Document of

The World Bank

FOR OFFICIAL USE ONLY

LA. 1qs4-c54r

Report No. 5015-EGT

STAFF APPRAISAL REPORT

ARAB REPUBLIC OF EGYPT

EXPORT I NDUSTRIES DEVELOPMENT PROJECT

June 1, 1984

Industrial Development and Finance DivisionProjects DepartmentEurope, Middle East and North Africa Regional Office

This 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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Currency Equivalents

Currency Unit = Egyptian Pound (LE)US$1.00 = LE 0.70 (Central Bank Pool Rate)US$1.00 = LE 0.84 (Commercial Bank Pool Rate)

List of Abbreviations and Acronyms

AFDB African Development BankBM Bank MisrCBE Central Bank of EgyptCED Cabinet Committee on Export DevelopmentCRD Commercial Representation DepartmentDIB Development Industrial BankDFC Development Finance CompanyDRC Domestic Resource CostEAF Exporter Assistance FundEDB Export Development Bank of EgyptEDI Economic Development InstituteEEC European Econor..ic CommunityEEPC Egyptian Export Promotion CentreEIB European Investment BankGAFI General Authority for Foreign InvestmentsGOE Government of EgyptGOIEF General Organization for International Exhibitions

and FairsIC Investment Centre, Bank MisrINP Institute of National PlanningITC International Trade Centre, GenevaKFW Kreditanstalt Fur WiederaufbauL/C Letter of CreditLIBOR London Inter-Bank Offer RateNBD National Bank for DevelopmentOPEC Organization of Petroleum Exporting CountriesPB Participating BankPPF Project Preparation FacilityTA Technical AssistanceTAP Temporary Admission ProcedureTOR Terms of ReferenceUSAID United States Agency for International Development

Arab Republic of Egypt

Fiscal Year: July 1 to June 30

FOR OFFICIL USE ONLYti)

Egypt; Export Industries Development Project

Staff Appraisal Report

Table of Contents

Page No.

Project and Loan Summary (iv)

I. Introduction - The Need for Export Growth 1and Rationale for the Project

II. The Industrial Sector 5

(A) Structural Characteristics and Trends 5

(B) Economic Efficiency and Comparative 6

Advantage

(C) Recent Export Performance and Medium Term 7Prospects

III. The Policy and InstitutionalFramework for Export Development 9

(A) Exchange Rate and Trade Policy Regime 9

'i) The Exchange Rate System and Exports 9

(ii) The Protection Regime 10

(iii) Exporter Access to Imported Inputs 10

(iv) investment Incentives for ExportPerformance 12

(B) Institutional Framework for Export Development 12

(i) Export Promotion Institutions 12

(ii) The Financial Sector and its Role in 13

Financing Exports

| This document has a restricted distribution and may be used by recipients only in the performance of 1their official duties. Its contents may not otherwise be discosed without World Bank authorization.

(ii)

Page No.

IV. Proposed Financial Intermediaries 17

(A) Export Development Bank (EDB) 17

(B) Development Industrial Bank (DIB) 21

(C) National Bank for Development (NBD) 24

(D) Bank Misr (BM) 26

V. The Project 29

(A) Bank Strategy and Relation to the Sector 29

(B) Project Description 30

(C) Financing Export-Oriented Projects 34

(D) Technical Assistance to The EgyptianExport Development Bank (EDB) 37

(E) Assistance to the Egyptian Export 39Promotion Centre (EEPC)

(F) Exporter Assistance Fund 48

(G) Technical Assistance Related 51to Action Program

VI. The Proposed Loan 52

(A) Loan Features 52

(B) Project Benefits and Risks 55

VII. Agreements to be Reached and Recommendations 57

(iii)

ANNEXES

Annex 1: Economic Efficiency and Comparative Advantage of EgyptianIndustry.

Annex 2: Program of Financial and Non-Financial Services for theExport Sector.

Annex 3: Egyptian Export Development Bank - Financial Statements.

Annex 4: Development Industrial Bank - Financial Statements.

Annex 5: National Bank for Development - Financial Statements.

Annex 6: Bank Misr - Financial Statements.

Annex 7: Eligibility Criteria for Sub-projects and Checklist ofItems to be Included in Export Development Plans.

Annex 8: Quarterly Disbursement Schedule.

Annex 9: List of Documents in Project File.

This Staff Appraisal Report is based on two missions which visited Egypt inNovember 1983 and January/February 1984. The first mission comprisedMessrs. S. Banerji (Chief), C. Basterra, G. Gowen and J. Stcphenson(Consultant). The second mission comprised Messrs. S. Banerji (Chief), G.Cowen, A. Deshpande, C. Basterra, D. Papageorgiou, G. Kansu (ITC Consultant)and D. Gupta (ITC Consultant).

(iv)

ARAB REPUBLIC OF EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

Loan and Project Summary

Borrower: Arab Republic of Egypt.

Amount: US$125 million equivalent, including capitalized front endfee.

Beneficiaries: Egyptian Export Promotion Center (EEPC), Export DevelopmentBank (EDB) and participating banks (PBs).

Terms: Repayable in 20 years, including 5 years of grace, at thestandard variable interest rate.

Relending Terms: The Government would on-lend US$118 million for the creditcomponent to EDB at an interest rate equal to the Bank rateplus 1.25 percentage points. EDB would relend this amountto the PBs with an idditional spread of 0.25 percentagepoints, and the PBs uould onlend this to the subborrowers ata minimum interest rate of 14X. Amortization of the creditcomponent would conform substantially to the aggregate ofthe amortization schedules applicable to the specificinvestment projects financed out of the proceeds of theproposed loan. The remaining Bank funds (US$6.7 million)would be retained by the GoveLnment and provided as a grantto EEPC and EDB for technical assistance and forestablishing an Exporter Assistance Fund. The technicalassistance components would be repayable in 20 years,including 5 years of grace. The exchange risk between theEgyptian pound and the US dollar would be borne by thesub-borrowers; the exchange risk with other currencies wouldbe borne by the Government.

Project The project is designed to support a government program ofDescription: policy and institutional reform, intended to expand

manufactured exports. The project would: help financeefficient export-oriented investments in the public andprivate sector through several PBs whose appraisalcapabilities in this area will be upgraded; strengthen therecently established EDB so that it can function as an apexunit for the proposed loan, and also provide export creditguarantees and insurance needed by exporters; assist in therestructuring and expansion of an export promotion agency(EEPC); finance technical assistance to improve theefficiency and marketing capabilities of e::porters; andfinance specific studies of export policy and procedures aspart of an agreed action program to further improve thepolicy and institutional environment for exports.

(v)

Project Benefits The project would result in about US$300 million ofand Risks: investments in 50 to 60 export-oriented sub-projects which

would export goods worth an estimated US$135 million peryear at ftill operation and would create roughly anadditional 10,000 jobs. It would help existing andpotential exporters upgrade export capability and diversifyproduct and market areas and help fill serious gaps in theinstitutional framework of the sector. Through itspreparation, the project has already made an impact on thepolicy and institutional framework, which would be continuedby means of an action program of reform in key areas. Asthe first project in a complex area, this project hasobvious risks, which relate to the pace of policy reform andthe effectiveness of the institutions involved. However,given action by the Government to date, its support forpolicy reforms and the proposed measures, these risks areconsidered acceptable.

Individual Maximum subproject investment of US$20 million; maximumSubloans and subloan size of US$5 million; free limit for each PB ofFree limits: US$1.25 million.

Estimated Project Costs: 1/ Foreign Local Total…-------- US $miTlion---…----

Project Investment 150.0 150.0 2/ 300.0Technical Assistance 3.6 3/ - 3.6

Consultants (2.1) - (2.1)Training Abroad (0.5) - (0.5)Equipment (0.3) - (0.3)Contractor Supervision (0.3) - (0.3)Contingencies (0.4) - (0.4)

EEPC Work Program - 5.7 5.7Exporter Assistance Fund 5.0 1.0 6.0Front-End Fee 0.3 - 0.3

Total Financing Required 158.9 156.7 315.6

Financing Plan: Foreign Lacal Total--------US $ Million--------

Bank 125.0 - 125.0Government - 5.7 5.7PBs 5.3 101.6 106.9Export Firms 28.6 49.4 78.0

Total Financing 158.9 156.7 315.6

1/ Net of taxes and duties.2/ Representing the estimated local costs of project investments financed by

the Bank line of credit.3/ US$565,000 of this would be used to refinance a Project Preparation

Facility which has already been made available to EDB and EEPC for urgenttechnical assistance requirements.

(vi)

Estimated BankLoan Disbursements; FY85 FY86 FY87 FY88 FY89 FY90

-------- US $ million-

Annual 5.0 20.0 36.0 35.0 18.0 11.0Cumulative 5.0 25.0 61.0 96.0 114.0 125.0

Economic Rateof Return: N.A.

Staff Appraisal Report

Egypt: Export Industries Development Project

I. Introduction: The Need for Export Growthand Rationale for the Project

The Need for Export Growth

1.01 Since the Open Door Policy was announced in 1973, Egyptian non-oilmerchandise exports (agricultural and industrial products) have declinedmarkedly in real terms, their share in GDP declining from 14% in 1974 to lessthan 6% in 1981/82. In constant dollar terms, exports of manufactures in1981/82 amounted to only about 60% of the 1975 level in spite of the stronggrowth of the industrial sector during this period. Much of this decline canbe attributed to; (a) distortions in the exchange rate and trade policyregimes and lack of actions to correct constraints to export growth mentionedin para 1.3; and (b) the redirection of trade from Clearing Account countriesto Western countries - from 80Z of the total in 1975 to 36% in 1980/81 - whichdisrupted exports of many labor intensive products which could not competeelsewhere.

1.02 Until recently, this poor performance of non-oil merchandise exportswas not viewed as a serious problem since large inflows of exogenous resources(foreign exchange receipts from petroleum exports, Suez Canal dues, workers'remittances, tourism receipts, and foreign capital inflows) enabled rapidgrowth of consumption and imports. However, in 1982/83, inflows of exogenousresources levelled off due to a fall in oil prices and a slowdown in thegrowth of tourism receipts and workers' remittances. In turn, this resultedin a fall in the GDP growth rate due to cutbacks in imports, creditavailability and investment. A recent Bank report I/ which reviewed growthprospects of the Egyptian economy concludes that exogenous resource transfersare likely to gradually decline in the long term. In the absence ofcorrective actions, this is likely to lead to a decline in average GDP growthrate, higher inflation and rapid devaluation of the pound in the free market.The same report demonstrates that, in order to maintain a high GDP growth rateover the next two decades, Egypt will need to achieve a substantial structuraltransformation of its economy through a large investment effort, directed atexport expansion and viable import substitution, in order to generate netforeign exchange earnings to replace the declining exogenous

I/ Arab Republic of Egypt: Issues of Trade Strategy and Investment Planning,IBRD Report No. 4163-EGT, January 14, 1983.

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resources. This structural transformation will require non-oil exports togrow in real tenns at twice the projected GDP growth rate i.e. 13.5Z for thebase case estimate in the report. Since the export prospects of theagricultural sector in the longer term appear uncertain, the brunt of thisexport effort is likely to fall on manufacturing industry. Thus efforts toexpand manufactured exports assume central importance in Egypt's long-termgrowth strategy.

Rationale for the Proposed Project

Constraints to Expansion of Exports

1.03 The disappointing perfornance of manufactured exports stems from anumber of serious constraints in the Egyptian environment that need to becorrected in order for export growth prospects to improve. These include:

(a) The bias against exports arising from the complex protectionregime which makes domestic sales of non-controlled productsgenerally much more profitable than exports. Moreover, pricecontrols, subsidies and tariffs combine to provide widely varyinglevels of effective protection to products and to producers ofthe same product depending on their status - public, private orLaw 43 - thus preventing efficient investment allocation.

(b) Complex and time-consuming export and import control procedures,which are a deterrent to all but the most dedicated exporters.Manufacturers and traders currently lack an export mentalitywhich is vital to the success of a national export developmenteffort.

(c) Ineffective institutions to promote exports. Egypt needs aneffective export development agency to ensure that exportpolicies and incentives are designed and administered properly;that the supply of export quality products is increased through avariety of technical assistance measures; and that exports areadequately promoted through market research, marketingassistance, etc..

(d) Most private exporters do not have easy access to export financeon liberal terms; existing financial institutions areconservative and follow time-consuming lending procedures.Exporters are thus at a disadivantage compared to theircounterparts in competing countries.

(e) Public sector industries which account for the largest share ofmanufactured exports (90% in 1981/82) are in some instancesconstrained by Government regulations to supply the domesticmarket; also many public sector firms have inadequate technicaland marketing capability to compete in export markets and mostsuffer from a variety of internal inefficiencies.

- 3 -

(f) Capacity constraints seriously inhibit export capability in manyproduct areas where Egypt has comparative advantage.

(g) Infrastructural deficiencies, e.g. inadequate or costlyfacilities, particularly in communication, storage andtransport; lack of adequate technical services, e.g. consultingengineering, packaging, sub-contracting, etc. place Egyptianexporters at a competitive disadvantage. Emerging shortages ofskilled workers and managers is a serious problem.

1.04 If Egypt is to achieve the high export growth targets required tosuccessfully bring about the structural transformation of its economy alludedto earlier, actions are needed on several fronts. These cover reform of theexchange rate and protection systems as well as reforms in other areas,removal of various procedural constraints, strengthening of the institutionalframework for administering export incentives and for carrying out promotionalactivities, improving access to export finance and amelioratinginfrastructural and other resource constraints. A recent Bank report 1/,referred to hereafter as the Export Development Report, formulates a mediumterm strategy for export development covering policy and institutional reformsand other supportive measures needed to foster growth of manufacturedexports. Bank staff have discussed this strategy with the Government andreached consensus on the needed reforms. In fact, the Government has alreadytaken steps to implement some of the important policy and institutionalreforms mentioned above and is studying reform of other issues. Theimplementation of additional reforms will be taken up within the framework ofan agreed action plan (para 5.02).

Recent Government Actions to Foster Exports

1.05 Until recently, an important source of bias against exports was theappreciating real effective exchange rate for export transactions. Exportershad to pay the higher free market rate for importing inputs but were only ableto convert export proceeds at the much lower commercial pool rate. In April1983, this problem was corrected by allowing all exporters to convert ixportproceeds (with the exception of a few agricultural products) at the freemarket rate. A high level Cabinet Committee on Export Development (CED) hasbeen established to coordinate policy decisions on export issues and providethe political thrust to the export effort. The CED has already initiatedactions to simplify export and import procedures including streamlining of theTemporary Admission Procedure (TAP) which allows exporters to import inputsfor export production on a duty-free basis and is considering additionalincentives for exports. A new Export Development Bank (EDB) has beenestablished to promote and finance exporters and the Egyptian Export PromotionCentre (EEPC) is being reorganized and strengthened as well as being givenwider functions through a new decree. Lastly, a new Law (97 of 1983) has beenpassed for reforming the management and organization of public firms which may

I/ Egypt; A Program for the Development of Manufactured Exports, Report No.4580-ECT, December 15, 1983.

- 4 -

improve efficiency and export competitiveness of these firms. These actionswhich reflect the Government'sa serious commitment to export development havelaid a solid foundation for further policy and institutional reforms requiredto stimulate export growth over the eighties. They need to be complemented bya medium term investment program for developing efficient export-orientedindustries. The proposed project aims at assisting the Government toimplement further policy and institutional reforms and to expand productivecapacity in efficient export-oriented industries.

- 5 -

II. The Industrial Sector: Structural Characteristics and Trends,Comparative Advantage and Recent Export Performance

A. Structural Characteristics and Trends

2.01 ahe industrial sector (excluding petroleum) 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. The shares ofconsumer goods, intermediate goods and engineering (capital) goods inindustrial value added were 51%, 36% and 13% respectively. During the pastdecade, the only change in the sector's structure has been a small increasefrom 11% to 13% in the share of the engineering industries.

2.02 As a consequence of the nationalizations of the early 1960s, thesector is dominated by about 250 mostly large public companies which currentlyaccount for some 80% of total investment, 58% of total employment and 66% ofvalue added in industry. The private sector consists of about 250,000artisanal establishments employing less than ten workers and some 7,500establishments employing 10 or more workers. Ninety per cent of this groupemploy less than 50 workers. Egypt's basic industries (iron and steel,aluminum, fertilizer, cotton yarn, heavy engineering, cement) are all in thepublic sector. Activities that can be carried out by small-scale firms -garments, food products, leather products, cosmetics, wooden furniture, andfabricated metal products - are the important areas of private activity.About 75% of private firms are located in Cairo and Alexandria.

2.03 Between 1975-81/82 industrial output grew at an annual average rateof 8.4%, somewhat less than the average GDP growth rate (10.1%). The greateravailability of foreign exchange and relaxation of bureaucratic controls thatfollowed the adoption of the Open Door Policy undoubtedly contributed torevitalizing the private sector, which achieved an annual average growth rateof 12% during this period. As a result, the private sector increased itsshare of total manufacturing output from 25% in 1974 to 34% in 1981/82.Although not as striking as that of the private sector, the performance ofpublic industry during this period has also been favorable, with an annualaverage growth rate of curput of nearly 7% resulting mainly from improvedcapacity utilization and labor productivity. Despite the high growth rate ofphysical output, however, the financial performance of public companies hasbeen poor. This is essentially the result of insufficient authority overprices, wages and employment decisions at the enterprise level, as these restmostly with the government, although there are also serious inefficiencies andmanagement problems.

2.04 Since nationalization, Egypt has pursued an inward-orienteddevelopment strategy and new investments have tended to be capital- andenergy-intensive. Between 1977-81/82, industrial investment (manufacturingand mining) increased from LE 561 million to LE 1,483 million comprising about26.5% of total investment during the period. Private sector investment inindustry, which was at negligible levels in 1974, substantially increased in

- 6 -

this period and by 1981/82 constituted 20% of total industrial investment.Much of the new industrial investment by the private sector has occurred underthe auspices of Law 43. Textiles, food, chemicals, metals and engineeringindustries represent the main areas of Law 43 investment. Most publicinvestment has been directed at rehabilitation and expansion of existingplants. Nevertheless, many sectors, e.g. fertilizers, cement, etc. needurgent restructuring to introduce new technologies, improve energy utilizationand reduce production costs. The new Five Year Development Plan(1982/83-1986/87) allocates a large share of total investment to theindustrial sector. Industrial output is projected to grow at 9.5% p.a. overthe Plan period. Industrial investment is estimated at LE 8.6 billion ornearly 25% of total investment, a slight reduction from its share in theprevious plan. The private sector's share of total industrial investmentduring the Plan period is estimated at LE 1.8 billion or 21%. A majordeparture from the previnltz Plan is a new emphasis on exports with the Planassigning export targets in important industries - cement, textiles,fertilizer and metals.

B. Economic Efficiency and Comparative Advantage

2.05 Analyzing economic efficiency of industry in Egypt is particularlycomplex because of the highly distorted domestic price structure of productsin relation to their international values because of tariffs, price controls,exchange rate distortions, and implicit subsidies. In maliy industries,financial rates of return diverge significantly from economic rates ofreturn. To overcome these difficulties, the Domestic Resource Cost Ratio (DRCratio) has been used here to analyze economic efficiency and comparativeadvantage. Analysis of DRC ratios for a broad range of industrial productsindicates that, at present, only a limited number of product groups can claimto be economically efficient activities. I/ These include high count cottonyarn, garments from knit and woven cotton fabrics, a range of food products,finished leather and leather products, and a limited number of engineeringgoods. However, there are additional products in the same industries as wellas other industries - nitrogenous fertilizer and paper products - which areclose to being efficient at world prices and could become competitive withsome upgrading. Unless faced with market restrictions, Egyptian firms shouldbe able to expand exports of these products substantially over the next fewyears, particularly if product quality and production efficiency are improvedand adequate export promotion and marketing programs are implemented.

2.06 However, a large segement of the intermediate and capital goodsindustries lack competitiveness at present. These include ceramic and glassproducts iron and steel, aluminum, transport equipment (buses, cars, trucks,bicycles), basic chemicals, synthetic fibers, phosphate fertilizers, and basicpulp and paper. Lack of competitiveness in many product areas stems fromuneconomically-sized plants employing obsolete technology (phosphatefertilizer, vehicles), inadequate domestic raw material availability (pulp and

1/ IBRD Report No. 4163-EGT (cf.).

paper), high cost of intermediate inputs (bicycles, consumer electronics,blended fabrics) and, more generally, inadequate technical and managementskills. Some of these industries could become efficient over time throughappropriate restructuring and modern technology inputs, e.g. engineeringproducts, basic chemicals, etc. and thus be in a position to compete in exportmarkets in the longer term. Annex I provides a more detailed analysis ofeconomic efficiency of major industries. Annex 1, Table 1 provides aclassification of product groups by degree of comparative advantage.

C. Recent Export Performance and Medium Term Prospects

2.07 Manufactured exports 1/ in 1981/82 totalled $540 million. In valueterms, about half consists of yarn and fabrics, and a third of basic metals(principally aluminum but some steel); garments comprise about 5%, essentialoils about 3%, and the balance is distributed among a number of products(medical and pharmaceutical products, metal manufactures, footwear, furniture,travel goods) each with 1% or less. Public enterprises account for nearly 90%of total exports - principally cotton yarn and fabrics, and aluminum. In1981/82, manufactured exports comprised only 7% of manufactured output andmanufactured value added derived from direct exports was only 3% of totalmanufactured value added, among the lowest of the large, semi-industrializedcountries.

2.08 Since the liberalization of the economy in 1974, the performance ofEgyptian manufactured exports, by any standard can only be judged asdisappointing. In constant dollars, the level of manufactured exports hasdeclined in every year but one since 1975 despite the fact that during thisperiod Egypt's economy grew rapidly. Since 1976, Egypt has been able toincrease hard currency exports -- exports to Western Europe grew from 5% tomore than a third -- but they failed to offset the sharp decline in exports tobilateral or clearing account currency areas whose share fell from 80% tolittle more than a third. Middle East and North African markets have arelatively small share, about 13%, which contrasts with other Meciterraneancountries such as Turkey which have more successfully exploited the recentgrowth of demand in these areas.

2.09 During this period, the product structure of exports has become moreconcentrated. In the two product groups - textiles (mostly yarn) and basicmetals (mostly aluminum) which have been growing and now account for nearly85% of exports, long-term expansion prospects appear uncertain. In cottonyarn, a traditional export, Egypt's competitive advantage has been eroding andthe outlook is limited by trade barriers, whereas aluminum exports areuneconomic if energy inputs are priced at world prices. By contrast, thegroup of export products which have been declining - leather, wood products,clothing, perfumes, engineering products - are products where Egypt hascomparative advantage. They are labor-intensive; for some -- clothing,leather products, metal products, and aromatic oils - local inputs of export

1/ Excluding petroleum and petroleum products.

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quality are available. Other than transport equipment and a portion ofclothing, most of the products in this group are produced in the privatesector. Further details on Egyptian export performance is given in the ExportDevelopment Report, Chapter II, Section C (paras 2.24-2.28).

Medium Term Export Outlook

2.10 The Five Year Plan forecast manufactured exports to grow by 12% p.a.during 1982/83-1986/87. For textile/garment products, the export growth rateof 7.1% forecast in the Plan is attainable although external trade constraintsare a limitation. Export targets for fertilizer and cement may be difficultto attain due to market and supply factors. However, there are severalproducts not included in the Plan export forecast -- leather goods, woodenfurniture, pharmaceuticals, engineering products -- which can be efficientlyexported. Preliminary indications are that recent changes in policies(particularly the free market exchange rate on exports) have alreadysignificantly stimulated exports of some items (yarn, cotton knit garments,pharmaceuticals). Given sustained policy and institutional improvements,Egypt should be able to attain the 12Z growth target in the Plan.

