Document of The World Bank FOR OFFICIAL USE ONLY Report No. 6391-UNI STAFF APPRAISALREPORT NIGERIA INFRASTRUCTURE DEVELOPMENT FUNDPROJECT November 20, 1987 Infrastructure Operitions Division Africa Country Department IV This document has a resticted dt*_ and may be ued by redoceb only In the pefonnaone of their ofkcil dutes. Its content may et othbemise be dlcobsed wkboutlddd Bank sauoIbaon. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document of
The World Bank
FOR OFFICIAL USE ONLY
Report No. 6391-UNI
STAFF APPRAISAL REPORT
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
November 20, 1987
Infrastructure Operitions DivisionAfrica Country Department IV
This document has a resticted dt*_ and may be ued by redoceb only In the pefonnaone oftheir ofkcil dutes. Its content may et othbemise be dlcobsed wkboutlddd Bank sauoIbaon.
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NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
CURRENCY EQUIVALENTS
Currency Unit Naira (N)US$1.00 - N 4.00N 1.00 - US$0.25
WEIGHTS AND MEASURES
Metric System
ABBREVIATIONS AND ACRONYMS
BSWC - Benue State Water CorporationCBN - Central Bank of NigeriaDHL - Division of Housing and LandsDLS - Development Loan StockFMBN - Federal Mortgage Bank of NigeriaFMF - Federal M;istry of Finance7MG - Federal Military GovernmentFMWH - Federal Ministry of Works and HousingGSUPDA - Gongola State Urban Planning and
Development AuthorityIDF - Infrastructure Development Fund1MB - International Merchant BankLGA - Local Government AuthorityMFEP - Ministry of Finance and Economic PlanningMLG - Ministry of Local GovernmentMLS - Ministry of Lands and SurveysMOF - Ministry of FinanceMOFI - Ministry of Finance IncorporatedMWT - Ministry of Works and TransportNBA - Nigerian Bankers' AssociationNIDB - Nigeria Industrial Development BankNMB - Nigeria Merchant BankNSUDP - Nigerian States Urban Development ProgramOWSC - Ondo State Water CorporationPIU - Project Implementation UnitPMCU - Project Management and Coordination UnitPPIU - Project Planning and Implementation UnitSPEM - Second-Tier Foreign Exchange MarketSOE - Statement of Expenditure
FISCAL YEAR
January 1 - December 31
NIGERIA FOR OFFCIL USE ONLY
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
STAFF APPRAISAL REPORT
TABLE OF CONTENTS
Page
DOCUMENTS IN THE PROJECT FILE i
LOAN AND PROJECT SUMMARY v
I. THE URBAN SECTOR 1
A. Urbanization and Demographic Trends 1B. The Urban Infrastructure Subsector 1C. Bank Role in the Sectot 3D. Bank Sector Strategy 4
LI. THE PROJECT 5
A. Project Objectives 5B. Project Description 5
Pro.4ect Components 6IDF Policy Statement and Project Guidelines 7
C. RatiQnale For Bank Involvement 7D. Project Cost and Financing Plan 7
Project Financing 8E. Institutional Framework 10
The Federal Government Role 10The Merchant Banks" Role 11The States' Role 12
F. Merchant Bank Organization and Finances 12Merchant Bank Organization 12Merchant Bank Firances and Impact of Project 13
G. State Finances and Financial Eligibility Criteria 14
This report is based on the findings of an appraisal mission(May/June 1986) and post-appraisal mission (September 1986) consistingof Messrs. B. Boldrick (mission leader), B. di Zitti, K. Robotham,H. Unger, Ms. A. Artaza (WAPUR), Mr. W. Dillinger (WUDOD) andMr. G. Faillace (WAFNG) assisted by consultants E. Anusionmu,M. Bagarani, KL Gylvar, M. Rogan, J. Jensen, W. McCulloch, andP. Sanderson. Messrs. D. Howarth and P. Owusu, Ms. E. Patterson (WAPUS),Me. E. Hewitt (WUDOD), and Mr. A. Saravanapavan (WUDDR) assisted in theappraisal of subproject water supply components. Mr. S. Berkman (WAPED)reviewed project training components. The report was typed byMrs. T. C. Tram and Ms. D. Gunderson and Mrs. H. Kofi.
This document ha a retrcted distibutIon n may be used by ecipients ony de pWefomnnceof theW offi duti IBts contents may not othrwise be discoed without Wold Bank autoi_on
Table of Contents - Continued Page
III. IMPLEMENTATION 15
A. IDF Project Development 15B. Procurement 17C. Disbursement 18b. Accounting and Auditing 19B. MDF Training and Studies 19F. Status of Project Preparation 20
IV. JUSTIFICATION AND RISKS 20
A. General Benefits 20B. Economic Evaluation 21C. Poverty Impact 22D. Project Risks 22
V. AGRUMENTS, CONDITIONS AND RECO)SENDATION 23
A. Agreements 23B. Conditions 24C. Recommendation 24
AN=XS
2-1 Detailed Description - Benue State Subproject 252-2 Detailed Description - Gongola State Subproject 302-3 Detailed Description - Ondo State Subproject 362-4 Detailed Description - Trainiidg Components
Objectives and Elements 422-5 Detailed Description - FMWH Support 472-6 Project Cost Tables 492-7 Merchant Banks Organization, Staffing, Procedures
and Selection Criteria 552-8 Merchant Bank Finances and Project Impact 632-9 State Finances - Structure, Trends, and P'rospects 862-10 Impact of Project on State Finances 943-1 Project Implementation - Benue State Subproject 973-2 Project Implementation - Gongola State Subproject 1003-3 Project Implementation - Ondo State Subproject 1043-4 Project Implementation - IDP Subproject
Preparation Procedures 1093-5 Project Implementation - IDJ Training and
Evaluation (FMVR) 113
Table of Contents - Continued Page
3-6 Project Implementation - FMW Support 1143-7 Implementation Schedule 1153-8 Procurement Table 1163-9 IDP Development Sequence 1173-10 Disbursement Schedules 1184-1 Summary of Economic Analysis of Subproject
Components 121
MAPS NIGERIA: Infrastructure Development Fund Project -Past and Present Projects(IBID Map No. 20044)
NIGERIA: Infrastructure Development Fund Project -Gongola State Sub-Project: Yola, Jimeta and Jalingo(IBIRD Map No. 20045)
NIGERTA: Infrastructure Development Fund Project -Gongola State Sub-Project: Mubi, Numan and Wukari(IBIRD Map No. 20046)
NIGERIA: Infrastructure Development Fund Project -Benue State Sub-Project: Makurdi and Gboko(IBRD Map No. 20047)
NIGERIA: Infrastructure Development Fund Project -Benue State Sub-Project: Idah and Otukpo(IBID Map No. 20048)
NIGERIA: Infrastructure Development Fund Project -Ondo State Sub-Project: Ado-Ekiti, Akure and Owo(IBRD Map No. 20049)
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NIGERIA
INFRASTRUCTURE FUND PROJECT
DOCUMENTS IN THE PROJECT FILE
Ref. No. File Code
1. General
A. Analysis of In3titutional Alternatives andFinancial Analysis of the IDYIme Ebong Associates, Jan. 1986 D-00149
B. Proposal for Funding MechanismFederal Mortgage Bank of Nigeria, Feb. 1986 D-00150
C. Analysis and Recommendations for anInfrastructure Development Fund (Nigeria)V.P. MeCuilloch III and Dr. B, Anusionvu,June 1986 D^00151
D. Draft Inception Report on InfrastructureDevelopment Fund - Federal Ministry ofWorks and Housing, May 1985 D-00152
B. Draft Discussion Paper - NSUDP AR
F. Infrastructure Development - Dr. E. Ansionvu,April 1986 D-00153
G. IDF Project Guidelines D-00154
H. IDF Policy Statement D-00964
I. Comments of FMG and Merchant Banks on DraftIDF Guidelines D-00965
J. Letters from Merchant Banks ExpressingWillingness to Participate in the IDF Project D-00966
K. An Overview of the Housing Finance Environment in BRNigeria and an Analysis of the Federal Mortgage Bankof Nigeria (FMBN) Operations (Draft) - Robert M.Stephens, February 1987.
2. Benue State
A. Selected Reports and Studies on Sector
Al. Benue State Regional Development Plan,Dar Al-Handasah Consultants for BenueState Ministry of Economic PlanningVolumes 1-3; December 1980 129.984 (A-1-1 1-3)
A2. BeDne State Urban Development Program,
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Preparatory Paperss, Housing and Environment;May 1980 129.984 (A-2)
A3. Benue State Housing Policy Recommendations,Dar Al-Handasah Consultants for Benue StateMinistry of Housing and Environment;March 1980 129.984 (A-3)
A4. WHO Benue State Water Sector Report,WHO/IBRD Cooperative Program; February 1982 127.916 (B)
B. Selected Reports and Studies on Stateand Local Government Finance
Bi. Financial Position and Prospects co! BenueState, WA1DA; October 1982 129.984 (B-1)
B2. Urban Taxation in West Africa, WAPUR/URBOR;July 1983 129.984 (B-2a, B-2b)
B3. Report on the Performance of Local GovernmentsAnambra, Benu4, Cross River, Imo andRivers States 1976-1980, Department ofPolitical Science, University of Nigeria-Nsukka; 1981 129.984 (B-4)
C. Selected Reports and Studies Relating to the Project
Cl. Feasibility Study Report on Benue StateUrban Development Project, PGIL, Ltd.;6 volumes, June 1983 129.984 (C-i-i 1-6)
C2. Rating in Benue State, S. Keith; Marche 1983 129-984 (C-2)
C3. State Government Finances, J.K. Bahal;August 1983 129.984 (C-3)
C4. Engineering Report, D. Ossen; July 1983 129-984 (C-4)
C5. Local Government Finance and TrainingComponent, D. Hopkins; August 1983 129-984 (C-5)
C6. Pre-appraisal and appraisal missionaide-memoire; March 1983 and July 1983 129-984 (C-6)
D. Selected Working Papers
Dl. Analysis of Benue State portions ofThird and Fourth Development Plans 129-984 (D-1)
D2. Details of component costs 129-984 (D-2)
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D3. Selected working papers oan financial andeconomic analysis 129-984 (D-3)
1. Logislation
E1. Benue - Plateau State Water Board Edict;September 1974 129-984 (X-1)
12. Benue State Water Board (Amendment) Bdict;May 1976 129-984 (1-2)
13. Benue State Statutory Corporations(Amendment) Law; December 1979 129-984 (1-3)
E4. Benue State Sales Tax Law; October 1983 129-984 (B-4)
15. Benue State Board of Internal Revenue Law;October 1983 129-984 (1-5)
A. Urban Development Project (Gongola State)Final Report; Dar Al-Handasah Consultants(Shair and Partners) 4 volumes; June 1986
Al. Executive Summary D-00156
A2. Recommendations D-00157
A3. Appendices D-00158
A4. Social Surveys D-00159
B. Working Paper - Sites and Services ProjectsDar Al-Eandasah Consultants (Shair and Partners)January 1986 D-00160
C. Interim Report; Dar Al-Handasah Consultants(Shair and Partners); July 1985 D-00161
4. Ondo State
A. 1986 Approved Budget of Ovo Local Government UNI - 182
B. 1986 Approved estimates of Akure Local Government UNI - 183
C. 1986 Approved Budget of Akiti Central LocalGovernment D-00154Project Preparation Study - Final ReportDRV Ingenieurs Conseils; September 1985Project Preparation Study - Interim ReportDHV Ingenieurs Conseils; July 1984 D-00155
D. Infrastructure Development Fund Project -I.P. Sanderson. Ondo State Sub Project;Rating Valuation Component; September 1986 D-00162
E. Traffic Surveys in Akure, Ado-Ekiti and Ovo;September 1986 D-00163
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND
LOAN AND PROJECT SUMMARY
Borrower: Federal Republic of Nigeria.
Beneficiaries: State Governments (Benue, Gongola, Ondoinitially, others later), Federal Ministry ofWorks and Housing (FNWH), five merchantbar2 s.
Amount: US$69.5 million.
Teims: Standard variable interest rate and 20-yearterm including 5 years of grace.
On-lending Terms: The amount of US$63.7 million equivalentwould be provided as a line of credit to theFederal Military Government (FMG) foron-lending to merchant banks to finance Stateinfrastructure subprojects. FMG wouldon-lend these funds to the merchant banks atthe Bank's standard variable interest ratefor 20 years including 5 years of grace. Themerchant banks would on-lend Bank proceeds tothe States at a rate not exceeding 3.5% abovethe FMG on-lending rate for a maximum 15-yearrepayment period with 3 years of grace. Themerchant banks would bear the credit risk andthe States would bear the foreign exctangerisk of the Bank loan. Any loan fundsremaining uncommited at the end of year 3of the project would be cancelled by theBank. Free limits would be established forsubproject loans of US$2.0 million equivalentor less, up to an aggregate limit ofUS$10.0 million equivalent. The amount ofUS$548 millior equivalent would be providedon a grant basis to FMWH to finance training,consultant services, studies, vehicles andequipment.
ProJect Description: The primary project objectives are to ini-tiate the establisbment of an urban infra-structure financing mechanism utilizingmerchant banks to appraise, supervise and
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cofinance State urban infrastructure sub-projects; and to assist States to improveinfrastructure investment planning. The loanwould finance: (a) a line of credit for:
(i) initial subprojects in Benue, Gongola,and Ondo States; (ii) future merchantbank-appraised subprojects; (b) Stateinvestment prioritization studies;(c) training, consultant services, andstudies for the merchant banks and theFederal Ministry of Works and Housing; and(d) vehicles and equipment for FMWH supportactivities.
Project Risks: The main risk is that the merchant banks, ascapable and well managed as our appraisal hasdetermined them to be, may not prove to beeffective institutions for the financing ofurban infrastructure. This risk is ad-dressed through: (a) Bank appraisal of thefirst three subprojects; (b) establishment offirm guidelines for merchant bank subp?ojectselection and approval; (c) training ofmerchant bank staff in appraisal techniques;(d) ex ante Bank approval of major merchantbank-appraised subprojects; (e) incentives tomerchant banks of fees for consultingservices to States; and (f) assistance to theStates for investment prioritization studies.Even in the extreme case, however, theproject would still have financed subprojectswith high rates of return, and FMG would notbe left with an institution to dismantle.The risks, therefore, while substantial,would not result in unacceptable con-sequences. The benefits, on the other hand,if the project succeeds in establishing aprivate sector wholesaling mechanism whichwould finance priority State infrastructurewhile imposing some financial discipline onthe States, would be substantial. Thebenefits of improved efficiency for Banklending operations would also be applicableto other sectors.
NIGERIA
INPRASTRUCTURE DEVELOPMENT FUND PROJECT
I. THE URBAN SECTOR
A. Urbanization and Demographic Trends
1.01 In 1986, Nigeria's urban population was estimated at over 30 muil-lion, or more than 30% of the national population. If present trendscontinue, the rapid urban growth rate of about 7% would result in an urbanpopulation of about 80 million by the year 2000--one-half of Nigeria'stotal population. It would also mean that about 85% of the total popula-tion increase of nearly 60 million would occur In the urban areas. Changesin the urban-rural terms of trade, slowing down of economic growth or ageneral recession could well dampen urban growth, but no foreseeablecircumstances would reverse it.
1,02 Existing urban infrastructure and systems are burdened by abacklog of unmet needs and by financial and institutional constraints.Investments made in urban areas in the past decade have not kept pace withgrowth, and were often poorly selected and executed. The anticipatedpopulation growth will add to the unmet needs, further hampering thecities' ability to provide an efficient operating environment for Nigeria'sindustry, commerce, and the other productive sectors of the economy locatedin the cities.
1.03 In spite of these problems, Nigerian cities account for a highproportion of the national value added and are important production,service, and administrative centers. They also account for a considerableportion of the total non-oil tax bare. The environment for private sectorbusinesses, already impaired by infrastructural deficiencies, will befurther eroded unless steps are taken to adequately maintain and rehabili-tate existing infrastructure and provide for the inevitable future growth.Recent Bank sector work identified inadequate infrastructure and the lackof an appropriate means of infrastructure financing as the most criticalurban problem in Nigeria.
B. The Urban Infrastructure Subsector
1.04 Institutional Setting. Federal, State, and local governmentsshare responsibility for the urban areas. The Federal Government isresponsible for setting and coordinating overall urban development, shelterand water resources policy. It has also been responsible for the planningand construction of new towns developed in conjunction with major Pederalinvestments such as steel (Ajaokuta, Aladja), fertilizers (Onne) and thenew Federal capital, Abuja. Federal ministries and corporations are alsoresponsible for major transportation links and facilities (roads, railways,ports, airports, etc.) between and within major towns. State Governmentshave the primary responsibility for managing the urban areas including:
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development planning, land allocation, land use control, water supply, andthe provision of road and drainage networks. Although constitutionallyentrusted with a broad range of responsibilities and authority, localgovernments in actual practice only provide and maintain markets, motorparks, minor roads, solid waste collection, primary education, and commu-nity facilities. However, because they are financially and administra-tively weak, they are, in general, only able to provide minimum maintenanceservices.
1.05 Public Financing. Revenues, both oil and non-oil derived, areshared between the three tiers of government through a complex sharingformula. The revenues not directly retained by the Federal Government(mostly those derived from oil) are deposited into the Federation Account.The funds not allocated directly to the Federal Government are allocatedthrough the Federation Account to the Federal Government (55%), to theStates (32.5%) l/and to the local governments (10%). The residual Federa-tion Account funds (2.5%) are allocated to mineral-producing States and tospecial reserves for national disasters and environmental control. Localgovernments also receive 10% of internal revenues generated by the States.In addition, State and local governments levy user fees, charges and taxesof their own, e.g., income taxes, motor vehicle fees, market and motor parkfees, property taxes, and business licenses.
1.06 Local governments in the past have barely been able to meet theirrecurrent costs and have only on rare occasions generated recurrent sur-pluses to finance infrastructure investments in the areas under theirjurisdiction. Since the beginning of 1984 there has been a marked improve-ment in the financial management and resource base of some local govern-ments, enabling them to become more active in the development process.State Governments, on the other hand, have financed urban infrastructurefrom current account surpluses, supplemented by Federal loans from theproceeds of Development Loan Stock (a bond series amounting to aboutN 300 million in 1986) issued annually by the Federal Government, byFederal-guaranteed foreign loans and by loans from local merchant andcommercial banks. Loan financing, particularly from external sources, hasbeen made available to States with little regard to the nature of theprojects to be financed or the financial condition of the recipient govern-ment. Federal guarantees on foreign loans have only been subject to a flatceiling per State which has in several cases been exceeded.
1.07 State and local governments now face a major problem in trying tomeet the infrastructure and service needs of the growing urban populationwith rapidly shrinking funds. During the oil boom of the 1970s, State andlocal governments became increasingly dependent upon Federal transfers of
1/ A standard percentage is allocated tG all States for administrationand the balance allocated on the basis of population, primary schoolenrollment and local revenue effort.
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oil-derived revenues. There were few incentives to recover costs, prudent-ly manage public finances or develop a local revenue base. On the con-trary, local tax systems were abolished or allowed to atrophy, and StateGovernments borrowed heavily (often from foreign banks) on inappropriateterms and for inappropriate investments. The financial crisis now faced bythe States derives from these factors, as well as the drastically reducedFederal transfers (about 45% in real terms between 1981 and 1985) due tothe oil market slump. Heavy debt service on the many short-term loanscontracted is now falling due--amounting, in some cases, to 75% of theStates' available resources. In addition to being caught in a financialsqueeze, the States also lack a reliable source of funding on appropriateterms, even for high-priority projects with high economic and financialreturns.
1.08 Some State and local governments have responded to the financialcrisis by drastically reducing recurrent and capital expenditures on theone hand, and increasing local revenues through the introduction of feesand user charges on the other. However, these measures, though significantin some cases, have proved inadequate to meet financing needs. Recently anumber of States (Lagos, Ogun, Ondo) have turned to the local capitalmarket, borrowing from mer-,hant banks to finance infrastructure projects.
1.09 The Federal Government recognizes the need for an appropriatefinancing mechanism for urban infrastructure and services, and for in-creased resource mobilization by the States. The need for rational invest-ment prioritization and programming by States is also recognized. While itis expected that the Federal Government's medium-term adjustment programwill in time alleviate the States' financial crisis (largely through theimpact of devaluation on Federation Account revenues), the States urgentlyrequire a comprehensive rescheduling of their debts to relieve the currentextremely heavy debt service which prevents them from meeting some impor-tant recurrent expenditure obligations.
C. Bank Role in the Sector
1.10 Bank assistance in addressing urban problems was first requestedby the Government of Nigeria in 1977. These discussions led to the crea-tion of the Nigerian States Urban Development Program (NSUDP), involvingprojects in eight States eventually (Bauchi, Imo, Benue, Ogun, Ondo, Niger,Gongola and Lagos), administered by the Federal Mortgage Bank of Nigeria(FMBN). Three projects have so far been undertaken. The first of these,Bauchi (Loan 1767-UNI, completed June 30, 1986) focussed on shelter issues,and aimed at strengthening the management of FMBN and demonstrating low-cost methods of shelter provision and cost recovery. The second, Imo (Loan2607-UNI, approved July 1985), similarly focussed on site-specific infra-structure and shelter issues. This Bank involvement in shelter issues hasshown concrete results at the policy level, with the recent decision by theFederal Government to discontinue its involvement in direct housing
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construction, and to adopt the sites and services concept as part of itsofficial low-income housing policy.
1.11 Problems of city-wide infrastructure and urban finance began tobe addressed under the Lagos Project (Loan 2620-UNI, effective March 30, -1986) and the subsequent NSUDP projects in Benue, Ondo, and Gongola(now subprojects of the proposed IDF project). During preparation of theseprojects, the need for a sustainable mechanism for funding urbaninvestments became increasingly apparent. While FMBN finances housing andinfrastructure for housing (sites and services) in the NSUDP projects, nocounterpart mechanism exists for financing sound urban infrastructureinvestments. 2/
1.12 In 1983, the Federal Ministry of Works and Housing (FMWH) re-quested Bank assistance in finding an institutional solution to the pro-blem. Following sector work by the Bank, and further discussion withGovernment, FMWH established an Inter-Ministerial Steering Committee whichproduced an inception report in May 1985. This was circulated to theFederal Government and the States and received favorable comment. TheFederal Executive Council approved the infrastructure fund concept inprinciple in June 1985. It was also enthusiastically received by theOctober 1985 national conference of Federal and State public works offi-cials. The Inter-Ministerial Committee designated a study group withinFMBN which, with the help of outside consultants, undertook a preliminaryfeasibility study. Results of the study were presented and debated at abroadly-representative workshop convened in February 1986. Consultantswere subsequently engaged to study the issue of the institutional locationof the infrastructure fund in greater depth. Their recommendation tolicence several of Nigeria's merchant banks to operate the fund was well-received by Government and was adopted as the institutional framework forthe fund at appraisal. Federal Government acceptance of the proposal toutilize the merchant banks is a major policy breakthrough, and will facili-tate greater private sector participation in the financing of urban infra-structure.
