Report No. 709a-KE 01LE COPY

Appraisal of theIndustrial Development BankKenyaMay 19, 1975

Development Finance Companies Department

Not for Public Use

Document of the International Bank for Reconstruction and Development

This report was prepared for official use only by the Bank Group. It may notbe published, quoted or cited without Bank Group authorization. The Bank Group doesnot accept responsibility for the a(curacy or completeness of the report.

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CURRENCY EQUIVALENTS

Note: The official unit of currency in Kenya is the Kenya

Shilling. However, in conformity with the prevalent

practice in Kenya, most large values in this report are

expressed in Kenya pounds; K61 = KShs 20.

Khl = TJS $2.80

1T5 $1 = K16.357 = KShs 7.14

ABEREVIATIONS

DFCK Development Finance Company of Kenya

EADB East African Development Bank

ICDC Industrial and Commercial Development Corporation

IDB Industrial Development Bank

ISPC Industrial Survey and Promotion Center

FISCAL YEAR

Government: July 1 - June 30

IDB: January 1 - December 31

APPRAISAL OF TTE

INDUSTRIAL DEVLCPMENT BAK

TABLE OF CONTENTS

Page No.

BASIC DATA . . . . . . . . . . . . . . . . . . .. .

SUOZIARY .......... 9 ii

I. INTRODUCTION . . . . v 1

II. ENVIRON1ENT. . a . 2

The Economy. . . . . , . . . . . . . . . . . . . 2The Industrial Sector. .......... 2Government's Industrial Policies and Plan . . .4

Prospects. . . . . . . . . . . . . . . . . . . 8

III. FINANCIAL INSTITUTIONS . . . . . . . . . . . . . . . 9

The Stock Exchange . .............. 9Commercial Banks .............. 9Development Finance Institutions . . . . . . . . 10

IV. THE C01LPANY. . . . . . . . . . . . . . . . . . . . I 2

Background 1 *a&ooooo -2Relationship with ICDC. . . . . . .. .. . .. 12Board of Directors . .... .... 12Management and Staff.. ... . .. . . .. . . 13Operating Policies and Onlending Terms . . . . . 13Procedures . . . . . . . . . t. . . . . . a . 5Auditors and Lawyers . . . . .. . . .. .. . . 16

V. OPERATIONS ANID FINAN4CE . . . . . . . . . . . . . . . 17

VI. PROSPECTS . . . . . . . . . . . . . . . . . . . . . lB

Business Outlook t k.... .. L8IDB's Strategy . . . . . . ........... 18

Forecast Cperations. . . . . . . . . . . . . . . 19

Resource Requirements. . . . . . . . . . . . . . O

Forecast Financial Results.. .. . . . . .X 21Increase in Share Capital. . . . . . . . . . 21

VII. GUNCLUSIONS AND RECOM1/0IDATIONS. . . . . . . . . . . 23

This report was prepared by -Messrs. J. Bloom and T. Tsui on the basisof their mission to Kenya in December 1974.

LIST OF ANNEXES

1. ICDC: Financial Statements

2. ICDC: Investments in Large- and Medium-Size Companies

3. Promotion Agreement Between GOK and ICDC

4. IDB: Board of Directors

5. IDB: Organization Chart

6. IDB: Statement of Policy

7. IDB: List of Approved Projects

B. IDB:: List of Project Possibilities

9. IDB: Assumptions for Projected Financial Statements

10. IDB: Actuial and Projected Operations (1974-79)

11. IDB: Actual and Projected Financial Ratios ( 1974-79)

12. IDB: Actual and Projected Income Statements (1974-79)

13. IDB: Actual and Projected Balance Sheets (1974-79)

14. IDB: Actual and Projected Cash Flow Statements (197 1 -79)

15. IDB: Estimated Disbursement Schedule for Proposed Loan.

KENvA(i)

INDUSTRIAL DEVELOPMENT BANK

BASIC DATA

Exchange Rate: K1 = US $2.80

Date of Formation: January 12, 1973

Date of Start of Operations: April 1, 1973

Ownership: KL'OOO %

Government 980 49

Industrial and Commercial 1,020 51Development Corporation

2,000 100

1973 19

Loans (KI' 000)Approvals 550 1,784Commitments - 600Disbursements - 400

Equity InvestmentsApprovals 55 669Cammitments - 349Disbursements - 198

Resource Position (as of December 31. 197L)

(K1' 000)Domestic Foreigncurrency exchange Total

Sources

Share capital (paid-in) 1,500 _ 1,500

Less: accumulated losses (25) - (25)

Borrowings available:IBRD - Loan 946-KE (7O ) - 1,786 1,786DEG (8%) - 570 570

Total sources 1,475 2,356 3,831

Uses

Fixed assets 23 - 23Loans and equity investments 198 400 598IJndisbursed commitments 151 200 351

Total uses 372 600 972

Available for commitments 1,103 1,756 2,859Uncommitted approved investments 375 1,734 2,109Available for approvals 728 22 750

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Interest Rate and Other Charges

Interest rate: 10 - 11% per annumCommitment charge: 1% on undisbursed conmitments

Basic Data on Bank Loan

A. Status of Loan (as of May 15, 1975)

US I millionDate of Loan

Effectiveness Amount Authorized Disbursed

946-KE March 26, 1974 5.0 5.0 2.46

B. Summary of Features of Loan 946-KE:

1) Foreign exchange risk: At IDB's option, either fully assumedby clients or, with concurrence ofGovernment, the Ksh/TJS $ risk assumed byclients and TIS $/disbursement currencyrisk borne by Government.

2) Final date for project submission: March 31, 1976

3) Closing date for disbursements: March 31, 1978

4) Free limit: US $200,000

5) Aggregate free limit: US $1,000,000

6) Commitment charge: 0.75% from date of authorizationto withdraw for each subproject.

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APPRAISAL OF THE

INDTSTRIAL DEVELOPMEIT BANK

SIJMMARY

(i) The Industrial Development Bank (IDB) was formed in 1973 withthe cooperation of the Bank, Government of Kenya, and the Industrial andCommercial Development Corporation (ICDC) to finance medium- to large-scale industrial projects. That year, a Bank loan ($5 million) was madeto IDB which is now fully committed. IDB has begun tapping alternativesources of overseas finance, but it continues to require additional fin-ance from the Bank to meet its operations program.

(ii) Although the industrial sector has grown rapidly (9% per annum)in recent years, the impact of recent international economic events is ex-pected to cause serious balance of payments problems and to slow growth.The Government has started to revise its Development Plan to reflect ananticipated resource shortage and to scale down the projected growth of manu-facturing output and investment. New emphasis is being placed upon max-imizing effective use of existing idle capacities to reduce the need for newinvestments, encouraging exports from the agricultural, mining, and wood-processing sectors, replacing imports with economic domestic production, andseeking more joint ventures with foreign investors. Selecting projects onthe basis of rigorous economic and financial standards has become essential.

(iii) IDB has made a good start; by December, 1974 it had approved 11loans amounting to KU2.3 million and 8 equity investments totalling K1,O.8million in such areas as agro-industries, textile, mining, tourism, and trans-portation. The projects, all Kenyan-controlled, have included several exportprocessing industries drawing supplies from smallholder farmers and a numberlocated in smaller cities and rural areas. IDB has made increasingly signi-ficant contributions to project designs.

(iv) However, commitments and disbursements have lagged somewhat primarilydue to: (a) IDB's efforts to improve the design of projects which had beenformulated before IDB had begun its own operations, and (b) staff build-upslower than expected. IDB's management is taking appropriate steps to stream-line project processing and has virtually completed the task of staffing.

(v) One factor which has constrained IDB's operations is its maximumexposure limit; IDB's management expects to resolve the problem by doublingits share capital from KL2.0 million to KLh.O million. IDB also expects toincrease its impact on industrial financing by serving as agent for invest-ments for Government account. Overall, IDB's policies and procedures havebeen satisfactory.

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(vi) IDB is not expected to show a net profit until 1977 primarily dueto its high administrative costs during the initial years relative to itsslower growth in overall operation. Much of the costs are associated withthe hiring of high-caliber staff within the local job market to undertakeIDB's operational program. It has now assembled a competent, capable staff,assisted by two advisers, one seconded from IBRD and another from a bi-lateral assistance agency.

(vii) IDB conservatively forecasts its operations to grow at an estimated10% per annum, averaging KI,3.5 million per year in the next 3 years. As inthe past, IDB anticipates promoting and assisting projects which will not onlycontribute to but also help to redirect Kenya's economic development, payingparticular attention to the opportunities for local resource-based manu-facturing (e.g., agricultural processing) and dispersion of industry from themajor urban centers. In Kenya's currently constrained economy, IDB's projectevaluation skills take on greater importance.

(viii) IDB is a creditworthy borrower for a Bank loan of $10.0 millionequivalent to fulfill part of its foreign exchange resource needs throughFY1977. IDB is making good progress in securing the remainder of its require-ments from other sources.

(ix) The proposed loan should be made on substantially the same terms asthe first, with two changes: (i) recognizing IDB's appraisal quality, theindividuial project free-limit should be raised from $200,000 equivalent to$400,000 equivalent, with the aggregate free-limit raised to $2.0 million or20% of the total loan; and (ii) IDB should pay the normal commitment chargeon the Bank loan, now that it is established. The maximum debt/equity ratioshould remain at 3:1; the foreign exchange risk should be passed on to IDB'sborrowers. IDB will serve as an investor for Government's accoumt at no riskto itself under the terms outlined in para. 4.09. IDB's Board has authorizeda share capital increase and Government has agreed to ensure its full sub-scription by September 30, 1975. As for the first loan, the Bank will continueto serve as an Executing Agency for IDB's TThDP-financed technical assistanceposition.

I. INTRODTTCTION

1.01 The Industrial Development Bank Ltd. (IDB) was established in1973 as the result of discussions since 1965 among the Bank, the Govern-ment of Kenya and the Industrial and Commercial Development Corporation(ICDC). A Bank loan of $5 million was extended to IDB in November 1973;

it is now fuily committed. IDB has requested further assistance fromthe Bank. This report appraises IDB and recommends a Bank loan of US $10million.

1.02 The main objectives of the proposed loan are:

(i) to provide term financing on appropriate terms tomedium- and large-scale industrial projects in Kenyawhich have been well-conceived on economic, financial,and technical grounds; and

(ii) to enhance IDB's role as an effective development insti-tution by strengthening its project appraisal and resourceallocation capabilities, internal organization and pro-

cedures, and resource base.

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II. THE ENVIRONMENT

The Economy

2.01 The current economic situation in Kenya is analysed in "TheSecond Decade: A Basic Economic Report on Kenya", report number 201-KE,dated January 15, 1974.

2.02 In mid-1973, Kenya had a population of 12.5 million, growing at about3.3% per annum, and a per capita GNP estimated at T7S $170. While the agri-cultural sector continues to dominate the economy in terms of contributingmore than one-quiarter of GDP, three-fifths of the foreign exchange earnings,and the livelihood of approximately 85% of the population, the role of themanufacturing sector has grown. In fact, the manufacturing sector has recentlydisplaced agriculture as the largest contributor to GDP within the monetaryeconomy.

The Industrial Sector

2.03 Manufacturing output stood at 10.4% of GDP in 1964, whereas it comn-prised over 12% of GDP in 1973 (at constant 1964 prices). While grossdomestic product (at constant prices) grew at an annual rate of 6.6% between1964-1973, the manufacturing sector grew at an annual rate of 8.8%. Manu-facturing's contribution to GDP (in current prices) in 1973 accounted fornearly KL105 million which compares to only K634 million in 1964.