2.11 Although the review of manufactured exports performance presents apicture that is not particularly encouraging, it indicates the directionsalong which Egypt will need to move to reverse the decline. Egypt needs toshift its economic policies to support expansion of exports in areas where ishas comparative advantage. The private sector which is involved in theseproduct areas has to be stimulated to contribute to export growth in a muchbigger way. Thus, how soon and to what extent Egypt implements measures tocreate the appropriate policy and institutional framework to foster exports isthe most important factor which will determine the export performance in themedium term.

III. The Pblicy and Institutional Framework for Export Development

A. Exchange Rate and Trade Policy Regime

(i) The Exchange Rate System and Exports

3.01 The exchange rate system has been one of the most important sourcesof bias against exports in the Egyptian economy. There are currently threedifferent explicit exchange rates operating in Egypt, the official (CentralBank) rate, the commercial bank rate and the own exchange or free marketrate. The official rate applies to the Central Bank pool and is set at 70piastres per dollar. The Central Bank pool is supplied by receipts from SuezCanal dues, petroleum and some agricultural exports (cotton and rice).Central Bank funds are used primarily to service external government debt andto finance imports of basic supply commodities. However, large proportion ofinvestment goods imports linked to official aid inflows are also recorded atthis exchange rate. The commercial bank rate applies to the commercial bankpool which is supplied mainly by cash remittances from Egyptians workingabroad, and tourism receipts. Commercial pool receipts are used to financethe imports of public sector companies that are included in the foreignexchange budget but not financed by the Central Bank pool. The commercialbank rate was institutionalized as a separate rate in August 1981 at 84piastres to the dollar and it has remained at this level, although manytransactions, including remittance transfers, some tourism receipts and importpayments, now occur at a rate between 108 and 116 piastres to the dollar. Ihe"free" or own exchange market is supplied by remittances from Egyptiansworking abroad, foreign investment within the Law 43 framework, some touristreceipts and non-oil merchandise exports. Private individuals and companiescan buy foreign exchange at this freely floating rate in order to financeimports or to invest in dollar-denominated assets. Growing private sectorimport demand, an inflation rate that is higher than that of its tradingpartner countries and some spill-over in demand from the public sector, haveexerted upward pressures on the own exchange rate. Over the past year, thefree market rate has fluctuated between 110 and 125 piastres to the dollar, orabout 30 to 40( higher than the commercial bank rate.

3.02 Until April 1983, the growing divergence between the commercial poolrate and the free market rates created serious problems for exporters, whowere allowed to retain only 25X of the proceeds of export sales for a maximumperiod of six months for importing raw material components, etc., and wererequired to convert the balance at the commercial pool exchange rate. Sinceprivate exporters could obtain additional foreign exchange only from the "freemarket" for imports, this policy amounted to a substantial financial penaltyagainst exports.

3.03 In April 1983 the Government announced its decision to provideexporters with the "free market" exchange rate which has restored the realeffective exchange rate to the 1978/79 level. Moreover, by equalizing theexchange rate for imports and exports and removing retention limits, it haseliminated the financial penalty. This action has corrected the bias againstexports arising from an overvalued exchange rate. However, since the FreeMarket is a fragmented market, maintainance of realistic rates in the long run

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cannot be assured. Reform of the exchange rate system is still needed whichis being addressed by the IMF in its discussions with the Government.

(ii) The Protection Regime

3.04 Protection in Egypt results from the combination of (a) a cascadingtariff structure with nominal rates well over 100% for consumer goods; (b)product specific indirect taxes on production and consumption; (c) anelaborate system of price controls and subsidies; (d) import licensing rulesused by the Import Rationalization Committee (IRC) to regulate imports of some135 different products if local supply is deemed adequate; and (e) variousother administrative practices such as the requirement of advance deposits onimports of as much as 100% of c.i.f. value. The actual effective protectionrate (ERP) which this complex system creates varies widely between differentproduct groups and sectors. Even within a product group, e.g. clothing, thereis substantial variation in effective protection between particular products.The level of protection afforded to a producer of a particular product alsovaries by whether or not the firm belongs to the public sector, the private orthe Law 43 sector since price controls and subsidies impact on these groupsdifferently, with the ERP tending to be higher on the whole for privat-sector and Law 43 firms.

3.05 A fundamental reform of the protection system is needed, despitereforms carried out in 1980 which simplified the customs tariff structure tosome extent. The reform should aim at elimination of non-tariff barriers,substantial reduction of effective protection rates, harmonization acrossproduct groups/sub-sectors and unification of incentives between the privateand public sectors. However, reform of the protection system must gohand-in-hand with reform of the price control and subsidy system andsimplification of import and export procedures since effective protection inmany instances results from a combination of all these elements.

3.06 The Bank has been addressing these issues in its economic policydialogue with the Government. So far this dialogue has focussed on a few keyissues, such as energy pricing, where price distortions are particularlysevere. In order to sensitize the Government to the need for reduction andharmonization of effective protection rates to foster long term export growth,agreement was reached during negotiations that the Policy and IncentivesDivision of EEPC would undertake, by the end of 1986, a detailed review torationalize the protection regime with technical assistance from the Project(para 5.35(c)) and present the findings to the Bank and Government. The Bankwould then engage in a dialogue with the Government on the next steps. Forthe purposes of export development, the impact of the protective environmentcan be ameliorated in the interim through reform of import/export proceduresand of specific mechanisms that enable exporting firms to have access toneeded inputs at world prices (see below).

(iii) Exporter Access to Imported Inputs

3.07 Egypt has two systems to provide exporters inputs at world prices.The first and most widely used, is the Temporary Admission Procedure (TAP), ascheme under which an import is allowed temporary entry, free of duty, without

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the requirement of obtaining an import license from the IRC. The importer isrequired to post a Bank guarantee which until mid-1983 covered not only thevalue of the customs duty but the c.i.f. value of the product as well.Because of complex procedures within Customs, and the requirement of technicalchecking by the Industrial Control Board of the Ministry of Industry,exporters have experienced delays both in importing needed inputs and inobtaining cancellation of the required guarantee. However, as a result of theBank's dialogue with the Government in the context of the Export DevelopmentReport, significant improvements have recently been made. In mid-1983, theGovernment reduced the guarantee requirement to cover the value of the dutyonly. Under the aegis of the Customs Sub-committee of the CED, all activitiesand associated record-keeping for the TAP is being consolidated into a singledepartment within Customs with attendant streamlining of procedures. Whilethese simplifications should enable exporters to use the TAP much more easilythan in the past, both EEPC and Customs recognize the need for a thoroughevaluation of present procedures and documentation requirements of the TAP andof import and export procedures generally, for which technical assistance willbe provided under the Project (para 5.35(b)).

3.08 The second scheme for obtaining access to imported inputs is a dUtydrawback scheme which requires the exporting firm to import the requiredinputs under normal procedures, pay the customs tariff and other taxes, andhave the import duty refunded provided export occurs within one year ofimporting the raw materials. It has a number of serious problems. First, itcovers only custom duties and not supplementary taxes nor the costs of advancedeposits required for opening L/Cs. Second, since normal importing proceduresare used, firms face the possibility that an import licence may be denied bythe IRC if the product is on the list of locally produced products and localsupply is deamed adequate (see para 3.04). Third, the administration iscumbersome since every claim related to a specific export transaction must besupported by evidence of duty payments, and importers must establish a clearlink between exports and the prior payments on inputs used in that trans-action.

3.09 Correcting the above-mentioned problems will require a change in thelegal framework and the import licensing rules, and therefore might not bequickly implemented. Nevertheless, a revamped, more automatic scheme, assuggested in the Export Development Report could be an important complement tothe Temporary Admissions Procedure as in the case where imported inputs arepurchased locally. The Government has given EEPC the responsibility fordesigning such a scheme. EEPC has begun preliminary work but the detailedtechnical work scheduled to begin in the second half of 1984, will require theassistance of outside consultants for which provision has been made in theProject (para 5.35(a)). The preliminary work will provide an evaluation ofalternatives as well as the detailed data needed for developing an improvedduty drawback scheme. At negotiations, understanding was reached that thisstudy together with the study on simplification of the TAP and exportprocedures (para 3.07) would be completed by July 1, 1985. The results wouldbe discussed thereafter with the Bank and agreement reached on theirimplementation.

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(iv) Investment Incentives for Export Performance

3.10 In recent years, the private sector has received considerablestimulus to invest as a result of protected markets, the strong growth ofdomestic demand and the removal of many procedural constraints under Law 43.To add to these inducements, direct, firm-level incentives are available toinvestors under Law 43, administered by the General Agency for Investments(GAFI). For "inland" projects", which comprise 82% of investments under Law43 they are limited, consisting primarily of a five-year tax holiday.Additional limited incentives include partial exemptions or deferrals ofduties on capital goods and exemptions from minor general income taxes andcommercial taxes. In contrast, free zone enterprises have been grantedvirtually complete exemption from taxes; privileged use of industrial estatesestablished by the government; and the right to sell on the domestic marketwith import duty reductions linked to the local content of sales.

3.11 Law 43 emphasizes exports as an important objective for inland aswell as general and special free zone projects, but export activities have notbeen sing'led out for special incentives in the past. Promises to export havenot been enforced. Consequently, inland projects exported only US$17 millionin 1982, which is less than one-tenth of the promised level. Free zoneprojects, which were to have produced almost exclusively for export markets,were reportedly registering only 20% of their sales in export markets in 1982.

3.12 Under Law 43 GAFI is authorized to extend the tax holiday beyond 5years for a further three year period but does not routinely do so.Investment in export-oriented activities would be stimulated if export-oriented projects (e.g. projects willing to give a commitment to directlyexport 30% of production by the end of five years) are automatically eligiblefor the full eight years of tax holiday; but the amount of tax holiday beyondfive years would be conditional on a firm actually meeting its exportcommitments. These measures can be implemented within the Law 43 framework bymeans of a resolution of the GAFI Board, ratified by Government. Atnegotiations, agreement was reached that by July 1, 1985 Government wouldprovide additional incentives to export-oriented projects based on proposalsto be discussed and agreed with the Bank prior to that date.

B. Institutional Framework for Export Development

(i) Export Promotion Institutions

3.13 At present, the Ministry of Economy has three agencies which aremainly concerned with export promotion - the Commercial RepresentationDepartment (CRD), the General Organization for Exhibitions and Fairs (GOIEF),and the Egyptian Export Promotion Centre (EEPC). The CRD has been mainlyconcerned with trade problems and bilateral economic relations and not muchwith trade promotion. GOIEF has a dual role: to manage the CairoInternational Trade Fair complex (which has little bearing upon Egypt's ownexport promotion needs), and to organize Egypt's participation in trade fairsabroad. The EEPC, which was established in 1979 to promote Egypt's exportshas generally been ineffective until recently. It has the potential forbecoming the principal institution for export development in Egypt, but,

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before this institution can play an effective role in developing Egyptianexports, it will need to be strengthened through a major program of trainingand technical assistance. The project proposes to finance a comprehensiveprogram of technical assistance for EEPC (see paras 5.14-5.25).

3.14 Experience in other developing countries, however, indicates that anexport development program which requires basic changes in economic policiescannot be mounted without a strong political commitment at the highest levelof government. The commitment of the Government must be channelled through ahigh-level political body which would provide effective leadership andguidance to the national export effort. Recognizing this need, in July 1983,the Cabinet established an interministerial Committee on Export Development(CED) with the Minister of Finance as Chairman and the Minister of Economy ascoordinator. Ihe EEPC has been designated to act as the secretariat to theCED. The CED has been coordinating all high level decision-making on mattersrelating to export development and has already initiated reforms in a numberof areas. Thus the institutional framework for export development, withappropriate strengthening of the EEPC as envisaged through the project, shouldmake an effective contribution to export development over the medium term.

(ii) The Financial Sector and its Role in Financing Exports

The Banking System

3.15 The structure of the Egyptian banking system has changedsignificantly since 1975. Before then, there were four nationalizedcommercial banks whose main function was to provide credit to the publiceconomic sector with each bank having responsibility for a specificsub-sector. This system of sectoral specialization was abolished in 1975 andthe government-owned banks were given greater scope to put their dealings withpublic sector entities on a more commercial basis. They have also greatlyexpanded the scope of their activities with the private sector.

3.16 Since 1975, 50 new banks have been established under the ForeignInvestment Law of 1974. Not all of these banks are foreign-owned as the Lawalso applies to companies that are wholly or partly Egyptian-owned. Some ofthese banks are joint ventures formed by nationalized banks with foreign banksand other partners. In addition, there are 21 branches of foreign banksauthorized to do business under the Foreign Investment Law. These branchescan only operate in foreign currencies and one of the branches (set up in thePort Said free zone) can only deal with non-residents and free zonecompanies.

3.17 There are also 4 specialized banks: the Principal Bank forDevelopment and Agricultural Credit which finances the subsidized creditprograms of the agricultual cooperatives and acts as their fiscal agent; theDevelopment Industrial Bank (DIB) which extends loans in domestic and foreigncurrencies for up to 15 years to finance the fixed and working capitalrequirements of industrial enterprises in the public and private sectors; theother two banks are real estate banks which provide mortgage credit of up to30 years for housing and utilities, and also extend shorter-term financingduring construction.

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Interest Rates

3.18 The Central Bank of Egypt (CBE) regulates interest rates on depositsand loans in local currency for all financial institutions. Lending rates aredifferentiated by activity and set in terms of the minimum and maximum ratesbanks may charge in order to give the institutions some flexibility indiscriminating between borrowers. Since 1975 there has been a substantialincrease in the interest rate structure for both deposits and loans,reflecting the need to mobilize resources in the face of rising inflation.Interest rates on local currency loans are now in the 13Z-16% range comparedto 7%-8% range in 1975. Similarly, the maximum rates obtainable on savingsand time deposits have risen substantially during this period: from 2.4X to8.5% for savings deposits; from 3% to 11% for deposits of 12 months; and 13%on deposits of 5 years. In addition, since 1977, interest earnings on bankdeposits are tax exempt. During this period the Central Bank discount ratewas adjusted seven times to reach 13% in 1982 as compared to 6% in 1975.Local currency base interest rates are currently slightly negative but areexpected to become marginally positive in future compared to expectedinflation projected at 14% for 1984, 13% f or 1985, and 12% f or 1986.

3.19 Certain categories of loans are exceptions to the foregoing interestrate structure. These include: short-term export loans (10-13%), Housing andReconstruction Bank loans (6%), and documentary credits for the importation ofsubsidized goods. Since the profitability of lending to the export sector islow (given the lower interest rate that can be charged), compared to generalcommercial lending, commercial banks have little inducement to lend toexporters. Consequently, many exporters can borrow funds only as trade creditfor which higher rates have to be paid (16%).

3.20 Interest rates on foreign exchange loans are not regulated by theCentral Bank and reflect the cost of these resources. Foreign exchange loansprovided by financial institutions (mostly short-term loans) generally carryfloating interest rates tied to the 6 month LIBOR plus a spread of between 1%to 2%. Suppliers' credits carry rates varying from 9.0% to 10% per annum.DIB's interest rate on foreign exchange loans is currently 15% with theeffective cost is around 17% because of compensating balance requirements.

Availability of Institutional Finance for Exports

3.21 In most successful exporting countries, financial institutions play akey role in fostering exports by providing a range of financial facilities andservices that enable exporters to compete in international markets. This isnot the case in Egypt. Although there are a large number of financialinstitutions, in actual practice, short-term export finance is extendedprimarily by the four public sector commercial banks. Medium- and long-terminvestment financing for export-oriented projects is provided primarily by theDevelopment Industrial Bank (DIB) and to a much lesser extent by a few jointventure investment banks.

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3.22 The bulk of manufactured exports (yarn, aluminum) is currentlygenerated by the public sector. Since public sector exports are channelledthrough public sector trading companies, financing poses no major problems astrade is conducted through well established commercial channels and standardpayment practices are followed. On the other hand, exporters ofnon-traditional items, particularly those in the private sector, facedifficulties in obtaining adequate financing from banks for working capitalneeds and in offering deferred credit to buyers abroad on competitive terms.These problems have become accentuated in recent years, due to thereorientation of trade towards western markets where competition on price andcredit terms is extremely keen. Unfortunately, no accurate statistics areavailable on loans granted by banks to the export sector.

Role of Commercial Banks

3.23 Commercial banks generally follow conservative and time-consuminglending practices with regard to financing exports. From discussions withbanks and exporters, it appears that a confirmed letter of credit (L/C) isrequired for most export transactions. Exports against documents on payments,documents on acceptance or consignment are not at all favoured by banks.Consequently, only large/established exporters with confirmed letters ofcredit are in a position to secure without difficulty pre--shipment finance tothe extent of about 50% to 60% of the value of the L/Cs. It is not apparentwhy banks retain such a high margin. New and small exporters, with or withoutL/Cs, experience considerable difficulty in obtaining bank loans. Althoughfrom a financing bank's viewpoint, documentary credits are attractive sincethey obviate the need for taking certain procedural formalities (e.g. creditchecks), it has become more difficult for exporters to get L/Cs established,particularly from importers in developed countries. Not infrequently,Egyptian exporters agree to bear all charges in connection with the opening ofL/Cs by importers just to secure orders. It is, therefore, imperative thatthe banks in Egypt relax their procedures and agree to finance exporters onthe basis of their capability, and against firm orders or contracts of salewithout the backing of confirmed L/Cs. Moreover, exchange control regulationsrequire that sale proceeds of non-traditional exports are remitted to Egyptwithin 90 days and in exceptional cases within 180 days. In some cases, theserules inhibit exporters from competing effectively.

3.24 Since October 1983, the CBE has fixed the interest rate on exportloans between 10% and 13Z and left it to the discretion of banks to chargerates lower than 13%. But in practice no bank will generally charge less than13% which is also the discount rate of the CBE. Moreover, it appears thatbanks very often do not charge the lower interest rate on advances to merchantexporters, since several merchant exporters mentioned that their borrowingswere being treated as trade sector advances and therefore charged higher ratesof interest - the minimum being 16 per cent. The banking system seems gearedmore towards financing import transactions than exports. Exporters are,therefore, critical about the rigid and complex practices followed by banks infinancing export trade. They feel handicapped in the matter of bankingservices compared to counterparts in competing countries. Although commercialbankers express great interest in assisting the export sector, they alsoindicate unwillingness to take any risks.

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Proposed Program of Financial Services for Exporters

3.25 The Export Development Report, which reviewed the role of the bankingsector in financing exports recommends the introduction of standardizedpre-shipment and post-shipment financing schemes to ensure that exporters haveadequate finance at a reasonable cost. The pre-shipment scheme would coverworking capital needs in the interval between receipt of the export order andshipment of goods; the post-shipment scheme would cover the financing needbetween shipment of goods and receipt of payment. These schemes should beadopted by commercial banks as guidelines for all their short-term exportfinancing transactions. To encourage commercial banks to use these schemes,the Report recommends: (a) the introduction of an export credit guaranteescheme to share the credit risk between the commercial bank and theorganization which will provide the guarantee; and (b) refinancing of exportloans made by commercial banks in case banks have temporary resourceconstraints. Annex 2 provides a summary description of the proposedpre-shipment and post-shipment finance schemes and the export credit guaranteescheme. The Report also recommends that the guarantee and refinance functionscould be undertaken by a specialized financial institution established forthese purposes.

3.26 The above recommendations were discussed in detail with the Ministryof Economy. As a result of these dicussions, in July 1983 the Governmentenacted legislation establishing a new bank - the Egyptian Export DevelopmentBank (EDB) - to implement the guarantee and refinance schemes. To enable theEDB to build up its institutional capability to implement these schemes, theProject provides for a comprehensive program of technical assistance (paras5.10-5.13). In addition, EDB will also act as an apex organization forchannelling Bank funds through selected financial intermediaries to financeexport-oriented projects under the Project. This would strengthen EDB's roleas an apex financial institution for the export sector. Details of EDB'sfunctions, policies, organization, staffing, procedures, etc. and role in theproposed project are given in paras 4.02-4.14.

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IV: Proposed Financial Intermediaries

4.01 This section appraises the four institutions which have been selectedas financial intermediaries in the proposed project. They comprise theEgyptian Export Development Bank (EDB), the Development Industrial Bank (DIB),Bank Misr (BM) and the National Bank for DevelopmenL (NBD). The EDB, whichhas been recently established by Government to facilitate lending to theexport sector will act as an apex institution in channelling Bank funds to theother three banks which will directly lend to export-oriented projects. TheEDB at a later stage may also directly lend to export-oriented projects.

A. The Export Development Bank

Institutional Aspects

4.02 Establishment and Legal Framework. EDB was established as anEgyptian Joint Stock Company under Law 95/1983 (see Project File Document No.1, Item No. 1) by Presidential Decree on July 30, 1983. The Decree alsoabolished the former National Bank for Imports and Exports and provided fortransfer of its assets after valuation etc. to shareholders. EDB's authorizedcapital is fixed at LE 100 million, of which LE 50 million is alreadysubscribed. The subscribers are the National Investment Bank (LE 20 million)and the four public sector commercial banks - National Bank of Egypt, BankMisr, Banque du Caire and Bank of Alexandria - LE 7.5 million each. Asprovided in the Law, the subscribers have paid in 25% of the subscribedamount, i.e. a total of LE 12.5 million, half of which is in foreigncurrency. The remaining LE 37.5 million is to be paid-in over the next threeyears, of which 5S% would be in ioreign currency.

4.03 Activities. Law No. 95/1983 states EDB main purpose as being"encouragement and development of Egyptian exports, as well as assistance increating an export sector in the spheres of agriculture, industry, commerceand services", i.e. EDB has a major responsibility for export promotion and isauthorized to carry out all banking operations for the attainment of thatprimary objective. Specifically, EDB is authorized to extend short- andlong-term loans in local and foreign currency to existing and proposedexport-oriented enterprises for working capital or investment, extendguarantees on their behalf, and refinance loans extended to sucb enterprisesby other banks. EDB may also finance import requirements of exporters. Twoadditional important functions entrusted to EDB are, firstly, issuance ofloans and guarantees to foreign banks and importers, and secondly, toformulate and operate a scheme for insuring Egyptian exporters againstcommercial and non-commercial risks, at both the pre- and post-shipmentstages. EDB is authorized to accept savings deposits, and issue bonds andCertificates of Deposit. In addition, EDB is empowered to carry outnon-banking activities for the promotion of Egyptian exports, such asundertaking market studies of foreign markets for Egyptian products,dissemination of such studies among Egyptian exporters, and setting up aninformation center for provision of statistics to prospective exporters. Theauthority permitted to EDB under the Law appears to cover all essential areasand provides an adequate basis for its functioning.

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4.04 Policies and Operations. In the short-term, EDB aims at encouragingexisting commerc ial banks to provide pre-shipment and post-shipment loans toexporters by guaranteeing part of these loans rather than competing directlyfor such business with existing banks. EDB will, therefore, need to formulateand implement an export credit guarantee scheme. Such a schieme, which isdescribed in detail in Annex 2, would reduce the lending risk of commercialbanks and thus enlarge access to credit, particularly for new exporters. Incase of liquidity shortages, EDB plans to refinance pre-shipment andpost-shipment loans by commercial banks. At present, refinancing doex notappear needed because of the adequate liquidity situation of commercialbanks. In operating the credit guarantee scheme, EDI plans to set aside partof the guarantee fee in a reserve fund to cover potential losses (par. 4.12).After operating the scheme for a year or so, EDB plans to review this policyand decide whether other alternative policies are needed, e.g.counter-guarantee from the CEE or setting up a special risk fund withGovernment assistance.