D. Bank Sector Strategy
1.13 In the current financial and economic context, characterized bysevere resource constraints, the Bank's urban lending strategy for Nigeriamust, in the short-term, support the establishment of a sustainable whole-saling mechanism to fund priority urban investments with high returns, andfocus particularly on the rehabilitation and maintenance of existing
2/ FMBN remains an important actor in the urban sector but has in recentyears experienced serious financial and managerial difficulties andurgently requires reorganization.
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assets. The Bank's long-term lending strategy should promote fiscal self-sufficiency at the State level, and a more efficient, equitable and sus-tainable delivery of urban services. The strategy should also support theStates in making the necessary fiscal adjustments, primarily through a morerational allocation of investment funds, and through mobilization of localfinancial resources. Improved financial performance by the States will, inturn, enhance their ability to raise the necessary capital to financefuture urban infrastructure needs without undue recourse to public, espe-cially oil-derived, transfers. The improved efficiency of urban areasthrough better urban management will not only improve the living conditionsof a sizeable portion of the country's population, but will be essential tostrengthening the country's productive base.
1.14 Another long-term sector objective is to develop a market forState and municipal bonds through which a significant portion of theinfrastructure programs of States and local authorities can be financed.In order to attain this objective the capital market must develop confi-dence in State investment projects, and the capacity to appraise theseprojects. The States in turn must establish their creditworthiness anddemonstrate the ability to prepare high priority infrastructure programs,within their financial and managerial capacity, and in balance with otherState investment needs.
II. THE PROJECT
A. Project Objectives
2.01 The primary objective of the project is to initiate theestablishment of an urban infrastructure wholesaling mechanism, theInfrastructure Development Fund (IDF), utilizing selected merchant banks toidentify, appraise, supervise and cofinance State urban infrastructuresubprojects. These subprojects would assist States to manage, maintain andconsolidate existing urban infrastructure and services, and to improvefinancial management and resource mobilization. An equally important andcomplementary objective of the project is to assist States to improveinfrastructure investment planning and prioritization.
B. Project Description
2.02 The project would establish and test a wholesaling mechanismthrough the financing of initial Bank-approved subprojects in three Statesand additional merchant bank-appraised State subprojects, and would provideassistance and incentives to States to improve financial management,resource mobilization and project preparation. The project would thusinitiate a long-term effort to mobilize the Nigerian private sector toassist in the development of urban infrastructure in the States. Projectcomponents are outlined below.
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Project Components
2.03 The project would include the following:
(a) line of credit to selected Nigerian merchant banks to finance:
(i) initial Bank-appraised infrastructure subprojects in Benue,Gongola and Ondo States (Annexes 2-1 to 2-3); and
(ii) future merchant bank-appraised State iumrastructure sub-projects;
(b) funding for FMWH to finance:
(i) training of merchant banks and States in infrastructureproject selection, appraisal, and supervision;
(ii) consultant services to undertake performance audits andstudies of IDF Project Guidelines;
(iii) training and studies to assist the FMWH to monitor andpost-evaluate infrastructure projects and programs;
(iv) training and studies to assist States to prioritize infra-structure investments;
(v) studies to restructure FMBN;
(vi) studies to prepare future projects; and
(vii) vehicles and equipment for IDF support activities.(Annexes 2-4 and 2-5 describe IDF support components.)
2.04 State Infrastructure Subprojects. The subprojects in Benue,Gongola and Ondo States have been selected to maximize their positiveimpact on city efficiency and on State revenues while minimizing theirimpact in terms of counterpart funding, debt service, and recurrent costs.They emphasize rehabilitation, maintenance and consolidation of urbaninfrastructure and services (roads, water supply, drainage, solid wastedisposal, markets and motor parks), and focus as well on resource mobiliza-tion and cost recovery through the implementation of property tax measures,and on improvements in billings an4 collections. The subprojects alsofocus on institutional development, and would assist State and localgovernment institutions to improve their financial management, planning andinvestment prioritization capabilities. (Annexes 2-1 to 2-3 presentdetails of the appraised subprojects, including subproject conditionality.)Future subprojects would be expected to focus on a similar set of issues,although the emphases may vary depending on the needs and priorities ofStates and the perspectives of participating merchant banks.
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IDF Policy Statement and Project Guidelines
2.05 Implementation of the project would be guided by a Policy State-ment which sets out the objectives of the project, and outlines the rolesand responsibilities of the agencies and organizations participating in theproject. In addition, the merchant banks would be required to follow aBank-type approach to project preparation and appraisal as expressed inProject Guidelines which specify the criteria for subproject selection andlappraisal. (Both documents have been agreed with FMWH and are included inthe project files.)
C. Rationale for Bank Involvement
2.06 The project fits the Bank's sector and country strategy forNigeria by supporting the establishment of an appropriate wholesalingmechanism for urban Infrastructure financing. It would maximize the Bank'simpact on the sector by financing the rehabilitation of essential economi-cally important and highly visible urban infrastructure and services inone-third of the States, and enhance the role of the private sector in theNigerian economy. The project also fits the Nigerian Government's presentpolicy of expanding the role of the private sector in the economy, increas-ing resource mobilization and improving institutional capacity at the Statelevel, and submitting the States to the discipline of the financial marketplace. The Bank has a comparative advantage in infrastructure financingbased on the three previous urban projects and extensive sector work whichhas significantly influenced Government policy. Direct Bank Involvementwould be essential in the early stages of the development of the infra-structure financing mechanism (while experience is being gained by themerchant banks), and would ensure objectivity in the analysis of sub-projects. Also, the discipline maintained by regular Bank supervisionmissions would be critical to institutionalizing the approach. Finally, Itis unlikely that the merchant banks would be willlng to participate infinancing State infrastructure subprojects at this time without the Bank'scontinuing interest and involvement.
D. ProJect Cost and Financing Plan
2.07 The total cost of the project is estim4ted at US$96.8 millionequivalent (see summary below and detailed cost tables in Annex 2-6).The foreign exchange component is estimated at US$69.5 million equivalent,approximately 72X of total project costs. 3/ Base costs have been
I/ This high foreign exchange component is explained by the fact that thesubprojects emphasize rehabilitation of existlng plant and equipmentmost of which must be imported into Nigutria.
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estimated in Naira as of December 1986 and converted into US dollars atUS$1 - N 4.00. Physical contingencies have been calculated at an averageof 10%. The project would be implemented over a period of 7 years endingDecember 31, 1994, which would be the closing date. Price contingencycalculations are based on foreign cost escalation projections of 3.0% and1.0% in 1987 and 1988-90 respectively, and 3.5% in subsequent years; localcost escalation is estimated at 20%, 16%, and 12% in 1987, 1988 and 1989respectively, and 10% in subsequent years. In addition, adjustment wasmade for anticipated exchange rate movements. 4/ The above represents theregion's best estimate of expected price increases and exchange rateadjustments.
2.08 Prolect Financing. The forelgn exchange component of the projectwould be financed by a Bank loan of US$69.5 million equivalent, covering(on average) 72% of total project costs (75% net of taxes). The amount ofUS$5.8 million equivalent would be utilized to finance IDP supportactivities to be managed by FMW. State subprojects would be financed bythe loan through a line of credit to the merchant banks totaling US$63.7million equivalent (US$37.5 for initial Bank-aipralsed subprojects andUS$26.2 million for future merchant bank appraised subprojects). Themerchant banks would finance a share of State subprojects totallingUS$9.1 million equivalent (9.4% of total project cost-9.7% net of taxes),and the individual borrowing States would contribute US$18.2 millionequivalent (18.8% of total project cost). The line of credit to themerchant banks would finance the foreign exchange component or(approximately 70% of State subproject costs, 5/ while the merchant banksand the States would respectively finance 10% and 20%. In order to ensuretimely project implementation, the merchant banks would be required tocommit the Bank line of credit to viable State subprojects by the end ofyear 3 of the project. Thereafter, uncommitted funds would be cancelled bythe Bank. Also! in order to provide merchant banks with flexibility indeveloping future subprojects, free limits would be established forsubprojects in which the foreign exchange component did not exceed US$2.0million equivalent. Aggregate Bank lending for such "free limit"subprojects would be limited to US$10.0 million equivalent. The allocationof the proceeds of Bank, merchant bank, and State funding is shown below.
Although some funds are earmarked in the line of credit for the threeInitial Bank-appraised subprojects, in the event that the completion ofdetailed engineering and contract documentation for any of these sub-projects is delayed beyond one year of the date of project effectivenessthe Bank, in consultation with PMWH, could reallocate these funds to otherviable merchant bank-appraised infrastructure subprojects.
2.09 Onlending Tenm. Bank loan proceeds would be on-lent by theFederal Government to the merchant banks at the prevailing Bank rate, for20 years with five years grace. The merchant banks would on-lend Bankproceeds to the borrowing States at a rate not exceeding 3.5% above theprevailing Bank rate and their own funds at market rates for a maximum termof 15 years with three years grace. The spread is considered adequate tocover operating costs and risk, and compares favorably with the grossspread, administrative expense and interest income/interest expense ratiosfor the five merchant banks as a group. States would bear the foreignexchange risk and the merchant banks would bear the credit risk of on-lentBank funds. FMG would pass funds for the urban investment prioritizationstudies on to the States on a grant basis as an inducement to the States toimprove their investment planning capabilities. Funds for training andevaluation would also be provided on a grant basis.
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E. Institutional Framework
2.10 In keeping with FMG and Bank policy, the principal institutionaldesign objective is to maximize the operational role of the private sectorand to limit the role of Federal Government agencies to the essential andappropriate one of policy formulation and guidance. Accordingly, theinstitutional design of the project relies on the demonstrated managerialstrengths of the merchant banks. The role and responsibilities of theimportant project agencies are outlined below.
The Federal Government Role
2.11 The Federal C)vernment would be responsible for policy guidance,monitoring, and the designation of the merchant banks that would partici-pate in the project.
2.12 The Federal Ministry of Works and Housing. FMWH would have theprimary responsibility for the project at the Federal level. In consulta-'ion with the Bank and the Federal Ministry of Finance (FMF), FMWH woulddetermine which merchant banks would be authorized to participate in theIDF project. It would also administer the IDF Project Guidelines-monitor-ing their application by the merchant banks through annual, ex post perfor-mance audits (para 3.12) conducted by an independent consultinraccountingfirm--and would hold semi-annual meetings with VFM and CBN to review thegeneral progress of the project. These three agencies would also meetannually to review the annual performance audit and the overall financialstatus of the project. On the basis of advice obtained from FMF and CBN,FMW would provide policy guidance to the merchant banks and the States,and formulate any necessary adjustments to the IDF Project Guidelines afterconsultation with the Bank. As the need arises, FMWH would also meet withthe CBN, merchant banks and the States to clarify any policy issues thatmay arise during the course of project implementation.
2.13 In order to streamline the operation of the IDF, all subprojects,with the exception of "free limit" subprojects, would be subject to ex antereview by the Bank in consultation with FMWH because of the limited priorexperience of merchant banks in infrastructure lending. In due course, asthe merchant banks demonstrate their capacity to appraise viable Stateinfrastructure subprojects, direct Bank and FMW involvement in the ex antereviews would decrease and free limits would be increased.
2.14 FMWH would also be responsible for coordinating the implementa-tion of training and studies for the merchant banks and the States in theoperation of the IDF project, as well as for coordinating the implementa-tion of infrastructure investment prioritization studies to be undertaken
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by the States and future project preparation studies. PMWH would adminis-ter a Special Account (para 3.08) for the above activities.
2.15 The Federal Ministry of Finance. PMF would assist PMWH to reviewthe performance of the merchant banks and to formulate and implementchanges in the IDF Policy Statement and Project Guidelines that may benecessary to expedite project implementation.
2.16 The Central Bank of Nigeria. CBN would open and operate an IDFControl Account (see para 3.09 and 3.12) in which would be recorded alltransactions relating to Bank disbursements and merchant bank withdrawalsfrom the line of credit, as well as merchant banks' payments of principal,interest and any other charges and fees connected with the line of credit.This control account, would enable CBN to provide FKWH and PMF and the Bankwith timely data on the overall financial status of the IDF project. CBNwould also undertake regular monitoring of the banking aspects of theproject, advise PMWH on the financial performance of the merchant banks,and assist 1MW to formulate and implement any changes in the IDF PolicyStatement and the Project Guidelines which may be necessary to expedite theproject.
The Merchant Banks' Role
2.17 The merchant banks would be responsible for: supervising theimplementation of the three Bank-appraised subprojects; presenting the IDFproject to otiler interested States; appraising and supervising future Statesubprojects; and opening and operating Special Accounts through which theline of credit for approved State infrastructure would be disbursed. Theywould also be responsible for financing 10% of subproject costs. TheBanking Act and the charters of the merchant banks permit them to undertakesubproject lending to the States. However, only the five appraised mer-chant banks would initially be authorized bv FMWH to participate in theproject. (Annexes 2-7 and 2-8 presents details of merchant bankorganization, staffing, procedures an4 finances and the criteria for theselection of additional merchant banks. See also, para 3.01.)
2.18 The merchant banks, as noted above, would select and appraiseState subprojects on the basis of Project Guidelines agreed by the Bank andthe Federal Government (para 5.01). They would: assist States in sub-project preparation by providing financing; guide the preparation of termsof reference for studies and the employment of consultants; process sub-project disbursement; monitor procurement and accounting; monitor sub-project conditionality (Annexes 2-1 to 2-3); and report annually to CBN,FMWH and the Bank on the physical and financial status of the subprojects.They would also be required to submit their own audited accounts to theBank on an annual basis, together with any other documentation regardingthe status of their portfolios that the Bank may reasonably request, toliaise with CBN by providing sufficient documentation to enable CBN to openand operate a Control Account for the project (paras 2.16, 3.09 and 3.12);and to liaise with PMWH in the conduct of annual ex post performance auditsof the project (para 3.12). Finally, the merchant Mabas would be
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responsible for debt collection from the States and subproject loanrepayments to FMG.
The States' Role
2.19 States would be responsible for: subproject preparation andimplementation (generally undertaken by State Ministries of Works andFinance, Annexes 3-1 to 3-3); training as identified in the individualsubprojects; State infrastructure investment prioritization studies to beundertaken with Bank funding provided to them on a grant basis throughFMWH; negotiating subproject agreements with the merchant banks; ensuringthat the detailed designs and contract documentation are completed; award-ing and administering contracts; maintaining subproject accounts; andcommissioning independent subproject audits-all in accordance with theProject Guidelines. The States would also be required to liaise with 1MWHin the conduct of annual ex post performance audits of the project. Stateswishing to participate in the project would be required to negotiateproject preparation agreements with the merchant banks and to submit theirsubprojects for merchant bank appraisal and financing.
F. Merchant Bank Orgization and Finances
Merchant Bank Organization
2.20 Five Nigerian merchant banks (Continental, Icon, IMB, NAL, andNMB) would participate in the IDF initially. These five banks were identi-fied by FMG and the Bank during appraisal, and were appraised in detail bya post-appraisal mission. They were selected on the basis of their finan-cial strength, technical capability and interest in the IDF program.Together, they account for about 80% of the assets held by merchant banksin Nigeria. Four of the banks are associated with prominent internationalbanks whose equity participation is generally 30-40%. Despite the factthat the Nigerian Government retains majority shareholding, the banks arerelatively free of Government intervention, except for the appointment ofmanaging directors. They operate on the basis of commercial criteria, andhave the reputation of bei-'g among the most profitable and efficiently runorganizations in Nigeria. The banks are generally well organized andcompetently staffed, with more than 50% of their middle and upper levelmanagement holding master's degrees or equivalent qualifications in fi-nance, accounting or marketing. On average, managers have had at least tenyears of banking experience, and have been in their present posts for fiveyears or more. They are well versed In project lending, syndication andsupervision. Their operating procedures are sound and well documented.Also, the merchant banks possess considerable experience in project lend-ing, particularly in the manuf4cturing, real estate and constructionsectors, ind all have been invdlved in project lending in the variousstates of the federation. Their experience with direct state lending forurban projects is, however, limited, and their staff are not well trainedin municipal engineering matters or in the intricacies of state finances,
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revenue mobilization and institutional development. These deficiencies canbe overcome by recruitment of a few municipal engineers to the staff ofeach bank, the development (with Bank assistance) of appropriate stafftraining programs, and the utilization, where necessary, of consultantexpertise, both local and international. The Project Guidelines would alsoassist merchant bank staff to undertake the tasks of project preparationand appraisal. All the appraised merchant banks have the basiccapabilities to implement the IDF project, and have indicated theirwillingness to improve their staff and hire consultants where necessary.(Annex 2-i presents details.)
Merchant Bank Finances and Impact of Project
2.21 The participating merchant banks have grown rapidly over the lastfive years, with an average annual rote of growth of total assets of 42%during this period. The fastest growth took place during the 1981-1982period, during which the banks grew at an unprecedented annual rate of 78%.The financial structure of the merchant banks is characterized by relative-ly short-term deposits, with little medium- and long-term debt. In gene-ral, cash, receivables, short-term loan and advances, and other short-termassets account for over two-thirds of total assets and over three-fourthsof total resources are represented by short-term deposits. (See Annex 2-8for details.)
2.22 Historically, the merchant banks have maintained debt/equityratios of roughly 20:1, which is an acceptable level for a commercial-typebanking institution, but somewhat high for medium- to long-term lendinginstitutions. Given the short-term uncertain impact of the structuralad'astment program on the liquidity of the merchant banks, the expectedfuture risk profile of their asset structure (vainly medium-term) and thesignificant term transformation that merchant banks may continue to under-take, a higher level of capitalization would be desirable (see para5.01(e)).
2.23 The profitability of the five merchant banks is adequate andtheir portfolios are generally sound. Agreement to review significantportfolio problems of the merchant banks was reached with FMG, CBN and themerchant banks at negotiations. Nominal after tax rates of return onaverage equity during the 1981-1985 period ranged from 202 to 46% and noneof the five banks had an average return for the five-year period of lessthan 25%. The five merchant banks earned very positive real rates ofreturn on equity during periods of low inflation, but lost much groundduring years of higher inflation due to the fixed loan margins (caused byinterest rate ceilings) which did not distinguish adequately between realand nominal profits of financial intermediaries. The banks were able tomaintain their profitability in spite of these restrictions through commis-sions, other charges and other interest income. As a percent of averagetotal assets, the gross spread (interest income less interest expense)shows narrow margins (0.5% to 5.4%), but when commissions and other incomeare included the margins increase significantly (5.0% to 8.2%). Thisillustrates the merchant banks' ability to adjust to the rigidities of the
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interest rate ceilings previously imposed by CBN. 6/ In general,administrative costs expressed as a percent of average total assets havebeen kept in the range of 1.3% to 2.7%, which is reasonable.
G. State Finances and Financial Eligibility Criteria
2.24 The current financial situation of the States is particularlydifficult as national-source revenues continue to decline and debt serviceon foreign loans be8ins to fall due. Information on Benue, Gongola, Imo,Niger and Ondo States indicates that debt service ratios have jumped fromthe 15-25% level of the 1980-1985 period to 70-90 for 1986. It can bereasonably assumed that all the States, with the possible exception ofLagos, are in the saee situation.
2.25 State Governments require a combination of internal measures andassistance from the Federal Government in order to halt this negativetrend, and to cope with financial pressures over the next five years andbeyond. The internal measures include:
(a) ,reater effort towards internal revenue mobilization and betterfinancial management;
(b) reduction of subventions to parastatals;
(c) increased application of user charges for services;
(d) restraint on the growth of recurrent and capital expenditures,with emphasis on rehabilitation, maintenance, and priorityprojects with cost recovery potential;
(e) new borrowing to be on appropriate terms; and
(f) rescheduling of debt to domestic banks and contractors over, sayfive years.
2.26 State Governments could realize growing current account surplusesfrom 1986 under FMG's medium-term adjustment program. They could alsobenefit from the rescheduling of their internal and external debt obliga-tions by PMG. 7/ (A summary of the financial status of the first threesubproject States is presented in Annex 2-9, and data indicating financialimpact of the project on the three States are presented in Annex 2-10.)
6/ Ceilings have now been removed by CBN.
7/ Proposals drafted by FMF are currently under consideration by FMG.- These proposals would be discussed with FMG at negotiations (para
5.02).
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2.27 State Financial Eligibility Criteria. To qualify for subprojectfinancing by the merchant banks, States would be required to demonstratetheir ability to meet the counterpart funding requirements (includingrecurrent expenses required to support project activities), and to servicethe proposed IDF loan. Staff of the merchant bank would review the budgetsof borrowing States and focus their analysis on actual and projectedestimates of: (a) recurrent internal revenues; (b) statutory allocations;(c) recurrent expenditures other than debt service; and (d) debt service.Adjustments in the budget items would be made to reflect significantaccounts payable or receivable (see Annex 3-4).
1II. IMPLEMENTATION
A. IDF Project Development
3.01 Project implementation would be undertaken in three broad phases.Phase 1 (project effectiveness) begins when one of the five participatingmerchant banks has approved at least one of the first three Bank-appraisedState subprojects. Phase 2 begins when participating merchant banks haveapproved the three Bank-appraised State subprojects. The final phase isone in which all the IDF project funds have been committed to subprojectsby the participating merchant banks. The total number of sub-projectswould depend on the size of the merchant bank-appraised subprojects.
3.02 The market would determine which merchant banks would financeparticular State subprojects, and, in general the decision rule would be"first come, first served," i.e., the first merchant bank to undertake anevaluation of State finances and agree to finance a viable State subprojectwould have the first call on IDF subproject funds--subject of course to thelimits outlined above-and syndications would be permitted. The decisionrule would be similar in Phase 2, however, the merchant banks would notnormally be permitted to act as the lead bank for more than one of thethree Bank-appraised subprojects. Exceptions would be made if the Bankdetermined that project implementation would be significantly enhanced byso doing. In Phase 3 there is no limit to the number of subprojects that amerchant bank would be allowed to finance provided that it had the capacityto do so effectively. (Annex 3-9 illustrates the development of theproject.)
