing and procedures ofimplementation of project under IDA Credits.

The Aide-memoires left by the supervision missions at differenttimes after reviewing and discussions with the concerned officials of BTMC atdifferent stages of implementation very rarely considered the views offeredby the officials of BTMCIMOT. The IDA missions which reviewed the implemen-tation of the project from time to time were in most cases very reluctant toappreciate the problems caused for frequent changes in machinery requirementover the GOB approved "PP" and always imposed decisions based on their preconceived notions. Due to imposition of certain critical pre-conditions bythe March 1986 mission the projects implementation remained suspended for along time (up to October 86). When GOB fulfilled the conditions and BTMCsubmitted the evaluated bids for approval, the Bank instead of givingclearance to the evaluated bids took decision to cancel the credit witheffect from the credit closing date i.e., December 31,1986 withoutconsidering the request of GOB for further extension. This lead theremaining project implementation works to total uncertainty.

51 Unedited.

- 15 -

B. Evaluation of Borrower's Own Performance

The Textile Industry Rehabilitation Project Phase-I of BTMC wasfirst of its kind in the sector which was funded by World BankJIDA as a partof the Bank's rehabilitation programme for war ravaged economy of Bangladesh.Tne scope and dimension of the project were nevertheless small. Since BT4Chad no previous experience in implementation of BMR projects of similar typeunder World Bank/IDA funding involving compliance of a number of complexformalities and preconditions, BTMC faced certain ambiguities and problems inimplementation of the project at different stages. The denationalizationprocess of the GOB from 1982 to 1985 also created a complex situation at thestarting period of implementation. Denationalization of nine mills of BTMCunder the project and substitution of these nine mills by new ones though hadeaten up a considerable period of implementation time, in addition theprocurement process was also delayed due to procedural complexities. TheBankJIDA took advantage of this situation and imposed some critical precondi-tions in the advance stage of implementation of the project.

The borrower as well as the implementing agency have realized thatnon-adherence to timely implementation of a project may cause disastrousconsequence.

C. Assessment of Effectivenes of the RelationGhiD between the Bank andthe Borrower

The relationship between the Bank and the Borrower was cordial andharmonious at the personal level of officials of both the organizations. Butthe Bank as a Donor Agency though offered the Credit with noble objectivesbut subsequently found to have critical preconceived notions in giving cog-nizance to the views and problems of the borrower as well as the implementingagency.

- 17 -

Pi Ills STATISTICAL I_gRH&TION

Table 1

Related Samk Loans

Year oftia Protect Purpose AiDroval Status

1477-BD Second Textile Industry To rehabilitate textile 1984 OngoingRehabilitation Project capacity in public and

private sector.

- 18 -

TI3LW 2

ogiaial Xifii.

A. nR_r IDlemernted Under Project

1. Ahmed Bawan.i Partial BMR under the project (incomplute)2. Bangladesh Partial BMR (complete)3. Chittaranjan n4. Dhaka Partial BMR (incomplete)5. Luxmi Narayan Comprehensive EMR under the project and

Indian Credit (complete)6. Zeenat Partial BMR (incomplete)

B. BRR not Implemented

7. Adharsha Denationalized8. Af ar "9. Bogra "10. Dhakeswari 211. Gawsia12. Jaba13. Kushtia14. Muslim15. Mohini

Substitute mills

1. Amin Included in the Second Textile IndustryRehabilitation Project (Cr. 1477-BD)

2. Bengal3. Chisty4. Dost5. Kokil6. Meghna7. Satrang8. Shariin9. Tangail

- 19 -

Tabe 3

Ptt -_ _ _ _

l~~ ~~~~~~~ .e~r 1...

LVWCrdit jOctober 26,1981 No~vembe 25-NPrtiati ens Toemur 4, 1961

Board Awovat 10ecafger 1s, 1981 jF.bruaev 0, 198

Lemn/Credf 2 I IFe*bnuV 10, 1982Sfwoturs

LoMVCredf t Hey 11, 1982 S.ptebSte 30, 1982 joctgr 27. 1962Effectfvwnss

LoCridit 1Octer 31, 19851 1O w1 19

LomCrtdit iJ 30, 15lo, 19___Lo _____________ _______ 31,______ 1 e~r 31, 198kIC~tetIn I I __________ ._________

1 Loan effectiveness was delayed because GOB did not securetimely approval of Project Proformas from the Planning Commission.