4.05 In addition, EDB aims at, eventually, building up a project lendingcapability to undertake project promotion, equity investment and term lendingactivity, much like a DFC specialized in the financing of export-orientedprojects. in the interim, it has agreed to establish an apex unit throughwhich Bank funds would be channelled to participating banks to be on-lent toexport-oriented projects. The role of the apex unit in project implementationis described in para 6.05. EDB's management has proposed a draftcomprehensive policy statement, stating EDB's policies in relation to itsproposed activities over the next 2-3 years which is satisfactory in substance(Project File Document 1, item No. 2). The policy statement covers prioritiesfor various banking activities, limits on equity investment and maximumexposure to individual clients, policies for making provisions for likelylosses on loans, guarantees and investments, and profit allocation policies.EDB's management has agreed to issue a policy statement, satisfactory to theBank, by November 1, 1984.

4.06 Board, Organization, Management and Staffing. The Law provides thatEDB will have a board of directors with not lesc than nine members and notmore than thirteen members. The chairman and vice-chairman are to beappointed by the Prime Minister upon the recommendation of the Minister ofEconomy and Foreign Trade, and two of EDB's managers will also be appointed tothe board in a similar manner. In addition, two other members are to beappointed from among financial and economic experts by the Minister uponrecommendation of the shareholders and the rest to be nominated byshareholding banks in proportion to their shareholdings. The term of thechairman, vice-chairman and all directors is initially for five years and forthree-year thereafter. In conformity with the above provisions, nine persons,including the chnioman. have been appointed to constitute the board. Thenames and backgrounds of the present members are indicated in Annex 3, page1. Two more nominations will be made in the near future from among theexporting community in Egypt.

4.07 The chairman has prepared an organization structure for EDB inconsultation with Bank staff (see Annex 3, page 2). The proposed organization

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structure provides for three major operating divisions - Banking, ProjectFinance and Promotion, and Export Credit Guarantee and Insurance. Eachdivision will have its own general manager reporting to the chairman. Supportfunctions, market intelligence and research departments will be directlysupervised by the chairman for the present. The position of vice chairman hasnot been filled as yet. As EDB is yet to becDme operational, its organizationstructure is necessarily tentativ; at present. However, the proposedstructure is appropriate for EDB's activities f'r the next 2-3 years. Theapex function to be undertaken under the proposed project will be handled bythe Project Finance and Promotion Department.

4.08 Management and Staff. The management of EDB consists, at present, ofthe chairman, who has substantial experience in banking and finance. Thechairman is in the process of recruiting a general manager for EDB's BankingDivision and has already recruited a highly qualified manager for EDB'sProject Finance and Promotion Division. At present, EDB has only a skeletonstaff of six persons excluding the chairman. The chairman plans to hire atotal of 28 persons including three general managers by December 1984. Thesalary scales approved by EDB's board (to be confirmed by the Prime Minister)are substantially higher than those of public sector banks but slightly lowerthan the highest scale prevalent among joint venture banks in Egypt. Thus,EDB's salary scales are competitive and it should be able to attract staff ofadequate experience and calibre to fill the key positions. The recruitment ofadequate professional staff (2 financial analysts and 1 industrial economist)for the apex unit will be a condition of loan effectiveness.

Accounting and Management Information Systems

4.09 Since EDB's activities will include commercial banking, projectfinancing and specialized export finance activities, its accounting, controland management information systems will have to be specially designed tosupport these functions. EDB's management has already invited proposals fromfour accounting, auditing and management consulting firms in Egypt to designand introduce these systems. It is proposed to finance the consultants'charges for designing and implementing the accounting system as part of thetechnical assistance to be provided to EDB through the Project (para 4.14).The consultants will be hired according to Bank guidelines. It is expectedthat the design of the system will be completed by September 30, 1984 andimplemented by December 31, 1984. As the accounting and managementinformation systems will be designed to meet the needs of EDB's entire rangeof activities, the entire system need not be implemented at the same time. Acore system to enable EDB to keep accounts of the proposed loan under its apexresponsibilities will have to be operational prior to loan effectiveness.Implementation of this core system is a condition of loan effectiveness.

4.10 Audit. Law 95/1983 provides that EDB's accounts will be audited bytwo auditors to be nominated by the Central Accounting Agency of theGovernment. The accounts of all public sector banks in Egypt are audited bythe above agency. However, agreement was reached during negotiations thatEDB's accounts will be audited as per Bank guidelines by independent externalauditors to be appointed by the general assembly of shareholders. An audit

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report along the lines of the Bank's illustrative form of audit report forDFCs would be prepared and submitted to the Bank within nine months from theend of each financial year.

Operational and Financial Aspects

4.11 Projected Operations. As relatively few export-oriented projectshave been promoted in the recent past in Egypt, there is little reliable dataon which projections can be based. It is also difficult to estimate thedemand for EDB's commercial banking services as accurate data on commercialbank loans to exporters are unavailable. Projections of operations preparedfor the first five years of EDB's operations (1985-1989), presented in Annex3, page 3, are, therefore, necessarily tentative. Based on the assessment ofloan demand from export-oriented projects (para 5.09), it is assumed thatdirect term financing of export oriented projects by EDB, to commence in 1985,will grow at an average rate of 20X per year and reach LE 20.6 millionequivalent in approvals by 1989. Short-term export credit operations areexpected to grow more slowly due to competition from commercial banks in thisline of business. On the other hand EDB's credit guarantee activities areprojected to grow much more rapidly from a starting base of LE 19 million inapprovals in 1985 to LE 44 million in 1989. Finally, EDB forecasts its equityinvestments in export-oriented ventures to grow to LE 20 million by 1989. Theprojected level of operations is based upon very conservative businessexpectations. It is likely that actual business levels will be higher thanprojected in view of recent policy changes which are expected to stimulateexports.

4.12 Financial Projections. Projected income statements, cash flows andbalance sheets for 1984-89 are presented in Annex 3, pages 4, 5 and 6. Theseprojections are also subject to the same qualifications as operationalprojections, and actual results may vary. With regard to the guaranteescheme, it is assumed that EDB will charge banks a guarantee fee of 2% ofwhich 1.5% will be allocated to a risk fund to cover potential losses and theremaining 0.5% will cover administrative expenses. The guarantee fee will bereviewed after the first year of operation and revised in the light of actualexperience. EDB will clearly become a financially viable institution and willcover its operational costs during its first full operating year (1985). Netprofit before taxes will reach 9.4% of average equity by 1989. Although thisis a level lower than that normally achieved by commercial banks in Egypt, itis consistent with the profitability level of institutions undertaking similarpromotional activities which tend not to be as profitable. EDB's profitswould be higher if it accepted low cost demand deposits and entered intoprofitable import financing activities like commercial banks. EDB'sdebt/equity ratio will be very low, long-term debt being less than 10% ofequity as EDB will be operating largely out of its equity funds up to 1988.EDB's liquidity will be high throughout the projected period as its remainingcapital will be paid in over the next three years. Overall, thie financialprojections establish that EDB will have a sound financial position and viableoperations over the first five years of its operations.

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4.13 Resource Needs. EDB will have only modest needs for borrowedresources over the projected period as its large equity base will provideadequate funds. EDB proposes to supplement its resources as needed byaccepting deposits from corporate sources and by inter-bank borrowing to fundits short-term lending activities. Its short-term borrowing over the 5-yearperiod is expected to total LE 30 million, of which LE 14 million equivalentwill be in foreign currency. Long-term borrowings from institutional sourcesincluding the World Bank will reach only LE 6 million equivalent, of whichonly LE 2 million will be in foreign currency. EDB will maintain a match inmaturities of borrowings and loans and will make equity investments only outof its own equity. Its total debt/equity ratio will remain below 1:1 even in1989.

4.14 Technical Assistance Needs. As a new institution which will engagein a new type of financial activity in Egypt, EDB will require a comprehensiveand structured program of technical assistance to develop its institutionalcapability to undertake these functions. Initially, the technical assistanceprogram will provide advisory and consulting services to set up operatingpolicies, procedures and systems which will be funded, in part, under aproject preparation facility. After commencement of operations, EDB will beprovided a management advisor for a period of one year to help implement theexport credit guarantee and insurance scheme, as well as short-termspecialists to train staff of EDB and commercial banks on various aspects ofexport finance operations. Terms of reference for these three advisors aregiven in the Project File (Document No. 1, Item No. 3). The total foreigncost of the technical assistance program is estimated at $520,000. The scopeand content of the technical assistance program is described in paras. 5.10 to5.13.

B. Development Industrial Bank (DIE) V/

Institutional Aspects

4.15 DIB was established in 1975, and its paid-in capital of LE 34 million(US$ 40 million equivalent) is held entirely by the Government. DIB issubject to supervision by the Central Bank of Egypt (CBE). DIB operates fromits head office in Cairo and three branches, one each in Cairo, Alexandria andTanta. Two more branches are planned to be opened during 1984, at Port Saidand the city of 10th of Ramadan. All of DIB's foreign currency term lendingoperations are conducted from its head office. Loans in local currency up toLE 200,000 for terms up to 5 years are approved in the branches.

4.16 After a reorganization in mid-1983, DIB now has 17 departments at thehead office which report to 11 General Managers who are also members of amanagement committee which meets every week under the chairmanship of the ViceChairman to deal with all management issues involving more than onedepartment. The Board of Directors consists of the Chairman, Vice-Chairman,

1/ A detailed analysis of DIB is given in the Project File, Document No. 2.

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three General Managers and two outside members. DIB also has an advisorycommittee to the Board consisting of five prominent persons with wideexperience in private industry and finance. The Board meets about once amonth or more often as necessary to decide on loan applications for amountsexceeding LE 500,000 or its equivalent in the case of a foreign currencyloan. All cases submitted to the Board are screened by a loan committeeconsisting of the Vice-Chairman and the four General Managers.4.17As of December 31, 1983 DIB had a total of 484 employees including 262professional staff. DIB is governed by public sector salary scales whichmakes it difficult to recruit top quality experienced staff. Recently,however, DIB has doubled the annual bonuses in order to reduce staffturnover. DIB has brought about improvements in staff quality by continuoustraining of staff with the help of advisors and consultants, and by sendingappraisal officers to training courses abroad. DIB has agreed to train atleast five professional staff through the training program on projectappraisal to be organized under this project (para 5.11(c)).

4.18 DIB has a comprehensive policy statement, acceptable to the Bank,which covers areas like maximum exposure limits to a single borrower, limitson maximum equity holdings, collateral policies and subsectoral policies.There have been considerable improvements in DIB's project appraisal work as aresult of internal training courses conducted by advisors and attendance atcourses conducted by various institutions, including EDI. Continuous inputhas also been provided by Bank staff during supervision missions and duringreview of subloans submitted by DIB. DIB's project supervision is essentiallyfocussed on the financial aspects as the large number of loans in DIB'sportfolio (about 5,000 at the end of 1983) makes periodic contact with allborrowers very difficult. To help DIB formulate an adequate supervisorymechanism, a management consultant funded by the European Economic Cormunity(EEC) will prepare a system of supervision appropriate to DIB's loan portfolio.

Bank-Financed Operations

4.19 DIB has so far received two IDA credits (Credit No. 412 - $15 millionand Credit No. 576 - $25 million) and three loans (Loan No. 1533 - $40million, Loan No. 1804 - $50 million and Loan No. 2074 - $120 million). DIBis also one of the banks in Egypt responsible for channelling loans toagroindustrial projects (Credit No. 988 and Loan No. 2243). DIB also hasaccess to almost all official fund sources including USAID, KFW, AFDB, EIB andOPEC Special Funds. The OED of the Bank prepared a report on DIB'sperformance under the first two credits. Its conclusions were that afterinitial difficulties, DIB has used Bank funds effectively, and the objectivesof the projects have been met to a substantial extent. DIB performance sincethen with regard to loan utilization has improved significantly.

Financial ard Operational Performance

4.20 Annex 4, pages 1 and 2 provide DIB's income statements and balancesheets for 1980-83. DIB has consistently performed well as a financialinstitution and has maintained a sound financial structure despite a very highrate of growth of operations. DIB's total assets have grown at an average

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annual rate of about 40 percent during the 1979-1983 period. As of the end offiscal year 1983, DIB's loan portfolio amounted to LE 316 million having morethan doubled in two years. The portfolio is well diversified among industrialsubsectors and has now matured; nearly 70 percent of the loans are inrepayment stage. Total arrears of principal amounted to LE 8.0 million or 2.5percent of loan portfolio, which is acceptable. Potential defaults are wellcovered by provisions for doubtful loans and reserves which totalled LE 25.5million. DIB has made adequate profits, before-tax return on average equityranging between 13 percent and 30 percent per annum during 1979-1983. Returnon total assets has been adequate at between 2.6 percent and 3.2 percent.

Projected Operations and Resource Requirements

4.21 DIB's operational projections for 1984-1987 assume an annual averageincrease of 10 percent per annum in nominal terms in both foreign and localcurrency loan approvals. The rate of increase assumed, which is lower thanthe historical rate, is considered appropriate in view of the need toconsolidate operations, to train staff and to maintain the quality of theportfolio. Local currency loan approvals are expected to rise from LE 55.5million in 1983184 to LE 76.8 million in 1986/87. Foreign currency loanapprovals are projected to increase from LE 78 million ($91 million) to LE 104million ($124 million). DIB's major source of local currency resources is aloan discounting facility provided by CBE. DIB has also begun to increaseborrowing from other commercial banks as inter-bank deposit rates are lowerthan the CBE rate.

4.22 Foreign currency resources made available to DIB totalled LE 313million ($371 million) by June 1983, of which $267 million has been providedby the Bank/IDA. During FY84-85 to FY86/87 DIB expects to commit foreigncurrency loans totalling LE 276 million ($329 million). It expects to meetthese resource needs by borrowing mainly from the Bank, KFW, EIB and AfDB.Bank funds likely to become available to DIB over the period FY84-85 toFY86/87 total about $248 million including $30 million under the ExportIndustries Development Project.

Projected Profitability and Financial Position

4.23 Annex 4, pages 3 to 5 give DIB's projected income statements, balancesheets and cash flow statements for 1984-87. DIB is expected to maintainadequate profitability with profit before taxes rising from LE 12.7 million in1984 to LE 22 million in 1987, and return on equity ranging between 26 percentand 31 percent. Appropriations to reserves will be made equal to 25 percentof profits, and 75 percent of remaining will be paid to CBE as dividends.Provisions for doubtful debts and reserves will be maintained at 6 percent ofoutstanding portfolio. DIB's financial structure will continue to be soundwith the debt/equity ratio being below the 8:1 limit at least until mid 1984.Under the proposed SMI project, the debt/equity ratio is being increased to9:1. At that stage a further increase in equity would be required and hasbeen planned for. Given the record of strong government support for DIB inthe past, it is reasonable to assume that further equity contributions will beavailable.

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C. National Bank for Development (NBD) 1/

4.24 Establishment and Ownership. NBD was established in 1980 as aprivate commercial bank according to the Arab and Foreign Investment Law No.43. Its authorized capital is LE 50 million. The main shareholders are avariety of public institutions, including the top four public sectorcommercial banks. NBD's objectives are broadly defined and include bothcommercial and development finance activities. NBD is also one of theparticipating banks in the Second Agroindustries Project (Loan 2243-EGT) ofthe Bank Group.

4.25 Organization, Management and Staff. The 12 members of NBD's Board ofDirectors are well known executives with considerable banking and businessexperience. NBD has also been able to attract a qualified and experiencedgroup of managers and staff. Its Head Office and six branches are located inthe Cairo area, but it also has 15 subsidiary regional banks in thegovernorates. Total staff was 534 in January 1984, of which 284 were in thebranches. The Head Office is organized into three departments:Administration, Commercial Banking, and Investment. The Investment departmentis divided into two units, Projects and Follow-up respectively, each headed bya deputy general manager who reports directly to NBD's managing director. Thedistribution of work between the projects and follow-up units could be betterbalanced. The Projects unit is in charge of promotion, appraisal and alsosupervision of long-term lending, whereas the Follow-up unit is in charge ofsupervision of equity investments. Furthermore, the Investment department hasonly 19 professionals (14 in projects and 5 in follow-up) which will beinsufficient in future to properly handle the increasing workload. To addressthis problem, NBD's management has agreed to implement a plan satisfactory tothe Bank for reorganizing and staffing the Investment department for which adraft has already been prepared.

4.26 Policies and Procedures. NBD was established as one of the few banksin Egypt to undertake both commercial and development finance activities, buta formal policy statement has never been prepared. Operational procedureshave evolved gradually arising from the experience of staff members comingfrom other banks. NBD's project financing started through equity investmentsin a variety of companies. NBD controls the companies at their initial stagesbut its ultimate goal is the resale of the shares it holds. NBD's involvementin long-term lending started by participating in syndicated loans andguaranteeing suppliers credits, and later on by granting long-term loans underthe Second Agroindustries Bank Project. NBD's contribution to regionaldevelopment has been mainly done by the creation and collaboration with theregional banks. In order to better highlight NBD's policies and priorities,NBD's management has agreed to adopt a policy statement satisfactory to theBank by March 31, 1985.

4.27 Appraisal and Supervision of Projects. The quality of projectappraisal has improved since the bank started operations, especially in food

1/ A more detailed analysis of NDB is presented in the Project File, DocumentNo. 3.

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and agroindustries projects. However, further strengthening will be needed,in particular for appraisal of export oriented projects on which the bank hashad little previous experience. The current project will provide for trainingopportunities in this area and NDB will train at least 5 professional staffthrough this program in 1984. Regarding supervision of projects, a system ofregular visits and reports to management on each project has been developed.In addition, the design and implementation of a more comprehensive system formonitoring and evaluation of projects is being financed under the SecondAgroindustries Project.

4.28 Operational Performance. In only three years, NBD has been verysuccessful in attracting deposits from the general public (LE 184 million atthe end of 1983) and increasing the volume of commercial banking operations(LE 122 million of loans and advances at the end of 1983) mainly for industryand trade. NBD's record in development finance activities include: equityinvestments of LE 20.6 million in 21 companies; LE 21 million ofparticipations in 14 long-term syndicated loans; participations in 20guarantee operations linked to suppliers credits; and six sub-projects alreadyapproved for financing under the Agroindustries Loan. In addition, NBD owns50% of the LE 2 million capital of each of 15 regional banks recentlyestablished in the governorates outside Cairo. NBD takes overallresponsibility for these banks, provides them with technical assistance andparticipates in some of their projects.

4.29 Financial Pbsition and Perfonmance. NBD's condensed balance sheetsand income statements for 1981-83 are presented in Annex 5, pages 1 and 2.NBD's total assets had grown to LE 497 million at December 31, 1983 and itsliquidity was very high. liquid assets represented 62% of total assets, andthe loans to deposits ratio was only 70%. The total liabilities, includingcontingent liabilities, to equity ratio was 16.5, rather low for a commercialbank. NBD's profits before taxes have been high, at about 25% of equity eachyear. NBD's portfolio is young and therefore difficult to assess after onlythree years of operations. However, NBD has been prudent in accruing interestdue and making adequate provisions for bad debts (LE 3.5 million or 2.5% ofthe loan portfolio at the end of 1983). NBD's financial statements areaudited by a reputable firm of chartered accountants, Z. and H. Hassan andCo., according to generally accepted auditing standards.

4.30 Operational and Financial Projections. NBD's projected balancesheets and income statements for 1984-87 are presented in Annex 5, page 3.NBD expects to consolidate and slow down its rate of growth during the nextfour years. Total assets will increase 15X per year to LE 873 million in1987. The loans and investments portfolio will grow 26% per year to about LE450 million, and about LE 90 million ($110 million equivalent ) of long-termforeign currency resources would have to be raised by 1987. The loans todeposits ratio will remain at about 70%, and total liabilities to equity willincrease from 9.8 in 1983 to 10.6 in 1987. Profit before taxes will increase21% per year to LE 28 million at the end of the same period.

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D. Bank Misr 1/

4.31 Establishment and Ownership. Bank Misr was established in 1920 as aprivate commercial bank but was nationalized in the 1950's. Currently, it isthe second largest commercial bank in Egypt and its paid-in capital of LE 20million is held by the Central Bank. In 1976 an Investment Center (IC) wascreated within the bank for developing its project finance activities. Sincethen, Bank Misr has participated in three Bank Group projects (Fruit andVegetable Development Project, Loan 1276-EGT, and First and SecondAgroindustries Projects, Cr. 988-EGT and Loan 2243-EGT) and is also expectedto participate in the new Construction Industry Project.

4.32 Organization, Management and Staff. The General Assembly of BankMisr is formed by the Board of Directors of the Central Bank of Egypt (CBE)which appoints the seven members of Bank Misr's Board. Bank Misr is orF inizedinto 11 departments. It has a network of about 300 branches in the countryand a total of about 13,000 employees. All development finance activities arechannelled through the IC, headed by a General Manager who reports directly tothe Managing Director. The IC has a total staff of 70 of which 52 areprofessionals, who are organized in small teams specialized by particularsectors. Separate teams are in charge of appraisal and supervision ofprojects. Under the proposed loan, sub-projects would be handled by differentteams according to the sector involved, but the IC is also planning to set-upa small unit for coordination of overall relationships with the Bank. Theturnover among professional staff of the IC has been recently very high (11%in 1982 and 19% in 1983) mainly due to competition from private banks, but itis now reviewing its policy of promotions in order to retain its most valuableemployees. It was agreed during negotiations that by June 30, 1985 at leastseven of the nine vacant positions of key professional staff will be filledwith suitably qualified personnel.

4.33 Policies and Procedures. A high level committee of ten GeneralManagers, including the General Manager of the IC, was recently created forpreparing a 5-year strategic plan for Bank Misr including the IC. Itspriorities are efficiency improvements, personnel and training policies,development of international banking and new types of services, and theorientation of Bank Misr's development finance activities. Bank Misr hasagreed to adopt by June 30, 1985 a policy statement satisfactory to the Bankcovering the IC's development finance activities.

4.34 Appraisal and Supervision of Projects. Nearly all project appraisaland supervision work are centralized in the IC except for small loans in foodand agroindustries which are handled under its supervision by Bank Misr'sbranches. Except in the food and agro-industries sectors, staff of the IClack technical skills. However, the IC relies heavily on consultants in otherareas for doing project appraisal, which is a satisfactory arrangement. Onlya limited number of staff have expertise in economic analysis. Staff need to

1/ A more detailed analysis of Bank Misr is presented in the Project File -Document No. 4.

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be trained in the special requirements of appraising export-oriented projects,particularly in the analysis of economic and marketing aspects. The projectwill include a training program for this purpose (para 5.11(c)), andparticipation in the program of at least six staff from the IC has been agreedupon. Regarding project supervision, visits to projects and reports tomanagement are prepared regularly, but they tend to focus mainly on costoverruns and debt repayments. However, a foreign consultant financed underthe Second Agroindustries Project is working on the design and implementationof a system for monitoring and evaluation of projects which should addressthis need.

4.35 Operational Performance. Bank Misr had a deposits base of LE 3.1billion and a portfolio of loans, advances and bills discounted of LE 2.6billion as of June 30, 1983. Since the creation of the IC in 1976 Bank Misrhas made equity investments in 47 companies in various sectors amounting to LE208 million. It frequently owns a large share in these companies and isdeeply involved during project implementation. Bank Misr provides long-termloans, in foreign and local currencies, mainly to its affiliated companies andto a lesser extent to other food and agroindustries projects. It hasparticipated in a small number of large syndicated loans. Long-term loanapprovals in each of the last three years were averaged LE 100 million . Theportfolio of loans to food and agroindustries projects in 225 companies was LE91 million as of June 30, 1983 but more than 90% of this amount wasconcentrated in 13 affiliated companies.

