DocumenE of The World Bank FOR OMCUL USE ONLY 2s3 3 -Ž2-6" Report No. 5413-ZIM ZIMABWE STAFF APPRAISAL REPORT SMLALL-SCALE ENTERPRISE PROJECT April 16, 1985 Regional Projects Department Eastern and Southern Africa Regional Office This document has a resktred dis{tnibi and may be used by rcipients ody in the performance of their oicial dutes Its contens may not odewwise be dischsed widout Wodd Bank antheri_aon. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
DocumenE of
The World Bank
FOR OMCUL USE ONLY
2s3 3 -Ž2-6"
Report No. 5413-ZIM
ZIMABWE
STAFF APPRAISAL REPORT
SMLALL-SCALE ENTERPRISE PROJECT
April 16, 1985
Regional Projects DepartmentEastern and Southern Africa Regional Office
This document has a resktred dis{tnibi and may be used by rcipients ody in the performance oftheir oicial dutes Its contens may not odewwise be dischsed widout Wodd Bank antheri_aon.
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CURRENCY EQUIVALENTS(November 1984)
Currency = SZ
US$1 $Z 1.40
$Z1 USSO.71
FISCAL YEAR
Government of Zimbabwe
SEDCO ] July 1 - June 30
ABBREVIATIONS
AADC Anglo-American Development CorporationAFC Agricultural Finance CorporationBIXAP Barbados Institute of Management and ProductivityCD Certificates of DepositCIDA Canadian International Development AgencyCIFOZ Construction Industry Federation of ZimbabweDCD Department of Cooperatives DevelopmentDFC Development Finance CompanyFCEC Federation of Civil Engineering ContractorsFEBCO Finance Trust for Emergent BusinessmenGOZ Government of ZimbabweIDC Industrial Development CorporationILO International Labour OrganizationIOBD Institute of Business DevelopmentIPCORN Investment Promotion Corporation of Rhodesia and NyasalandLDC Less Developed CountriesPOSB Post Office Savings BankMCNH Mirnistry of Construction and National HousingLMLPSW Ministry of Labor, MaLipower Planning and Social WelfareRBZ Reserve Bank of ZimbabweSEDCO Small Enterprises Development CorporationSIAS Small Industries Advisory ServiceSSE(s) Small-Scale Enterprise(s)UDI Unilateral Declaration of IndependenceUSAID United States Agency for International DevelopmentZIAS Zimbabwe Industrial Advisory ServiceZIMBATA Zimbabwe Master Builders and Allied Trades Association
FR OMICAL USE ONLY
ZIMBABWE
Small-Scale Enterprise Project
Loan and Project Sumrary
Borrower: Zimbabwe
Beneficiaries: Small Enterprises Development Corporation (SEDC0) and theMinistry of Labo-:, Manpower Planning and Social Welfare(MUPSW)a.
Amount: US$10 million.
Terms: Repayable in 17 years, including 4 years of grace, withvariable interest rate.
Relending The Government would onlend the credit component (US$8.5Terms: million) to SEDCO at the interest rate that it charges on
loans to its parastatals (currently 9.75% p.a.) with a fixedamortization schedule for 15 years including 4 years ofgrace. The Government would bear the foreign exchangerisk. SEDCO would relend at 18% p.a. for sub-loans in urbanareas and 16% ic rural areas with maturities up to 7 yearsincluding a grace period of up to 2 years. The technicalassistance components of US$1.5 million would be madeavailable to MLMPSW (US$0.9 million) and as a grant to SEDCO(US$0.6 million).
Objectives This pilot SSE project would support the Government's
and Project program of providing urgently needed financial assistance,Description: training and management counselling to small-scale
entrepreneurs. The project would also strengthen the SmallEnterprises Development Corporation (SEDCO). Morespecifically, the project would:
(i) provide a line of credit to SEDCO foron-lending to an estimated 470 SSEs; and
(ii) provide technical assistance to improve theinstitutional efficiency of SEDCO and tohelp finance a management training programfor small contractors and a study of theconstruction sector and its potential forsmall construction firms.
Ths document as a resticted distribution and may be usd by recpients only in the performanc oftheir orcildutis. Its conttnts may not otherwise be dscld without Word Bank autbizaion.
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Benefits The project would play a critical role in strengthening theand Risks: Government program to provide an effective integrated
package of technical and financial support to small scaleentrepreneurs. It would help enhance the entrepreneurialand technical capabilities of small-scale entrepreneurs,increase the supply of credit to them, and build up SEDCOinto a strong and effective institution. The project wouldcreate nearly 4,000 jobs at an estimated average cost perjob of only about US$3,100.
There is a risk that SEDCO may expand its operations tomarginal enterprises in rural areas with limitedinfrastructure. The risk is mitigated, however, by SEDCOproviding training and management counselling to SSEs,strengthening its supervision capabilities and by fundinghigh risk operations only through a special Governmentfinanced -Managed Fund.
Resources Available for Disbursements 1,052.8Less Undisbursed CoOmitments -Less Uncommitted Approvals 483.5Resources Available for Approvals 569.3
6. Interest Rates: 18% p.a., to projects located in urban areas and 16Xp.a. to those in rural areas. An 'administrative fee for projectsupervision is charged, ranging between 0.5X-5Z, depending on the sizeof the loan.
7. Financial Results and Position (SZ '000)(4 months ending uctober jL, 1984)
ResultsGross Income 496.7Net Profit 182.6Administrative Costs as % of average
total assets (annualized basis) 38.6%
PositionNet Worth 1,308.3Total Assets 1,418.4Long Term Debt/Equity Ratio
8. SuImrary of Approvals 1/ Number Amount ($Z)Commerce 396,748.6Industry 6 65,015.0Construction I 10,000.0Services 2 11,726.0
Features of the Proposed Loan 24Project Implementation 25Disbursement 26Benefits and Risks 27
IV. AGREEMENTS AND UNDERSTANDINGS TO BE REACHED AT NEGOTIATIONS 27
This report is based on findings of appraisal missions to Zimbabwe-in Julyand November 1984, consisting of Zia Ahmed (mission leader), MariluzCortes, Philip Adoteye, Melanie Horton and Helmut Kaden (consultant).Mr. Francisco Aguirre-Sacasa also participated in the July 1984 mission forabout a week.
List of Annexes
Zimbabwe
Annex 1 Structure of Financial System
Annex 2 Interest Rates
Small Enterprises Development Corporation
Annex 3 Organization Chart
Annex 4 Policy Statement Action Plan and Strategy Statement
Annex 5 Lending Terms
Annex 6 Analyses of Pipeline and Approvals
Annex 7 Summarized Income Statement - FY84
Annex 8 Summarized Balance Sheet - FY84
Annex 9 Projected Operations FY85-89
Annex 10 Projected Income Statements - FY85-89
Annex 11 Projected Balance Sheets - FY85-89
Annex 12 Projected Sources and Uses of Funds - FY85-89
Annex 13 Actual and Projected Financial Ratios - FY84-39
Annex 14 Disbursement Schedule
Construction Industry Conponent
Annex 15 Training and Advisory Services - Outline Terms of Reference
Annex 16 Study of the Construction Industry - Outline Terms ofReference
Project File
Annex 17 Selected Documents and Data Available in the Project File
I. THE SECTORAL BACKGROUND
A. The Setting
1.01 The Zimbabween economy, one of Sub-Saharan Africa's mostdiversified, rebounded from the damages of five years of war, followingindependence in 1980 and the relaxation of economic sanctions imposed afterthe Unilateral Declaration of Independence (UDI). GDP achieved an averageannual growth rate of over 10X in 1980 and 1981 due to bumper crops,increased exports of ferro-alloys and an increase of nearly 25% inmanufacturing value added. In 1982 the economy experienced a sharpdownturn with GDP falling in real terms by nearly 2% that year and by afurther 3.5% in 1983. Major factors contributing tc this decline were: theeffects of the 1982-1984 drought, the impact of the international recessionon the volume and prices of mining output; and a 5% contraction in thevolume of manufacturing output, greatly affected by foreign exchangeshortages and contracting demand. Preliminary data for 1984 show increasesin agricultural and mining output, and higher manufacturing exports.Manufacturing and trade, however, still suffer from weak consumer demandand drastically reduced foreign exchange allocations.
1.02 Most economic activities in Zimbabwe are carried out by theprivate sector. While the Government has been under considerable pressureto bring about a rapid, less skewed, distribution of income, its approachto achieve this objective has been pragmatic. It has avoided any majorredistribution of productive assets, such as land and industry, andcontinues to support the private sector, which is the economy's main sourceof foreign exchange. Through a substantial currency devaluation and thepreferential allocation of foreign exchange to export activities, theGovernment succeeded in stimulating exports. The Government is also takingmeasures to create an environment propitious to the development of privatesmall scale enterprises in both rural and urban ar-3s. The Government'seconomic measures are being implemented in collaboration with the privatesector, particularly the trade and industrial associations, with which theGovernment maintains frequent consultations on policies and procedures.
B. The Small Scale Enterprise Sector
1.03 Structure and Contributions to the Economy. Small scaleenteprises (SSEs) 1/ provide about 20% of non-farm employment in Zimbabweand constitute ove7r 80% of all non-farm establishments. Of the nearly92,000 people employed in SSEs, about 40Z are in trade, 28% in services and18Z in the manufacturing sector. The relative contribution of SSEs tototal value added is estimated to be in the range of 12 to 18%. Availablestatistical information does not show the contribution of SSEs to valueadded by sectors, other than manufacturing, where they contribute to about10% of value added.
1/ Small Scale Enterprises (including industry) in the context of thisproject are firms with less than 51 workers and fixed assets notexceeding Z$ 200,000.
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1.04 The relative importance of SSEs varies greatly among sectors.They employ 60% of all the workers in the area of services and about halfof the workers in retail and wholesale trade, but less than 15Z of thoseworking in manufacturing, transport and construction. The contribution ofSSEs to total employment in the latter sectors is low if compared withcountries of similar or higher level of development than Zimbabwe. Forexample, SSEs in Zimbabwe contribute to only 10% of manufacturingemployment compared to an average of 50% among a sample of 17 low incomecountries and 25% among 10 high income countries 2/.1.05 The oroportion of people working in SSEs in Zimbabwe is somewhathigher than what the above figures indicate, if employment in informal SSEs(i.e. comprising the self-employed and units without operator's license) isincluded. There is, however, little statistical information on informalSSEs in Zimbabwe. A recent study carried out by the University of Zimbabwe'nd the ILO concluded that compared to other developing countries theiL±ormal sector in Zimbabwe is also relatively small. Informal SSEs areusually found in the backyard of shops, in makeshift premises or in theopen air. The most common activities in the informal sector are:vegetables retailing, carpentry, tailoring, metal working, shoe repair,truck shops, tin container production and car repair. Little competitionexists between formal and informal SSEs, particularly in the rural areaswhere formal enterprises do not have outlets. Even in urban areas,informal sector units cater mostly to low income black Zimbabweans withlimited access to formal sector products and services.
1.06 The low labor absorption capability of both formal and informalSSEs outside trade and services is largely the result of pre-independencepolicies that favored the development of a white dominated, relativelycapital intensive, modern economy 3/, while limiting the economicactivities of black entrepreneurs to retail trading and personal servicesin restricted geographical areas. These policies also contributed to theconcentration of non-farm activities, including SSEs, in the major urbancenters of Harare in the Mashonaland East province and Bulawayo in theMatabeleland North province, where only 15X of the population of Zimbabwelives. These two provinces are home to nearly 80% of small manufacturingfirms, 65% of small traders and 772 of small construction firms.
1.07 The overwhelming majority of formal sector SSEs are owned bywhite Zimbabweans. Although there is no statistical information onownership by race, the 1981 Employment Census shows that only 16% of the7,000 persons in managerial and administrative positions in manufacturingtrade and services were black Zimbabweans. Since independence, however,the number of black Zimbabweans in these positions has increased as aresult of white emigration and the elimination of discriminatorylegislation.
2/ R. Banergi, "Average Size of Plant in Manufacturing and CapitalIntensity. A Gross Country Analysis by Industry-, Journal ofDevelopment Economics, Vol. 5, No. 2, June 1978.
3/ In Zimbabwe, white-owned SSEs in manufacturing are nearly as capitalintensive as larger firms.
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1.08 The experience of countries at a similar level of industrialdevelopment as Zimbabve shows that SSEs tend to be established by peoplewho acquired production and management skills working for larger firms. InZimbabwe this process has been largely limited to white small entrepreneursbecause, in the past, black citizens had little access to skilled andmanagerial positions, little savings and no severance payments to investwhen leaving their jobs. Moreover, It was illegal for Africans to ownestablishments in the so-called first class trading areas, which includedall the major urban centers. Most could not own property in rural areaseither, because communal area land--where most of the black populationlives--is not privately owned. As a result, black businessmen had noproperty to offer as collateral for bank loans. In addition, restrictivelicensing and foreign exchange allocation procedures during UDI discouragednewcomers to business, particularly black entrepreneurs.
1.09 Pre-independence policies also limited the development of theinformal SSEs sector. In the communal lands, located in the poorestecological zones, the main constraint was the poverty of the populationengaged in subsistence agriculture. Migration of the rural poor to urbancenters was controlled by circumscribing black residence to areas(townships) set aside for the purpose and duration of employment only.These measures limited the number of unemployed blacks in urban areas andhence hindered the development of an urban informal sector.