3.03 As the project develops, FMWH would implement a program aimed attraining the merchant banks, the States and their own staff in the opera-tion of the IDE, and at assisting the States to improve infrastructureinvestment planning and programming. (Annexes 3-1 to 3-3 summarize theimplementation requirements of the subprojects and Annex 3-7 presents theProject Implementation Schedule.)
3.04 Subproject Preparation Procedures. Full operation of the IDFsubproject cycle would begin in Year 1 of the project with the processing
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of applications for funding from the Bank line of credit. As noted inpara 2.08, the Bank would place a three-year commitment limit on thesefunds to encourage merchant banks to expedite subproject preparation. Themain steps in the subproject preparation cycle are summarized below, andfurther details are provided in Annex 3-4 and in the Project Guidelines:
(a) Orientation -- To Initiate the cycle, a State would approach anyauthorized merchant bank with a subproject concept. The Stateand merchant bank would then review the subproject concept inlight of the IDF Guidelines, and agree on any required modifica-tions. Based on a preliminary review of the State's financialcondition, the merchant bank would advise the State as to theextent of measures required to render the State eligible for IDFfunds. The merchant bank would also impress upon the State theneed to begin the preparation of investment prioritizationstudies with the aid of project funds provided through FMWH;
(b) Preparation - Where a State and merchant bank reach generalagreement on the subproject concept and feasibility, the merchantbank would conditionally commit the required portion of its IDFfunds to the subproject and inform the Bank of this tentativecommitment. The merchant bank would then assist the State inpreparing terms of reference for project preparation, and wouldprovide financing (on the same terms as subproject loans, withthe outstanding balance being absorbed into the subproject loanonce approved) for any required feasibility studies. The mer-chant banks would review the State's progress with its investmentprioritization studies, and assist where necessary (for a fee),with the preparation of these studies; and
(c) Appraisal and Board Presentation - Upon completion of subprojectpreparation, the merchant bank would appraise the subproject, andStates would be charged an appraisal fee. Appraisal wouldencompass inter alia: (i) the economic, technical, and socialjustification of the components to be financed; (ii) the designof civil works and specifications of equipment and technicalassistance to be financed; (iii) details of institutionalarrangements for execution and operations and maintenance;(iv) financial arrangements for cost recovery and operations andmaintenance; and (v) financial targets for institutions concernedwith the subproject. In the case of "free limit" subprojectsmerchant banks would provide the Bank with completed appraisalsof the proposed subproject loan prior to subproject loaneffectiveness in order to ensure that effective conditions aremet. However, for all other subproject loans the completedappraisal would be forwarded to the Bank for review and approvalin consultation with PMWH prior to being presented to the boardof the merchant bank for final approval.
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B. Procurement
3.05 The merchant banks would be responsible for monitoring allsubproject procurement and for ensuring compliance with Bank ProcurementGuidelines. Infrastructure improvements in the first three subprojectswould be implemented in about 40 separate contracts ranging from underUS$100,000 equivalent to a maximum of US$1.5 million equivalent spread over13 towns in the three States (Annex 3-8). Most of these contracts would betoo small and scattered to interest foreign contractors unless they arealready established in Nigeria. The largest civil work contracts for watersupply, roads, and drains would be procured through ICB, but procurement ofthe smaller civil work contracts of less than US$0.5 million equivalentwould be through local competitive bidding in accordance with the applica-ble State procurement regulations and Bank Guidelines. State procurementpractices were reviewed during appraisal for compliance with Bank LCBguidelines, and assurances were given by the State Governments that BankLCB guidelines will take precedence over any conflicting State tenderregulations and practices. Also, all bid documents and contract awardswould be subject to prior review and approval of the lending merchant bank.Ex ante Bank review would be required for any contracts exceedingUS$1.0 million equivalent and the Bank would also review smaller civilworks contracts on an ex post basis by sampling.
3.06 Works that are not suitable for contracting out due to theirsmall size or particular nature--minor improvements not exceeding US$50,000equivalent per separate operation-could be carried out by force account,but only purchased material and equipment, if procured under acceptableprocedures, would be eligible for reimbursement in the same manner as othermaterial and equipment.
3.07 Vehicles and equipment for each State subproject would be groupedto obtain packages of a size suitable for ICB in conformity with Bankguidelines for procurement of goods. For materials and equipment of lessthan US$300,000 equivalent per contract local shopping up to a total ofUS$1.0 million equivalent per State would be permitted. Consultant ser-vices for design and supervision, technical assistance and training wouldbe procured in consultation with the merchant banks and in accordance withBank guidelines for the use of consultants. Much of the consultant ser-vices, studies, and technical assistance are of a nature and scope to allowextensive use of Nigerian consultants and experts. Those activitiesrequiring the use of expatriate firms and experts would be linked withtraining programs with a view to replacing the expatriates with trainedNigerians as soon as practicable. Training of local staff will be fullyintegrated with the technical assistance assignments to assure the maximumtransfer of expertise (see Annex 2-4).
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C. Disbursement
3.08 In order to facilitate project implementation, Special Accountswould be established for each participating merchant bank that agrees tofinance an approved State subproject, and the proceeds of the line ofcredit would be disbursed to the merchant banks through these SpecialAccounts. A Special Account would also be established for FMWH for projectcomponents that would be managed by the Ministry. All Special Accountswould be established in foreign currency and operated on terms and condi-tions acceptable to the Bank. The merchant banks would be entitled to makeperiodic withdrawals from their respective Special Accounts to finance theforeign exchange component of approved State infrastructure subprojects.FMWH would be similarly entitled to make periodic withdrawals from the FMWHSpecial Account to finance approved IDF project support activities.
3.09 The Bank would make an initial deposit of US$0.3 million into theFMWH Special Account at project effectiveness, and would replenish thisaccount from time-to-time. Replenishment of this Special Account by theBank would require the submission to the Bank of full documentation for alleligible expenditures by FMWH. The Bank would also make initial depositsinto the IDF Special Accounts of each participating merchant bank equiva-lent to three months expenditure for each approved subproject, or approxi-mately US$1.0 million for each of the three Bank-appraised subprojects.These initial deposits would be made as and when the approved subprojectsbecome effective, i.e., when the Boards of the relevant lending merchantbanks and the legislatures or other appropriate authorities in the relevantsubproject States ratify a Bank-approved subproject. Replenishment of amerchant bank's Special Account by the Bank would require submission to theBank of full documentation or, in the case of smaller contracts, certifiedstatements of expenditure (SOEs) for all eligible subproject expenditures(para 3.10) by the relevant merchant bank, as well as evidence that themerchant bank had submitted duplicate copies of its disbursement requestsand documentation to CBN (see paras 2.16 and 3.12). The rate of merchantbank withdrawals from, and Bank replenishment of the merchant banks'Special Accounts would depend on estimates of the financing requirements ofthe subprojects. These estimates would be agreed by the Bank and therelevant merchant bank prior to subproject effectiveness, and would bereviewed periodically as the need arises.
3.10 Merchant bank disbursements to approved subprojects from theirrespective Special Accounts would be on the basis of architects or engi-neers certificates against approved contracts, or, where appropriate underBank Procurement Guidelines, against the certified SOEs of approved sub-project ministries or agencies. Full contract documentation would berequired for all eligible expenditures except for civil works contracts ofless than US$50,000 equivalent and other contracts of less than US$20,000equivalent. Where a merchant bank's existing disbursement documentationrequirements include, ead are more extensive than those outlined above,these requirements may prevail. SOB limits could be liberalized based onexperience gained during the course of project implementation. The
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detailed contract and disbursement documentation would be retained by themerchant banks and made available for inspection by periodic Bank supervi-sion missions.
3.11 The amounts to be disbursed by the Bank to the FMWH and IDFSpecial Accounts of the participating merchant banks are summarized inAnnex 3-10, and disbursement would be made on the following basis:(a) 100% of foreign and 75% of local subproject expenditures and forexpenditures on vehicles and equipment for FMWH; and (b) 100% ofexpenditures for technical assistance, training, and studies managed byFMWH. The estimated quarterly schedule follows the regional profile forsector investment and maintenance loans (see Annex 3-10).
D. Accounting and Auditing
3.12 The participating merchant banks would be required to provide theBank with audited subproject accounts (including SOEs), as well as auditedfinancial statements of the merchant banks themselves--including details onarrearage and structure of portfolios. The FMWH would be required, inaddition to providing independently audited accounts of its project compo-nents, to undertake an annual performance audit of the entire IDF Project.These performance audits would include: (i) an overall quantitative andqualitative assessment of the IDF project (including assessments of sub-project performance and merchant bank compliance with IDF policies andguidelines); and (ii) consolidation of the individual merchant bank sub-project and PMWH project accounts. In addition to its normal supervisoryfunctions under the Banking Act, and on the basis of special subprojectreporting by the merchant banks (paras 2.16 and 3.09), CBN would open andoperate a Control Account for the project, and report annually to FMF, FOWRand tba Bank on the merchant banks' financial performance and the overallfinancial status of the project. The merchant banks' audits, CBN's reportand the project performance audit would be submitted to the Bank annuallywithin six months of the close of each fiscal year.
E. IDF Training and Studies
3.13 FMWH would implement a training component aimed at improvingthe capability of relevant merchant bank, FMWH, and State staff members tooperate the IDF project. They would also supervise the implementation ofthe following studies:
(a) studies to be undertaken by States to improve their infrastruc-ture investment planning and programming (prioritizationstudies);
(b) studies of the IDF Project Guidelines aimed at improving theireffectiveness;
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(c) studies to restructure FMBN; and
(d) future project preparation and other studies that may be neces-sary to enhance the effectiveness of the IDF project.
Over the last few years FMBN, which was established in 1977 to play therole of an Apex Housing Finance Institution, has been experiencing seriousfinancial and managerial problems and FMWH has requested that studies beundertaken to redefine FMBN's role and restructure its operations. Apreliminary study of FMBN was undertaken in February 1987. (This documentincluded in project file). The findings of this study will form the basisfor drafting terms of reference for a detailed study to be financed underthe project. Annexes 2-4 and 2-5 outline the scope of the training andstudies that would be undertaken under the project, and Annexes 3-5 and 3-6outline the implementation proposals.
F. Status of Project Preparation
3.14 Feasibility studies for the IDF and the three subprojects havebeen completed and were the basis for project appraisal, which was carriedout by staff of the Bank, jointly with FMWH. Merchant bank staff wouldappraise future subprojects. As noted above (para 2.05), the IDF PolicyStatement and Project Guidelines have been agreed. Preparation of detaileddesigns and bidding documents for the first year's works for the threeappraised subprojects is in progress.
IV. JUSTIFICATION AND RISKS
A. General Benefits
4.01 By rehabilitating essential infrastructure and services, andimproving resource mobilization and financial in important towns in approx-imately one-third of the States the project would have a significant impacton the efficiency of the urban sector in Nigeria. By establishing amechanism to provide long-term finance for State and local government urbaninvestment ptograms, the project would begin the process of channellingfunds from the Nigerian capital market to the States for priority projects,and reduce the need for Federal Government resources. The project'ssupport for improved mobilization of local fiscal resources and the in-creased use by States of cost recovery for specific services would in time,help shield State and local governments from the vagaries of fluctuatingoil revenues, and provide a more reliable source of local finance tofacilitate multi-year planning and programing purposes. Urban investmentswould ba rationalized as a result of investment prioritization studiesfunded through the project. This should help in ensuring that scarce
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resources will be applied to priority, high-yielding projects which direct-ly benefit the productive base and the overall efficiency of urban areas.
4.02 The project would also have a significant physical, economic andsocial impact on the subproject cities and their surrounding rural areas.Properly planned improvements of infrastructure and public services (ac-cess, drainage, water supply, sanitation, markets, etc.) in the projecttowns would enhance the growth of productive activities and hence therevenue base. The maintenance of existing assets will be supported by theproject, and will prolong the useful life of these assets and avoid costlyreconstruction. Rehabilitation, general improvement and modernization ofthe urban fabric would induce cost savings and greater reliability in theoperations of public services and private enterprise.
4.03 Other savings would accrue to firms and households from morereliable supply of goods and services, more efficient delivery of commodi-ties, reduced losses of perishable goods, and fewer working days foregonebecause of poor health and sanitation conditions. Permanent benefits wouldalso include the generation of additional employment and the more effectiveutilization of local labor.
B. Economic Evaluation
4.04 A summary of the economic analysis of the appraised subprojectsis presented in Annex 4-1. The merchant banks would be required to under-take the economic analysis of future IDF subprojects by applying criteriaand methodological approaches outlined in the IDF Guidelines.
4.05 Fcr the appraised subprojects, cost streams were calculated onthe estimated December 1986 base costs plus relevant design, supervision,management, maintenance costs, and physical contingencies. The standardconversion factor for Nigeria (0.95) was used to compensate for distortionsby tariffs, subsidies, and taxes. Some benefits, such as improved health,environmental quality, and land use are difficult to quantify. Quanti-fiable benefits were calculated for specific subproject components andaggregated by town and State. The major benefits from improvements inroads, associated drainage, water supply, and solid waste management wereassumed to be vehicle operating and fuel consumption savings (roads),increase in building rental value (roads and water supply), and buildingmaintenance cost savings (drainage). Sensitivity analysis was used toexamine the impact of lower/higher benefits and lower/higher costs on theeconomic rates of return within a matrix of variations in costs and bene-fits ranging from -30% to +30%.
4.06 The results of the analysis indicate an ERR for the investmentsas a whole (all subproject costs, all quantifiable benefits in all areas)of 26X and none were below 11%. Future subprojects would be expected tohave an ERR of at least 20%. Only in exceptional circumstances where
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benefits are difficult to quantify would subprojects with lower ERR's beselected; in no case should a project's ERR be less than 12%.
C. Poverty Impact
4.07 In 1985, 7/ the relative poverty threshold for Nigeria's urbanareas was estimated to be about US$330 per annum per capita. In currentterms, some 45% of the urban population is below this poverty threshold.While there are no data for the States appraised (Benue, Gongola, Ondo), itis estimated that the poverty line and the share of the population thatfalls below this threshold is about the same as the national average (about45%). While it is the older central residential/commercial areas whichpresently suffer most from poor infrastructure and inadequate or non-exis-tent waste disposal services, and which will benefit most from theseimprovements, the urban poor are represented in these areas to approxi-mately the same extent as in most other parts of town.
D. Project Risks
4.09 There are two sets of risks involved in the project: (a) thoserelated to the establishment of a sustainable infrastructure financingmechanism using merchant banks; and (b) those related to the States andtheir capacity to plan, implement, finance and manage urban investments.
4.10 Establishing the Wholesaling Mechanism. This is a high riskcomponent. The main risk is that the merchant banks, although generallywell managed, may not prove to be effective institutions for the financingof urban infrastructure. This problem would be addressed under the projectby the preparation and utilization of Project Guidelines, training ofmerchant banks' staff, merchant bank recruitment of municipal specialists,and by the employment of other consulting expertise by the merchant bankswhere necessary. However, even in the extreme case of failure to establisha sustainable mechanism for the financing of urban infrastructure, Statesubprojects with high rates of return would still have been completed.Although the institution-building objectives would not have been achieved,the Federal Government would not be left with an institution to dismantle.Therefore, vhe risks, while substantial, would not result in unacceptableconsequences. The benefits, on the other hand, would be great if theproject succeeds in establishing a basically private sector mechanism whichmobilizes local and external funds on appropriate terms for urbaninfrastructure while inculcating financial discipline in the States
7/ The last year for which data are available.
- 23 -
and improving their investment programming capabilities. This wouldachieve Federal Government and Bank objectives for the sector with minimalGovernment involvement. Furthermore, these benefits are not limited to theurban sector as this wholesaling mechanism could be used in other sectorsas well.
4.11 State Capacity. The risks involved in the project at the Statelevel are that exogenous factors will make it impossible for the States torepay their loans; that the States will not be able to sustain the politi-cal will to satisfy subloan financial and institutional conditionality; andthat implementation problems typical of Nigeria, such as staff shortages,institutional weakness and procurement delays, will prevent the timelyimplementation of the subprojects.
4.12 Risks at the State level are mitigated by the States' demons-trated ability to mobilize additional local resources and reduce recurrentexpenditures, and by the beneficial impact of the Federal Government'smedium-term adjustment program on the Nigerian economy and on State finan-ces. Also, investment prioritization studies financed under the projectshould ensure more rational financial planning and management by theStates. The subprojects have been designed and phased to minimize imple-mentation problems (Annexes 3-1 to 3-3). Activities important to a rapidstart-up of the project (design and technical assistance for financialimprovements) are commencing prior to Board presentation. The weak poinitsin the implementation framework and the components which involve newagencies or procedures would be strengthened through technical assistanceand training.
V. AGRKEI4TS, CONDITIONS AND RECOMENDATION
A. Agreements
5.01 During negotiations the following agreements were reached withthe Federal Government and the participating merchant banks:
(a) to adopt the IDF Policy Statement and the IDF Project Guidelinesas approved by the Bank (para 2.05);
(b) to adopt the criteria for determining the eligibility of Statesfor infrastructure subproject financing (para 2.27 andAnnex 3-4);
(c) to commit the funds provided under the Bank line of credit toviable State subprojects by the end of the third year of theproject, failing which the Bank would cancel uncommitted funds(para 2.08);
- 24 -
(d) that the merchant banks would hire the staff, undertake thetraining necessary to undertake the IDF Project and negotiatesubproject agreements with the first three borrowing Statesessentially according to agreements reached during appraisal byBank (paras 2.17 and 2.20, Annexes 2-1 to 2-3, Annex 2-7, andAnnexes 3-1 to i-3);
(e) beginning in May 1988 and annually thereafter, to discuss themerchant banks' financial performance with the Bank and CBN andtake measures, where necessary, to improve performance(para 2.22, 2.23 and Annex 2-8);
(f) to adopt the on-lending terms to the States, including interestrates, loan period, grace period, and spread (para 2.09); and
(g) to open and operate accounts (including Special Accounts) in amanner satisfactory to the Bank, and to undertake such audits,and to provide such reports as the Bank may reasonably request(paras 2.16 and 3.08 to 3.12).
B. Conditions
5.02 As conditions of project effectiveness the following would berequired:
(a) execution of subsidiary loan agreements satisfactory to theBank between FMG and at least two participating merchant banks(para 3.01);
(b) execution of subloan agreements satisfactory to the Bank betweenat least one of the three Bank-appraised subproject States(para 3.01).
C. Recommendation
5.03 On the basis of the above actions and agreements, the proposedproject would be suitable for an IBRD loan of US$69.5 million at theprevailing terms and conditions.
AF4INNovember 1987
- 25 -
ANNEX 2-1Page 1 of 5
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Detailed Description - Benue State Subproject
1. The infrastructure and service improvements would be aimedat remedying critical deficiencies in the urban systems of the foursubproject towns, Makurdi, Gboko, Idah, and Otukpo, throughrehabilitation and extension of basic infrastructure In an integratedand coordinated way, and through additional equipment for and improvedmanagement of, solid waste collection and disposal, and road and drainmaintenance. These interventions would be concentrated on high-density lower income areas and commercially active zones in the towns'core areas to achieve the greatest benefits in social and economicterms. The criteria employed for the selection of the infrastructurecomponents were:
(a) interventions which promote the more efficient functioningof the urban services network; and
(b) interventions which maximize financial, economic, and socialreturns on urban investments.
2. In addition to financing physical infrastructure improve-ments, the subproject would also provide funds for strengthening keyState and local government institutions and for improving resourcemobilization and financial management.
In summary, the subproject would support:
(a) improvements of water supply, roads, storm drainage andsolid waste management in the four subproject towns, includ-ing detailed design and engineering supervision duringconstruction; and
(b) assistance to various ministries, agencies, and localgovernments to improve revenue generation, land administra-tion and information systems, training, and projectpreparation (through studies).
3. The subproject components are described below, and IBID MapNo. 20047 and 20048 show the location and extent of the physicalinprovements proposed in the four subproject towns. A summary ofsubproject costs is presented in Annex 2-6 and subprojectimplementation details are given outlined in Annex 2-12.
- 26 -
ANNEX 2-1Page 2 of 5
Infrastructure Improvements
4. The focus of the various physical interventions would be asfollows:
(a) Makurdi - In Makurdi, the subproject would complement theefforts of the State Government by improving and rehabili-tating infrastructure networks such as water supply, androads and drainage, particularly in deficient, high-densityareas. Overall water supply and its reliability to the citywould be enhanced through upgrading and improvements to themain treatment works and pumping station (pumps, spareparts, standby generators, chemical treatment), rehabilite-tion of the old treatment plant, booster pumping station andtransmission mains to supply currently deficient areas. Thesubproject would also finance the rehabilitation andconstruction of about 20 km of primary, secondary, and localroads, and related drains in the Central and North Bankareas. Pedestrian walkways totalling 3.5 km in the centralareas would be provided. Three major drainage channelstotalling 7.5 km would be constructed to reduce theincidence of flooding and improve environmental conditiorsin the central area;
(b) Gboko - In Gboko, because of the extremely large investmentneeded (over N 10 million) to complete the large surfacewater supply project which has been under construction forover eight years, the subproject would be limited toimproving the reliability of four existing water supplyboreholes with new pumpsets and the drilling and equippingof one new borehole. The water distribution system would beimproved by relaying of defective distribution mains. Thesubproject would also finance the improvement of the maindrainage channel and rehabilitation of major roads in thecentral commercial area and upgrading of 5.0 km of collectorroads in medium- to high-density residential areas;
(c) Idah - To improve the rellability of the existing surfacewater and groundwater supply sources for Idah, urgentlyneeded new pumps, equipment, and a standby generator wouldbe provided. A limited amount of relaying of defectivepipelines would also be carried out. The subproject wouldalso finance detailed design engineering for priorityinfrastructure identified in 1983 and the reconstruction ofsome 4 km of prioirity central area roads; and
(d) Otukpo - The surface water treatment works would berehabilitated and the presently inadequate supply and itsreliability improved. The distribution system in centralOtukpo would be rationalized by laying about 10.5 km ofdistribution mains. The subproject would also finance therehabilitation and reconstruction of 6.0 km of primary and
- 27 -
ANNEX 2-1Page 3 of 5
collector roads in the central commercial area to easeaccess to the market area- the motor park and to generallyimprove traffic flow.