4.36 Financial Position and Performance. Bank Misr's balance sheets andincome statements for 1980-83 are presented in Annex 6, pages 1 and 2. BankMisr's total assets have increased at an average annual rate of 25% during thelast three years to LE 4.1 billion (24% in foreign currencies, and 33Z inliquid assets) as of June 30, 1983. The loans to deposits ratio was 84% andthe debt to equity ratio of 42.6 was high as in all public sector banks inEgypt, but provisions had accumulated to 1.8 times total equity. Bank Misr'sprofitability is high, and profits before taxes in 1983 were LE 80 million (2%of average total assets and 91% of average equity). The quality of BankMisr's portfolio seems to be sound and 60% is represented by governmentinstitutions and public sector companies. Regarding loans to food andagroindustries, only 7 out of 225 companies had arrears of more than sixmonths which amounted to LE 1.7 million or 0.8% of the outstanding portfolio(outstanding loans affected by these arrears were LE 16.6 million).Furthermore, Bank Misr's provisions mainly for bad debt amount to 6.6Z of itstotal loans portfolio. Bank Misr's financial statement are audited by twoindependent auditors, both members of the Egyptian Society of Accountants andAuditors and audit reports have been issued without qualifications.

4.37 Operational and Financial Projections. Bank Misr's projected balancesheets and income statements for 1984-88 are presented in Annex 6, page 3.Bank Misr expects to consolidate its operations and to grow at a lower rateover the next five years than in the recent past. Loans are projected toincrease by 16% per year, deposits by 14%, and investments by 10%. Long-termloan approvals will increase from LE 115 million in 1983 to LE 240 million in1988 (including about $70 million equivalent in foreign currency), and

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projects will be selected according to the government's policies andpriorities as specified in the Five Year Plan. The liquidity of Bank Misr isexpected to remain high and the liabilities to equity ratio will improveslightly to 38.6 in 1988. Profit before taxes will grow steadily at about 13Zper year, from LE 80 million in 1983 to LE 146 million in 1988.

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V. The Project

A. Bank Strategy and Relation to the Sector

5.01 This project has emerged from the growing awareness of both theGovernment and the Bank of the importance of non-oil industrial exports inEgypt's future economic growth and the urgent need to address a variety ofserious constraints to export growth at the policy, administrative,institutional, and industrial levels (para 1.03). Bank strategy to fosterexport development is based on two reports completed in 1983 (Egypt: Issuesof Trade Strategy and Investment Planning (4163-EGT) and Egypt: A Program forthe Development of Manufactured Exports (4580-EGT)). The strategy ca'ls for along-term, multi-faceted effort to assist the Government in a overcoming theseconstraints. The main elements are: (i) correcting the bias against exportsarising from the protection regime which makes domestic sales more profitablethan exports; (ii) simplifying the complex and time-consuming export andimport control procedures, which deter exporters, contribute to the biasagainst exports and impede the development of an export mentality; (iii)establishing effective institutions to encourage and develop exports; (iv)providing finance, particularly to the private sector, to encourageinvestments in export-oriented projects in industries whereas Egypt hascomparative advantage; (v) improving the system of export finance;(vi) undertaking reforms to enhance the potential of the public sector toexport (such companies currently are responsible for nearly 90% ofmanufactured exports) by improving their technical and marketing capability tocompete in export markets and their ability to operate on a more business-likebasis; and (vii) overcoming infrastructural deficiencies in such areas ascommunications, storage, packaging, transport, and technical services, whichplace Egyptian exporters at a competitive disadvantage. Besides the proposedproject, which deals directly with export development, the Bank has assistedthe Government in expanding port capacity, a significant bottlebeck in thepast, at Alexandria and El Dekheila (Loans 1239 and 2280) and intends tocontinue this effort at Port Caid in a project scheduled for FY85. The Bankis also assisting the Government in a review, just being launched, of publicsector enterprises, in the context of the new public sector reform law, with aview to improving their long term efficiency.

5.02 During discussions of the above-mentioned two reports and in thecontext of project preparation, the Government and Bank reached a consensus onthe proposed export development strategy and the measures needed to improvethe export environment. In fact, the Government has already taken significantactions to implement this strategy (para 1.05). They include: providing ahigher effective exchange rate for exports (para 3.03); creation of theCommittee for Export Development (CED), a cabinet-level group, to coordinatepolicy decisions on export issues and mobilize political support for theexport effort (para 3.14); improvement of export/import procedures which giveexporters access to imported inputs at world prices (paras 3.07-3.09);establishment of the Export Development Bank (EDB) to provide needed exportfinance (para 3.26), and reorganization of the Egyptian Export PromotionCentre (EEPC) to enable it to become a major focal point for exportpromotion. The scope and complexity of the proposed policy and institutional

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reforms imply that considerable time will be needed to implement them. Theproposed project is thus conceived to be the first in a series of programmedassistance to the export sector to help the Government carry through with thepolicy and institutional reforms already begun and to help develop efficientexport-oriented industries. More specifically, agreement has been reached onan action program which specifies the policy and institutional reforms thatwould be implemented during the course of project implementation as well asstudies for actions to be taken in future (see Table 1).

5.03 The objectives of the proposed Project are:

(a) to expand production capacity in export-oriented industries withcomparative advantage, particularly where private firms areoperating;

(b) to improve export competitiveness of firms in industries withcomparative advantage through appropriate technical assistanceand investment inputs;

Cc) to assist the Government in implementing further reforms in thepolicy and institutional framework related to export developmentas covered by the Action Program.

Cd) to build up effective institutions to develop and promoteEgyptian manufactured exports;

Ce) to assist the Egyptian Export Development Bank (EDB) to introduceappropriate credit guarantee and insurance schemes in order toimprove the availability of export finance (pre-shipment andpost-shipment loans).

(f) to strengthen the project appraisal capability of EDB andparticipating banks.

B. Project Description

5.04 The project consists of the following four components and activitiesto be undertaken within the framework of the Action Program which are brieflymentioned below and discussed in detail in subsequent paragraphs. Loanallocations for each component are indicated in parentheses.

Ci) Financing of Export Oriented Projects ($117.96 million):Providing finance for a portion of the fixed investment andpermanent working capital needs of export oriented projects,which would be channeled through an apex unit in the ExportDevelopment Bank (EDB) and on-lent by participating banks (PBs).

Table I

EGYPT

Action Progra, and Related Activities for improvement of Policy/inatitutional/IncentiveEnvironment for Manufactured Export Development

1SsUE/PROBLEH PROGRESS UNDER EXPORT PROJECT FUTURE ACTIONSCoupleted During Proposed During

PREPARATION INPLEIHNTATION

A. MACRO-POLICY ENVIRONFENT AND FINANCIALINCENTIVES

Excharge Rate Refonr - Multiple E-change . Exporters (except certain . Possible unification ofrates; aymte a a major source of bias agricultural exporters) exchange rate for allatainst exports. Exporters penalized by allowed to convert 1002 price sensitiveusinx free market for Imports; of export earnings at transactions under aeisicomercial pool rate for exports. free market rate. of WHF.

Protection Re ime. Effective protection . Bank/ministry of Industry . CED will review vith Update ERP study and extend . Reviev of CovernmenthiTh for private sector and varies widely study on trade strategy assistance of EEPC (see coverage. Plan on extent andacross sectors, within sectors and circulated to Egyptian below) the Protection timing of tariffhetween public, private and Law 43 firms Government. Analyzes System and review reform.creating bias against exports, and vrong levelq, variations of findings with Bank . Reduce and gradually @Investment signals. Reform difficult effective protection (12/86). eliminate quantativebecause of complexity and social rates. reattictions tosensitivity. ias due prisarily to: extent not coveredhigh casceding tariff structure; price in duty drawbackcontrols and subsidies affecting reform (see below).principally internediete products and . Implement tariffcertain consumer goods; and import reforM.licensing and related procedures (seebelov) vhich act as 321.ntitative . Dank dialogue on energy G Goverrment commitment to . Implement program torestrictions. price policy vhere price eliminate price eliminate price

distortion is controls/subsidies except controls andparticularly severe. for selected consimer subsidies.

products.

Costly and cumbersome proced%res for Conduct study to simplify . Continuation of procedureisports and exports. isport/export procedures. simplification.

Discuss results withDank, Covt., comment onplan of implementation by7/85.Implement plan.

ISSII!/Pll03L0 115nocass UNDEXR30 PIOJIC? JuTU ACTIONSCmpleted During Proposed During

PIZPALtATION IMPLEIEVTATION

Aces to ifyuts at world prices for . major refom of TAP. Mi)exporters through Temporary Admissicns elimination ofProcedure (TAP) and Duty Drawback Scheme requiremnt for bankis ineffective because schses. are costly guarantee of productand cuuberoame. Duty drawback access value;restricted by import licensina.

(ii) proposal developed . Implement proposal toto centraliae customs centralize custemsadminiatratfen of TAP in administration of TAP.single department.

. Conduct study to develop . Ispleweat agreed plan (mayImproved duty drawback begin earlier) os dutyscheme. Study vill drawback scebe orinclude reviev of import appropriate alternativelicensing as applies to (including, as appropriate,duty dravback. Agree reform of import licensing).on implontation by12/85.

Invetment Incentives. No explicit Agreesent reached vich . Implement agrement byinvestm`nt Incentives given to GArl that *xport-criented means of board resolutionexport-orlented projectt, projects vould be of CAll, ratified by

automtically eligible Coverment by 6/85.for 8 year income taxholiday with actual grant *of holiday after firstfiva years conditional onactually esporting 302 ofproduct ion.

Technical Assistance tncentives . Areemnt that Covernment . Set up organisation and . Replenialieat of FMd, iflrport.rs are hesitant to make technical will finAnce SL0 million procedures for Fund, and successful.assistance expenditures to identify and Fund to finance one-half launbh.sepand export smakets and improve the costs of qualifying . Evaluate criteriacapability in serving them because of technical assistance operations. procedubes ofperceived high coats of mostly foreign expenditures managed by Fund and modify asconsultants and uncertainty regardinqg 1PC according to agreed needed. Identifybenefits. guid 'ines. poeaible sources for

replenishtent of fund ifsuccessful.

INStITUtIONAL PUANEVOEK

Need for top-level political body to m Hinisterial Coeittee onprovide leadership. policy guidance mnd gxport Developent (CIED)overall coordination to national export create4 bith 9 cabinetdevelopment effort, with arrareemnta for einste&s chaired by Kin.effective staff and technical support . Finace. coordinator

ministry of Itoemy.

proble areas

I9SUE/PROlL~f PROGRESS UNDER EXPORT PROJECT FUTURE ACTIONSCompleted During Proposed During

PREPARATION IMPLEMENTATION

Agreement reached that Implementation of EEPCEEPC will create new restructuring (seeDepartment, of Policy, below).Planning and Incentivesthat will provide staffsupport to CED.

Need for revitalized export development , Government appointment of Further expansion but inager:y with broader functions (policy new management of EEPC. selected areas wheresupport, advice, and monitoring; .Decree promulgated experience shows EEPC to becoordination; assistance in product providing improved legal providing usefulit.provement, as well as export basia for expanding and cost-effective services.promotion), upgraded staff and dynamic restructuring EEPC. Supporting technicalmanagement. assistance if needed.

. Agreement reached on plan . Implementation ofand financing of initial program, staff-expansion and ing build-up and train-restructuring of EEPC. ing with Bank-financed

technical assistance.

EXPORT FINANCE Export Development Bank, Implementation of initial Develop and implementExports are being inhibited because of set up to functio,. as programs, staffing schemes for medium/long terminadequate pre-shipment and post-shipment apex institution in build-up and training post-shipment finance andfinancing resulting from conservative accord with project with Bank-financed for export credit insurancepractices of banks especially with regard recommendation. Manager technical assistance. in accord with assessedto collateral requirements. In longer appointed and management need.term will need long-term post-shipment team recruited.financing to stimulate exports of capital Agreement reached onequipment, and consumer durables. initial programs and

staffing and trainingrequired.

Public Sector Efficiency . Project provides funds Performance criteria for Possible Bank project toPublic Sector, though primary source of for investment and public industrial firms implement wider reforms inmanufactured exports (90%) is technical assistance to being developed under public firms.inefficient, unresponsive to market upgrade facilities, separate Bank study toforces, and suffers from a variety of production management and Improve managementmanagement problems, Investment is marketing. Systematic efficiency.misallocated due to distorted price appraisal required bysignals, rate of return criteria

will reduce resourcemis-allocation.

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(ii) Technical Assistance to the EDB ($0.52 million): Financing of atechnical assistance program for EDB to help develop itsinstitutional capabilities to provide export credit guaranteesand insurance facilities and to establish an apex unit to channelBank funds.

(iii) Technical Assistance to the Egyptian Export Promotion Center(EEPC) ($3.20 million): Financing of a comprehensive 3 yearprogram of technical assistance to build up the EEPC as a viableand effective export development and promotion agency.

(iv) Exporter Assistance Fund (EAF) ($3.0 million): Establishing aFund to be managed by the EEPC to finance technical assistanceneeded by exporters in a variety of area3, e.g. for adaptingproducts to export market requirements.

Action Program Activities: The project will also assist in(a) in the formulation of an improved duty drawback scheme;(b) in the simplification of export-import procedures; and (c)in assisting EEPC to review the protection regime. Funding forthese activities ($130,000) has been included in the technicalassistance programs for EEPC and EDB above.

Of the amounts allocated for technical assistance for EDB and EEPC US$565,000has already been made available through a Project Preparation Advance whichwould be financed under the proposed loan.

C. Financing Export Oriented Projects

Background

5.05 Egypt needs to shift its economic policies to support exportexpansion in product areas where it has comparative advantage and correctimportant institutional, procedural and administrative constraints, referredto earlier, to maximize the impact of policy changes. While these actionswould create the right climate for export growth, they need to be supplementedby additional actions at the industry level. Firstly, there is an urgent needto increase production capacity in export industries since in the medium tolonger terms export growth will be inhibited by supply constraints.Export-oriented projects have to be identified, promoted and implemented.Secondly, even firms which are exporting at present ueed to improve productionand marketing efficiency and cost competitiveness. For example, even the bestpractice textile mills are considerably below the productivity standards ofaverage plants in developed countries. There is a need to quickly introducenew technologies (manufacturing methods, machinery, new designs, etc.) andimproved production management techniques. Improved energy utilization andconservation offer significant opportunities to improve economic efficiency.

5.06 This component will finance the fixed investment and permanentworking capital needs of export-oriented projects in both the private andpublic sectors; it will also finance technical assistance needed by firms aspart of the initial project investment in a variety of areas, e.g. fortraining technicians, for improving purchase of technical know-how, etc.

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Financing of technical assistance from this component is expected to beavailed mainly by public sector firms who have less inhibition about borrowingfor technical assistance compared to private firms. Also the technicalassistance needs of large public sector firms are likely to substantiallyexceed the maximum amount of financing available through the ExporterAssistance Fund (EAF) (paras 5.26-5.34). For both the above reasons, publicsector firms would not be eligible for financing from the EAF.

Eligibility Criteria for Sub-projects

5.07 To be eligible for financing under the proposed loan all sub-projectsshould meet the following criteria:

(i) Give a commitment to export, either directly or indirectly, 30%of production attributable to the investment being financed,within 5 years from start up of production for new projects, andwithin 3 years for expansion or rehabilitation projects.

(ii) Demonstrate an economic rate of return (ERR) of at least 12% ifthe project investment is greater than LEO.8 million.

(iii) Prepare a satisfactory export development plan (covering fiveyears for new projects and at least three years for expansion/rehabilitation projects) which analyzes key factors affectingthe export potential, identifies actions that need to be takento improve export capability and develops a monitorable actionprogram to be implemented by the firm in order to meet theexport target.

The above criteria are broad-based to allow financing of a wide variety ofprojects which directly or indirectly support expansion of exports. Projectsproducing intermediate products that enter into production of final exportproducts (i.e. indirect exports) have been specifically included becauseintermediate inputs of export quality are in short supply and have to beimported. By financing them the proposed project would help increase thevalue added of exports, particularly in non-traditional product areas. Theminimum level of export orientation (30%) has been selected on the basis thatthis level of exports would have a significant impact on the firm's operations(in forcing the firm to improve efficiency, product quality; upgrade marketingskills; improve packaging facilities; etc.). A higher level of exportorientation may be appropriate as a screening device in countries where themanufacturing sector has achieved a moderate level of export capability, whichis not the case in Egypt. The five year time horizon allowed to new projectsto achieve minimum export targets is realistic given the lack of experience inexporting of most Egyptian entrepreneurs and the special problems in achievingefficient operations from start up. Rehabilitation and modernizationprojects, which concern operating plants, should face fewer start-up problemsand can devote more attention to exporting. A shorter time period, threeyears, is therefore appropriate. Annex 7 elaborates on the eligibilitycriteria and provides examples to illustrate their application.

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5.08 The export development plan is viewed as a key element of appraisalwhich would establish the export potential of the project and define an actionprogram to realize the export target. Annex 7, para 9 presents a check listof items to be covered in a typical export development plan. Exportdevelopment plans for all sub-projects, irrespective of size, will be sent tothe Bank by the PBs for review. An indirectly exporting project would need todemonstrate a verifiable link with the direct exporter in the exportdevelopment plan. Such projects should provide evidence that direct exporterswould consider the project's o'utput competitive with regard to price andquality and would be prepared to purchase their products as inputs for exportproduction in sufficient quantity, to enable the project to meet its exporttarget. Appraisal reports should indicate that the PBs have verified thisevidence. To ensure that the export development plans are realistic and wellprepared, the Project provides training for the staff of PBs in the specialappraisal requirements of export-oriented projects (para 5.11(a)) as well astechnical assistance sources to which PBs can refer their clients (the EEPC,and private consultants financed from the Exporter Assistance Fund) forspecialized help. To ensure that performance under the export developmentplan is monitored, PBs will require sub-borrowers as part of the sub-loanagreements, to provide annual reports on implementation of the action plan andagreed export targets. These reports, providing firm by firm information,will be reviewed by Bank supervision missions.

Estimated Loan Demand from Export Oriented Projects

5.09 Until recently, the policy environment in Egypt was biased againstexport industries with the result that little investment in export-orientedprojects by the private sector had taken place. Recent important changes ingovernment policy (particularly the free market exchange rate on exports-para.3.03), the new emphasis in the Five Year Plan on exports from public sectorenterprises and Government initiatives to strengthen export promotioninstitutions are likely to stimulate substantial investment in export orientedprojects in the future. A Bank loan of about $118 million over a three yearcommitment period (1985-87) appears justified based on planned investment inexport-oriented projects in the public sector and projected investmentapprovals by GAFI in Law 43 projects. Some 11 projects in the Ministry ofIndustry which are part of the Five Year Plan have been identified asexport-oriented projects and they will require about $70 million in foreignexchange for investment. They include the expansion of two plants forprocessing fruits and vegetables ($8 million); modernization and expansion offive plants plus a new one in textiles involving facilities for spinning,weaving, dyeing and made up garments ($55 million); and the expansion of threeengineering projects ($7 million) which will produce consumer durables,pressure vessels, and electrical equipment. In addition, a demand of about$10 million is expected fom other public sector companies producingpharmaceutical products and building materials for export. In the privatesector, there has been a resurgence of Law 43 investment approvals in 1983 anda greater interest by GAFI in enforcing export commitments. Some 72 Law 43manufacturing projects recently approved by GAFI are expected to export 39% oftotal output or about LE 205 million per year. These projects comprise abouthalf of Law 43 industrial projects recently approved and are distributed as

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follows: 20 in leather, cosmetics, perfumes and other chemical products, 11in food industries, 11 in building materials, 8 in textiles, 8 in engineering,7 in metal products, 4 in furniture and wood products, and 3 in medicines andpharmaceuticals and are indicative of the type of export-oriented projectsbeing established under Law 43. For the three years 1984-86, industrialproject investment approvals under Law 43 are projected at about LE 1 billion(based on 1983 approval levels), of which at least 25% can be conservativelyexpected to qualify for financing under the loan, which implies a minimum loandemand in foreign exchange of $150 million from this source. 1/ Moreover,since the loan will finance indirect export oriented projects, e.g.manufacture of intexmediate goods, packaging material and containers, etc.,substantial loan demand from this group can be expected. Finally, theparticipating banks have indicated that they do not envision any difficulty inutilizing the proposed loans and are willing to bear the commitment fees fortheir part of the loan allocations.

D. Technical Assistance to the Egyptian Export Development Bank (EDB)

5.10 EDB's role in the field of export finance, major functions,organization structure, staffing, financial position and prospects, etc. havebeen presented in Chapter IV. As a new institution entering a specializedline of financial activity, EDB requires external assistance to develop soundoperating policies, procedures and documentation and to train its own staff aswell as those of commercial banks with which it will transact its guaranteeand refinance business.

5.11 The project will finance a structured prograr of technicalassistance for the EDB to meet the above-mentioned objectives. It willconsist of the following elements:

(a) Advisory Assistance: (i) an advisor to the Banking Departmentfor six months to develop policies and procedures and provideon-the-job training to staff; (ii) an advisor to the CreditGuarantee and Insurance Department for six months to developpolicies and procedures and provide on-the-job training tostaff; (iii) an advisor to the Credit Guarantee and insuranceDepartment for one year to follow up on the work of the policyadvisor and help implement the scheme and provide training.Detailed job descriptions for each advisor are given in theProject File (Document No. 1, Item No. 2).

(b) Training Programs for EDB StaffThe EDB will need to provide training for its staff in itsoperations. External experts will be provided to design,organize and teach the courses and to train EDB's own trainingstaff, who will be expected to take over the training activityby the end of three years. The following types and number of

1/ The foreign exchange component of these projects are estimated at 60% oftotal in"estment valued at LE 250 million.

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training courses are envisioned over a three year period (1985-87);Export Procedures and Documentation (for exporters - 6 courses of oneweek's duration); Export Credit Guarantee and Insurance Facilities(for staff of EDB and other banks - 6 courses of two weeks'duration); Export Financing (for staff of EDB and banks - 5 coursesof two weeks); and Export Finance and Support Services (for seniorbankers - 6 courses of one day duration).

(c) Training Program in Project AppraisalThe project will finance the foreign exchange costs of a trainingprogram to be held in 1984 for the appraisal staff of EDB's apex unitand participating banks, focusing on problems of export projects.EDB will sponsor the course and bear the foreign costs (para 5.12).PBs will be charged appropriate fees by EDB to cover both the localand foreign costs. The course will be designed, and implemented bythe Institute of National Planning (INP), Cairo, who haveparticipated in similar training courses with the Bank's EconomicDevelopment Institute (EDI). About 20-25 appraisal staff will betrained in a course of about six weeks duration in 1984. EDB willorganize a similar course with the help of INP for the appraisalstaff of the PBs during 1985.

Cd) Consulting Assistance for Accounting and Management InformationSystemsEDB will be provided specialized consulting services to set up itsaccounting systems for supporting the apex financing unit functionsfor the Bank loan and for the other export refinance, guarantee andinsurance activities.

(e) Miscellaneous - office equipment and supplies.

