Document of

The World BankpLIE CGrl FY

FOR OFFICIAL USE ONLY

Report No. 4047-EGT

STAFF APPRAISAL REPORT

ARAB REPUBLIC OF EGYPT

SECOND AGROINDUSTRIES PROJECT

November 11, 1982

Regional Projects DepartmentEurope, Middle East and North AfricaAgriculture I

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

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CURRENCY EQUIVALENTS

1 Egyptian Pound (LE) = US$1.19US$1.00 = LEO.84

MEASURES AND EQUIVALENTS

1 feddan (fd) = 0.42 hectare (ha)1 kilogram (kg) = 2.20 pounds (lbs)1 metric ton (mt) = 2,220 pounds (lbs)

ABBREVIATIONS AND ACRONYMS

BDAC - Bank for Development and Agriculture Credit

CBE - Central Bank of EgyptCY - Calendar yearDIB - Development Industrial BankERR - Economic rate of return

FRR - Financial rate of returnFY - Fiscal yearGOE - Government of EgyptGOFI - General Organization for IndustryGPC - General Poultry CompanyIDF - Industrial Development & Finance Division, World BankLIT - Limited international tenderNBD - National Bank for DevelopmentPB - Participating BankPBDAC - Principal Bank for Development and Agricultural CreditPT - Piastre (100 PT = LE1.00)SSI - Small Scale Industry

USAID - U.S. Agency for International Development

GOVERNMENT OF THE ARAB REPUBLIC OF EGYPTFISCAL YEAR

July I to June 30

FOR OFFICIAL USE ONLYEGYPT

SECOND AGROINDUSTRIES PROJECTSTAFF APPRAISAL REPORT

Table of ContentsPage No.

I. PROJECT BACKGROUND

A. Project History .I........ ... ... ... ... . 1B. The Agricultural Sector ...... . .. . .. . .. .. . 1C. Prices and Subsidies ....... .. .. .. ... .. . . 3D. Role of Agroindustry ....... .. .. .. ... .. . . 3E. Overview of Agroindustries in Egypt . . . . . . . . . . . . 4F. Previous Loans ........ ... .. ... ... .. . 9

II. THE BANKING SECTOR

A. Financial Institutions and Agroindustries Lending . . . . . 12B. Interest and Exchange Rates. . . . . . . . . . . . . . . . . 13C. Participating Banks .14

DIB .14PBDAC . . . . . . . . . . . . . . . . . . . . . . . . . 16Bank Misr .19NBD .20

III. THE PROJECT

A. Objectives .23B. Description .23

Agroindustries Credit .23Monitoring and Evaluation Components . . . . . . . . . . 25Training . . . . . . . . . . . . . . . . . . . . . . . . 25Technical Assistance for NBD . . . . . . . . . . . . . . 26

C. Summary of Project Costs .26D. Financing . . . . . . . . . . . . . . . . . . . . . . . . . 27E. Implementation Schedule .27F. Procurement . . . . . . . . . . . . . . . . . . . . . . . . 27G. Disbursements .28H. Environmental Impact .28

IV. PROJECT IMPLEMENTATION

A. Organization and Management .29The Borrower . . . . . . . . . . . . . . . . . . . . . . 29The Credit Component .29

B. Technical Assistance and Training . . . . . . . . . . . . . 30C. Onlending Terms and Conditions . . . . . . . . . . . . . . 32D. Accounts and Audits .35E. Monitoring, Evaluation, and Reporting . . . . . . . . . . . 36

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

Table of Contents (Cont'd) Page No.

V. BENEFITS AND JUSTIFICATION

A. Credit Component . . . . . . . . . . . . . . . . . . . . . 38B. Beneficiaries . . . . . . . . . . . . . . . . . . . . . . . 38C. Financial and Economic Rate of Return . . . . . . . . . . . 39

Risk and Sensitivity Analysis . . . . . . . . . . . . . 39

VI. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . . 40

ANNEXES

1. Profiles of Participating Banks

2. Selected Documents and Data Available in Project File

MAP IBRD 16407

EGYPTSECOND AGROINDUSTRIES PROJECT

I. PROJECT BACKGROUND

A. Project History

1.01 The project, for which a Bank loan of US$81.2 million is proposed,comprises; (i) a credit component to small and medium sized agroindustries;and (ii) funds and technical assistance for strengthening intermediaryfinancing institutions to better serve such agroindustries. The project wasidentified by Bank staff in cooperation with Egyptian authorities as arepeater project to the US$19 million credit component of the firstagroindustries project, Cr.988. As agroindustries in Egypt are not generallyable to obtain medium term financing from existing sources, it was felt that afurther project was justified. Accordingly, it was prepared by FAO/CP inNovember 1981, and appraised in March 1982 by Messrs. R. Hing, T. Turtiainen,D. hodgkinson, and B. Ateng.

B. The Agricultural Sector

1.02 Because a primary function of agroindustry is to add value to theagricultural sector, a profile of that sector is presented hereunder.Agriculture accounts for about 23% of GDP and 40% of total employment, therebyconstituting the largest sector of the Egyptian economy. Agriculturalproduction is based upon some 6.1 million feddans (2.5 million ha) ofirrigated land, including about 5.5 million feddans of "old" alluvial lands,virtually all of which are double cropped (with 195% average intensity) andfarmed in small plots by traditional methods. Cropping patterns in Egypt aredetermined by a mix of factors, including commodity prices, Government quotarequirements, producer preferences, soil and climate limitations, and degreeof farrmer commercialization. Wheat and berseem are the principal wintercrops; in summer, cotton and rice are important cash crops, while maize andsorghum are major subsistence crops. In a typical three-year rotation,berseem or beans followed by cotton are cultivated in the first year; in yeartwo, berseem is cultivated in winter, followed by maize or rice in summer; inyear three, winter wheat is followed by maize or rice. This pattern changesin Upper Egypt, where sugarcane is the main cash crop, replacing rice andcotton. Through the seventies, feed crops (such as berseem and maize) anduncontrolled crops (notably berseem, fruits and vegetables) increased at theexpense of controlled crops such as rice, beans, and lentils.

1.03 Egypt has under cultivation only about 0.14 feddan for each personin the population (currently some 43 million). Although this land isintensely cropped and yields are considerably above world averages, theboundaries of developed land place severe limits on the growth of agriculturaloutput. Moreover, the failure of yields (excepting cotton) to exhibit any

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substantive growth over the past decade gives cause for concern. As well as alag in the application of better technology, a major factor underlying thestagnation of agricultural productivity is the problem of rising water tablesresulting from the increase in water supplies made available by the Aswan HighDam, combined with increasing soil salinity in some areas. A very largedrainage program is being implemented, though it is running below the levelneeded to counteract the effects of waterlogging and salinity. It isestimated that some 75% of Egypt's cultivated land will need eventually tohave drainage installed. The faltering performance of the agricultural sectorin the last decade is evidenced by a fall in aggregate production growth ratesfrom around 3% in the 1960s to around 2% in the 1970s. In contrast,population is increasing at an annual rate of 2.8%, and rural to urbanmigration has accelerated. This population increase, coupled with infusionsof money from Egyptians working abroad, has increased domestic food demand toa level which greatly exceeds the present capacity of the agricultural sector.

1.04 The combination of slow agricultural growth and excess demand hastriggered sharp increases in food imports. Between 1973 and 1979, forexample, wheat and flour imports rose by 170% (representing about 75% ofdomestic consumption); for maize and sugar, imports increased from negligibleamounts to 20% and 36% of domestic consumption respectively; similarly, dairyimports have increased fourfold (to about 25% of domestic consumption), whilefrozen meat imports have grown from small quantities to over 150,000 tons (25%of domestic consumption); in the case of vegetable oil, the increase has beenon the order of 120% (approximately 70% of domestic consumption). During thesame period, the value of agricultural exports stagnated, leading to anegative agricultural trade balance (versus a surplus prior to 1975) andcontributing to a growing deficit in the overall trade balance. These trendsare well set out in a strategy paper put out by the Minister of Agriculture inJanuary 1982. 1/ This paper calls attention to the magnitude of the "foodgap", sets forth the reasons (mainly in terms of production disincentives, aswell as increasing usage of food commodities for animal feed, and forprocessing industries) and recommends a number of measures (more rationalprice policies; emphasis on technological inputs; agricultural land zoning;cooperation between ministries, etc.). In terms of agroindustries, the paperpoints out the high level of wastage arising from the undeveloped marketingsystem (particularly in the case of perishables), the desirability of morecompetition in marketing channels, and the need for more storage andprocessing facilities, in particular cold storage and slaughter houses. Thepaper also points to the major role agroindustries play in generatingemployment and income. In terms of production priorities, the paper suggeststhe following ranking; (i) cereals and pulses; (ii) dairy products; (iii)fish; (iv) poultry; and (v) red meat. Relevant to the proposed project is thefinancing of agroindustries to support these goals. For export opportunities,the paper recommends priority be given to vegetables, fruits, flowers,medicinal, and aromatic plants.

1/ Strategy of Agricultural Development in the Eighties, by Dr. YoussefWally, Minister of Agriculture and Food Secuirty.

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C. Prices and Subsidies

1.05 A major objective of the government is to control food prices at lowlevels to protect consumers' real income. The major effect of this objectiveis a heavy net "tax" on the agriculture sector, due to controlled outputprices, of the order of LE1,300 million, whereas the government subsidies toagriculture are about LE250 million. (The value added from agriculturalproduction in 1981 is estimated at LE3,427 billion). Interest rate subsidieson agricultural loans in Egypt include; crop production 3% (short term), farmmechanization 8%, and land reclamation 3%. Agroindustries, as distinct fromagriculture, subsidies do not significantly abet price distortions althoughactivities defined as "food security" projects (described in Project File,Annex 8) benefit from 6% local currency loans - the bulk of these are forcattle fattening and poultry production - from a LE100 million revolving fundcontributed by the major commercial banks, by government decree. This fundwas instituted in November 1981. Price controls; As a result of governmentintervention, consumers are served by a two-tier distribution system, offeringboth controlled price and free price items. Staples are available atsubsidized price, usually rationed by quantity, but items are also availableon the free market at considerably higher prices. Examples are given in theProject File. Similarly, agroindustries, according to the particularactivity, may be subject to price control on their output but benefit fromsubsidized inputs. In these cases the government allows a reasonable marginof profit to the firm. Where a company opts to apply for quotas of rawmaterials at subsidized price, it must also commit to deliver a percentage ofits output into government controlled distribution channels at a controlledprice. Yet there is little net intervention in agroindustries as shown by apositive ERR calculated for representative activities (para.5.03).

1.06 The pricing system in Egypt is highly inefficient, comprising as itdoes a variety of subsidies and controls. The resulting inefficiency inresource allocation cannot effectively be tackled piecemeal, but ratherrequires sectoral transformation. This is recognized by GOE, but thepolitical realities are such that dramatic changes are unlikely. Certainly,such widespread distortions cannot be corrected by the proposed project,though the 15% onlending rate to subborrowers for foreign currency for theproposed project is a major improvement over past policies which set the rateat 6%. (Interest rates are more fully discussed in paras 2.04-2.05). Theimpact of subsidies on agroindustries, and in particular "food security"projects, has been to increase investor interest in this field, presumably atthe expense of alternative expenditures (including, for example, urban realestate), although the vitality of the agroindustries subsector in Egypt restsmore fundamentally on strong and increasing consumer demand and attractiveprofit opportunities.

D. Role of Agroindustry

1.07 Related directly to the needs of Egypt's agricultural sector, butlimited by the country's general level of advancement, is the agroindustriessubsector. Its basic task, at this time and in the near future, is to get

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more food from farmers and overseas sources to consumers through basicfunctions which reduce waste, extend marketing regions, and generallycontribute to lower costs and greater quantities of food produced,distributed, and consumed. This means efficient primary processing andmilling of staples such as grain (rice, wheat, sorghum, maize), vegetable oil,sugar, and poultry products; new and improved local storage (for grain and forperishable food products) as well as the provision of economical transportmodes, and the development of input industries such as animal feed. Secondaryfunctions of agroindustries are to process nonfood agricultural commodities(tanneries, for example) and to provide facilities for exporting products inwhich Egypt has a comparative advantage (fruits and vegetables; essentialoils).

1.08 Capital Needs for Agroindustries. Egypt's agroindustry subsectordoes not have adequate facilities with which to fulfill its roles. In therecent past, because of other government priorities, it has been starved ofinvestment or even maintenance funds; coupled with the need to service thelarge and expanding population, this has resulted in a very large aggregateneed for investment funds. While much of the need is concentrated in thecapital intensive industries (such as sugar refining and vegetable oil

milling) in the public sector, the government's policy of encouragingdecentralization and growth of the private sector has resulted in demand forfunds for new and expanded enterprises in such activities as dairy processing,coldstores, poultry plants, and the like. The availability of medium termfunds to such private sector enterprises is very limited (whereas the publicsector does have increasing access to government budget funds), and theproject aims to increase the flow of funds in this respect as well as tostrengthen the capabilities of the intermediary banks in identifying andservicing such needs.

E. Overview of Agroindustries in Egypt

1.09 Agroindustries in Egypt are in a period of overall expansion. Thepublic sector, which accounts for the bulk of the activity, plans to spendabout US$1.5 billion on agroindustry projects in the period 1981-1985. Theprivate sector, too, is expanding at a fast rate as entrepreneurs respond toprofitable opportunities created by high consumer demands for a greatervariety of food products. Ths income demand, which commenced its rise in1974, especially encourages investments in livestock and poultry, importeddairy products, and supporting investments in processing and distribution,including cold storage.