1.10 Since independence, black Zimbabweans have established a numberof small firms by purchasing on credit the equipment and stocks left byemigrating white small entrepreneurs. Although there are some black ownedmanufacturing firms, most new entrepreneurs have gone into retail tradingand services, where lack of capital and technical expertise is less of aconstraint to starting a business. A number of black Zimbabweans have alsoentered the transport and contracting business. About 200 of theseemerging contractors may exist nationwide, one half of whom are capable ofundertaking contracts of up to Z$200,000. In addition, a number ofconstruction brigades have been established in the last few years withGovernment support to work mainly for Government financed constructionprojects.
1.11 The majority of SSEs are sole ownerships and partnerships. Sinceindependence, however, the number of cooperatives, made up mainly of blackZimbabweans, has increased sharply with Government support. By May 1984there were 159 industrial cooperatives, 194 retail trade cooperatives and32 transport cooperatives, with membership totalling about 12,000. Mostnew cooperatives ha-we a minimum of 10 members per cooperative with aminimum initial investment of Z$22,000. The majority of these cooperativesare in trade (e.g. supermarkets and butcheries), although some are intransport and manufacturing.
1.12 The Government is committed to pushing for an increasingcontribution of SSEs to employment and output in all sectors includingmanufacturing and construction as part of its efforts to stimulate thedevelopment of black owned, labor intensive enterprises (para. 1.16 to1.22).
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1.13 Problems and Constraints. Black-owned small enterprises shareseveral important weaknesses. First, the owners usually lack managerialexperience and have problems estimating their working capital needs andadequately costing products and services. Second, some firms haveinadequate equipment as a result of lack of technical know-how or becauseof their inability to obtain term finance for capital investment, or both.This results in low labor productivity and product quality. Third, mostsmall firms suffer from chronic working capital shortages which lead tofrequent production slowdowns. Finally, black-owned enterprises cannotafford their own training programs and are, therefore, affected by the lowskill level of the labor force.
1.14 Lack of an established track record limits the access of SSEs tosuppliers' credits or bank overdraft facilities. When granted, theoverdraft facilities are hardly adequate to cover their working capitalneeds. Moreover, it is difficult, even for skilled blacks, to obtain bankfinance because few of them own property that can be offered ascollateral. Discriminatory laws on urban land ownership have beenrepealed, but high land costs make it difficult for black entrepreneurs toown property in these zones. Rural businesses also cannot offer titledeeds as collateral for bank loans because land in the communal areas isnot privately owned. The Government is trying to resolve this problem bygranting title deeds in selected Growth Centers in the communal areas (para1.19). Cooperatives and small contractors have some particular problems.Many cooperatives formed by persons without previous cooperative experiencehave failed because they have unclear performance standards which -ausemisunderstanding among the members. Government agencies in charge ofcooperatives have not been able to provide adequate support due to staffconstraints and lack of coordination among themselves. Emergingcontractors, on the other hand, suffer from lack of training in sitemanagement, as do the newly established building brigades. The Ministry ofConstruction and National Housing (MCNH) is also not adequately staffedwith experienced technical personnel to provide trained site managers tosmall contractors and building brigades working for Government projects.
1.15 The proposed loan is designed to help overcome these problems andconstraints by strengthening the Small Enterprises Development Corporation(SEDCO), a Government institution created to provide financial, trainingand advisory services to SSEs, Particularly those owned by emerging blackentrepreneurs. The loan will also assist in financing training andadvisory services to the domestic construction industry.
1.16 Government Objectives and Strategy. Both the Government PolicyStatement Growth with Equity (1981) and the National TransitionalDevelopment Plan (1982/83-1984/85) support the development of formal andinformal small- and medium-scale manufacturing and commercialestablishments, particularly in the rural areas. Both documents alsoendorse the creation of cooperatives in all areas of economic activity.The Government views the development of SSEs in the urban and rural areasas a way of achieving its objectives of developing a black businesscommunity ar.d providing additional productive employment to Zimbabwe'sgrowing population. The Government expects that the development of a laborintensive SSE sector, will contribute to increase the labor absorption
capacity of the formal sector, which--even during the period of greatesteconomic growth (1969-74 )--was able to create only 40,000 jobs a year, halfthe increase of the labor force.
1.17 The Government has chosen to implement its strategy by: (a)creating SEDCO to provide financial and technical assistance tc smallenterprises; (b) granting title deeds to black businessmen in selectedareas of the communal lands; (c) assisting small cooperatives; and (d)expanding vocational training. The Government has also done away withformer legal restrictions to land ownership and geographical mobility ofthe black population and is compensating for past discrimination againstemerging black entrepreneurs by giving small firms preferential treatmentin foreign exchange allocations and in assigning small constructionprojects.
1.18 The Small Enterprises Developmen.t Corporation (SEDCO). In theearly seventies, the Government set up two institutions, the SmallIndustries Advisory Service (SIAS) and the Institute of BusinessDevelopment (IOBD), to provide training and management counseling toindustrial and commercial SSEs. Both were non-profit organizations fundedby Government grants and contributions from a few private sector industriesand commercial houses. Towards the end of the decade, the Government setup a 100Z subsidiary, the Development Finance Company (DFC), to provideloans to SSEs. Initially, most of SIAS's assistance was to white-ownedbusinesses, but assistance to black entrepreneurs increased to over 50%during 1981-1983. SIAS, subsequently named the Zimbabwe IndustrialAdvisory Service (ZIAS) and IOBD cperated with few staff and limitedbudgets and were unable to improve their clients' accessibility to credit.The DFC, on the other hand, dissipated its resources during the regimeimmediately preceding independence by making politically-motivated loans,many of which had to be written off. These limitations ultimately led tothe closure of these institutions and the establishment of SEDCO, aparastatal organization which started operations in April 1984. SEDCO'sfunctions, as laid down in its charter, are "to provide assistance whetherin the form of financial assistance, management counselling, traininginformation, advice or otherwise, to cooperatives and small commercial andindustrial entreprises. Paras. 2.03 to 2.38 describe in greater detailSEDCO's functions and structure.
1.19 District Service Centers and Growth Points in the CommunalLands. Since independence, the Government of Zimbabwe has enactedlegislation to give land titles to black citizens in selected areas in thecommunal lands, which can be offered as collateral for bank loans. Fifty-five District Service Centers and 11 Growth points have been selected forthat purpose. Each center will have areas for commerce and industry, andfor the provision of other essential services such as schools, hospitalsand community facilities. The title deeds will be granted in mid-1985,when the process of surveying the land and existing buildings is completed.
1.20 Cooperatives. The Ministry of Lands, Resettlement and RuralDevelopment has overall responsibility for the development of cooperativesin Zimbabwe, although other ministries are also involved. The Ministry'sDepartment of Cooperatives Development (DCD) is supposed to register
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cooperatives, review proposed by-laws, train cooperative uembers inrelevant subjects and offer management and advisory services. DCD'sactivities have been seriously hamprered, bowever, by staff constraints.The Governmant is taking actions to improve DCD's assistance tocooperatives, including obtainIng the provision of technical assistancefrom ILO to help DCD to develop financial training courses for its ownstaff and cooperative members. An interministerial committee has beencreated to coordinate the support to cooperatives provided by differentGovernment agencies. Cooperatives also receive some limited assistancefrom -Zimbabwe Projects-, a U.K.-sponsored charitable organization.
1.21 Vocational and Technical Education. To reduce the shortage ofskilled manpower, a bottleneck to the development of SSEs, the Govermenthas recently founded three new technical colleges and opened to blackstudents two colleges that were for white students only beforeindependence. There are plans for six more in the future to train middlelevel technicians for industry. It hao also created two new VocationalTraining Centers to upgrade workers' skil1', and pLans to establish sixmore in the future. Vocational and technical education suffer from a lackof qualified teachers. Since independence many of the industry technicianswho taught part-time in the training institutions have emigrated. Aidagencies from the U.S.A., Germany and France have recently startedproviding teachers, equipment and finance for these training institutionsin order to help Zimbabwe deal with this problem.
1.22 Government Construction Policies. The Government relies oninternational competitive bidding for procurement in the case of largepublic sector projects. For small projects (e.g. buildings with less thanthre- rtoreys) the Government favors the use of construction brigades andsmall contractors. In 1981, the Ministry of Construction and Nationalfausing initiated a special arrangement ror permitting emergentcontractors, not yet registered with the Ministry, to prove their abilityby executing small projects, (i.e. secondary schools in rural areas). Mostof the 41 selected contractors produced acceptable results on time. Othersimilar schemes followed, of which the latest is being assisted by theAfrican Development Bank, comprising 59 contracts for the construction ofclinics (one-story buildings).
C. The Financial Sector
1.23 Structure. Zimbabwe has a well-developed and, for a sub-saharanLDC, a fairly sophisticated financial sector. This is due to the fact thatHarare (the former Salisbury) served as the financial center of theFederation of Rhodesia and Nyasaland in colonial times. The sector has anarray of diverse institutions, largely modelled on the British financialinstitutions, consisting of the central bank, five commercial banks, fouraccepting houses (merchant or investment banks), two discount houses, fivefinance houses, three building societies, seven development financinginstitutions, the Post Office Savings Bank, over 50 insurance companies, 17insurance brokers, about 1,400 pension and retirement funds, an ExportCredit Insurance Corporation, the Stock Exchange and a number ofunregistered finance companies providing consumer credit (Annex 1). A
feature of Zimbabwe 's financial structure is the integration anddevelopment that has taken place in recent years of financial groups whichprovide a complete range of banking and otber financial services. Thus,most ccmmercial banks also have accepting and f-iance houses assubsidiaries and are shareholders in a discount house.
1.24 The comerciai banks, with a network of over 100 branches,provide the full range of banking services. Three of the five commercialbanks are wholly-owned subsidiaries of British banks or are incorporated inBritain and the remaining two are locally incorporated. The latter are
Ajint-ventures with the Government of Zimbabwe, who bolds a 61% share -tone (39Z held by the Zimbabwean public) and 47Z in the other (53% held by abank owned by Middle Eastern interests). Commercial bDanks accept depositsof all types and typically provide short-term loans and overdrafts tocommerce, industry, mining and commercial farming. These short-tern loans,however, are sometimes rolled over for 2-3 years.
1.25 The accepting houses or merchant banks specialize in thefinancing of foreign trade :hrough acceptance credits, commercial lettersof credit and foreign bills. They accept both demand and time deposits andlend to corporate customers; they also provide other financial servicessucr as flotation of public companies, mergers, acquisitions and capitalire:.onstruction.
1.26 There are five registered finance houses, three of whiceb aresubsidiaries of the eommercial banks operating in Zimbabwe. The financehouses specialize in providiag mediuw-term financing (in the form ofhire-purchase and leasing finence), mainly for comercial and privatsvehicles, tractors and other agricultural, manafacturing and constructionequipment. They normally lend to established businessmen with a good trackrecord who would be able to repay the loans within 3-5 years. In keepingwith the longer term of tiieir lending (an average of three years), theyhave a longer term deposit structure and approximately 50Z of their depositbase is obtained through the issue of certificates of deposit (CDs); themain purchasers of CDs are the two discount houses, large industrialcompanies, irsurance companies, pension funds, and local city governments.
1.27 Other than SEDCO, Zimbabwe also has seven development financeinstitutions, three of which are prIvately owned and four publicly owned.Of the former, IPCORN and AADC 4/ have, in the past, made developmentfinance available on a lisited scale to private sector plantations andindustrial and mining enterprise_ in which their main shareholders areinterested. Their activities in recent years have almost ground to ahalt. The third institution, EDESA, based in Zurich and having its AfricaHeadquarters in Harare, is owned by a coasortium of seven majorinternational banks and fifteen international industrial companies. Itaims at providing equity and loan finance to privately owned enterprises.Except for a recent US$1 million equity and loan investment in a financehouse in which IFC has also participated, EDESA has not been very active inZimbabwe so far. Of the public sector development finance ivstitutions,
4/ Industrial Promotion Corporation of Rhodesia and Nyasaland (IPCORN) andAnglo-American Development Corporation (AADC).
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the Agricultural Finance Corporation (AFC) provides short and long termloans to the agricultural sector and the Industrial Development Corporation(IDC) provides financial and promotional assistance to industrialenterprises, mainly through equity participations. IDC's present policy isto make loans only to companies in which it has equity participation. Forall practical purposes, it has evolved into a Government holding companyfor a number of subsidiaries. Of the remaining two institutions, theDevelopment Finance Company (DFC) was established in rhe late seventies, toprovide financial assistance to emerging small-scale enterpreneurs, but isnow in voluntary liquidation (para 1.31). The Zimbabwe Development Bankwas set up in 1983 to provide medium and long-term finance to theindustrial sector and started operations recently.
1.28 Resource Mobilization. Resource mobilization in Zimbabwe iscarried out quite efficiently by commercial banks through their branchnetwork, accepting houses, finance houses, building societies and the PostOffice Savings Bank-(POSB). The share of the commercial banks in depositmobilization is the largest, followed by building societies, POSB,accepting houses and finance houses, in that order. Total deposits ofthese institutions grew from $Z1.6 billion in 1979 to $Z2.7 billion in1983, or an average annual increase of 13.2%, in nominal terms. As ofDecember 31, 1983, fixed deposits constituted 35% of total depositsfollowed by savings deposits (32%) and demand deposits (20%).