2 Last disbursement date was on July 08, 1987

- 20 -

Table 4

Prol_et Cgots awd liangina

A. Projc-t Costs

Araisal Estimate (113 S at Ms U)Locat Foreign Lint For ff

Iti Co#st Enchua Costs Tot cots Exdwm Co Total

Equitpnt a Spars 4.0 18.2 22.22 0."4 6.22 6.86

Civil lIorks 2.4 2.4 0.01 0.05 0.06

Quality Zntrol Equipmnt - 2.5 2.5 - 0.32 0.32

Technicat Assistance 0.3 1.6 1.9 0.02 0.48 0.50

,........ .. . .. .............. . ... ......... ....... . ..... ....... ....... . .. ..............................

6.7 22.3 29.0 0.67 7.07 7.74

Phyicat Cotingengcies 0.1 0.5 0.6

Price Continewcies 0.8 2.6 3.4....... ............ .. ..... .... .......... ........... ...... ....... .............. ........... ...

7.6 25.4 33.0 0.67 7.07 7.74

uies & Taxes 3.7 3.7 1.09 - 1.09... .... .............. ......... ...... .............. .......

Total Capital Cost 11.3 25.4 36.r 1.76 7.07 8.83

Incrontal WCapital 7.2 - 7.2 2.90 2 - 2.903__3333 33383333333333 353= 3833 3333338 3#s330m*W_g*_*

Total Costs 18.5 25.4 43.9 I/ 7.76 7.07 11.73/-------------- ===3333 3338 3 3333 3 33*33 3333

y Revissd project costs on a six mills basis, is estimated to be aboutUS 20.2 million. This is based on prorating the expenditure foreqaipnt and civil works.Since GoS provided the entire equity contribution, it is ass.umd thatthe incrinntal working capital for six mills has been fully provided for.

I/ 0oe not include interet during construction (IOC). which was not inctudedin wpraisal estimte, 9TNC estimates IOC of about UtS 6.0 million.

- 21 -

TdAq 4

l. Prolet f' ll

PtM as X of-ANXWL CSItU tl fll Esti

(US * I) (US s N)

IDA 30.0 7.7 25.8

.'#"INC 13.9 . 28.7...... . ........

Totat 43.9 11.73 26.?.. ~ ~ ~ ~ ~~~~~~ausa . ....

- 22 -

Table 5

Credit DI2nabwx*t

A. CLmatativs Esti"M d u Actut O I(US S million)

AwisaI Estint. eSWa* Float Yer urtYwty CLmkt.tiW I nteuIy oAstive Aetml S of

NW rMO i Dfsusinft Diswriaants Estiu.tg ptndtg o 1wmini Estima

FM8 1 0.30 0.30 0.12 0.30 0.60 0.23 4.95 5.55 18.54 8.35 13.90 46.3

FY8S 1 8.30 22.20 74.o2 4.30 26.50 88.33 1.90 28.40 94.74 1.60 30.00 100.0

FY85 1 30.00 100.02 30.00 100.03 30.00 100.0 0.70 0.70 2.3S 30.00 100.0 1.13 1.83 6.1

FY86 1 30.00 100.0 0.23 2.06 6.92 30.00 100.0 0.21 4.27 14.23 30.00 100.0 0.25 4.52 15.14 30.00 100.0 0.01 4.53 15.1

FY87 1 30.00 100.0 0.99 5.52 18.42 30.00 100.0 0.60 6.13 20.43 30.00 100.0 0.32 6.44 21.S4 30.00 100.0 1.24 7.68 25.6

FY88 1 30.00 100.0 0.06 7.74 25.8.......... .......... . ....... . ......... . .... ............... ....... .............

TOTAL 30.0 100.0 7.74 7.74 2S.8

Oate of finlt Disbursemmnt Juty 08, 1987.

Cancetted Amount : US $ 22.26 miItion.

- 23 -

Table 5

B. DiNbUruapnt bV Catgoy (tOR Million)

Amount of Actual OiabursementsCatgery go. Daeeription Credit Qisbursmmnt as Z of Original

Allocated at AllocetionAppraisaL

(1) Part A if the Proiect:

t-A Equipment and spare ports SOR 16,640,000.00 SoQ 5,223,508.00 31.4

1-S Civil, electrical and 2,175,000.00 150,477.00 6.9mechanical works

(2) Part 8 of the Proiect:2-A CorJtultants services for 220,000.00 12,699.00 5.8

Part S of the Project

2-S Related equipment 20,000.00 0.00

(3) Part C of the Pro e.t:Management system upgrading:

3-A-1 Consultant' services 1,305,000.00 909,067.00 70.0

3-A-11 Related equipment 85,000.00 0.00

3-0 Ouality control equipment 2,175,000.00 630,682.00 29.0

4 Unallocted 3,480,000.00

FUND Special Account 0.00 15,024.00 (0.2) 1/

Total SOR 26,100,000.00 SOQ 6,941,457.00 26.6Cancellation -effective: July 8, 1987 S0R 19,158,S43. - 0.00

...... ........... .... ...... ... .... ...........