1.10 Role of the State in Agroindustry. As with so much of Egypt'seconomy, the state's involvement in agroindustrial activities is widespreadand complex. Some of the principal agencies involved are as follows; theMinistry of Agriculture (in addition to its other activities) operates somepoultry and feedstuff plants and has jurisdiction over cooperatives who may

operate coldstores, packing plants, and the like; the Ministry of Industry

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oversees the Higher Council of Foodstuffs 1/, associated with the GeneralOrganization for Industry (GOFI), which has 21 companies under its umbrella.The Ministry of Supply largely controls grain storage, milling, and importedfoodstuffs; the Ministry of Investment and International Cooperation hasjurisdiction over export companies (citrus, vegetables, essential oils, etc.);the Ministry of Planning allocates budgets for all new public investments.The governorates own and operate wholesale markets, abattoirs, and otherfacilities. Furthermore, there are split jurisdictions (e.g., the Ministry ofSupply can veto requests by the Ministry of Agriculture to increase poultryprices); there are spin-offs (when state organizations are transformed intoautonomous state companies); there are joint ventures between state andprivate sector; and there are occasional transfers of authority betweenministries. This system can be very cumbersome for state owned companies,whose procurement, production, and marketing functions may be subject toseparate jurisdictions with consequent difficulty in coordination.Nevertneless, new developments in Egypt are such that a private company canget into business with rather minimum formalities such as a license from GOFIand, in some cases, an allocation of raw materials from the Ministry ofSupply. Private companies operate either under Law 43 of 1973 or under Law 21of 1958. The former applies to new companies and includes incentives such asa five-year tax holiday and ability to import without a license.

1.11 Small Scale Industries. A recent study 2/ reports that there are anestimated 7,700 SSIs in Egypt (defined by the authors as firms with 10 to 200employees and less than LE300,000 in assets excluding land and buildings).About 97% SSIs are in the private sector, and they account for about 25% ofindustrial output and the same percentage of workers. Although definitions ofthe food processing sector differ, it seems that the SSIs account for aboutthe same percentage of that sector. A minority of these companies have accessto bank credit, and their importance to the economy merits special attention,as in Agroindustries I (Cr.988), where 33% of funds were reserved for smallcompanies. (See para 4.14 for applicable definitions for the proposedproject.)

1.12 For the sake of completeness, major agroindustry activities in Egyptare summarized in the following paragraphs. Those agroindustry activitiesexpected to be financed under the proposed project are referred to in moredetail in paras 3.02, 3.03, 3.04, and Project File, Annex 8.

1.13 Grain Storage and Cereal Processing. Wheat imports were4.4 million mt in 1980 and corn imports 1.2 million mt in 1981. Localproduction was 1.8 million mt and 3.25 million respectively. Rice productionwas 1.60 million mt (with a small export surplus). These figures have risendramatically during

1/ Formerly, Egyptian Organization for Food Industries (EOFI), which wasreplaced under the new policy of decentralization. The function of theCouncil is to prepare a five-year plan of investment needs for state ownedcompanies for submission to government, to recommend priorities, and todistribute funds.

2/ Arthur D. Little and Arab International Consultants, Review and Evaluationof Small Scale Enterprises in Egypt, March 1982. An AID financed study.

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past years and are expected to be even higher in the future due to increasedaggregate consumption. Wheat flour is used 95% for bread in Egypt, and thebyproduct of milling, 1.3 million mt of bran, goes to animal feed. 75% offlour production is in the public sector. Corn is utilized 60% for directhuman consumption and 40% for feed. (In the future increasing amounts will beprocessed into sugar substitutes). There is evidence that storage, transport,and processing capacities have not kept pace with expanded production andimports. Needed investments associated with the above are additional grainstorage capacity, transport vehicles, flour mills, rice mills, glucosefactories, pasta factories, animal feed mills, and bakeries. Shortfalls inbread production are particularly significant and several hundred new bakeriesare required in the immediate future (Project File, Annex 8).

1.14 Edible Oils. In 1981, 430,000 mt of edible oil were consumed inEgypt, of which 280,000 mt were imported. Consumption is expected to increaseby about 5 1/2 percent per annum through 1990. Both domestic production andimports will rise to meet this demand. Cotton seed oil accounts for about 90%of domestic production, and soybean oil for the balance. The Ministry ofSupply distributes the output on a rationed basis as well as handling importedoil. Eight companies (seven of them publicly owned) have 98% of Egypt'smilling capacity. 1980 production of oil cake by these companies was517,000 mt. Additional milling capacity is required and is expected to doubleduring the next few years. Detailed immediate investment needs aggregateUS$220 million. These plants will rely to a great degree on imported oilseeds. While the government owned mills operate at a significant loss due topricing policies, present and future private companies will be allowed to sella substantial percentage of their output on the free market.

1.15 Dairy Products. Egypt produces about 1.9 million mt of fresh milk ayear, of which 34% are available for processing. Imports account for another1.1 million mt milk equivalent. The dairy products industry includes theproduction of pasteurized milk, cheese (white, hard, processed), butter, icecream, yogurt, and others. The private sector produces 80% of the totaloutput (with the exception of pasteurized and concentrated milk which ispresently monopolized by Government owned companies) and with consumptionincreasing at 3% per annum it is expected that numbers of investments will befinanced under the project. The main constraints to the further developmentof this industry are unproductive dairy farms and the inadequate state of theanimal feed industry. Poor packaging and distribution of dairy productssignificantly affect the quality of the final products and farmers are unableto deliver additional fluid milk to the processors because of inadequate milkcooling facilities and transportation. The project would provide funds formilk processing, packaging, and transportation together with coolingfacilities.

1.16 Sugar Mills. In recent years sugar consumption in Egypt has beengrowing at an annual rate of more than 10%. 1981 production and importfigures were 658,000 mt and 695,000 mt (imports exceeded production for thefirst time). The Egyptian Sugar and Distillation Company (publicly owned)with eight large mills as well as smaller plants had until recently a monopoly

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on the sector. It is adding a new mill and renovating and expanding existingmills at a projected cost of US$200 million. Two new sugarbeet plants arealso nearing production. Because of the very high capital costs involved, theproject will be limited to considering such applications as low cost buturgent repairs.

1.17 Other Capital Itensive Agroindustries. Egypt's needs for starch andglucose, fertilizer, insecticides, maize flour, alfalfa pelletization as wellas full line feed plants are not primary targets of this project, because ofthe high investment costs involved. As in the cases of sugar and edible oils,this project would be limited to considering participatory financing inselected high priority cases.

1.18 Meat, Fish, and Eggs. Government is giving high priority toproduction of these items, consumption of which in 1980 was 640,000 mt,300,000 mt, and 2,167 million eggs respectively. Imports were 26%, 43%, and10%. respectively. Fish and poultry consumption with recent per annum ratesof increase of 25%, and 12% respectively have increased much faster than redmeat consumption which has only been growing at 1.5% per annum. Governmentinvestments in poultry and meat production are a small percentage of theoverall total, though both activities are eligible for certain incentives(para 1.05). Slaughtering of large animals will continue to be mostly agovernment (or governorate) function. As to fish, the government ownedEgyptian Company for the Distribution of Fish handles about 90% of fish thatenters trade channels. Both animal slaughtering and fish distribution have avery inadequate infrastructure (although new municipal abattoirs for Cairo andAlexandria are being financed under Cr.988) and the project is expected tofinance small and medium sized facilities in these areas.

1.19 Production of fruits and vegetables is expanding rapidly in Egypt andreached 12 million tons in 1980. This gives rise to a range of investmentopportunities in such activities as wholesale markets, packing and grading,dehydration, canning, juicing, cooling, trucking, and miscellaneousprocessing. Previous experience indicates that processing of fruits andvegetables in Egypt is unlikely to make rapid progress, because almost all ofthe Egyptian output is now consumed on the domestic market which does notdemand very much grading beyond that done by retailers. Furthermore, as freshproduce is available year round in Egypt, the need for processing forpreservation is comparatively low. Nevertheless, two state owned firms,Edfina and Kaha, are active in this area, both with ongoing expansion plans.An earlier project, approved in 1976 (Fruits and Vegetables Project,1276-EGT), provided $9.2 million for unidentified investments in this fieldbut few applications were forthcoming and the funds were used for otheragroindustries. Plastic greenhouse production (of which there are only about50 feddans in Egypt) holds excellent promise, as demonstrated by researchfunded under Ln.1276.

1.20 Miscellaneous Export Industries; medicinal herbs, condimentalspices, and essential oils are procured from areas scattered throughout Egypt,and then cleaned, graded, and processed as necessary for shipment as highvalue exports. Such investments would be eligible under the project.

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1.21 Service Industries. Container manufacturing and trucking (includingrefrigerated and insulatc--f vt hicles) for agricultural products are two typesof service investments that would qualify under the project, as would smallinvestments in wholesale distribution facilites. Several subprojects of thistype were financed under Cr.988.

1.22 Food Packaging has as its primary function preservation andsecondarily convenience. Hygenic and standardized packaging reduces waste andcontributes to a more efficient distribution system. The market for modernfood packaging materials in Egypt is small but with the steady increase inurban population it is growing rapidly. 1980 estimates showed a total usageof 50,000 tons, of which 46% were for the private sector. 42% of the totalwere imported. These materials comprise carton packaging (e.g. egg cartons),treated paper packaging (e.g. for milk), aluminium packaging materials (e.g.for juices), and polypropeline bags (e.g. for frozen chickens). Additionalmaterials, not included in the above figures, include metal cans, glass jars,and wooden boxes. A number of food packaging subloans were made under Ln.1276and Cr.988 and it is anticipated that further subprojects will be financedunder the proposed loan.

1.23 Egyptian food distribution facilities, especially for perishableproduce, are inadequate at all levels and this bottleneck between productionand consumption adds considerable cost to the economy. Public and privateretail outlets coexist throughout Egypt with the former supplying subsidizedand rationed foods, while the latter offer both subsidized and free marketitems.' In Cairo there is a mix of specialized food stores enjoying few if anyeconomies of scale, two state owned chains, and a publicly sponsored privatesector chain. Coverage is even more limited in the provinces, and there isgreat scope for more facilities throughout Egypt. Needed investments arecoldstores, refrigerated trucks, ice making plants, retail sized refrigeratorsand display cases, as well as ancilliary industries such as food packaging andbottling. For village trade, current proposals for mobile retail stores couldbe supported if demonstrated as feasible. Current coldstore capacity in Egyptis approximately 200,000 mt. Projected increases in the consumption ofimported and domestic perishables indicate a need for cold storage of about350,000 mt by the year 1990. The Bank has financed a number of coldstoresunder previous loans, and expects to receive more applications under theproposed loan mostly for food distribution but also for field units to removefield heat before shipment or further storage. Similarly, ice making is agrowing activity in Egypt both in the public and private sectors, where thelack of a refrigerated chain lends importance to the use of block ice (usually25 kg) in the transport of perishables. A number of ice plants were financedunder previous loans and further investments would be eligible for financingunder this project. The Ministry of Supply plans to add more than 12 iceplants with aggregate daily output of 6,000 mt.

1.24 Poultry. There has been a very significant increase in poultryproduction in the past decade in Egypt. With poultry meat consumptionincreasing at an annual rate of 15.5% since 1974 and egg consumptionincreasing at 8%, large imports were also needed. In 1980, estimated eproduction in Egypt was 2,000 million eggs, with another 200 million eggs

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imported. (The cost of importing eggs - mainly handling - exceeds the cost ofegg production in Egypt). Yet this only provides an average per capitaconsumption of about 50 eggs per year. Egg consumption, therefore, is likelyto double during next ten years indicating the need for another 2.5 billioneggs. If 75% of the increment comes from commercial facilities, this wouldentail 125 facilities each producing 15 million eggs per year. Since about 35such facilities are now under construction, there is scope for a further US$90million (foreign exchange component) investment. (By the year 2,000, egg

consumption is projected at 8.4 billion, with a production gap of 600million). Poultry meat production has followed a similar growth pattern tothat of eggs. The comparative cheapness of poultry products compared with redmeat and the amenability of this activity to 'factory' type production hasresulted in rapid expansion. Nevertheless, village flocks will also increasetheir output as problems such as disease, unproductive breeds, and inadequatefeed are overcome. 1/ 1980 estimates of consumption were about 200,000 tonswith 40% imported. Egyptian government goals for future production call forpoultry production to be double red meat production by the year 2,000 (1.06million tons poultry meat and eggs vs. 0.52 million tons red meat). Thisimplies an additional 500 broiler production units of average 1,000 tons perannum output and a foreign exchange component of US$125 million (assuming 60%local production). Additonally, poultry slaughterhouses are required forbroilers and spent laying hens. Whereas chickens have traditionally been soldlive, urban dwellers increasingly prefer prepared birds, because urban lifestyles permit only limited time for food preparation. The number of poultryslaughterhouses in Egypt is relatively small, at this time, about six in all,whereas by 1990 trends to slaughter an increasing percentage of a largernumber of birds will require facilities for an estimated 150 million birds peryear, three times the present capacity. This additional capacity will belocated near to concentrations of broiler producing units and slaughter birdseither on a custom basis or own account (buying from producers). Hatcheries.The supply of day old chicks to commercial poultry operations has been largelymet by imports in the last few years. Hatchieries and parent stock will beincreasingly important in Egypt. Typical investment costs are LE250,000equivalent for facilities to hatch two million chicks per annum.

F. Previous Loans

1.25 World Bank operations in the agricultural sector have focussed onassisting Government to maintain and increase production levels in the "oldlands", and, particularly, to support the drainage program in Lower and UpperEgypt to prevent a decline in land productivity on account of rising water

1/ In the recently appraised Minya Development Project village poultry flocksare included for financing.