2.04 Manufacturing output in 1972 comprised the following sub-sectors:

Food processing 26%Equipment and Machinery 19%Chemicals and Oil Refining 14%Textiles 10%Transport Equipment Repairs 10%Building Materials 7%Paper, Printing and Publishing 6%Mining 5%Others

100%

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2.05 The sub-sectors showing the fastest growth rates were paperand printing (18%), and food processing (12%). In paper production, evenfuirther increases are expected following the completion of a large K17million paper mill at Webuye. Growth in food processing wss due to higherproduction of sugar, fruit and vegetable canning, coffee milling and dpiryindustries. which offset setbacks for meat production cauised by droughtconditions. Meat production is expected to improve with better rainfall andincreased meat processing facilities. Other sub-sectors that showed highgrowth were metal products and non-electrical machinery.

2.06 On the other hand, the clothing and weaving apparel sub-sectordeclined in production by 35% as imported knitwear expanded its market shareand the Kenyan textile industry slowed operations to re-tool and manlfactureits own knitwear. The non-metallic minerals sub-sector (primarily cementproduction) declined by 1% due to the lower level of building activity inKenya.

2.07 Annual investment in the industrial sector in 1964 in current pricesamounted to about K66 million. The comparable fig,ure for 1973 was aboutKb3O million in current prices, or an average annual rate of increase of over20%. Actual manufacturing investment under the Second Development Plan(1970-73) represented nearly one-sixth of the total capital formation withinthe monetary economy.

2.08 Government considers unemployment a major concern of its develop-ment planning. Employment in the induistrial sector stood at 97,500 in 1973which represented about 13% of total Kenyan wage employment. Recent increasesof about 6.6% annually in industrial employment are due to increased employ-ment in food processing, textile production, and furniture manufacturing. Thecurrent Developnent Plan (1974-78) projected an average annual increase inindustrial employment of 7.3% compared to an overall growth rate in modernsector employment of 4.5% per annum; industrial sector growth was to be basedon a growth target in output of 10% (para. 2.l1) and new policies to encouragehigher labor intensity by increasing the cost of capital relative to that oflabor. In 1972, over 8 out of every 10 employees engaged in manufacturing inKenya were employed by one of the nearly 380 manufacturing firms (out of morethan 4h,000 firms) with 50 or more employees; such concentration iF expected tobe reduced as development of large-, medium- and small-scale indlustry proceeds.

2.09 Wage employment in Kenya is concentrated in the two largest citiesof Nairobi and Mombasa, with neqrly three-fouirths being absorbed in thosecities in 1973. This proportion is relatively unchanged from 1963. Withinthe upper hierarchies of Kenyan enterprises, signs of successful Kenyanizationare evident (para. 2.28).

2.10 Industrial exports (including re-exports) in 1973 reached approx-imately KL73 million, approximately 45% of Kenya's total exports (KE16l million).Exports to the rest of the East African Community (Tanzania, TJganda) com-prised 44% of industrial exports, primarily refined petroleum and paper pro-ducts. Industrial exports for 1973 included intermediate goods (31%),

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fuel (30%), processed foods (20%), conm-ner -,oods (16%), and machinery (3S)-.The composition of exports has changed little in recent years.

2.11 Intermediate goods comprised approximately 54% of the value ofKenya's imports of KE21R million in 1973 while capital goods and consumer:,oo3ds made up the remainder with 28% and 18% respectively.

Uovernment's Industrial-Policies. and Plan

2.12 The 1970-1973 Development Plan. Overall performance umder the Planappears to have been aenerally satisfactory. Compared to the Plan's targetof 6.7 percent real economic agrowth per annum, the actual rate achieved was6.5 percent, despite varying performances within the sectors.

2.13 Among the three major sectors (agriculture, manufacturing and trans-portation) in which the highest levels of investment were envisa7ed for thePlan period, manufacturing fared the best and attained an actuial investmentof K174h.5 million versus the target of Kb76.0 million - equial to 98% of target.On the other hand, agriculture fell short of its tar;get by 20% as did trans-portation by 19%. For the economy overall, the shortfall in investment wasestimated at 6%.

2.14 The 1974-1778 Development FPan. The present Third Five-Year Planwas is.sued in 197L4 before the adverse impact of the oil crisis on Kenya andthe 1973 economic statistics were known. Government is currently adjustingthe Plan targets to the new situation. While still tentative, Government islikely to pursue the follo-wincr in the new Plan: (i) consolidation strategyto make more effective use of existing idle capacities, therefore reducing theneed to make large amounts of new investments; (ii) emphasis on manWfacturing'sexport-orientation (especially in agricultural, mining and wood processinggectors) with an evolution of newJ tariff policy conducive to this goal;(iii) concentration on the agricultural sector for attaining greater self-sufficiency and improving export potential; (iv) exploration of new sourcesof energy, i.e., geo-thermal exploration, and ways to reduce fuel consumption.As a result, targets for annual growth of value-added and investment in manu-factlring are likely to be reduiced to 5 and 6 percent respectively.

2.15 The existing Development Plan sets forth a number of quantitativetargets; although these will likely be scaled down, the emphase- will probablyremain. -The real growth rate (GDP) aimed at was ?.4 percent per ann,zu as com-pared to 6.5 percent attained diring the previous Plan period. By 1978, GDPwas expected to murpasms KU1 billion with a per capita income of K168 (TS $190).Fixed capital formation was expected to grow At 9% annually and total K1920million (in constant prices) during the period, with manufacturing accountingfor 16% of total investment.

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2.16 The Manufacturing Sector. Growth in manufacturing is expected tocome not only from import substitution industries but from an increasingemphasis upon production of exportable goods. The fastest growing sub-sectors are expected to be pulp and paper, leather products, textiles,chemicals, and miscellaneous food processing. The greatest level of newinvestment is anticipated in textiles, metal products, manufacture andchemicals.

2.17 Although the bulk of manufacturing output is expected to continueto come from large and medium-scale enterprises during the Plan period,efforts are planned to develop small-scale industries, especially in therLral areas. While recognizing the high costs involved, the Government isprepared to continue establishing, training, and funding programs to assistsmall enterprises through vehicles such as the village training centers, RuralIndustrial Development Centers, and other programs sponsored by ICDC. Dis-cussions between Government and the Bank Group on possible assistance to smallbusiness are continuing. With the exception of a possible IFC project stillin preliminary stages, no near-term assistance is foreseen given the extensivebilateral support being provided (para. 3.09).

2.18 Together with increasing manufacturing's growth rate, the Plan setsout additional objectives for 1974-78: (i) production to increasingly cater tothe domestic market at prices comparable to international prices; (ii) Kenyani-zation with encouragement of joint investment between local firms, Governmentdevelopment institutions and foreign investors; and (iii) diversification withincreased production of machinery, equipment and intermediate goods.

2.19 Induistrial Regulation, Incentives and Protection. Although possiblechanges are under discussion, no provision currently exists in Kenya forGovernment licensing of industrial enterprises but the East African Community,through its East African Industrial Licensing Act, has exercised some controlover the establishment and operation of factories manufacturing a limitednmmber of scheduled items. However, foreign or local promoters of new in-dustrial projects may apply to the New Projects Committee if they seek Govern-ment backing.

2.20 Local or foreign promoters have the option to apply to a New Pro-jects Committee (NPC) for a Certificate of Approved Enterprise which facilitatesa project's application for benefits such as remission 4nd refunds of importduty on intermediate and capital goods, guarantee of foreign exchange availa-bility for repatriation of profits, tariff protection or other concessions;promoters needing Government support such as infrastructure development, rawmaterials supply availability or plant sites also frequently seek;NPC approval.

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The New Projects Committee is an informal forum for the evalluation andapproval of industrial projects; it is chaired by the Permanent Secretaryof Cormuerce and Industry and composed of representatives from the Ministrlrof Finance and Planning, ICDC, IDB, DFCK and interested Govern-ent agencies.The Conmittee's recommendations are normally passed on to the Ministry ofFinance and Planning who authorize the issuance of the Certificates. Whileconsiderations are r,iven to the economic benefits of new projects throuahmeasures such as amount of local value-added, emplowment 7eneration andforeiig exchanre savings, the Committee's primaryv concerns have t±baditionallbeen the more practical aspects of how much protection is requiired to make aproject financially viable and whether on more subjective grounds the projectshould be given priority.

2.21 Firms requesting specific remission or refund of import duties,tariff protection, or import restriction must apply to the Industrial Pro-tection Committee (IPC) which is headed by the Ministry of Finance and Plannin.,and includes representatives fron Commerce and Industry, Customs authorities,and other interested Government agencies. Consistent with ;Government's intentionto rationalize the tariff structure and eliminate the remission and refund ofduty, IPC is expected to play a major part in the implementation of suich changes.

2.22 Projects that have cone to the Government's attention throuTh theNew Projects Committee or by some other means are freqluent'v referred to theIndustrial Survey and Promotion Center (ISPC) for assistance in flurther projeztpromotion and evaluation (para. 2.29), and also to ICDC, IDB, or other insti-tuitions for possible financing and implementation. In some cases, the develop-ment finance institutions may seek out entrepreneurs or join with them earlyin the project formulation process.

2.23 As an added incentive for export, Kenya introduced a manu-facturer'sExport Compensation Scheme in June, 1974 which provides for the payment to thelocal manufacturer of 10 percent of the f.o.b. value of the manufac-tured gfoodsexported or 10 percent of the foreign currency received in payment for suchgoods, whichever is less.

2.24 Corporate profit tax has recently been increased from 40 to 45 per-cent of taxable profit, and to 52.5 percent for branches of foreign companies.

A 10 percent sales tax on manufactured goods, local and foreign, was alsointrociced in 1973.

2.25 Kenya maintains a common external tariff system with its East AfricanCommon Market partners, Tanzania and Uganda, which is administered by the EastAfrican Community Customs and Excise Department. The system provides pro-tection to local manufacturers with tariffs on numerous finished goodsaveraging 30 percent of the c.i.f. value, 20 percent on imported raw materials,and higher duties on vehicle- and luxury products. Specific duties 2re levied*pon somw items such as textiles and clothing to protect local industries fromlow-cost imports. As a community member, Kenya's exports to its partner statesare subject to transfer taxes equal to at moct 50 percent of the comnon

external tariff on items produced in Tanzania or TTganda. At presentKenya is conducting negotiations with the other member states to revisethe tariff structuire and attain more uniform protection levels so as toenable Kenyan manufacturing to diversify into capital and intermediate goods.

2.26 Kenya has used import controls since independence in 1964 to pro-tect its local "infant" industries in order to spur its industrialization.TTnlike the tariff system, import licensing is whaTly under control of Kenyanauthorities and, for that reason, has been resorted to increasingly over theyears. The foreign exchange crisis of late 1971 precipitated a rise ofimport controls to conserve foreign exchange. Since then, the tightening orrelaxing of import licensing by Kenyan authorities has depended upon thecountry's balance of payments situation as well as the level of industrialprotection thought to be required by local enterprises. In light of itsrecent balance of payments problems, the coumtry further tightened its con-trol on imports in June, 1974. This action has imposed even greater burdenson the already inadequate acministrative machinery for import licensing andhampered manufacturer's efforts to obtain raw materials, parts, and otheritems. However, the Minister of Commerce and Industry recently announcedintentions to remedy the problem as soon as possible.

2,27 In sum, past tariff and industrial policies have probably givenexcessive protection to some impoirt-substitutirng industries while providing in-sufficient incentives for local resource-based export manufacturing. In thecontext of basic economic and sector work the Bank has discussed with Govern-ment realignment of these policies to foster both greater and more widely dis-tributed benefits from industrialization. Given the constraints imposed bythe need to reach agreementwith its East African Common Market partners, Kenyahas responded positively to the Bank discussions and is making satisfactoryprogress towards restructuring industrial growth while preserving the incentivesfor private sector development with increasing local participation.