Total disbursed: SOR 6,941,457,08 SOR 6,941,457.00

..................... ...................I/ S of the *etu l amount disbursed.

- 24 -

*~~iaIaI Lotumi S of

4ppia"t l s o

nticator I Ruhabiitation of 1 i tls 6 Ni tis ham ban rehabilItoted (3 401milts as propiqd in th eaprWisatrept ad for the rinlng 3,betwn 101-301 U uslt ar* yet tobe cupltted.

Indicator 2 Inerease in operatiwal spindles Operationt capacity Inereased by 21cpaity by 52.500 about

1000 spindles

indIc tor 3 InerCess in opertial lo by 600 Operati1al lotn dcrees. by 95 Negtive 1/

I/ kigeving cpcityfor thesix rehabilltatsdmitelshasdecresedfrom 1.9tbouaeidtol.8thowd loor_, be-suseabsw100 tao becoe obsolete.

Table 7

INDICATORS OF RET ACWEVENFSTIMATED AND ACTUAL FOR PROJEC MILLS

BEFORE ESTUTED AFrERBmR TAI¢ET O %M INCP RISE

(FY1981-FY85) AFTER BMR (FY1988-FY89) TARGET ACTUAL

(1) (2) (3) (4) 2V (5) 3 _

SPINNINGCAPACITY UTILIZATION(%) B4% (a) 95W%() 13 -4.8,

PRODUCTION (MILLION LOS) 1/ 14.26 (a) 27.30 15.06 9196 5.6%

SPINDLE PRODUCTIVITY(OZJSH4FT/SPINDLE) 2.25 (a) 3.42 (e) 2.43 52 8.

WASTAGE (%) 9.05 (a) 6.61 - -27.09

WEAVINGCAPACITY UTILIZATION (%) 77% (a) 96% (e) 809 250A 3.9A

PRODUCTION (AILLION YARDS) 1/ 25.5 (a) 47.3 (e) 26.3 856 3.2%

LOOM PRODUCTlVrIy(YARDSISH&IFITLAM) 21.6 (a) 24.9 (e) 23.0 159 6.

WASTAGE (%) 4.4 (J) 33 -24.

NOTE: (a): aclual(a): appraisal estimate

1 Production for six mills ate protated based on actualproduclion of 15 OUR mills in FY81.

21 (Col 2 - Col 1) divided by Col I

31 (Col 3 - Col 1) dievded by Col I

Table 8

OPERTI BORMNEOFLQ PROJECIUrCOMPAISON AMONG O _RB*34 .jo Ner -N_E AND VKI)MPLE rMR MU.S

COMPLETE BMR WILLSCOM...EHENStVE NON- TOTAL )EIE TOTAL

mm mmR WR OUR(1 MILL) (2 MILS) (3 MILLS) ( 3 8l4 (6 "ML

A. SPINNGCAPAC1cY UTLIZATIONtnremental Change: 11

- Proect Mills -4.4 -9.1 -7.9 -1.3 -4.8

- Projea Vs Non-Projec Mils 2V 2.3 5.0 -24 -7.7 5.0

PFODKClION (LUON LS)lncrmemenalChange: 1if

- Project Mills 1.5 -0.8 1.4 06 5.6 0

- Project Vs Non-Project flls 2i 23.7 17.7 20.5 287 20.5

Powy (ZWTISPncrmntal Chane: 11-ProctMings 9.5 99 to 5.8 8o- Project Vs Non-Project Mils 21 19.6 4.7 a6 6.7 .6

WASTAGE (%)cremental Change: 11- Project Mitls -16.6 -27.6 -24.5 -29.4 -27.0- Proect Vs Non-Project MiIs 2 -30.2 -1&9 -225 -21.6 -21.9

11 Incremental change is the increase (or decrease), in the perlomnance measure btween the Post-OMR (FY88-89%

and Pre-OUR (FY81 -85) perios

2J Incremnental Change, as delined above. in the project mils compared to incremental change In non-project mils

during the similar period.

Table 8 (Cotd.)