Operations and Maintenance
5. The subproject would provide for the following improvementsIn solid waste management and road/drainage maintenance:
(a) Solid Waste Management - The subproject would finance thepurchase of 13 refuse trucks, 14 tractors, and 31 trailers,handcarts and equipment for sanitary landfill operations, aswell as the construction and equipment of garages and repairfacilities for each of the four local authorities. Anon-the-job training program for each Local GovernmentAuthority's Personnel would be conducted by a waste disposaloperations expert leading to the organization of an ongoingsolid waste management program to take over from the currenttask forces in the four major towns; and
(b) Road/Drainage Maintenance - In conjunction with the solidwaste management program, a road and drainage maintenancecapability would be developed in each of the four LocalGovernment Areas. Appropriate maintenance equipment andtools would be provided to maintenance brigades under thesupervision of works foremen who would be trained on-the-jobby the same personnel concerned with solid waste management,augmented by a municipal maintenance engineer. Vehicles andequipment used for solid waste management would be used forroad/drainage routine maintenance.
Institutional and Financial Strengthening
6. The subproject would finance assistance for:
(a) Project Management - Technical assistance in the form of anexperienced project manager to head the project managementunit to be established within the Ministry of Works. Twelvemonths of periodic accounting assistance would be providedto design and support the project accounting system, as wellas six months of short-term specialists for tasks to beidentified during the course of subproject implementation.Funds would also be provided for a subproject launchworkshop, as well as vehicles and equipment;
(b) Resource Mobilization and Financial Management - Anaccountancy training expert would be assigned to theMinistry of Finance to develop and conduct training forTreasury Division personnel. Financing for internal andexternal training of Ministry of Finance Internal RevenueDivision personnel would also be provided. Technicalassistance for public finance training would be provided to
- 28 -
ANNEX 2-1Page 4 of 5
the Ministry of Local Government to develop a trainingprogram for Local Authority staff. A property valuationexpert and financing for a valuation consultancy would beprovided to the Ministry of Lands and Surveys to enhance therevenue potential of the newly introduced property tax. Aland administration spe:lialist would be provided to theMinistry of Lands and Surveys to improve revenue generatedfrom ground rents and also to develop a data base to be usedfor the property tax. Short-term specialists totalling upto 16 months would be provided as needed to investigate andimplement new sources of revenue. Financing would also beprovided for studies of Local Authority revenue sources andtraining requirements and for vehicles, equipment, andmaterials required by all the above elements of assistance;and
(c) Water Supply - The Benue State Water Corporation would beassisted to improve its finances and operations through theprovision of a commercial adviser, a management expert and adistribution system expert. Vehicles, equipment spareparts, leak detection equipment, bulk meters, and a radiosystem would be financed. Finally, provision would be madefor the preparation of strategic plans for future watersupply investments.
Subproject Conditionalities (To be Monitored By Merchant Banks)
7, In addition to confirming arrangements for procurement,accounting, auditing and reporting at negotiations, Benue StateGovernment shall agree to special conditions as follows:
(a) Conditions of subproject negotiations -
(i) establish Project Management and Coordination Unitwithin Ministry of Works and Transport and appoint theProject Manager;
(ii) appoint consultants for detailed engineering design ofall major civil works and for the solid wastemanagement study;
(iii) execute agreement with FMBN for financing initialdetailed design for at least the first two years of theinfrastructure improvement program;
(iv) appoint a Chief Valuation Officer acceptable to theBank;
(v) introduce a property rating valuation system acceptableto the Bank;
- 29 -
ANNEX 2-1Page 5 of 5
(vi) agree to annually review and agree the level of watertariffs and recurrent subvention to Benue State WaterCorporation to enable BSWC to meet at least 502 of Itscash operating expenses by December 31, 1989, 75X byDecember 319 1991 and 100% by December 31, 1993; and
(vii) agree to pass on to local governments of Makurdi,Gboko, Otukpo, and Idah the proceeds from the propertytax collection deducting only the cost of administeringthe valuation.
(b) Conditions of Merchant Bank Board presentation -
(i) complete design and tender documents for at least thefirst year of the infrastructure improvements program;and
(ii) appoint staff to Project Management and CoordinationUnit and to Rating Valuation Authority;
(c) Conditions of subproject effectiveness -
(i) execute subloan agreement with merchant bank; and
(ii) deposit the first year's counterpart fund requirementrinto project account.
A741NSeptember 1987
- 30 -
ANNEX 2-2P!ageT1of 6
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Detailed Description - Gongola State Subproject
1. The infrastructure and service improvements would be aimedat remedying critical deficiencies in the urban systems of the sixsubproject towns, Yola, Jimeta, Jalingo, Nubi, Numan, and Wukari,through rehabilitation and extension of basic infrastructure in anintegrated and coordinated way, and through additional equipment for,and fsproved management of, solid waste collection and disposal, androad and drain maintenance. These interventions would be concentratedon high-density lower income areas and commercially active zones inthe towns' core areas to achieve the greatest benefits in social andeconomic terms. The criteria employed for the selection of theinfrastructure components were:
(a) interventions which promote the more efficient functioningof the urban services network; and
(b) interventions which maximize financial, economic, and socialreturns on urban investments.
2. In addition to financing physical infrastructure improve-ments, the subproject would also provide funds for strengthening keyState and local goverrment institutions and for improving resourcemobilization and financial management.
In summary, the subproject would support:
(a) improvements of water supply, roads, storm drainage andsolid waste management in the six subproject towns, includ-ing detailed design and engineering supervision duringconstruction; and
(b) assistance to various ministries, agencies, and localgovernments to improve revenue generation, landadministration and information systems, training, andproject preparation (through studies).
3. The subproject components are described below, and IBRD MapNo. 20045 and 20046 shows the location and extent of the physicalimprovements proposed in the six subproject towns. A summary ofsubproject costs is presented in Annex 2-6 and subproject implementa-tion details are given in Annex 2-13.
- 31 -
ANNEX 2-2Page 2 of 6
Infrastructure Improvements
4. The focus of the various physical interventions would be asfollows:
(a) Yola/Jimeta - In Yola, the old traditional seat ofgovernment, and Jimeta, the present State capital, thesubproject would complement the efforts of the StateGovernment by improving and rehabilitating infrastructurenetworks and services such as water supply, roads, anddrainage, particularly in deficient, high-density areas.Jimeta would also benefit through the upgrading of a 110 halow-income, residential area which houses approximately2,000 compounds. The reliability of the water supply systemwould be enhanced through improvements to treatment worksand pumping stations (pumps, spare parts, standby genera-tors, chemical treatment), and through limited improvementsand extensions of the distribution network. The subprojectwould finance a major drainage scheme which would relievethe worst incidence of flooding in Jimeta, and improvementsin solid waste collection and disposal. It would alsofinance the provision of equipment, spare parts, and garbagecollection points, and improvements to markets and motorparks through the provision of footpaths, drainage, watersupply, sanitation, and solid waste collection facilities;and
(b) Jalingo, Mubi, Numan, and Wukari - These secondarysubproject towns would benefit through the improvement and-ehabilitation of infrastructure networks and services. Thewater supply plant and equipment in each town would berehabilitated through the provision pumps and spare parts.The distribution systems would be improved through theconstruction of critical linkages which would boost mainspressure, through minor extensions to the network to serveimportant settlements (approximately 15,000 meters of 75 and100 mm pipeline), and through the rehabilitation ofstandpipes in high density residential areas. Prioritydrainage works would be undertaken to improve environmentalconditions and control flood damage in each town. Theseworks include dredging the channel of the Yedseram River inMubi, and the construction of main drainage channels andculverts in each town. The subproject would also financeimprovements to approximately 5,000 meters of urban roadsand footpaths, improvements to markets and motor parksthrough the provision of drainage, sanitation and solidwaste collection and disposal services, and improvements tosolid waste collection and disposal systems throughout thetowns by the provision of equipment (collection vans,bulldozers, etc.) and spare parts.
- 32 -
ANNEX 2-2Page 3 of 6
Operations and Maintenance
5. The subproject would improve solid waste management and roadand drainage maintenance, as well as operation and maintenance ofwater supply plant, equipment, and distribution networks. The focuswould be:
(a) Solid Waste Management - The subproject would finance thepurchase of 20 refuse collection vans, six bulldozers andtwo years' supply of spare parts, as well as improvements torepair facilities in each of the subproject towns. Anon-the-job training program for collection and disposalpersonnel in each of the subproject towns would be conductedby a solid waste management specialist who would also beresponsible for reviewing existing solid waste managementsystems and programs, and for developing more effectivemethods of collection and disposal. The subproject wouldalso finance technical assistance to improve the maintenanceof vehicles and equipment; and
(b) Road/Drainage Maintenance - In conjunction with the solidwaste management program, a road and drainage maintenancecapability would be developed in each of the subprojecttowns. Appropriate maintenance equipment and tools would beprovided to maintenance brigades under the supervision ofworks foremen who, in turn, would be trained on-the-job by aroad and drainage maintenance specialist. This specialistwould also be responsible for developing and instituting aneffective road and drainage maintenance program.
Institutional and Financial Strengthening
6. The subproject would strengthen existing institutions andimprove financial management and resource mobilization. The focuswould be:
(a) Project Management - The subproject would provide about250 staff-months of technical assistance to a ProjectImplementation Unit (PIU) which would be established withinGSUPDA. This unit would be headed by an experienced projectmanager who would be assisted by project engineers andaccountants. Six staff-months of short-term technicalassistance would be provided to the Project Unit forspecialized project accounting assistance and training. Inaddition to the above, GSUPDA would be strengthened by theprovision of 42 staff-months of technical assistance toimprove financial planning and management, managerial andoperational systems, solid waste management, road anddrainage maintenance and, vehicle and equipment maintenance.The subproject would also finance computer facilities,office equipment and vehicles;
- 33 -ANNEX 2-2Page 4 of 6
(b) Resource Mobilization - The subproject would improveresource mobilization through assistance to the Ministry ofLocal Government, the Ministry of Works, and the Ministry ofFinance. It would finance the establishment of a PropertyValuation and Rating Unit within the Ministry of LocalGovernment, and support 60 staff-months of technicalassistance expertise in property rating and valuation, localgovernment finance and accounting, computer systems andoperations. In addition, the subproject would finance aprogram of property valuation to be undertaken by privatesector valuers, and training, vehicles and equipment for thevaluation unit. The Land Administration Division of theMinistry of Works would be strengthened through administra-tive support to the ground rent collec'ions department, theprovision of essential office equipment and vehicles, andthe implementation of a program of aerial photography andmapping. The Ministry of Finance would be strengthenedthrough the provision of technical assistance and stafftraining to the Budget and Revenue Offices, the Commissionof Internal Revenue, and the Accountant General's division,as well as through the provision of micro-computer facili-ties, office equipment and vehicles; and
(c) Water Supply - The Water Division of the Gongola StateUtilities Board would be assisted to improve its financesand operations through the engagement of commercial andaccounting experts, and operations, maintenance, and distri-bution system experts. In addition, the subproject wouldfinance staff training, micro-computing facilities, leakdetection and repair equipment and materials, chemicals forwater treatment, and vehicles. Provision would also be madefor undertaking feasibility studies which would serve as abasis for future water supply project preparation.
Subproject Conditionalities (To be Monitored By Merchant Banks)
7. In addition to confirming arrangements for procurement,accounting, auditing and reporting at negotiations, Gongola StateGovernment shall agree to special conditions as follows:
(a) Conditions of Subproject Negotiations -
(i) adopt a system of property valuation, rating, billingand collection acceptable to the Bank, and define theinstitutional arrangements for giving effect to thissystem, inclusive of the establishment of a propertyrating and valuation unit acceptable to the Bank;
(ii) enact the legislation necessary to give effect to(i) above;
- 34 -
ANNEX 2-2Page 5 of 6
(iii) define, to the Bank's satisfaction, the respectiveroles and responsibilities of GSUPDA and the localgovernment authorities;
(iv) adopt a system of sharing the proceeds of the propertytax between the local government authorities and GSUPDAthat is acceptable to the Bank;
(v) enact the legislation necessary to give legal status toGSUPDA and to the system of sharing the propertytaxation revenue as determined in (iv);
(vi) prepare, to the Bank's satisfaction, a five (1988-1992)year corporate plan for GSUPDA clearly outliningGSUPDA's cbjectives, program, organization, staffingand budget, and the means by which this corporate planwill be implemented;
(vii) make budgetary provisions for the funding necessary forGSUPDA to effectively undertake its responsibilitiesunder the project;
(viii) establish the Project Implementation Unit (PIU) withinGSUPDA;
(ix) appoint a Project Coordinator acceptable to the Bank,who will oversee the establishment of the PIU and bedirectly responsible for project implementationactivities until such time as a project manager isappointed, and thereafter, be responsible forcoordinating the activities of the PIU and the otherproject agencies, i.e., GS Ministries of Works andTransport and Local Government, and the MinistriesBoard, and for liaising with the Federal Ministry ofWorks, FMN and the merchant banks;
(x) execute an agreement with FMBN for financing initialdetailed design and engineering work required for atleast the first two years of the civil worksconstruction program;
(xi) appoint consultants for detailed engineering of allmajor civil works and initiate detailed engineeringdesign work; and
(xii) agree to annually review and agree the level of watertariffs and recurrent subvention to the Water Divisionof the Gongola State Utilities Board to enable theBoard to meet at least 50% of its cash operatingexpenses by December 31, 1989, 75% by December 31, 1991and 100X by December 31, 1993;
- 35 -
ANNEX 2-2Page 6 of 6
(b) Conditions of Merchant Bank Board Presentation -
(i) establish a Property Rating and Valuatioon Unitacceptable to the Bank and make the necessary budgetaryprovisions to enable this unit to undertake itsresponsibilities under the project; and
(ii) complete detailed engineering designs inclusive of costestimates and contract documents for at leas1 thefirst year of the civil works construction program;
(c) Conditions of Sub2roject Effectiveness -
(i) appoint a Manager of the Property Valuation and RatingUnit acceptable to the Bank and complete all legaland/or administrative actions required for the start-upof operations of this unit;
(ii) appoint a project manager acceptable to the Bank tohead the PIU;
(iii) appoint a project accountant and at least two projectengineers, all with qualifications and experienceacceptable to the Bank, to the PIU;
(iv) initiate the legal and/or administrative stepsnecessary for the PIU to begin operations; and
(v) execute subloan agreement between State Government anda participating merchant bank and deposit the firstyear's counterpart fund requirements into subprojectaccount.
AF4INSeptember 1987
- 36 -
ANNEX 2-3Page 1 of 6
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Detailed Description - Ondo State Subprolect
General
1. The infrastructure and service improvements would be aimedat remedying critical deficiencies in the urban systems of the threesubproject towns, Akure, Ado-Ekiti, and Ovo, through rehabilitationand extension of basic infrastructure in an integrated and coordinatedway, and through additional equipment for, and improved management ofsolid waste collection and disposal, and road and drain maintenance.These interventions would be concentrated on high-density lover incomeareas and commercially active zones in the towns' core areas toachieve the greatest benefits in social and economic terms. Thecriteria employed for the selection of the infrastructure componentswere:
(a) interventions which promote the more efficient functioningof the urban services network; and
(b) interventions which maximize financial, economic, and socialreturns on urban investments.
2. In addition to financing physical infrastructure improve-ments, the subproject would also provide funds for strengthening keyState and local government institutions and for improving resourcemobilization and financial management.
In summary, the subproject would support:
(a) improvements of water supply, roads, storm drainage andsolid waste management in Akure, Ado-Ekiti and Owo, includ-ing detailed design and engineering supervision duringconstruction; and
(b) assistance to various ministries, agencies, and localgovernments to improve revenue generation, landadministration and information systems, training, andproject preparation (through studies).
3. The subproject components are described below, and IBRD MapNo. 20049 shows the location and extent of the physical improvementsproposed in the three subproject towns. A summary of subproject costsis presented In Annex 2-6 and subproject implementation details aregiven in Annex 2-14.
- 37 -
ANNEX 2-3Page 2 of 6
Infrastructure Improvements
4. The focus of the various physical interveuttions would be asfollows:
(a) Water Supply - Priority would be given to: (i) extensionsto the distribution system to serve areai with highpopulation densities, and to increase service reliabilityand system preseures; (ii) rehabilitation of some equipment(pumps, motors); and (iii) provision of leak detectionequipment and pipe repair materials;
The proposed water supply improvements vould be designed to maximizethe benefits to be derived from presently ongoing improvements of thesupply, treatment and major transmission facilities (undertaken byOndo State Water Corporation (OSWC) through direct labor). If theseworks were not completed by subproject start-up, some subproject fundscould be diverted from main extensions to sourceworks improvements toassure an adequate supply of water.
(b) Roads - Road improvements would involve the upgrading andreconstruction (including surfacing with a double dressing)of important sections of the urban road network (min. widthof 6m). Priority would be given: (i) to those sectionswhich service areas with high population densities andimportant economic activities; (ii) to sections whichprovide important linkages or constitute critical bottle-necks; and (iii) to routes which will improve the circula-tion of traffic. Tertiary (road-side) drains would also bereconstructed;
(c) Storm Drainage - Drainage interventions would aim atrelieving the worst areas of flooding in the subprojecttowns through clearing and excavation of the major drains,and through construction of essential secondary drains.More permanent solutions for the primary drains would beinvestigated by a study to be financed through thesubproject; and
(d) Solid Waste Management and Municipal Maintenance - The solidwaste component would provide essential equipment for refusecollection and disposal, and funds for the development ofsanitary landfill sites. Workshop tools and equipment, andspare parts for the servicing and rehabilitation of road anddrain maintenance vehicles and equipment would also beprovided.
5. The quantities of the various physical infrastructureimprovements can be summarized as follows:
(a) Akure - Laying of approximately 22 km of water mains rangingin diameter from 100 to 350 mm, upgrading/reconstruction of
- 38 -
ANNEX 2-3Page 3 of 6
about 8 km of roads, construction 0.8 km of secondarydrains, clearing and excavation of major drains, and provi-sion of solid waste and municipal maintenance equipment;
(b) Ado-Ekiti - Laying of approximately 12 km of water mains(100 to 350 mm diameter), repair of 4.5 km andupgrading/reconstruction of about 7 km of roads,construction of 2.3 km of secondary drains, clearing andexcavation of major drains, and provision of solid waste andmunicipal maintenance equipment; and
(c) Owo - Laying of approximately 21 km of water mains (100 to300 mm diameter) upgrading/reconstruction of 7.5 km roads,construction of 1.3 km of secondary drains, some major drainrehabilitation work, and provision of solid waste andmunicipal maintenance equipment.
Institutional & Financial Strengthening
6. About one quarter of the subproject costs would be devotedto strengthening the technical, managerial and financial capacity ofthe following major institutions acting in the urban sector. Techni-cal assistance and training would be provided for:
(a) Department of Lands & Housing:
project planning, coordination & management;- town planning;- mapping, land information and administration; and- property rating valuation;
(b) Ministry of Works and Transport:
- road and drainage design, construction supervision; and- project management and coordination;
(c) Ministry of Local Government and local governments of Akure,Ekiti-Central and Owo:
- public finance and financial management;- solid waste management; and- municipal maintenance (roads, drains); and
(d) Ministry of Finance and Economic Planning:
- assessment, collection, monitoring supervising anddocumenting of revenue generation;
- planning, budgeting, accounting and financialmanagement; and
- project analysis and evaluation, and investmentprogramming.
- 39 -
ANNEX 2-3Page 4 of 6
7. A brief outline of the specific elements of the institu-tional and financial strengthening component is given below:
(a) Prolect Planning and Coordination Unit (PPCU) - The PPCU,attached to the DLH would be strengthened through 48 staff-months of longer term and short-term externally recruitedtechnical assistance, and 6 staff-months of accountingassistance to establish acceptable project accountingsystems. Provision would be made for staff training,especially in the areas of town planning and projectmanagement/coordination. In addition, there would be fundsfor a project launch workshop, publicity campaigns, officeequipment and four vehicles;
(b) Survey Division - In support of the mapping program for thethree subproject towns six staff-months of intermittentshort-term technical assistance would be provided, inaddition to staff training, and printing materials requiredfor map production (some critical materials could beacquired during the detailed design phase to permit earlystart-up of the mapping program). This component would alsobe supported by two vehicles and equipment and training foruser-directed innovative aerial photography usingultra-light aircraft;
(c) Rating Valuation Division - This component would be providedwith 36 staff-months of an externally recruited ChiefValuation Officer and 6 staff-months of a systems analyst toset up the computerized data base. Further, there would befunds for the engagement, on a short-term contract basis, ofprivate sector valuers. In support of the newly createddivision's activities, staff training, data processing andoffice equipment, as well as seven vehicles (including threefor the local government's treasuries) would be provided;
(d) Lands Division - The Lands Division would be strengthenedthrough four staff-months of a systems analyst for settingup land data base to enhance revenue generation. Dataprocessing equipment and materials, staff training andtwo vehicles would also be provided;
(e) Resource Mobilization and Financial Management - Twenty-fourstaff-months of an externally recruited public financeexpert would be provided to assist the three localgovernments (through the MLG Training Division) and MFEP inthe areas of planning and budgeting, financial managementand accounting, revenue collection and project analysis,evaluation and investment programming. There would also betraining for LWt, MLG and MFEP staff, and data processingequipment and two vehicles for NFEP;
- 40 -
ANNEX 2-3Page S of 6
(f) Solid Waste Management and Municipal Maintenance - Forty-twostaff-months of externally recruited intermittent short-termtechnical assistance would be provided for the three localgovernments, mainly in the areas of solid waste collectionand disposal, road and drain maintenance, and vehicle andequipment maintenance rAnd repairs. Funds would also beincluded for staff training in these tasks, and for threevehicles;
(g) Ondo State Water Corporation (OSWC) - OSWC's revenuegeneration would be strengthened through 24 staff-months ofan externally recruited commercial manager to improve theCorporation's billing and collection system. In order toreduce the percentage of "unaccounted-for" water, sixstaff-months of a distribution system specialist would beprovided to implement a leakage detection and repairprogram. In support of this component there would be fundsfor staff training, and for the acquisition of bulk meteringequipment, leakage detection equipment, leakage repairmaterials and for four vehicles; and
(h) Studies - The subproject would include funds for carryingout urban infrastructure development project preparationstudies for three other major urban centers in Ondo State(Ondo, Ikare, Okitipupa), and for a study to identifylow-cost solutions for the major drainage problems in Akure,Ado-Ekiti and Ovo.