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tables. This has been financed through a series of four drainage projects 1/covering 2.8 million feddan of irrigated area. One of these projects (NileDelta Drainage I, Credit 181-EGT) was completed in 1981 2/ whileimplementation of the others has slowed over the last two years, largely as aresult of management and contractor problems. The Agricultural DevelopmentProject (Credit 830-EGT) is a pilot project to raise productivity in twogovernorates by increasing the level of farm mechanization and strengtheningagricultural credit, cooperatives and extension services. The project hassuffered seriously due the weak management. Better progress is now being madefollowing recent reorganization and strengthening of the administration of thevarious project components. The Fruit and Vegetables Project (Loan 1276-EGT)includes financing for a seed farm, construction of the West Nubariya Drain,credit to fruit and vegetable processors/exporters, and associatedactivities. Progress to date on development of the seed farm has been muchbelow appraisal forecasts. However, following some initial delays, drainconstruction is progressing satisfactorily and the project's US$20 millioncredit component has been fully committed. Studies on the repair of the ElNasr Canal are only now progressing. The Agroindustries Project (Credit988-EGT) for US$45 million, which became effective in December 1980, compriseda US$19 million credit component, as well as funds for the relocation of theAlexandria and Cairo municipal abattoirs, in addition to financing studies forthe relocation of the Cairo and Alexandria fruit and vegetable wholesalemarkets. The credit component was oversubscribed within 15 months fromeffectiveness and when fully disbursed is expected to total about 65subprojects in 15 governorates. The three participating banks - DIB, PBDAC,and Misr - drew down unequal amounts of the credit for subprojects whichincluded poultry (egg laying and packing facilities as well as hatcheries),feed mills, bakeries, and dairies, cold stores, food packaging, andmiscellaneous projects such as essential oil from medicinal plants, halavaprocessing, and other processing equipment. Contracts for turnkeyconstruction of both abattoirs have been signed and civil works are wellunderway at Cairo. The New Lands Development Project - West Nubariya (Credit1083-EGT) was declared effective in October 1981. The project is the firstinvolvement of the Bank in the development of new lands. It providesfinancing for reclamation of 24,000 feddans for intensive agriculture,including settlement of 4,000 smallholders, and related services andfacilities. The Fish Farming Development Project (Credit 1111-EGT) representsthe Bank's first involvement in the fisheries subsector in Egypt. The projectincludes establishment of a 3,100 feddan fish farm in the West Delta area,credit for individual fish farmers, training and related activities. Theproject became effective January 25, 1982. The Technical Assistance Project(Credit 1162-EGT) to help Government develop institutional capacity toundertake planning, feasibility, and engineering studies related toagricultural projects has recently been approved by the Bank. The projectbecame effective January 15, 1982. Finally, the Bank is the executing agency

1/ Credit 181-EGT (1970), Credit 393-EGT (1973), Credit 637/Loan 1285-EGT

(1976), Credit 719/Loans 1439-1440-EGT (1977).

2/ The PCR was issued July 16, 1981, and the PPAR is under preparation.

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for a UNDP-financed project which will draw up a Master Plan for WaterDevelopment and Use. This Plan is expected to make a major contribution towater allocation and priority decisions in all sectors. Also relevant to theproposed loan is the IDF lending to DIB, which recently received its fifthloan for onlending to the private industrial sector. These loans 1/, aimed atsmall and medium term businesses, have been very effective and in fact haveprovided the bulk of long term credit to industrial firms in Egypt. Duringthe period 1978 to 1980, 15% of DIB's loan approvals were for food processing.

1/ DIB III (Loan 1533), US$40 million, DIB IV (Loan 1804) US$50 million, DIBV (Loan 2074) US$120 million

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1. THE BANKING SECTOR

A. Financial InstiLutions and Agroindustries Lending

2.01 The present arrangements for institutional financing in Egypt dateback to the early 1960s when banks were brought into public ownership, and anattempt at functional specialization between the four existing commercialbanks was made. Under this system the banks had little flexibility and wereessentially instruments for carrying out government policy in their particularareas. The abolition of the system of functional specialization in 1975, byremoving from the banks exclusive responsibility for financing specifiedactivities, gave them greater scope for placing their relations with publicsector entities on a more businesslike basis. Additional obstacles to theefficient operation of the government-owned commercial banks were removed bythe new banking law in 1975, which also increased the autonomy of the CentralBank of Egypt and removed the statutory ceiling on interest rates. Under thislaw, the Central Bank has the power to adjust interest rates in the light ofprevailing monetary and credit conditions. 1/

2.02 Perhap- the most fundamental change that has occurred in thebanking system recently was the entry into Egypt of a number of foreign banksas the result of the new foreign investment law in 1974. The new law resultedin a rapid increase in the number of domestic, foreign, and joint venturebanks competing freely, apart from other kinds of financial insitutions. Atpresent there are 37 commercial banks (4 state owned, 20 local private sector,and 13 joint venture private sector), 20 merchant banks, and 2 developmentbanks - the Development Industrial Bank (DIB) and the National Bank forDevelopment (NBD). All concentrate largely on short-term credit, with theexception of Misr Iran Development Bank (MIDB), NBD, and and DIB. Only thelatter extends long-term credit to industrial firms.

2.03 Although the special needs of agroindustries lending and thepressing demand for all forms of credit for this sector have been wellrecognized in the country, there is no bank which concentrates on financing ofagroindustries as such. A group of "specialized banks" is, however, of greatsignificance for agriculture, agroindustries and other industries, betweenwhich the delineation is often difficult. Specialized banks in Egypt consistof 17 regional Banks for Development and Agricultural Credit (BDAC) supervisedby a Principal Bank (PBDAC) in Cairo, and two mortgage development banks, theDIB and the newly established National Bank for Development. The AgriculturalCredit Banks (2.12-2.15) finance the subsidized production credit programs ofthe agricultural cooperatives and individuals and also act as fiscal agentsfor the cooperatives. The production loans are largely seasonal in nature andmay be granted either in cash or in the form of production inputs such asseeds or fertilizer; repayments may be effected either in cash or as adeduction from the value of produce delivered to the cooperative. Themortgage banks are under the supervision of the Central Bank, and are involvedmainly in real estate

1/ The various changes in interest rates are more fully described in theProject File, Annex 2.

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lending and in financing public housing, construction and utilities projects;their loans are secured by mortgages and have maturities of 5-30 years. TheDevelopment Industrial Bank, (para 2.07) took over the term lending functionsof the Bank of Alexandria when DIB was established in 1976. The DIB financesthe fixed and working capital requirements of private and state ownedindustrial enterprises. Its loans may be in local or foreign currency andhave terms of up to 15 years. The newest addition to development financeinstitutions is the National Bank for Development, which started itsoperations in 1981 (para 2.22). The Investment Center of Bank Misr(para 2.20) provides similar services to the ones mentioned above. Totalapprovals of agroindustries lending by these banks between 1976 and 1981exceeded LE220 million.

B. Interest and Exchange Rates

2.04 The CBE regulates interest rates on deposits and loans in localcurrency for all financial institutions. In the face of rising internationalinterest rates, the rates on local currency loans were raised, in January1981, from 12%-14% to 13%-15% with a simultaneous increase of the maximumrates on term saving deposits from 10.5% to 11.5%. The CBE does not interferewith interest rates on foreign exchange loans granted to general authoritiesand state owned units. Consequently these interest rates fluctuate with themarket movements. DIB's effective interest rates on US dollar loans arebetween 15-17% partly as a result of the compensatory interest free depositsof 10-20% of foreign currency loans which the DIB requires from itsborrowers. The "food security" loans - covering a large variety of lendingpurposes with the aim of providing incentives to enterpreneurs to invest inessential food processing industries l1 - are an exception. The interest ratefor the local currency part of these loans has been 6% since October 1980, andeven their foreign currency component was lent at 6% from January 1982onwards. Various agricultural purposes also enjoy concessional interestrates. When foreign assistance funds are not available, the institutionsapply a floating interest rate of 6 months LIBOR plus 2% to their (generally)short-term foreign currency loans. The interest rate of these loans was about18% in the first half of 1981 and about 13%-14% in autumn of 1981.Compounding the picture of widely varying interest rates is the three-tierexchange system in use. There are two controlled and one fluctuating exchangerates, viz;

1/ In October 1980, GOE decided that animal protein projects would qualifyfor a 6% on-lending rate under a special "Food Security Scheme". Therevolving fund is financed from nationalized commercial bank profits whichwould normally be turned over to the government. The banks receive asubsidy payment from the government for the lost interest margin. A

committee at Central Bank of Egypt approves the projects qualifying forthis category, and they have gradually expanded the list of acceptableprojects even outside animal protein production. The cumulative lendingby PBDAC, DIB, and Bank Misr for these purposes (short- and medium-term,local and foreign) was about LE300 million in March, 1982. They includefinancing of livestock not normally part of agroindustries loans.

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- US$1 to LEO.70 for State imports of strategic and basic supply goods,revenues from Suez Canal tolls, and export proceeds from cotton, riceand petroleum (operations of the C.B.E. foreign exchange pool);

- US$1 to LEO.84 affect tourism, Egyptian workers transfer earningshome, and certain categories of exports (authorized Banks foreignexchange pool); and

- since 1974 private companies have been allowed to freely borrowforeign exchange from financial institutions and convert localcurrency into foreign currency on the open market. The rate was inMarch 1982, US$1 to LE1.04.

2.05 The ultimate borrowers usually carry the foreign exchange risk. Whenconverting loans from foreign financial assistance institutions, such as theWorld Bank Group, the "official bank rate" (US$1 to LEO.84) is used. The samerate applies for interest payments and loan repayments. The exchange risk forthe borrower is thus the one arising from possible official devaluation of theEgyptian Pound.

C. Participating Banks

2.06 All three banks which participated in the First AgroindustriesProject, i.e., DIB, PBDAC and Bank Misr, have expressed interest in the newproject. In addition, GOE has suggested inclusion of a fourth bank group, therecently established National Bank for Development and its affiliates. Thethree banks which implemented the previous project are wholly state owned,whereas NBD is a private bank. The PBDAC is controlled by the Ministry ofAgriculture, and the other banks come under the jurisdiction of CBE. 1/

Development Industrial Bank

2.07 Objectives. Of the participating banks (PBs), DIB is one of the twowhich is fully devoted to development banking. According to its policystatement, originally adopted in 1978 and amended and expanded in 1980, DIB'sfinancial assistance will be available mainly for enterprises in the privateand cooperative sectors, including artisans and persons providing professionalservices. Public sector projects may also be financed on a selective basis.DIB will particularly assist projects which will result in increasedutilization of existing capacities and will endeavour to spread its assistanceamong different regions in accordance with the broad economic objectives ofthe Government. Financial assistance can be in the form of short-, medium-and long-term loans, participation in equity capital, or both. In addition,DIB provides technical assistance for pre-investment studies, feasibilitystudies, research required, etc., particularly for small scale borrowers.

1/ The PBs are described in detail in the Project File, Annex 2,Appendices 1-4.

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2.08 Organization. DIB is a compact bank, which operates from its headoffice in Cairo and three branches located in Cairo, Alexandria and Tanta.The Tanta branch was established in early 1979 and DIB plans to open the nextbranch in the city of 10th of Ramadan in late 1982, followed by branches atMinya in Upper Egypt, at Damanhour in the lower Nile Delta, and Port Said inthe Canal area. There are now 20 departments (each headed by a manager) atthe head office, ten of which are grouped under three General Managers (oneeach for finance and administration; short-term operations and resources, andfor long-term lending and follow-up) which report to the Vice-Chairman. Theremaining departments dealing with legal matters, internal audit etc. reportdirectly to the Chairman. Overall, DIB's organizational structure seems to beappropriate for its present activities as well as those planned in the medium-term. The organization charts for the head office and a typical branch are inProject File, Annex 2.

2.09 Board, Management, and Staff. The number of DIB Directors is fixedat seven by a law regulating state owned banks; this includes two outsidemembers. The five internal directors consist of the chairman, vice chairmanand three general managers. The Board meets about once a month or more oftenas necessary to decide on loan applications for amounts exceeding LE500,000 orits equivalent in the case of a foreign currency loan. All cases submitted tothe Board are screened by a loan committee consisting of the Vice-Chairman andthe three General Managers. DIB's senior and middle management team hasremained virtually unchanged since its inception, with the exception of tworetirements. As the team has gained experience, there has been considerableimprovement in the delegation and communication of information betweendepartments. There has been improvement in the performance of the managementalso, due to training of senior managers in foreign institutions during thelast four years and the provision of extensive advisory services. Furtherimprovement is expected to continue with the provision of advisory servicesunder the USAID program of management consultancy. Project preparation andappraisals are at commendable level, although project supervision and expostevaluation need further development. As of December 31, 1981, DIB had a totalof 390 employees including 227 professional staff (excluding top management).DIB's salary scales make it difficult to recruit top quality experienced staffespecially as the emergence of the large number of merchant banks in Egypt hascreated increased demand for individuals with experience or knowledge ofproject analysis, and has pushed salary levels well beyond DIB's permissiblescales. However, the staff has successfully implemented, among other things,four small scale industries development projects and part of the FirstAgroindustries Project, all financed by the Bank Group.