2.28 Kenyanization. The Government has made good progress in its drivefor Kenyanization of employment and ownership, concentrating primarily ontrade and agricuilture. In the five-year period between 1967-1972, it hasbeen able to expand the percentage of high and middle level manpower posts inthe modern sector held by Kenyan citizens from 59% to 7h%. Transportation andretail trade, previously dominated by Asian enterprises, have been increasinglytransferred to Kenyans through withdrawing and re-issuing commercial licenses.Government has encouraged non-citizens as well as Kenyan traders to participatemore significantly in manufacturing enterprises. Both private and parastatalinstitutions have been strongly encouraged to enter into joint ventures withforeign investors. Where initiative from the private sector is not sufficientlyforthcoming, Government has expressed the willingness to take either a minorityor majority shareholding in new investments with foreign investors (para. h.09).

2.29 The Industrial Survey and Promotion Center (ISPC). The ISPC, anagency under the Ministry of Commerce and Industry, was established in 1970on the recommendation of TTIDO, to (a) analyze industrial data for planningpurposeF; (b) identify and promote industrial projectq; and (c) evaluateprojects prepared by others, especially those encouraged by Government. Inaddition, ISPC has served as technical advisor for the preparation of theThird Development Plan and special Government sub-committees on specific pro-ject.s. The Center's effectiveness in carryine, ouit its fumetions has beenhampered by staffing difficulties, which have been resolved only recently.Its staff now includes six expatriates (a director, three induistrial engineers,and two economists) and seven Kenyan counterparts (co-director, two engineer/specialists, three economists, and one trainee). Government is discussingISPC's financing and role with TINDP, TJNIDO and IDB; hopefully, this will serveto bolster ISPC's future promotional role and impact.

Prospects

2.30 Recent economic developments have made it necessary for Kenya toimdertake a thorough re-assessment of its Development Plan. Given the morelimited availability of resources, Kenya will need to adapt her strategy tosustain industrial growth even at 5% per annum and ensure optimum allocationof her already existing resources. Steps to correct factor price distortions,as recommended by the Bank's economic reports, have been started with new taxesand higher interest rates, coupled with attempts to hold down wage increases,seeking to increase the cost of capital relative to that of labor. Discussionswith Tanzania and Ufganda to reform the tariff structure remain in the pre-liminary stages. All these measures seek to restructure the pattern of growthin both private and public sectors, stimuilating the directly productivesectors - agriculture and industry. To this end, it is essential to ensurethat projects are selected which have good economic yields as well as satis-factory financial returns.

III. FINANCIAL INSTITUTIONS

3.01 There are currently fourteen commercial banks in Kenya, with thelargest being owned by the Government. There are also a host of other insti-tutions as well as a fledgling stock exchange. Commercial banks primarilyprovide short-term money for working capital purposes while four developmentinstitutions provide term financing to the industrial sector.

Stock Exchange

3.02 The Nairobi Stock Exchange has five members and approximately 69companies registered, half of whose securities are traded regularly. Mostissues are ordinary common shares with several preference and debentureissues also traded. Until 1967 when exchange controls came to be more rigorouslyenforced in Uganda and Tanzania, these countries' securities were also handledby the exchange; however, only Kenyan securities are now traded. The registeredKenyan firms are mostly those who have maintained a policy of steady dividendpayments; current dividend yields range from 5 to 15% per annum, with a few highlyspeculative issues yielding more.

3.03 The Nairobi Stock Exchange has not been a major source of long-term industrial financing for new projects in recent times. A recent newissue was undersubscribed making it the first new issue failure in fiveyears. Price trends have been on the decline in the last nine months of1974 with the ordinary shares index dropping from 240 to 174 (Index Base:January, 1964 = 100). Even share prices of the ICDC Investment Company,which was established to encourage share ownership by Kenyan-citizens,dropped from a mid-1973 share price of Ksh 15 to Ksh 10, although it isstill holding well above the original issue price of Ksh 5. In an effortto mobilize more Kenyan investors, ICDC established a confidential investmentregister for investors with more than KF£2,500 who wish to maintain theiranonymity.

Commercial Banks

3.04 Fourteen commercial banks operate in Kenya, with two owned bythe Kenyan Government and the rest by foreign institutions. Kenya CommercialBank (60% Government-owned, 40% Grindlays Bank) is the largest with over20% of total assets and liabilities of the banking system. The next twolargest are the British-owned Barclay and Standird Banks. While commiercialbanks occasionally make medium to longer-term loans and equity investments,they are primarily engaged in providing short-term finance of less than oneyear to manufacturing, agriculture, domestic commerce, and import-export.The minimum interest rate on deposi;-s has risen to 5.0% per annum which isapproximately 3.0% above the minimum prevailing 18 months ago due to thecurrent liquidity squeeze precipitated by the fuel crisis and worldwideinflation. Bank lending rates on term loans range between 10 and 13%.

3.05 Faced with serious balance of payments deficits, the Central Bankof Kenya has adopted new policies affecting commercial banks which aim atconserving foreign exchange and encouraging more efficient credit allocation.First, local lending limits to foreign-controlled firms were tightened withsome relief available for companies primarily operating in the priorityareas of agricultural production, manufacturing, export business, or tourism,

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redirecting credit from import trade. Second, a 12 percent guideline onthe increase of bank credit to the private sector was set with the stip-ulation that credit needs for agriculture, small enterprises, and importedindustrial raw material be met in full. Third, the previous 9% per annuminterest rate ceiling on foreign borrowing was raised to 11% per annum withflexibility for higher rates in the cases of approved enterprises operatingin priority areas mentioned above.

Development Finance Institutions

3.06 Three main development finance institutions operate in Kenya inaddition to IDB. They are the Industrial and Commercial Development Cor-poration (ICDC), the Development Finance Company of Kenya (DFCK) and theEast African Development Bank (EADB). The Kenya Tourist DevelopmentCorporation was also established by Government to promote tourism and toinvest in this sector.

3.07 Industrial and Commercial Development Corporation. ICDC wasestablished as a statutory corporation in 1955 to promote and assistcommercial and industrial activities, with emphasis on transferringbusinesses owned by non-Kenyans into Kenya hands and providing financialassistance to them. Its activities have grown rapidly in recent years,and it now holds assets exceeding K£ 18 million; summary financial state-ments are at Annex 1.

3.08 About 90% of ICDC's loan portfolio is related to small loanschemes. The largest scheme is one concerned with the transfer of non-Kenyan businesses to Kenyans, financed by five-year loans at 8%. Anotherscheme assists Kenyans in property purchases for business purposes. ICDC'sequity portfolio includes thirty-eight companies, with the largest twoholdings in DFCK (see para. 3.11) and IDB. ICDC controls thirteen sub-sidiaries including IDB, seven of which are wholly-owned (see Annex 2).

3.09 Another important vehicle for the promotion of Kenya indus-trialization is the Kenyan Industrial Estates Limited (KIE) which iswholly-owned by ICDC. KIE is charged with developing industrial estatesto promote small and medium-scale enterprises by erecting the requiredinfrastructure, leasing them to entrepreneurs, and providing finance formachinery and equipment at 8-8.5% p.a. over 8 years with 1-2 years' grace.Moreover, KIE is responsible for establishing Rural Industrial DevelopmentCenters (RIDC) which are similar to industrial estates except for their moremodest scale, focus on rural areas, and extension service. Industrialestates have been established in Nairobi and Nakuru with plans for fivemore between 1975-1977. Four RIDCs are in operation in Nyeri, Embu,Machakos, and Kakamega with approximately seventeen more planned by 1978.Financing for KIE has mainly come from bilateral agencies.

3.10 Though ICDC is primarily involved with financing smaller-scaleenterprises, its role in financing large-scale industrial enterprisesthrough equity and some loans has gradually increased to where 38 percent

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of its total portfolio (versus 28 percent in 1973) is comprised of large-scale projects. ICDC has KaL.4 million tentatively earmarked for itfrom the Ministry of Commerce and Industry's development budget to engagein large-scale industrial investment during the Third Fiv-e-Year Plan Period(para. 4.09). It is expected, however, that with the current revision ofthe Plan and increased activities of TDB in medium to large-scale industrialfinancing, ICDC will be increasingly re-emphasizing small-scale enterprises.

3.11 Development Finance Company of Kenya (DFCK). DFCK was set upin 1963 for promoting and financing medium to large-scale industrial projects.Its share capital is held at 25 percent each by three overseas developmentcorporations - CDC (U.K.), DEG (vest Germany), FMO (Holland)l/ - and ICDC.By December 31, 1973, DFCK had total resources of K£4.2 million comprisedof K£ 2.2 million in equity and K£2.0 million in 8% income notes from itsshareholders. Its loans and equity; portfolio amounted to K£3.9 millionwith diversified investments in tourism, textiles, agricultural processingand other sectors. DFCK is currently negotiating with its four shareholdersto obtain new resources and is pursuing an active investment program ofabout KU million yearly. Its interest rate on sub-loans ranges from 9 1/2%to 11% per annum. DFCK anticipates increasing joint appraisal and financingactivities with IDB, with whom it has good relations.

3.12 East African Development Bank (EADB). Established in 1968 withheadquarters in Kampala, EADB has a share capital of K6.5 million whichis held in equal portions of 31% by the three Governments, with the remainderdistributed among several foreign institutions. EADB's charter favors theless developed industrial sectors of Uganda and Tanzania over that of Kenyaand consequently limits its operations in Kenya to 22.5% of its totaloperations - the rest being equally divided between the other two countries.By September, 197h, EADB had a net worth of K7.5 million and borrowingstotalling K£2.4 million which includes disbursed portions of a K£2.9 millionloan from the Bank (Loan 843-EA) and a K£1.3 million loan from SIDA. Asof September, 1974 EADB had approved 14 projects in Kenya totalling K£3.1million out of which 11% was for equity financing. EADB has also made twolines of credit to ICDC totalling almost K£U.2 million for financing ofsmall enterprises projects in Kenya. In its Kenya project pipeline, EADBcurrently has 14 possibilities totalling approximately X£5.4 million. EADB'sinterest rate on its loans recently rose to 10% per annum. It is beginningdiscussions with IBRD and SIDA about new lines of credit to finance itsprospective lending program.

1/ Conmmonwealth Development Corporation (CDC), Deutsche Gesellschaft furWirtschaftliche Zusammenarbeit (DEG), and Financierings Maatschappijvoor Ontwikkeling n.v. (FMO).

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IV. THE COMPANY

Background

4.01 IDB was incorporated under the Companies Act in January, 1973 asa limited liability company. The full back-round leading to IDB's establish-ment was detailed in Report 221a-KE (October 31, 1973). The subscribedshare capital of IDB is KL2 million, of which K11,500,000 will have been paid-in by June 30, 1975, and the balance will be paid in September 1975. TheGovernment; of Kenya has subscribed directly to 49% of the share capital, andprovides ]-CDC the resources to subscribe to the remaining 51%.

Relationship with ICDC

4.o2 The division of responsibilities between IDB and its parent, ICDC,are spelled out in a Promotion Agreement (Annex 3) which provides that ICDCwill not finance any industrial project with a capital cost of more thanK150,000 imless IDB has decided not to invest in such project or has decidedto invest jointly with ICDC. ICDC staff continue to supervise its existingportfolio of investments in large-scale industry, and work together with IDBon 4oint investments; five of the eleven projects approved by IDB by the endof 1974 were joint investments with ICDC. These joint investments are likelyto continue as the project pipelines of IDB and ICDC overlap considerably dueto the fact that IDB has limits on the amount of funds it can put in a singleproject, now K1400,000 or about $1 million equivalent (para. 4.08 and 4.09),and joint operations with ICDC permit a larger national participation in signi-ficant indulstrial projects. While responding to increasing interest on the partof Government and external lenders in its small-scale industries programs,ICDC will also continue to serve as a vehicle for Govemnment purchase of share-holdings in existing companies. Conversely, IDB is likely to eventually takeICDC's place as an investor representing Kenyan interests in new companies.IDB has already established its independent viability and is likely tostrengthen it further (para. 6.16).