1.29 Interest Rates. Annex 2 gives the evolution of the interest ratestructure for deposits and loans during 1979-84. Since independence,Zimbabwe has followed pragmatic interest rate policies and adjusted itsinterest rate structure to prevailing economic and monetary conditions.For instance, interest rates for 12 month deposits went up from between4%-5.25% in 1980 to between 9.752-12.25% in 1983. Similarly the commercialbanks' prime lending rate increased from 7.5% to 13% during the sameperiod. Their maximum rate on loans and advances is 18% p.a. The maximumrates charged for hire-purchase finance by finance houses also rose frombetween 11%-17.54% in 1980 to 20%-23% in 1983. The Reserve Bank ofZimbabwe (RBZ) exercises some control over the interest rate structure incollaboration with financial institutions operating in the country. Itdetermines the minimum lending rate for commercial banks, the deposit andlending rates of building societies and the deposit rates of the PostOffice Savings Bank. RBZ fixes the maximum deposit and lending rates offinance houses but places no restrictions on deposit rates offered bycommercial banks. The maximum lending rates for commercial banks arelimited by the ceiling in the Usury Act (at present 18%) and, for thefinance houses, by the ceiling in the Hire-Purchase Act (20%-23%).Inflation rates are estimated to average about 14% over the next few yearsthus making interest rates generally positive in real terms.
1..10 Financing of Small-Scale Enterprises. Small-scale enterprises inthe modern sector, which are predominantly owned by white Zimbabweans orforeign investors, have traditionally obtained financing for their
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enterprises through equity contributions by owners, retained earnings,medium-term loans from accepting and finance houses and short-term(revolving) loans from commercial banks. They obtained foreign currencyfor imported plant and equipment from the Government's import licensingsystem. The inadequacy of foreign exchange in recent years has restrictedfinancing for their modernization, balancing and expansion programs. Theemerging black entrepreneurs, on the other hand, have all along faceddifficulties in obtaining credit, even for short-term working capitalrequirements, due to inadequate collateral and lack of a business trackrecord. This project is designed to address tbis problem as well as theinadequacy of management counselling and training facilities for SSEs. Therole and performance of the two institutions established by the previousgovernment in the late seventies to facilitate the provision of credit toemerging SSEs are commented upon In the paragraphs immediately below.
1.31 Development Finance Company (DFC). At the instance of theGovernment, IDC estabAished DFC as a wholly-owned subsidiary in 1979 toprovide loans to emerging black entrepreneurs who did not qualify for loansfrom the existing financial institutions on conventional terms. It had anindependent Board and initial funding of $Z3 million (SZ2 milliora from IDCas equity and loan in equal proportions and $ZI million as a loan fromRBZ). Due to politicization of its decision making and inadequatepolicies, DFC dissipated its resources in primarily politically motivatedloans, many of which had to be written off. As a result, its equity haderoded by about $Z800,000 as of May 31, 1984. DFC is virtually defunct nowand a skeleton staff is trying to collect its remaining loans. IDC hasinitiated steps to put it into voluntary liquidation.
1.32 Finance Trust for Emergent Businessmen (FEMCO). Governmentcreated FEBCO in 1978 as a non-profit making institution to operate acredit guarantee scheme, with 60% ownership by RBZ and 10 by each of thethen existing four foreign banks, to encourage commercial bank lending tosmall-scale emerging entrepreneurs. FEB0C has a small staff fnded byRBZ. The staff appraises SSE loan applications received through theparticipating commercial banks and submits its recommendations to FEBCO'SAdvances Committees consisting of representatives of all shareholders forconsideration. FEBCO conveys the committee's approval to the originatingbanks for further action. Under the scheme, FEBCO and commercial banksshare credit risks on commercial banks' short-tern loans to SSEs on a 50:50basis, with the FEECO share of losses borne by RBZ. Commercial bankconservativeness as well as the black entrepreneurs' lack of a track recordand adequate collateral, have resulted in a modest level of operations forFEBCO. As of February 29, 1984, FEBCO had issued credit guarantees tocommercial banks at an average rate of $Z730,000 (US$584,000) to 144entrepreneurs per year. This level of operations was inadequate to meetthe growing credit needs of the emerging SSEs. Despite the increasingdemand from the emerging black entrepreneurs for short-term as well asmedium-term credits, the banks remain reluctant to significantly expandtheir lending levels.
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D. Bank Strategy
1.33 The Bank's strategy is to support the Government's program ofincreasing the availability of credit and training to small-scaleentrepreneurs, particularly emerging black SSEs. To thils end, the proposedloan would provide both short and longer term financing to SSEs and financetechnical assistance to the Institution (SEDCO) establisbed by theGovernment for this purpose. The development of the small-scale enterprisesector is an Important objective of the Government 's development strategy.Through development of SSEs, the Government is seeking, among other things,to create employment opportunities for and develop entrepreneurship among alarge number of Zimbabweans who so far have remained outside the econonicmainstream and thus to contribute to economic growth and a more balanceddistribution of income and ownership of assets.
II. The Project
Project Objectives
2.01 The proposed project is a pilot operation 1- the small scaleenterprise sector. Its main objectives are to (i) assist SEDCO, now in itsformative stages, in becoming a strong institution capable of providingeffectively both technical and financial assistance to sall, scaleenterprises; (ii) provide resources to the emerging SSE sector, which haspotential for development and employment creation both in urban and ruralareas but thus far has been neglected; (iii) help develop entrepreneurialcapabilities especially among black Z ibabwes; and (iv) improve theefficiency of emergimg small scale contractors Constraints facing smallscale contractors and how best to remove them would also be examined undera study to be funded from the proposed loan.
Project Description
2.02 The project would support the Government's program of providingfinancial assistance, training and management counselling to emerging SSEsin Zimbabwe, including small-scale contractors. Bank assistance would have-the following components:
(a) a credit component of US$8.5 million, representing 85%of the Bank loan, in the form of a Line of credit toSEDCO for onlending to an estimated 470 SSEs,(including small-scale contractors) to be committedover a period of 3 years, for equipment and machinerypurchases as well as for meeting part of their workingcapital requirements;
(b) a technical assistance component of approximatelyUS$600,000 to SEDCO to finance (i) two expatriateadvisors to help improve SEDCO's institutionalcapabilities in appraising and supervising projects,and providing training, management counselling andother advisory services to SSEs; (ii) overseas training
of SEDCO staff in project appraisal and supervision andthe provision of extension services to SSEs; and (iii)office equipment to improve SEDCO's managesent andaccounting systems; and
(c) a technical assistance component of approximatelyUS$900,000 to finance ti) training of Zimbabweancontractors in site and enterprise management; and (ii)a study of the construction industry in Zimbabwe.
The Institution - Small Enterprises Development Corporation (SEDCO)
2.03 Background. Given the inadequacies of the past institutionalframework for providing advisory assistance (para. 1.18) and financialassistance (paras. 1.31 and 1.32) to emerging SSEs, the Government set upSEDCO in 1983 to provide financial assistance, management counselling andtraining to cooperatives and small commercial and industrial enterprises.SEDCO's focus would be to assist the emerging black small-scaleentrepreneurs, although assistance would not be limited to blackZimbabweans. The traditionally conservative and collateral-conscious banksare reluctant to expand their financing to SSEs, (particularly emergingentrepreneurs). The finance houses, on the other hand, have expressedinterest in sponsoring suitable proposals from their clients in need offoreign currency to SEDCO for a fee. SEDCO has reached broad agreementwith the finance houses and is working out with them the detailed terms andconditions of collaboration in financing SSEs.
2.04 Given the above scenario, the Bank has, in its discussions withSEDCO and the Government, agreed to support SEDCO as the principalinstitution providing both financial intermediation and training andadvisory assistance to SSEs, provided the autnorities agreed to carry out anumber of improvements in SEDCO's capital structure, organization, policiesand procedures. The Ministry of Trade and Commerce (MTC), which is SEDCO'sparent ministry, is in agreement. with the institution building measuressuggested by the Bank (spelled out below) and is initiating actionsnecessary to implement them. With these improvements, SEDCO should evolve,over time, into an effective provider of assistance to SSEs.
2.05 Charter. Under an Act of the Parliament, SEDCO was establishedas a wholly Government-owned institution in 1983, and became operational onApril 2, 1984. SEDCO's functions, as spelled out in its charter, aremainly to (a) encourage and assist in the establishment of co-operativesand small commercial and industrial enterprises and (b) provide financialassistance, management counselling and training, inforration and advice tothe enterprises mentioned under (a) above. In order to carry out thesefunctions, SEDCO has been empowered to lend and borrow money and carry outall other ancillary activities, directly or through its agents. The twocardinal principles which SEDCO is required to observe in its operationsare Ci) to have due regard to the Government's economic policy and thenational interests of Zimbabwe and (ii) to conduct its business on soundcoumercial principles.
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2.06 Capital. SEDCO's statute does not require it to have aconventional paid-in capital base. Its funds would consist of -such moneysas may be payable to the Corporation from moneys appropriated for thepurpose by Parliament and 'money as may, with the approval of the Ministryof Finance, Economic Planning and Development, be obtained by theCorporation as loans or development aid funds-. Since it is important fora soundly-Tun financial institution to have an adequate equity base and aset of well-established financial criteria to guide its behaviour, the Banksuggested to the Government and the latter agreed at negotiations that itwould provide SEDCO with an equity base of $Z 5 million before theeffectiveness of the proposed loan.
2.07 Board. The SEDCO Act requires that SEDCO's operations shall becontrolled by a Board which would consist of not less than five and notmore than nine members, to be appointed by the Minister of Trade andCommerce. The members are appointed for a maximum term of three years, onethird of them rotating each year. The present Board consists of sevenmembers, with the Permanent Secretary of the Ministry of Trade and Commerceacting as Chairman. The other members include one representative each fromthe Ministry of Industry and Technology and the Ministry of CormunityDevelopment and Women's Affairs, two Zimbabwean businessmen, a seniorBranch Manager of a commercial bank and SEDCO's General Manager. Thepresent composition of the Board is fairly evenly distributed between civilservants and private sector members. In order to strengthen the expertiseof the Board, the Permanent Secretary of the Ministry of Trade and Commercehas decided to fill the two remaining vacancies on the Board with personshaving experience in finance, business and/or law. The present Chairman ispragmatic and dynamic and has been instruuental in securing Board approvalfor policies enabling SEDCO to operate as a sound and financially viableinstitution. The Board is particularly keen to avoid the institutionalinadequacies and weaknesses which contributed to the demise of DFC, ZIASand IOBD (paras. 1.18, 1.31 and 1.32).
2.08 Organization. Annex 3 provides SEDCO's organization chart.SEDCO has its Head OTfice at Harare and four regional offices at Bulawayo,Masvingo, Mutare and Gweru, which are Zimbabwe's major urban and economiccenters. The Head Office has four departments: Projects, Development,Finance, and Administration. The Projects Department is responsible forappraisal and supervision of all projects in the geographical area servedby the Head Office. Applications for projects in other areas are referredto the concerned regional offices for appraisal and credit evaluations.The Projects Department also provides assistance to the regional offices inproject appraisal and indicates training needs of SSE sponsors to theDevelopment Department. The latter is responsible for project promotionand the provision of training and advisory assistance to SSEs. The FinanceDepartment carries out accounting, financial management, anddebt collection functions. The Administration Department carries outgeneral administration and personnel management, and also acts as theSecretariat for SEDCO's Board. The four regional offices are provided withbetween 2-5 professionals with responsibilities to carry out appraisal,supervision, debt collection and extension service functions.
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2.09 Since SEDCO would be carrying out both financial assistance andtechnical assistance activities, the latter being in the nature ofextension services normally carried out by the Government, SEDCO has, inkeeping with Bank advice, taken steps to set up two separate units withinits organization, the technical assistance unit and the financialassistance unit. The responsibilities of these units have been carefullydelineated. The technical assistance unit would be responsible for alldevelopment, promotional, training and management counselling activities,and the financial assistance unit for project appraisal, supervision,disbursements, debt collection and financial management functions. Theseparation of these two functions would enable SEDCO to make lendingdecisions on financial grounds and avoid possible pitfalls stemming fromexcessive zealousness in promoting projects irrespective of their financialviability. Such bifurcation would also help SEDCO's staff to supervise andmonitor its projects more effectively. SEDCO has already startedmaintaining separate accounts for these activities.
2.10 Management and Stafflng. SEDCO's General Manager, a formerDeputy Secretary in MTC, is a competent and dedicated official ,ho haswithin a short time assembled a staff of good quality, established fourregional offices and a good set of policies for the institution. He isably supported in his task by a Secretary to the Board, who was formerlyhead of IOBD, a Finance Manager and a Development Manager. Recruitment ofa suitable candidate for the Project Manager's position is underway. As ofOctober 31, 1984, SEDCO had a professional staff of 33, including 12 atregional offices, and a support staff of 35. Some of the professionalstaff previously worked for IOBD, ZIAS or DFC and thus have experience inappraisal, supervision, and extension services. SEDCO proposes to increaseits professional staff strength to 38, including 13 at regional offices.Of the 38 professionals, 17 professionals (including eight at regionaloffices) would devote most of their time to providing extension services.SEDCO's middle management and professional staff is of good quality butneeds further training in project appraisal and the provision of trainingand management counselling to SSEs; these training needs are addressed inthe following paragraphs.
2.11 Although some of SEDCO's professional staff have experience inappraising projects and providing advisory assistance to potential SEDCOclients, their skills in these areas need to be strengthened considerably.SEDCO has taken steps to begin to fill these gaps. SEDCO has obtained agrant of $Z I million from CIDA to finance technical assistance to beprovided by the Manitoba Institute of Management (MIM). This grant wouldfund the services of one Assistant to the General Manager for about 15months and additional consultancies for shorter periods to: (i) developmaterials to support SSE management counselling activities in areas such asbookkeeping, inventory control, marketing and financial management; (ii)carry out consultancy demonstration programs; and (iii) train SEDCO'smanagement consultancy staff in field work. MIM is sub-contracting some ofthese tasks to the Barbados Institute of Management and Productivity(BIMAP) which was assisted by MIM some years ago in areas of managementcounselling and which MIM considers has developed into a very competentinstitution. MIM is also proposing to award SEDCO staff some internshipswith BIMAP for short periods.