Subpro_ect Conditionalities (To be Monitored By Merchant Bank)
8. In addition to confirming arrangements for procurement,accounting, auditing and reporting at negotiations, Ondo StateGovernment shall agree to special conditions as follows:
(a) Conditions of subproject negotiations -
(i) establish Project Planning and Implementation Unit(PPIU) and appoint Project Coordinator;
(ii) appoint consultants for detailed design and commencework on detailed design;
(iii) execute agreement with FMBN for financing initialdetailed design for at least the first two years of theinfrastructure improvement works program; and
(iv) agree to annually review and agree the level of watertariffs and recurrent subvention to OSWC to enable OSWCto meet at least 50% of its cash operating expenses byDecember 31, 1989, 75% by December 31, 1991 and 1001 byDecember 31, 1993.
- 41 -
ANNEX 2-3P.age 6 of 6
(b) Conditions of Merchant Bank Board presentation -
(i) engage key staff for PPCU;
(ii) establish Rating Valuation Unit (Division) includingtaking all necessary legal and administrative steps forsetting up the unit;
(iii) prepare detailed cost estimates for all infrastructureimprovements; and
(iv) complete tender documents for at least the first yearof the Infrastructure improvement works program;
(c) Conditions of subprolect effectiveness -
(i) appoint Read of Rating Valuation Unit and completelegal/administrative action to allow enhanced propertytaxation and collection; and
(ii) execute subloan agreement between State Government andmerchant bank and deposit first year counterpart fundsrequirements into subproject account.
AF4INSeptember 1987
- 42 -
ANNEX 2-4Page 1 of 5
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Detailed Description Training Components:
Obiectives and Elements
Introduction
1. The success and sustainability of the project will depend inlarge part upon the ability of the staff and personnel involved in itsImplementation to carry out their functions in a competent andefficient manner. To determine existing staff capabilities in thevarious agencies connected with the project, a training needs analysiswas conducted at the State and local government levels, and at themerchant banks. In general, the analysis indicates that most of thepublic officials interviewed are reasonably qualified for the job andgrade positions that they hold. Likewise, staff of the merchant banksappear to be well-qualified for their job positions, and the merchantbanks are committed to in-service training and staff upgrading. Theanalysis also indicates that most of the training required to meetproject objectives can be largely accomplished in-country throughlocal seminars and workshops, on-the-job training, and short coursesat local institutions. Some training will involve overseas coursesand work attachments for selected staff. For the successfulimplementation of these activities, it will be essential to integratethe training with the technical assistance assignments to assure themaximum transfer of expertise during the course of the project. 1/
Training Objectives
2. The primary objective of the project training componentswill be to ensure that all staff and personnel are able to carry outtheir job duties and functions with maximum efficiency. To this end,training objectives will encompass:
(a) the development and implementation of common standards,methods and organization at all levels;
(b) the introduction of new technologies and techniques(computers, aerial photography, leak detection, etc.); and
1/ Contractual terms of reference for technical advisors (TA) muststress the importance of transferring their knowledge and skillsby training their Nigerian colleagues on-the-job.
- 43 -
ANNEX 2-4Page 2 of 5
(c) the transfer of knowledge, skills, and relevant expertise tosustain project objectives after the departure of technicalassistance.
Project Training Elements
3. Proiect Orientation and Subproject Appraisal Guidelines - Aseminar will be held in Lagos imediately following projecteffectiveness to: (a) acquaint all concerned agencies with theInfrastructure Development Fund Project (IDF); and (b) give merchantbank staff detailed training on subproject appraisal guidelines. Keyproject staff from the Federal Ministry of Works and Housing (FMWH),the Central Bank, the merchant banks, and the three State ProjectImplementation/Project Planning Coordination Units would be requiredto attend. The first week and will cover the following topics:
(i) IDF objectives, policies, and organization;
(ii) subproject feasibility and appraisal guidelines;
(iii) subproject approval procedures;
(iv) financial administration of subprojects;
(v) monitoring of progress;
(vi) performance auditing; and
(vii) IBRD procedures, purchasing, local competitive bidding,international competitive bidding, etc.
The second week will focus on the engineering, financial, and economiccriteria to be applied in subproject identification, preparation, andappraisal.
4. A follow-up seminar will be conducted after the first yearof project implementation to review progress of the project andexperience with the subproject appraisal guidelines based on the firstIDF performance audit. In addition, to strengthen the Urban andRegional Planning Division of FMWH for its role in providing IDFpolicy guidance and in reviewing the performance audits, up to six keyPMWH staff will be sent on a three-month overseas course oninfrastructure needs assessment, infrastructure project financing andorganization, program design, monitoring of implementation, andevaluation of project achievement.
5. Project Implementation/Project Planning and CoordinatingUnits - The State level PIUIPPCU's will coordinate and monitor projectactivities for both the State and local governments. Trainingactivities will involve a two to three week local seminar covering thefollowing topics:
- 44 -
ANNEX 2-4Page 3 of 5
(a) IDF program objectives and institutional framework;
(b) role of Federal, State and local governments;
(c) role of the merchant banks;
(d) responsibilities and duties of the PIU/PPCU;
(e) lines of comunication between IBRD, FMWH, merchant banks,State water corporations, State and local governments;
(g) subproject financial management, accounting, and reporting;and
(h) contract management.
Additional guidance and on-the-job training will be carried out bysubproject technical advisors during their assignments. Increases instaff productivity will also be accomplished by establishing thenecessary procedures and systems, and identifying and correctingtechnical weaknesses.
6. State Water Corporations - The training needs analysisindicates that Ondo State Water Corporation has many suitablyqualified staff both in the technical and commercial departments,while Gongola and Benue State water entities are relatively weaker instaff qualifications and capabilities. Nevertheless, all three waterentities require training of staff. Project training will involveprimarily an on-the-job approach conducted by technical advisors.This will be supplemented, where possible, by water sector trainingprograms available in each State and elsewhere in Nigeria. Inaddition, selected staff will be sent on work attachments with waterutilities in other countries, preferably under twitnning arrangements.The following important areas have been identified:
(a) Technical Training -
(i) Leak Detection and Repair: The leak detection andrepair unit should be headed by an engineer (diplomalevel), two to three technicians (certificatedapprenticeship), skilled and unskilled labor. Trainingand technology transfer will be carried out by the TAusing the specialized equipment supplied; and
(ii) Distribution: Technology transfer and training will becarried out on-the-job by technical assistanceexpertise;
- 45 -
ANNEX 2-4page 4 of 5
(b) Commercial and Financial Management - Commercial andfinancial management advisors will assist their Nigeriancolleagues to improve the billing and collection methods,financial and management systems. For computer trainingcomponent, see para 10(a).
7. Surveying Department - Ministry of Lands and Housing (MLR) -Aerial photography and mapping will be provided on a turnkey basis.After the delivery of project-supplied consumables and materials,on-the-job training will be carried out by the technical advisor onthe use of the orthophotography and maps in the production of plansand service layouts for the project towns.
8. Valuation Units (MLH) - In Benue and Ondo States, theValuation Units, assisted by a TA expert, will work with privatesector valuation consultants for an initial period of 12 months atwhich time they should be able to assume full responsibility forvaluation activities. During this period, staff of the ValuationUnits will be trained in property valuation methods and proceduresthrough a twinning arrangement between the Valuation Units and theprivate valuation consulting firms under the guidance of the technicaladvisor. Related computer training will be accomplished as defined Inpara 10(a). In Gongola State, training in this sector will not beprovided since property valuation is to be carried out entirely byprivate sector valuers under contract.
9. Operations and Maintenance - Training in these areas will beas follows:
(a) Road Drainage, Municipal Engineering, and Maintenance -Municipal/civil engineer technical advisors will assist andtrain suitably qualified State and local governmenttechnical officers and their units. The objectives of thetraining are to implement a systems approach to planning,improve the organization and management of work activities,strengthen the technical capabilities of the units, improvemaintenance workshops and facilities, train personnel on theuse of new equipment, and introduce planned maintenanceprograms (roads, drains, buildings, workshops, equipment,etc.). To meet these objectives, the project will financespecialized training of skilled personnel (i.e., mechanics,electricians, carpenters, and masons) at local trainingcenters in each State; and
(b) Solid Waste Management - Training activities in solid wasteoperations will be conducted on-the-job under thesupervision of the technical advisor. Personnel will beinstructed in the use of new equipment provided under theproject, the planning and implementation of street cleaningand refuse collection operations, and the management ofrefuse disposal sites. In addition, personnel will be
- 46 -
ANNEX 274Page 5 :;& 5
trained in the operation and maintenance of equipment andvehicles.
10. Resource Mobilization and Financial Management - Training inthese areas will be as follows:
(a) Computer Training - Computer operator training for selectedstaff will be conducted in three phases. The first phase(approximately two to three weeks) will cover an orientationto computers primarily centered around the development ofkeyboard skills. The second phase (approximately three tofour weeks) will be conducted at a centrally located site ineach State using the actual computers provided under theproject. The third phase will be conducted on-the-job underthe supervision of the relevant technical advisors covering,specific applications related to departmental functions;
(b) State Governments - On-the-job training activities will beconducted in the Internal Revenue, Planning, and LandsDivisions under the supervision of the technical advisors.Areas of instruction will include divisio'Aal management,assessment procedures, tax billing and collection, sourcesof revenue, operations planning and budgeting, computerapplications, the establishment of data bases, and systemsmanagement. In addition, selected staff of these divisionswill go on three to six month work attachments in similargovernmental agencies in other countries where appliedtraining will be provided based on participation inday-to-day operations;
(c) Local Governments - Local Treasury and Finance Departmentstaff will receive training on-the-job under the supervisionof the technical advisors. Areas of instruction will besimilar to those at the State Government level: assessmentprocedures, tax billing and collection, sources of revenue,operations planning and budgeting, computer applications andthe establishment of data bases, and systems management. Inaddition, the project will finance specialized training atlocal institutions for personnel in the sub-professionalgrades (4, 5, and 6) to supplement the on-the-job trainingas deemed necessary by senior staff and the technicaladvisors.
AF4INMarch 1987
- 47 -
ANNEX 2-5Pages of 2
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Detailed Description - FMNH Support
Training for Merchant Banks
1. The project would finance 50 staff-weeks of consultantservices to conduct training seminars for merchant bank staffresponsible for implementing the IDF program. The seminars wouldcover project processing, analysis of State financial condition,project appraisal, and disbursement procedures (see Annex 2-4 fortraining program details), and would be coordinated by FMWH inconsultation with the World Bank and the merchant banks.
FMWH Infrastruoture Project Training
2. Overseas training of short duration would be provided forkey FMWH staff involved in monitoring the IDF program. The trainingwould focus on the evaluation of infrastructure projects.
Annual Proiect Performance Audit and Consolidation of IDF Accounts
3. The project would finance approximately 210 staff-weeks ofconsultant services to execute the annual project performance auditover the initial seven years of IDF operations. The performance auditwould include a qualitative and quantitative examination of individualsubprojects, as well as assessment of performance of each licensedmerchant bank in implementing the program. Independent auditorsacceptable to the Bank would be employed to undertake this performanceaudit on terms of reference approved by the Bank. The auditor'sresponsibilities would also include annual consolidation of thesubproject accounts that would be prepared by the merchant banks, andthe annual accounts that would be prepared by FMWH for theircomponents into an overall IDF consolidated project account. FMWHwould be responsible for coordinating this activity.
IDF Project Guidelines Review
4. The project would finance 30 staff-weeks of consultantservices to periodically review (every two to three years) theguidelines governing the IDF program under the first two tranches ofIDF lending. The review would produce a set of recommended revisionsin IDF guidelines to be implemented in subsequent tranches of ID?operations, and would be coordinated by PMWH.
- 48 -
ANNEX 2-5Page 2 of 2
Urban Prioritization Studies
5. Grant funding would be made available for studies of urbanXinfrastructure priorities and other topics on a State by State basisto assist the States intending to seek IDF financing, to identifypriority projects and to develop a framework for justification ofprojects to be presented for financing. The studies would formulateton-year investment programs for the major towns of each State.Approximately two staff-months of consultant services per State wouldbe required and the provision is intended to cover all the States.
FMBN Restructuring Studies
6. Government intends to undertake studies leading to therestructuring of the housing sector institutions. This componentwould involve a sequence of studies concerned with: (a) analysis ofIHEN's current finances and organization in relation to therequirements of the housing sector; (b) the feasibility of usingexisting banks to retail mortgage lending at the regional or Statelevel; (c) housaing demand analysis and definition of appropriatelending instruments for different income levels; (d) analysis ofexisting and potential sources of financing and their implications;and (e) determination of appropriate public and private sectorparticipation in wholesale and retail mortgage lending. The studieswould be operationally oriented to facilitate implementation and wouldinclude detailed action plans. A total of 60 staff-months ofconsultant services would be required.
Sector and Future Project Preparation Studies
7. The project would include provision for studies supportingthe definition and implementation of Government policies in urbandevelopment and housing sectors as well as for preparation of futureIDF projects or free-standing projects.
Unallocated Technical Assistance
8. Provision is included in the project for short-term techni-cal assistance, studies, and other requirements related to thedevelopment of the IDF financing mechanism to be identified during thecourse of the project. This technical assistance would be coordinatedby FMWH and/or the merchant banks in consultation with the Bank.
Vehicles and Equipment for FMWH
9. In order to assist FMWH to undertake its monitoring andsupervisory responsibilities, the project would finance essentialvehicles, and office equipment (including personal computers andcopying machines).
AF41NMarch 1987
IIItA
-smy Project Cots a/
(hass Costs a of hcuiw 31, 191)(13I 1 'lire 4)
Percutap Purcutapof of Forwi
fOIIL TUIES FO911 T Liz TAM P9EII MA lakw Cost Eah.p
1. Nigeria has a relatively well-developed and diversifiedfinancial sector, comprising the Central Bank and about 25 comercialbanks (with over 1,100 branches throughout the country), 12 merchantbanks (with over 25 branches), several insurance companies, leasingcompanies and saving banks, 2 stock exchanges, 3 major public develop-meut finance institutions and a public mortgage bank. Since 1977,following the promulgation of the Nigerian Enterprises PromotionDecree, all banking institutions In the country are required to be atleast 60% owned by Nigerians.
2. Despite this relatively sophisticated institutionalframework, a high degree of Government regulation and control haveretarded the full development of the financial sector and limited itsallocative efficiency. The result has been the evolution of arelatively rigid and compartmentalized credit system with limitedmarket determination of the terms and conditions of financialintermediation. The financial sector has been subject to a complexsystem of controls by the Central Bank of Nigeria (CBN) regarding thesectoral allocation of loans and their maturities, and to low legallimits on nominal interest rates for both borrowers and savers. 1/ Ingeneral, as inflation increased, traditional deposit and lendinginstruments of the banking sector were limited by low nominal interestrate ceilings which did not permit the adjustments necessary to ensurepositive yields in real terms. Given the lack of a premium on medium-and long-term instruments, savings in recent years have been channeledalmost exclusively to highly liquid short-term instruments. Under thestructural adjustment program being implemented by the Government withBank/IMF support, many of the above controls, particularly interestrate ceilings and sectoral allocations of the lending, are to beeliminated. This should enable the banks, particularly merchantbanks, to gradually lengthen the maturities of saving instruments andloans. Merchant banks would then be in a better position to meettheir stated purpose which is to provide medium- and long-term fundsfor investment.
1/ Interest rates on savings accounts and certificates of depositnow range from 8.52 to IOZ and lending rates range from 91 to13%.
- 56 -
ANNEX 2-7Page 2 of 8
3. Five of Nigeria's merchant banks 2/ have been chosen aspotential participants in the IDF on the basis of their financial
strength, technical capability and interest. Together, these fivebanks account for about 80% of the assets held by merchant banks inNigeria, and four of the banks are associated with prominent inter-national banks. The ownership, organization and staffing, operationsand procedures of the banks are outlined below, and their financialstructure and performance are analyzed in Annex 2-8.
4. Ownership. As noted above, Nigerian banking institutionsare requried by law to be at least 60% Nigerian owned and the fiveparticipating banks all conform to this ruling. In the case of threeof the banks (Continental, IMB and NMB) this 60% share holding isretained directly by the Federal Government through the Ministry ofFinance Incorporated (MOFI), a wholly-owned subsidiary of the FederalMinistry of Finance. MOFI, in addition, retains a 20% share holdingin NAL. Nigerian parastatals also figure prominently in the ownershipstructure of the banks, with the Nigeria Industrial Development Bank(NIDB) owning 45% of the shares of ICON and the National InsuranceCompany (NICON) owning 15% and 25% respectively of ICON and NAL.
5. Four of the five banks (NAL, ICON, IMB and Continental) havestrong foreign banking participation. American Express and CredicLyonnais together own 30% of NAL while First National Bank of Chicagoand Chase Manhattan Overseas Banking own 40%, respectively, of DMB andContinental. Until quite recently (1985), Morgan Guarantee and Baringtogether held 40% of the shares in ICON, however, they have decided torelinquish these holdings. Their reason for doing so is not entirelyclear, but is probably related to the recent instability of theNigerian economy. ICON is now actively seeking a foreign bankingpartner, although Morgan and Baring continue to provide them withcorrespondent banking services. NMB is unique among the five banks innot having any foreign banking participation. This does not appear tohave limited their operations however.
6. The active participation of these foreign banks in theownership and operations of the Nigerian merchant banks has addedgreatly to the range and depth of experience, skills and servicesavailable, as well as provided a sense of stability and confidence tothe banking sector. Contrary to what might have been expected (and tothe situation that obtains in the commercial banking sector and in thefinancial parastatals), the merchant banks have been largely free ofGovernment intervention in their lending and syndicating operations,and in the management of their portfolios. In fact, these bankscompete intensely among themselves, and with the commercial banks, forsavings, letters of credit, syndications and borrowers, and with the
2/ NAL, ICON, International (IMB), Continental, and Nigerian (NMB).
- 57 -
ANNEX 2-7Page 3 of 8
development banks for long-term projects." They operate strictly onthe basis of commercial criteria and have developed the reputation ofbeing among the most profitable, effective and efficiently runorganizations in Nigeria. The following table summarizes the owner-ship structure of the five merchant banks and Indicates the size oftheir assets and staffing,
( 8W aN1E OF MIE lmm R BA
N)rdXat sok Assets Staff SurdDJdlng("yr of 05 nulW Co1ait
5. NB 3944 239 a/ 60 - NMDI Ncze(1979) 40% - United Bank
for Africa
al4 1986R/ 1965p 1984
7. Organization and Staffing. The five merchant banks are allfairly similar in their organizational structure and staffing,reflecting the similarities in their operations. They are generallyorganized into three main sectors (corporate banking, corporatefinance and management services), within which there are specializeddivisions (credit and marketing, trade and correspondent banking,operations, securities, corporate affairs-, finance and administration,etc). While the reporting relationships differ somewhat among thebanks, the basic organizational elements are quite similar. The main
- 58 -
ANNEX 2-7Page 4 of 8
sectors are usually headed by a general manager, and the divisions byan assistant general manager. The organizational structure of ICON,which is typical of the five banks, is presente4 below.
8. The staff complement of the banks ranges from 239 (NMB) to431 (ICON), with the three largest banks averaging just over400 persons each. As might be expected, all the banks are strong onfinancial and accounting skills but, with the possible exception ofICON, they are weak on engineering skills, lacking most of theengineering skills that would be directly relevant to an IDF type ofproject lending. ICON's engineering skills are unusual, being largelya legacy of its filial relationship with NIDB and its consequentinvolvement with industrial projects. In spite of this significantgap, the mission was very impressed with the general caliber of thestaff particularly at the middle and senior management levels (projectofficer, assistant manager and upwards). Once again, ICON is fairlytypical of the banks as a group, with more than half of its staff atthe level of deputy manager and above possessing masters degrees orequivalent in finance, accounting or marketing, and the restpossessing bachelor's or equivalent degrees in disciplines relevant tobanking.
9. Some banks are clearly stronger than others in particularsubject areas, however, none is considered significantly betterorganized or more strongly staffed than the others. In general, theyare all well run and capably staffed. The typical middle and seniorlevel manager has had 10 years experience in the banking sector andhas been in his post for five years or more. ICON is, however,exceptional in the latter regard as most of its senior managers haveonly recently (1-2 years) been appointed to their posts, reflectingthe high degree of staff turnover experienced by this bank in recentyears. It appears that these difficulties have now been largelyovercome however.
10. Operations and Procedures. While the banks offer a widerange of services to their clients, the mission focussed mostspecifically on syndications and project lending, these areas beingmost relevant to the IDF project. The operations and proceedings ofthe banks are, again, quite similar. In general, they attempt tospread their risks by syndicating their larger loans and, given thesize of the merchant bank share of the financing of the proposed IDFState projects (N 6-7 million), it is possible that IDF loan would besyndicated. The procedures for loan syndication are well established,regulated and supervised by CBN. Though not regulated by CBN, theprocedures for project lending and supervision are fairly standarized,well developed and documented in the operations manuals of each of thebanks.
11. The banks have the capacity to evaluate as well as to adviseon the technical and financial viability of the projects, and In mostcases project lending involves both operations. Existing projectlending is concentrated in the manufacturing (42% average for the five
merchant banks) and real estate and construction (23% average) sectors(see Annex 2-8), and two types of projects are typical. In the usualindustrial project the banks rely on the participation of a strongtechnical partner, and the operational procedures focus on thefinancial viability of the project. This is especially the case whereproprietary technology is being provided by the technical partner. Inmost such cases, however, the bank spot-checks equipment specifica-tions and prices, and seeks comparisons with similar projects. Theexperience of foreign banking partners has proven particularly helpfulin this regard as international price comparisons can be quickly andeasily checked by telex with foreign branch offices and corporateheadquarters. In cases where the technical partner is found to beweak, the banks assist the client to identify a suitable technicalpartner or to retain appropriate consultants.
12. In both of the above cases, banks are willing to supplyconsulting advice in the areas of marketing and finance-the areas inwhich they are well endowed with staff resources. Fees ranging from1/2-1/ 1/2% of project costs are charged for these services. Mostclients require advice and assistance with project preparation, andthe banks have offered this consulting service, seeing it as a growingand lucrative source of revenue. Over the years, particular bankofficers have developed a familiarity with certain sectors and typesof projects and this has, to some extent, compensated for the lack ofengineering expertise.