COMPAS9N AO NON-COMPREHESIVE AND SCOMPLETE OM &ILS(ALL IN %)

COMPLETE BilR MILLSCOMPREHENSIVE NON-COMPIEHEPNE TOTAL C E TOTAL

0MR BSR SPMR IIMR(1 MILL) (2 MLLS) (3 MILLS) (3 MILLS) (6 MILLS)

8.WEAVINGCAPACffY UTNIZATION ()incrwtai Chme: 11

- Project Mips 0.0 2.4 2.4 5.7 3.9- Poject Vs Non-ProjecwMlUs 2 17.4 17.4 17.4 4.1 11.3

PRODUCTION (LUON YARDSlncemntal Change 1.

- Pr*ct MpAs -5.9 16.0 7.7 7.7 &3.- Proct Vs Non-Proct Mifst 2 -6.8 139 4.3 -3.1 0.8

IfW OUCIY0W NIfT0O01lscemnt" Change I,

- Pr1je Mill 2.9 18.2 12.3 0.1 6.2- Project Vs Non-Project Mils 2t 12.0 3.6 6.6 -3.0 1.

WASTAGE (%)Ice,mnal Chang-: 1-

- ProjectMill -33.6 -16.6 -22.7 -27.1 -25.1- Projec Vs Non-Project Mipls 2/ 31.6 36S 36.4 36.3 37.3

Tabb 9

FINANCIAL PERFORMANCE OF PROJECT MILLS

A. NO. OF MILLS HAVING OPEFRATING PROFIT BETWEEN FY-

FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89No. of Mills 6 6 6 6 6 6 6 6No. of Profitable Mills - 2 5 5 1 1 1 3No. of Loss Making Mills 6 4 1 1 5 5 5 3

co

B. INTER-MILL COMPARISON AMONG PROJECT MILLS ANDBEiWEEN PROJECT AND NON-PROJECT MILLS

BEFORE BMR FYO I-FY5) AFTER OR (FY88-FYO) _TYPE OF MILLS NO-OF SALES TO COST OF SALE PROFIT NET OPERATING SALES TO COST OF SALES PROFIT MET OPERATING % OF

MILLS ASSETS TO SALES TO LES PROFIT ASSETS TO SALES TO sALES PROFIT CHANGE

_______ _ RATIO RATIO RATIO (TK MILLION) RATIO RATIO RATIO (TKMILLION) AFTER SW

ALL PROJECT MILLS 6 117 006 ng. -31.73 1.0 0." o -26.04 21

COMPLETED PROJECT MILL 3 1.16 0.93 ng -4 5 2.71 0 76 . -1211 -I"

a. ON-COMPREHEN8SVE 2 1 II 093 a" -7.12 2.24 0.660 f. -13.60 -02

b. COMPREHENSIVE 1 123 0.91 2.84 2.56 4.62 0." I.I 1.56 -38

INCOMPLETE PROJECT MIL 3 118 10 a" -21.17 1.67 0.02 Ag. -12.93 39

NON OMR MILLS 3 080 09 I 9o -0.14 1 13 0.91 .__i o 460 -488

l- 29 -

Tdt. 9 (ccu lm)

C. Cenmwia tm I gf Sets)

6 Mlt*,Pro so AftNNr

FY79-81 FYl-85 FfY8T7-tActuat) (Actul)t hstua

LaZbour 28 22 31

Other 19 20 16--- . ... . . ...... .......

TOtAL 47 42 47

D. am NteiaI (AM CGMto of i aimt)

TeO FM9 FM FM FMY# FM F4 FM fM flU FYN FIW AoM

RIm Costas S "to 59 63 65 72 60 56 66 51 41 46 44 56

- - - - - - - - - - -

- 30 -

tAo 10

lWim AL uL U!LII

11. of slits tqm prOf It&.m

FY82 FYr3 FY84 fY15 86 FY8T FT8 FY69

no. of mitts 40 30 33 36 37 38 37 39

fo. of Prf fto bt it ts 2 14 25 I? 3 10 6 17

ft. of La" ting Milts 28 16 8 19 34 28 31 22

................................................

- 31 -

Ish. It

FINSIAL U 1iUWIhNO

A. Crf IoNf n u cwmuian of MP LM to EdtY fgt 3 mll t

(Tk. ntitfsm)

bnat Dctt ewaMibatln S ofvow CwOrlbft1mn cam lb*< CwwlIn tot fstweai

FY62 250.0 135.0 135.0 54

fr83 250.0 149.0 149.0 60

FY84 240.0 200.0 513.0 713.0 297

"as 240.0 150.0 150,0 63

FY86 200.0 259.0 200.0 49.0 230,....... _...... ...... ........................ _...........