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2.12 While CIDA's technical assistance is a step in the rightdirection, its short-term nature and primary focus on training in extensionservices make it inadequate in and of itself to enable SEDCO to carry outits varied functions effectively. To covtz this gap, agreement was reachedat negotiations that SEDCO would appoint, before the effectiveness of theproposed loan, an Operations Adviser and a Technical Adviser, each for aperiod of two years initially, to provide technical assistance in thefollowing areas respectively: (a) appraisal and supervision of SSEprojects, and (b) technical appraisal of projects and the provision oftechnical extension services to SSEs (selection of appropriate equipment,operation and maintenance of equipment, procurement of raw materials,marketing, inventory control, etc). Thne proposed Bank loan includes atechnical assistance component (para. 2.02) which would assist SEDCO in (i)funding the two advisory positions and (ii) training its staff inappropriate institutions overseas in project appraisal and provision ofextension services. Training of SEDCO staff in appraising constructionindustry projects would be provided through the technical assistancecomponent for the construction industry (paras 2.39-2.42).
2.13 Policies. Annex 4 contains SEDCO's statement of Policy andOperational Strategy, setting out guidelines for investment, financial andtechnical assistance policies and operational strategy for the next threeyears. The Policy Statement defines a small-scale enterprise (for purposesof SEDCO's operations) as one with total fixed assets not exceeding a valueof $Z 200,000 and employing less than 51 permanent workers and sets theceiling for SEDCO's loans to any one borrower at SZ 100,000. It requiresits borrowers to contribute between 10% to 25% of the cost of projects, thecooperatives and sponsors of very small projects (loans up to $Z 20,000)contributing 10%-15%. It also limits SEDCO's debt to equity ratio at 3:1.The policy statement emphasizes the implementation of an intensive stafftraining program and maintaining staff a-L the minimum level necessary tomonitor its operations effectively. In its operations, SEDCO is requiredto give first priority to projects in the industrial sector and then coenterprises in commercial and service sectors. Commercial and serviceprojects in growth points and in areas where such enterprises do not existwould also receive priority. SEDCO would maintain separate accounts forits technical assistance activities and the Government would providefunding for these activities. SEDCO would also establish a Managed Fund,with special resources provided by the Government, to finance high riskprojects in less developed areas on behalf of and at the risk of theGovernment. The policy statement also requires SEDCO to protect itselfagainst exchange risks on foreign currency borrowings. SEDCO's strategyemphasizes strengthening SEDCO's institutional capabilities through (i)establishment and implementation of appropriate operational procedures and(ii) intensive staff training in project appraisal, supervision, financialmanagement and consultancy skills development. SEDCO's Policy Statement issatisfactory and will not be modified without prior consultation with theBank.
2.14 Lending Terms. SEDCO is authorized to lend money for acquisitionof fixed assets and for permanent as well as short-term working capital.The maturity of loans for the latter purpose does not exceed two years withgrace period of three months, whereas loans for fixed assets and permanentworking capital could be for periods from two to ten years with grace
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period of one to two years. The details of maturity of loans, graceperiods, borrowers' contribution to project costs and the scale ofapplication fees and other charges on loans are given In Annex 5. Securityis taken by way of various instruments including notarial bonds on allmoveable assets, asset and life insurance, and personal surety (the latterparticularly where cooperatives are involved). In addition, SEDCO plans toenter into lease agreements where possible for projects involving durablegoods.
2.15 Interest Rates. SEDCO's policy statement requires that indetermining its interest rate structure it sbould endeavour to ensure thatits interest rates are (i) positive in real terms, as far as possible; (ii)in line with the market rates of interest; and (iii) adequate to cover itsadministrative expenses, provide for loan losses and earn a reasonableprofit. In line with this policy, SEDCO's Board approved in 1984 aninterest rate structure for SEDCO loans ranging from 13.25Z to 18%. Withinthis range SEDCO's Board determined, case by case;- the rate to be chargedon any particular loan. Following a Bank suggestion that SEDCO systematizeand consolidate its interest rates on the basis of specific categories ofborrowers, SEDCO agreed at the negotiations to charge 18X p.a. on loans toprojects in urban areas and 16% p.a. to projects in rural./communal areas.SEDCO also agreed to review its interest rate structure every 6-12 monthsin the light of prevailing market and economic conditions and the criteriaset forth in its policy statement.
2.16 SEDCO also cbarges a one-time administrative fee on a scaleascending with the amount of loan from 0.5X to 5%; this would increase theactual cost of funds to its borrowers (from a minimum of 16.4% to a maximumof 19%). Since most SEDCO loans are likely to be made to projects in urbanareas, the average interest on its loan portfolio is likely to be over 17%which should enable it to cover its financial intermediation costs by FY86and to generate small surpluses on its financial assistance operationsthereafter. With these increases, SEDCO's interest rates aresatisfactory. They compare favorably with the commercial bank prime rateof 13% p.a. and with the 14% to 18% charged to other clients including SSEson a short-term, revolving basis. These amounts, when rolled over,constitute an Important source of term finance. SEDCO's variable interestrate structure with regular adjustments, as appropriate, based on marketdevelopments, is also compatible with past inflation rates ihich during thelast few years have averaged about 14%. Inflation is likely to stay inthat range in the coming years.
2.17 Foreign Exchange Risk. Under its policy statement, SEDCO isrequired to protect itself against exchange risk on its foreign currencyborrowings. Since Bank funds would be used by a large number of relativelyunsophisticated small-scale entrepreneurs, it would not be appropriate topass on the exchange risk to them or to charge them a fee in lieu thereof.In view of this, the Government agreed at the negotiations to assume theexchange risk on the loan and to on-lend the credit component to SEDCO inthe equivalent local currency. The Government wili not charge SEDCO a feefor assuming the exchange risk because SEDCO's interest rates are alreadyhigher than average commercial bank rates. Moreover, by not charging SEDCO
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a fee for assuming the foreign exchange risk, the Government will provideSEDCO with an additional financial margin during its formative yearsenabling it to quickly build up a record of profitability.
2.18 Fees for Technical Assistance Operations. SEDCO's technicalassistance operations consist of: (a) development activities cDmprisingidentification of investment opportunities and preparation of feasibilitystudies and project profiles, and (b) management counselling and trainingactivities. If SEDCO were to pass on the full cost of these services toSSEs, the average cost per client would be $Z 750 per annum for bothtraining and consultancy, an amount which (i) is too high for manyentrepreneurs to bear; and (ii) would serve as a disincentive for SSEs whomost need to take advantage of these services. Therefore, SEDCO hasproposed that the client bear 30Z of the cost of training and consultancyservices, amounting to approximately $Z 225 per annum. For SEDCO clients,this amount could be included in and amortized as part of the loan. SEDCOalso contemplates providing training and management consultancy tosmall-scale entrepreneurs who are not SEDCO borrowers; such entrepreneurswould be charged at a rate of $Z 20 per training or consultancy day,payable in advance. To make up the revenue shortfall in carrying out theseactivities, which are extension-type operations normally performed andunderwritten by Government for other sectors, the Government agreed at thenegotiations to provide funding for SEDCO's -development- activities andshare the major financial burden for SEDCO's training and consultancyservices to its clients. Bank projections show that Government would needto provide SEDCO with on average $Z 650,000 per annum during the next fiveyears to fund these activities.
2.19 Procedures. Appraisals are carried out at SEDCO Head Office iiHarare for projects in the Mashonaland Province and at regional offices forprojects in their respective regions, but the power to approve projects atpresent vests only with the Board. Borrowers submit a loan application andare interviewed by project analysts to ascertain the seriousness of theirapplication before SEDCO staff begin their appraisal. Project analysts inregional offices conduct site visits, prepare a short appraisal report andpresent it to senior management and the Board. SEDCO's Loan Committee,consisting of the General Manager and all department heads at headquarters,evaluates all loan proposals before Board presentation. At present, allprojects, including those for which the project analyst has recommendedrejection, must go to the Loan Committee and Board. Given the large numberof applications received by SEDCO (over 1,000 in its first 7 months ofoperation), of which relatively few represent viable projects, requiringLoan Committee and Board review of rejections is a heavy burden on SEDCOmanagement and is inefficient. It is understandable, however, that theLoan Committee and the Board during the early period of SEDCO's operationswould like to know the nature and purpose of all applications received bySEDCO and the reasons for rejection of any application. This procedure,however, should be revised after the initial phase of SEDCO's development.SEDCO's management has informed the Bank of its intention to seek Boardapproval to delegate the authority to reject unsound applications to theGeneral Manager; this is likely towards the end of FY85.
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2.20 Although SEDCO's project analysts have had some experience inevaluating SSE projects, particularly sole proprietorships, theircapability to appraise more complex projects remains weak. Furthermore,SEDCO staff need training in appraising construction sector projects(para. 2.41). SEDCO has devised a standard format for appraisal reportsand a flowchart detailing its project cycle, but these formats need to beimproved. While for many of SEDC0's projects cash flow analysis willsuffice, for loans in excess of $Z 50,000, SEDCO should introduce moresophisticated project appraisal techniques. It was, therefore, agreed atnegotiations that as part of its normal appraisal procedures SEDCO staffwould calculate the financial rate of return on all projects considered fora loan exceeding Z$50,000 and that no loan in excess of this amount wouldbe approved unless the FRR for the project is at least equal to theinterest rate proposed for the loan. Furthermore, the terms of referencefor the proposed Operations Adviser (para. 2.12) would include thedevelopment and documentation of appraisal guidelines (including FRRcalculations) as well as the development of a training program for projectanalysts in project appraisal.
2.21 Supervision. As SEDCO started approving loans in August 1984,its project analysts have spent most of their time to date appraisin-projects. SEDCO's Acting Project Manager has drawn up a monitoring"checklist", detailing the standard loan agreement covenants for whichcompliance should be verified (insurance, accounting practices, etc.).Further work on its supervision procedures is required, however, to assureadequate coverage of projects and minimize duplication of efforts by theProjects and Development staff. This work would be one of the tasksundertaken by the proposed Operations Advisor (para 2.12).
2.22 Procurement and Disbursement. In keeping with the Bank'sstandard approach, the major responsiblity for procurement would rest withSEDCO's borrowers, who would be expected to procure equipment, goods, etc.in accordance with sound business practices, namely to purchase from themost competit-a sources taking into account, price, quality, deliveryschedule, after sales service, etc. SEDCO's role would be to ensure that,wherever possible, sponsors have obtained competitive quotations from threesuppliers and procured equipment from the most advantageous source. SEDCOconfirmed at the loan negotiations that this procedure was in factfollowed. SEDCO also assured the Bank that it wi'l soon adopt appropriateregulations to reflect this policy. Disbursements, administered by theFinance Department in Harare, are to be made directly to supplieru or tothe borrowers after their share of investment in the project has beenverified.
2.23 Debt Collection. The Finance Department has responsibility fordebt collection, with support from the financial staff in regionaloffices. Clients will receive monthly/quarterly bills and any overdueamounts will be followed up regularly by the financial staff. SEDCO plansto use outside legal counsel for debt collection actions. The FinanceManager has designed an adequate manual record system for the loanportfolio and debt collection functions, including monthly statements ofaccount and aging analyses of arrears. An understanding was reached at
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negotiations that SEDCO would establish a special unit at headquarters tofocus on loan collections and that the proposed Operations Advisor would beasked to help strengthen the existing collection procedures.
2.24 Auditors. SEDCO has appointed Price Waterhouse as its auditorsand recently cozpleted its first audit review with them. Duringnegotiations, an understanding was reached with SEDCO that its futureaudited accounts would be prepared and presented along the lines indicatedin the -Illustrative Form of Audit Reports for Development FinanceCompanies" and submitted to the Bank within six months of the close of thefinancial year.
2.25 Lending Operations. Since it commenced operations in April 1984,SEDCO has received over 1,000 loan applications. As of November 1984,SEDCO had approved 41 projects, for a total of $Z 483,490. Although thesample of approvals is small at this point, Annex 6 and the followingparagraph illustrate some of the basic characteristics of SEDCO 's approvalsto date.
2.26 Of the 41 loans approved, 51.2% were for sole proprietors(accounting for 45% of the value of loans approved) and 26.8% were forcooperatives (amounting to 29Z of the value of loans approved). Theremaining 9 projects were sponsored by private companies and 1partnership. Just under 502 of projects approved were located in urbanareas. All the beneficiaries were erging black entrepreneurs. Theaverage interest rate charged for all projects was 14.3%, and averagematurity just under two years. About 75% of the loan amounts approved willfinance working capital and over 78% of the number of projects approvedwere in the commercial sector. As SEDCO begins to identify investmentopportunities through its Development Department and begins to collaboratewith finance houses, the percentage of commercial projects is expected todecline in favor of industrial projects. Industrial projects approved asof November 1984 included those producing leather goods, furniture, fencingmaterials, canned mushrooms and textiles.
2.27 As of November 1984, SEDCO had completed appraisal reports forapproximately 100 projects, including the 41 approved. The pipeline issomewhat more indicative of SEDCO's future portfolio, in that it containsmore services projects, such as transportation, grinding mills, printers,etc., (24% vs. 5% of approvals) and the average loan is slightly larger.Industrial projects account for 14% of the value of the pipeline. Thesefigures also reveal that SEDCO plans to finance on average just over 50% oftotal project costs, well below the 75-90% limits spelled out in its policystatement. Moreover, most of the proposed loans will finance expansion ofexisting businesses or replacement of equipment, which should help reducethe risks that SEDCO would assume in its financing activities. Finally,although SEDCO will initially finance a substantial amount of workingcapital, its future pipeline will include more industrial and servicesprojects which, on average, have proportionately lower working capitalrequirements than commercial projects.