5.12 The estimated cost of the T.A. program is as follows:

Advisory Assistance $240,000

Advisory Assistance for Training Programsand Training Supplies $120,000

Consultancy Services for AccountingSystems $125,000

Office Equipment and Supplies $10,000

Contingency $25,000$520,000

5.13 EDB will receive the funds for the technical assistance program as agrant from the Government. About $300,000 of the above will be incurredbetween July 1 to December, 1984 (twelve months of advisory assistance;consultancy services for accounting system; office equipment; andconsultants for the training program on project appraisal) which will befinanced at the Government's request under a PPF (See Project File, Document

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No. 5, item No. 7). EDB proposes to sub-contract the execution of the T.A.program to an experienced consulting firm or international agency and willselect the consultants according to Bank guidelines.

E. Assistance to the Egyptian Export Promotion Centre (EEPC)

Introduction

5.14 The recommendation to provide technical assistance to the EEPC hasemerged from a review of the effectiveness of the institutional framework forexport promotion undertaken by the Bank in November 1982 with assistance fromthe International Trade Centre (ITC) 1/. This review confirmed that the EEPChad been ineffective in promoting exports due to inadequate leadership, lackof private sector involvement, a narrow concern only with "downstream"marketing and promotional activities, and difficulty in recruiting andretaining capable professional staff due to inadequate budgets. A revampedEEPC could greatly contribute in the long term to the expansion of Egyptianexports as a lead export agency such as PROEXPO in Colombia, or the ExportDevelopment Board in Sri Lanka. Broadly, the report recommended that EEPCshould act as a focal point, coordinator, and catalyst for export promotionactivities; provide information and technical services to the exportingcommunity in appropriate areas; and assist the Government in developing moreappropriate policies and procedures needed to improve the export climate, andin monitoring their effectiveness.

Prerequisites for EEPC Restructuring

5.15 The report made clear, however, that there were a number ofprerequisites for the EEPC to function effectively requiring urgent Governmentaction. Highest priority was for a top-level political body to provideleadership, policy guidance and overall coordination to the national exportdevelopment effort under which a revamped EEPC could function. Also neededwas an appropriate legal basis for EEPC. The Presidential decree, No. 475 of1979, on the basis of which EEPC was founded provided for only part-timemanagement, and did not appear to give EEPC a leading 'focal' point role. TheEEPC would also require staff expansion and upgrading and a new organizationto reflect the enlarged functions recommended. To implement the proposedreorganization and expanded work program a major program of technicalassistance would need to be designed supplemented by an adequate localcurrency budget.

Recent Government Actions

5.16 The Government has acted decisively to create the environment neededfor an effective EEPC. A dynamic new director was appointed in early 1983.Also, in mid-1983 a Ministerial Committee on Export Development (CED) wascreated with nine cabinet ministers as members, with the Minister of Financeas chairman, and the Minister of Economy, who has made a strong personalcommitment to export expansion, as the coordinator. The CED has establishedworking groups for export planning, taxes and duties on exports, export

l/ Fxport Development Report, Chapter IV.

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procedures and regulations. These groups have already begun to makeimprovements in the export environment (see para. 3.07). A revisedPresidential decree has been drafted which the Government intends topromulgate in the near future. The draft decree, which is an acceptable basisfor a restructured EEPC provides for enlarged private sector representation onEEPC's Board. Promulgation of the revised Presidential decree is a conditionof loan signature.

5.17 In coordination with the ITC and the new Director of EEPC, themission developed a strategy and a work program for EEPC over the next threeyears which includes detailed recommendations regarding organization,staffing, technical and financial assistance that wotild be needed to implementthe work program (Project File, Document No. 5, Item No. 1). Agreement hasbeen reached with EEPC and the Government on the technical assistance thatEEPC would need to implement this work program.

EEPC Program and Related Technical Assistance

5.18 EEPC proposes specific export development programs along the linesdiscussed below. In addition it will require general organizational support(para 5.20). The technical assistance to support this program is summarizedin Table 2.

Export Development Program

(a) Product and market development. This is the primary area of EEPCactivity. In this area, EEPC proposes to work with a core group offirms in selected industries with export potential to enhance thesupply of exportable products and to help the firms find andpenetrate markets. This program would involve identifyingbottlenecks and constraints on the supply side, helping firms todevelop programs to penetrate markets, and identifying andfacilitating the use of experts and consultants in all phases of theprogram. Five priority product groups in the following industries --garments, furniture, food products, leather, and electrical machinery-- have been identified and it is expected that a core group of about75 firms would be assisted during this period. In addition to workwith specific firms, the product and market development activitieswould include general promotional effort (including collaborationwith GOIEF in exhibitions), and organizing sales missions todifferent market areas.

Related Technical Assistence. An adviser will be needed initially tohelp set up this activity whose TOR is given in the Project File,Document No. 5, Item No. 2. The main requirement, however, is forshort-term consultants with various product and disciplinaryspecialities to assist EEPC in working with individual firms. Theprogram also includes study tours and orientation for EEPC staff andparticipation of EEPC staff as well as exporters in market surveysand sales missions.

Table 2

EEPC Technical Assistance Program

Associated Training Abroad Total CostProgram Item Consultant Advisor Se.vices Study Tours Equipment 6 Documentation ($000)

Type o ActivitCo Type of Activity Cost Type of Activity Cost(1000) ($o0o) (*000)

A. EXPOW! DSVEWPHEWT PROGRAM H Advisor to assist head of Study tours and(a) Product and Market PHD department to set up orientation for

Development (PHD) dept., formulate and hentd of PHD andlaunch work program. for product

. Specialized short-term 870 division chiefs. 320 1190consultants to firms thruPHD dept. for product Participation afimprovement, product PHD staff andadaptation and marketing. selectedConsulting services for exporters ir.sales missions. market surve7s

and salesmissions inselecttd targetmarkets.

(b) Specialized Support . Consultant, on 60 Study tours for 70 130Services transport-related aspects training of EEPC

of exports to study staff inbottlenecks, make specializedrecommendations, and support servicesestablish service withinEEPC (Contiltants onpackaging quality control,product design, costingatd pricing, etc.including in (b) above(PHD) vill help developthese services).

(c) Trade Information and . Advisor on trade 200 Study tours for 45 Books and 85 330Documentation (TID) infomation to design and TID staff on periodicals for

help launch service, trade library;information equipment for TID

Advisor on trade docu- servicesmentation to design and Specialized (furniture,help launch service, training of TID copiers, office

staff in use of equipment, etc.). Short term expetts on computers,computerization of data, publication ofand on preparation of exportexport directories and directories,other infor ation etc.services

Associated Training Abroad Tat I CostPro_ ram Item Consultant Advisory _ervices Study Tours Equinment & Documentation _ _00)_

Type of Activity Cost Type ef Activity Cost Type of Activity Cost(*000) ($0) ($000)

(d) Training Short term consultants to 180 Study tours for 50 230organize and conduct in key staff ofEgypt short term courses trainingin different aspects of division andexport promotion for EEPC selected otherstaff and selected service EEPC staff.agencies and export firms.

Study tours forAssessment of feasibility selectedof developing long tem commercialexport training institute, representatives.

(e) Export Policies, . Action Program activities 190 Study tours and 30 220Procedures end to be undertaken by EEPC: fellowships forIncentives - simplification of import/ staff of EEPC and

export procedures Customs DepL. on- advisor to assist in export incentives,

study of improved duty proceduresdrawback scheme aimplification.

- advisor to assist inreview of protectionsystem

(Details of Action Programactivities are set forthin Letter No. I )

. Product level studiesof investmentopportunities in potentialexport orientedindustries.

B. GENERAL ORCANIZATIONAL . Resident Senior Trade 155 . Study tours for 35 Vehicles, 220 410SUPPORT Advisor to give guidance executive furniture, office

and assistance to director to equipment,Executive Director, selected trade computer systemsCoordinator ta. program. promotion and

developmentShort-term adviser to institutions.develop methods forcorporate planning. . Study tours for

EEPC oncorporate andexport planning.

Sub-Totals *1655 *550 $305 2510

C. CONSULTANT SUPERVISION AND . Supervision and 300OERHEAD backstopping

D. OONTINIECY * Price contingency (+8% for 390second year; +18U for thirdyear). Physical contingencyof 52.

TOTAL $3200

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(b) Specialized Support ServicesIn parallel with direct assistance provided in product and marketdevelopment, EEPC also intends to develop a capability to assistexporters in a n'imber of trade-related functions: product design andadaptation, quality control, packaging, transport, costing andpricing, and publicity and public relations. EEPC intends to acquirestaff specialized in these areas. As information focal points theywould become closely familiar with the problemn and constraints ineach area and be able to guide exporters to information sources,consultants and experts that can provide substantive assistance.

Related Technical Assistance. Short-term consultant assistance willbe needed for each of the specialized support service areas(packaging, quality control, product design, costing and pricing,tLansport, and export finance). In Table 2 all but transportservices have been included under item (a) (for product and marketdevelopment) since the same experts that help to set up theseservices in EEPC and provide necessary training would also extenddirect assistance to firms as part of the PMD program above). Inaddition, EEPC staff filling these positions would be givenappropriate training and study tours abroad.

(c) Trade Information and DocumentationEEPC plans initially to establish two units: one for a TradeDocumentation/Library Section and a Trade Inquirieb SeiLion.Eventually these units can develop into an integrated tradeinformation service that will enable EEPC to provide a flow oftimely, accurate, and relevant information for use by the exportingcommunity in trade promotion and marketing. Information to becollected, processed, appraised and disseminated will relate toprices, marketing channels, importers, import regimes, marketopportunities and general and specific export directories. This unitwould also expect to develop, maintain, and publish systematicinformation about Egyptian exporters for general use.

Related Technical Assistance. The main technical assistance elementsto support this program are (a) two resident experts for six monthseach on trade information and trade documentation to design andlaunch the services whose TORs are given in the Project File,Document Nc. 5, Item No. 3; (b) short-term experts for a number ofspecific assignments (computerization of data, export directorypreparation, etc.); and (c) both general and specialized overseastraining for staff of the T.I. Department which will be managing thisservice (para 5.19). ahe T.A. program also provides for books,periodicals, the purchase of data bases for the T.I. library, as wellas associated equipment.

(d) 1rainingDuring the next 3 years EEPC proposes not only to ensure that its ownstaff receive appropriate training but to act as an agency to manageand coordinate appropriate training programs in trade promotion andinternational marketing for exporting companies, service

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organizations, and Government agencies. A small training unit wouldbe established in EEPC for this purpose. For the longer term, as thevolume of training activity grows, this unit could become the nucleusfor a separate though closely associated training institute as hasbeen the pattern in some other countries such as Ihailand.

Related Technical Assistance. Short term eonsultants are needed toorganize training courses in Egypt for staff of EEPC and of selectedservice agencies and export firms. Training abroad will also beneeded in the form of study tours for EEPC staff and for selectedcommercial representatives that will be working with EEPC.Eventually consulting assistance will be needed to establish theappropriate longer term arrangements required for exporter training.

(e) Export Policies, Procedures, and IncentivesThe EEPC would have several functions with regard to export policies,procedures and incentives. It would formulate proposals to improvethe policy framework for action by the CED. In particular, it wouldreview the protection regime with the aim of reducing effectiveprotection rates and submit its findings to the CED and the Bank(para 3.06). It would have specific responsibility of formulating amajor needed incentive, namely, an improved dnty drawback scheme(para 5.35(b)); it would manage an important incentive program, thegrants of exporter technical assistance (para 5.31) and would play acatalytic role in streamlining import and export procedures. At alater stage, it would launch a program of studies of selectedinvestment opportunities in promising industries.

Related Technical Assistance. In addition to generalized trainingfor appropriate EEPC staff to familiarize them with conditions andprograms in other countries, the technical assistance programs inthis area provides specifically for consultants to review and helpstreamline import and export procedures (para 5.36(b)), for aconsultant/adviser to assist EEPC to develop an improved dutydrawback scheme (para 5.36(a)) for consulting assistance to reviewthe protection regime (para 3.06), and, at a later stage, consultantsto assist in preparation of investment opportunity studies.

Organization and Staffing of EEPC

5.19 To carry out the above program will require a complete reorganizationof EEPC along functional lines. The EEPC plans to create 2 new departments:Policy and Planning, and Product and Market Development, and to strengthen theTraining, and Trade Information Departments. The Policy Planning andIncentives Department would administer the programs concerned with exportpolicies, procedures and incentives (para 5.18(e)) as well as assist thedirector of EEPC in developing and monitoring the corporate plan and budgetsof EEPC itself. This Department would also administer the Exporter AssistanceFund (para 5.30). The Product and Market Development Department, which wouldcarsy out the program of the same title discussed above, would be organized in5 divisions along product/industry specialties, e.g. textiles, engineering,

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food products, etc. The Trade Information Department's functions have beenexplained above, and would also include related document research. TheTraining Department would handle specialized support services as well astraining. When reorganization is complete at the end of the three year periodEEPC would have a total of about 65 professional staff, mostly in the areas ofmarketing and economics, finance, and engineering. Present professional stafftotals about 40 but less than half are considered to be qualified. Thus a netstaff build-up of at least 45 is envisaged. This implies a major effort inrecruitment by EEPC and requires sufficient local currency resources in orderto provide adequate compensation to attract and retain qualified professionals(para 5.23). An organization chart showing staffing levels at fulloperational strength is given in Figure 1.

Technical Assistance for General Organizational Support

5.20 In addition to technical assibLance for specific program elements,described above, general support for EEPC is envisaged (summarized in Table 2,part B). Most important, an experienced resident Senior Trade PromotionAdvisor would be provided on a priority basis for a two year period to assistthe executive director in building up EEPC and launching its expandedprogram. The advisor would assist in developing strategies, policies and workprograms for EEPC, in p-eparing job descriptions and recruiting staff, indeveloping detailed guidelines and operating procedures of the ExporterAssistance Fund (para 5.30) and he would have primary responsibility forcoordinating the technical assistance inputs. The TOR for this position isgiv#Ln in the Project File, Document No. 5, Item No. 4. Because of theimportance of this position special emphasis will be given to the selection ofthis advisor. Assistance will also be provided to help develop an internalcorporate plan and to improve EEPC's accounting system. The latter is neededto ensure that EEPC can adequately handle the T.A. program and the exporterassistance fund under the disbursement arrangements proposed (para 5.25 and5.34).

5.21 A detailed timetable and work program for the first 12 months(1984/85) has been developed (see Project File, Document No. 5, Item No. 6).Key activities to be done as soon as possible include establishment of the neworganization, fixing comprehensive staff salary structure, recruitment of fournew department heads which with the director will form the management team,moving to larger and more adequate premises, and bringing aboard the keyadvisors to assist in the restructuring and the launching of the main exportdevelopment programs. Also planned are studies to improve the duty drawbackscheme and to streamline import and export procedures. Since the Bank loanmight not become effective until late 1984 the Government has requested anadvance under the Project Preparation Facility covering technical assistanceand related training and equipment requirements for July 1 to December 31,1984 estimated at $190,000 (See Project File, Document No. 5, Item No. 7), andin addition, about ¢75,000 to launch the Action Program (para 5.35).

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECT

Egyption Expodt Pomotion CenterOrgoniion Chart

I.-E-

I ut(2)

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kenwerl Derr Dr 5.rece & r?r2 t .r

Wxd I LO'? Pc.cEI rqrwwg U r&s. QAe CtD*S~ *4C0) &crci oa ) WWriCP

Crormco a 0-0 VW-kY

Note 1W -n DraCiOfj --<O#* pVr 4< sw tf 400al 'ham r 2t V

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Financing Arrangements

5.22 The technical assistance program needed to build up EEPC and enableit to implement the proposed work program calls for consultant and advisoryservices over a three year period commencing July 1, 1984, costing $1.6million; and about $560,000 for overseas training, study tours, andparticipation in market surveys and sales promotion missions for EEPC staffand selected exporters. Equipment required by EEPC for general institutionalstrengthening (vehicles, furniture, office equipment, computer systems) aswell as documentation for the Trade Information Center is estimated at$305,000. Together with the costs of consultant overhead to administer theprogram ($300,000 and contingencies ($395,000) total program costs areestimated at $3,200,000. The Government has agreed to borrow the above amountand make the funds available to EEPC as a grant.

5.23 The local currency requirements to support the above program areestimated at LE 4.7 million for FY1985-87. About half of this is needed forstaff salaries; the balance is required for promotional and developmentprogrammes, locally purchased equipment, and direct support for consultantsand advisors. Since the program envisages an expansion of the present scopeand level of activities as well as upgrading of staff, the local currencyrequirements will substantially exceed amounts budgeted in FY1984. Sinceadequate local currency budgets are crucial to the effective implementation ofthis component, an understanding was reached during negotiations thatGovernment would provide EEPC with the budgetary support needed duringFY85-87. If the PBs increase the on-lending rates in the future, any excessin spread income of a PB beyond 3.5% will go to the Government to help meetthe local costs of this program (para 6.03).

Monitoring and Supervision

5.24 EFPC will recruit an agency/consulting firm to implement thetechnical assistance program according to Bank guidelines. The implementationof the program will be monitored closely by the Bank. EEPC will prepareannual work programs for FY86 and FY87 which will be discussed and approved bythe Bank prior to implementation. EEPC will also provide semi-annual reportson its activities with particular emphasis on the implementation of the TAprogram. Bank supervision missions will review the implementation of the TAprogram and EEPC's overall activities at least on a semi-annual basis.Activities to be undertaken by EEPC as part of the Action Program (studies ofthe protection regime, duty drawback system, export import procedures,investment incentives) will be closely monitored by Bank staff particularly inthe initial phases. Because of the need to ensure that the build up of EEPCservices is consistent with the demand for such services from the exportingcommunity and the ability of EEPC to recruit suitable staff to administerthem, agreement has been reached at negotiations and recorded in the loandocuments that an in-depth review of progress during the first year - jointlyby the Bank and the Government - will be undertaken.

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5.25 The Government will repay the amount of S3.2 million allocated fortechnical assistance to EEPC and will contribute the LE4.7 million for theoperations and programs of EEPC (para 5.23). Payments will be made toconsultants in accordance with the payment terms to be specified in thecontractual agreement to be executed between the EEPC and the consultants.

F. Exporter Assistance Fund

Eligibility Guidelines

5.26 The project will include an Exporter Assistance Fund of $3 million.The purpose of this fund is to induce existing and potential exporters to maketechnical assistance and related developmental expenditure that will expandmarkets for manufactured exports and their capability to serve them. The Fundwould finance only services. The following broad activities would be eligiblefor financing:

(a) pre-feasibility and related types of studies for export-orientedinvestment projects;

(b) export market identification and development (e.g. market surveys,trade fair participation, developing marketing channels, inward buyervisits, etc.);

Cc) product upgrading and development (employment of consultants toassist in product design and development, tooling design, packagingdesign, etc.);

(d) improvements in production and cost efficiency (e.g. design ofproduction management and cost control system. improvements inproduction layout, redesign of materials handling systems, etc.); and

(e) training of staff in both market-related and production relatedactivities (e.g. training of export market managers, training offirst level production supervisors which are critically short inEgypt'.

5.27 In order to provide an incentive for exporters to undertake the aboveactivities, which are often costly because of the need to hire mostly foreignconsultants, it is proposed that the Fund share with exporters up to 50% ofthe costs of individual projects on a grant basis. A ceiling of $100,000would be placed on the amount available to any single firm. This would ensurethat a reasonable number of firms benefit while allowing sufficient funds forrealistic programs to be executed.

Qualifying Firms

5.28 Both trading and manufacturing firms in the private sector wouldqualify for assistance. Public sector finms would not normally be eligiblesince alternative sources are usually available to them, e.g. USAID, EEC, etc.and because as a group they are less likely to require an inducement toundertake such activities. All eligible firms would have to:

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(a) register with EEPC, providing basic data about the firm and itsactivities;

(b) provide adequate evidence that they are now exporting or will be ableto export at a substantial level (e.g. through record of pastexporting, market studies, etc.);

(c) present a plan acceptable to the EEPC for export expansion ordevelopment appropriate to the level of assistance requested,indicating the role of the project to be financed by the Fund and theresults expected.

Relation to EEPC Programs

5.29 The Exporter Assistance Fund is intended to complement, not competewith, the technical assistance efforts of the EEPC. Technical assistanceprovided by EEPC would be limited to specific high priority programs developedby EEPC within the limitations of its budget and financial resources. Directtechnical assistance to firms within this context, would be largelydiagnostic. The technical assistance activities financed by the Fund areprimarily at the initiative of the exporter, and typically will emphasizeremedial as well as diagnostic activity. For example, under EEPC's productand market development program (para 5.18(a)) a garment production expertmight visit several factories over a 10-day period and provide each with anassessment of productive efficiency and how to improve it. With theassistance of the Fund, an exporter might then hire experts for several monthsto train staff, re-organize production lines, etc. The management andorganizational arrangements (para 5.30) would ensure that possible duplicationof effort could be eliminated.

Management and Operations

5.30 The Fund will be managed by a Managing Committee consisting of theExecutive Director of the EEPC, the Chairman of the Export Development Bank,representatives appointed by the Board of EEPC and representatives from thePBs. Agreement on this was confirmed during negotiations. Staff support forreviewing applications and supervising implementation will be provided by theIncentives Division of EEPC's Policy, Planning and Incentives Department.This division would review applications for assistance, calling on technicalstaff from the Product and Market Development and other departments to assist,as appropriate. The review would take into account other activities of EEPCwhich might be possible alternatives to the assistance requested therebyhelping to avoid duplication. General guidelines for the Fund's operationcovering the eligible items of assistance and eligibility criteria forbeneficiary firms are given in paras 5.26 and 5.28, respectively. However,detailed guidelines and documentation for launching the Fund's operation willbe needed concerning eligibility of firms, types of project expenditures thatwill qualify, as well as the requirements for acceptable export expansi.plans. Review procedures must also be established with maxima set for thetime for staff review and approval (say 1 month total) to ensure that exportsector interest in the Fund does not flag due to bureaucratic delay. This

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would be prepared by the Senior Trade Promotion Advisor (para 5.20) on apriority basis, as part of his/her terms of reference. The Fund (EEPC) wouldfurnish, in English, a copy of the detailed guidelines regarding reviewprocedures, eligibility of firms, and eligible types of expenditures, etc.which must be satisfactory to the Bank as a condition of disbursement of thiscomponent.

Bank Review and Supervision

5.31 In order to ensure that applications for Fund assistance areprocessed quickly, Bank review prior to approval will not be required. Everythree months the Fund (EEPC) would furnish a report on Fund commitmentslisting the name of firm, type, employment, and sales; exporting objectivesof firm; project expenditures; financing by Fund; and expected results ofprojects. Each firm which receives Fund assistance will be requested tosubmit a brief report to the Fund on the results achieved, within six monthsafter project completion. Eligibility for additional grants from the Fundwould be conditional on receipt of such a report. Every year, the Fund willsubmit a report to the Bank, analyzing the effectiveness of the Fund'soperation (by sub-sector, type of expenditure, etc.) and make recommendations,if needed, for any changes in the Fund's operation (eligibility criteria,limits, review procedures, need for priorities, etc.).

5.32 Until substantial experience has been gained, it is not possible toassess the adequacy of the procedures or estimate how quickly the Fund will beutilized. Applications will therefore be accepted, initially, on afirst-come, first-served basis. When expenditures under the Fund reach $0.5million, the Bank will review with the Fund Managing Committee the adequacy ofthe procedures adopted and the initial operations with the view to agreeing onany modifications that may be necessary in order to achieve the Fundobjectives.

5.33 The Government will be responsible for repayment of this componentand would be compensated partly by means of additional spread on the interestrate charged by the Government to EDB which would be passed on by theparticipating banks to sub-borrowers. On the basis of an expected total loansize of $125 million including capitalized front end fee, and reasonableassumptions about patterns of disbursemnent and the likely amortizationschedules of the participating banks, a spread of about 0.75 percentage pointswould be required.