Board of Sirectors

4.03 The Permanent Secretaries of the Ministries of Finance and Planningand of Commerce and Industry as well as the Executive Director of ICDC are ex-officio members of IDB's Board; the latter has been elected IDB's Chairman.The Permanent Secretaries are usually represented by their alternates,respectively the Chief Economist from Finance and Planning and the Directorof Industry from Commerce and Industry. Three knowledgeable and able business-men add to the range of experience represented (see Annex 4). The GeneralManager has recently been appointed to the Board as Managing Director. TheBoard has been meeting every six to eight weeks and has been very active andthorough :Ln its review of projects, budgets and staffing.

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Management and Staff (Annex 5)

4.04 At the time of the first loan to IDB, an expatriate was servingas General Manag7er tnder a TJNDP contract for which the Bank was ExecutingAgency. This arrangement proved unsatisfactory and the Bank and the Govern-ment agreed that the then Chief of Operations sholld be appointed GeneralManager. In this position, Mr. Joseph Gatuiria, former Deputy Secretary inthe Ministry of Finance, has suieceeded in assembling a competent staff andhaq made a good start in processing projects. Most importantly, he hasbuilt an initial replutation for IDB as an aggressive, responsive and inde-pendent project financier.

4.05 Following Mr. Gatuiria's promotion, IDB appointed Mr. John Yaa,former Tinder Secretary at Treasuiry, as Chief of Operations,; he took up hisduties on June 1, 1974. In his brief time with the bank, he has establishedgood project processing procedures and succeeded in integrating the work ofthe four project officers. Mr. Marinus Piek, on secondment from IBRD, hasbeen serving aF adviser to the Chief of Operations since October 1973.Although chiefly involved in operational project preparation and appraisalduiring his first nine months, he has been increasingly concerned with inten-sive training of the project staff and assisting in the development ofappraisal and supervision procedures. TUpon expiration of this contract inOctober 1975, it is anticipated that TINDP will renew its support for theposition for a further two years and IDB has requested Bank assistance inrecruiting a replacement. It is expected that further training assistance maynot be required at the end of this time.

4.06 After discussions with the Bank on the need for a second adviser,IDB obtained an ODA (TT.K.) grant and appointed Mr. M.A. Boyd, former GeneralManager of the Tanganyika Development Finance Co., as manaaement adviser.Having started in July 1974, Mr. Boyd is expected to remain at IDB about oneyear. Following his departure, IDB expects ODA-financing of a new investmentofficer position to oversee the implementation and monitoring of approved projects.4.07 Total Kenvan staff numbers 29 of whom 9 are professionals. During1974, a senior projects officer and three projects officers were recruited,the former with several years of development banking and commercial experienceand the latter with backgrounds in Government or finance; all fouir seem com-petent and able. In addition to in-house training by the advisers, three ofthe projects staff have participated in programs in Germany, Japan and at EDI.A chief accountant and accountant were engaged during 1974 and recruitmentof an engineer is underway. Plans to recruit and train a lawyer are underHisculssion with IDB's attorneys.

Operating Policies and On-lending Terms

4.08 IDB's operations are guided by its Policy Statement (Annex 6) whichwa.s drafted in consultation with the Bank. It conforms in all significantrespects to policy statements adopted by other development finance companies.

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IDB finances industrial enterprises including mining, agro-industries andengineering enterprises, but is excluded from financing purely commercial,real estate and farming activities. IDB limits its total financial assis-tance to a single enterprise to 20% of IDB's subscribed share capital andreserves, which permits IDB to make a maximum investment of KE400,000 in asingle venture. Equity investments in an enterprise do not exceed 10% ofIDB's subscribed share capital and reserves, equivalent to a maximum ofKE200,000. IDB's total equity portfolio may not exceed its subscribedcapital and reserves. IDB does not normally finance more than 50% of aproject's total cost including permanent working capital, and will notacquire an interest of more than 49% in the share capital of any one enter-prise. IDB's minimum investment is KT20,000 in projects with a minimumcapital cost of KL50,000.

4.09 In practice, the Policy Statement has proved a useful guide forIDB's initial operations. The most binding constraint has been the limit oncommitments to a single firm; indeed IDB has closely approached or hit thelimit on 5 of 11 projects approved to date. IDB's management, Government andsaoe clients feel KL400,000 neither permits IDB to finance a substantialenough part of large projects nor, consequently, to have a sufficiently strongrole in project formulation. Two proposals are under discussion between IDBand Governrent to remedy this problem, an increase in IDB's share capital(para. 6.16) and the possibility of IDB serving as agent for equity invest-ments.for Government's account. The current Development Plan projects scmeKE2 million per year of such direct Government (viz., Ministry of Finance andPlanning) share investments in industrial projects; Government has reaffirmedthis plan. These funds are in addition to some K360.3 million annually plannedfor IODC investments; ICDC's allocation is extremely variable as, in the yearending June 30, 1974, only KLO.2 million was projected for ICDC's equity in-vestments, but it actually received KL1.5 million. In the past variousMinistries and parastatal corporations have served as channels for these funds,usually the Ministry of Finance and Planning itself for industrial projects.Were IDB to serve as agent for a part of those investments, its interventionin the design of large industrial projects could be both earlier and more sub-stantial, hopefully increasing the economic contribution of the projects. AsIDB expects to invest both equity and debt for its own account in the type ofprojects envisioned, there would be little additional work for the staff.During negotiations, it was agreed that IDB would amend its Policy Statementto enable it to undertake investments on Government's account and risk subjectto the conditions that: (i) such undertakings will be limited to a scale bearingreasonable relationship to IDB's own operations and staffing constraints (butlimiting its maximum undertakings to one-third of the total number of projectswhich it has financed solely for its own account in a given year); (ii) IDBwill receive an appropriate fee; (iii) IDB will ensure that such investmentswould be consistent with its own investment criteria.

4.10 Most loans approved to date have carried an interest rate of 9½Oto 10%. Given the current liquidity squeeze in Kenya as well as the need tomaintain a spread over increasingly costly resources, IDB has raised its lending

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on most loans to 1c½-ll% with a somewhat lower rate (9-93S%) on subloansto wood-processing industries under a special Finnish line of credit (para.6.10). IDB charges a 1% commitment fee on undrawn balances and is con-sidering the introduction of a is project examination fee, payable at thetime of application. Most of IDB's loans carry a foreign exchange risk(see following paragraph) and thus its charges are in line with ratescharged by DFCK (9½i-11%) and the commercial banks (10-13%).

4.11 At the time of the first Bank loan to IDB, DFCK's resources per-mitted it to lend in local currency, while EaDB relent its foreign borrowingsin foreign currency and its borrowers had to bear the foreign exchange risk.To allow IDB to be competitive, the Bank agreed that in cases where lDB wasnot able to pass the entire exchange risk to its clients, the foreian exchangerisk on the Bank's loan to IDB could be shared between Government and IDB'sBorrowers. This was accomplished by IDB having its borrowers assume the riskof exchange fluctuations between the Kenya shilling and the TS dollar (acurrency to which the shilling has been tied and with which IDB's borrowerswould be familiar), and having Government accept the risk on any fluctuationbetween IJS dollars and the currencies in which the Bank loan was disbursed.DAe to Kenya's stringent external reserves position, Government has acceptedthis risk-splitting arrangement for only one subloan; for the others, IDB haspassed the full foreign exchange risk on to its borrowers. As all lendablefunds and, in particular, local currency fumds are scarce at present, IDB ex-pects to have few problems in maintaining this policy by passing the risk tosubborrowers in all cases.

4.12 Subloan terms have ranged from 6 to 14 years, including 1 to 2 ofgrace, based on subproject cash flow projections. IDB's security requirementsare normally limited to a first mortgage on the borrowers assets, pari passuwith other lenders when appropriate. It justifiably seeks personal guarangeesfrom promoters in special circumstances.

Procedures

4.13 In its first year of full operations, IDB has, understandably,actively promoted only perhaps two or three projects. Rather, as anticipatedat the time of the first Bank loan, it has largely helped finance ICDC pro-jects which had crystallized prior to IDB's start (para. 4.02). Nevertheless,IDB has made a surprising number of significant contributions to several pro-jects (see remarks in Annex 7). In cooperation with the New Projects Committeeand the Industrial Survey and Promotion Center (para. 2.29), IDB has taken onthe job of moving a number of projects from the idea stage to the appraisablestage. With its staff now in place and with the improvements at the New Pro-jects Committee and ISPC, IDB should become more effective in this role ofspeeding actualization of project ideas.

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4.14 IDB's appraisal work to date has been satisfactory. The staffrecruited brought relevant experience and, with the management, trainingtand advisory support provided, have adequately appraised the subprojectspresented. The recent introduction of an "issues paper" procedure early inthe evaluiation process, coupled with a new operations manual. should enhanceboth the quality and speed of appraisals. Although it is far too early toevaluate the success of its subprojects, IDB has made useful contributionsto financial, economic and technical aspects of subproject design. The lackof a staff engineer has forced it to completely rely on outside technicalexpertise; this should be alleviated shortly by recruitment of an engineerand, possibly, bilaterally funded assistance.

4.15 The weakest stage of IDB's operations has been moving projects toformal commitment once IDB's Board has approved an investment. This laghas been due to the time which was required to recruit sufficient staff forthe workload and to the difficullty of introducing changes suagested by IDBat its necessarily late entry to the project formulation process. Moreover,IDB's management has been eager to build a track record and there was atendency to present projects to IDB's Board at too early a stage. Delays inlecal. processing have also hampered implementation of approved projects. Therecent completion of a standard loan agreement, drafted with Bank assistance,coupled with the streamlined appraisal procedures noted above and strongermanagement attention to this lag should reduce the delays. Most importantly,however, IDB now has a full staff complement and should be itvolved in projectsfrom their inception, eliminating- the two major causes of past delays.

4. 16 None of the projects financed by IDB have yet started full operations;hence, the amount of supervision required has been limited. After discussionswith the Bank, management seems to be taking satisfactory steps to preparesupervision policies and procedures.

4.17 Review of subborrower's procurement plans has been adequate. IDB'sstaff, management and board have acutely queried such plans, making usefullsuggestions and sometimes imposing requirements regarding evaluation, sourcesand performance guarantees on subloans. As IDB becomes involved in projectsearlier in their formulation, it will be better able to ensu.re proper procure-ment procedures.

4.18 As of December 31, 1974, IDB has disbursed against only one loanfor which disbursement proceduires were satisfactory. The chief accountant,with assistance from the management adviser, is creating adequate general dis-bursement systems and procedures.

Auditors and Lawyers

4.19 IDB has established satisfactory working relationships with itsauditors (Pannell Fitzpatrick Bellhouse Mwangi & Co.) and its attorneys (Kaplan& Stratton). The auditor's opinion on the accounts for 1973 was lnqualifiedand they have raised no question since that time. Both firms have also pro-vided informal training support to IDB.

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V. OPERATIONS AND FINANCE

5.0L Operations. As of December 31, 1974, IDB had approved 11 loanstotalling K£2.3 million and 8 equity investments for K£O.8 million in 11projects; details are at Annex 7. One project had started pilot operationsand four were under construction, while five were still in formation andone was likely to be completely restructured: this last project is theonly likely drop-out. TDB has worked closely with a number of developmentfinance institutions, including ICDC, DFCK and EADB, with which it maintainsgood working relations.