10-ToUt (P112-1) 1,180.0 893.0 713.0 1,606.0 136..............................................................................

FY67 178.0 * ?.0

"as 92.0 92.0

P189 92.0 9 02.0..............................................................................

sub-totl (P187") 362.0 713 362.0,,,,, ....... (Fl ) 1,180.0 _ ,5.0 713 1,966.0 .ToAL (fVU2w) 1.18O.0 t,2S5.0 ns3 t,.N. my..... ....... ............ ;.....................

- 32 -

T 11

fil AthL Umial t

ofwm mmitt to c m I

"aU noU "AS "ab "a FM FMb FMass a.... aaa.S .. USU SUU a..533

0tlquIty Ratio 21 19 19 20 t9 21 21 10

Curwr t/Crt~rnt ratio 3 5 2 2 4 6 5 a

o of mills with regtiveOudty r.do 7 6 4 4 a 10 15 14

,............................................................. ..............................................

I Mills were supposed to meet, by June 30, 1986, the followingratios:

(i) Debt/Equity of 60:40(ii) Current Ratio of 1.5

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Table 12

TA 8tMS&

Sb t -i-I Sn p 10 f tsn

I * ProdLction PtaIfing To review mainterance, ComPteted in Partly Inulen ntedUnd Cotrol mw m Q uality controt of tSTC Feb. 1987

mills and set productionstandards.

2. Marketing Advisory To d tevlop appropriate March, 1986 at ImplementedSrwvices strategies for the sale of

*TMC's proacts

3. organitationst and To carry out detailed review of March, 1987 Partly tmlementodMoeement STMC'5 orgenfzatioen structureSuccession ard mtuNpagmnt succession-

poticies

4. Review of Authority To review the distribution of Jurs, 1967 Partty liementedDistribution ond mnagerfial uthority nd Mn agriot authority partiall)Incentive System responsibility within public given, but recommendation on

sectcr mitts incentive system was notimplemented

S. Review of the To review and recommend Compteted Not E temimtodoperation of StMC measures to Impove operational April, 196(Vol.1 & Vol.2) procedures of the mills

6. Manogement To undertake the feasibility Completed Substentialty Imalementedtnforsmtion System for mechanitation of the NIS April. 1987Miwuel and Financial System and

procesiures

7. tnetitutional To improve mongeriet decision Completed ot ImplementdDevetopment of STMC by computerization. Aprit 1987(Coupiterization) Stu* was undertaken.

6. Financiat M gment To improve fin ncial planning Completed Parttlv 100ementedond Control and control and management April, 1989

reporting procedures

9. Acountins MNmisls To recommnnd the tpe of Completed Partlv amHlamentedaccKating principles, control April. 1969and prodares to be usd bysTMC

- 34 -

Tdg* 13

USe of am* _as

A. UhfIfu ts

(STAFF )EI

Stage ofProiset Cvcle Ptanned finat

Through Apprisal 906

Appraisl throughSourd Aproval 15.2

Suervision 90.3.....................................................

...................................................

- 35 -

Tabl. 13

D. XigiLtflLDIat

St_ of d 1u1 of W in _idtestt1 Po leeim TWa. ofPrJ. Cy"* Yea Pe" Field Represnted Ruti. Prtlo...... ................ ..... ......... ........ ............... ... ........... ............ .....................................

App- eet 03m 5 -. A

Suspevisio 11/82 4 2 Finanilt AnalystsTextile Enginer .A. - OwmtimlIation of

project mills* Capitat structuring

behird sdcedale

04/83 4 3 Firwacial AnaIysts - lpaptmatation behind schedleTextile Eineer N.A. - Poor mint

- Poor firacilt controt

09/83 4 3 Finacial Analysts N.A. - Poor perfottce of PIC.Txtitle Engineer -' l lle onttion behind schete

01/84 4 2 Finamisl Analysts N.A. - Slow corswion of ADP toanto ewity

06/84 4 3 Financial, Anlysts 2 -Stow procure_metTextile Enginer -Stow iplemmntat ion

10/84 3 3 Finanmial Anaysts 2 - Appoimnt of comrultants at BTC- Delay in ssaion of report on

poilution control

03/65 2 3 Finniatl Analysts 2 -Procurement behini scheuto-Poor finalelet performnce

0/85 I 1 Financial Anatyst 3 - Procurement behind shedu*le- Poor financial pWeform

03/86 2 2 Finaniatl Antyst 3 - Reluctance to imptemnt reformEconmist pwckg

-36 -

Table 14

Status of Compliance with Covenants

Section/ Deadline forCovenant Subsect Compliance status

DCA Z.01(c) (ii) Subsidiary Loan Agreement (SLA) - In Comullanceto be entered into between the Agreement, satisfactoryBorrower, (GOB) and BTHC upon to IDA, was signedterms and conditions satisfactory between GOB and BTHCto the Asaociation on October 31, 1982.