Di sbursement

5.34 To facilitate disbursement, a special account, designated as theExporter Fund Account will be opened by the Goverment (para 6.09). TheExporter Fund Account will be established at an initial level of $250,000. AStatement of Expenditure would be used for contracts costing less than $10,000equivalent. The Fund would be required to submit semi-annual reportsregarding the nature of disbursements made and would maintain invoices andassociated recoids regarding smaller expenditures for purposes of audit andsupervision.

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G. Technical Assistance Related to Action Program

5.35 The Project will also assist in (a) the formulation of an improvedduty drawback scheme; (b) in the simplification of export-import procedures;and (c) in initiating a review of the protection regime.

(a) Assistance Towards Designing an Improved Duty Drawback SchemeThe existing duty drawback scheme is inoperative because of complexand time-consuming procedures, import licensing restrictions andbecause only duties are refunded not supplementary taxes (para3.08). The Bank has recommended that an improved duty drawbackscheme be introduced which takes into account indirect tax payments(see Export Development Report, Chapter 3).It has been agreed with the Government that the EEPC will ev,aluatealternatives and complete the detailed technical work associated withformulating the improved duty drawback scheme by July 1985. Theproject provides for consultancy assistance to help EEPC with theformulation and detailed design of the scheme, estimated to cost$20,000. Terms of reference for this consultancy are given in theProject File (see Document No. 6).

(b) Simplification of Export-Import ProceduresThe existing export-import documentation and procedures are adeterrent to exporting and need to be drastically simplified. EEPCand the Customs have been working on streamlining export-importprocedures on an ad-hoc basis and considerable improvement has beenrealized. Both, however, recognize the need for a systematicapproach to the problem. It has been agreed that EEPC will engageappropriately qualified consultants to review existing proceduressystematically and suggest measures for simplification by July 1985.The costs of such consultancy services, estimated at $60,000 will bemet from the project (Table 1). The scope of work for these servicesis given in the Project File (see Document No. 7). Consultants forthe above tasks must be acceptable to the Bank.

(c) Review of Protection SystemEffective protection varies widely between groups and sectors, and bytype of firm (para 3.04). To sensitize the Government to the needfor reduction and harmonization of effective protection rates,agreement was reached at negotiations that EEPC would undertake bythe end of 1986 a review of the protection regime under TOR agreeableto the Bank, as the basis for a dialogue on the next steps (paras3.06 and 5.18(e)). This study will require assistance from qualifiedconsultants for which $50,000 has been allocated from the project andhas been included with the T.A. program for EEPC (see Table 1).

5.36 About $75,000 will be needed between July 1, 1984 and December 31,1984 to finance consultants to assist in the study of the duty drawback schemeand in simplifying export-import procedures. The Bank has approved theGovernment's request for an advance under the PPF to enable EEPC to initiatethese programs (para 5.21). The Ministry of Economy will establish acoordinating com ittee consisting of representatives from concernedministries, Finance, EEFC 2nd EDB to facilitate and guide the execution of thestudies under the AcLjaI: Program.

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VI. THE PROPOSED LOAN

A. Loan Features

Lending and Onlending Arrangements

6.01 The Government of Egypt will be the borrower of the loan of $125million which it will repay to the Bank over a period of 20 years including agrace period of five years. After allowing for the front end fee of about$0.31 million, the Government will onlend an amount of $117.97 million to EDBwhich in turn will onlend this amount to the PBs. The PBs will use the amountof $117.97 million to make subloans to export-oriented projects underconditions and criteria specified in paras 5.07 and 6.06, for terms up to 15years including a grace period of up to 3 years. Each PB will repay theGovernment through EDB the amount utilized by it for making subloans accordingto an amortization schedule which will correspond to the aggregate ofamortization schedules of all the subloans made by it. Initially, the loanamount will be notionally allocated equally among the participating bankswhich would then be responsible for payment of the Bank's commitment chargeand front end fee on an equal basis.

6.02 Of the amount of $6.72 million retained by the Government $6.02million will be passed on to EEPC and $0.52 million to EDB, both as grants.EEPC will use the amount to meet the foreign currency cost of the technicalassistance program for itself ($3.20 million) and to operate the ExporterAssistance Fund ($3.0 million). EDB will use the funds to meet the cost ofthe technical assistance to EDB. Amounts advanced to the EDB and the EEPC todefray part of the T.A. costs under the PPF will be refinanced from the loanaccount.

Interest Rates and Foreign Exchange Risk

6.03 The Bank loan will be made to the Government at the prevailingvariable rate. The Government will releuid the amount of $117.97 million toEDB at a fixed interest rate equal to the Bank rate at the date of loansignature plus a minimum spread of 1.25% under a sub-loan agreementsatisfactory to the Bank. The proposed minimum spread of 1.25Z should besufficient to cover the interest rate and part of the foreign exchange risksand to finance partly the cost of the Exporter Assistance Fund of $3.0million. EDB will pass on the funds to the participating banks (PBs) afteradding 0.25% for meeting the cost of its apex function, under sub-loanagreements satisfactory to the Bank, and finally the PBs will onlend the fundsto the projects keeping a minimum margin of 2.5% for their costs. Signatureof the sub-loan agreements between the Government and EDB and between the EDBand at least two of the PBs will be a condition of loan effectiveness.

6.04 On the basis of the Bank's present lending rate, the rates will be asbelow:

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(a) Bank loan to Government 10.08% p.a.

(b) Government to EDB for onlending to PBs 11.33% p.a.

(c) EDB to PBs 11.58% p.a.

(d) PBs to borrowers 14.08% p.a.

If the PBs increase their on-lending rates so as to enable them to increasetheir spread to more than 3.5%, the excess over 3.5% will be transferred tothe Government for meeting a part of the local costs of the TA program forEEPC. The interest rate structure will be reviewed at least annually toreflect changes in the cost of similar, alternative funds to Egyptianborrowers, and the new rates will be applied to the uncommitted portion of theBank loan. Sub-loans made by the PBs will be denominated in U.S. dollars butsub-borrowers would repay their sub-loans in Egyptian pounds at the highestofficial exchange rate declared by the Central Bank of Egypt. The proposedon-lending rate of 14.08% is about the same as the cost of short term foreignexchange funds available from banking institutions at present.

Roles of EDB and Participating Banks

6.05 It is proposed to use the EDB as an apex institution to channelthe Bank loan proceeds to the PBs. Under this arrangement, EDB will borrowthe loan proceeds from the Government and relend the proceeds to the PBs on afirst come-first served basis. The lending risk will be borne by the PBs.EDB will maintain accounts of loan utilization, repayment, etc. and act as acentral monitoring agency to ensure that the various sectoral targets proposedfor the loan as a whole are observed. With regard to sub-loans, the PBs willsubmit individual sub-loan applications directly to the Bank, but will send asummary of the project appraisal data to EDB to enable it to monitorcompliance with eligibility criteria. The proposed arrangement will have thefollowing benefits. (i) It will create & central review point, which willfacilitate monitoring of allocations to public and private sectors for theloan as a whole. (ii) It will promote healthy competition between the PBs andspeed-up loan utilization. (iii) It will provide EDB an opportunity torapidly acquire familiarity with appraisal of export oriented projects and toinitiate eventually its own project finance activities as a PB under thisproject.

Individual Subloan Limits and Free Limits

6.06 Subprojects which satisfy the eligibility criteria specified inpara. 5.07 above will be eligible to receive finanicing out of the loanproceeds. Tne following additional conditions would apply: sub-projectsshould not have a total investment cost over $20.0 million and each subloanshould not exceed $5.0 million. In addition, at least 50% of the loanproceeds would be limited to projects in the private sector. Each of the PBswill have a free limit of tl.25 million. If EDB is designated as a PB duringproject implementation, its free limit would be determined in light of itsappraisal capability, quality of portfolio etc.. The first three sub-projectssubmitted by each PB will be reviewed in the Bank irrespective of the size of

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the subloans proposed. All sub-projects proposed by companies in which any PBhas more than 25X equity holding will be treated as an above free limitsub-project. Based on an analysis of the typical size of export-orientedprojects in the public and private sectors, about 20 to 25 above free limitsub-projects and 30-40 below free limit sub-projects are expected to befinanced. The above free limit projects will account for about $80 million ortwo-thirds of the loan amount. This represents an adequate amount ofsub-projects to be reviewed directly by the Bank.

Subproject Appraisal and Supervision Requirements

6.07 As the objective of the project is to increase production capacity inexport-oriented industries, each subproject appraisal report will include a 3or 5-year export development plan, depending on whether the sub-project is anexpansion or new project, prepared by the sponsors which the PBs would examinewith the assistance of EEPC as needed. In the case of sub-projects forindirect exports i.e. sub-projects for manufacture of intermediate goodsrequired by a direct exporter, the PBs must satisfy themselves that a linkbetween the output of the indire t sub-project and the ultimate user/exporteris clearly established (see para 5.08).

Procurement and Disbursement

6.08 It is proposed that the PBs would follow international shoppingprocedures with comparison of offers from at least three suppliers for bidpackages valued below $2 million. Review by Bank staff of the procurementprocedures of DIB (which has had substantial experience of utilizingBank-financed industrial credits) during subloan review has shown that theseprocedures are satisfactory and have resulted in procurement of suitable goodsat reasonable prices. Bid packages exceeding $2 million would be procuredaccording to Bank's ICB procedures. About 4 to 5 such contracts can beexpected to be financed under the loan ($10-12 million). Bank staff wouldreview the bid documents and award of contract decisions for such items on anex ante basis before withdrawal applications are processed. The proposedprocurement procedure is consistent with those followed under previousindustrial credits.

6.09 It is proposed that the Government would establish a specialaccount on behalf of EEPC for the Exporter Assistance Fund to facilitatedisbursement. The initial deposit in the Special Account would be $0.25million. For the technical assistance component for EEPC, payment will bemade to the consultants in accordance with payment terms specified in thecontract agreement. For the TA component for EDB, standard disbursementprocedures would apply. Agreement has been reached with EEPC that the annualaudit would include an audit of the special account.

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6.10 The Bank loan will be disbursed against 100% of the foreignexpenditures and 60X of the local purchase cost of "off the shelf" purchase ofequipment already imported by machinery dealers in Egypt. In regard to thetechnical assistance components, disbursements will be made to cover 100% ofthe cost of consultants recruited for delivery of technical assistance.Disbursement will be made against standard documentation except for contractsvalued at less than $20,000 equivalent, which will be claimed under Statementof Expenditures. The supporting documentation will be retained by the PBs andreviewed by supervision missions. The proposed loan of $125 million isexpected to be committed over three years from loan effectiveness anddisbursed as shown below;

FY 85 FY 86 FY 87 FY 88 FY 89 FY 90($ million)-

During Period 5.0 20.0 36.0 35.0 18.0 11.0

Cumulative 5.0 25.0 61.0 96.0 114.0 125.0

A quarterly disbursement schedule is given in Annex 8. The projecteddisbursement schedule assumes a slightly slower build-up of disbursement inFY86 compared with the standard disbursement profile of existing IDF loans inEMENA region. This is because the proposed project is a pilot project and theintermediaries are likely to need a longer time at least in the initial years,to promote and appraise export-oriented projects.

Other Features

6.11 The final date for submission of subloans is proposed to be December31, 1987 (about 3 years from expected date of loan effectiveness) and closingdate for disbursements will be December 31, 1990 (about six years after loaneffectiveness). Other terms and conditions of the loan will be similar tothose applicable to Bank loans to DFCs.

B. Project Benefits and Risks

Project Benefits

b.12 As mentioned earlier in this report, the development of manufacturedexports is central to Egypt's ability to maintain a high GDP growth rate and ahealthy balance of payments position over the next two decades. The declinein manufactured exports needs to be .-eversed and the project is the firstserious effort on the part of the Government and the Bank to address jointlythis critical issue. The project aims at developing efficient export-orientedfirms in industries with comparative advantage. Besides financing prcductionfacilities, the technical assistance provided through the project will helpboth existing and potential exporters to improve cost competitiveness,

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marketing skills, product quality and design, etc., and thus enhance theirexport competitiveness. Egyptian industry will also improve operatingefficiency and resource allocation through exposure to foreign markets andcompetition. Both private and public firms will benefit from this process andthis will help develop an export mentality among Egyptian industry which ismissing at present. The project will emphasize growth of non-traditionalexports which will help reduce the vulnerability of Egyptian exports to marketlimitations. The Project will finance nearly $300 million of investment insome fifty export-oriented sub-projects estimated to export $135 million perannum at full operations and would create roughly an additional 10,000 jobs atan investment cost per job created of about US$30,000 which is slightly belowthe marginal investment cost per job for the Egyptian industrial sector as awhole.

6.13 The project has already made an impact on economic policy-making inthe Government by helping to build consensus among decision makers on the needfor policy reform, particularly with regard to exchange rate and protectionpolicies. During project implementation, further improvement in tradepolicies and export-import procedures will be realized through an ActionProgram agreed with the Government which will help to improve the long-termprospects for export growth. The project will help in building up twoinstitutions vital to the development of the export sector - the EgyptianExport Promotion Centre (EEPC) and the Egyptian Export Development Bank(EDB). The EEPC will have a key role in trade policy formulation and, as thesecretariat to the Cabinet Committee on Export Development (CED), can make animportant contribution to policy formulation for export development.

Project Risks

6.14 As a pilot project in the complex area of export development, thereare a number of risks which could impede the effectiveness of the project inincreasing Egyptian exports. Recognizing that export expansion takes time andthe benefit of the project will be only slowly felt, an important risk is thedegree to which policy reforms will be enacted in the mediumrterm which willinfluence the project outcome. The Government has already enacted significantreforms to the exchange rate applicable to exports and to improvingexport-import procedures. It fully supports the action program for policy andinstitutional reform proposed in the project. Thus, a positive trade policyregime can be expected to be achieved over the medium term. The project aimsat building up two new institutions in the export sector - a riskyundertaking. The TA program to EDB and EEPC will be closely supervised.Moreover, EDB has recruited an experienced chairman who has the Government'sfull support. Finally, since sub-projects financed through the loan areexpected to export 30% of production in a three- to five-year period, there isalways the chance of some firms not meeting this target. The Project providesfor careful appraisal to ensure that sub-projects are designed for exportmarkets and the export development plan is realistic. The intermediaries andEEPC will monitor the performance of these firms and provide technicalassistance as needed. Bank staff will also supervise the implementation ofthe project components intensively. During the first year, supervisionmissions will be scheduled every 3 to 4 months which will enable the Bank towatch developments closely. Thus the risks are reasonable.

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VII. AGREEMENTS REACHED AND RECOMMENDATIONS

7.01 The following agreements have been reached with the Government,EEPC EDB and the PBs during negotiations:

(a) The Government would:

(i) Borrow the loan of $125 million and repay the principal andinterest over a period of 20 years including 5 years grace (para6.01);

(ii) bear the foreign exchange risk between the US dollar and thecuirrencies owed to the Bank (para 6.03);

(iii) provide $3.20 million out of the loan on a grant basis to EEPC tomeet the foreign currency cost of technical assistance tb EEPC(para 6.02);

(iv) provide $3.0 million out of the loan on a grant basis to EEPC tooperate the Exporter Assistance Fund (para 6.02);

(v) provide LE 4.7 million over the period 1984-87 to EEPC to meetits local currency budgetary requirements (para 5.23);

(vi) Provide $0.52 million to EDB as a grant to meet the foreign costsof the technical assistance program (para 6.02);

(vii) Relend the amount of $117.97 million to EDB for on-lending to thePBs under a satisfactory subloan agreement which would providefor a minimum spread of 1.25% to the Government over the Bank'sinterest rate at the date of loan signature by the Bank (para8.01);

(viii) Agree in connection with the Action Program (paras 5.02, 5.35),to discuss the results of the studies of the duty drawbackscheme, export-oriented procedures (para 3.09), and protectionregime (para 3.06), and confirm agreement to extend tax holidayfor export projects (para 3.12);

(ix) Promulgate a new decree restructuring the EEPC which will be acondition of loan signature (para 5.16);

(x) Establish a Special Account to facilitate disbursement of theExporter Assistance Fund (para 6.09).

(b) EDB would:

(i) onr-lend the amount of $117.97 million to PBs under satisfactorysub-loan agreements; signing of a satisfactory sub-loanagreements with at least two of the PBs is required prior to loaneffectiveness (para 6.03);

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(ii) set up an apex unit to carry out its function as an apex agencyfor the credit component of the loan prior to effectiveness (para4.08);

(iii) set up an accounting and monitoring unit, staffed by an adequatenumber of individuals considered satisfactory by the Bank toonlend the proceeds of the loan received by EDB from theGovernment, prior to loan effectiveness (para 4.09);

(iv) adopt a statement of operating policies, satisfactory to the Bankby November 1, 1984 (para 4.05, 6.05);

(v) engage consultants to implement the technical assistance programaccording to Bank guidelines (para 5.13);

(vi) engage external auditors to audit its apex operations inconformity with Bank guidelines (para 4.10);

(c) PBs would:

:i) onlend the loan proceeds to export-oriented projects whichsatisfy the criteria described in para 5.07 at an interest rateof at least 14% p.a. (para 6.04);

(ii) review their lending interest rates annually wdth the Bank (para6.04);

(iii) if at any time, the prevailing lending rate of the PBs results inan interest spread exceeding 3.5% to the PB, agree to place theincome arising from the excess over the 3.5% spread in a separateaccount to be used for meeting the local currency costs of EEPC(para 6.04);

(iv) follow agreed subproject appraisal guidelines (para 6.07);

(v) ensure that at least half of the proceeds under the creditcomponent are allocated to the private sector (para 6.06);

(vi) observe the free limits assigned to them (para 6.06);

(vii) not grant loans to projects whose total investment cost exceeds$20 million in 1984 prices (para 6.06);

(viii) observe the ceiling of $5.0 million in 1984 prices on individualsubloans (para 6.06);

(xi) each PB will share equally the commitment and front end fees onthe part of the loan to be onlent by EDB (para 6.01).

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(d) NDB will;

(i) Prepare and implement a plan for reorganization and staffing ofthe Investment department satisfactory to the Bank (para 4.25).

(ii) Prepare a policy statement satisfactory to the Bank and adopt itby March 31, 1985 (para 4.26).

(iii) Train a minimum of 5 professional staff in 1984 through thetraining program included in this project (para 4.27).

(e) Bank Misr will:

ti) Fill at least seven key vacant positions most urgently needed atthe IC by June 30, 1985 (para 4.32).

(ii) Adopt a policy statement for the IC satisfactory to the Bank byJune 30, 1985 (para 4.33).

(iii) Train a minimum of six staff from the IC in project appraisalthrough a training program to be organized under this Project in1984 (para 4.34).

(f) DIB will:

Train a minimum of five professional staff in 1984 through thetraining program to be organized under the project (para 4.17).

Cg) The EEPC would:

i) Engage consultants, in accordance with Bank guidelines, toimplement a program of technical assistance for EEPC (para 5.24);

(ii) Agree to a joint Government, and Bank review of EEPC progressafter one year as a pre-requisite to further expansion of EEPC TAactivities (para 5.24);

(iii) Agree tc. undertake the following studies concerning thepolicy/'incentive environment:

- undertake with consultant assistance technical work for animproved duty drawback scheme before July 1985 (paras 5.18(e),5.35(a);

- engage qualified consultants to review and help simplifyexisting export-import procedures before July 1985 (paras5.18(e), 5.35(b);

- undertake with consultant assistance a review of the protectionsystem befo-e end-December 1986 (paras 5.18(e), and 5.35(c)).

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(iv) Agree to manage the Exporter Assistance Fund for which it would:

- develop detailed guidelines for procedures and operations whichmust be satisfactory to the Bank as a condition of disbursement(para 5.30);

- establish a MAnagement Committee consisting of the ExecutiveDirector of EEPC, Chairman of EDB, a Board member andrepresentatives of the PBs to sanction grants, monitorperformance and approve all operating procedures for the EAF(para 5.30);

- review with the Bank the procedures for the operation of theFund when disbursements reach $0.5 million with the view toagreeing on any changes needed in the procedures or operations(para 5.32);

- provide appropriate semi-annual and annual reports (para 5.31).

7.02 Conditions of Effectiveness

(a) Signature of satisfactory sub-loan agreements between the Government andEDB and between the EDB and at least two of the three :B's would beconditions of effectiveness (pars 6.03).

(b) EDB will set up an apex unit with satisfactory staffing before loaneffectiveness (para 4.08).

(c) EDB will set up an accounting and monitoring unit with satisfactorystaffing, systems and procedures prior to loan effectiveness (para 4.09).

7.03 Subject to the conditions listed above, the proposed project issuitable for a Bank loan of $125 million including the capitalized front-endfee.

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ANNEX Ipage 1 of 4

Economic Efficiency and Comparative Advantageof Egyptian Industry

1. Analyzing economic efficiency of industry in Egypt is particularlycomplex because of the highly distorted domestic price structure for productsin relation to their international values. These distortions in relativeprices are a result of the Government's policy to subsidize consumption ofvarious commodities by controlling prices on output and providing implicitsubsidies on intermediate inputs to the producing firms. A particularlyunfortunate outcome of these price controls is that economic and financialrates of return on these activities diverge significantly; thus financialrates of return usually fail to indicate economic efficiency. Moreover,because of the extensive nature of price controls in many industries, e.g.textiles, conclusions on economic efficiency are particularly sensitive toassumptions regarding the relative international prices of inputs and outputs.

2. mhe criterion used here for analyzing economic efficiency of anindustrial activity is the domestic resource cost (DRC) ratio which comparesthe opportunity cost of domestically supplied factors of production in thatactivity to the value added at world prices. Activities/products with a DRCratio less than one are termed efficient, which means that the value of outputat world prices is greater than the economic value of the inputs to producethem. A DRC ratio that is less than one also provides a preliminary measureof comparative advantage. However, care needs to be exercised in interpretingDRC ratios as indicators of comparative advantage since a product that isefficient as an import substitute, may not be competitive as an export item ifa wide margin exists between its FOB and CIF price. Also, since DRC ratiosare computed for a specific time period, temporarily low capacity utilizationdue to factors extraneous to firms would produce low DRC ratios.Consequently, some products that may not be efficient now, could in timebecome so due to total factor productivity improvements and, therefore, wouldhave comparative advantage in the longer run. Witihin a product group, ratiosfor individual firms may be distributed over a range of values and thusaverage values are only broadly indicative of industry or product grouppotential; they may conceal individual products that may be highly efficientor inefficient.

3. The DIRC results presented below are based on a study of some 110firms both public and private, covering ten major industrial product groups.The results have been used to classify industries/products into threecategories - those which have an aggregate DRC ratio below one and thus appearto show significant comparative advantage; those which are close to beingcompetitive at international prices and have the potential for furtherexpansion either as import substitutes or for export; and those which havehigh DRC ratios and do not at present appear to warrant further investment.Table 1 presents the list of products in each category. A discussion ofcomparative advantage in each product area follows.