2.10 Operations. DIB's lending operations have grown fast, theoutstanding loans being LE46 million in 1978 and LE183 million in 1981(Annex 1, Table 1). Investments in equity capital have not been verysignificant due to the lack of an active capital market in Egypt, but theseinvestments also more than tripled during the same period from LEO.5 millionto LE1.6 M. Compared with the early period after DIB's establishment, lendingoperations in the last 3-4 years have shown a rapid decline in the proportionof short-term operations and an increase, to a predominant position, ofmedium- and long-term foreign currency operations. Foreign currency loanapprovals

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amounting to LE18.0 million pj25.2 million) exceeded mediuin- run lonlg-termlocal currency loan appr; ,l,-;i for the first tinme in 1978. ,:i 1980, foreigncurrency loan approvals tot"aLing LE46.3 million ($66.l miD ion) equalledtotal local currency loan approvals (including short-term loanas) but increasedin 1981 less than the local funds approvals. The overall trend confirms thatDIB has now attained one of its objectives of becoming primarily a provider ofmedium- and long-term foreign currency investment funds to indclustry in Egyptalthough the local funds still continue to be an important factor. Foodprocessing industries were the largest beneficiaries in 1978 and 1979 (27% and33%) while building and construction industries had the largest share (26%) in1980 and 1981. DIB's loan recovery record has been excellent. The arrearshave varied annually between 2-4% of portfolio, but the overdues more than twoyears old were only 0.2% in 1981.

2.11 Operational Results and Financial Position. DIB's income statementsfor 1978-1981 indicate that DIB has made adequate profits, before-tax returnon average equity ranging between 11% and 23% p.a. Return on equity hasincreased despite more than doubling of DIB's paid-in capital between theyears 1978-81 (Annex 1, Table 1). This illustrates DIB's abiSity to deployfunds in a remuner-ltive manner within a short period. Retu,n on total assetshas been adequate sbetween 2.9% and 3.6%) and DIB has enjoyed an increasingaverage spread on borrowed funds excluding current deposits. DIB'sprofitability is projected to grow nearly in line with its operations and nodifficulty is expected in its meeting operational and financial expenses aftermaking adequate provisions for doubtful debts. DIB's comparacive balancesheets for 1978-1981 show that DIB's total assets have grown at an averageannual rate of over 45% during the 1978-1981 period. As of June 30, 1981, 91%of DIB's assets were accounted for by outstanding loans, reflecting a highdegree of resource utilization, as well as a need for further resourcemobilization. DIB has achieved a satisfactory liquidity situation, withcurrent assets exceeding current liabilities by six times. Despite the highrate of growth of assets and debt, DIB has a very satisfactory financialstructure after the doubling of its paid-in capital to LE20 million in 1979and again increasing it by LE5 million in 1981. The long-ter- debt/equityratio was 6.1;1 as of June 30, 1981, which is within the limit of 7;1 fixedunder the loan agreement for DIB IV Project financed by the Bank Group.Overall, DIB has a strong financial position and is well placed to continueexpanding its operations.

The Principal Bank for Development and Agricultural Credit

2.12 The Principal Bank for Development and Agricultural Credit (PBDAC)has a long history dating back to 1931 with the creation of -.he AgriculturalCredit Bank of Egypt. Though numerous phases and different -ames of theorganization, and with the enactment of a new law in 1976, t-he PBDAC wasestablished as the apex bank in the agricultural sector, and che Banks for

Development and Agricultural Credit (BDACs) as the central agricultural bankin the governorates. Adoption of the new 1976 charter entailed restoringPBDAC's financial viability and extending its organizational base. The PBDAC

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is, together with the affiliated 17 BDACs and an extensive network of about5,000 branches, member (village) banks and agencies, the biggest source ofinstitutional credit for agriculture in the country. PBDAC is the umbrellaorganization for the regional, in principle semi-autonomous BDACs. Inpractice they form a highly centralized organization with nearly all decisionmaking powers concentrated in the PBDAC. The general policy matters belong tothe sphere of the Ministry of Agriculture.

2.13 Organization. The Board of Directors of the PBDAC, its highestorgan, has 23 members. They include, besides the chairman and two deputies,representatives of GOE ministries and CBE and eight heads of affiliatedbanks. Apart from the customary powers to control and manage its business,the Board exercises supervision over the BDACs. The Chairman of the Board isassisted by two Deputy Chairmen, fulltime employees who are assisted by fiveDirectors General. The Board of Directors, strengthened by representatives ofState Auditing Organizations and Ministries of Finance and Planning, form theGeneral Assembly which meets annually. The organization of PBDAC is dividedinto a Commercial Sector, an Investment Sector, and the Head Office(administrative functions). The most important department from a foreignlender's viewpoint is the one for General Administration for Investment andDevelopment Affairs, established in 1978. It handles all term lendingactivities, embracing preparation, appraisal and supervision of investmentprojects in the agricultural sector, i.e., agricultural marketing, processingand agrobusiness. It has seven sub-departments, of which the "Food SecurityDepartment" is most directly concerned with preparation and appraisal ofagroindustries subprojects, whereas "International Loans Department" and"Credit Transactions Department" take care of the relations with foreignlenders and correspondence banks. Personnel in the Investment and DevelopmentAffairs Department exceeds 100, most of them in the Rural Development (sub-)Department. The professional staff for agroindustries loans was only 10, butit was doubled in March 1982 by transferring another 10 persons to the newlyestablished Evaluation Department. PBDAC staff in Cairo now totals 400. Toenhance its support to the field level, PBDAC has developed six branches inprincipal agricultural areas which are manned by about 200 staff members.However, most of the field work is carried out by the 17 BDACs and their 140branches, each of which has a staff of about 40. At the village level, BDACshave about 4200 "agencies" with a staff of 3-5 employees each. In the biggervillages there are a total of 750 "village banks", each with a staff of about10-15 employees. The total village level staff is about 30,000. The BDACssupervise the village banks and agencies in each governorate.

2.14 Operations and Policies. According to law the PBDAC is to undertakethe central planning of agricultural credit and cooperative financing at thenational level, the following-up of their programs, and the supervision oftheir application in the framework of the State's policy. A prominent featureof PBDAC operations is that it is not only a bank but is responsible formaking available all production inputs either through importation or fromlocal production, and to formulate the policy of their distribution in cash oron credit. At the national level, the PBDAC is also responsible for planning,raising the necessary funds and implementing its programs through the BDACs.

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From the regional to village level, DACBs in the governorates, their branches,the Village Banks and the agencies fulfill the objectives of the PrincipalBank. BDACs and their member banks deal with several activities supportingagriculture. In fact, they handle more non-banking than banking activities.The former includes the sale of fertilizer, seed and grains, jute bags, feedand oilcakes, insecticides, spare parts, and procurement of some farmproduce. In these operations they are dealing both with cooperatives andindividuals.

2.15 The banking operations have expanded rapidly, reflecting theimportance of PBDAC group in agricultural lending and a growing desire byagriculturalists to borrow for their short- and medium-term needs. Thebalance of loans to agriculturists almost tripled between 1977 and 1981,rising from LE96 million to LE284 million. The balance, however, only revealsa part of short-term lending and the total funds provided to agriculture arelarger than these figures. PBDAC group has been very active in granting the"food security" loans, for which they are not subject to any limit because ofthe general nature of their business (the total limit for all other banks isLE150 million annually). In 1980-81, they granted LE260 million for thepurposes qualifying under this scheme. Nearly half of this amount, LE122million, was for medium-term loans, mainly for livestock and poultrydevelopment (92%), but smaller amounts also for fisheries, freezing tunnelsand feed production were granted. The short-term loans during the same periodwere LE138 million.

2.16 Larger borrowers are expected to use consultants to make feasibilitystudies, whereas the bank provides assistance to smaller investors. Thisassistance cannot, however, be more than limited in view of the number ofexperienced staff at PBDAC and particularly engineers (in March 1982 only 4).The bank has each borrower fill in a preliminary information collection formon which the more extensive feasibility study is based. The format of atypical study contains all the items common in this kind of document. VariousIDA and FAO missions have also observed a definite improvement in thepreparation and appraisal of investment projects by PBDAC group. However, themissions have found some weaknesses, particularly in the follow-up,supervision and market surveys. Project supervision in particular --mainlyensuring loan collection--has been left to branch or village bank staff whohave little training or experience in this area.

2.17 Operating Results. Before its reorganization in 1976, PBDAC grouphad suffered continuous losses as a result of GOE pricing and creditpolicies. As a result of IBRD representation during preparation and appraisalof Cr.830-EGT PBDAC's capital base was strengthened. Amounts due by theGovernment were paid and its operations were put on a more sound footing.Since then, it has shown remarkable performance as described below. Theaccumulated loss of LE54 million has been covered by continuously growingprofits during the last five years. Profitability has increased steadily,reaching an annual level of about LE70 million in 1981 (less taxes). AlthoughPBDAC reports that all activities are profitable, the income statementindicates that the commercial activities still overshadow the creditoperations.

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Interest and other banking-related income was 35% of accounting revenue in1981. The overall net profit in 1981 was high in relation to own capital,i.e., nearly two thirds of it, but that is mainly due to a fairly low capitalbase. The return to total assets also has been satisfactory, 8.5% in 1980 and95% in 1981, indicating that operational margins are sufficient. Otherperformance ratios were also satisfactory (Annex 1, Table 2).

2.18 Resources and Financial Position: As of June 30, 1981, the resourcesof PBDAC and its member banks, subtracting accounts payable, totalled LE635million (Annex 1, Table 2). Only 15%, or LE53 million, represented foreigncurrency funds from IDA, USAID and Credit Agricole, France. Less than half ofthe total funds have been made available for lending, the rest have beenneeded to finance farm inputs and other activities. An increase in localfunds has been generated mainly by borrowing from other banks and collectingsavings from cooperatives and individuals. Total assets of PBDAC group in1977-81 increased during the period 1976-1981 from LE282 million to greaterthan LE750 million, i.e., at an average annual growth rate of over 20%.Lending to agriculturists grew at the same rate, but mainly because of largeincreases during the last two years. The level of equity (share capital plusreserves) grew dramatically from LE2 million in 1977 to nearly LE99 million in1981. Simultaneously, the debt/equity ratio has improved from a very weak18.5:1 to the very satisfactory 6.6:1. Liquidity, however, has beencontinuously tight. Although details of current assets and currentliabilities are not presented in the accounts, it appears that meeting currentliabilities largely depends on the successful sale of farm inputs and thepunctual repayment of loans.

Bank Misr

2.19 Established in 1920, Bank Misr has developed into Egypt's largestcommercial bank. Before nationalization, Bank Misr created and invested innumerous important industrial and commercial enterprises. In spite ofnationalization it has essentially retained its commercial character and itsrelative role in the banking sector. Long term lending in the field ofdevelopment finance was started only after the establishment of a separate"Investment Center" and undertaking the implementation of the IDA assistedFruit and Vegetable Development Project (Cr. 1276-EGT). This activity waslater broadened by partic-ipating in IDA Credit 988. Bank Misr's Board ofDirectors consists of the Chairman, a Deputy Chairman, three General Managersand two outside banking specialists. Bank Misr is efficiently organized withregard to its commercial banking operations, in which it has a longtradition. Its portfolio contains predominantly short-term loans forcommercial and trading activities. A significant part of its organizationalset-up, including about 300 branch offices, is directed to ensuring asufficient flow of domestic funds from depositers. It has been markedlysuccessful in attracting deposits from the private sector (LE1,577 million asof June, 30, 1981).

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2.20 Development Finance. All development activities iacLuding medium-and long-tern lending i(id , .y participation are channelled through the"Investment Center". I£t s he-aaed by a General Manager who reports directlyto the Vice-Chairman. The center consists of three departments (Project File,Annex 2), employing a total staff of 70. It has embarked on agricultural andagroindustrial projects as well as a great variety of equity investmente suchas financial and banking projects, housing and reconstruction projects,hotels, tourism projects, transpontation and service projects. of theInvestment Center departments, the Agricultural Development and LendingDepartment (ADLD) has a professional staff of 20. It was originally createdto handle the Fruit and Vegetable Project. The Investment Ceater hasresponsibility for all of Bank Misr's medium- and long-term financingactivities in the agricultural and agroindustries sectors, carried onpredominantly through external aid projects. Technical assistance providedunder the Fruit and Vegetable Project has considerably improved the financialappraisal capability and sub-borrower assistance in project preparation at theHead Office level. However, the staff in relation to the number of projectsis few. The main principle of organization is complete centralization ofinvestment lending and equity participation, although some supervision tasksin credit accounting have been given to branch offices. As of March 15, 1982,Bank Misr had approved 165 agroindustry projects (LE45 million), 22 of whichwere financed by World Bank group loans. There is a clear concentration ofagroindustries loans in the poultry sector (69%), followed by fisheriesprojects (10%).

2.21 Finances.. BanL: Misr has shown remarkable growth during the last fewyears. Its total assets increased from LE1,482 million on 31 December 1978 toLE2,811 million as per 30 June 1981, or 100%, with almost the sameproportional increase in deposits. Bank Misr has a comparatively highliquidity ratio, total loans to assets being about 50% until 1980 (Annex 1,Table 3), which is commensurate with commercial banking practices in Egypt.Due to higher demand for funds in 1980/81, among other things, the above ratiowas reduced to 61%, and deposits exceeded the loans by only 8%. Financialresults have been satisfatory, the profit before provisions and taxes risingfrom LE44.5 million in 1978, to LE90.7 million in 1981. This is 1.3 timeshigher than the Bank's own capital. There is no separate statement on theprofitability of medium- and long-term lending, but relatively small staffindicates that also it is profitable for the Bank. Compared to the volume oflending, the operational expenses (staff, equipment and services) for theentire bank are a moderate LE37 million. This is 2.2% of total lending and1.3% of liabilities (Annex 1, Table 3).

National Bank for Development

2.22 Based on a separate law, NBD was incorporated as recently as June1980 and formally started operations on 1 January 1981. In spite of the factthat 60% of its equity is held by state owned banks (among them the threePBs), insurance companies, and the Suez Canal Company, the-NBD has the legalstatus of a private, commercial bank. The purposes of the bank and itsactivities are very broad and its statutes allow the bank to "undertake all

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activities licensed for commercial, merchant and investment banks in Egyptianpounds and foreign currencies including and without limitation thoseactivities related to all commercial banking business, foreign trade financingand foreign exchange as well as studying, financing, establishing andparticipating in development projects in the various sectors, whether local orjoint venture or foreign projects".