2.28 Technical Assistance Activities. Technical assistance to SSEs(other than small-scale contractors) will be supplied by the Developmentstaff in SEDCO's head office and regional offices; small-scale contractors
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will benefit from the training and advisory service for the constructionindustry to be undertaken by the Ministry of Labor, Manpower Planning andSocial Welfare (MLMPSW) under the project (para. 2.41). SEDCO's technicalassistance services would principally focus on: (a) training in generalmanagement, bookkeeping, financial management, inventory control,marketing, procurement of raw materials, -equipment maintenance, etc.; and(b) management consultancy to solve problems faced by on-going projects.To a lesser extent, SEDCO would also carry out sectoral studies to identifyinvestment opportunities and prepare project profiles. Project analystswill initially identify the training and consultancy needs of SEDCO clientsduring appraisal, and will provide further recommendations during projectsupervision. Staff from MIM and BDMAP will train SEDCO staff in providingSSE training and consultancy services (para. 2.11).
2.29 Financial Performance and Situation. SEDCO's summarizedfinancial statements for FY84 (for the period April 1 - June 30) are shownin Annexes 7 and 8. As SEDCO has just begun to operate and has no trackrecord, the financial results of its first few months of operations are notindicative of Its future financial condition. Indeed, to date, SEDCO hasrelied largely on grants ($Z 441,000 for the year ended June 30, 1984) fromGovernment to cover its administrative expenses. SEDCO's only other majorsource of income has been interest earned on deposits with other finaacialinstitutions. As a result, SEDCO's current ratio is a very high 1G.8, andshould remain high during its first few years of operations.
2.30 Resources and Strategy. As of October 31, 1984, SEDCO's totalresources, amounting to $Z 1.3 million, consisted of (i) $Z 1.0 million irloan capital and reserves and (ii) $Z 0.3 million in surpluses. As of thesame date, SEDCO had $Z 0.6 million in local currency available for futurecommitments. It has since drawn down another $Z 2 million from theGovernment and is planning to draw down fully by the end of June 1985 the$Z 5 million made available by USAID to the Government.
2.31 Although SEDCO's current pipeline is dominated by working capitalloans to commercial SSEs, in the future SEDCO plans to give preference toloans for industry, services and construction. As a new institution, SEDCOis eager to quickly build up its portfolio, but its management wishes toensure that SEDCO grows at a measured pace without overtaxing staff andinstitutional capability. Thus, SEDCO has stated its intention to restricttotal FY85 loan approvals to 150 and number of offices to the existing 5.This would enable SEDCO's project staff to gain more experience in projectappraisal and supervison and receive on-the-job training before they starthandling significantly higher numbers of appraisals and approvals; theprojected number of loans approved is expected to increase to 250 in FY86and to 300 in FY89. This program of gradual growth is a prudent one.
2.32 Government has indicated that it would like SEDCO to assist, on aselective basis, cooperatives and SSEs in rural growth points with limitedinfrastructure. Government and SEDCO, however, are keenly aware of thepotential risks of such lending to SEDCO 's financial integrity and its costto Government. Therefore, SEDCO proposed to the Government that to theextent that it would make loans to these enterprises for socio-economicreasons, such lending would be done by SEDCO only on a Managed Fund basis,financed entirely by Government. The Managed Fund would help to safeguard
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SEDCO's capital and would provide Government on an annual basis with aclear measure of the costs of lending to those higher risk, and highercost projects. Government agreed at negotiations to establish such afund. In working out the detailed arrangements for the Managed Fund, SEDCOand Government have agreed on the following basic principles:
(i) only those projects which have developmental potentialbut are to be located in areas with limitedinfrastructure would be eligible. Even in these cases,the minimum equity contribution required ofentrepreneurs in SEDCO's policy statement would apply;
(ii) SEDCO would finance such projects on behalf of theGovernmert without itself assuming any credit risk andonly to the extent that funds were available in theManaged Fund;
(iii) SEDCO would be compensated for all administrativeexpenses incurred in conducting such operations;
(iv) Government would ensure that the volume of theseoperations would not impose an undue administrativeburden on SEDCO; and
(v) the Managed Fund operation would be reviewed annuallyby the Government.
2.33 Finance House Collaboration. SEDCO has been making efforts toenlist the support of existing financial institutions to provide financialassistance to a broad spectrum of SSEs. Although commercial banks remainreluctant to significantly expand their role in the SSE sector, theirFinance House subsidiaries have expressed interest in collaborating withSEDCO in providing term financing to SSEs. Although details are stillbeing worked out, the arrangements with the finance houses are broadlyalong the following lines. Finance houses would identify clients needingforeign exchange loans and would prepare appraisal reports for submissionto SEDCO. SEDCO would evaluate the loan, and if approved, would beresponsible for disbursements and supervision. SEDCO would have the optionof seeking finance house assistance in debt collection as well. SEDCOwould charge its normal rates for such loans, but would pay a fee up to 2Zto the finance houses for their participation. This arrangement wouldenable SEDCO staff to observe and learn from other institutions'well-established credit policies and procedures, and would help improve theoveraU quality of SEDCO's portfolio.
2.34 Forecast Operations. SEDCO's forecast operations for FY85-89 areshown in Annex 9. Total approvals are expeated to increase from 150projects in 1985 to 250 in 1986 and 300 from 1987 onward. This increaseassumes that SEDCO will continue to process about 900 applications peryear, but will approve a greater proportion as the overall quality ofapplications increases. In addition, the loan amounts approved are
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projected to Increase by 52 p.a. in real terms, reflecting SEDCO'sincreasing capacity to handle larger and more complex projects. Totalapprovals over the 5 year period (including loans originating from financehouses) will thus amount to $Z 34.6 million. Distribution of total amountsapproved by sectol is expected to be as follows: cmmmerce, 43.5Z; industry,18.8X; construction, 5.4-z services, 16.8%; and loans origiuating fromfinance houses, 16.4Z. Commiiments and disbursements are forecast to be95% and 85Z of approval levels. Beginning in FY86, finance houses couldchannel approximately $Z 1 million through SEDCG, or about 7Z of tneircurrent hire purchase financing. The finance houses anticipate strongdemand for such a program, as at present they do not have access to foreignexchange to meet the needs of their clients.
2.36 Resource Requirements. SEDCO's resource requirements over thefour year period FY85-88 are expected to total $Z 22.5 million, as detailedbelow. This amount represents the br:st estimate of SEDCO's projectedoperations, but may understate somewhat the demand for credit, particularlyfrom finance houses for foreign exchange resources.
Sources of FundsCollections 8,236Unrepayable Capital (from Government out of USA.n D funds) 5,000Borrowings - BDC 11 s 900
Total al ts3t
Resources Available for Future Commitments 2,,608
The proposed 'World Bank line of credit of US$8.5 million ($Z 11.9 million)would represent about 52.4Z of SEDCn's total resource needs. GoSvernmentwould mke available to SEDCO Z$5 million from USAID as equity for lendingactivities. In addition, Government will fund the proposed Managed Fundand provide SEDCO continuing support to meet projected shortfalls ia ftsfinancial and tecimical assistance units (para. 2.37). Although thepreceding table shows that SEDCO would have approximately $Z 2.6 millionavailable for future commitment at the end of FY88, this surplus would meetonly 24% of SEDCO's FY89 projected commitments. In any event, SEDCO mayneed some cushion to cover increased demand from finance houses or higherthan projected commitments.* SEDJCO plans to seek additional funding forfuture operations from other sources, including bilateral and multilateralagencies as well as the Government.
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2.37 Projected Financial Condition. SEDCO's projected financialstatements and ratios for the period FY85 through 1989 are shown in Annexes10-13. SEDCO's administrative expenses iu its early years are highrelative to other DFCs because (i) they have hired their full staffcomplement before commencing operations; and (it) salaries, which compriseover 60% of SEDCO's administrative costs, are high in Zimbabwe relative toother developing countries. It is appropriate then, that SEDCO shouldreceive Government funding to cover its losses on financial assistanceactivities during its formative years. By charging adequate interest ratesand endeavoring to keep administrative costs down to a reasouable level,Government contributions to the financial assistance unit are projected tobe eliminated by FY86. Thereafter, SEDCO is expected to generatesufficient surpluses on its financial assistance unit to place it on asound financial basis. On the other hand, SEDC0 would require continuousGovernment funding for its technical assistance unit (para. 2.18). TotalGovernment contributions (including unrepayable capital) to SEDCO areforecast to be about $Z 8.5 million over the five year period FY85-89 asshown below.
Year Ending June 30 1985 1986 1987 1988 19895$Z '000)
Government Contribution -Financial Assistance Unit 321.4 - - -
Government Contribution -Technical Assistance Unit 411.3 580.4 643.4 715.5 798.4
Government Contribution -(USAID Funds) for onlending 5,000.0 - - - -
Total Government Support 5,732.7 580.4 643.4 715.5 798.4
Total Government Support 1985 - 1989 = 8,470.4
Of this amount, $Z 0.3 million would fund financial assistance activitiesand $Z 3.2 million would fund the technical assistance program. AlthoughSEDCO's financial assistance unit is likely to break-even and start makinga small profit as from FY86, agreement was reached at loan negotiationsthat Government would fund any shortfall in SEDCO's income to cover theexpenses of the Financial Assistance Unit during the next 3 years. To helpSEDCO strengthen its institutional capabilities, Government agreed atnegotiations to pass on the proceeds of the proposed US$600,000 technicalassistance component to SEDCO as a grant for financing key advisers andtraining SEDCO staff. To strengthen SEDCO's capital structure, theGovernment has agreed to provide SEDO0 with a capital base of $Z5 million.
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Such a capital base is necessary for SEDCO to borrow funds for futureoperations and to maintain its debt/equity ratio below 3:1 as required inits policy statement. This prudent ratio is considered necessary at thisstage because SEDCO, a newly established institution, is yet to develop aportfolio of sound projects and a record of good financial performance.
2.38 With Government providing support for its administrative expensesas outlined in para. 2.37 above, SEDCO's financial assistance activitiesshould be profitable beginning in FY86. SEDCO's proflt on its financialassistance activities is expected to be $Z 353,000 in FY87 and $Z 887,100in FY89. Throughout the period, SEDCO's long-term debt/equity ratio wouldaverage a low 0.5, and its current ratio would remain high at an average13:1. Administrative expenses for the financial assistance unit woulddecline rapidly from 15.6% of average total assets in FY85 to 6.1Z byFY89. SEDCO's debt service coverage would average a high 17.0 during theperiod because SEDCO's subloans will have a much shorter amortizationperiod than the Bank loan.
Construction Industry Component
2.39 Although the construction industry is 7imbabwe is wellestablished, European' firms and managers have traditionally beendominant. Since 1980 the structure of the local construction industry hassignificantly changed, with building brigades, construction cooperativesand emergent contractors coupeting for construction contracts. Due toemigration of a number of white Zimbabweans, however, both the Governmentand the private sector are sbort of experienced personnel. In addition,the government's policy in processing construction work and allocatingforeign exchange to construction enterprises has significantly changed inrecent years with the government wanting to play a more active role In thecontracting industry. Therefore, the Government has requested that theBank assist in financing training and advisory services to the domesticconstruction industry. In addition, a study was considered necessary toprovide up-to-date information on the potential and constraints of thelocal construction industry and to include recommendations for improvedperformance and policy adjustments taking into account the findings andproposals of previous relevant studies.
2.40 The construction industry component of the project seeks toassist the Government in developing the magerial capability of emergingsmall-scale contractors, building co-operatives and brigade supervisors.The component would employ consultants to:
(a) provide training to local instructors in site and enterprisemanagement;
(b) train work superintendents, inspectors and emergent contractorsin, and provide advisory services on, site mnmagement;
(c) train emerging small-scale contractors in enterprise management;
(e) prepare a study of the local construction industry; and
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(d) train SEDCO staff and assist them in appraising small-scalecontractors.
The Ministry of Lator, Manpower Planning and Social Welfare (MLMPSW), whichis responsible for organizing and conducting all kinds of training underpublic sector auspices in Zimbabwe, would be the executing agency for thiscomponent. Proposed terms of reference for the training program and thestudy are given in Annexes 15 and 16 respectively. The training programwould be conducted with the assistance of a Steering Committee comprisingrepresentatives of the Construction Industry Federation of Zimbabwe(CIFOZ), a private sector organization which includes the Zimbabwe Buildingand Allied Trades Association (ZIMBATA) and the Federation of CivilEngineering Contractors (FCEC). The participation of these twoassociations would be important for the training program's success.
2.41 Site management training would be provided to managers of allsectors of the domestic construction industry. Training in enterprisemanagement will be offered for domestic contractors with individualcontracts not exceeding $Z 200,000 and who lack the human, financial orphysical resources to execute construction work efficiently. Classes wouldinclude both construction sector participants as well as SEDCO staff andpotential trainers as observers and would cover site management, tenderpreparation, contractual obligations and enterprise growth management.Advisory services and field visits would supplement the courses. Advisoryservices would also be provided to SEDCO to help evaluate construction loanapplications.