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ANNEX 1page Z of 4

Textiles

4. The textile industry is fundamentally two different industries plussome miscellaneous activities. Textiles proper -- the spinning, weaving, andfinishing of fabrics -- has become a relatively capital intensive industryparticularly in the cotton-based system. Egypt's potential comparativeadvantage lies less in low labor costs (though this is significant) and morein the availability of high quality cotton and the fact that there is awell-established industry specialized in using that cotton. Products in whichcotton has the most significant share of costs - yarns - are potentially themost competitive particularly the medium and fine count yarns which make bestuse of that cotton. The DRC ratios calculated for the sector, notsurprisingly, are highly sensitive to the economic price assigned to cotton.If priced on the basis of marginal export revenue which is the correctapproach rather than the fuli export price, the aggregate DRC for the sectoris less than one which indicates overall significant potential advantage forfurther expansion. However, as discussed in more detail in another BankStudy 1/, trade restrictions severely limit this potential. Clothing, whichremains a relatively labour-intensive industry in Egypt, should have a highlevel of comparative advantage of Egypt given its relatively low wagestructure. However, this is evident only in knit products from cotton, whereexisting plants are relatively efficient and products are able to command apremium on export markets. With regard to the more technically demandinggroup of woven garments, the results are more mixed. Clearly considerableindustry upgrading is needed before a fully favorable DRC would beregistered. Other textile products include jute goods, carpets and woolentextiles. Jute products are highly inefficient as the shadow value of outputand inputs are about equal. Cotton carpet manufacture is competitive butmachine manufactured polyester-natural fiber blended carpets arenon-competitive. Woolen textiles are the least inefficient of this group.

Food Products

5. The food industry is the most efficient industry in Egypt with anaggregate DRC well below one. Food products whose manufacture is competitivein international terms include alcohol, sugar, biscuits, jams, edible oil,yeast and soft drinks. Tobacco processing is mixed. Four food products -processed vegetables, chocolate, confectionary and salt have marginal DRCswhile syrup and starch are clearly inefficient. The food industry derives itscompetitiveness from the local availability of basic inputs and the naturalprotection arising from higher packing, storage and transport costs faced byimports. However, these natural protection factors also tend to work againstthe producer who desires to export.

Chemicals

6. Basic pulp and paper manufacturing are not competitive activitiesgiven Egypt's existing plant and raw material inputs, basically rice straw andbagasse - which yield short fibered pulp. Some paper products - corrugatedcardboard, printed products, cellophane - are competitive because of beingable to use local inputs.

i/ Egypt: A Program for the Development of Manufactured Exports, IBRD, ReportNo. 4580-ECT.

Table 1

Comparative Advantage of Industrial Products

1. Activities which already appear II. Activities which may become competitive II. Activities with high domestic resource costacompetitive at international prices and- offer potential for exports which are unlikely to allow efficient exports

Textiles Textiles Textiles- high and medium count cotton yarns - cotton/polyester blended yarns - coarse count yarns-higher quality cotton cloths - cotton/polyester blended fabrics - coarse cloth- knitted cotton fabrics- readymade clothing of cotton fabrics Tobacco

Food Products Food Products Food Products- flavors and essences - preserved fruits and vegetables _ syrups- edible oils - biscuits and confectionary - starch- soaps and detergents - cosmetics- fodder and concentrated animal feed - salt Chemical Products- soft drinks - pulp and paper- milk products Paper Products - phosphate fertilizer- sugar - packaging materlals - basic industrial chemicals- fruit jams, preserves, Juices - printed matter - artificial fibres 0%

- non-edible oilsLeather and Tanning Nitrogenous Fertilizer (using natural gas)

Metal Producta Metal Products Metal Products- railway carriages - shaped and formed metal - road motor vehicles- industrial electrical apparatus - wire and cable - basic iron and steel- non-eloctric consumer durables - aluminum products - metal castings

- motor vehicle parts - aluminumNon-metallic Minerals - steel pipes- cement

Consumer ElectronicsWood Products- furniture Ceramics, China and Glass

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ANNEX Ipage 4 of 4

7. Fertilizer manufacturing is another sector with mixed results.Production of nitrogenous fertilizer based on locally available natural gas isefficient (DRC=0.7), but existing plants do not yet show sufficiently low unitcosts required to overcome the CIF-FOB price differential in order to becompetitive in export markets. The phosphate fertilizer industry which was anexporter at one time has deteriorated dramatically in efficiency as aconsequence of unfavorable international price movements in phosphate rock andenergy inputs relative to the price of output. It is no longer efficient.New plants employing modern technology are likely to be efficient but need tobe carefully analyzed. Other chemical products present a mixed picture.Manufacture of detergents, laundry soap, tanned leather and leather productsis competitive as import substitutes while that of synthetic fibers, cokeproducts and non-edible oils is highly inefficient (negative value added atworld prices).

Basic Metals

8. The basic metals sector broadly consists of aluminum and iron andsteel production. Aluminum production is highly inefficient with negativeDRC, while the iron and steel complex has a DRC ratio between 1.6 to 2.6depending on assumed valuation of capital costs. Manufacture of steel pipesand ferrous castings also appear extremely inefficient. Enterprises in thissector avail a huge subsidy from controlled electricity and fuel prices whichallow them very high levels of effective protection. Existing plants in thebasic metals sector, therefore, does not appear to have comparative advantageat prevailing international prices.

Engineering Products

9. Existing production of industrial electrical goods (motors, cables,batteries, etc.) is economically efficient as the aggregate DRC's for thisproduct category is well below one as opposed to consumer electronics whichare highly inefficient. In the case of transport equipment, the only productgroup which is efficient is railway wagons and coaches. The industrial firmsmanufacturing buses, trucks, cars, and bicycles are inefficient, primarilybecause of the small scale of operation and high import content, but themanufacture of vehicle components is an efficient industry although thecurrent product range is extremely underdeveloped.

Building Materials, Ceramics, China and Glass

10. Cement manufacture is economically efficient in plants employing thedry process. Ceramic products exhibit negative value added at world prizeswhile china and glass have very h4;,z DRC ratios. Enterprises in this sectorgain a substantial implicit subsidy from low fuel prices which allow them veryhigh levels of effective protection.

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ANNEX 2page 1 of 5

Program of Financial and Nonr-Financial Servicesfor the Export Sector

1. Many developing countries have introduced special financing schemesto ensure that exporters are provided with adequate finance in time at areasonable cost. Exporters basically need financing of two types:

(a) pre-shipment finance to cover working capital needs in theinterval between receipt of the order and time of shipment;

(b) post-shipment finance to bridge the financing gap betweenshipment of goods and receipt of export proceeds.

As discussed earlier, only financially strong Egyptian exporters withconfirmed L/Cs are able to obtain pre-shipment finance from commercial bankson a routine basis although margin requirements are very high (para 3.23). Inorder to improve access to Bank financing for all exporters it is proposed tointroduce special schemes for pre-shipment and post-shipment financing to beimplemented by all commercial banks. Table 1 provides a summary descriptionof both schemes. To en:ourage commercial banks to provide export financealong the lines of these schemes, it is proposed to introduce an export creditguarantee scheme to reduce the banks' lending risks which would be implementedby the newly established Export Development Bank (EDB). As an addedinducement, the EDB would also refinance pre-shipment and post-shipment loansat a reasonable spread whenever the commercial banks face resource constraints.

2. The following important points need to be taken into account indeveloping and implementing these schemes:

(i) Exporters should be provided finance _gainst firm orders orcontracts of sale without requiring the backing of confirmed L/Cs;

(ii) Streamlined methods of credit evaluation should be adopted withsimplified documentation;

(iii) interest rates particularly for post-shipment loans should be inline with rates applied by competitors;

(iv) Margin requirements and maturities should be flexibly determinedto improve competitiveness;

(v) Collateral requirements should be simplified by requiring

transfer of ownership of the goods to the bank or obtaining apromissory note from the exporter.

(vi) An export credit guarantee scheme should be introduced inparallel with these financing schemes to enable banks to reducetheir security requirements by sharing the lending risk with theguarantee institution.

Table I

OWtline of Pre-Shipmnt and Post-5hipmnt lnance Schemes

Pre-Shipment Finance Scheme Post-Shipmnt Finance Scheme(Short-Teru)

Eligibility Exporters of all goods Exporters of all goodsand commoditLes other than mineral and camoditiec other than mineralfuels, crude uaterials (excluding fuels, crude materials (excludingfuels), cotton and rice. fuels), cotton and rice.

Amount Up to 80 per cent of the value of Up to 90 per cent of FOB value ofcontract. c ontrac t.

Types of Advances Overdrafts, packing credits or pre- Export bill.shipment loans depending upon the items/goods under finance and the nature ofsales contracts.

Rate of interest Preferential rate - currentLy 10-13Z Preferential - in line with competitorrates 0

Type of Security/ Firxo orders or contracts of sale either Export bills,Collateral under letters of credit, on approved shipping docuaents, export credit

credit terms, or according to generally guarantee/insurance policy.acceptable international practices. Alsoexport credit guarantee.

Period of credit Up to 12 months. Up to 12 months.

Repayment Negotiation/purchase/discount of Retirement of bills/realization ofproceeds export bills. proceede.

Refinance With Export DBvelopmat Bank e.g. at 112 p.a. With Export Development Bank e.g. atto allow net spread of at least 2Z to comercial 9Z p.a. to allow net spread of atbank. least 22 to comercial bank.

0

n.

- 67 -

ANNEX 2page 3 of 5

3. These financing facilities should be provided both to exporters whoare manufacturers and to merchant exporters or trading companies. 1/ Tradingcompanies in Egypt currently find it difficult to secure export credit on thesame terms as manufacturers and are thus at a competitive disadvantage. Sincetrading companies potenitially have an important role to play in Egypt's exportdevelopment as evidenced by the experience of several successful exportingcountries (Japan and Korea in particular, and more recently India and Turkey),it is essential to provide them the same financial facilities as manufacturingexporters. Both the pre-shipment and post-shipment finance schemes shouldhave a normal term of one year which should cover adequately the terms ofcredit required for most goods currently exported. However, there is apossibility that Egypt may start exporting some engineering goods to worldmarkets in the not too distant future. It would then be necessary tointroduce a medium term export credit scheme for which appropriate terms andconditions would need to be formulated.

Export Credit Guarantee Scheme

4. As discussed before, the immediate need of Egyptian exporters is tosecure adequate finance at the pre-shipment and post-shipment stages under asimple operational scheme from their commercial banks. Since commercial banksare reluctant to finance export transactions because of perceptions of higherrisk, particularly in non L/C cases, it is suggested that an export creditguarantee scheme be introduced to provide collateral support to exporters inobtaining pre-shipment and post-shipment loans. The beneficiaries under thisscheme would be the banks which provide pre-shipment and post-shipmentfinance. The guarantee would ensure that should an exporter default on aloan, a percentage of the loss would be reimbursed by the guaranteeorganization.

5. A summary description of an Export Credit Guarantee Scheme is givenbelow:

(i) Eligibility

All types of short-term advances given by banks to exporters forthe manufacture, processing, purchasing or packing of goods meantfor export against firm export orders/contracts and/or pastexport performance will be eligible for the pre-shipment creditguarantee. Transactions where no letters of credit have beenopened will also be covered under the scheme. Post-shipmentadvances given by banks to exporters through purchase or discountof export bills against firm export orders will be eligible underthe scheme. Advances given by banks to exporters, who enter intocontracts for export of services or for construction work abroad,to meet preliminary expenses, in connection with such contractsare also eligible for cover.

1/ Trading companies need pre-shipment finance for purchasing goods, packagingand covering freight and insurance costs.

- 68 -

ANNEX 2page 4 of 5

(ii) Risks Covered

Pre-Shipment: Any loss sustained by a bank due to the failure ofthe exporter to repay the debt because of insolvency or protracteddefault of the exporter or importer.

Post-Shipment; Any loss sustained by a bank arising out ofpurchase or discount of an export bill due to protracted defaultor insolvency of the exporter or importer.

(iii) Maximum Liability: The guarantees will be issued with a maximumliability. While fixing the maximum liability, the guaranteeorganization will be generally guided by the views of financingbanks regarding standing, capability and creditworthiness of theexporter.

(iv) Guarantee Fee

Pre-shipment: About 2.0 per cent per annum.

Post-shipment: About 2.0 per cent per annum.

(v) Extent of Guarantee Claims

Pre-shipment: A sum equivalent to 70 per cent of the amount indefault subject to maximum liability.

Post-shipment: A sum equivalent to 80 per cent of the amount indefault subject to maximum liability.

(vi) Payment of Guarantee Claims

For pre-shipment and post-shipment loans.

Protracted default - Not exceeding three months from the due dateof repayment.

Insolvency: Within thirty days from the date of confirmation thatthe guarantee advances have been admitted to rank against theinsolvent's estate or within three months from the due date ofrepayment, whichever is earlier.

(vii) Currency

The guarantees will be issued in Egyptian pounds and the claimswill also be settled in the same currency.

6. To implement the scheme, the guarantee organization could offer threetypes of credit guarantees in Egyptian pounds, initially to suit the varyingneeds of exporters. Broad features of the three types are indicated below:

- 69 -

ANNEX 2page 5 of 5

(a) Individual Credit Guarantees; Banks should be able to obtainindividual guarantees to cover pre- and post-shipment advancesmade to each exporter against a specific export order or salecontract for a stipulated period of time.

(b) Whole Turnover Credit Guarantee: The guarantees are aimed atproviding a total cover to banks by guaranteeing all theirpre-shipment and/or post-shipment advances. Such guarantees mayalso cover the running accounts of an exporter-client up toprescribed limits in respect of various export orders or salecontracts which may or may not be backed by letters of credit.Depending on the volume of business offered for cover, the spreadof risks and other relevant factors, the guarantee organizationmay agree to issue whole turnover pre- and post-shipmentguarantees at lower premium rates with a higher percentage ofrisk covered compared to individual credit guarantees.

(c) Credit Guarantees for Small Exporters; The small exporters couldbe those whose export turnover during the preceeding 12 monthshas not exceeded, say, L.E. 100,000. In order to encourage suchexporters and ensure easy availability of credit to them forexecution of export orders/contracts, the guarantee organizationshould be able to offer liberalized pre- end post-shipmentguarantee facilities.

7. Operational details of the guarantee scheme will need to be developedby the guarantee organization in consultation with the CBE, commercial banksand exporters.

Export Credit Insurance Schemes

8. The main purpose of the export credit insurance schemes are toprovide cover to exporters in respect of default and insolvency of buyers(commercial risks) or to cover risks associated with political and countryfactors (restrictions on remittances, war, cancellation of import license,etc.). Exporters can assign the insurance policy to their banks as additionalsecurity. Export credit insurance policies are particularly important in thecase where exporters provide medium-term financing to importers since risksare considerably higher compared to short-term loans. The question ofintroducing the export credit insurance schemes simultaneously with the exportcredit guarantee schemes has been considered. Taking into account the natureof Egyptian exports and their financing requirements which are mainlyshort-term, the export credit guarantee scheme alone appears sufficient totake care of the interests of banks and exporters at present. It is,therefore, suggested that after gaining experience in the operation of theexport credit guarantee schemes for a year, the EDB consider introducinginsurance schemes for exporters.

- 70 -

ANNEX 3Page 1 of 6

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

EDB - Board of Directors, January, 1984

Dr. Hazem El Biblawi Chairman

Dr. Mohamed Samir Mohamed El SharkawiProfessor of Commercial Law Representing Financial andUniversity of Cairo Economic Expertise

Dr. Baher Mohamed AtlamProfessor of Public Finance Representing Financial andUniversity of Cairo Economic Expertise

Dr. Ibrahim KamelPrivate ExporterEx Professor of Management Representing The NationalUniversity of Cairo Bank of Egypt

Dr. Abdelaziz HusseinEx Minister of Land Reclamation Representing Banque du Caire

Mr. Abdelrahman El Shazli

Ex Minister of Supply Representing Bank of Alexandria

Eng. Fouad Abou ZaghlaEx Minister of Industry Representing Misr Bank

Mr. Aly El LeithyUnder-Secretary of the Representing The NationalMinistry of Planning Investment Bank

Mr. Elsayed Elsayed OmarCounselor of the Representing The NationalMinistry of Economy Investment Bank

EXPORT INDUSTRk ! EVELOPMENT PROJECT

EDB - Proposed Organization Structure

Insjeotton Ilr.aecal j Adn. | Internation.a1 Intelegence Reaetrch, tae Dept. Dept Coordirt Dept. Planning ProSea311L_ _ DeL 0 erain. De-t.t.

P re,Jects -3akr .E.C.tG.IFln2ce 6 Prctlon DVLi31on DivisionM.li a ton

'FF

PreJects .I 1|w ProJeats |etall Creidt Interlaulc Cnselrn EI Under- Ir ccc,t;I | Appraimal Up | Prartion | Brkirig D| pt. F.lations & Advior I| writir| Dept | Dept. | 4L.Cenat. D L rpt. De. Deptt.. Dept. ervie ept pt.|~~ ~~~~~~~~~~ l

Marl/e Accountlr etsIL &Resear | Dpt. r Finance ID Curantee I4ardcendiseDept. * | Dept. D Dept. Dept.

d inary Cntrol|Credi;

CaIc 1--- M .. Wi

0'

- 72 -

ANNEX 3Page 3 of 6

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

EDB - Projected Operations, 1985 - 1989(LE '000)

1985 1986 1987 1988 1989

Long-term loans (FC) (t)

Approvals 5,000 6,500 7,800 9,360 11,232Commitments 2,500 5,750 7,150 8,580 10,296Disbursements 750 2,975 5,520 7,299 8,809

Long-term loans (LC (LE)

Approvals 5,000 6,500 7,800 9,360 11,232Commitments 3,000 5,900 7,280 8,736 10,483Disbursements 1,500 4,450 6,590 8,008 9,610

Short-term loans (FC) (t)

Export:Approvals 6,000 10,000 11,200 12,544 14,049Outstanding 3,000 5,000 5,600 6,272 7,025

Non-Export:Outstanding 5,000 8,000 9,000 9,500 10,000

Short-term loans (LC) (LE)

Export:Approvals 6,000 10,000 11,200 12,544 14,049Outstanding 3,000 5,000 5,600 6,272 7,025

Non-Export:Outstanding 2,000 3,500 4,500 5,000 5,500

Equity Investments (LE)

Subscribed 2,000 4,000 8,000 10,000 12,000Paid-in 500 1,500 3,500 6,000 8,500Outstanding 500 2,000 5,500 11,500 20,000

Guarantees (t)

Approvals 23,000 33,000 41,000 47,000 52,000Outstanding 15,000 22,000 29,000 32,000 34,000

- 73 -

ANNEX 3Page 4 of 6

EGYPT

EXPOiT INDUSTRIES DEVELOPMENT PROJECT

EDB. - Projected Income Statements, 1984 - 1989(LE '000)

Years Ending 31 December 1984 1985 1986 1987 1988 1989

I NOOMEInterest from Loans

Short-term - Foreign - Export - 151 403 534 598 670- Non export - 300 780 1,020 1,110 1,170

- Local - Export - 180 480 636 712 798- Non export - 140 385 560 665 735

Long-term - Foreign currency - 47 282 811 1,570 2,438- Local currency - 98 484 1,194 2,086 3,067

Sub-total - 916 2,814 4,755 6.741 8.878

Interest from Deposits- Foreign currency 625 425 215 165 220 275- Local currency 200 140 150 172 220 260

Guarantee Fund Admain. Fee - 92 135 178 190 209Apex Spread - 5 25 73 138 182Other fees/commiosions - 100 350 850 1,600 2,500Dividends from investments - - - - - 200

TOTAL INCOME 825 1,678 3,689 6,193 9.109 12,504

EXPENSESInterest Expenses:

Deposits - Foreign - - - - 400 1,100- Local - - - 90 540 1,215- Foreign - - - - - 120

Borrowings - Local - - - - - 200

Sub-total - - - 90 940 2.635

Salaries 350 650 780 936 1,123 1,348Other Adm. Expenses 860 390 470 560 675 810Depreciation 338 368 388 411 437 298Provisions - 100 380 720 1,080 1,520

TOTAL EXPENSES 1,548 1,508 2.018 2,717 4,255 6.611

Profit before Taxes (723) 170 1,671 3.476 4.854 5.893

- 74 -

APNEX 3Pagc 5 of 6

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

EDB - Projected Cash Flow Statements, 1984 - 1989(LE 'ODO)

Years Ending 31 December 1984 1985 1986 1987 1988 1989

INFLOWS

NET PROFIT (723) 170 1,671 3,476 4.854 5,893Depreciation 338 368 388 411 437 298Provisions - 100 380 720 1,080 1,520

Capital Increases 13,000 12,500 12,500 12,500 - -

Long-Term Borrovings:- Foreign currency - - - - - 2,000- Local currency - - - - 4,000

Loan Collections- Foreign currency - - - 87 551 1,406- Local currency - - - 125 746 1,787

Deposits Increase- Foreign currency - - - - 8,000 6,000- Local currency - - - 2,000 8,000 6,000

TOTAL INFLOWS 12,615 13,138 14,939 19,319 23,668 28,904

OUTFLOWS

Loan DisbursementstShort-term - Foreign - Export - 2,520 1,680 504 564 633

- Non export - 5,000 3,000 1,000 500 500- Local - Export - 3,000 2,000 600 672 753

- Non export - 2,000 1,500 1,000 500 500Long-term - Foreign currency - 630 2,499 4,637 6,131 7,399

- Local currency - 1,500 4,450 6,590 8,008 9,610

Debt Repayment:- Foreign currency - - - - - -- Local currency - - - - - -

Equity investments - 500 1,500 3,500 6,000 8,500Fixed assets increase 4,240 150 100 115 130 145

TOTAL OUTw'IWS 4,240 15,300 16,729 17,946 22,505 28.040

NET CASH FLOW 8,375 t2,162) 1.790) 1.373 1.163 864

Opening Cash - 8,375 6,213 4,423 5,796 6.959

Closing Cash 8,375 6,213 4.423 5.796 6.959 7.823

- 75 -

Annex 3Page 6 of 6

EGYPT

EXPORT INDUSTRIES DEVELOPNENT PROJECT

EDB - Projected Balance Sheets, 1984 - 1989(LE '000)

As of 31 December 1984 1985 1986 1987 1988 1989

ASSETSCash 875 1,213 1,323 1,396 1,459 1,323Bank deposits - Foreign 6,000 3,000 1,300 1,900 2,500 3,000

- Local 1,500 2,000 1,800 2,500 3,000 3,500

Total Cash & Banks 8,375 6,213 4,423 5,796 6,959 7,823

LoansShort-term - Foreign - Export - 2,520 4,200 4,704 5,268 5,901

- Non export - 5,000 8.000 9,000 9,500 10,000- Local - Export - 3,000 r,000 5,600 6,272 7,025

- Non export - 2,000 3,500 4,500 5,000 5,500Long-term - Foreign - 630 3,219 7,679 13,259 19,252

- Local - 1,500 5,950 12,415 19,677 27,500

Total Loans - 14,650 29,779 43,898 58,976 75,178Provisions - 100 480 1,200 2,280 3,800Net Loans - 14,550 29,299 42,698 56,696 71,378

Equity Investments - 500 2,000 5,500 11,500 20,000Net Fixed Assets 3,902 3,684 3,396 3,100 2,793 2,640

TOTAL ASSETS 12,277 24,947 39,118 57,094 77,948 101,841

LIABILITIES AND EQUITYDeposits - Foreign currency - - - - 8,000 14,00Q

- Local currency - - - 2,000 10,000 16,000long-term borrowings - Foreign - - - - - 2,000

- Local - - - - - 4,000Total Liabilities - - - 2,000 18,000 36,000

Paid-in capital 12,500 25,000 37,500 50,000 50,000 50,000Reserves and retained earnings 500 (223) 53 1,618 5,094 9,948Net profit in year (723) 170 1,671 3,476 4,854 5,893

Total Equity 12,277 24,947 39,118 55,094 59,948 65,841

Total Liabilities and Equity 12,277 24,947 39,118 57,094 77,948 101,841

GUARANTEE FUNDContingent liabilities - 12,300 18,000 23,800 26,200 27,900Accumutated Provisions _ 245 605 1,080 1,587 2,144