2.23 Organization. The bank is managed by a Board of Directors initiallyappointed for five years. Henceforward the period of appointment will bethree years. The Board consists of 14 well known executives havingconsiderable banking and industrial experience. This augurs well for thefuture development of the bank. The bank is chaired by the former chairman ofBank of Cairo. The main powers have been delegated to an executivecommittee. The day to day management is the responsibility of the chairman,vice-chairman, and managing director. The last two positions were combined tostart with, and the incumbent is the head of all operations, viz.,"InvestmentSector" and "Commercial Sector". Under these and the "Head Office" staff,subordinated to Chairman, there are 10 department groups (Project File,

Annex 2). Initially working out of one office in Cairo, NBD plans togradually open seven branches in the city. However, to better serve thegovernorates and the countryside in general, the NBD is to act as a holdingcompany for small subsidiary banks established in each governorate, with acapital of LE2 million, 50% owned by NBD and 50% by various bodies in thegovernorate. These 17 subsidiary banks were to become operative in April-May,1982, and function as a kind of mini-development banks. At the same time theywill endeavour to attract deposits. This organizational set up is in linewith the Government's decentralization policy, giving the governorates muchgreater say in their own development plans. Although their functions wouldbasically be the same as those of NBD, NBD will take care of all foreigntransactions on behalf of the bank group. As a private sector bank, NBD isable to pay the same level salaries as foreign commercial banks in Egypt.Consequently, it has been able to attract a well-qualified staff, totallingover 100 and expected to increase to 250 by 1983. Their experience is lackingin agroindustries sector, but is particularly relevant for the operations ofthe commercial sector, and will also help in investment financing. However,NBD and the governorate banks which are being staffed, are prepared to recruitpersons with suitable experience and will favour those with agroindustriestraining and consultancy experience.

2.24 Operations. After its first year of operation (1981), NBD hadgranted about LE40 million in investment loans, of which LE7 million werewithdrawn. The balance of short-term (commercial) loans was LE59 million,part of it for the agroindustries sector. Two commitments had been made formedium- and long-term loans to agroindustries for investments totalling LE85million (oilseed processing and livestock). Simultaneously, NBD's equity

participation was LEl4 million, over half of that in the food industrysector. Without performance records from the past, future projections aredifficult to make, but NBD has estimated that their total lending will reachLE100-150 million in 1982. NBD had a good pipeline at its head office topromote the achievement of this target. Several of the subprojects werealready at preparation and appraisal stage.

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2.25 Sources of Funds: Besides its LE25 million share capital (paid in bythe end of 1981), NDB obtained a LE150 million line of credit from CBE at itsestablishment. The credit period is five years, and the interest rate, at9.5%, is 2.5% below the CBE discount rate. By the end of 1981, NBD had usedonly LE18 million of this facility. The main source of funds has beendeposits from current and potential customers and the general public. Theserose to LE75 million by the end of 1981, far exceeding earlier projections(Annex 1, Table 4). The bank does not receive foreign currency developmentfunds from international financing institutions but has been able to getexport credits to its customers from several individual countries.

2.26 Operating Results: Due to its "commercial" short-term lendingoperations and low cost of funds, NBD had already during its first year ofoperation LEl2.1 million in interest and other income, while costs were onlyLE5.4 M. The net profit of LE6.8 million represents 22% of the share capitaland 9% of deposits (Annex 1, Table 4).

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III. THE PROJECT

A. Objectives

3.01 The major objectives of the proposed project are;

(i) To add value to the agriculture sector in Egypt by financing themeans to store, transform, and distribute agricultural products withconsequent beneficial effects upon, inter alia, increased supplies toa growing population;

(ii) to strengthen links between participating banks and agroindustries,especially those of small and medium size; and

(iii) to strengthen the participating banks in identifying, appraising, andsupervising medium- and long-term agroindustries investments, thusimproving the quality of such investments.

B. Description

3.02 Agroindustries Credit. The project would finance investmentsthroughout Egypt for the establishment, expansion, and modernization offacilities for primary processing, marketing, and distribution of basicfoodstuffs and other agricultural commodities and associated service and inputactivities. It would support certain factory type production activities suchas commercial poultry production and greenhouse production of fruits andvegetables. Investments are envisaged primarily in the private sector (i.e.,customers of the participating banks), but cooperatives and state ownedenterprises would also be eligible if satisfactory to the PBs. For theprivate sector, at any rate, demand for funds has been concentrated over thelast three years on poultry enterprises, and coldstores, with lesser amountsfor food packaging and bakeries. These are the fastest expanding activitiesnot only because of the need for them, but because entrepreneurs perceive thehighest profit margins in these areas. The project would be a three year timeslice of the ongoing lending program of the PBs. The estimates were drawn upin consultation with the PBs and were adjusted during the appraisal to takeaccount of previous performance and disbursements, and known institutionalconstraints and overall demand (Project File, Annex 3).

3.03 Under the credit components of Loan 1276-EGT and Credit 988-EGT, theBank group financed a reasonable range of agroindustries such as poultryoperations (eggs, broilers, and hatcheries), new and expanded bakeries, coldstores, ice making factories, dairies, feed mills, food packaging companies,and a variety of food processing and miscellaneous agroindustrialenterprises. It is anticipated that similar types of activities will befinanced under the proposed loan. 1/ In addition to the priority given torates of return in individual projects, broader, sectoral considerationsdictate that desirable investments will be

1/ Investment demand and the viability (both financial and economic) oftypical subprojects are discussed in Project File, Annex 8.

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those which complement other tivities, and avoid bottlenecks todistribution. For bal. - rh of agroindustries in Egypt, it is importantto support development of mo-e versatile portfolios than those the PBspresented under Cr.988. This would also improve their institutionalcapacities to deal with different types of agroindustries sectors. In aneffort to introduce some general guidance in providing more balanceddevelopment each bank, in addition to using consultant advice, would beallowed to use no more than 25% of their allocation for any sirgle eligibleagroindustrial activity. This would be subject to review, and monitored atthe time of each additional allocation (para 4.09). (See para 4.13 forassurances received). For poultry production, there needs to be a betterbalance between production and supporting activities such as slaughterhouses,hatcheries, and feed mills, and - of increasing importance as suppliesincrease - investments in the distribution infrastructure through cold storageat the wholesale level and refrigeration at the retail level The dairyindustry needs supporting investments in milktrucks and in concainermanufacturing. There needs to be a balance between flour mills and bakeries.The cotton and the sugar industries need investments for further processingbyproducts in order to give maximum added value to those subsectors. Thebanks will be encou-aged to achieve a balanced portfolio by making contactwith potential subborrowers in a wide range of industries and, to some extent,promoting and assisting in planning investments in provincial centers.Nevertheless, "distortions" due to government incentives to invest in certainindustries and, conversely, disincentives to entrepreneurs (through pricecontrols) to invest in others, as well as considerations of collateral andother repayment assurances which may be lacking for cooperatives and stateowned enterprises must be recognized as limitations on the goal of sectoralbalance in the loan portfolio.

3.04 State owned enterprises including sugar milling, slaughterhouses,grain storage elevators, vegetable oil processing, cotton ginning, andfertilizer manufacture are usually capital intensive facilities withinvestment needs beyond the scope of this loan. However, applications wouldbe entertained from PBs for financing some incremental investments in theseindustries, not to exceed US$2 million equivalent per loan, in cases where thebenefits to the economy are clear and where alternative sources of funds arenot available (4.13). Similarly, partial financing of large private sectorenterprises would be encouraged as in Cr.988; for example, under this projectIDA financed US$2 million (and the European Investment Bank the balance ofUS$2.5 million) for one of several coldstores needed to supply a 200 retailstore chain in Cairo. (A subsidiary benefit of the facility was that itcomplemented the numerous egg production facilities financed under thatcredit.) Under Credit 988, numerous applications were received from smallbusinesses for financing additional lines of machinery, for example, bakeriesadding a new line of semi-automatic machinery. Similarly, loans were extendedfor process modernization; for example, a small company involved in cleaningand selling medicinal herbs raised its daily output from three tons to eighttons (as well as improving quality of product) by acquiring a fanning mill

costing-US$36,000 to replace manually operated mesh screens. It is estimatedthat 20% of the applications under the new loan will be for the purpose ofexpansion and modernization of agroindustries of all sizes.

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3.05 Technical assistance components.

(a) Consulting assistance in three areas will be available to the threePBs that participated in Agroindustries I (Cr.988) through fundsstill available for that purpose under the Credit (para 4.05). Thesethree areas, which are not included in the cost table of thisproject, are;

1. Sector analysis and project identification.2. Training.3. Monitoring and evaluation systems.

Suggested Terms of Reference have been provided to the PBs (detailsin Project File).

(b) Consulting assistance for the same three areas will be made availablethrough the project to the fourth PB, NBD.

(c) Funds for training courses and fellowships will be available throughthe project.

3.06 Monitoring and Evaluation Component. The consultants provided underthe first agroindustries project will assist the banks to design a suitablemonitoring and evaluation system and data flows (4.18-4.19). The PBs would beresponsible for increasing and training their staffs in these activities.However, in view of rapidly expanding operations in agroindustries (and otherinvestment) lending, and the needs of management for accurate and timelyinformation, mechanization of monitoring activity is desirable. Under theproject, the equivalent of LE170,000 is provided for purchase of the necessaryequipment and/or services. Sufficiently powerful microcomputers are availablein the Egyptian market, but the PBs would decide whether they wouldincorporate the expanded monitoring system in their overall computerizationprogram being developed particularly for accounting purposes, or buy separatemicrocomputers suitable for this specialized task. In the former case, IBRDfunds would be available for designing and implementation of a computerprogram for monitoring and base-line studies in evaluation activity. In thelatter case, the banks will buy 1-2 microcomputers each (financed by theproject), and purchase a suitable software package and expert services to makethe necessary applications and implement them.

3.07 Training. Training for agroindustries lending under Agroindustries I(Cr.988) will continue (para 4.04). Funds would be needed to organize basiclending courses for new operational staff, refresher seminars and follow-upworkshops for staff trained earlier, and courses on basic business managementfor potential or recent borrowers in the small scale agroindustries sector.The funds reserved under the project, LE80,000, would allow training of about60 new employees, refresher and follow-up training of 150 staff members, andcourses for a similar number of new entrepreneurs. In addition, it wouldallow provision of four fellowships for training in agroindustries lendingabroad.

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3.08 Technical Assistance to NBD. The three banks participating in thefirst agroindustries project will receive consultancy assistance to improvetheir portfolio planning and development, for modernizing their monitoring andevaluation methods, as well as organizing certain aspects of their trainingneeds. Funds for these are available under Cr.988. For NBD, not aparticipant in the previous projects financed by the Bank Group, a separateallocation of loan funds of US$150,000 is made under this project for fundingconsultants, foreign or local, to carry out the same functions. 1/

C. Summary of Project Costs

3.09 Project costs over the three year period are estimated atLE112.0 million (US$133 million), of which about 60%, or LE67 million (US$80million) represent the foreign exchange component. Duties and taxes areincluded. They amount to less than 5% in the case of agroindustries. Detailsof costs estimates, summarized below, are in the Project File. The costestimates are based on 1982 prices and actual costs of recently constructed,or estimates of soon-to-be-constructed units of typical project investments(3.02). Price contingencies for other than agroindustries subprojectcomponents are calculated in accordance with Bank Group projections of futureprice inflation in Egypt and supplying countries. 2/ Physical contingencieshave been added at 5% of base costs of the same components. The contingenciesof these components amount to LEO.9 million (US$1.1 million), about 24% oftheir cost.

Project Costs% of % ofForeign Tot.Base

Local Foreign Total Local Foreign Total Exchange Costs--- LE million ---- --- US$ million ---

Agroindustries Subproj. 44.62 66.91 111.53 53.11 79.66 132.77 60.0 99.6Monitoring & Evaluation 0.05 0.12 0.17 0.06 0.14 0.20 70.0 0.2Training & Fellowships 0.04 0.04 0.08 0.05 0.05 0.10 50.0 0.1Tech. Asst. for NDB 0.05 0.08 0.13 0.06 0.09 0.15 60.0 0.1Total Baseline Costs 44.76 67.15 111.91 53.28 79.94 133.22 60.0 100.0

Physical Contingencies 0.01 0.01 0.02 0.01 0.01 0.02 60.0 0.0Price Contingencies 0.03 0.04 0.07 0.04 0.05 0.09 60.0 0.1Total Project Costs 44.80 67.20 112.00 53.33 80.00 133.33 60.0 100.1

Front End Fee - 1.00 1.00 - 1.20 1.20 100.0 0.9TOTAL FINANCING

REQUIRED a/ 44.80 68.20 113.00 53.33 81.20 134.53 60.4 101.0

a/ Interest during construction, not payable from project funds, has beenestimated at LE6.4 million (US$7.6 million).

1/ About 15 man-months (US$10,000/man-month for salaries, travel,accommodation, allowances, etc.)

2/ The projections used for foreign expenditures are: 1983 - 8%, 1984 - 7.5%,1985 - 7%. Projections for local price increases are 13.7%, 14.2%, 14.8%,respectively.