2.42 Two experts would provide appropriate expertise and direction tothe program. Funds are also available to furnish other consultants on ashort-term basis to deal with specific topics, if necessary. In additionto the experts, 10 local instructors would be trained to carry on theprogram after the initial two years and to expand it beyond Harare. Localinstructors would also assist the experts in adapting training materials tosuit local conditions. Total component costs are estimated at $Z 1.5million, to be financed 85% by the Bank and 152 by the GOZ. It isanticipated that the study and training would require 12 and 18 monthsrespectively for completion.
III. THE LOAN
Features of the Proposed Loan
3.01 The proposed Bank loan of US$10 million would be made to theGovernment of Zimbabwe on variable interest rate, with a fixed amortizationschedule for 17 years, including four years of grace, and commitmentcharges.
3.02 The Government would on-lend US$8.5 million equivalent out of theproposed loan to SEDCO, under a subsidiary loan agreement, which would besatisfactory to the Bank, with a fixed amortization schedule for 15 yearsincluding four years of grace on the terms and conditions described below(para 3.03). The Government would pass on US$1.5 million to (a) the
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Ministry of Labour, Manpower Planning and Social Welfare (US$0.9 millionequivalent) to finance training and advisory services to the constructionIndustry and a study of the construction sector and (b) SEDCO (US$0.6million equivalent) to finance two advisors and overseas training of SEDC0professionals. During loan negotiations, the Government agreed to pass onthe technical assistance component to SEDCO as a grant.
3.03 The Government would on-lend US$8.5 million equivalent by way ofa credit line to SEDCO at the rate of interest fixed by the Government forloans to its parastatals, at present 9.75% p.s. Given the lack ofsophistication of small-scale borrowers who would benefit from this line ofcredit, the exchange risk on the amount of loan on-lent to SED)O would beborne by the Government (para. 2.17). Neither SEDCO nor the smallborrowers would be required to pay commitment charges on the undisbursedloan/sub-loans respectively. SEDC0 is a new institution which needs timeto build its business to a profitable level. Moreover, its borrowers arerelatively unsophisticated and may misinterpret the rationale for thecharge, particularly bec-ause they would be required to pay other charges(Annex 5) in addition to interest. The Government agreed at negotiationsto assume the exchange risk on the loan and the variable interest risk onthe credit component of the Bank loan onlent to SEDC0.
3.04 SEDCO would pass on funds from the line of credit at 18% p.a. toprojects In urban areas and at 16% p.a. to projects in rural areas, withfixed amortization schedules depending on the nature and the debt servicingcapacity of the sub-project, but not exceeding 7 years. The sub-loanswould finance capital equipment and machinery and working capitalrequirements of sub-projects. Since most SSE equipment would be locallyfabricated with substantially imported inputs, accounting for 70% of theequipment costs, to simplify loan administration Bank funds would financenot more than 70% of the sub-project costs, with financing for workingcapital not exceeding 50% of the sub-loan. In case of imported goods, theBank funds would finance 100% of the foreign exchange cost. The line ofcredit would also finance sub-projects for small-scale contractors. SEDC0would ensure that the financial rate of return (FRR) is calculated on allsub-projects receiving sub-loans exceeding $Z50,000 and that the FRR is notbelow the rate of interest on the sub-loan.
3.05 SEDC0 would be allowed a free limit of US$50,000 after the Bankhas reviewed and approved the first ten sub-projects and is satisfied thatthe quality of SEDCO's appraisals has reached the standards acceptable tothe Bank. These measures would enable the Bank to review about 15% of thesub-loans financed out of the Bank's line of credit. In addition,supervision missions will review a sample of free-limit sub-projects toascertain that these projects meet acceptable appraisal standards and arein line with project objectives.
Project Implementation
3.06 Reporting Requirements. SEDCO would be required to submitquarterly reports which would include a summary of operations, financialstatements, resources position, statement of arrears and a statement of
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projects in difficulties. It would also be required to submit auditedannual accounts, prepared in accordance with the Bank guidelines for auditof DFCs, by qualified auditors, acceptable to the Bank within six monthsafter the close of the year. MUMPSW, which would be the executing agencyfor the technical assistance component for the construction industry, wouldsubmit quarterly reports on the progress of implementation of the trainingcourses and the construction sector study as well as audited annualaccounts.
3.07 Procurement and Consultants' Services. Procurement of goods andservices under the line of credit to SEDCO would be in line with proceduresfollowed by Bank-assisted DFCs, namely, on the basis of competitivequotations from the main sources of supply, to ensure that purchases aremade from the most advantageous source. The qualifications of consultantsselected under the project and the terms and conditions of their employmentvould be subject to the approval of the Bank. The qualifications and termsand conditioas of employment of experts for SEDCO to be financed under thetechnical assistance component would also be acceptable to the Bank.
Disbursement
3.08 Proceeds of the loan would be disbursed for:
(a) 10OZ of the total expenditure approved orauthorized for sub-projects by the Bank,representing up to 70 of the cost of sub-projectsfinanced by SEDCO;
(b) 70% of local expenditures for services ofconsultants domiciled in Zimbabwe and 100% offoreign expenditures for services of otherconsultants;
(c) 100% of foreign expenditures and 70% of localexpenditures for equipment and vehicles.
3.09 Withdrawals for the sub-project component will be submitted understatements of expenditure; all other withdrawals will be fully documented.A review of our documentation requirements will be made six months afterdisbursements begin.
3.10 In order to expedite disbursement of funds, it was agreed duringnegotiations that the Government would open a Special Account (revolvingfund) with an initial deposit of $400,000 representing estimateddisbursements over a three month period in the Reserve Bank of Zimbabwe inSEDCO's nawe to finance the Bank's share of SEDCO expenditures. Depositsinto the account will be made through the U.S. correspondent bank ofReserve Bank of Zimbabwe. Replenishment applications will be submittedmonthly or when the fund has been diminished by half, Whichever occurssooner.
3.11 The estimated disbursement schedule (Annex 14) is in line withthe Region-wide sectoral disbursement profile for the IDF sector (7 years).
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There are, however, good prospects that because of the establishment of theSpecial Account the loan would be disbursed faster than indicated in thehistorical disbursement profile. Assuming the loan becomes effective bySeptember 1, 1985, the credit component would be fully disbursed by thefirst quarter of FY93. The last date for submission of sub-projects shouldbe June 30, 1989 and the closing date December 31, 1992. The technicalassistance component for SEDCO is estimated to be disbursed by the fourthquarter of FY89 and that for the construction industry by the third quarterof FY88. The project is expected to be completed in about seven years.
Benefits and Risks
3.12 Benefits. The project is expected to play a critical role instrengthening the Government program to provide an effective integratedpackage of technical and financial support to small-scale enterprises(including contractors), particularly those set up by emerging blackentrepreneurs who do not presently have adequate access to institutionalcredit or technical assistance. Institution building assistance to SEDCOin its formative years would considerably improve its operational andfinancial policies and strengthen its capability to provide managementcounselling and training to SSEs. The project would also help (i) enhancethe technical skills and develop entrepreneurial capabilities ofsmall-scale entrepreneurs, particLlarly of the black Ziubabweans, and thushelp redress the highly dualistic socio-economic structure of the country;and (ii) increase the availability of credit to the emerging SSEs andensure that recipients of credit also receive adequate counselling andtraining. It is estimated that the Bank funds would furnish credit toabout 470 SSEs and help create employment for about 3,900 persons at anestimated average cost per job of only US$3,100. The proposed Bankassistance may also play a catalytic role in attracting additionalbilateral and multilateral support to SSEs.
3.13 Risks. There is a risk that Government, for socio-economicreasons, may ask SEDCO to expand its operations to marginal enterprises inrural areas with limited infrastructure. This pressure could adverselyaffect SEDCO's financial integrity and efficiency particularly during itsformative years. This risk is mitigated, however, by the following actionscontemplated/initiated by SEDCO: (i) providing training and managementcounselling to SSEs; (ii) appointing experienced advisers to establishappropriate appraisal and supervision procedures; (iii) limiting lendingoperations to levels which would be consistent with the capability ofSEDCO's staff to manage efficiently; (iv) meeting credit demands for highrisk projects only out of funds provided by the Government by way of aspecial 'Nanaged Fund" for which SEDCO would not assume any credit risk;and (v) adopting policies and strategies to achieve financial viability forits financing unit. Bank supervision missions would also closely monitorSEDCO's performance and progress in these areas.
IV. AGREEMENTS AND UNDERSTANDINGS REACHED AT NEGOTIATIONS
4.01 During negotiations agreements were reached with the Governmentand SEDCO on the following:
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(a) With the Government that it will
(i) provide SEDCO with an equity base of $Z 5 millionbefore loan effectiveness (para. 2.06);
(ii) fund on a continuing basis the cost of SEDCO'stechnical assistance unit (para. 2.18);
(iii) provide SEDCO with financing for a Kariuged Fund'for high risk operations in areas with limitedinfrastructure (para. 2.32);
(iv) fund during the first three years of SEDCO'soperations the shortfall in SEDCO's income tocover the expenses of its Financial AssistanceUnit (para. 2.37);
(v) pass on the technical assistance component of theBank loan to SEDCO as a grant (para. 3.02);
(vi) assume exchange rate risk and variable interestrisk on the credit component of the Bank loanonlent to SEDCO (paras. 2.17 and 3.03); and
(vii) establish a Special Account with the Reserve Bankof Zimbabwe for expediting disbursements ofsub-loans and the technical assistance componentfor SEDCO out of the Bank loan (para. 3.10).
(b) With SEDCO that it will
(i} appoint two experts (Operations Advisor andTechnical Advisor) before loan effectiveness(para. 2.12);
(ii) not modify its policy statement without priorconsultation with the Bank (para. 2.13);
(iii) charge interest rate of 18 percent p.a. on itsloans to projects in urban areas and 16% on itsloans in rural areas and review Its interest ratestructure with the Bank every 6-12 months (para.2.15);
(iv) have its audited accounts prepared and presentedalong the lines indicated in the 'IllustrativeForm of Audit Reports for DFCs and submit them tothe Bank within six months of the close of theyear (para. 2.24).
ZIHBABWE
Small-Scale Enterprise Project
Structure of Financial System(as of December 31, 1983)
.1. Barclaya 1. Merchant Bank of Central Africa 1. Grindlays Industrial 61. Beverly 1, Bard2. Standard 2. RAL Merchant Bank Commercial Finance 2. Central Africa 2. DCZ3. Grindlay Foreign 3. Standard Merchant Bank 2. Standard Finance 3. Foundere4, BCCZ - 4. Syfrets 3. UDC Total Assets $ $Z131S. Zimbank Local 4. Scotfin Total Assets $ Z652*
Total Assets - MO35n 5. FincorTotal Aa.etb-$Z1,509m
Total Assets - $Z202m
Non-Bank Financial lnstitutions
Development Finance Institutions Post Office Pension and Inudrance Credit Stock ; UtedSavings Bank Provident Funds Companies Ins. Corp Exchange Finance
nEVELOPHENT DIVISION| PDIT DIISO FINC D|IO AD ITArol(ooo D Io |
| 9.Vrsla-ioXals
GI^lUNASVINCO
2 kotongoaloolj H
2 kftolesoals
RAPIDJanuary 1985
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Annex 4Page 1 of 11
ZIMBABWE
Suall-Scale Enterprise Project
Small Enterprises Development CorporationPolicy Statement Action Plan and Strategy Statement
1. Policy Statement
General. In line with the objectives for the development ofco-operatives and small scale commercial and industrial enterprises set outin the Transitional Development Plan SEDCO's functions as laid down insection 18 of the SEDCO Act are to:
(a) encourage and assist in the establishment ofco-operatives and commercial or industrial enterprises;
(b) provide assistance, whether in the form of financialassistance, management counselling and training,information advice or otherwise, to co-operatives andsmall commercial or industrial enterprises;
(c) advise the Minister on all matters connected withco-operatives and small commercial or industrialenterprises;
(d) do all things which by this Act or any other enactmentare required or permitted to be done by theCorporation.
2. Definition
For purposes of SEDCO's assistance, a small scale enterprise isdefined as one with total fixed assets not exceeding a value of $200,000 oremploying lesa than 50 permanent workers.
3. Organizational Structure
3.1 In order to meet the objectives and carry out the functionsoutlined above, SEDCO will establish an organization structure which willprovide both financial and technical assistance, directly or incollaboration with other institutions, to cooperatives and small scalecommercial and industrial enterprises, including those engaged in buildingand civil engineering contracts and related trades both in urban and ruralareas through its head office in Harare and branch/regional offices.
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Annex 4Page 2 of 11
3.2 Allocation of Responsibilities within the OrganizationalStructure. SEDCO will maintain the following Divisions with dutiesascribed as under:
(a) Administrative Division
(i) All the Corporation's secretarial duties.
(ii) Preparing all documentation in respect of loans.
(iii) Ma'intaining records in respect of all clients.
(iv) Personnel management.
Sv) Co-ordination.
(vi) Public relations.
gvii) Legal issues and arrangements for valuation ofsecurity.
(viii) General administration.
(b) Development Division
(i) Research into new opportunities.
(ii) Enterprises development and feasibility studies.
(iii) Comprehensive consultancy services.
(iv) Liaise with professional, educational and businessinstitutions.
(v) Identification of markets/exports.
(vi) Establishment of training requirements.
tvii) Seminars and conferences.
(viii) In-service Staff Development both in house andexternal.
(ix) Liaison with the Financial and Project Divisionsbut staff will not be involved in debt collection.
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Annex 4Page 3 of I1
(c) Project Division
(1) Assessment of loan applications.
(ii) Project irvestigations/reports.
(uti) Recommendation of loans.
(iv) Monitoring and followp.