5.02 In line with Government's policy of industrial decentralization,only four projects were located in Nairobi or Mombasa, the rest being insmaller cities and rural areas. The projects were about evenly divided innumber between export-oriented and import-substitution, with two, in part,serving new local demand. Over one-third by number and amount were agro-processing projects, two of them involving substantial smallholder coopera-tive participation. Two projects, accounting for one-quarter of the fundsinvested, were for textiles, with the balance in metal fabrication, mining,transport and tourism. Economic rates ol return on all these projects areestimated to exceed 12% with several over 20%. All were Kenyan-controlledcompanies with both local and expatriate management either in place orenvisioned; about one-half of the projects had substantial public sectorparticipation in addition to IDB.

5.03 Portfolio. Due to the lags in conmitments and disbursements(para. 4.1 5, IDB-had only one loan of K4OO,OOO and three equity invest-ments totalling KZ198,000 in its portfolio as of December 31, 1974.

5.04 Profitability. IDB's primary source of revenue has been intereston term deposits o.t' its paid-in share capital, which was somewhat higherthan originally projected due to slower disbursement and higher interestrates available. The slow disbursements also resulted in low interestcharges and delays in the recruitment of staff offset rising staff costs.Consequently, the operating loss for the year ending December 31, 1974 was,as projected, KU10,000. IDB has adopted a conservative provisions policy,taking 2 1/2% of annual disbursements. Thus, provisions of K£15,000 broughtthe net operating loss to K£25,000.

5.05 Financial Position. Over two-thirds of IDBts assets at December 31,1974 consisted of cash and short-term deposits. Slow disbursements on sub-loans and consequent slow drawdown on loans kept IDB's debt/equity ratiobelow 0.3:1.

VI. PROSPECTS

Bisiness Outlook

6.01 Kenya's past economic success has given it an excellent reputationas fertile grolud for industrial investment. Recent adverse developmentsnotwithstanding, past performance and expectations of future politicalstability should support this reputation.

6.02 The impact of recent worldwide economic developments on Kenya isnot yet clear but some of the first reactions have already been ouitlined inGovernment's revisions to the Development Plan (para. 2.14). With emphasison increased utilization of existing capacity, overall industrial investmentis likely to be below original targets. However, continued stringency of bothexternal and domestic resources is likely to concentrate investment demand oninstitutions with available funds.

6.03 In view of the above, industrial investment in Kenya from 1975throuigh 1977 is projected to be between KE35 million and K150 million per yearor on the order of K1l25 million over the three years. As detailed below(para. 6.08), IDB is expected to finance some KU3.5 million annually or about8% on average of the total.

IDB's Strategy: Promotion. Economic Evaluation and Resource Mobilization.

6.04 In its short period of operations, IDB has succeeded in recruitingand training a competent staff, established a reputation for independent,critical appraisals, and contributed to the projects it has helped finance.The major external constraint on IDB's activity has been a shortage of projectsformulated to the stage where IDB's intervention can be fruitfuil; scarcityofi' qualified entrepreneurs has been a secondary though clearly related con-straint. Internally, IDB has been limited primarily by its slow build-up ofstaff and, secondarily, by its maximum exposure limitation.

6.05 IDB should, therefore, serve an important promotional role. Ideasfor possible projects are continually generated from Government and privatebusiness, both foreign and domestic. It is hoped that, following review ofits program, ISPC (para. 2.29) will become a more useful agency for assistingboth Government and business in the feasibility stuidy stage of project pre-paration. Hence, IDB's distinctive role will lie in its capability for takinga feasible project'and helping a promoter to elaborate it to the point whereit becomes a project wJhich can be financed.

6.06 As the next stage in this proreess, IDB can serve Kenyan developmentby its independent financial, technical and, perhaps above all, economicevaluation of projects. While it has made a good start on financial and eco-nomic work, it needs to develop a technical competence and refine its economic

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analyses; both are receiving increasing management attentior. IDB has andwill continue to give particular attention in its project work to issues ofthe economics of Kenyan industry which concern both Government and theBank, such as the priority of agricultural processing (e.g., PanafricanVegetable, Kenya Cashewnuts), labor intensive technologies (e.g., KenyaCashewnuts), and decentralization from major urban centers (e.g., boilerproject at Kisumu).

6.07 In light of the resource shortage in Kenya, IDB can become a usefulmobilizer and channel for external resources. Initial contacts have alreadyproven fruitful (para. 6.13). Moreover, this same strength should help itto act as a lead institution for the commercial and development banks inKenya, fostering mobilization of domestic resources. The projected increasein its equity base (para. 6.16) and the possibility of serving as investorfor Government's account (para. 4.09) should further enhance its ability tocontribute to project designs.

Forecast Operations

6.08 Annex 8 presents a list of project possibilities under considerationby IDB; while it is unlikely that all of these projects will be replized, itis probable'that others would replace those that are not. The sectoral emphasesremain agricultural processing, including food and industrial raw materialsas well as forestry products; textiles also remain a probably important sector.

6.09 Operational projections for IDB and the assumptions behind them arepresented at Annexes 9 and 10. It is anticipated that IDB will increase itsnormal operations by 10% in 1975 and again in 1976; this is a conservativeassumption based on the fact that full staffing was only recently completed.The total volume of operations from 1975 to 1979 is expected to average overK13.5 million per year.

6.10 In addition to its normal operations, IDB expects to serve as thechannel for a line of credit extended to Kenya by Finland for purchases ofFinnish equipment. It is expected this would be primarily logging, sawmillingand wood-working machinery, although other equipment would not be excluded.It is planned to coordinate these subloans with the Bank-supported forestryproject in Kenya. These subloans are expected to nimber some 40 and to totalKM1 million. To handle the increased workload, IDB hopes to receive Finnishtechnical assistance and to recruit an additional project officer in mid-1975,either to work exclusively on these subloans or to spread the workload acrossthe entire projects staff withouit overburdenin7 them. This program should bea productive adjunct to IDB's regular operations.

6.11 Through 1977, IDB expects almost all of its loans to finance imports,with local expenditures being financed from promoters' eqouity and the localbanks; hence, there is little near-term need for IDB to acquire local currencyresources. As it develops its project processing capabilities, IDB hopes to

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move increasing,ly into more intensive support nor African entrepreneurs toimdertake medium-sized projects, defined as those whose total project costis between KE50,000 and KL150,000. IDB expects to aid in project formulation,promotion, and eventlual operating management. As this will clearly requiremuch more intensive staff work, IDB's management is at the preliminary stagesof investigating bilateral assistance to enable it to lend in either Kenyashillings or US dollars and to defray the additional staff cost. This programwould also likely entail some small local expenditure financing. As detailsand consequences of such a program are at a very preliminary stage, the pro-posed Bank loan is based on estimates not including such a program.

Resource Requirements

6.12 Through the end of 1977, IDB is expected to commit about TJS $24.9million equLivalent in foreign cLrrency loans and TJS $7.3 million equiivalentin equity investments. In addition, IDB is expected to lend about TTS $0.7million equivalent in local currency. Both the eauity investments and localcLrrency loans would be funded from IDB's share capital. Current subscribedcapital is firmly anticipated to be increased by continuing subscriptions ofK6500,000 annuallv in 1976 and 1977 by Goverment.

6.13 The foreign exchange resources would come from several sources.In December, 1974, IDB signed a loan agreement with DEG (Gemany) for M 4million at 8% for 12 years including 5 of grace; the funds are available forany foreign procurement and, in special cases, some local procurement. Inaddition, IDB has secured a line of credit from- the Export Credit Guar-antee Department (ECaD) (United Kingdom) of Li million for procure-

ment of British equipment; as the maximiin subloan term is 5 years, IDB mayhave some difficulty utilizing the entire amount. Although onlending termsfrom Government are not yet set, IDB expects to have available the Finnish lineof credit described above (para. 6.10) amounting to FM 10 million. Finally,preliminary discussions with the African Development Bank indicate a strongpossibility of a loan to IDB of 2 million UJnits of Account (US $2.4 millionequivalent) in 1975-1976. Consequently, IDB's resource position should be asfollows:

TJS $ millioneQuivalent

Foreigyn-currency loan commitmentsthrough 1977 2h.9

Financed by:IBRD Loan 946-KE 5.0DEG 1.6Finland 2.7ECGD (at 75% utilization) 1.7African Development Bank 2 .4Proposed second IBRD loan 10.0

Residual resource -ap 1.5

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IRLD would therefore finance 60% of 1DB' I cumilative requirements or 50% ofcom.itments beyond the fir.st Bank Loan.

Forecast Financial Results

6.14 Lending at 10-11% per annum and paying an average of 8% per annumon debt, IDB is not expected to show a net profit until 1977 when it returnsI.1% on its average equity, which improves to 6.9% by 1979 (Annex 13). Thisis primarily because of (i) pha.sed pay-in of share subscriptions by Govern-ment and ICOC, thereby limiting short-term interest-bearinog investments;(ii) high administrative costs as a proportion oL total assets in the initialyears for staffings up (especially in 1974-75 when four new staff are expectedto be hired); (iii) relatively conservative provision policy; (iv) low pro-jected dividend receipts (i.e., IDB expects its eqnity investment to yieldbeginning only in year 3 with 2%, 5% in year L and 6% in year 5); and(v) -rowth rate of only about 10% per annur. in overall operations. No Leeincome is projected from managed funds as the additional cost of this taskshould be nominal; this would, however, be subject to negotiations. In viewof its low profitability duiring the be,ginning years and need to rapidly buildlip its reserves, IDE expects to request tax exempt status from the Governmentalong the lines of ICDC.

6.15 Including new equity from Government of KE500,000 in 1976 and thesame in 1977, IDB will remain under its three-to-one debt to equity ceilingmntil the end of 1978. Annex 11 shows IDB's debt coverage to be adequlate,although thin at 1.1 to 1.2.

Increase in Share Capital

6.16 IDB's Board has authorized an increase in the bankts share capital fromK12 million to KMh million with a view towards increasing the maximum potentialcommitment to an individual client, thereby enhancing IDB's impact on a pro-ject. TTnder the terms of IDB's Promotion Agreement, the currently subscribedKT2 million would be fully paid-in by ICDC and Government by 1976. Govern-ment has reaffirmed its comriitment in the Development Plan (1974-1978) tocontinue subscriptions of KL500,000 annually through 1978. However, the decisionhas not yet been taken as to whether this wouild be, a. in the past, 51%channeled through IGDC or, as proposed by IDB, solely .subscribed by Govern-ment. IDB's management has proposed an eventual shareholding distribution asfollow#:

Present ProposedK1 million % KE million %

Government0.98 49 1.98 49

ICDC 1.02 51 1.02 26

Two local financialinstitutions - - 1.00 25

2.00 100 4.00 o00

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It is proposed that these subscriptions be paid from 1976 through 1978.The addition of two local financial institutions, expected to be aninsurance company and a commercial bank, would strengthen IDBts equitybase, increase its independence from both ICDC and Government, and enhanceits ability to develop with the new shareholders a comiplete financial planfor its clients. The local institutions have expressed sapport for IDB'sproposal. It is, however, still under discussion within Government and withICDC. Agreement is expected by September 30, 1975.

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VII. CONCLUSIONS AND REOMMENDATIONS

7.01 IDB has made a good start in supporting large and medium-scaleindustry in Kenya. Having assembled a competent staff, usefully contributedto subproject designs and utilized the first Bank loan well, it is suitablefor further financial assistance and institutional support from the Bank.

7.02 Bank Loan. IDB is a creditworthy borrower for a Bank loan ofUS$10.0 million equivalent. It is recommended that the proposed loan bemade on substantially the same terms as the first, with two changes. First,in recognition of the quality of IDBts appraisals, it is recommended thatthe individual project free limit be raised from US$200,000 equivalent toUS$400,000 equivalent; the aggregate free limit would be US$2.0 million,or 20% of the total loan. Second, it is proposed that IDB pay the normalcommitment charge on the Bark loan. Under the first loan, IDB was grantedconcessional treatment, not paying commitment charges until authorizationto withdraw funds was given on individual subprojects, as it had not yetstarted operations. The maximum debt/equity ratio would remain at 3:1which should suffice through the end of 1978. The loan would carry thestandard Bank interest rate and the amortization schedule would conformsubstantially to the aggregate of subloan repayments to IDB, with a maximummaturity of 15 years. As is normal for development finance companies, IDBwould be expected to pass the full foreign exchange risk to its borrowers.