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D. Financing

3.10 The financing plan for the project base costs would be as follows.

(i) Agroindustries subprojects Millions

IBRD 60% US$79.44 LE66.73PBs 10% 13.33 11.20Subborrowers 30% 40.00 33.60

(ii) Monitoring and Evaluation

IBRD 100% 0.26 0.22

(iii) Training and Fellowships

IBRD 100% 0.13 0.11

(iv) Asst. for NBD

IBRD 100% 0.17 0.14

TOTAL 133.33 112.00

The proposed Bank loan, US$81.2 million would be made repayable within 20years with 5 years grace at the standard variable interest rate, and it wouldfinance 60% of the project costs, which represents the estimated averageforeign exchange component of the project. Thus, the loan proceeds willfinance 100% of the cost of imported goods and services. The borrower has notasked IBRIJ to finance interest during construction but has requested that thefront end fee of 1.5 percent, or US$1.2 million be financed out of the Bankloan..

E. Implementation Schedule

3.11 The agroindustries subloans are expected to be committed over a threeyear period from March 1983 and disbursed by the end of FY 87. Technicalassistance and training expenditures will be committed over the same period.

F. Procurement

3.12 The PBs would follow the procedures used in Cr.988, entailing costcomparisons from at least three suppliers. This is very effective where largenumbers of small and medium projects are served by several agencies (PBs).(DIB, which has been a borrower under five IDF loans, as well as under Cr.988,has used this muethod exclusively for these projects.) Under Cr.988 the threePBs administered procurement successfully, and the system proved bothefticient and fair, with wide sourcing from suppliers in numerous countries.As in Cr.988, for subloans involving contracts not exceeding US$150,000equivalent, procurement would be through the normal, informal, commercialchannels, whereby the subborrower solicits as many bids as is appropriate tohis own circumstances. Consultants under the project would be selected andengaged according to IBRD guidelines.

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G. Disbursements

3.13 The proposed loan of US$81.2 million is projected to be committedover three years and disbursed over six years.

FY 83 FY 84 FY 85 FY 86 FY 87 FY 88---------------- US$ million ------------…---

3.2 14 24 21 12 7

The Bank loan would be disbursed against 100% of the foreign expenditures.Technical assistance and training, as well as foreign expenditure ofmonitoring equipment and services would be financed 100% from the Bank fundsagainst invoices. 80% of local expenditure of the monitoring equipment andservices would be financed in the same manner. This projection is in linewith experience to date on Credit 988 (which is considered relevant) andsomewhat faster than the historical profile of Egypt loans over the period1970-8U. Five categories for disbursements would be included in schedule 1 ofthe Loan Agreement as follows; (1) subloans, (2) consultants services for NBD,(3) training, (4) computer equipment and related services, and (5) "front-endfee".

H. Environmental Impact

3.14 A wide range of activities is expected to be financed under theproject of which the most active categories (cold stores, bakeries, eggproduction, and container manufacturing) present few if any adverseenvironmental problems. A few of the agroindustries subprojects expected tobe financed under this project - such as poultry slaughterhouses and cheeseprocessing - would have unpleasant effluents. When such subprojectsmaterialize in the pipeline, the Bank will furnish appropriate guidelines tothe PBs and will be available for consultation or site visits. The PBs willbe expected to apply such criteria.

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IV. PROJECT IMPLEMENTATION

A. Organization and Management

4.01 The Borrower. The Government of the Arab Republic of Egypt would bethe Borrower. Of the loan amount, US$79.5 million would be earmarked foronlending to subborrowers for investments in subprojects in the agroindustriessector, as defined (para 3.02), through four participating banks. IBRD wouldenter into a project agreement with the PBs, defining their responsbilitiesand obligations for carrying out the agroindustries lending component. Thiswould be a condition of effectiveness of the loan. The PBs would dealdirectly with IBRD on project technical matters. Coordination for the projectwould be provided by the Ministry of Investment and InternationalCooperation. The Ministry will, in coordination with IBRD, keep a centralregister of subprojects and monitor the use of individual allocations underthe loan. The Government, as Borrower, would enter into subsidiary loanagreements with the PBs in regard to the terms and conditions of onlending tothem. The signing of the subsidiary loan agreement would be a condition ofeffectiveness.

4.02 The Credit Component. Three banks known to the Bank group and one

new bank have been selected and have agreed to participate in the project.The multiple channel credit system is a conscious part of project design toreach out extensively to a variety of agroindustries including smallenterprises outside the main urban areas. As a group the PBs have anextensive branch network, acknowledged project processing capability,familiarity with term lending, and specialization in agriculture oragroindustries which should in the aggregate make up an effective system.Their weaknesses, as indicated herein, are not insignificant; a majorobjective of the project is to remedy them to the extent possible. DIB comesclosest to meeting the criteria for a suitable agroindustries financingchannel, but it has a relatively small and centralized organization operatingin the industrial sector at large. For Bank Misr this project will be a verysmall part of their overall large volume of commercial banking operations. Tosome extent, this observation is true also of PBDAC, with its large scaleonfarm production loans. However, circumstances are changing rapidly, andPBDAC has begun to respond to the Government's high priority food securitypolicy by financing agroindustries and, generally, developing its term lendingas enjoined in its new charter. NBD, a new bank but with experiencedpersonnel (paras 2.23) and an orientation to development through medium termlending, has considerable promise as a development bank. With the exceptionof DIB, the PBs' ability to undertake development financing is at an earlystage. The strategy adopted for this project is to concentrate onstrengthening the relatively small parts of the PBs' organizations which willbe responsible for this project. The managements of these four banks haveexpressed interest in building up their agroindustries development lendingactivities. This basic interest was a necessary precondition for their

participation. Thus, it is expected that each PB will proceed according toits own ability to carry out the project buttressed by appropriate technicalassistance. The result expected is an element of healthy competition, leadingto a better impact on agroindustries development than if there were only oneimplementing bank.

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4.03 Because of the desirability of building on the Bank Group's previousinputs into Mier's Agricultural Development Lending Department (in Ln.1276 andCr.988), it has been decided that Misr be included in the project providedthat it lend the first 25% of the first allocation to small businesses andthat it maintain the 25% ratio over each additional allocation (para 4.09).Misr has requested to be included and represents that it will finance smallbusinesses from the loan. Up until now, Bank Misr's small business customers,recipients of local currency loans, have not been prepared to assume a foreignexchange risk, but recognizing that small business customers of DIB and PBDACroutinely purchase imported equipment and assume the foreign exchange risk,Bank Misr now intends to advertise the availability of foreign exchange loansto small businesses.

B. Technical Assistance and Training

Background

4.04 The First Agroindustries Project (Cr. 988-EGT) included a componentfor agroindustries training in PBs. This facility has been used unevenly bythe three banks involved in the project, with most efforts having been made bythe PBDAC group. PBDAC has organized four courses in investment financing andproject analysis for agroindustrial purposes. Two of these, each lasting fortwo weeks, were for senior management of PBDAC and BDACs whereas the othertwo, each of 5-7 weeks duration, were given to middle level managerial andoperational staff. The Institute of National Planning (INP) has been theexecuting agency, assisted by EDI of the World Bank. Course programs andmaterials have drawn heavily from EDI, and the main part of the material hasalready been translated to Arabic. Both the course syllabi and materials areoriented towards project work, although the background of INP lecturersappears somewhat lacking in practical experience. A total of 103 staffmembers of PBDAC group have been trained in these courses. DIB has given manyof its employees an opportunity to obtain some training related to bankactivities. In 1979/80 the consultancy firm of A. D. Little organizedeight-week courses on investment financing for 40 staff members. Nearly 50employees have attended some specialized local courses and 15 have been sentabroad for management and project analysis training. The European EconomicCommunity has provided a grant to finance a local course for 20 staff membersduring 1982. DIB has selected three European consulting groups to compete forthe contract. Bank Misr's efforts in the area of agroindustries training havebeen very limited. Only four staff members have been sent to projectappraisal courses organized by INP, and four have attended EDI courses inWashington. The previous experience of many new staff members at NBD isrelevant to the operations of investment financing, but in the specializedfield of agroindustries lending only two of the staff have received anytraining. The situation is similar in the governorate banks belonging to NBDgroup and being currently staffed.

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4.05 None of the allocation of US$400,000 under the first agroindustriesproject to recruit consultants to advise the PBs on identifying, appraising,and supervising subprojects has been used. Instead subborrowers have hiredconsultants as needed to identify and prepare their own projects and, wherenecessary, the cost of these has been covered through subloans. This hasmeant that the PBs, instead of aggressively seeking the identification of awell balanced portfolio of projects, as well as the marketing analysis inindividual appraisals, have largely responded to requests for loans on anad hoc basis. A development orientation, however, involves consideration ofthe entire subsector with a goal of an overall balance of complementaryinvestments. The PBs agreed during the negotiations to proceed with hiringconsultants under Cr.988 in order to be able to benefit from them in the earlystages of the proposed loan. NBD would hire consultants under a separatebudget (3.08). This requirement was communicated to the PBs beforenegotiations, while terms of hiring were discussed and agreed duringnegotiations. (Terms of reference are in Project File, Annex 5).

Technical Assistance Needs

4.06 In reviewing the current consultancy needs, the main requirementshave been identified in three areas, viz:

(a) Identifying bottlenecks in the agroindustry subsector: to support thecurrent and future requirements of the agricultural sector and ofconsumers of agricultural products is an important objective of theproject. Currently, the agroindustries portfolio in the PBs consistsof many types of agroindustries but is concentrated in a few.Consultancy inputs in agroindustries identification and development,including small scale projects, are desired for all PBs with theexception of DIB. Appointment will proceed as soon as possible inorder that the input will be in the early stage of the loan. Asystematic survey of agroindustrial activities is desirable as abasis to improve the marketing plans for each bank. Special shortcourses and practical field advising and follow-up would be necessaryto implement such plans effectively.

(b) Monitoring and Evaluation, in which assistance would be used toestablish more advanced systems benefitting from the contemporarylevel of mechanization (4.18).

(c) Training. All three participating banks under the First

Agroindustries Project have made considerable progress in projectpreparation, appraisal and basic lending operation skills at theirhead offices (para 4.04). These skills are largely lacking or areutilized too little to provide the necessary expertise at the branchoffice/regional bank level. DIB is an exception, because even theirbranch offices do good quality appraisal of smaller projects. Sincethere are no operational manuals (or they are very general in nature)consultancy assistance would be needed to further develop andstandardize the methods and procedures used in

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agroindustries lending, and to prepare such guidelines and manuals.Improvement is needed in systematically organized project supervisionand follow-up, which has in many cases been mainly oriented torepayment supervision. Training plans need to be prepared andrelated to manpower development plans (not existing) and todevelopment of new guidelines materials, directing them primarily tothe network of branches and regional banks. Particularly importantis follow-up training and field support, now not available, to ensurethe quality of small project preparation and appraisal in desirableactivities (para 3.03). Connected to special efforts in the smallscale agroindustries sector, the banks have a responsibility fortraining the new (primarily small scale enterpreneurs) in basicbusiness management. A training consultant can assist in preparationof a syllabus and course material, and in organization of thistraining.

4.07 Each bank would be separately responsible for implementing trainingof its own staff. It is expected that most staff training would be carriedout by the Institute for National Planning, which has already good experiencein the field of agroindustries training and has established a permanentrelationship with EDI. Basic lending seminars of six weeks duration on topicsfrom sub-project preparation to loan recovery and evaluation would be given toall new staff required for implementation of the project (Annex 1, Table 5).Due to phased recruitment of staff and different schedules in PBs, about 5-6such courses would be needed. Shorter refresher courses and follow-upworkshops would be needed for the staff trained earlier, particularly thoseworking in the field. These courses are estimated to number about 10. Forpotential small scale enterpreneurs and recent borrowers, the banks wouldorganize, or have arranged and financed, about 20 courses in basic businessmanagement. In addition, funds would be provided, during the third projectyear, for one fellowship in each participating bank for training inagroindustries lending abroad. These would be granted to the best students inthe local basic agroindustries lending seminars, and would be subject to IBRDreview. The practical arrangements for training were discussed duringnegotiations and assurances were obtained that such a program would beimplemented.

C. Onlending Terms and Conditions

4.08 Lending Arrangements. The loan is proposed to be made to GOE at thenormal Bank rate, and GOE would onlend it to the PBs as agreed in thesubsidiary loan agreement. The PBs would on lend the funds for the foreigncomponent of subloans at 15% to eligible subborrowers for terms up to 15 yearsincluding a grace period of up to 3.5 years, and for financing the monitoring,technical assistance, and training components (3.05). As a commitment periodfor subloans of three years is proposed from the date of signing of the loan,the final maturity of the loan would thus fall within about 18 years.Execution of a subsidiary loan agreement between PBs and GOE and acceptable toIBRD would be a condition of credit effectiveness (para 4.01).

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4.09 Use of Loan Funds. The US$79.5 million IBRD loan amount allocatedfor agroindustries would be available for financing of agroindustrialsubprojects by the PBs. The credit would not be preallocated between the PBs,but would be available on a first-come, first-served basis, as an open line ofcredit. This approach would reward good performance and promote disbursementof funds. It will be up to the PBs to generate the volume of business whichthey can process. For good order and coordination, the Government, as theBorrower, has agreed to operate the agroindustries credit as follows; astart-up fund of $8 million would be assigned to each PB against which itcould make commitments. Bank Misr would be subject to special conditions(para 4.03). As and when a PB has fully or substantially committed itsportion, GOE would provide it with a further allocation of funds afterappropriate review of and in agreement with IBRD. The review would includemonitoring of observance of covenants and the PBs' utilization of facilitiesfor training and technical assistance provided under the loan. This processwould be repeated until the full amount of the agroindustries credit has beenmade available to the PBs. In the event that, in the judgement of theGovernment, any PB has not committed funds available to it within a reasonableperiod (measured by performance of other PBs), the uncommitted balance wouldbe transferred to one or more of the other PBs. The status of commitmentswould be periodically reviewed by the Government and the IBRD. Eachallocation of funds assigned to a PB will be subject to the limits on thefinancing of small and public sector subborrowers (para 4.14). Assurances onthese points were received during negotiations.