(v) Reporting on doubtful cases to the Finance andDevelopment Divisions.
(d) Finace Division
(i) Disburseamt of loans.
(ii) Credit controlldebt recovery.
(ii) Inspection of client's accounts.
(iv) Preparation of monthly/yearly accounts andschedules.
(v) Budgets.
(vi) Financial structure of the Corporation.
(vii) Financial reports of the Corporation.
(viii) Advising the Projects and Development divisions ofdoubtful loans.
4. Office Acco_odation
SEDO will work on the existing basis of the Read Office inEarare and four branch offices in Bulawayo, Gheru, Masvingo and !utare.
5. Staff
The staffing component shall be maintained at the minimal levelrequired to achieve the optimal norn of loans that may be muonitoredefficiently. The staff complement, will also be subject to considerationbeing given to the furtherance of Government policy endeavour to achieve anequitable geographical spread of the 8ervices of the organisation.
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Annex 4Page 4 of 11
6. Collaboration with Existing Financial Institutions
6.1 In providing financial assistance to small-scale enterprisesSEDCO shall seek, as far as possible the collaboration of existingfinancial institutions in the country with a view to providing services tothe approved entrepreneurs as near their places of business as possible.For this purpose SEDCO may enter into agreements individually orcollectively with the financial institutions setting out the procedures ofcollaboration and terms and conditions of providing the assistance,including arrangements for sharing credit risks.
6.2 In cases where because of lack of security, inadequacy ofcollateral or some other reason (such as remoteness of the area) thefinancial institutions are unwilling to provide assistance to an applicantwho in the opinion of SEDCO is considered capable of undertaking a projectwhich meets SEDCO's normal criteria of project selection, SEDCO may providefinancing to such applicant directly without the collaboration of afinancial institution.
7. Priority Areas
7.1 In accordance with the principles laid down in section 20 of theAct priority shall be given to:
Ca) Industrial enterprises;(b) Commercial and service enterprises in growth points;(c) Commercial and service enterprises where these do not
exist.
7.2 In selecting projects for assistance, SEDCO shall give priorityto projects which are designed to utilize economically domestic rawmaterials and are labour intensive. Other criteria shall be:
(a) Skill formation and development;(b) Promotion of national savings;(c) Foreign currency earnings or savings;(d) Provision of necessities to underdeveloped areas;(e) Development of technology and improvement of
efficiency;(f) Decentralisation of economic activity.
8. Eligibility
Applicants for financial assistance may be registeredco-operativep, sole proprietors, partnerships or limited liabilitycompanies. Applicants shall be Zimbabwe citizens or co-operatives andcompanies registered under the laws of Zimbabwe.
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Annex 4Page 5 of 11
9. Financial Policy
SEDCO shall:
(a) establish its operations on sound financial principles andthereby create an effective and viable institution for theimplementation of Government stated policy of co-operatives,small-scale commercial and industrial enterprises;
(b) obtain from the Government adequate capital grants for carryingout its operations and establish a de facto equity baseconsisting of unrecallable capital. However the Corporationshall not at any time borrow funds internal or external in excessof three times its unimpaired unrecallable capital;
(c) seek funding for its technical assistance services not only frouGovernment but also from all possible alternative sources,national, overseas or international;
(d) establish as soon as possible after the commencement of itsoperations a reserve fund by appropriating sufficient amountsfrom its Income, to provide for possible loan losses and anyother unforeseen contingencies;
Ce) maintain at all times a satisfactory balance between thematurities of its obligations and those of the loans it grants;
Cf) at all times seek to protect itself against exchange risks onforeign currency borrowings;
(g) finance only those projects which are technically feasible,economically sound, financially viable and competently managed,and in assessing viability pay due regard to the followingfactors:
(i) the existence of an adequate infrastructure;(ii) the experience of the applicant in the particular
project sector; andCiii) in the case of an existing enterprise the
desirability of expansion.
(h) create a -managed fund' to enable the Corporation to meet highrisk projects. The managed fund would be obtained fromGovernment and managed by SEDCO. High risk projects are those:
(i) set up in areas of poor or inadequateinfrastructure or
(ii) sponsored by persons who have no previousexperience and little or no investments of theirown.
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Annex 4Page 6 of 11
(i) with the objective of being financially self sufficient by 1990,seek further funding from Government for purely developmentalcosts which are not attributable to a particular project orprojects. To implement this SEDCD will provide for separateaccounting systems for technical assistance and development.
10. Type of Financial Assistance
10.1 SEDCO's finamcial assistance may be for:
(a) acquisition of fixed assets such as building, machineryequipment, permanent working capital or
(b) short-term working capital.
10.2 Loans for fixed assets or permanent working capital shall be formedium-tern (2-5 years) or long-term (5-10 years) depending upon theability of the borrower to service repayment and on the economic life ofequipment. Short-term loans for workdng capital requirement would be forperiods not exceeding 2 years.
10.3 All loans shall have adequate grace periods depending on thenature of projects but will not normally exceed three months for short-termloans, one year for medium-term loans and 2 years for long-term loans.
10.4 SEDCO's total exposure to any one borrower shall not exceedz$100p000.
11. Condition of the Loan
11.1 SEDCO shall not finance in any circumstances the full cost of aproject. In case of projects whose total costs do not exceed Z$20,000 theborrower if a co-operative will be required to put in as equitycontribution 10-15X, and 15-252 for loan amounts above Z$20,000. For allothers 15-25Z equity for loan amounts below Z$20,000 and 25-30% equity forloan amounts above Z$20,000.
11.2 As a general rule, SEDCO shall adopt a scale of charges, fees andinterest rates which will enable it as soon as possible to meet its ownadministrative and financial expenses without subsidies or subventions fromthe Government, although during its formative yers it would need supportfrom the Government.
11.3 SEDCO shall charge an application fee of Z$5 for co-operativesand Z$10 for other applicants payable at the time of application.
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Annex 4Page 7 of 11
11.4 SEDCO shall charge a one-time administrative charge at the timeof first disbursement of the loan to cover its expenses in administeringand supervising the loan. This charge will be calculated according to thefollowing formnula:
C - N ( N + 1) , 2 where C is the charge and Nthe number of thousands of dollars of the loan.
11.5 In deciding on a structure of interest rates to be charged to itsborrowers SEDCO shall endeavour to ensure that as far as possible suchinterest rates are positive in real terms and are in line with ratescharged by other financial institutions for similar loans and aresufficient to cover its administrative costs, provide for possible loanlosses and enable it to earn a reasonable profit. In cases where, in orderto implement Government policy to reach out and provide financial assistance in remote areas, it has to reduce its interest rates and otbercharges and take additional risks it will seek specific compensation fromGovernment for undertaking such operations as stated above.
11.6 Specific conditions in respect of provision of managerial ortechnical experience or training may be imposed.
12. Financial Disbursement
12.1 SEDCO shall in furtherance of Government policy endeavour toachieve an equitable geographical spread within the provinces.
12.2 Total disbursement In the following years will depend upon:
(a) Experience gained in the first year of operation.(b) The amount of Government grants to SEDCO for loan
purposes.(c) Possible overseas aid.(d) SEDCO's ability to raise loan finance.
12.3 Total disbursements shall be subject to the capability of thestaff to provide effective and adequate appraisal, analysis, consultancyand monitoring requirements.
13. Methods of Financing
13.1 The Corporation may consider in the implementation of itsfinancial policy any or all of the following:
(a) Share financing loans
(i) Category A
The Corporation may extend loans to Zimbabweanexecutives up to maximim of 2 years income for
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4.Page 8 of 11
purpose of acquiring shares in a particularcompany. The important prerequisite is that theymst be employed by' the compan and receiveregular or fixed remeratio and allowences.
(ii) Category B
Under this category, the Zimbabwean individualsneed not necessarily be in full-tim employment inthat company, The applicant can be any Zimbabneancitizen or d IOOZ owned Zimbabwean company andco-opcz.cive.
14. Employee Share Ownership Plan (ESOP)
This scheme my be offered to companies with a specific plan toenable the employees to purchase and own shares in the compadegs.
15. Guarantees
The Corporation may also offer medium and long-term guaranteesfor industrial mschinery and equipment financing extended by machinerysuppliers or otber financial ns titutions. A guarantee fee will be payableon the guaranteed amount outstanding. The criteria, limits and securityrequirements shall be the same as for loans where applicable.
16. Leasing or Plant Hire
The Corporation may also offer leasin:g facilities up to fiveyears. After the expiry of the primry lease period the lessee will begiven the option to either carry on leasing the items at a reduced rent orto acquire the item at preferential prices.
17. Technical Assistance Policy
17.1 SEDCO shall provide technical assistance to the extent feasibleand needed in the form of promotional assistance, training and ementconsultancy to all co-operative and small-scale enterprises who arerecipients of its loans directly or who obtain loans from other financialinstitutions wbo are collaborating with SEDCO In furthering its objectives.
17.2 SEDCO shall charge adequate fees for providing technicalassistance.
17.3 Where SEDCO Is required in the furtherance of Government policyIn respect of technical assistance to provide:
(a) out-reach services to remote areas or geographicallyisolated projects or
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Annex 4Page 9 of 11
(b) where such services are to be provided in any specialor general category below the real cost of the service.
SEDCO shall seek funds from Government to the extent that rever.e from feesfalls short of actual cost.
18. SEDCO shall provide appropriate technical assistance In one ormore of the following areas on a continuing basis:
(a) Information on technical, export market, labour andlegislative utters affecting small enterprises.
(b) Intensive entrepreneurial and management training tomaximize response to inducements by means of:
(i) Seminars and conferences.
(Ii) Localised individual training In co-operatives,comercial and industrial techniques and wherepossible at the site of the enterprises.
(iii) Workshops at local level for entrepreneurs fromdifferent sectors of interest.
(iv) Encouragement and creation of strong links betweensmall and large enterprises to promote sectorinteraction.
(v) Advice and guidance to co-operatives, associationsand entrepreneurs on methods of self-help.
(vi) Utilisation of a wide variety of advisory servicemechanisms, in addition to its own staff includingbanks, private consultants and appropriateprofessional, technical and educationalinstitutions.
(vii) Management services on an agreed fee basis whereappropriate.
(viii) Close collaboration with training institutions andassociations in providing relevant technicalassistance in order to implement its programme.
(ix) Appropriate uanUals for use by entrepreneurs.These will cover inter alia financialappreciation, operational-appraisal, ranagement
accounting and costing, improving utilisation ofresources, basic management skills, marketing andsales, casb management, bookkeeping and inventorycontrol.
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Annex 4Page 10 of 11
(x) A system of business improvement groups. Thiswill be based on the branches ani provide forgroups of beneficiaries in the area. The trainingwill be continuous with probably one session permonth per group of entrepreneurs. Groups will notnormally exceed 15-20 participants.
(xi) Faults diagnosis clinics. These will be designedto train managers to identify problems that existin their own enterprises. They will be heldlocally and an essential component will be afollow-up by consultants at premises of theenterprise.
19. tesearch and Development Policy
Implementation of a planned programme., This would include thefollowing activities:
(a) Carrying out sub-sector studies at the national levelon the problems and assistance needs of smallenterprises.
(b) Carrying out subsector studies on a regional level todetermine specific regional industry problems.
(c) Identifying new industries which should be promoted.
(d) Identifying areas of domestic market assistance.
(e) Identifying export opportunities and with advice fromMinistry of Trade and Commerce recommend means ofexport promotion.
(f) In collaboration with Government bodies andinstitutions identifying technologies and productsappropriate for small enterprises and disseminateinformation.
(g) Assistance in providing information on the purchase andprocurement of new machinery and equipment from localand external sources.
(h) In accordance with clause l(c) of this statement,advising the Minister on incentive scbemes for theencouragement of co-operatives and small-scalecommercial and industrial enterprises.
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Annex 4Page 11 of 11
20. As SEDCO is- embarking on a programe of assistance to small-scaleenterprise for the first time it will follow operational strategies wlichwill enable it to maxmize its Impact and ensure the success of itsoperations.
21. During the next three years, SEDOO vill take steps to strengthenits institutional capabillties so as to increase Its efficiency andeffectiveness in providing financial and technical assistance tosmall-scale enterprises. To achieve this objective, SEDCO will:
(a) establish and implement appropriate procedures forproject proootion, appraisal, lmplementation, loanadministrations, supervision, training and consultancyservices, and procurement, disbursement and loancollection.
(b) institute an Intensive staff training programme, takingadvantage of local and overseas training facilities,its own training staff and consultants. Training willeWphasize iMproved appraisal and monitoring capacity,financial management and consultancy skillsdevelopment.
(c) utilize advisory services either local or overseas withproven-and appropriate experience to provide in housetraining to SEDCO staff and in particular in the areasof project analysis, engineering and financialmnagement. Such advisory services may be employed ona continuing or ad hoc basis as deemed appropriate.
22. To wake this training programme effective SEDCO will use theexpertise of:
(a) Manitoba Institute of Management in collaboration withthe Barbados Institute of Management and Productivity.
(b) United Nations Industrial Development Organisation.