7.03 Disbursement. Disbursement would continue at 100% of the c.i.f.cost of direct imports, 65% of the invoice price of goods previously importedinto Kenrya and 40% of the cost of civil works. These percentages are basedon a study carried out by IDB for the first Bank loan. Agreement was reachedduring negotiations that the Bank would finance the foreign exchange componentof locally manufactured goods made in part from materials previously imported andthat the appropriate percentage would be substantiated by IDB on a case-by-case basis.

7.o4 Also during negotiations, understanding was reached on:

(a) the modalities of IDB serving as an investor forGovernment's account (para. 4.09);

(b) the future increase of IDB's share capital and the timeby which it would be fully subscribed (para. 6.16); and

(c) the Bank's willingness to continue serving as ExecutingAgent for the UNDP-financial technical assistance post.

Arimex 1

K9I\YAIndustrial and Commercialevelopment Cororation

Fi-nancial Statements (1972,-74(Ka ooo)

IT Balance Sheets (Year ending June 30)

Assets 1971/72 1972/73 1973/74

Current Assets 94 137 150Subsidiary CompManies 631 1,386 1,785other Equity Investments 1,926 2,393 3,724Loans to Subsidiary Companies 1,008 1,239 1,4361/Other Medium and Large Loans 469 681 821Snall Loans 4.,843 6,588 9,017Fixed Assets 903 1,197 1,314

Total Assets 9, 162 18 247

Liabilities and Equity

Current Liabilities 160 391 701Long-ter-m Loans 5,208 6,526 8,125Grants and Capital Reserve 4.,506 6,704 9,421

Total Liabilitiesand Equity 92874 13,621 18,247

II. Income Statements

Revenues

Dividend Income 231 645 626Interest on loans 221 5b0 783Other Income 26 117 200

Total Revenues 478 1,302 1,609

Expenses

Administrative Expenses 119 24L 326Financlal Expenses 108 320 424Depreciation 45 8 23Provisions 34 66 98

Total 3Thcenses ~ 7zTT 38 C-Net Profit 172 664 738

1/Includes KS97,000 held in current accounts of subsidiary companies.

DFCDJanuary 28, 1975

Annex 2

KENYAIndustrial and Conmei= TT Development CorporationEquity Investments and Medium- to Large-sized Loans

As of June 30, 1974(KS '000)

Equity Investment Loan Total

A. Subsidiaries1'

1. Kenya National Trading Corporation, Ltd. 10.0 - 10.02. Kenya Film Corporation, Ltd. 2.0 - 2.03. Kenya Industrial Estates, Ltd. 0.1 943.0 943.14. Kenya National Properties, Ltd. lf00.0 80.0 180.05. African Diatomite Industries, Ltd. 0.1 44.4 44.56. Pulp and Paper Company of E.A., Ltd. 0.1 9.1 9.27. Kenya Wine Agencies, Ltd. 229.5 - 229.58. Fluorspar Company of Kenya, Ltd. 255.0 - 255.09. Kenatco Transport Co., Ltd. 333.0 - 333.0

10. Kenya Mining Co., Ltd. 255.0 15.0 270.011. ICDC Investment Co., Ltd. 24.1 200.0 284.112. Wananchi Sawmill, Ltd. 6.6 47.5 54.113. Industrial Development Bank, Ltd. 510.0 - 510.0

Sub-total 1,785.6 1,338.9 3,124.5

B. Other Companies

1. Development Finance Company of Kenya, Ltd. 500.0 2/ 1,025.02. Kenya Engineering Industries, Ltd. 175.0 - 175.03. Metal Box Company of East Africa, Ltd. 231.8 - 231.84. NAS Airport Services, Ltd. 155.8 - 155.85. East Africa Industries, Ltd. 151.7 - 151.76. J. H. Minet and Co. (E.A.), Ltd. 52.9 - 52.97. Union Carbide Kenya, Ltd. 244.4 - 244.48. Block Hotels, Ltd. 30.6 - 30.69. Eslon Plastics of Kenya, Ltd. 25.3 16.0 41.310. Firestone East Africa (1969), Ltd. 421.8 - 421.811. Ceramic Industties of E.A., Ltd. 30.0 - 30.012. The Raymond Woollen Mills (Kenya), Ltd. 15.0 59.9 74.913. E. A. Clothing Factory (1969), Ltd. 8.8 - 8.814. Lake Baringo Fisheries, Ltd. 7.0 7.0 14.015. African Radio Manufacturing Co., Ltd. 6.8 - 6.816. Kenya Industrial Plastics, Ltd. 5.0 6.5 11.517. E.S.A., Ltd. 12.3 - 12.318. Kearlines, Ltd. 9.9 - 9.919. J. W. Kearsley (Kenya), Ltd. 2.0 4.1 6.120. Mea Garments, Ltd. 2.3 10.6 12.921. Kenya Toray Mills, Ltd. 149.0 - 149.022. Panafrica Paper Mills (E.A.), Ltd. 179.0 - 179.023. Polysynthetics Eastern Africa, Ltd. 32.2 - 32.224. Kenya Fishnet Industries, Ltd. 43.0 _ 43.025. Kenya Fishing Industries, Ltd. 20.0 - 20.026. Nakurn Chrome Tanning Co., Ltd. 10.0 - 10.027. E. A. Fine Spinners, Ltd. 175.0 129.1 304.128. Brollo Kenya, Ltd. 333.3 - 333.329. Kenya Peanuts Co., Ltd. 31.3 - 31.330. Seracoatings, Ltd. 30.0 62.8 92.831. Associated Battery Manufacturers (E.A.), Ltd. 42.8 - 42.832. Soroko Fibreboards, Ltd. 160.7 - 160.733. Kenya Cashews, Ltd. 220.0 - 220.034. Kenya Bowling Centres, Ltd. 10.0 - 10.035. C.P.C. Industrial Products, Ltd. 139.2 - 139.236. Somerset Africa, Ltd. 12.8 - 12.837. Pan African Vegetable Products, Ltd. 47.2 - 47.2

Sub-total 3,723.9 821 4,544.9

Total 5,509.5 2,159.9 7,669.4

1/First seven are wholly-owned.'2/Income notes.

DFCDJanuary 28, 1975

Annex 3Page 1

KENYAPromotion Agreement Between the

Government and ICDC

THIS AGREEXENT is made the 18th day.of December of one thousand nine hundredand seventy-two BE1WEEN the GOVERNMENT OF THE REPUBIIC OF KENYA (hereinaftercalled "the Government??) of the one part and INDUSTRIAL AND COMMERCIALDEVELOPMENT CORPORATION, a body corporate established in the said Republicby the Industrial Development Act (Chapter 517) having its principal officeat Marshall House, Harambee Avenue, in the said Republic (hereinafter called"I.C.D.C.") of the other part.

W H E R E A S : -

(1) I.C.D.C. was established for the purpose of facilitating the industrialand economic development of the said Republic and is authorized -under Section8 of the said Act, subject to the approval of the Minister for the time beingresponsible for Commerce and Industry, inter alia to promote and aid inpromoting, constitute, form or organize companies, syndicates or partnershipsof all kinds and to exercise and enforce all rights and powers conferred byor incident to its ownership of any shares, stocks, obligations or securitiesfor the time being held or owned by I.CD.C.

(2) The Government is desirous of further facilitating the industrialdevelopment of the said Republic and it and I.C.D.C. have agreed jointly toestablish and operate in the said Republic a development Bank in the mannerand on and subject to the terms and conditions hereinafter appearing.

NOW IT IS HEREBY AGREED as follows: -

1. As soon as may be practicable after the date of this Agreement, I.C.D.C.,on behalf of the Government and itself shall procure the incorporation in tuhesaid Republic of a company to be known as "Industrial Development Bank Limited"and the Government shall procure that the consent of the Minister for the timebeing responsible for Finance shall be given, under Section 3 (1) (b) of theBanking Act, 1968, to the use of the word "Bank" in the name of the said com-pany, (hereinafter referred to as "the Company") notwithstanding the factthat it.is not envisaged that the Company shall at the outset be a licensedbank under the said Banking Act.

2. The authorized capital of the Campany shall be Shillings Forty million(Shs. 40,000,000Q) divided into Two million (2,000,000) shares of ShillingsTwenty (Shs. 20/=). each and the Memorandum and Articles of Association of theCompany shall be substantially in the form of the draft contained in theFirst Schedule annexed hereto.

3. The Government shall procure that the Minister for Finance and Planning,in exercise of the power conferred on him by Section 106 (1) of the Stamp DutyAct (Chapter 48) shall grant exemption from the capital duty on the authorizedcapital of the Company which would otherwise be payable under Heading 8 in theSchedule to the Stamp Duty Act (Chapter 480).

Annex 3Page 2

4. ]:.C.D.C. shall meet in the first instarce all the costs of andincidental to the incorporation of the Company and shall be credited withthe amount thereof in the books of account of the Company as part of thefirst instalment of the sum to be subscribed for shares in the capital ofthe Company by I.C.D.C. as hereinafter provided.

5. The parties hereto shall procure that, so long as they remain theonly holders of shares in the capital of the Company, the Board of Directorsthereof shall consists of the following: -

The Permanent Secretary to the Ministry of Finance and Planning,The Permanent Secretary to the Ministry of Commerce and Industry,The Executive Director of I.C.D.C.,The Managing Director of the Company, andThree persons, not being officers of the Government, appointed bythe parties hereto as Members of the Company or, from time totime, by the other Directors, to fill casual vacancies, suchappointments to be of persons who havelad extensive experienceand shown capacity in industry in the said Republic or elsewhere.

6. Unless and until otherwise agreed by the parties hereto, they shallbe the only Members of the Company and shall hold the issued capital thereoffor the time being as to Fifty-one per cent (51%) by I.C.D.D. and as toForty-nine per cent (49%) by the Government. The total authorized capitalof the Company shall be fully subscribed not later than the fourth anniver-sary of the date of incorporation of the Company and, unless the partieshereto, having regard to the capital requirements of the Company, shallagree to accelerate subscription, I.C.D.C. shall subscribe the sum ofShillings Five million one hundred thousand (Shs. 5,100,000/-) and theGovernment shall subscribe the sum of Shillings Four million nine hundredthousand (Shs. 4,900,000/-) for shares in the capital of the Company ineach of the first., second, third and fourth years following the date ofincorporation of the Company, on such dates in those years as they maymutually agree. The parties hereto shall procure that, on subscriptionin full of such amounts, totalling Shillings Ten million (Shs. 10,000,000/-)in each of the said years the Company shall forthwith allot and issue toI.C.D.C. Two hundred and fifty-five thousand (255,000) and to the GovernmentTwo hundred and forty-five thousand (2451,000) fully paid shares of ShillingsTwenty (Shs. 20/=) in the capital of the Company. All the shares in thecapital of the Company shall be Ordinary shares ranking pari passu with eachother in all respects.

7. The Government will procure that I.C.D.C. shall-be provided with suchfunds as may be necessary to enable it to subscribe for shares in the capitalof the Company in accordance with the provisions of Clause 6 hereof.

8. The parties hereto shall procure that the Board of Directors of theCompany shall adopt, and that the Company shall operate initially in accord-ance with the Statement of Policy and Regulations, a copy of which iscontained in the Second Schedule annexed hereto, provided that the samemay be modified by the said Board from time to time.