4.10 Interest Rates and Foreign Exchange. Banks funds would be onlent at15% with the subborrower bearing the foreign exchange risk between theEgyptian pound the the US. dollar. Subborrowers would be obligated to repaytheir subloans in local currency in an amount equivalent to the foreignexchange loan at the highest exchange rate declared by the Central Bank ofEgypt at the time of repayment. The Government will bear the foreign exchangerisk between the US dollar and the currencies owed to the Bank. Assurances onthe above points were received during negotiations. In previous loans about80% to 90% of all agroindustries loans made by the PBs fell under the category"Food Security Loans", which qualify currently for the subsidized 6% interestrate for local funds.- However, the foreign exchange funds would be onlent toultimate borrowers at nonsubsidized interest rates. This would mean that IBRDfinancing, under the project, covering the foreign exchange component (about60% on average) would carry an interest rate of not less than 15% (11.4% costof Bank funds I/ plus amortized commitment charge and front end fee -equivalent to less than 1/2% - plus 3% margin for PBs). The interest rate forthe foreign exchange component would thus be about the same as the averageprojected inflation rate for the years 1982-85, which varies from 14% to 16%.

1/ The loan to the Borrower (GOE) would be made at a variable interest rate,subject to change every semester and based upon the cost of Bank qualifiedborrowings plus one half percent.

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4.11 Appraisals. The PBs would carry out adequate appraisals of eachsubproject,, which would include a detailed review of technical, managerial andfinancial aspects and involve field investigation by its technical and bankingstaff. These criteria have been established in agreement between the PBs andIBRD (Project File, Annex 6). An assurance was obtained from PBs that thesecriteria would be applied by them and their affiliates appraising eachsubproject under the project. The authority delegated to branch offices oraffiliated regional level banks to approve loans would differ with thepractice of each bank, but all subprojects bigger than LE500,000 (totalinvestment, or loan amount over LE400,000) would need to be appraised by thehead office units of participating banks. Appraisals made by branches,regional and governorate banks of small subprojects are to be supervisedsatisfactorily by specialized head office units.

4.12 The first subproject in each subsector (for each bank) would bereviewed and approved by IBRD in cases where the Bank has not previouslyfinanced such an activity for that PB. If satisfied, thereafter onlyinvestments above the free limit (4.13) would be sent to, reviewed andapproved by IBRD. The other subproject reports would be retained at PBs.IBRD staff would review a selected number of these smaller subprojects duringthe supervision visits to Egypt. Thus, applications for subloans of or belowthe free limit need to be supported only by a summary description in an agreedformat, upon receipt of which the Bank would normally authorize promptwithdrawal.

4.13 Limits. Subject to the procedure of paragraph 4.12, the free limitfor other subloans is proposed to be $1.0 million. The proposed free limit of$1.0 million is considered appropriate after a review of current projectpipelines, the appraisal capabilities of PBs and adjustment for inflation. 1/There would be no aggregate free limit. It is expected that about 15-20% ofsubprojects accounting for about 50% of the loan amount would be over the freelimit and would be submitted to the Bank for prior review before PBs'approval. An upper limit for individual subloans would be US$2 million (para3.04). No more than 25% of project funds would be used for any singleeligible activity (para 3.03). Assurances on these points were receivedduring negotiations.

4.14 Lending to Small Scale Entrepreneurs. One objective of the projectis to increase the access of small businesses to institutional financing andto develop a broader enterpreneurial basis in the country. Accordingly, thePBs would be expected to make special efforts to reach out to such entities.For the purposes of this project, and unless otherwise agreed between theGovernment and the Bank Group, a "small subborrower" is defined as asubborrower with fixed assets (excluding lands and buildings), valued at notmore than LE500,000 in 1982 prices, and applying for a subloan not exceedingLE400,000 equivalent. Not less than 25% of each allocation would be reservedfor financing small subborrowers. The PBs have agreed to make every effort toensure that subloans would be made to as large a number of subborrowers asfeasible. Also, in line with the project objective of encouraging the

1/ The limit is the same as in DIB V Project financed by Bank Group.

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financing of private sector investments, not more than 25% of the IBRD loanproceeds could be utilized for financing state owned subprojects. 1/ Suitableassurances on these aspects were received from GOE and PBs during negotiations.

4.15 The PBs would continue present practices for separate minimumsubborrower contributions by small and other subborrowers to the financing ofthe cost of subprojects; for small subborrowers this would normally be 15 to20%. The share of IBRD financing for subloans would be 60% with subborrowerscontributing an average of 30% and the PBs providing the balance of eachsubproject cost. Subloan amortization schedules would be based on projectedcash flows and debt repayment capacities of subprojects as analyzed by thePBs. The schedule of repayment to the Borrower of the IBRD loan amountwithdrawn by each PB would conform substantially to the aggregate of thesubloan amortization schedules for the respective PB. The security orcollateral required by the PBs of subborrowers would be governed by theirpresent, generally conservative practices which follow legal or statutoryrequirements in their strictest interpretation. For example, only "real",i.e., fixed assets can be accepted as security. However, as the projectimplementation proceeds and the PBs gain experience in medium- and long-termlending, the Bank would expect greater emphasis on the future financialprospects of subborrowers as well.

D. Accounts and Audits

4.16 Project accounting and audit procedures would be in line with theother Bank Group projects in which DIB, Bank Misr and PBDAC areparticipating. All participating banks would prepare annual budgets,quarterly progress reports, summary loan statements, and annual accounts asthey relate to project activities. Each participating bank and its affiliatedbanks or concerned branch offices would maintain detailed memoranda ofrecords, ledger and control accounts relating to subproject cycle progressincluding appraisals, approvals, disbursements, contributions by borrowers,interest charges, installments due, collections, overdues and follow-upaction. These records would be reviewed periodically by IBRD reviewmissions. The information would be summarized in semi-annual progress reports(4.19). Assurances were obtained during negotiations that copies of annualwork programs and related cost estimates would be made available to IBRDbefore the start of each financial year.

4.17 The PBs are audited by different audit companies and organizations.DIB's financial statements are audited by Z. and H. Hassan Co., a reputablefirm of chartered accountants associated with Messrs. Peat, Marwick, Mitchelland Co. The auditors of Bank Misr are M. Shawky and F.A. El Sawaf, charteredaccountants who appear to be well qualified. NBD has selected M. Hassiq andH.Z. Hassan, also chartered accountants, as their auditors. PBDAC is auditedby the state owned but independent Central Agency for Auditing, which has

1/ This is similar to the requirement under Cr.988. In practice no publicsector subprojects were forthcoming (although several subborrowers havestate owned backing).

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under other projects been dee,oed to be an acceptable audit agency to IBRD.They have also appointed a quailified, independent auditor, Mr. Mokhtar. Underthe project, the PBs would be required to submit the audited statements ofproject accounts and related audit reports to the Bank within nine monthsafter the end of the financial year. An assurance to this effect was obtainedduring the negotiations as well as to the effect that the audit arrangementsof the PBs themselves would continue to be satisfactory to the Bank Group andcomprehensive audit reports of the PBs' financial statements be submitted tothe Bank within nine months from the end of each financial year. The PBswould be responsible for seeing that the accounts of affiliated banksparticipating in project implementation would have satisfactory arrangementsfor accounting for project funds and these banks would have their accountsaudited according to the same requirements set out for PBs.

E. Monitoring, Evaluation and Reporting

4.18 Monitoring and evaluation systems aim at providing management withtimely information about developments in the field and in differentorganizational units connected with the project. They permit an overview ofimplementation and operations and early follow-up and correction of possibledeviations from timetables and objectives. Formal monitoring is undevelopedin participating banks, except in DIB, which over the years has through itsown efforts and with assistance and advice from consultants and IBRD developedsuitable procedures. Currently, DIB is combining monitoring as a part of anoverall computerized management information system with the help of aconsultancy company (Price Waterhouse) financed by USAID. The other banksalso have a basis in their reporting arrangements for individualagroindustrial projects to build up a management oriented monitoring system.However, much development work will be needed before the monitoring datadesired (Project File, Annex 7) can be expected to be available with theregularity and in format suitable for efficient management actions. This workdemands sophisticated methods for data flows and statistical presentation,knowledge of practical and time-saving procedures, and experience of suchoperations in banking. Such expertise should be combined with knowledge ofproject evaluation (measurement of project benefits in relation to intendedobjectives aimed to'be achieved through the sub-projects). This has not yetbeen planned in any of the banks, and specialist assistance would be requiredto establish suitable procedures. Consultants would be available under theon-going Agroindustries Project (Cr. 988)(see also paragraph 4.05). Withtheir help and with the technology available and provided for under thisproject, PBs would develop the capacity and procedures of their Monitoring andEvaluation units, link these tools with overall Management InformationSystems, and thus provide relevant data continuously for management'sfollow-up and decision-making.

4.19 The project and monitoring staff would produce monthly reports basedon the data flow created by the systems. The PBs would submit to GOE and IBRDsemi-annual progress reports in reduced format of the monitoring reports(Project File, Annex 7), complemented with management observations. Allparticipating banks

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would be requested to prepare, either themselves or by appropriateinstitutions on contract basis, two evaluation reports each year on the most

important types of agroindustrial projects in their portfolio to verifycontinued feasibility of such investments. Copies of the evaluation reportswould be sent to IBRD for information and comments. GOE would be responsiblefor coordinating preparation of the project completion report. Assurances asregards the regularity and format of progress reports. orRanization andcomprehensiveness of monitoring and evaluation, and preparatio-. and submissionof evaluation reports to IBRD were obtained during negotiatio:s

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V. BENEFITS AND JUSTIFICATION

A. Credit Component

5.01 Major benefits expected from the agroindustries to be financed underthe credit component of the project include:

- reduiction in waste as a result of improved storage, processing, andtransport;

- provision of increased volume of food staples to serve a growingpopulation;

- creation of rural employment for males and females;

- extending marketing regions, with potential increase in producerincomes;

- improvement in diets from provision of greater variety of foodsavailable;

- contribution to balance of payments through encouragement of exportindustries as well as import substitution.

An important means of attaining these benefits is that the project wouldstrengthen the institutional capabilities of the participating banks throughtechnical assistance to build up the linkage with small and medium sizedagroindustries, many of whom have no access to medium term credit. Theproject would also provide support to the training capabilities of a nationalorganization (The Institute of National Planning).

B. Beneficiaries

5.02 Beneficiaries under the project include: (i) urban consumers,through the increased availability of food and the improvement in its qualitythrough better processing and storage; (ii) farmers, who would have increasedmarkets for their products; and (iii) workers in jobs created by the project.Based on a ratio of retail revenues to assets of at least two to one,representative of agroindustries, the agroindustries credit of US$133 millionequivalent may be expected to generate about twice that figure in value ofannual output (even excluding the proportion exported). The project involvesmodernization and expansion of existing productive facilities as well ascreation of new facilities with expectation of resulting increases inproductivity of the existing labor force and creation of new employment,respectively. Calculations, albeit based on the direct employment impact offour illustrative agroindustries models show an estimated 5,000 to 8,000 jobsmay be expected to be generated by the project.

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C. Financial and Economic Rate of Return, Risk and Sensitivity Analysis

5.03 Specific subprojects to be financed under the project are not yetknown. Indicative financial rates of return (FRR) for agroindustries of thetypes likely to be financed under the project are in the order of 25% on totalassets employed and 30% on owner's equity (after taxes). These calculationsare based upon models in Project File, Annex 8 of representative actualinvestments (dairy processing, bakery, cold store, and egg farm). The FRR toall resources are calculated respectively as dairy processing plant 44%; eggfarm (15 million eggs per year) 16%; cold store (renting space for meat andvegetables) 17%; bakery 23%. Subprojects involving modernization are likelyto show higher rates of return because of the effect of sunk costs, whileprojects involving price controlled products will show lower but stillsatisfactory financial rates of return, as the Government's price policy doesallow for a profit margin and an annual return on invested funds ofapproximately 20%. Economic rates of return (ERR) are higher than theopportunity cost of capital as shown by analyses of illustrative models whichshow ERRs ranging from 17% to 25%.

5.04 Risk and Sensitivity Analysis. The types of agroindustries proposedto be financed under the project are mostly relatively simple in technologyand associated with projects which are already in operation. Moreover, manyventures are to be undertaken by the private sector, where the investor hasconsiderable incentive to implement the subproject successfully. Although anumber of agroindustries in Egypt depend largely upon imported grain, theirclassification by GOE as "food security" projects makes it unlikely that theywould be subject to arbitrary cutoff of raw materials. A major risk in theproject could be associated with failure to commit funds to complementary andsupporting investments (para 3.03) needed to preclude distribution bottlenecksas a result of the quality of performance of the intermediary PBs. But thisrisk is minimized by retaining consultants to identify such bottlenecks, andlimiting investment in anyone eligible activity to 25% of funds (para 4.13).Sensitivity tests on indicative agroindustry models show that the rates ofreturn for these enterprises are more sensitive to reductions in revenues thanto investment or operating cost increases of similar magnitude. Typical ofthe four illustrative models, the bakery subproject has a base FRR of 23%.With a 10% increase in both investment and operating costs, the rate of returndrops to 15%. When benefits decrease by 10%, the FRR drops to 14%. As amajority of the enterprises are expected to be in the private sector, theywill have some ability to vary their prices outside Government edict, andthereby cover inflationary increases in operating costs.