13. Because of the variability of the quality of projectpreparation done by the mercbant banks' clients and the consequentvariability in the extent of consulting assistance required, it isdifficult to generalize about the loan appraisal period. However,where adequate preparatory work has been undertaken by the client, thetechnical partner is strong and legal and collateral requirements arenot overly complex, loan appraisal and processing can be completedwithin a six month period. The typical appraisal consists of thorough(and standarized) analyses of recent and projected performance basedon assessments of balance sheets, income statements and cash flowprojections. Audited financial statements for the past three years ofoperation are normally required. Based on the above, a standardizedset of ratios is derived, assessing project profitability, liquidity,asset utilization, capital structure and degree of risk. These.quantitative indicators are supplemented by qualitative evaluations ofcompany history, management capability, stability and the probabil-ities of successful project implementation. In addition, clients arerequired to demonstrate the capacity to adequately (and quite con-servatively) capitalize projects from their own resources, often inthe form of cash equity to be deposited with the banks on the approvalof a loan.
14. Project assessment would usually be the responsibility of aparticular project officer who is responsible for undertaking thenecessary financial and managerial analyses, ensuring that sound andappropriate technical advice has been obtained by the client, and that
- 61 -
ANNEX 2-7Page 7 of 8
the project is feasible. On completion of this assessment, a reportis submitted, through a senior manager, to a loan committee comprisingthe senior officers of the bank. This loan comittee recommends tothe managing director that a particular loan be approved or otherwisedisposed of. Managing directors are allowed discretionary approvallimits which vary from bank to bank, but are generally belowN I million. Above these limits, approval has to be sought from aloan committee of the board and, in special cases, by the boarditself. Once approval is given to a particular project, the client isinformed in writing, and all the legal and financial conditionsattendant on approval are stated. Loan disbursement is thencontingent on the fulfillment of these conditions, including, interalia, the payment of commitment fees, the pledging of equity andcollateral, and guarantees of performance. Payments would normally bemade only against engineer's or architect's certification.
15. In general, the mission was satisfied that all the banksadhered to wise and well documented procedures. The mission was alsoimpressed by the fact that, in most cases, project supervision wentwell beyond the simple monitoring of payments. The banks consider itnot only normal but essential that their project officers shouldattend site meetings during the construction stages of projects, anddevelop a firm grasp of the critical project activities and theprogress of the project as a whole.
16. The mission was also satisfied that the five merchant bankshave the basic capability to appraise and supervise Nigerian Stateinfrastructure subprojects, provided that their staffs are supple-mented by two or three experienced civil/municipal engineers and atleast one economist/financial analyst to evaluate and monitor credit-worthiness. Periodically, special technical skills or constructionsupervision capabilities will have to be acquired but these arereadily available in the Nigerian consulting industry. The banks haveconsiderable experience in disbursing against appropriate documenta-tion and in field supervision of State industrial projects. However,there are two important IDF project objectives which go beyond thenarrow requirements of a typical merchant bank project, namely:
(a) monitoring the creditworthiness of State Governments and,more importantly, using the proposed project as a vehicle tohelp States improve their creditworthiness through a seriesof subprojects that would be financed from a variety ofsources, including the World Bank and the Nigerian capitalmarket; and
(b) helping the States prepare infrastructure projects, developa capacity for project execution and improve their revenuebases-in particular, substantially improving cost recoveryto make urban services self-financing-and generally puttingState infrastructure on a sounder financial, technical andinstititional footing.
- 62 -
ANNEX 2-7Page 8 of 8
17. These are important project objectives on which the FederalGovernment of Nigeria and the World Bank are in agreement, but whichgo beyond the normal business practices of the merchant banks. Thereare no existing institutions in Nigeria dealing effectively with thesecomplex questions. The technical assistance and training providedunder the project will address these larger objectives. The Bank isalso working with the merchant banks on assistance directly to theStates on guidelines and procedures. The combination of technicalassistance directly to the States, training of the merchant bank staffto enhance their capabilities (see Annex 2-19 for details ontraining), competition among the merchant banks for State subprojectsand the States' self-interest in improving their creditworthinessshould help to achieve these objectives.
Criteria for the Selection of Additional Merchant Banks
18. As the IDF expands, or if the performance of the fiveappraised merchant banks is inadequate, additional merchant banks orother financial institutions may be selected and appraised. Thefollowing minimum criteria would guide selection and appraisal:
(a) minimum total assets of N 300 million;
(b) medium- and long-term loans and advances of at least 50Z oftotal loans and advances;
(c) rates of total debt to equity not greater than 20:1, andpreferably 15:1 or less;
(d) asset composition, portfolio quality, income outlook andtechnical capacity acceptable to the Bank;
(e) operating policies and procedures acceptable to the Bank;
(f) agreement to adopt the IDF Policy Statement and ProjectGuidelines; and
(g) agreement, where necessary to train existing staff, recruitadditional staff with municipal engineering capability andemploy private constultants satisfactory to the Bank.
AP4INMarch 1987
- 63 -
ANNEX 2-8Page I of 23
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Merchant Bank Finances and Project Impact
1. Financial Structure. The accompanying tables present thepast audited financial statements and summary financial ratios of thefive merchant banks participating in the IDF project. Total assets ofthe five banks have grown at an average annual rate of 42% over thepast five years, with all banks growing over 30% a year. The fastestgrowth took place during the 1981-1982 period, during which the banksgrew at an unprecedented annual rate of 78%.
2. The financial structure of the merchant banks is character-ized by relatively short-term deposits (less than one year), withlittle medium- and long-term debt (over five years). In general,cash, receivables, short-term loans and advances, and other short-termassets accounted for well over two-thirds of total assets during1984-1985. While limiting earnings, these liquid assets have assistedthe banks in reducing their exposure during economic downturns,particularly during the last two years. Nevertheless, given that wellover three-fourths of total resources are represented by short-termdeposits, a liquidity problem could materialize to the extent that thewithdrawal of deposits by importers to purchase foreign exchange underthe. Secondary Foreign Exchange Market (SFEM), do not flow back intothe banking system. This problem would be particularly accentuated inthe case of the merchant banks whose operations involve considerableterm transformation, 1/ with an average of 46% of their portfolio inloans with maturities of over three years. However, the plannedremoval of interest rate ceilings under the structural adjustmentprogram would largely mitigate this potential problem by allowing apremium to be paid by the banking system on medium- to long-termdeposit instruments, thus attracting such deposits.
3. As shown below, historically, the merchant banks havemaintained debt/equity ratios of roughly 20:1, which is an acceptablelevel for a commercial-type banking institution, but somewhat high for
1/ Term transformation, which involves using short-term deposits formedium- to long-term lending, is a normal bankizg practice, butposes two main risks: (a) the possibility that interest ratespaid by the banks for their short-term deposits could increaseover the interest rate charged on long-term loans outstanding,thereby causing a loss to the banks; and (b) the possibility ofthe liquidity problems caused by deposit withdrawals.
- 64 -
ANNE 2-8Pap 2 of 23
medium- to long-term lending institutions. The needed adjustmentwould be addressed under the proposed project (para 11).
4. Profitability. The profitability of the five merchant banksis adequate. The nominal after tax rates of return on average equityof the five merchant banks are shown below:
AFTER-TAX RETURN ON EQUITY
Merchant Bank(percent)
PriceFiscal Year NAL ICON DMB Continental NMB Index
The five merchant banks earned very positive real rates of return onequity during periods of low inflation, but lost much ground duringyears of higher inflation due to the fixed loan margins (caused byinterest rate ceilings) which did not distinguish adequately betweenreal and nominal profits of financial intermediaries. They were ableto maintain their profitability in spite of these restrictions throughcommissions and other charges on loans and through the substantialinterest-free advances placed with banks by importers pending releaseof foreign exchange by CBN. (These advance deposits, which at times
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AN=E 2-8Page 3 of 23
were up to 200% of the value of the imports to cover for the devalua-tion of the naira, are, as of August 1986, being held by CBN.) As apercent of average total assets, this gross spread (interest incomeless interest expense) shows narrow margins (0.5% to 5.4%), but whenother income is included the margins increase significantly(5.0% to 8.2%). This illustrates the merchant banks' ability toadjust to the rigidities of the interest rate ceilings imposed by CBN.In general, administrative costs expressed as a percent of averagetotal assets have been kept in the range of 1.3% to 2.7%, which isreasonable.
5. Portfolio Structure, Quality, and Reserves. In general, theportfolios of the five merchant banks are concentrated In loans ofN 0.5 million and more with loans under N 100,000 in size representingless than 5% of all lending. As mentioned earlier, the term structureof the lending is medium term, with loans over three years represent-ing an average of about 461 of all loans. Given the short-term natureof the merchant banks' borrowing portfolio, this lending structureimplies a considerable amount of term-transformation.
6. The sectoral distribution of the merchant banks' portfoliosis concentrated in manufacturing (42% average for the five banks) andin real estate and construction (23% average). Lending foragriculture, forestry, and fishing has also been significant,amounting on the average to about 9% of their portfolio during thelast year. This, of course, is in direct response to CBN'srequirement during 1985 that a minimum of 52 of merchant bank'slending should be allocated to these sectors. The fourth sector witha significant level of lending activity is commerce, particularlyimport financing operations (letters of credit, etc.). Such lending,while decreasing recently as a result of the restrictions on imports,represented in 1985 about 7X of all lending activities for the fivebanks. Loans to Government (State and Federal) represented a fairlyinsignificant proportion of the total portfolio (less than 2%). Loansto the public sector in general is also relatively low (maximum 11%).
7. In terms of quality, the portfolio of the five merchantbanks is generally good, particularly considering the economicdifficulties experienced by the manufacturing sector, as a result ofthe downturn in the economy and shortage of foreign exchange topurchase much needed raw materials and spare parts. During 1985, forfour of the merchants arrears of over 90 days averaged only about 7%of their average portfolio. One bank experienced arrears of over90 days (representing about 21% of its portfolio), as a result of itsrather large exposure in a problem enterprise. / Adequate levels of
2/ Arrearage data were supplied to the mission on a confidentialbasis, and are thus not presented here, but have been retained inthe project file.
- 66 -
ANNEX 2-8Page 4 of 23
provisions are being made annually by all five banks to cover possibleloan losses. During the last year the growth of provisions of thefive merchant banks averaged 45%, reflecting the rapidly deterioratingeconomic environment in the manufacturing sector. By the end of 1985provisions represented about 11% of their average portfolio. For allfive merchant banks interest overdue by 90 days is no longer accrued.In addition, ample security is taken on all loans, so the uncoveredexposure in delinquent loans is not a problem.
8. As can be seen from the above analysis of their pastfinancial performance, merchant banks are generally very sound andwell-managed financial institutions. However, given the recentunprecedented economic difficulties and the short-term uncertainimpact of the SFEM on certain import-oriented firms, some portfoliodeterioration is likely to occur in the short run. For negotiations,the merchant banks would need to present to the Bank, for review,updated information on their portfolios (including arrearage data) andtheir latest financial statements. In addition, one of the merchantbanks would need to present to the Bank a plan of action to addressits problem portfolio in order to reduce its excessive arrearage.
Projections
9. Projected balance sheets, income statements, and funds flowstatements for the five participating merchant banks are shown in theaccompanying tables. The projections assume a liberalization ofinterest rate regulations beginning in 1987. The interest rate paidon short-term deposits is projected to increase in 1987 to 12%; therate on long-term deposits to 14%. The rate of interest earned bymerchant banks on short-term funds is assumed to increase to 13%.Interest rates on short-term loans are assumed to average 15%; onlong-term loans, 17%. The increase in rates paid on deposits isexpected to permit merchant banks to attract additional savings-bothshort- and long-term--to compensate for the withdrawal of depositsarising from the SFEM (para 2). Continued deregulation of interestrates is expected to permit the banks to maintain an adequate level ofprofitability despite a short-term increase in the rate ofinflation. 3/
3/ For projection purposes, interest rates on loans and deposits areheld constant in nominal terms. This results in negative ratesof interest during the initial projection years. The banks are,nevertheless, expected to be able to attract deposits during thisperiod, as this rate of return is expected to characterize allfinancial instruments available to savers. The Banks' lendingrates would remain positive during this period if special loancharges and commissions, classified as 'other income', are addedto the nominal interest rate.
- 67 -ANNEX 2-8Page 5 of 23
10. Interest rate premia on long-term deposits, and long-termlending are expected to gradually alter the financial structure of themerchant banks. Long-term deposits are expected to increase from anaverage of 15% of total liabilities for the five banks in 1986 to anaverage of 36% in 1993. Long-term loans are projected to increasefrom 21% of total non-fixed assets in 1986 to 41% in 1993. In thisrespect, merchant banks would increasingly play their intended role asproviders of mecium- and long-term funds in the financial system.
11. Given the short-term uncertain impact of the structuraladjustment program on the liquidity structure of the merchant banks,the expected future risk profile of their asset structure (mainlymedium-term) and the significant term transformation that merchantbanks may continue to undertake, a lower level of debt/equity ratioswould be desirable. Therefore, during negotiations, agreement wasreached with FMG, CBN and the merchant banks to review the financialperformance of the merchant banks annually, beginning May 1988, and totake measures, where necessary, to improve their performance. Thiswould imply increased capitalization and/or a higher level of retainedearnings for four out of the five banks. The lower debt/equity ratiowould provide an additional safety margin to cover for the termtransformation risk which will still exist, albeit at a reduced levelas a result of the expected increase in the proportion of longer termdeposits.
12. IDF Financing. The projections incorporate three componentsof Bank-supported financing. The first tranche of the Bank loan(US$38.4 million for the three preidentified and appraisedsubprojects) is assumed, for the purpose of these projections, to bechanneled through the three largest banks, i.e., IMB, ICON, andContinental, over 1988-1992 disbursement period. The line of creditof US$26.3 million for new subprojects, is assumed to be channeledthrough all five banks over the 1989-1991 period. The projectionsalso assume that a future (second) IDF Project of US$50.0 million (tofinance the proposed Tbadan Urban Project) would begin disbursement in1990.
13. Merchant banks would be compensated for their role in theIDY in three ways: through a spread between borrowing and lendingrates on IBID funds, through the early cash-flow resulting from thedifference in grace and repayment periods between borrowed and lentIBRD funds, and through appraisal fees. (The latter are intended tocompensate merchant banks for the additional costs involved inappraising subprojects under the IDF guidelines). The interest ratespread and term differentials are intended to compensate the banks forother administrative costs, including orientation, supervision,debt-service collection, risk, and to provide a margin for profit.
14. Under the proposed IDF Project, Bank funds would be lent tothe Federal Government of Nigeria (FMGN), which would on-lend funds tothe merchant banks on the same terms and conditions (5-year grace,20-year repayment period, and variable interest rate adjustedsemi-annually). Merchant banks would combine Bank funds with their
- 68 -ANNEX 2-8Page 6 of 23
own proportionate contribution of 101 and on-lend the proceeds to theStates, under World Bank procedures, to finance approximately 80% ofsubproject costs. The States would provide approximately 20% ofsubproject costs as their counterpart contribution, and would bear theforeign exchange risk. Merchant bank subloans would carry graceperiods on principal of three years, and repayment periods of15 years. This spread is expected to be around 4S and this figure hasbeen used in the projections.
15. The projections indicate that the IDF program would have arelatively small impact on the finances of the merchant banks. At nottme would outstanding IDF loans represent more than 10% of the totalassets of an: bank. At no time would borrowings from IBRD representmore than 9% of outstanding liabilities. ID? loans would, however,constitute a major share of longer-term loan portfolio held by somebanks. NAL, which had no medium- and long-term loans outstanding in1985, ICON and Continental banks, with relatively small longer-termloan portfolios (in relation to total assets) would be particularlyaffected. The projected IDF loans would represent virtually all ofKAL's long-term portfolio in 1992, and approximately one-quarter ofthe long-term loan portfolios of ICON and Continental banks.
AS7Cash, ot*h short term funds 313.27 317.51 322.12 327.72 334.64 342.73 350.80 356.5Lons due within I year 207.11 227.64 250.65 2M5.74 303.35 334.15 366.33 405.30lof which IDF) 0.00 0.00 0.00 0.00 0.00 0.41 1.16 1.37
Current Assets 520.36 545.35 57.77 603.4 636.20 676.68 719.13 763.86
Lon de at r 1 uyea 0.08 1.05 1.27 6.66 29.10 47.19 56.45 57.61(of Nhich IDF) 0.00 0.00 0.00 7.14 26.26 45.01 55.83 54.46
rmuWsprd as Itotal ant 52 21 21 21 21 n 3a 31"sin cets a total muts 21 31 31 3 31 3t 31Pretax profit as I tot assets 31 1U It 12 12 It 11 2bt profit as Iatt li 23 9t 91 el St 91 III I31Interet ione a I
cash Ioa and atvances II 14 143 142 141 141 14 141lntrest VpIs as I dept 4 IIU Il 1l 112 112 II 12tInflation 201 252 161 14 121 tO 101 lO0OMAU PLO STATEMEN
Sae of she 0.00 0.tO 0 0.00 0.00 0.00 0.00 0.00Long tur borrowing 4.38 5.70 7.40 14.42 23.92 32.68 30.54 27.49
Cah, other short twr funds 363.93 376.01 391.22 409.80 432.72 459.01 4.55 520.51Loan due within I yea 152.-0 169.96 190.22 213.15 239.76 269.90 304.47 313.15
Id which IDF) 0.00 0.00 0.00 0.00 0.61 1.21 2.16 2.51Currat kAts 515.7 545.97 51.43 622W." 67 720.91 M.03 863.6
Loans due after I yer 113.53 142.24 101.14 22.06 302.81 330.35 459.62 527.90(of wbich IDF) 0.00 0.00 10.45 28.04 57.02 65.40 105.68 103.18
AMETSCasb, other short tero funds 418.01 436.01 452.37 472.05 496.03 523.55 554.61 583.48Loans due within I year 133.63 151.83 172.82 197.09 225.76 258.91 m.69 342.03
Current ratio 0.98 1.02 1.06 1.10 1.14 1.18 1.23 1.27Debts equity ratio 19.72 15.63 1.49 12.23 11.56 11.09 10.64 11.00Annual grouth in total assts, 71 M lOt III 131 132 122 101Lons a I total nsst m 42 46 502 541 57 602 2Equity as loans and adance 121 142 152 152 15 141 142 13tInflation 20 251 162 142 122 10t 102 10t
kns spr.a a I total ant S2 32 32 42 42 42 42 42Aiu cuosts aItotal "ets .3 3 3 21 22 22 22 22PMta pit u I totat su 4 32 2 42 42 42 42 42ht profit S I ut urt 41U 142 14I 162 182 192 22 212nteret iacs as 2
1. The basic instrument of revenue sharing in Nigeria, theFederation Account, is embodied in the Constitution. The majorconstituents of the Federation Account are: (a) petroleum profittaxes, royalties, and licences; (b) custom and excise duties;(c) corporate profit taxes; and (d) export tax. The current relativeshares are:
- Federal Government 55.0%- State Governments 32.5Z- Local Governments 10.0%- Mineral Producing States 1.5X- Provision for Ecologic Disaster 1.0%
The method of allocation among States and local gonernments is:
- 40X on the basis of equality of States;- 40% on the basis of population; and- 20% on other criteria, including the development need and
revenue effort, among others.
The State Governments are also required by the Constitution to trans-fer 10% of their internal revenue to the local governments which areconstitutionally independent in administrative and fiscal matters.
Structure and Composition of State Finances
2. The fiscal system of States distinguishes two sets ofaccounts:
(a) the Consolidated Revenue Fund Account for all recurrentrevenue and expenditure flows, and
(b) the Capital Development Fund Account for all capitalreceipts and expenditure flows.
3. Recurrent Revenue - The recurrent revenue of StateGovernments is derived largely from the States' share of the statutoryFederation Account allocations, complemented by revenues from internalsources, which constitute on the average 10-15% of the total recurrentrevenue.
- 87 -
ANNEX 2-9Page 2 of 8
4. The constitutional provision on fiscal structure gives StateGovernments the jurisdiction over the following revenue sourefs:
(a) Personal Income and Profit Taxes;
(b) Licenses, Rents, and Fees; and
(c) Other Taxes and Levies.
The uniformity of these taxes across States is ensured by a regularmeeting of the Joint Tax Board attended by the Directors of StateBoards of Internal Revenue and presided over by the Director of theFederal Board of Internal Revenue.
5. There are, however, variations among States in the scope ofthe revenue base and administrative efficiency. These depend on therelative levels of economic activity, the administrative machinery,the need for additional revenue over and above the atatutory alloca-tion and the relative awareness of the residents of their obligationto pay tax. In addition to Board of Internal Revenue collections,State Government ministries and their parastatals contribute tointernal revenue, largely in the form of user charges for theirservices.
6. Capital Receipts - The major sources of capital receipts ofState Governments include recurrent budget surpluses, domesticborrowing (from Federal Government and domestic commercial banks) andexternal loans (guaranteed or unguaranteed by the Federal Government).The domestic borrowing from the Federal Government for financingcapital projects is usually in the form of the Development Loan Stock(DLS). DLS is issued by the Federal Government to the public, and theproceeds shared among the States using the same formula as thestatutory allocation. DLS is usually repaid over a period of 25 yearsand the outstanding issues bear interest rates in the range of 52 to12X. State Government borrowing from the domestic commercial banksfor capital investment is irregular and short-term (maximum of threeto five years) at high interest rates (over 10%).
7. The Constitution permits State Governments to borrow exter-nally with or without the Federal Government guarantee.
8. Past Trends in Revenue Performance - Stats Governments bavedepended very heavily on the statutory allocation for current revenuessince the creation of the 19 States in 1976. States' share ofstatutory allocation has been sustained to the tune of 85 to over 90%by buoyant oil revenue, and States made little effort towardsmobilization of internal revenue. Subsequent expansion of governmentactivities, adverse developments in the oil -arket and the consequentdecline in statutory allocation to States, especially from 1981,resulted in substantial current deficits which were financed by heavyborrowing from the Federal Governmen- and other sources. Total
- 88 -
ANNEX 2-9Page 3 of 8
arrears on the repayments of loans from the Federal Government inJanuary 1986 amounted to N 1.7 billion.
9. The average proportion of statutory allocation to totalrecurrent revenue for five States (see table below) was 88.4% in1981-1983 and 82.6% in 1984-85. This trend was virtually the same inthe other States, except Lagos in which internal revenue was 70% oftotal revenue in 1984.