Annex 3Page 3

9. Fromand after the date on which the Ccmpany shall have commencedoperatiams, I.C.D.C. .ill not approve any investment or loan for any indus-trial project, except for those projects falling within its IndustrialEstates and small scale Industrial Loans Programmes, with an estimatedcapital cost of more than Shillings One million (Shs. 1,000,000/=) unlessand until the Company shall have decided not to invest in such project orthe parties hereto have agreed to invest jointly therein.

10. Each of the parties hereto shall use its best endeavours to procurethe successful operation of the Company as an effective instrument for theprGmotion and development of industry in the said Republic.

IN WITNESS WHERDF

duly authorized in that behalf under the Government Contracts Act (Chapter 25)has hereunto set his hand and I;C.D.C. has caused its Common Seal to be here-unto affixed the day anu year first above written.

DFCDMay 15, 1973

Annex 4

KEYYA

INDTSTRIAL DEVELOPMENT BANK

Board of Directors(As of December 31, 1974)

Chairman: Mr. E.M. Wamae Executive Director, ICDC

Mr. N. Nganga Permanent Secretary,Ministry of Finance and Planning

Alternate: Mr. Y.F.O. Masakhalia Chief Economist,Ministry of Finance and Planning

Mr. L. M. Kabetu Permanent Secretary,Ministry of Commerce and Industry

Alternate: Mr. A. N. Ndiho Director of Industry,Ministry of Commerce and Industry

Mr. B. M. Gecaga Director, British-American Tobaccoand President of the Council,University of Nairobi

Mr. R. Kemoli Officer, Commonwealth DevelopmentCorporation

Mr. K. Mwendwa Director, Mackenzie (Kenya) Ltd.

From March 7,1975: Mr. J. Gatuiiria Managing Director, IDB

AFCDApril 9,1975

Annex 5

KETYA

INDUSTRIAL DEVEIWPMENT BANK

Organization Chart

BOARD

Anaging Director(J. Gatuiria)

Chief of Operations(J. W. Yaa) A

IrAdviser(M.A. Boyd)

Adviser .. ____ (14C. Piek) - 1

Chief Accountant Lawyer(J. Muguiyi) (vacant)

I _~Engineer Senior Project Officer(vacant) (C.N. Kamau)

Accountant(D.K. Ngaanga)

Project Officers:(D.G. Hbatia)(M.P. Kunguru)(H. Njoroge)

EFCDJanuary 28, 1975

Alnns£x 6

KEINYAINDUSTRIAL DEVEL ORI'1 BANK L==TED

STATEMNT OF POLICY

1. The Industrial Development Bank Limited is a financial institutioncreated by the Goverment of Kenya and the Industrial and Commercial Devel-opment Corporation for the purpose of furthering the economic developmentof Kenya by assisting in the promotion, establishment, expar.sion and modern-ization of mediu..m and large scale industrial enterprises, including mining,agro-industries, engineering and such other enterprises as the Board mayapprove. In pursuance of this objective it shall be the purpose of theBank to achieve and maintain a satisfactory and acceptable return on theshareholders? capital compatible with the maintenance of a sound financialposition. Tne IDB will not assist enterprises in the purely cosmercial,real estate and purely farming activities.

2. The IDB will promote the.industrial development of Kenya through one,or a combination of the several of the following methods:

(a) Provision of medium and long-term loan finance.

(b) Direct equity investments.

(c) Provision of guarantees for loans from other sources.

(d) Underwriting security issues, shares stocks andsimilar obligations.

3. The IDB will normally finance or otherwise assist enterprises onlywhere new productive assets axe to be created and will normally not engagein re-financing operations.

4. Dhe IMB operations shall be guided by sournd banking principles.The Bank's investments decisions shall be based on sound appraisal methods,and will particularay take into account the total financial requirementsof the project and the soundness of the resulting financial structure forthe enterprise.

5. The Bank shall finance only economically sound, financially viable,technically feasible projects, and those which have or will have competentManagement.

6. The Bank shall not invest in any project in which the total capita:cost including permanent working capital is less than KZ50,000 and will n.invest an amount of less than K£20,000 in any project.

7. The Bank shall not finance or otherwise commit itself in any ente-prise to the extent of more than 50% of the project's total capital cos-including permanent working capital.

8. The Bank will not seek to acquire a controlling interest in itsequity investments, and shall not acquire an interest of more than 49'the share capital of any one enterprise. The IDS wilL not in normal

Arnex 6Page 2

circumstances manage enterprises, although it will use its best endeavourto ensure the acquisition of comipetent Management. It will, however, not-withstanding these limitations, take such action as it considers appropriatewhere, in case a project supported by it is in jeopardy, it has to protectits investment.

9. The Bank's equity investment in any one enterprise shall not exceed10% of its unimpaired subscribed capital stock, surplus and reserve at thetime of the investment decision.

10. The aggregate amountsof the Bank's loans, equity holding or guaranteesto any one enterprise shall not exceed 20% of the Bank's unimpaired subscribedstock, and reserve at the time of the investment decision.

11. The Bank's aggregate investments in share capital shall not be allowedto exceed the Bank's own unimpaired subscribed share capital, surplus andreserves.

12. The Bank's total debts including guarantees shall not at any time,exceed three times the amount of its unimpaired subscribed share capitalplus surplus and reserves.

13. The Bank shall at all times seek to protect itself against exchangerisks of foreign borrowings.

14. The Bank shall seek to diversify its investments both geographicallyand by industrial sectors.

15. The Bank shall give special consideration to enterprises utilizingconsiderable local material and labour resources, and to export orientedprojects.

16. The Bank shall seek to revolve its funds as much as possible byselling its equity portfolios where prices which give it a reasonablereturn on its investments are obtainable.

17. The Bank shall charge, for its funds or services, interest rates,fees,or commissions which are compatible with the prevailing market ratesand/or which enable it to earn a reasonable return on its operations.

18. The Bank shall take such security for its loans and guarantees asthe Bank's Board of Directors shall, for each investment determine adequateor reasonable.

19. The Board of Directors shall conduct the business of the Bank inaccordinace with the Company's Act, and shall observe the exchange controlregulations.

20. The Bank shall recruit qualified personnel for its operations.

21. The Bank shall supervise its investments to protect its interests andto enable it to assist its projects to the maximum extent possible.

22. The Board of Directors of the Bank shall lay such rules and regulationsas it deems fit to govern the day to day operations of the Bank.

DFCDMay 25, 1973

KENYA Annex 7INDUSTRIAL DEVELOPMENT BANK

List of Approved IDB ProiectsAs of December 31. 1974

(KB ' 000)

Amt. Approved Amt. Comatd. Amt. Disbsd Loan Terms Equity RemarksLroject and Location Activity Loan Equity Loan Equity Loan Equity Interest Term (of (IDB's YO

which grace) of company)

1. Panafrican Paper Paper 400 - 400 - 400 - 9.57. 14 (2) - IFC is sponsor, shareholder and lender;Mills, Ltd. Products Orient Paper (India) is technical partner.(Webuye) GOK, ICDC, DFCK, EADB and others also

participating. Construction almost com-plete; pilot production started. IDBloan splits foreign-exchange risk betweenborrower and GOK. Subloan approved byBank.

2. Panafrican Vege- Vegetable 150 55 - 55 - 13 9.5% 10 (2) 11 SIFIDA, Barclays and ICDC are co-finan-table Products, dehydra- ciers; Bruckner (Germany) is technicalLtd. (Nakuru) tion manager. Subloan approved; construc-

tion under way. Expect to be in com-nercial production July, 1975. Expectedto dra supplies from 13,000 smallholdersaod export 957. of output.

3. East African Wool Wool Pro- 200 25 - - - - 9.5% 8 (2) 107. ICDC, Amatex (Switzerland), Kenya FarmerdIndustries cessing Association, Agricultural Development,(Nakuro) EADB.Original promoter's suitability

being re-assessed. IDs caking leadingrole among investors to (a) seek alter-native technical partner and (b) secureacceptable raw materials supply arrange-ments. Project in abeyance.

4. Thika Cloth Mills Textile 188 198 - - - - 107. 10 (2) 12.5% Sponsor is Bhagwanji Group (Kenya); en-Ltd. (Thika) financiers are SIFIDA and DFCK. Invest-

ment plan in revision; IDB reappraising.5. Trupki Ltd. Pipe 70 - - - - - 9.5. 6 (2) - Individual promoter. Prototype for

(Nairobi) fittings medium-size loans program. Free lisitsubloan.

6. Nairobi Serena Tourism 200 _ _ _ _ 9.5% 12 (2) - Tourism Promotion Services (Kenya)Hotel (Nairobi) IFC, and Kenya Commercial Bank partici-

pating. Approved for IBRD financing.Under construction.

7. Kenya Cashewnuts, Agricul- 275 94 - 94 60 9.57 8 (2) 11 ICDC, Maize Production Board, the BiliftLtd. (Kilifi) tural Pro- Cooperative Union, and Banco di Sicilia.

cesaingIBRD has approved project. Commitmentof loan expected shortly. Productian tocomence July, 1975. Smallholder sJp-pliers and intermediate technology Pro-duction process enhance economics.

8. African Marine & Dry Dock 150 125 - 125 - 125 not set 257 Sponsor is Mackenzie (Kenya) Ltd. Can-Gen. Eng. Co., scru,tion uuderway but encountering tech-Ltd. (AMGECO) nical problems. AKGECO not keen on IDB(Mombasa) loan because of foreign exchange risks.

IDB playing significant role in tighten-inS up project's technical areas.

9. Salt Manufac- Salt Pro- 300 100 - _ _ _ 10% 7 (2) 20% Saltec SPA, Ltd. (Italy), ICDC, KenYaturers Kenya cessing Commercial Bank. Financing plan snagLtd. (Malindi) slowing commitment. IDB working up al-

-ternatives,10. Nanyuki Textile Textile 200 75 200 75 - - 10% 12 (2) 12.57 Cofinanciers and sponsers include Kenya

Mills Ltd. Industrial Investments (KII), David(Nenyuki) Whbitehead and Sons, DEG (West Germany),

Mbtor Hart and Exchange, Ltd., DFCK,EADE, and ECGD (U.K.). Project awaitingfinalization of financing plan (with_possLble IFCj2art icipatin.-

11. General Filtts At mobile 202 52 - _ _ _ 10% 8 (2) 267. United Development Incorporated (Israel),Kenya, Ltd. fi r various Kenyan individuals, Standard Bank(Nairobi) Ltd. IDB re-checking project's market

assumptions to validate financial andeconomic projections.