- 76 -

ANNEX 4EGYPT Page 1 of 5

EXPORT INDUSTRIES DEVELOPMNT PROJECT

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

For Years Ending 6/30/80 6/30/81 6/30/82 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 3,679.9Total 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 aCarges 63.5 436.8 498.4 1,022.6Administrative Exper.ses 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 22,60.3 31,194.4

Net Profit before Taxes 1,410.1 4,342.7 5,259.5 8,645.,Taxes 815.1 2,858.7 3,75 9.5 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 1,659.0Dividends 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 (X) 13.8 18. 9 20.0 30.5Profit before tax/Av. TotalAssets (%) 2.8 3.2 2.6 3.2Admin. Expenses/Av. Total Assets (% 1.6 1.2 1.1. 1.2Average Spread on Borrowing

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

- 77 -

ANNEX 4EGYPT Page 2 of 5

EXPORT INDUSTRIES DEVELOPMENT PROJECT

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 12,4 .8 17,097.9 13,730.5

PortfolioLoans Outstanding 101,139.6 153,348.4 234,375.6 316,171.8(Less: Provisions fo-rdoubtful 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 108,028.9 159,289.9 239,834.2 311,083.9

LIABILITIES AND EQUITYCurrent LiabilitiesDemand Deposits 1,411.7 1,041.0 2,038.3 3,013.4Time Deposits 955.6 1,691.1 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 57,924.3Foreign 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 23,000.0 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/Port folio (%) 5.4 5.9 6.7 7.9

- 78 -

ANNEX 4Page 3 of 5

EGYPT

EXPORT INDUSTRIES DEVELOPMENT 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 3772 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

- 79 -

ANNEX 4Page 4 of 5

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

DIB - Projected Balance Sheets, 1964-1987(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 374,364 459,019 551,477 641,290Investments 6,779 10,273 13,273 16,273Provisions (32.454) (42,391) (53,040) (64,360)Net Portfolio 348689 426,901 511,710 593,203

Government Bonds 387 587 887 1,237Net Fixed Assets 79 139 199 259Total Assets 363,197 441, 9% 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 35,0C0 35,000 40,000 45,000Reserves 3,200 4,700 6,450 8,450Total Equity 38,200 39,700 46,450 53,450

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

- 80 -

ANNEX 4Page 5 of 5

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

DIB - Projected Cash Flow Statements, 1984 - 1987(LE '000)

For Years Ending June 30 1984 1985 1986 1987

INFLOW

Profit before Tax. 12,705 15,915 18,367 21,757Provisions 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 Currency Loans 25,372 29,913 38,558 45,211Borrowing from CBE - 5,548 1,557 3,299Borrowing 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

OUTFLOW

Disbursements

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

Repayments to CBE 12,829 - - -Increase in current assets 312 327 344 361Increase in investments 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 62000

Total Out.lov 160,200 186,474 219,431 253,474

- 81 -

EGYPT ANNEX 5EXPORT INDUSTRIES DEVELOPME:NT PROJECT PaRe 1 of 3

NBD - Condensed Balance Sheets, 1981-1983(LE '000)

As of December 31 1981 1982 1983(unaudited)

ASSETS

Cash & Balance with Central Bank 37,738 89,399 43,030Balances with Commercial Banks 26,742 121,285 267,266

Total Cash & Balances 64,480 210,684 310,296

Commercial Loans 50,335 99,770 121,930Investment Loans 7,317 7,374 20,899Equity Investments 14,939 29,039 32,469

Total Loans a Investments 81,591 136,183 175,298

Fixed Assets 1,689 3,967 7,286Other Assdts ' 3,160 .7,090 7,609Less; Provisions (616) (1,912) (3,500)

TOTAL ASSETS 150,304 356,011 496,989

LIABILITIES & EQUIITY

Demand Deposits 36,973 52,874 45,953Time & Savings Deposits 29,957 68,037 91,451Other Deposits 8,875 12,209 47,081

Total Deposits 75,805 133,120 184,485

Borrowings from Central Bank 18,282 85,461 100,815Due to Other Banks 21,988 79,267 136,870Profit Distributions Due 4,105 6,589 8,092Other Debts 3,848 10,013 20,851

Total Liabilities 124,028 314,450 451,113

Paid-in Capital 22,552 35,786 37,500Reserves & Retained Earnings 3,723 5,776 8,376

Total Equity 26,275 41,562 45,876

TOTAL LIABILITIES & EQUITY 150,304 356,011 496,989

Guarantees & Other ContingentLiabilities 132,013 204,510 307,609

RATIOS

Cash & Balances/Deposits (Z) 85.1 158.3 168.2Loans/Deposits (Z) 76.0 80.5 77.4Liabilities/Equity (2) 4.7 7.6 9.8Provisions & Reserves/

Loan Portfolio (M) 7.5 7.2 8.3

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ANNEX 5Page 2 of 3

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECT

NBD -. Condensed Income Statements, 1981-1983(LE '000)

Years Ending December 31 1981 1982 1983(unaudited)

INCOME

Interest Income 8,440 18,540 22,836Commissions & Others 3,768 3,768 8,029

Total Income 12,208 22,308 30,865

EXPENSES

Interest Expenses 2,925 8,523 13,849Administrative Expenses 1,805 3,977 4,516Depreciation 47 176 220Provisions 581 1,296 1,588

Total Expenses 5,357 13,972 20,173

Profit Before Taxes 6,851 8 10,692

Taxes

Net Profit 6,851 8,336 10,692

RATIOS

Profit Before Taxes/Aver. Equity tX) 26.0 24.6 24.5Profit Before Taxes/Aver. Total Assets (%) 4.6 3.3 2.5Adm. Expenses/Aver. Total Assets tX) 1.8 1.6 1.1Interest Spread (Z) 7.4 5.7 3.1

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ANNEX 5Page 3 of 3

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECT

NBD - Financial Projections, 1984 - 1987(LE '000)

Years Ending December 31 1984 198i 1986 1987

A. BALANCE SHEETS

ASSETS

Cash & Banks 248.9 290.7 304.8 353.5Loans 190.9 238.6 298.2 360.8Investments 45.4 56.7 70.9 87.9Fixed Assets 6.5 8.1 10.1 12.6other Assets 20.2 25.2 31.6 30.5Less: Provisions 5.7 8.8 13.0 18.4Total Assets 517.6 628.1 728.6 872.7

LIABILITIES & EQUITY

Deposits 270.6 337.7 422.2 527.8Due to Banks 161.8 187.3 194.1 217.6Profit Distributions Due 9.8 13.4 12.5 15.2Other Debts 18.9 23.6 29.6 36.9Total Liabilities 461.1 562.0 658.4 797.5

Paid-in Capital 44.9 501.0 50.0 50.0Reserves & Retained Earnings 11.6 16.1 20.2 25.2Total Equity 56.5 66.1 70.2 75.2

Total Liabilities & Equity 517.6 628.1 728.6 872.7

B. INCOHE STATEMENTS

INCOME

Interest Income 30.9 40.7 51.8 63.6Commissions & Others 7.0 8.1 10.2 12.7Total Income 37.9 48.8 62.0 76.3

EXPENSES

Interest Expenses 16.5 20.6 25.8 32.0Administrative Expenses 6.0 7.1 8.6 10.6Depreciation 0.2 0.2 0.3 0.3Provisions 2.2 3.1 4.2 5.4Total Expenses 24.9 31.0 38.9 48.3

Profit Before Taxes 13.0 17.8 23.1 28.0

Taxes - - 6.5 7.8

Net Profit 13.0 17.8 16.6 20.2

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ANNEX 6Page I of 3

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECTBank Mier - Balance Sheets, 1980 - 1983

(LE '000)As of June 30 1980 1981 1982 1983

ASSETSCash & Balance withCentral Bank 305,582 262,787 653,450 593,277

Balances withCommercial Banks 597,909 587,411 600 114 756 515Total Cash & Balances 903,491 850,198 1,253564 1,3499792

Government Securities 116,779 152,061 154,008 148,243Equity Investments 22,461 30,59 38,748 59,581Other Securities 20,148 30,836 36,783 45,629Total Investments 159,388 213,492 220,539 253,453

Loans to Banks 40,279 98,193 156,002 286,210Loans to Customers 915,375 1,556,082 2,150,995 2,327,725Bills Discounted 635 5,312 8,924 10,857Loans to Government 150,000 60,000 45,000 -Total Loans 1,106,239 1,719,588 2,360,921 2,624,792

Fixed Assets & Others 31,149 28,450 43,571 47,770Less: Provisions (75,839) (94,358) (139,463) (172,377)Total Assets 2,124,478 2,717,370 3,748,132 4,103,432

LIABILITIES AND EQUITYDemand Deposits 601,378 682,477 872,140 1,040,942Time Deposits 515,320 666,090 995,582 1,285,852Savings Deposits & Others 460,048 511,503 656,419 814,473Total Deposits 1,576,746 1,360,070 2,524,141 3,141,267

Due to Central Bank 1,250 1,250 1,250 1,250Due to Other Banks 360,569 508,036 772,889 529,916Foreign Borrowings 30,389 89,549. 100,455 92,401Dividends Payable 13,995 24,099 29,244 36,975Other Debts 87,827 168,617 238,334 207,475Total Debts 494,030 791,551 1,142,172 868,017

Paid-in Capital 11,000 15,000 20,000 20,000Reserves 42,702 50,749 61,819 74,146Total Equity 53,702 65,749 81,819 94,146Total Liabilitiesand Equity 2,124,478 2,717,370 3,748,132 4.103,432

Guarantees & OtherContingent Liabilities 586,359 869,235 862,458 1,121,162

RATIOSCash Balances/Deposits (Z) 57.3 45.7 49.7 43.0Loans/Deposits (Z) 70.2 92.4 93.5 83.6Liabilities/Equity (times) 38.6 40.3 44.8 42.6Provisions and Reserves/Loan Portfolio (Z) 10.7 8.4 8.5 9.4

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ANNEX 6Page 2 of 3

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECT

Bank Miar - Income Statements, 1980 - 1983(LE '000)

Years Ending June 30 1980 1981 1982 1983(6 months)

INCOME

Interest on Loans 33,295 99,681 170,721 227,216Interest on Deposits 30,469 78,139 79,371 61,144Total Interest Income 63,764 177,820 250,092 288,360

Income from Investments 5,232 13,026 16,570 18,847Comissions 17,462 45,618 57,066 59,111Other Income 4,085 5 211 11,938 10,559

Total Income 90,543 241 675 335,666 376,872

EXPENSES

Interest on Deposits &Foreign Loans 37,290 106,952 155,718 190,752

Interest to Banks 327 1,030 1,151 2,710Total Interest Expenses 37,617 107,982 156,869 193,462

Salaries and Wages 9,483 26,607 36,687 38,766Administrative Expenses 4,567 14,401 17,123 16,981Depreciation 380 1,987 1,842 1,152Provisions 10,539 25,773 46,800 46,800Total Expenses 62,586 176,750 259,321 297,161

Profit Before Taxes 27,957 64,925 76,345 79,711Taxes 5,614 29,133 30,274 28,456Ne' Profit 22,343 35,812 46,071 51,255

RATIOS

Profit Before Taxes/Aver. Equity (Z) 55.0 108.7 103.5 90.6

Profit Before Taxes/Aver. Total Assets (Z) 1.4 2.7 2.4 2.0

Admistrative Expenses/Aver. Total Assets (Z) 0.7 1.8 1.7 1.5

Average Interest Spread ofLoans over Deposits (Z) 1.0 2.1 2.8 3.6

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ANNEX 6P age 3 of 3

EGYPTEXPORT INDUSTRIES DEVELOPMENT PROJECT

Bank Misr - Financial Projections, 1984 - 1988(LE million)

1984 1985 1986 1987 1988A. BALANCE SHEETS

Assets

Cash & Banks 1,539 1,754 1,900 2,080 2,300Loans 2,940 3,352 3,888 4,588 5,505Investments 278 306 337 370 407Fixed Assets & Others 54 60 67 76 85Less: Provisions (213) (261) (322) (398) (486)Total Assets 4,598 5,211 5,870 6,716 7,811

Liabilities & Equity

Deposits 3,581 4,082 4,653 5,305 6,048Borrowings 6 OtherDebts 908 997 1,068 1,237 1,566Total Liabilities 4,489 5,079 5,721 6,542 7,614

Paid-in Capital '0 25 25 30 30Reserves 89 107 124 144 167Total Equity 109 132 149 174 197

Total Liabilities& Equity _4598 5,211 5,870 62716 7,811

B. INCOME STATEMENTS

Income

Interest on Loans 256 295 306 403 471Interest on Deposits 69 81 89 100 110Income from Investments 21 23 25 28 31Commissions 67 77 90 107 127Other Income 11 13 15 18 21

Total Income 424

Expenses

Interest Expenses 232 268 310 363 424Administrative Expenses 64 72 81 91 102Provisions 41 48 61 76 88Total Expenses 337 388 452 576

Profit Before Taxes 87 99 113 126 146Taxes 31 35 40 a

Net Profit 56 64 73 82 94

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ANNEX 7page 1 of 5

Eligibility Criteria for Sub-Projects

Introduction

1. The criteria for export-oriented sub-projects (paras 5.07-5.08)provide three basic tests of eligibility. The first sets a minimum percentageof production (30%) attributable to the project investment within thespecified period (3 or 5 years depending upon whether an expansion/rehabilitation or a new project is involved). The second sets an ERRrequircment (12%). The third requires sponsors to demonstrate that there is areasonabie probability that the project will in fact lead to exports, throughpreparation of a satisfactory export development plan covering the time framewithin which the minimum export target is expected to be reached. This annex,using examples, is intended to clarify how these criteria should be applied inspecific situations. It does not, of course, eliminate the need for judgement.

Production attributable to the investment

2. The production "attributable to the investment" in the firstcriterion means all production of a firm to which value has been added byfixed assets financed under the project. It is to this production that theminimum percentage (30%) is applied. In making this calculation, productionwould be valued at international prices.

Example 1. The project to be financed is for the replacement of half ofthe spinning frames in an integrated textile mill. Present mill output is4,000 tons of finished fabric sold domestically at US$30 million (US$7.5Kg). In addition to cost reduction and improved yarn quality, spinningcapacity will increase 30% as a result of the project. Since :loth weavingand finishing equipment is substantially underutilized, total productionwould also be increased by 30%. Export wil be sold f.o.b. at US$6/Kg.

Production "attributable to the investment" is as follows:

(a) 1/2 of existing level of output: 2000 tons valued at US$12.0 million(b) Full amount of expansion: 1200 tons valued at USS 7.2 million

Total: 3200 tons valved at US$19.2 million

Required miminum export of 30% of the above is 960 tons valued at US$5.76million.

Example 2. In the above example if the project is to modernize theblowroom of the same mill which prepares the cotton used in all thespinning lines without any increase in capacity, the productionattributable to the investment is total present output. The minimumexport requirement would be 30% of this, i.e. 1200 tons valued atUS$7,200,000.

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ANNEX 7page 2 of 5

Indirect Exports

3. To meet the criteria for indirect exports it is not sufficient toshow simply that the reqitired percentage is being utilized by an eUortinRfirm. There must also be convincing evidence that the production is indeedbeing used in actual export production. The following example illustratesthis principle.

Example 3. Firm A requesting finance under this loan as an indirectexporter intends to produce 50,000 fractional horsepower electric motors.It intends to meet the eligibility criteria by supplying 15,000 motors toFirm B, a consumer durable manufacturer, which is producing 100,000 vacuumcleaners annually of which 50,000 are exported. Firm D's vacuum cleanersuse electric motors of the same design and quality specificationsregardless of whether they are exported or sold domestically. Firm Aproduces a letter that Firm B would consider purchasing 15,000 electricmotors if competitive in price and quality.

(a) On Lhe basis of the above facts, Firm A would not be eligible as anindirect exporter even though 50% of the ouLput of the firm to whichit is selling (Firm B) is exported. The reason is that since FirmA's sales can equally well be used domestically, only 50%, which isthe percentage of Firm B's exports, ca. be considered as exports.Thus, its exports are calculated as 5OZ x 15,000 which equals 7,500which is only 15Z of its total production.

(b) Alternatively, under the initial assumption that the same motor is

used for both domestic and export markets, if Firm A can provideconvincing evidence that 70% of its output would be sold to Firm B(which might be the case if they had the same shareholders) then FirmA would be eligible as an indirect exporter. Its indirect exportswould be calculated as 50Z x 35,000 which is 17,500 motors equivalentto 35% of production.

(c) Alternatively, if Firm A were to produce motors of a higher qualitybetter suited to the export market which would be exclusively used byFirm B in its export products, then Firm A would qualify.

Economic analysis of sub-projects

4. For the purposes of the second crit.rion, the project's output shouldbe evaluated in accordance with the usual methodology. This means that theportion of output to be exported should be valued at international prices andthe balance at c.i.f. prices. For investments below LE800,000, the ratio ofthe ex-factory price of products (exclusive of local taxes) to their c.i.f.price should not exceed 1.

Export Development Plans

5. There is a risk that projects which commit to export at the appraisalstage would fail to meet their comitments later on, preferring simply to sellon the domestic market. Even the proposal to extend investment incentives toexporters on the basis of actual performance (para 3.12) may not be a

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ANNEX 7page 3 of 5

sufficient inducement. The PBs have primarily the sanction of acceleratingloan repayment for failure to meet a loan condition -- a drastic measure whichcould adversely affect the willingness of sub-borrowers to make use of theBank credit line and is therefore not appropriate. Thus the scope to enforceexport commitments after a project is in production, is limited. In thesecircumstances, the proposed loan places primary emphasis on projectpreparation and appraisal to ensure that only sound projects with exportpotential are promoted and that th,:e is a reasonable likelihood that underthe circumstances of the specific project they are likely to meet the minimumexport target of 30% of production.

6. The principal mechanism of achieving this objective is therequirement stated in the third criterion that each project prepares an exportdevelopment plan covering at least three years for expansion/rehabilitationprojects and five years in the case of new projects. For directly exportingprojects, this plan would target annual levels of exports and formulate anaction program to achieve these target levels. Client firms would be requiredto make annual reports on progress in implementation and in meeting thetargets. PBs would refer clients to the EEPC, which can arrange appropriateassistance either directly or from the Exporter Assistance Fund in preparingexport development plans.

7. The export development plan, together with supporting data andstudies on which it is based must make a convincing case that the project isexport capable and that exports will in fact take place. While the elementsof this plan will vary from project to project, all plans need to show that(i3 expected production will be competitive in specifications, price, andquality in the selected markets, and that (ii) conditions exist that make itlikely that incremental exports to meet the minimum under the definition willtake place. Each plan must contain an action plan to show how each projectwill attain export targets. The action plan must deal with all the stepsconcerning market development and penetration, product design and adaptation,efficiency improvement, organization and training, and technical assistancearrangements needed to implement actions. Additional supporting evidence ofexport likelihood, as relevant in each case, will include: (a) past exportingperformance; (b) detailed market studies; (c) already established marketingchannels; (d) orders from foreign importers. Also relevant is evidenceregarding the competing pull of domestic markets, such as the extent to whichdomestic capacity will meet domestic demand at that time exports areexpected. Para 9 (below) provides a check list of items which need to beaddressed in the action plan.

8. Indirectly exporting projects must also present an action plan. Theaction plan and other supporting evidence must make a convincing case that therequired minimum percentage of the project's production will indeed be used inactual exports. They must show on the basis of actual contact that theproduct intended to be produced is being used by firms that are now exporting,or would be used in export-oriented projects which are being implemented. Aspart of the appraisal process the PBs will be required to verify thatpotential buyers will be bona fide exporters, that the proposed input productmeets their requirements, and that there are no special arrangements thatwould preclude sales of the proposed indirect export.

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ANNEX 7page 4 of 5

9. Following is a check list of items that should be covered in atypical export development plan to be reviewed during appraisal. The elementswhich appear in an export development plan will vary with different projectsas will the emphasis placed on different elements and the way in which theyare organized. In total, however, they should provide convincing evidencethat the project has the potential to achieve the minimum required exportlevel and that the project sponsors have a realistic plan to attain the target.

A. Target Markets

- Location, size, growth rate

- product design, price, quality

- domestic and foreign competition

- market structure

- tariffs and other import protection

- health or other regulatory requirements

B. Proposed Export Targets by:

- product

- country

- year

C. Strategy elements to reach target levels

- Design, specification, quality level of products to be produced formarkets

- Marketing and sales channels

- Pricing strategy

- Packaging - needs and sources

- liransportation - needs and availability

- Promotion and Advertising

- Organization and Staffing (sales, recruitment, training)

- Inputs needed for export quality output - needs and sources

- Production costs to meet sales price requirements

- Obtaining licenses, permission, or special support from Government

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ANNEX 7page 5 of 5

D. Required support to implement strategy

- Past experience and present capability of firm and its sponsorsin relevant strategy elements.

- Information and technical assistance needs in implementingstrategy elements in light of present experience and capability.

- Proposed sources of infonmation and technical assistance and howit will be used as appropriate, to supplement present capabilityin various elements of strategy (joint venture partners, buyers,consulting firms, recruitment of staff, foreign manufacturers,individual experts (short and long term), staff training, etc.)

E. Timebound Action Program

Time based action program to implement strategy in light of abovefactors indicating major steps, activities, decisions, etc. in eachof the strategic areas, their interdependence, and when they are tobe taken in order to meet export targets.

F. Other supporting evidence relevant to export credibility

- present domestic price of proposed product compared with f.o.b.price and relative profitability of each;

- present and planned capacity to meet domestic demand;

- expected future developments with regard to relativeprofitability.

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ANNEX 8

EGYPT

EXPORT INDUSTRIES DEVELOPMENT PROJECT

Quarterly Disbursement Schedule(US$ million)

DuringQuarter Ending: Quarter Camulative

FY-1985March 31, 1985 2.2 2.2June 30, 1985 2.8 5.0

FY-1 986September 30, 1985 3.4 8.4Decemcber 31, 1985 4.1 12.5March 31, 1 986 5.5 18.0June 30, 1986 7.0 25.0

FY-1 987September 30, 1986 8.0 33.0December 31, 1986 9.0 42.0March 31, 1987 9.4 51.4June 30, 1987 9.6 61.0

FY-19s88September 30, 1987 9.6 70.6December 31, 1987 9.4 80.0March 31, 1988 8.8 88.8June 30, 1988 7.2 96.0

FY-198 9September 30, 1988 5.5 101.5December 31, 1988 4.5 106.0March 31, 1989 4.2 110.2June 30, 1989 3.8 114.0

FY-19 90September 30, 1989 3.2 117.2December 31, 1989 2.8 120.0March 31, 1990 2.6 122.6June 30, 1990 2.4 125.0

- 93 -

ANNEX 9

List of Documents in the Project File

Document ItemNumber Number Item

I 1 Export Development Bank of Egypt - Law

1 2 EDB - Draft Policy Statement

1 3 Terms of Reference of Advisors on Banking, andExport Credit Guarantee and Insurance

2 - Development Industrial Bank

3 National Bank for Development

4 Bank Misr

5 1 Egyptian Export Promotion Centre - Work Program

5 2 TOR of Advisor on Product and Market Development

5 3 TORs of Advisors on Trade Information and TradeDocumentation

5 4 TOR - Senior Trade Promotion Advisor

5 5 EEPC - Timetable and 1984/85 work program

5 6 PPF for EEPC and EDB

6 - TOR for consultant on Duty Drawback Scheme Study

7 TOR for consultant on Simplification ofExport/Import Procedures