Proportion of Statutory Allocation a/ to Total Recurrent
10. Capital Receipts - Recurrent surpluses as a source ofcapital receipts have been rare for most States in Nigeria since 1981(Lagos is an exception). Between 1981 and 1983, the current deficitin most States was colossal as States built up arrears of unpaidsalaries, especially teachers' in the primary and secondary schools.As noted above, the arrears on outstanding loans extended to States bythe Federal Government to cope with the deficits amounted toN 1.7 billion in January 1986 and there are no prospects that theseloans will be repaid in the near future. Since 1984, the FederalGovernment, as a policy, required State Governments to balance theirbudgets by exercising prudence in financial management, restrictingrecurrent expenditure and borrowing, where needed, only in the localfinancial market.
11. DLS has been the most reliable source of capital receiptsfor States at the most favorable terms. The outstanding issues arethe 15th (issued in 1976) through the 23rd (issued in 1985).Subscription for the 24th DLS has been made and should be distributedto States in 1986. DLS provides an average of about N 15 million toeach State annually. Until 1983, States used DLS to finance eventheir growing current deficit but since 1984 their application waslimited to specific capital projects, especially the WorldBank-assisted projects. In January 1986, the outstanding DLS
- 89 -
ANNEX 2-9Page 4 of 8
(including deferred principal and interest payments) amounted toN 3.54 billion. The principal was N 2.9 biilion and the deferredinterest payments was N 638 million. DLS outstanding in some Statesis as follows: Gongola N 272.7 million, Ondo N 383.9 million, BenueN 306.1 million, Niger N 134.3 million, and Imo N 202 million.
12. The extent of State Government borrowing from domesticcommercial banks, either directly and/or indebtedness to local con-tractors is enormous. A Special Commission which investigated theextent of such debt established the amount outstanding atU 6.6 billion in 1984. The estimates of outstanding obligations forsome States in January 1986 were Gongola N 199 million, OndoN 251 million, Benue N 73 million, and Niger N 81 million (1984).
13. Between 1981 and 1983, all State Governments borrowedheavily from external sources to execute capital projects. Theseloans were largely syndicated short-term high and/or floating interestrate loans and export credit to finance turn-key projects. Therepayments fell due in 1985 and 1986, and added to the huge currentarrears on repayments due to the Federal Government, contractors andbanks. This resulted in average debts service ratios about 80% andabove in many States and consequently defaults in payment. StateGovernment external loans were estimated at N 3.5 billion in 1984--ofwhich U 2.9 billion is currently outstanding. As of January 1986, theeumulative repayments made on behalf of State Governments by theFederal Government for external loans and yet to be recovered amountedto N 406.8 million.
14. The outstanding external debts on the three IDF subprojectStates in the first quarter of 1986 were Benue N 230 million, GongolaU 257 million and Ondo N 232.9 million.
Future Prospects of Revenue
Recurrent Revenue
15. The prospects for recurrent revenue of States will dependlargely on what happens in the oil market. The oil price is projectedto decline from US$27.5 in 1985 to US$13 in 1987 and then increasegradually to US$15.8 in 1990 (IBRD projections as at September 19,1986). On the basis of this scenario and the assumptions that:(a) oil production will increase to 1.40 million barrels per day by1990; and (b) the Naira will decline to US$0.20 by 1990, the totalStates' share of the Federation Account is projected to increase fromN 3.7 billion in 1986 to N 4.6 billion in 1987 and continue to buildup rapidly to N 11.4 billion in 1990 largely due to exchange rate andoil price adjustments.
16. State Governments will have to exploit the available sourcesof revenue, as well as find new sources, especially in the period1986-1990. Even though the State revenue resources are not veryrobust In most cases, institutional changes and better organization
- 90 -
ANNEX 2-9Page 5 of 8
and financial management hold the potentials for substantial increasein internal revenue from existing and new sources. Among the measuresproposed are:
(a) States should critically review user charges for governmentutilities and services, and impose economic rates that coverat least the cost of providing them as well as ensuring thatthe services are provided;
(b) the administration of sales tax should be improved in scopeand effectiveness-more items and institutions have to becovered;
(c) the revenue generation administrat on needs to berestructured for better coordination and effectiveness, andthe scope should cover more economic and social services;
(d) State Governments should establish better institutionalarrangements for sanitation and for effective solid wastedisposal;
(e) State Governments slould impose fees on educational andhealth services to cover a significant proportion ofrecurrent expenditures;
(f) State Governments should review the rates and administrationof ground rents in the urban areas and restructure billingand collection mechanisms; and
(g) State and/or local government should set up an effectivemechanism for the assessment, collection and administrationof the property rate.
For the next five years, however, State Governments will continue todepend heavily on the statutory allocation as the above measures willtake time to yield results.
Expenditures of State Governments
17. The expenditures of State ministries and parastatals haverecurrent and capital components. Recurrent expenditure is classifiedinto personnel, maintenance, recurrent subvention to parastatals, andpublic debt service. Capital expenditure is allocated among thevarious sectors according to the availability of funds and thepriorities of government. There are, however, externally-financedprojects which fall into two categories:
(a) projects financed by bilateral and/or multilateral arrange-ments with a programmed local counterpart finance; and
- 91 -
ANNEX 2-9Page 6 of 8
(b) projects financed on turn-key basis, usually financedentirely with syndicated loans from private externalsources.
Past Trends in Expeaditure
18. Recurrent Expenditure - Recurrent expenditure wasresponsible for over 80Z of the annual expenditure of StateGovernments in the period 1981-1983 and for about 90% in 1984 and1985. Generally, personnel cost absorbed around 90X of recurrentexpenditure. The drastic cut in allocation for maintenance andoverheads is apparent from the state of disrepair of economic andsocial infrastructure. Recurrent grants to economic and socialparastatals, especially in the period 1983-1986, were mainly forpersonnel costs, and little or nothing was left for meeting overheadand maintenance costs.
19. Debt service was not a major problem before 1984 as it waslimited to largely the long-term Federal DLS. Repayments on externalloans taken largely in 1981-1983 were not yet due. Severe budgetaryconstraints resulted in inability of States to meet a substantial partof their debt service obligations to the Federal Government, external,and other domestic creditors, especially in the p'Ariod 1984-1986.Arrears of repayment due to the Pederal Government built up toN 3.0 billion. This includes repayment made to external creditors bythe Federal Government on behalf of States.
20. Capital Expenditure - Capital expenditure made over theperiod 1981 through 1985 was financed largely with syndicated externalloans contracted at the most inappropriate terms. Subject to differ-ences in exchange rates, the value of the loans were in ImoN 232 million, Benue N 230 million, Gongola N 257.1 million, OndoN 233 million and Niger N 152 million. These loans are generallyfully disbursed, but the corresponding projects are still at variousstages of completion.
21. State Governments also undertook capital projects financedfrom their own resources, most of which resulted in debts to domesticcontractors and financial institutions. The estimates of such debtsare N 251 million in Ondo, N 73 million in Benue, N 199 million inGongola. It should be noted that figures obtained from the respectiveStates are tentative.
Future Prospects of Recurrent and Capital Expenditure
22. The future prospecis of recurrent and capital expenditureshave to be viewed against the background of the dwindling recurrentrevenue and capital receipts, the need for providing a certain miniwmsocial and economic services and the ability of the respective Statesto cope with the obligations within the constraints of their potentialresources.
- 92 -
AMREK 2-9Page 7 of 8
23. Recurrent Expenditure - Over the past ten years recurrentexpenditures have tended to grow very rapidly and although reductionshave been made in recent years, these have generally been ad hocunplanned reactions to falling statutory allocations. A more positiveand consistent effort by the States is needed to cope with thesinancial difficulties anticipated over tOe next five years. Thegrowth of personnel cost should be restricted to a maximum of 51annually or, more realistically, every two years for the next fiveyears. rhis can be achieved by further rationalization of staff,ensuring that payment is made for performance as against the currentpractice of viewing the public service employment as a social serviceand income distribution strategy.
24. The recurrent subvention to parastatals in the economic andsocial ministries was responsible for about 55 to 651 of the recurrentexpenditure in some States in the period 1981-1985. The size of suchsubventions can be reduced progressively while the parastatals augmentand/or finance their activities by increasing user charges. SomeStates have already made progress in this direction. Examples areImo, Anambra, and Ogun States. In some States parastatals like hotelsand industries that can be effectively operated by the private sectorhave been marked for sale. State and Federal Governments have yet toimplement their policy of commercialization/privatization of certaincategories of parastatals.
25. Debt service will continue to be a major constraint on Statefinances in the next five years and beyond. The outstanding debt ofState Governments is estimated at N 15.8 billion as follows:
(a) Federal Government N 6.3 billion
(b) external creditors N 2.9 billion
(c) domestic banks and contractors N 6.6 billion
26. States have borrowed short-term very heavily to financelong-term projects. They cannot cope with this situation withoutsubstantial assist'ance from the Federal Government which so far hasoffered only ad hoc, short-term debt service relief and special loans.It is necessary that the Federal Government comes up with a definiteconsistent policy on States indebtedness which would include:
(a) a long-term rescheduling of 20-25 years, including amoratorium of three to five years on principal;
(b) a firm embargo on further borrowing at inappropriate terms;and
(c) assisting State Governments in negotiating the reschedulingof external loans.
- 93 -
ANNEX 2-9Page 8 of 8
27. The maintenance of social and economic infrastructure hasbeen neglected especially in the past four years. State Governmentshave to address the need for maintenance and ensure that theallocation for this pirpose bears a relationship to the stock ofinfrastructure. A minimm of 10 to 1SZ of recurrent expenditureshould be allocated for this purpose. This will enhance the qualityof services, as well as assist in resource mobilization. Themaintenance of urban roads and drains will enhance the quality andvalue of urban property and justify higher property rating and groundrents.
28. Capital Expenditure - Capital expenditure will beconstrained by very limited resources in the future. In addition, thecompeting needs of the various sectors will constrain investment inmany important areas. The sources of capital receipts will be limitedto DLS, budget surpluses, and other internal sources since there is anembargo on external and domestic borrowing. To cope with thissituation, future investment should emphasize upgrading existinginfrastructure facilities to make them more effective and functional,as well as enhancing resource mobilization. Priority ought to begiven to areas where cost recovery is feasible, especially in theurban sector.
29. The development of social infrastructure, especially ineducation, health, and rural development should be based on a strategyin which users contribute a substantial proportion of the cost ofdevelopment and maintenance. Communities could be required to buildschools, hospitals, health centers and contribute a large proportionof the investment in water and electricity projects. This strategyhas been used in Imo and Anambra States, and is gaining prominence inthe other States. Currently most States have imposed a developmentlevy and have established education, industrial and generaldevelopment endowment funds for financing capital projects.
srles Ratio a) 20.3 17.7 13.4 42. 43.3 4. 44.0 31.2 31.0 42. 49.4
State Cotrab. to Prej. ki 0.0 0.0 0.0 2. 2.9 2.9 2.9 2.9 0.0 0.0 0.0
aS ktotl Wfenoh1 fettasta e t25 basis o4 ttul wfz c. to lb# firnt qurttr
of I1c/ Cotructo 3te 30 PreIn r hotiio. Proestit as At I1i97
of PEpl bot. rtaloo rIV fr 1298 to 129%4di 4ssad to twO"t I la o2 e flO Nobds.01 Poog at h0r of letmo deve to tat Cstitsttoe.
"mm ros dtg of Fedora) ot. ae" t 123 yur 8ettdie 2 ,a".9r0 tiled ad teotw t Y4 12t awOp. l8OOtC 2 of 5tUm dfte owr10 nWr raucloito 4 v" - #race d at leaot of dIII 11 3. bssJoncentractors dot full P*9V to3 "ars 5 1437-1) with ae sstenit addot to ce eoo Satb tOpaid ove re aW 215 ieto rt.
it T0 C_Uets O* d a) oq d W loto ditch tart by tOroostiag90 of tr Ct rnt spotitot l. efit do m c en 4) e rowitl l "ositch cowesr 4 ierig atd""p elont (35J, ad a loeast no eomt412 0f operating cot). ne ad nuto anho to Ira 202 W antt i from
1W cowds Plu allosiwog 21 roati pw soseo ia ltapat. Dwrioel aa@suia) fertp cots "low to v " W iW tO ioo" torsO (oW? futap Utftleaitofu) ad fidustof let #amp3 OichaO ratfl k2 lota cats asOw0f to yroun1 one io .l rt W" ovo loadl tWllateam 1 .
tl wilt frm £nsttettto h otrooq zt an SW ewttatioa anaouts"itmi especially Io uroetp tao ad ra trt, of ptiltoe ad_lgbst d uttlitits am urban ofrnttctte.
it Asud b tO 402 of total utoroa lios ot of rt tax a costet celt ctiee.
i I - bm 'to b 21 of capita cC ot ereojct.tha sill tai Iy 102 wy t Wr.
Ui 20M of pejct Cat atin 29"9.
124N
* - 9A -_~~~~~~~~~~~~~uL STTEl f1lhill5
(11th Miustmnt fur thflotIn ad Fpn h .oI Ptla i pge 2 of 3
state Centr. to Proj.kl 0.0 0.0 3.1 3.1 3.1 3.1 3.1 0.0 0.0 0.0 0.0
a/ Rtaal perfaeehi Estloated ot the basis of actual erforoance in the first qarter
of 196.cl Consructed fe IIRo I Proras Division Projectios (as at Aprl 5937)
of Fdeal Bot. retained revmu Proe 1936 to 195.di kaed to rease by l01 from 913 owrds.a/ fd at 10e n teo nteal kwe by the tmotgutie.ft Asumd rescheduling of Feral out. dets oer 12 ers including 2 yers
gra pwId oed iterest of 12 vrage. Aheduing of externaldate oevr10 yrs Inleang 4 yes grace erod at laterest of LIll 1 313. Asmecontractors date fully pU we in 3 yer 1191709) with no interat addebt to coercia beue reoad over 3 yes I 1 interest.
of TIe coepouts asWIs a) wags nd mel t ich start by rrusntlngI of otber currt eapItur (sac. debt ervtIcel a l 6) prating ephich coewrle a foreign each n t ( , and a loa ct elenat
( of ewratInag costs. ag ad mniumets susd to gmr 1 pr anwm free197 onw p0um allo1ng 2t growth e en4ue In eplyet. Opratifi PMpessa) ferlgr. cust ae to grew 7 per mau ral tenr (oer forp iafl3atinlades) d adutdm er foregn macha rate h local costs to grton wp a In rd tam oer local Ssfltsen ien.
hi bslts frm Irstlta U trngthsning and ergetaln1l angatasisIae epcially to r ty t a grnd r nt. provitsin and
_negentf 6itilitie ad urbana ifrastrcture.Li _me to be 102 3f total tateral ren t of prerty ta an cost
of ellectle.J1 _ toeAte 21 ef capita cost of prolect.
th 1ll ica by 101 erU ethr wyer.f 2t ofect ast ete 1w9.
Stat tenth. to Prej.1i 0.0 0.0 3.3 3.3 3.3 3.3 3.3 0.0 0.0 0.0 0.0
etiote on the masi of actul # urfn te. in the first SuMtenof am.
C1 CoStructe frog i50Pori iain PrW4tki OD SeCtinS (4s it 96ali 5961of Fedwral GMs. reutaid revnu from 19 to 1995.
di Ilom to imas ft 1.t free am mwards.=f Fixed at 503 of tetr.1 Ie, tb. ky the Constitttaoa.
ft Issue r4oechide of, 04.615W to. debt owe 12 ywol iKclodang 2 yas'rsgrow prod and tntewest of 2nusap. I2cwdual f external debts over10 Iees secluding 4 vees greco Werod at interes of LION. 3I31L. Isesecentre r .o de filly oddap o Im 3 s (179 oit imn interest auGdtam to co1 eesl "Du repaid O Ioe " I Ie s t aret.
gI Too ceesets assumed: a) W age ad aeo t uich stert by rapresaheg90204 thr curret uonstae test. debt m te amd hi qirting atomiesethch ceo t a foroi.s encg elemet (35, asd a local cost 5eemn(633 of o.te tre ts). O.O o "Newts "Sam to grim .0 per anus f.1967 oewser phi 1llouiel 23 you Wth p erwn in emplsyme. Operating espemeea) foreign ca sts C M$ d to ygw m p ie toer (over f ore ir fattmlodw) go41uijuted fer ferotg "a" a lu, rate I lca costs "NWge to VON71 en r W nnus Il rel torm oer blo a liiletl on dtlb.
hi %eemte frm eIntitutionsl streagthenllg and ergihsetlena eanegeedm 7st 41ce in isope tan ad rand rot, an prosiet and"enageet 4uilIties and whon lsfrestrsctue.
it kma teto05 of total nterwe A -s net of prorty tax aid catof ColtectU2I.
if kwm to So2104 capitel cost of e 1o2ect.t wal cb ream by tot ey othe yeor.
U1 M o4 projt cost etuhen 3110 92r.
a6ttd lttei22yd r a4l. 9dC_
-97- ANNEX 3-1Page 1 of 3
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Project Implementation - Benue State Subproject
Project Management and Coordination
1. The Benue State Ministry of Works and Transport would be theprimary implementation agency. However, the State Ministries ofFinance, Lands and Surveys, local government, and the State WaterCorporation have important roles to play in project execution.Coordination would be ensured through the establishment of ProjectSteering Committee comprising representatives of the ministries andagencies involved. The subproject is expected to be implemented over afive-year period with civil works occurrIng over the first threeyears. To ensure proper coordination of all subproject activities andthe administration and supervision of all contracts, a small ProjectManagement and Coordination Unit (PMCU) would be established withinthe Ministry of Works avid Transport. Responsibilities of PMCU wouldinclude:
(a) coordination of the activities of each agency concerned withthe subproject;
(b) procurement for, and technical supervision of subprojectcomponents (including technical assistance and stools);
(c) financial management of the subproject, including administra-tion of all contracts and subproject accounts; and
(d) project reporting to the lending merchant bank and, wherenecessary, through the merchant bank to the World Bank.
The unit would be headed by a Project Manager/Administrator, anexperfenced, internationally recruited municipal engineer, supportedby a locally recrited civil engineer (counterpart understudy), anurban planner, an accountant and two or three technicrl assistants.In due course, the unit's functions would be broadened to includeproject programming and evaluation, at which time the staff would beaugmented by an urban economist/financial analyst.
Infrastructure: Water Supply
2. The Benue State Water Corporation (BSWC) would beresponsible for the supervision, operation, and maintenance of thewater supply and distribution network In the subproject towns. However,consultants would be engaged to carry out detailed design of upgradingand treatment plant rehabilitation works and distribution networks.
- 98 -ANNEX 3-1Page 2 of 3
In addition, longer term technical assistance would be provided tostrengthen the BSWC*s engineering and financial managementcapabilities. Improved financial management, an appropriate tariffand improved collection would result in greater financial autonomy,reduced State subvention, and would permit the Corporation to improvesupply reliability. Consultants would also be engaged to carry outoutline water master plan studies for each of the four subproject towns.
Infrastructure: Roads and Drainage
3. Roads and drainage works would be supervised by the chiefcivil engineer of Department of the Ministry of Works assisted by asenior engineer provided under the technical assistance package to theProject Management Unit.
Solid Waste Management
4. Responsibility for solid waste management and road/drainagewould be transferred from the Benue State Environmental SanitationTask Force to the local governments. The subproject would assist theLocal Government Authorities to improve their capability to managetheir resources and to maintain infrastructure and operate servicesthrough the provision of technical assistance, equipment, and train-ing. The proceeds of the property tax would cover the necessaryrecurrent and equipment capitalization costs. In order to proceed atthe earliest with implementation of service improvements and to enableprocurement of appropriate vehicles and equipment, the State wouldengage solid waste management consultants in accordance with alreadyprepared terms of reference.
Resource Mobilization and Financial Management
5. The Treasury and Internal Revenue Divisions of the Ministryof Finance would be responsible for implementing their respectivetraining components. The training expert provided by the projectunder the direction of the Accountant General, would develop theaccountancy training program for the Treasury Division and conducttraining courses for staff while training a counterpart trainingofficer to take over the program after the departure of the expert.The Internal Revenue Division would designate the appropriate staff tobe sent to Lagos and the United Kingdom for tax assessment andcollection training financed by the subproject.
6. The Ministry of Local Government would be responsible fordeveloping the training program for the local authorities. The publicfinance training specialist would first focus on training MLGInspectorate staff as trainers and then on conducting several of thetraining courses before handing over to the MLG trainers.
7. The Lands Department of the Ministry of Lands and Surveyswould be responsible for implementing the property tax and ground rentsupport components through the two experts who would design and
-99 - ANNX 3-1Page 3 of 3
introduce the appropriate valuation and management systems and trainstaff of their respective units and their counterpart officers to takeover after their departure. Valuation consultants would be engaged bythe valuation expert for the Lands Department to establish the initialproperty tax roll which the Lands Department would continue to developwith its own staff.
Summary of Project Implementation Responsibility
Project Component Responsible Agency
(a) Overall project management PMCU
(b) Design and supervision of infrastructureimprovements
- Water supply BSWC- Roads and drains MWT/PMCU- Solid waste and mun. maintenance LGA's
(c) Institutional and financialstrengtnening
- Mapping MLS/EMCU- Rating valuation NLS- Land administration NLS- Resource mobilization and financial
management 11LS/MOF/MLG/LGA's- Solid waste management and mun.
maintenance MLG/LGA' s- Revenue enhancement and leakage
reduction BSWC
(d) Project preparation and studies PCKU
AF41NMarch 1987
- 100 -
ANNEX 3-2Page 1 of 4
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Project Implementation - Gonaola State Subproject
Proiect Management and Coordination
1. The Gongola State Ministry of Works and Transport would bethe primary implementing agency, and the Gongola State Urban Planningand Development Authority (GSUPDA)-an agency reporting to theministry-will have the main responsibility for subproject execution.However, the State Ministries of Finance and Local Government andState Utilities Board also have important roles to play in subprojectexecution. Coordination would be ensured through the establishment ofa Project Steering Committee comprising representatives of theministries and agencies involved. The subproject would be implementedover a five-year period beginning in 1987, with civil works beingundertaken during the first three years. To ensure propercoordination of all project activities, a small Project ImplementationUnit (PIU) would be established within GSUPDA. Responsibilities ofPIU would include:
(a) coordination of the activities of each agency concerned withthe subproject;
(b) procurement for, and technical supervision of subprojectcomponents (including technical assistance and studies);
(c) financial management of subproject components, includingadministration of all contracts and subproject accounts; and
(d) subproject reporting to the lending merchant bank and, wherenecessary, through the merchant bank to the World Bank.