DFCDJanuary 28, 1975

Annex 8KENYA

INDUSTRIAL DEVELOPMENT BANK

List of IDB ProJect Fossibilities(as of November 30, 1974)

Area of New or Total Project Prtential IDBActivity Expansion Location Ownership Cost(KE'0O0) Financing(K£'000)

1. Alliance Litho Ltd. Printing New Nairobi Kenyan 150 50

2. Alpha Tanneries Ltd. Leather New NoA. Kenyan 80 20

3. Holiday Inn Hotel Tourism New Nairobi Jt. Venture 1,200 300

4. East Africa Packaging Packaging Expansion Nairobi N.A. N.A. 350Industries Ltd. Products

5. Associated Vehicle Transport New Mombasa Jt. Venture (30%) 1,200 216Assemblers

6. Baker's Yeast Food Processing New Muhoroni Jt. Venture 1,500 425

7. Textile Mill Textiles New Nakuru Jt. Venture 17,000 NoA.

8. Boiler Manufacture Metal Manu- Expansion Kisuti Kenyan 175 90facturing

9. Kenya Mining Industries Mining Expansion Kinangop Jt. Venture (51%) 750 250Ltd.

10. Sunset Hotel Tourism New Kisumu tenyan 416 120

11, Maize Mill Food Processing New Nakuru Kenyan 1,650 40012. Intercontinental Hotel Tourism Expansion Nairobi Jt. Venture 2,706 230

13. Caustic Soda Chemical New Mombasa Jt. Venture (30%) 4,000 40014. JoKe Synthetics Textile New Thika Jt. Venture (51%) 5,300 51215. Chui Soap Factory Ltd. Chemical Replacement Nairobi Kenyan 140 NoA,16. Pharmaceutical Drugs Chemical New Nairobi Jt. Venture 725 30017e Sanitary Tampons Textile New Nairobi Kenyan 90 35

18. Kilaguni Lodge Tourism Expansion Coast Jt. Venture 175 12019. Saw Mill Forestry Expansion Nakuru Kenyan 90 50

20. Slaughterhouse Livestock New Ngong Kenyan 561 N.A.

21. Metal Box Co. Metal Manu- Expansion Nairobi Jt, Venture 1,700 400

facturincg22, Pharmaceutical Drugs Chemical New Nairobi Kenyan 200 98

DFCDJanuary 28, 1975

Annex 9CRITNYA

INDUSTRIAL DEVELOPMENT BANK

Assumptions for Operations and Projected Financial Statements (1974-1979)

A. Approvals, Commitments, and Disbursements

1. Loan approvals (foreign exchange):1974 - KU1,784,000 Based on estimate of actual traditional operations.1975 - KB2,312,000 10% increase over 1974 traditional operations plus

K6350,000 for medium-sized industrial loans(e.g, frcn Finnish credit)

1976 - K12,808,000 10% increase over 1975 traditional operations plusK,650,000 for medium-sized industrial loans.

1977 - KU2,374,000 10% increase over 1976 traditional operations.1978 - KL2,611,000 10% increase over 1977 traditional operations.

2. Loan approvals (local currency):1974-1976 None1977 - KL400,000 Loans emphasizing medium-sized projects. Project

costs between KU50,000 - K]150,000).1978 - K4o00,000 Same as 1977.1979 - KEh00,000 Same as 1978.

3. Equity Investment:1974 - KE669,000 Based on estimate of actual operations.1975 - K1750,0001976-1979 KL650,000 per year.

4. Commitments: a) Assume 60% of Board approvals canmitted in year ofapproval, 40% in the following year.1974 - Estimate of actual operations.1975 - Estimate of actual operations plus 60%

of 1975 approvals.1976-1979 Follows assumptions.

b) Equity - Assume 75% of Board approvals committedin year of approval, 25% the following year.1974 - Estimate of actual operations.1975 - Estimate of actual plus assumption,1976-1979 Follows assumptions.

5. Disbursements:a) Loans - Assume 40% of commitments in year of commitment, 50% in

second year, and 10% in third year.1974 - Estimate of actual operations.1975 - Estimate of actual plus assumption.1976-1979 Follows assumptions.

Annex 9Pace 2

b) Equity - Assizre 70% of commitments in year of coimiitmtert,30G in the following year.1974 - Estimate of actual operations.1975 - Estimate of actual plus assumption.1]j76-1979 Follows assumptions0

B. Rescurces

1. Share Capital: 1975 - Final payment. of KL500,000 from ICDC andGovernment toward original KU2.0 million capitalsub scripti on.

1976 - New share capital payment of KE500,000 (in nes}Development Plan)

1977 - New share capital payment of K3500,000 (in newDevelopment Plan).

2. Borrowings: For June 30, 197h-1976 - KL3.9 million0For June 30, 1976-1978 - K,5.6 million.For June 30, 1978-1979 - K13.0 million0

C. Financial Operations

1. Interest charged by IDB is 10% per anrnum plus 1% commitment fee of 1%on undisbursed loan balance.For computation in projections, assume effectively 1C& per annum onloans from 1975. Use 9½% per annum on 1974 loans.

2. Cost of IDB's funds - Assume 7.8% weighted average interest rate offoreign borrowings plus 0.2% weighted average cammitment fee and othercharges, making it 8.0% per annum (IDB's spread is 109 less 8% or214).

3. Yield on short-term investments is 7% per a-nnum,

h. Average loan term: 12 years with two years' grace.

5. Dividend income from equity portfolio: Year of investment - None;Year 2 - None; Year 3 - 2%; Year 4 - 5%; Year 5 - 6%o

6. Provisions for bad investments: 2.5% of annmal disbursements starting1974.

7. Adm1niLitrative Expenses: 1974 - K1664,000; 1975 - KT'1h,000 (increasemostly die to budgeted increase of five new staff, four to be paid byIDB); 1976-1979 - a-verage of approximately 6.5% per anniwi compoandedgrowth.4

DFCDJanuary 28, 1975

Arnex -'

KENYA

INDUSTRIAL DEVELOPMENT BANK

Forecast of Operations (1974-1979)(KI'ooo)

(Actual) (Actual) Projected1973 1974 1975 197 1277_ 1975 1979

FE LC FE LC FE LC FE LC FE LC FE LC FE LCApprovals

- Term loans 550 - 1,784 _ 2,312 - 2,808 - 2,374 400 2,611 400 2,872 400- Equity Investment - . - 750 - 65 650 - 650 - 650

Total Approvals 550 55 1,784 669 2,312 750 2,808 650 2,374 1,050 2,611 1,050 2,872 1,050

Commitments

- Term loans - - 600 - 3,121 - 2,610 - 2,547 240 2,517 400 2,767 4oo- Equity Investment - - - 349 - 925 - 675 - 650 - 650 - 650

Total Commitments - - 600 349 3,121 925 2,610 675 2,547 890 2,517 1,050 2,767 1,050

Disbursements

- Term loans - - 400 - 1,248 - 2,604 - 2,637 96 2,542 280 2,620 384- Equity Investment - - - 198 - 648 - 750 - 657 - 650 - 650

Total Disbursements - - 400 198 1,248 648 2,604 750 2,637 753 2,542 930 2,620 1,034

_- -- - - m = -=-=-=

Note: FE = Foreign ExchangeLC = Local Currency

DFCDJanuary 28, 1975

Annex 11KENYA

INDUSTRIAL DEVELOPMENT BANK

Actual and Projected Financial Ratios (1973-1979)

A. Income Statement Items as % of Average Total Assets

(Actual) (Actual) Projected

Gross Income 2.5 4.7 7.2 7.6 8.2 8.5 8,8Less: Financial Fxpenses - 0.5 3.0 4.6 5.2 5.5 5.7Administrative Expenses 3.2 4.9 4.0 2.4 1.5 1.2 1.0(including depreciation)

Operating Profit (0.7) (0.7) 0.2 0.6 1.5 1.8 2.1Less: Provisions forLoan and Investment - 1.1 1.7 1.6 1.0 0.8 o.6

Net Profit (0.7) (1.8) (1.5) (1.0) 0.5 1.0 1.5

B. Selected Income and Cost Items

Dividend income as % of averageequity portfolio - - 0.3 1.2 2.3 3.2Income from loans as % of averageloan portfolio - 2.8 11.1 10.7 10.7 10.7. 10.8Cost of debt as % of average totaldebt _ 1.8 8.0 8.0 7.9 7.7 7.7

C. Net Profit

Net profit as a % of average equity (0.7) (2.1) (2.bl) (2.2) 1.1 4.2 6,9

D. Structural Ratios

Debt/Equity _ 0.3:1 0.9:1 1.8:1 2.4:1 3.2:1 3.8:1Provisions as a % of loan and equityportfolio - 2.5% 2.5% 2.5% 2,6% 2.6% 2.7%

E. Debt CoverageInterest and Principal Coverage - - 1.1 1.2 1.2 1.2 1.2

DF CDJanuary 28, 1975

Annex 12

KENYA

INDlJSTRIAL DEVELOPMEIT BANK

Actual and Projected Statements of Inccne (1274-1979)

(K]6 000)

Actual ProjectedYear ending Dec. 31 lJ4 1975 1976 1977 1978 1979

Income

Interest and Cormission - 11 1114 315 589 861 1,133on Loans

Dividend Income - - - 4 23 60 :103

Income from short-term in- 22 53 84 71 62 44 19vestments and deposits

Total Income 22 64 198 390 6714 965 1,255

Expenses

Interest on Borrowings - 7 82 233 433 619 80o4Adninistrative Expenses 26 64 104 113 119 127 1314Depreciation 2 3 5 7 8 8 8

Total Expenses - 74 191 353 560 7514 9146

Profit before Provisions (6) (10) 7 37 1114 211 309and Tax

Provisions - 15 417 84 85 87 91Income Taxi/ - - - - - - -

Met Profit (6) (25) (40) (47) 29 1214 2:18

26/ Assume tax exempt.

DFCIJ.inuary 28, 1975

Annex 13

KENYA

INDUSTRIAL DEVELOPMENT BANK

Actual and Projected Balance Sheets (1974-1979)(Ks' 000)

Actual ProjectedYear ending Dec. 31 1973 1974 1975 1976 1977 197t 1979

Assets

Current AssetsCash and Short-term

investments 863 1,267 1,125 908 869 h33 95Loans Receivable - - - 40 165 425 689Total Current Assets 863 1,267 1,125 948 1,034 858 784

PbrtfolioLoans- Import Loans - 400 1,648 4,212 6,724 9,oo6 11,362- Local Currency Loans - - - - 96 280 384Eq;ity Investments - 198 846 1,596 2,253 2,903 3,553Less: provisions - (15) (62) (146) (231) (318) (409)Total Portfolio (net) - 583 2,432 5,662 8,842 11,871 14,890

Fixed Assets (net) 8 23 24 28 24 21 18Total Assets 871 1,873 3,581 6,638 9,900 12,750 15,692

Liabilities and Equity

Current LiabilitiesAccounts Payable 4 4 4 4 4 4 4Loans Payable - - - 40 165 425 689

Long-term DebtBorrowings - 400 1,648 4,212 6,820 9,286 31,746

EquityShare Capital 873 1,500 2,000 2,500 3,000 3,000 3,000Accumulated Reserves

(losses) (6) (31) (71) (118) (89) (35) 253

Total Iiability and 871 1,873 3,581 6,638 9,900 12,750 15,692Equity -

DFCDJanuary 28, 1975

Annex 14

KENYA

INDUSTRIAL DEVELOR!ENT BANK

Actual and Projected Cash Flow Statements (1974-1979)(Ka'ooo)

Actual ProjectedSources 1973 1974 1975 1976 1977 1978 1979

Net Profit (6) (25) (40) (47) 29 124 218Non-cash charges 2 18 52 91 93 95 99Cash generation (4) (7) 12 44 122 219 317Drawdown of: 1/- Share capital7 873 627 500 500 500 - -- Foreign B3orroidngs - 400 1,248 2,604 2,733 2,822 3,004Loan Collection - - - 40 165 425 689

Total Sources 869 1,020 1,760 3,188 3,520 3,466 4,010

Uses

Increase in fixedassets 10 18 6 11 4 5 5

Loan Repayments _ - - 40 165 425 689Disbursements of:- Loans - 400 1,248 2,604 2,733 2,822 3,004- Equity Investments 198 648 750 657 650 650Change in Wbrking Capital

859 404 (142) (217) (39) (436) (338)

Total Uses 869 1,020 1,760 3,188 3,520 3,466 4,01C

I/Assumes Government of Kenya provides additional equity as projected in DevelopmentPlan of £500,000 each in 1976 and 1977.

DFCDJanuary 28, 1975

Annex 15KENYA

INDUSTRIAL DEVELOPMENT BANK

Estimated Disbursement Schedule for Proposed Loan

Amount($ 000)

2975

Third Quarter 100Fourth Quarter 150

1976

First Quarter 750Second Quarter 1,300Third Quarter 1,500Fourth Quarter 2,500

1977

First Quarter 1,800Second Quarter 600Third Quarter 450Fourth Quarter 250

1978First Quarter 250Second Quarter 175Third Quarter 125Fourth Quarter 5°

Total 10,000

DFCDJanuary 28, 1975