DCA 3.02(a) Employ an Industrial Economist and June 31, 1982 (Org.) Not in full complianceand (b) establish Planning Cell (PC) in August 31, 1984 (R) Industrial Economist

NOT to assist it in Policy and vas appointed threestrategy fonmulation of the years late (July 10,textile sector. 1985) and he worked

on NOT*s routinematters rather thanpolicy issues. There isa PC, but it does nothave trained staff toundertake anypolicy studies.

DCA 3.02(c) Measure to improve the yarn and July 31, 1982 Not in compliancecloth distribution system While some changes were

made in the yarndistribution system, tothis day, it is notbased on soundcommercial grounds, andis used more as asource of patronage.

DCA 3.04 The Borrower shall introduce a June 30, 1985 Not in full compliancefree market pricing system for Partial pricingthe mills autonomy was given to

enterprise managers onSeptember 17, 1987.But even with thislimited autonomy,managers have to seekpermission for reducingyarn prices.

DCA 3.05 To attain a debt/equity ratio not June 30, 1986 In comeliancePA 4.04(a) greater than 60:40; a current By FY86, Tk.1.6 million

ratio of at least 1.5:1 and debt was given to BTMC, butservicing ratio of at least 1.2:1; it did not improve BTMCthe Borrower (GOB) should provide financial structure orBTMC as cash infusion/equity performance, becausecontribution of Tk.1.2 billion of poor operationalby FY86. performance. Majority

of the mills did notmeet these ratios.

DCA 3.06 GOB shall ensure that health, December 31, 1982 Not in full compliancesafety norms and ecological and Final review report andenvironmental standards are guidelines weremaintained and carry out review submitted to IDA inand prepare new guidelines on these February, 1984; IDAfor IDA review. required BTMC to hire s.

Consultant to finalizea list of pollutionequipment for betterworking environment.It was not implementedduring this project.

- 37 -

section/ Deadline forCovenant Subiect Complianee status

DCA 5.01(b) GOB vas to issue the order May 11, 1982 In Complianceproviding winding up/divestment Gazette notificationof four chronically unprofitable was issued onmills: Adharsha, Dhakeswari I February 4, 1982& II and Hohini Textile Mills

PA 2.02(b) BTHC shall enter into contract June 30, 1982 In complianceas referred to in Section3.01(c)(ii) of DCA with eachmill participating in Part A ofthe project

PA 2.03 BTHC shall establish a Project As soon as Not in full complianceImplementation Cell (PIC) with possible PIC was created onStaffing, functions, powers and February 2, 1982,responsibilities satisfactory to but with inadequatethe Borrower and Association. staff, power and

responsibilities

PA 2.04 BTHC shall establish within BTHC's June 30, 1982 Not in Comoaianceheadquarters a Marketing Cell to BTHC did not create aimprove marketing system and marketing cell.procedures.

PA 2.05(c) Carry out labor rationalization June 30, 1985 Partly in Conalianceso as to attain and maintain a In FY89, spindle/spindle/employer ratio of 25:1 employee ratio was 27:1and loom/employee ratio of and loomlemployee ratioabout 0.8sl of 0.5:1

PA 2.06(a) BTHC shall employ consultants to July 31, 1982(Org.) Not in full ConuliancePA 2.06(b) assist BTHC to improve performance August 31, 1984 (R) Consultants were

in the areas of: (i) marketing, appointed on April 23,(ii) production planning and 1985. Consultantscontrol, financial management; and produced their(iii) sectoral planning recommendation in time,

but they werehardly implemented

PA 4.02 BTHC shall furnish the Association Within six month Not in full Comollance4.03 the audited balance sheet of BTHC, after the Audited reports were

in any case, not later then six completion of FY submitted but notmonths after the end of each promptly. Auditedaudited year. report for FY89 is

still due

DC& u Development Credit AgreementPA a Project AgreementSAR a Staff Appraisal Report