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VI. AGREEMENTS REACHED AND RECOMMENDATIONS

6.01 During negotiations, agreements were reached on the following:

A. The Government would:

(i) enter into a subsidiary loan agreement with Bank Misr, PBDAC, DIB,and NBD (the PBs) on terms satisfactory to the Bank (para 4.01);

(ii) in coordinating the credit component ensure

(a) the observance of the minimum limit of financing from the loanof "small" subprojects (para 4.14);

(b) the observance of the maximum limit for financing of state ownedsubprojects (para 4.14);

(c) the limitation on any single activity (para 4.13); and(d) a general upper limit of US$2 million per subloan (para 4.13);

(iii) oversee allocations of funds to individual PBs (para 4.09);

B. The PBs would;

(i) onlend the Bank loan proceeds at annual rates of interest of not lessthan 15%, with the exchange risk between the dollar and the Egyptianpound borne by subborrowers (para 4.10); and

(ii) engage consultants on terms and conditions satisfactory to the Bank(para 4.05).

(iii) follow subproject appraisal criteria (para 4.11).

(iv) observe auditing (para 4.17), reporting (para 4.19), and monitoringand evaluation (para 4.19) covenants;

(v) ensure that staff training courses are organized (para 4.07).

6.02 Execution of a subsidiary loan agreement between the Government andPBs for the credit component of the project will be the condition ofeffectiveness (paras 4.01 and 4.08).

6.03 The project would be suitable for a Bank loan of US$81.2 million tothe Arab Republic of Egypt on the above terms and conditions.

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ANNEX 1Table 1

EGYPTSECOND AGROINDUSTRIES PROJECT

Financial and Performance Ratios: Development Industrial Bank(Amounts in LE M)

Accounting Information 1978 1979 19801/ 1980/81

Assets 2/ 48.3 85.3 129.0 201.8

Total Loans Outstanding 2/ 46.1 75.1 121.8 183.5Debts (liabilities less own capital) 2/ 35.6 60.4 100.3 160.1

-of which deposits 7.1 10.4 15.5 32.8Share and Reserve Capital 2/ 12.4 24.1 27.0 39.6

-of which bad debts reserve 2.2 4.0 6.2 11.3Income 4.5 7.6 13.5 23.1

-of which interest onlending 3.7 6.5 12.0 20.7Expenditure 4.2 6.8 11.8 21.0

-of which admin. expenses 0.9 1.3 1.6 2.7Net Surplus 0.3 0.8 1.7 2.1

Own Capital 3/ 12.7 24.9 28.7 41.7Overdues, total 1.3 3.1 2.5 3.5

Overdues, over 2 years 0.2 0.8 0.2 0.5Annual Repayment Requirement 4/

RatiosOwn Capital to Assets 1:3.8 1:3.4 1:4.5 1:4.8

Own Capital to Loans Outstanding 1:3.6 1;3.2 1;4.2 1:4.4Deposits to Loans Outstanding % 15.4 13.9 12.8 17.9Overdues to Own Capital (%) 10.2 12.5 8.7 8.4Over 2 Years Overdues to own Capital 1.6 3.2 0.7 1.2

Debts to Equity (own Capital) 2.8:1 2.4:1 3.5:1 3.8:1Net Surplus to Loans Outstanding (X) 0.7 1.1 1.4 1.1

Net Surplus to Income (%) 6.7 10.5 12.6 9.1Net Surplus as Return on ofShare and Reserve Capital (X) 2.4 3.3 6.3 5.3

Bad Debts Reserve to over2 Years Overdues (%) 1100.0 500.0 3100.0 2260.0

Overdues to Assets 1;37.2 1;27.5 1;51.6 1:57.7Overdues to Loans Outstanding (%) 2.8 4.1 2.1 1.9Overdues to Annual RepaymentRequirement (%) 4/

Adm. Expenses to Loans Outstanding (%) 2.0 1.7 1.3 1.5

1/ The end of the financial year changed from December to June.2/ Including Provisions for Doubtful Debts, which had been deducted from the

balance sheet figures.3/ Share Capital, Reserves and Net Profit.4/ Data not collected or available.

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ANNEX 1Table 2

EGYPT

SECOND AGR0INDtUSRIES PROJECTFinancial and Performanrze Ratios: Prirripal Bank and its Affiliates

Atmxints in LE million)

Accaintingg Information 1977 1978 1979 1980 /1 1980/81Assets 282.5 336.7 376.7 510.3 758.2Total Loans Outstanding 2/ 161.2 175.1 145.5 235.8 390.0Debts (liabilities less own capital) 268.0 315.2 322.5 450.5 659.3

-of which deposits 10/ 43.6 61.5 111.7 124.1 197.1Share and Reserve Capital 3.3 6.3 54.2 59.8 98.9-of which Bad Debts Reserve 1.3 3.1 27.7 29.3 35.3Income 4/ 50.6 62.7 85.7 55.6 178.8 11/-of which interest on lending 3/ 24.2 32.1 41.7 23.5 37.1

Expenditure 5/ 39.2 47.5 65.2 34.6 106.9-of which admin. expenses 14.0 20.3 23.4 15.6 40.9Net Surplus 10.2 15.2 20.5 21.0 71.9Own Capital 6/ 14.5 21.5 54.2 59.8 98.9Overdues, total 7/ 24.2 20.2 16.5 13.0 9/Overdues, over 2 years 7/ 4.0 3.9 2.7 3.8 9/Annual Repayment Requirent 7/ 118.0 126.4 134.2 154.5 9/

RatiosOwn Capital to Assets 1;19.4 1:15.7 1:6.9 1:8.5 1:7.7OWn Capital to Loans Outstanding 1:11.1 1:8.1 1:2.6 1;3.9 1:3.9Deposits to Loans Outstanding % 27.0 35.0 77.0 52.6 50.5Overdues to Own Capital (%) 7/ 9/ 9/ 30.5 27.7 9/Over 2 Years Overdues to Own Capital 7/ 9/ 9/ 5.0 6.3 9/Debts to Equity (own Capital) 18.5:1 14.6:1 5.9:1 7.5:1 6.6:1Net Surplus to Loans Outstanding (7) 6.3 8.7 14.1 9.6 18.4Net Surplus to Ircxne (7) 20.2 24.2 23.9 37.8 40.4Net Surplus as Return onShare and Reserve Capital (.) 70.3 70.7 27.4 26.0 72.7

Bad Debts Reserve to over2 Years Overdues (X) 7/ 32.5 79.5 1,075.9 771.0 9/

Overdues to Assets (x) 7/ 9/ 9/ 4.5 3.0 9/Overdues to Loans Outstanding (%) 7/ 9/ 9/ 12.3 6.7 9/Overdues to Annual Repayment

Requirement (X) 7/ 16.1 12.4 8.5 6.3 9/Adm. Expenses to Loans Outstanding (x) 8.7 11.6 16.0 13.8 /8 10.5Adm. Expenses to Receivables (7.) 5.0 6.1 6.4 6.1 5.8

1/ Thle end of the financial year changed from December to June (income and expenditurefor 1/2 year only).

2/ Due from Goveramwnt, govermnent bodies, and farmers.3/ Interest actually collected plus net incrae fron previous year.4/ Accounting income activitywise (not deducting general indirect expenditure), net

profit fron subsidiary banks, net imcome relating to previous year, and dividends andother revenue.

5/ General indirect expenses plus loans, interest, and taxes.6/ Share capital, reserves (including net profit transferred to reserves) igioring the

accumulated losses prior to 1977, which were wiped off finally in 1981.7/ Only PBDAC, not affiliated banks.8/ Trend data used for one of the figures; contains also the expenses for

fann supply operations.9/ Data not collected or available.10/ Due to cooperative societies.11/ Contains subsidy payment by the GOE (LE40.0 million).

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ANNEX 1Table 3

EGYPTSECOND AGROINDUSTRIES PROJECT

Financial and Performance Ratios: Bank Misr(Amounts in LE M)

Accounting Information 1978 1979 1980 1/ 1980/81Assets 1,482.5 1,890.3 2,200.3 2,811.7Total Loans Outstanding 761.4 998.6 1,106.3 1,719.5Debts (liabilities less own capital) 1,446.7 1,842.3 2,146.6 2,746.0-of which deposits 1,035.7 1,344.9 1,576.7 1,860.0Share and Reserve Capital 36.0 48.0 53.7 65.7-of which Bad Debts Reserve 2/Income 94.5 135.9 90.2 238.4-of which interest on lending 3/ 64.5 95.6 63.8 177.8Expenditure 48.9 71.2 52.0 150.9-of which admin. expenses 4/ 18.2 21.6 12.9 37.0Net Surplus 44.5 64.7 38.2 87.5Own Capital 6/ 80.5 132.7 153.2Overdues, total 2/Overdues, over 2 years 2/

RatiosOwni Capital to Assets 1:18.5 1;14.3 1:15.4 1:18.4Own Capital to Loans Outstanding 1:9.5 1;7.5 1:7.7 5/ 1:11.2Deposits to Loans Outstanding X 136.1 134.6 142.6 108.0Overdues to Own Capital (%) 2/Over 3 Years Overdues to Own Capital 2/Debts to Equity (own Capital) 18.1:1 14.3;1 15.0;1 17.9:1Net Surplus to Loans Outstanding (X) 5.8 6.5 6.0 5/ 5.1Net Surplus to Income (%) 46.8 47.6 42.4 36.8Net Surplus as Return on ofShare and Reserve Capital (! ) 123.6 134.8 140.7 5/ 132.5

Adm. Expenses to Loans Outstanding (7) 2.4 2.2 2.7 2.2

1/ Change of the end of financial year from December to June.2/ Data not collected or available.3/ Actual interest received.4/ Staff expenses, expenditure on equipment and services.5/ Average figure between years 1979 and 1980/81 for one of the items has been

used.6/ Share Capital, Reserves and Net Profit.

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ANNEX 1Table 4

EGYPTSECOND AGROINDUSTRIES PROJECT

Financial and Performance Ratios: National Bank for Development(Amounts in LE M)

1980/81Accounting InformationAssets 150.9

Total Loans Outstanding 66.7Debts (liabilities less own capital) 120.7-of which deposits 75.8Share and Reserve Capital 23.5

-of which Bad Debts Reserve 0.9Income 12.2

-of which interest on lending 8.4Expenditure 5.4

-of which admin. expenses 1.5Net Surplus 6.8

Own Capital 1/ 30.3Overdues, total 2/Overdues, over 3 years 2/

RatiosOwni Capital to Assets 1;5.0

Own Capital to Loans Outstanding 1:2.2Deposits to Loans Outstanding 1:3.6Overdues to Own Capital (%) 2/Over 3 Years Overdues to Own Capital 2/Debts to Equity (own Capital) 4.0:1Net Surplus to Loans Outstanding (x) 10.2

Net Surplus to Income (%) 55.7Net Surplus as Return on of

Share and Reserve Capital (%) 22.4Bad Debts Reserve to over

3 Years Overdues (%) 2/Adm. Expenses to Loans Outstanding (%) 2.2

1/ Share Capital, Reserves and Net Profit.21 Not applicable after one year's operations.

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ANNEK 1Table 5

EYPTSEOJND A(ROINDUSTRIES PROJEC?

Staff Requirements for Agroindustrial Mediun and long-TermLending by Participating Banks

(LE M1ILLONS)

DIB NBD PBIAC MISR ToI9L

Estimated Nimber of Sub-Loans 1/a) If total loan LE 70 M 87 68 68 67 290-Annual 29 23 23 27b) If total loan LE 100 Mi 126 98 98 97 420-Annual 42 33 33 32

Requirenent of Professional Staff,Case a) 2/ 7-16 3/ 6-13 6-13 6-13 25-55Case b) 2/ 10-22 9-19 9-19 9-19 37-79

Professional Project Staff forAgroindustries (March 1982)-= Head Office 6 6/ 2 10 20 64- Branches/Regional Banks 2 6/ - 80 4/ - 88 4/

Current Staff Available for New Projects 5/ 1 & 1 - 2 & 16 4 7 & 16

Additional Staff Required,Case a) 6-14 6-13 4-10 7/ 2-9 18-46Case b) 9-20 9-19 7-15 7/ 5-15 30-69

1/ Assuan-rg that 33%. is used for small scale sub-projects, averaging LE 100,000, and the restfor bigger projects, averaging LE 700,000 - 800,000. Based on assessment of pipelines, staffcapacity and network in 1981. DIB has been estimated to use about 3CYo of project funds, andthe remaining 70% is divided evenly betwen the other banks (Note: this is not a target, butestimation for this table).

2/ Staff time needed has been estimated to be as follows. each new project requires 2-3man-months of professional manpower during the year of preparation and appraisal, and 1-2manmnnnths during the following years for supervision, follow-ps and transactions.

3/ In the range of staff requirement the first figure refers to first project year, the last one- to third project year.4/ Trained, but only partly utilized.5/ Due to increasing supervision tasks arising from already approved (and undersupervised)

projects, only 20% of current staff can be reserved for work on new projects. The secondfigure refers to branch offices.

6/ Out of the total 40 project staff, about 20% belongs to agroindustries.7/ Refers to H/Q staff, even with further delegation to govermorate banks.

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ANNEX 2

EGYPTSECOND AGROINDUSTRIES PROJECT

Selected Documents and Data Available in Project File

ANNEX 1 Prices and Subsidies

ANNEX 2 Banking and Financing of Agroindustries in Egypt

ANNEX 3 Lending Projections for Agroindustrial Medium- and Long-Term Loansby Participating Banks

ANNEX 4 Agroindustries Projects Launched under Investment Law 43 up to 71,December 1979.

ANNEX 5 Terms of Reference for the Consultants

ANNEX 6 Criteria for Appraisal of Subprojects

ANNEX 7 Monitoring and Evaluation Arrangements

ANNEX 8 Investment Demand and Subproject Analysis

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