The PIU would report directly to the general manager of GSUPDA andwould be headed by a qualified and experienced project manager/ad-ministrator, who would be supported by three to four qualified projectengineers, a project accountant and by four to six engineering,accounting, and administrative assistants. GSUPDA itself would bestrengthened through the provision of technical assistance in theareas of financial planning, operational systems, solid wastemanagement, and computing and would, in turn, provide technical,financial and administrative support to PIU. In due course (say threeto four years), PIU would be fully integrated into GSUPDA's organiza-tional structure.
- 101 -
ANNEX 3-2Page 2 of 4
Infrastructure: Water Supply
2. The Water Division of the Gongola State Utilities Board (anagency reporting to the Ministry of Works and Transport) isresponsible for the supervision, operation, and maintenance of thewatet supply and distribution network in the subproject towns.However, consultants would be engaged to carry out the detaileddesign, contract documentation and supervision of treatment plantrehabilitation works and extensions to distribution networks. Inaddition, technical assistance would be provided through thesubproject to strengthen the Water Division's engineering, accountingand financial management capabilities. Improved financial management,appropriate tariffs, and Improved collection would result in greaterfinancial autonomy and reduced State subvention, and would permit theWater Division to improve service reliability. Consultants would alsobe engaged to prepare an action plan for the subproject towns whichcould form the basis for future project investments. Theimplementation of this component will require close liaison betweenPIU and the Utilities Board.
Infrastructure: Roads and Drainage
3. Roads and drainage works would be supervised by PIU, withthe assistance of consultants who would be engaged to undertakedetailed engineering design, contract documentation, and contractsupervision.
Solid Waste ement and Sanitation
4. Responsibility for the execution of physical works and theprocurement of equipment would lie with PIU, however, the PublicHealth Division of GSUPDA would be responsible for implementing theprogram of immediate solid waste management improvements, and fordeveloping a medium term (two to five years) service improvementprogram. Technical assistance would be provided to the Public HealthDivision to improve collection and disposal services, fleet, andequipment maintenance, operations planning and management, financialplanning and management, and staff training. Consultants would beengaged by GSUPDA to assist with planning and implementation.
Resource Mobilization and Financial Management
5. The Ministry of Local Government would be responsible forestablishing a Property Valuation and Rating Unit within the Ministry.This unit would implement a program of property valuation and ratingin the subproject towns, on the basis of a valuation and rating to beagreed upon by MLG, MOP and MWT and the Bank. Technical assistancewould be provided to NLG to establish and maintain a valuation andrating system through the engagement of a qualified and experiencedvaluation and rating coordinator, and through the engagement of theservices of private sector valuers to undertake a detailed propertyvaluation exercise. In addition to the above, MLG would be
- 102 -
ANNEX 3-2Page 3 of 4
responsible for engaging the services of a local government financeexpert to advise on rationalizing and improving resource mobilizationby the Local Government Authorities. Consultants would also beengaged to advise on stremlining LGA accounting and revenue operationsand, to develop and implement a training program for LGA accountingand revenue collection staff.
6. The Budget and Revenue Offices, the Commission of InternalRevenue, and the Accountant General's Division would be responsiblefor implementing training programs to be undertaken within theMinistry of Finance. MOP would engage the services of a budgetadvisor who would assist in rationalizing and streamlining thebudgeting process, in devising measures to enhance State revenues andin devising measures to rationalize State expenditures. Technicalassistance would be provided to MOP to implement a program ofon-the-job, as well as academic training for key budget, revenue, andaccounting staff.
7. The Land Administration Division of the Ministry of Worksand Transport would be responsible for implementing a program ofimprovements in land identification and ground rent collection in thesubproject towns. Technical assistance would be provided to engagethe services of a systems/computer specialist to develop a landidentification and billing system, and to engage consultants to trainthe ground rent collection staff. The Ministry of Works would also beresponsible for implementing an aerial mapping program covering theimportant urban areas of Gongola State. This aerial photography wouldprovide valuable information for planning and administration to allState agencies and would greatly assist future project preparation.
Summary of Project Implementation Responsibility
8. A summary of the subproject component and the agenciesresponsible for their implementation is presented below:
- 103 -
ANNEX 3-2Page Z 4
Project Component Responsible Agency
(a) Overall project management PIU/GSUPDA
(b) Design and supervision of infrastructureimprovements
- Water supply Utilities Board/PIU- Roads and drains PIU/GSUPDA- Solid waste and nun. maintenance PIU/GSUPDA
(c) Institutional and financialstrengthening
mapping Lands Div. /PIU/GSUPDA_ Rating valuation MA_ Land administration Lands Division- Resource mobilization and financial Utilities Board/MOPF/LG/
managemnt PIU/GSUPDA- Solid waste management and mun.
maintenance PIU/GSUPDA/LGA's- Revenue enhancement and leakage
reduction Utilities Board
(d) ProJect preparation and studies PIU/GSUPDA
AF4INMarch 1987
- 104 -
ANNEX 3-3Page 1 of 5
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Project Implementation - Ondo State Subproject
Project Planning and Coordination
1. The Ondo State Ministry of Lands and Housing would be theprimary implementing agency. However, the State Ministries ofFinance, local government, and the Ondo State Water Corporation haveimportant roles to play in project execution. The subproject would beimplemented over a five year period starting in 1987. To ensureproper planning, coordination, and management a Project Planning andCoordination Unit (PPCU) would be set up within the Department ofLands and Housings (DLH). The unit would report directly to thePermanent Secretary (DLH), and through him to the Office of theMilicary Governor.
2. The unit would be headed by an experienced manager/administrator with a broad background in the urban sector; profes-sionals with technical qialifications plus project management exper-tise would also be suitable to fill this position.
3. The main responsibilities of the PPCU would include:
(a) planning, coordination, and monitoring of the tasks andactivities of all subproject implementing agencies Involved;
(b) financial management and operation of subproject accounts;
(c) overall supervision of procurement and contract administra-tion;
(d) provision of advisory services and assistance with implemen-tation of training components;
(e) supervision of studies included in subproject; and
(f) reporting to, and liaison with FMWH, merchant bank and WorldBank.
4. The activities of the PPCU would be guided and monitored bya Project Implementation and Monitoring Committee consisting of thePermanent Secretaries of Lands and Housing (as Chairman), Works andTransport, Local Government and Chieftaincy Affairs, Finance andEconomic Planning, a representative of the Military Governor's Office,the General Akure, Ekiti-Central, and Ovo Local Government Councils.
- 105 ANNEX 3-3
Page 2 of 5
5. In line with its planninlg, supervision and coordinationresponsibilities, plus the advisory tasks to assist subprojectimplementing agencies, the PPCU would comprise only a small number ofprofessional and support staff. The unit would consist of fivesections, each headed by a suitably qualified and experiencedprofessionah If the positions cannot be filled by suitablecandidates from within the establishment, they will be advertisedinternationally.
6. The proposed five sections of the unit and their main tasksvould be as follows:
(a) Administration and Accounting Section
- budgeting and financial anagement;
- maintaining and operating consolidated subproject ac-counts;
- payments to contractors/suppliers/consultants;
- preparation of disbursement requests; and
- general administration;
(b) En8ineering and Technical Section
- coordination and supervision of detailed design andconstruction of water supply, road, and drainageimprovements;
- handling of all procurement matters; and
- technical advice and quality control;
(c) Urban Planning Section
- monitoring of progress and adherence to schedules;
- preparation of progress reports;
- overall planning and coordination of varioussubsectors;
- supervision of studies; and
- future project Identification, planning, and prepara-tion;
- 106 -ANNEX 3-3Page 3 of 5
(d) Land Information and Administration Section
- assistance and support to Lands, Survey and RatingValuation Division and coordination of their projectactivities;
- coordination of data processing systems, includingtechnical assistance;
equipment and material procurement; and
coordination of surveys and map production; and
(e) Local Government and Finance Assistance Section
- coordination of technical assistance and training forthe three local governments in solid waste management,municipal maintenance and public finance;
- general coordination and liaise with MLG and LGA's;
- coordination of technical assistance and training forMFEP in public finance and financial management; and
- coordination of procurement for local governments.
7. Since the PPCU's tasks as outlined above are concerned withongot'ng subproject preparation and preparation of detailed design andtender documents, the unit would be set up by the end of 1986, and keystaff, such as its chief, be appointed by then.
Infrastructure: Water Supply
8. The Ondo State Water Corporation (OSWC), a corporationreporting directly to the Governor's Office, is responsible for thedevelopment, operation and maintenance of the water supply anddistribution network in the three subproject towns. The proposedwater supply improvements would be implemented by OSWC under thegeneral direction and coordination of the PPCU. Design and tenderdocuments would be prepared by OSWC staff supported by technicalassistance Irom consultants, and construction supervision would behandled similarly. In addition, technical assistance would beprovided in the form of a commercial manager and a distributionspecialist. While the first would focus on improving the accounting,billing and collection system, the latter would develop a leakagedetection and repair program, and a program to install production andconsumption meters to reduce water losses. Liaison with the PPCUwould be mainly through its Engineering and Technical Section.
- 102 -ANNEX 3-3Page 4 of 5
Infrastructure Roads and Drains
9. The Ministry of Works and Transport (MIT) through itsPlanning and Construction Dlvis4ons, would be responsible for thedesign, tendering and construction supervision of the road anddrainage works. MWT staff would be supported by technical assistance,provided by consultants, in the performance of these tasks. Liaisonand coordination would be assured by the Engineering and TechnicalSection of the PPCU.
Solid Waste Management and Municlpal Maintenance
10. The Survey Division of the Department of Lands and Housing(DLH) would be responsible for the production of base maps and forobtaining the necessary aerial photography including ground control.
II. The Lands Division of DLH would be responsible for thesetting up of a land data base for enhancing revenue generation,particularly from ground rents.
12. A new Rating Valuation Division would be created within DIEwith responsibility for setting up and implementing a program ofproperty rating valuation. Technical assistance funds would beprovided for hiring a Chief Valuation Officer and a systems analyst.
13. Coordination of all subproject activities related to landinformation and administration would be the responsibility of theappropriate section of the PPCU.
Resource Mobilization and Financial Management
14. All technical assistance provided in these areas would becoordinated by the Local Goverrnent and Finance Assistance Section ofthe PPCU. Assistance to the local governments would be channeledthrough the training division of the Ministry of Local Government andChieftaincy Affairs, while the assistance to the Ministry of Financeand Economic Planning would be managed by the Planning Division andthe Internal Board of Revenue.
Summary of Project Implementation Responsibilities
15. A sumary of the subproject component and the agenciesresponsible for their implementation is presented below:
- lop -
AN=EX 3-3Page S of S
Project Component Responsible Amency
(a) Overall project management PPCU
(b) Design and supervision of Infrastructureiuprovements
- Water supply OSuC- Roads and drains MVT- Solid waste and mun. maintenance LGA's
(c) Institutional and financilstrengthening
- Mapping DHL (Survey Div.)- Rating valuation DEL (R-V Div.)- Land administration DEL (Lands Div.)- Resource mobilization and financial
manag0Ment MPEPNLG/LGA'as- Solid waste management and mun.
maintenance MlG/LGA's- Revenue enhancement and leakage
reduction OSW
(d) Project preparation and studies DLI (Town Planning)
March 1987
- 109 -
ANNEX 3-4Page 1 of 4
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Project Implementation - IDF Subproject
Preparation Procedures
1. For the first tranche of lending (Benue, Gongola, Ondo)merchant bank responsibilities will be limited to financing 10% ofsubproject costs, determining borrewer financial eligibility,processing disbursement applications, supervising construction, andcollection and repayment of debt service. Full operations of the IDFproject cycle would begin with the processing of new applications forsubproject funding.
2. Line of credit funds would be allocated to the merchanta banks on a first-come, first-served basis - funds being comitted to
acceptable subprojects as they are presented to the Bank for ex antereview. The line of credit would be subject to a three-yearcommitment period at the expiration of which uncommitted funds wouldbe cancelled by the Bank.
3. Project processing would comprise three major steps:
(a) Orientation. At the initiation of-the program, StateGovernments would be officially informed of the program'sexistence, and the type of infrastructure eligible forfinancing, the terms of which financing would be provided,and the procedures for application. States interested inthe program would then approach any of the licensed merchantbanks, for more detailed orientation. Detailed orientationwould comprise:
(i) agreement on subproject concept, resulting from discus-sions of the initial State subproject proposal in thelight of IDF Project Guidelines, and agreement onwhatever modifications would be required to maintainconsistency with these Guidelines; and
(li) understanding of financial conditionality: during thecourse of orientation, States would be required tosubmit financial data to the concerned merchant bank,and the merchant bank would review this information andadvise the State as to whether improvements in finan-cial performance would be required in order to meet thefund's financial criteria within the required timeperiod. States unable, or unwilling to meet the fund'sfinancial conditions would be dropped from subprojectprocessing at this stage;
- 110 -
ANNEX 3-4Page 2 of 4
(b) Preparatiou. Where a State and merchant bank reach generalagreement on the subproject concept and feasibility ofachieving the fund's financial conditions, the merchant bankwould formally commit the required portion of its IDT fundsto the subproject. This commitment, contractually, would beconditioned upon satisfactory and timely progress by theState in further project processing. Detailed terms ofreference for subproject preparation would be agreed betweenthe merchant bank and the requesting State Government. TheBank would assist the State in preparing terms of referencefor project preparation, and would provide financing (on thesame terms as subproject loans, with the outstanding balancebeing absorbed into the subproject loan once approved) forany required feasibility studies. The terms of referencewould require preparation of:
(i) an economic, technical, and social justification forsubcomponents to be financed, in the context of theStates overall investment program; and an assessment ofindividual components (ERRs, or least cost solutionanalysis);
(ii) the preliminary design of civil works, and specifica-tion of equipment and technical assistance to befinanced;
(iii) details of institutional arrangements for execution ofworks; the supervision of execution, and for operationand maintenance;
(iv) financial arrangements for cost recovery and forfunding operation and maintenance; and
(v) a State financing plan, incorporating audited finalaccounts from the preceding year, and projections ofinternal revenues, statutory allocations, debt service,the other recurrent expenditure, over five yearsbeginning in the year of presentation to the merchantbank board. Project preparation documents would beexpected to justify projections of internal revenuesand recurrent expenditures, on the basis of specificactions to be undertaken by the State. Projections ofstatutory allocations would be based on standardizedforecasts of oil revenues applicable to all Statesseeking IDF funding in a given year. Debt serviceobligations would reflect actual obligations (as at thedate of loan effectiveness) plus any obligationsarising from additional debt the State expects toundertake during the projection period; and
(c) Appraisal and Board Presentation. Upon completion ofsubproject preparation, staff of the merchant bank would
- ill -
ANNEX 3-4Page 3 of 4
appraise each State subproject, based on the ProjectGuidelines. These Guidelines specify criteria to be used inassessing the economic justification, appropriateness ofstandards, institutional arrangements for execution andmaintenance, and financial arrangements for cost recoveryand recurrent expenditures of each subproject. Theexperiencb Sained by merchant banks in processing fundsunder the pres.t IDF project would permit the Guidelines tobe broadened in any subsequent tranches of IDF lending.
4. To qualify for subproject financing States would be requiredto demonstrate their ability to meet counterpart funding requirements,including recurrent expenses to support subproject activities, and toservice the proposed loan. The guideline governing State financialperformance would specify a standard indicator to be used atappraisal: the current account surplus, measured as internal revenuesplus statutory allocations; less recurrent expenditure, including debtservice. States would be encouraged to achieve a current accountsurplus in the year in which the loan is to be effective, and todemonstrate that the level of surplus is sustainable over the periodof the subproject. A State's ability to comply with these financialcriteria would be determined by the merchant bank appraisal mission onthe basis of information included in the project preparation documentsverified and revised by the appraisal mission on the basis ofdiscussions in the field. 1/
5. the current account surplus is proposed as the measure offinancial performance, first, because it is a standard measure of debtservicing capacity, and is therefore appropriate to a lending program.(A zero-level current account surplus indicates that the borrower hasjust enough funds to pay the additional debt service, given projectedrecurrent revenues and expenditure. A surplus indicates theadditional margin-often used to finance small capital works_-whichcould be used to pay debt service if projections prove wrong.)Second, the current account surplus measure (unlike other indicatorsof debt service capacity) also incorporates variables over whichStates have some control (most importantly, recurrent expenditure),and therefore provides States with an incentive to improve financialperformance in order to qualify for IDF funds.
6. Reports of the merchant bank appraisal mission would besubmitted for comment and approval to the World Bank. This form of exante project review is necessary in light of the merchant banksinexperience in State infrastructure project appraisal. As the banksgather more experience in appraisal (and poorly performing banks are
1/ The more complex issue of State indebtedness is outside the scopeof this project and would be addressed in the proposed FinancialRestructuring Loan (FY89).
- 112 -
AN=EX 3-4Page 4 -of 4
removed from the program) it is expected that prior approval by theWorld Bank can be phased out. Subsequent World Bank lending for theIDF could therefore incorporate a gradually increasing free lii t,below which no ex ante review by the the Bank would be required.
7. Projects recommended for financing by the merchant bank andcleared by the World Bank, would be formally submitted by resolutionof the State Executive Council, for the consideration of the mercbantbank's board. The loan documents submitted for Merchant Bank boardapproval would be expected to incorporate various conditions foreffectiveness, including acquisition of land, opening of projectaccounts, deposit of initial counterpart contributions, andpreparation of tender documents. Approval by the merchant bank boardwould constitute authorization to begin reimbursable expenditure,subject to satisfaction of these conditions.
A741NSeptember 1987
- 113 -ANNEX 3-5Page 1 of 1
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
ProJect Implementation - IDF Trainlng and Evaluation (FMWH)
1. In accordance with terms of reference acceptable to theBank, the Urban and Regional Plannlig Division of FMWH would engageconsultants, according to Bank guidelines, for the initial IDFtraining seminars for merchant bank, State and FMWH staff, which willtake place in the first year of the project with a follow-up seminar ayear later. The training materials would be compiled as a guide forother banks which may be admitted to the IDE program in the future.
2. Consultants would be engaged according to Bank guidelinesto: (a) review the IDF guidelines after the first three subprojectsare substantially completed (year 3) in order to assist PMWH inrevising the IDF policy statement and guidelines to reflect theexperience gained under the project; and (b) conduct the annuvlproject performance audits which would serve as the primary monitoringtool of the project for PMG, and as a basis for initiating, with priorBank approval, any necessary policy changes.
3. Other consultant services would be engaged as required fortasks to be identified from tlie-to-time by 1MWH with the concurrenceof the Bank.
AF4INMarch 1987
-114 - ANNEX 3-6Page 1 of 1
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Project Implementation - FMWH Support
Infrastructure Project Training
1. The Urban and Regional Planning Division (URPD) of FMWHwould select those of its staff for the overseas seminar on infra-structure projects. The seminar content and location would beselected with the assistance of the Bank.
Urban Prioritization Studies
2. URPD would manage the fund for urban investment prioritiesstudies. URPD would provide interested States with standard terms ofreference, monitor the procurement of consultant services, and providethe financing, but the States themselves would be responsible for thestudies.
Housing Sector Restructurins Studies
3. URPD would be responsible for the series of studies leadingto the restructuring of the housing sector. URPD would select andengage consultants for the studies which could be undertaken as asingle package by a single firm, or grouped together or individuallyby a number of firms. After review of the studies by the appropriateagencies, URPD would draft an implementation strategy for Governmentconsideration on the basis of the studies' recommendations.
Sector and Future Project Preparation Studies
4. URPD would select and engage consultants for sector studiesand consult with States on future project preparation studies.
Vehicles and Equipment for PMWH
5. FMWH would be responsible for procuring vehicles andequipment for project monitoring and supervision in accordance withBank procurement guidelines.
AF4INSeptember 1987
~~~~i N tX rrI f 1 1 gF |E pI 1 g llrSr l' qt 3 1~~~~~~~~~~r
T ta pru -st v.1. . 1.Tdd~~~~~~~~~~~~~~~~~l. I l.slu
allocated prswtlmlly.Ad a lrQi
din"
No&' rF14 1
- 117 -
ANNEX 3-9
MII0tA ZNFRASRUCVtD ODVELOPNEgt FUND PROJECT Page 1 of 1(Development Sequonce)
-~~~~~ ~STAGE I(Effectiveness)
.'~ l Cne04 paticipatinlg NO1Sl l I _ _agrees to fitnamc a
II. II Ru~~~~~Bnk-appaised SP.FIIH opens SAS first NSopens SAS Ca opens Ca.
rSA Rule: First cons firstI served$ syndications
allowd.
I:] L:] UN STlGE 2-1;I C3ll It c V to O)
Athre partliipating Nas__qre to finance the
= 7 !-- ~~~~~~tbree 8 ek-approved SP&and each establishes a SA.
[ Di.. U8 lules First cone firstSw* 3 b served; one lead Hi per
SP; syndications allowed.
CN Three to five 136 agree tohAl CA ~~~~~~~~finance six or move SIPaL~~J L.,~~~~-.J ~ard each establishes a S*
no Rule: first cones firstI ~~~~~~~~~served; NUs may be lead-haskj Nil.. oa:re ~~~~than OnA SPa sydica&-IS , a r LCll (tll3O w4)ed
KEYFINalFederal Ministry of Works &Housing, XC:1=local caPital -Akt, CBM= Central Bankif8aI.rchant bank, SAm special account, CA= control account, $p-state subproject
-SA unding, - suppSrt Aunding, -CA info flow.
WAPWUFebruary 1987
- 118 -
ANNEX 3-10Page 1 of 3
NIGERIA
INFRASTRUCTURE DEVELOPMENT FUND PROJECT
Bank Disbursement
Amount of Percent ofLoan Allocated Expenditures
Categories (US$ Equivalent) To Be Financed
1. Line of Credit ForSubproject Loans ManagedBy Merchant Banks
(a) Benue State 10.4 ) 100% of3 Foreign &
(b) Gongola State 11.5 ) 752 of local) Expenditures
(c) Ondo State 10.4 3(d) Other Eligible States )
(i) free limit subloans 10.0 )(ii) other subloans 12.3 )
Subtotal 54.6
2. IDF Training and Evaluation 1.0 100%
3. FMWT Support
(a) Staff Training and Studies 4.1 1002(b) Vehicles and Equipment 0.2 1002 of
Foreign &75% of localExpenditures
4. Unallocated a
(a) Benue State 1.5(b) Congola State 1.8(c) Ondo State 1.9(d) Other (Including States other
a/ Benue State Government has begun improving roads originally includedIn project and analyzed and subsequently dropped. Retained roadssimilar to Gongola, and therefore, similar ERR likely.