Profitabilily IndlcatorsNet Profit as % of Year End Net Worth 22.1 2/ (14.0) (6.6) (5.0) (2.9) 1.2Fln. Net Profit as % of Year End Net Worth 22.1 2/ (6.1) 4.1 6.1 8.4 12.3Loan Inceme as % of Average Loan Portfolio n.a. 19.0 18.6 18.4 18.6 18.6Cost of Debt as % of Average Long-Term Debt n.a. n.a. 9.0 9.0 9.0 9.0
Financlal Structure IndicatorsCurrent Ratio 38.4 16.8 12.4 12.9 14.9 6.5Long-Term Debt/Equity Ratio 2/ 0.0 0.0 0.2 0.5 0.8 0.9Provisions as % of Average Portfolio n.e. 3.0 3.0 3.0 3.0 3.0Debt ServTce Coverage Ratio n.a. n.e. 30.4 18.4 13.5 5.9Arrears as % of Portfollo n.a. 7.0 8.4 9.0 10.1 10.2Collections Ratio (Principal) - S n.a. 70.0 75.0 80.0 80.0 80.0
1/ Includes SZ 441,100 received from Government as administratlon grant.2/ Includes SZ 854,000 "Loan Capital" tn Year End Net Worth.3/ Profitablitty ratios exclude potential contrTbutions by Government In calculating net profit.
Construction Industry ComponentTraining and Advisory Services
Outline Terms of Reference
1. Introduction
1.1 The Government of Zimbabwe (GOZ) has identified certain segmentsof the local construction industry, which need strengthening by providingtraining and advisory services to their managers. These segments includeemergent contractors, building brigades and road construction units,building and construction inspectors of the relevant ministries, andSEDCO ' appraisers of contractors. The required services are to beprovided by consultants.
1.2 In addition to conducting the initial trainirg courses with theabove identified participants, the consultants will also train 10 localinstructors for about eight months, who will subsequently carry theprincipal burden of the training and advisory services. Most of them willhave been employed with large local construction companies and will bereleased by these companies for a two-year secondment.
1.3 The Ministry of Manpower will be the Executing Agency for theprovision of these services. The Zimbabwe Master Builders t and AlliedTrades Association (ZIMBATA), the Federation of Civil EngineeringContractors (FCEC), CIFOZ, the Ministry of Construction and NationalHousing and other appropriate organizations will jointly assist theMinistry in administering the execution of services under a separatearrangement.
1.4 The consultants' agreement will also include a study of theconstruction industry in Zimbabwe under separate terms of reference.
2. ObJective
The objective of this assignment is to improve the efficiency ofcertain segments of the domestic construction industry with particularattention to the development of their managerial capability (i.e. in siteand enterprise management) and cost-effectiveness. These segments includeabout 60 small contractors, 48 work superintendents of force account units,48 inspector of the relevant ministries and supervising Engineer/Architects, 4 appraisers of lending institutions and 10 local instructors.
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3. Scope of Work
3.1 The consultants will provide the international experience and thespecial expertise for the required training and advisory services and workin close cooperation with local organizations and counterparts to adjusttheir exoertise to conditions and requirements in Zimbabwe. The twoprincipal trainers, will familiarize themselves with the Zimbabweanenvironment by assisting the consultants at the beginning of theirassignment in the country in carrying out the study of the localconstruction industry. The contribution of these two expatriates will belimited to assessments of manpower and training needs as well as therelated training and educational institutions in Zimbabwe.
3.2 Based on the experience gained from this initial activity, thetwo principal trainers will, together with the local instructors, (a)prepare a detailed training program on site and enterprise management, (b)adjust, if necessary, their imported training material to the specificneeds in Zimbabwe, and (c) participate in the final selection of the tenlocal instructors.
3.3 The training program will be executed in three phases. The twoexpatriates will mainly perform the training and advisory services duringthe first phase. Subsequently, the trained local instructors will takeover under the guidance of the consultants, and extend the services fromHarare (for West-, Central- and East Mashonaland) to at least one otherProvince with its capital as (venue e.g. Masingo).
3.4 Courses, supplementing the curriculum for local instructors andappraisers, will be held intermittently. These courses will be completedin about eight munths; they will be simultaneously complemented by advisoryservices. These services will be extended to the participants of the siteand enterprise management courses by following-up with field visits ontopics discussed in the classroom. The instructor trainees willparticipate in these visits and gradually take over from the expatriates orother more knowledgeable Zimbabwean instructors. The advisory services toSEDCO will be provided when loan applications have to be reviewed and theapplying contractor has to be appraised. It is envisaged that, after aboutsix months, adequate in-house expertise will have been developed in SEDCOthat advisory services will be required for exceptional cases only.
3.5 The courses on site management will include subjects as settingup a site; preparing a budget for the execution of work at a specific site;setting up a system for accounting and cost control during work execution;selection and composition of construction equipment and tools for typicaltypes and sizes of works; and preparation of a work schedule determiningthe timing and duration of the principal work items.
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Annex 15Page 3 of 3
3.6 The courses on enterprise management will include subjects as acontracto-'s review of tender documents; the preparation of a tender withunit prices; establishing a site as a production entity including cost andprogress control; procurement of equipment and supplies; cash flow andliquidity assessments; relationship and cooperation with financial -
institutions providing overdraft facilities, loans, bonding, guarantees andinsurances; and growth of enterprise without undue risk.
4. Resources
4.1 The consultants will provide the expatriate personnel necessary tocarry out the two-year training program. The personnel will include:
(a) the Program Director to be resident in Harare for about18 months;
(b) the enterprise management expert to be resident inHarare for about 8 months, and
(c) an expert or experts on short-term visits (tentativelythree visits) totalling about 3 months, as and whenrequired.
4.2 The consultants will provide the curricula vitae of the personsProposed for the first and second positions above, indicating, inter alia,the experience, particularly in Africa,
(a) in building and civil engineering construction for theProgram Director and
(b) in business management of a construction company forthe second expert.
4.3 The expert(s) on short-term visits will deal with special andcomplex issues, if the need would arise and the appropriate expertise wouldbe locally not available.
Reporting
5.1 The consultants will submit an interim report within seven monthsafter the starting date of their assignment also indicating anyimprovements or changes necessary to the training program based on theexperience gained.
5.2 Within fifteen months after that starting date, the consultantswili submit a final report on the first and second phases of the trainingprogram including an assessment of the results achieved and recommendationson how to proceed with this type of training and the selection ofparticlpants.
EAPIDApril 1985
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Annex 16Page 1 of 3
ZIMBABWE
Small-Scale Enterprise Project
Study of the Construction IndustryOutline Terms of Reference
1. Introduction
1.1 The construction industry of Zimbabwe (CIZ) has undergone Certainstructural changes since independence i.e. April 1980. The Government ofZimbabwe (GOZ) wishes to retain the services of consultants to be providedwith a comprehensive overview of the existing situation related to the CIZ,its capabilities and constraints, and with recommendations forimprovements.
1.2 For the purpose of the study, GOZ will establish a SteeringCommittee which will consist of representatives from the relevantMinistries and the private sector.
1.3 The consultants' agreement will also include other relatedservices which the consultants are requested to perform, e.g. as trainersand advisers, under separate terms of references.
2. Oblectives
2.1 The principal objective of the study is to assist GOZ inpreparing a suitable strategy to strengthen those segments of theZimbabwean Construction Industry which cannot meet GOZ's development goalswith adequate capability and efficiency.
2.2 Particular attention will be given to the emergent enterprisesand their appropriate role in the local construction industry, focussing onthe development of their highly valued human resources.
3. Scope of Stage I of the Study
3.1 The study will be carried out in two stages. Stage I will assessthe basic facts, principal trends, significant indicators, majorconstraints etc.. of the CIZ. Based on this review stage II will propose arealistic strategy and an action plan for the strengthening of thosesegments of CTZ, which require improvement. The focus will be on therequired near-term efforts to initiate a development momentus, rather thanto attempt to quantify the long-term needs in detail. Special attentionwill be given on the small to medium emergent contractors with identifiable
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Anex 16Page 2 of 3
qualifications for highly repetitive and fairly simple types of contractwork sucAi as single-storey clinics and schools in rural areas, regravelingof roads (periodic road maintenance) and sall private contracts in low-and middle-income housing.
3.2 Under Stage I, the consultants will review the capacity andcompetence of CIZ in general, related to its present status and itsdevelopment over the last three to five years. This will include interalia private contractors, construction co-operatives, force account unitsand building brigades; performed work; existing local production ofconstruction materials; past experience with, and performance of, privatecontractors particularly the emergent contractors including the role ofdomestic enterprises as partner in joint ventures and as sub-contractors;availability of qualified manpower at the various levels; role of thecontractor associations in Zimbabwe; and procurement practices related totype of work and size of contract.
3.3 The consultants will assess the impact of &OZ policy on CTZrelated inter alia to construction demand for each principal segment ofCIZ, investmants in CIZ, taxation and import duties, availability offoreign exchange, the public sector procurement systems and practices ofawarding contracts to companies and individuals, preferences for localcontractors, financial assistance to contractors, payment methods, feasibleuse of locally available material and human resources, the enforcement ofcontractual obligations by the public sector, and the role and practice ofthe informal sector.
3.4 Related to the construction demand on CIZ, an estimate will beprepared of the annual public-sector construction and maintenanceactivities for the next five years and the part thereof to be executedunder contract of each principal category, the private sector constructiondemand for the next five years, and the impact of likely available foreignaid on construction for the same time period.
3.5 The consultants will also review presently existing andpotential development constraints including inter alia fluctuation ofconstruction demand; availability of skilled manpower and managers; legaland administrative constraints; appropriateness of tender documents foremergent contractors; and availability of overdraft facilities (e.g. forworking capital) and term loan (e.g. for acquisition of equipment) toemergent contractors.
3.6 Under Stage I, the consultants will also assess the suitabilityof existing financial institutions for lending to emergent contractors;CIZ's manpower requirements and the adequacy of existing education andtraining institutions; the appropriateness of the applied technology byCIZ, and feasible and practial alternatives for GOZ interventioninto CIZ tocontrol prices, availability of adequate construction capacity, and localparticipation in the construction process.
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Annex 16Page 3 of 3
4. Report on Stage I of the Study
The consultants will present their findings and conclusions ofStage I in a draft Interin Report to the Steering Committee not later thanfour months after the starting date.
5. Scope of Stage II of the Study
5.1 Based on the findings and conclusions of Stage I, the consultantswill-rank the previously identified needs; propose a strategy on bow tomeet the identified demands e.g. for assistance, reforms and incentives;and resulting from the above, prepare an action plan for at least the nextthree years.
5.2. To the extent practicable, the consultants will prepare estimatesfor the proposed near-term actions indicating the required financial,manpower, material, physical, and institutional resources in such detailthat an adequate basis would be provided for GOZ to proceed in preparingthe next steps to secure the outlined resources.
5.3 The consultants will also offer their views related to thefeasibility and practicability of creating a permanent Construction Councilto GOZ. The Council would monitor the implementation of GMZ policiesrelated to the construction sector and of the consultants recommendationsaccepted by GOZ.
6. Report on Stage II of the Study
The consultants will present their findings, conclusions andrecommendations in a draft Final Report to the Steering Committee not laterthan eight months after the starting date.
EAPIDJanuary 1985
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Annex 17Page 1 of 2
ZIMBABWE
SMALL-SCALE ENTERPRISE PROJECT
Selected Documents and Data Available in the Project File
Small Enterprises Development Corporation (SEDCO)
1. Assumptions for Operations and Financial Forecasts.2. Schedule of Approved Loans as of November, 1984.3. Unaudited Financial Statements April-October 1984.4. Budget Reports April-October 1984 - 1986.5. Proposed Debtors System.6. Draft Loan Agreement, Lease Agreement and Notarial Bond.7. SEDCO Act.8. Sample Loan Application Form.9. Organization Chart and Description of Divisional Functions.10. Loan Regulations Workflow.11. Training Division Background Notes.12. MDI Proposal for Program Support to SEDCO.13. Background Notes on Proposed Scope and Funding of SEDCO Technical
Assistance Unit.14. Project Pipeline Data.
Construction Industry
15. ILO Paper on the Development of Small-Scale Construction Enterprises -May 1984.
16. ILO Paper on the Appropriate Rural Technology in Zimbabwe - Problems -Prospects - Proposals, September 1983.
17. Sample Contracts, Registration Schedules.18. FCEC Membership.19. ZIMBATA Constitution, Rules and By-Laws.20. Final Mission Report on the Construction Industry Componenr by
R. Kaden tConsultant).
Zimbabwe Industrial Advisory Service (ZIAS) (formerly Small IndustriesAdvisory Service)
21. The Role and Modus Operandi of the Small Industries Advisory Service,February 2, 1978.
22. Consideration on the Form and Extent of Future Assistance to andDevelopment of Small Business in Zimbabwe - Rhodesia, July 1979.
2?. Observations Extracted from IBRD Report (1971) on 'Development ofAfrican Enterprise", July 20, 1979.
24. Annual Reports FY 79-81.25. Industrial Estates: Consideration in Relation to Zimbabwe, 1981,
December 6, 1980.26. Operating a Small Business with Particular Reference to Marketing,
Stock Control and Credit, August, 1981.
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Annex 17Page 2 of 2
27. Chief Executive's Report for September 1981.28. Report on the Activities of ZIAS for the Mouth of October 1981.29. An Appreciation of Small Industry as a Factor in Development and a
Five Year Programme of Assistance, September 1980 and February 1982.
Institute of Business Development (IOBD)
30. Pamphlets on IOBD.31. Annual Report 1980/81.32. A List of Non-Sponsored Courses 1982.33. A Perspective of the Institute and a Three-Year Development Programme
Ministry of Labour and Social Services - Department of Employment andEmployment Development
34. Draft Papers on the Informal Sector in Zimbabwe.35. The Legal Constraints on the Informe.l Sector in Zimbabwe.36. The Role of Women in the Informal Sector.
Development Finance Company (DFC)
37. Papers on the Organization, Investment Guidelines, Objectives andPolicy Statement and Act of the DFC.
38. Financial Reports of DFC.
Finance Trust for Emergent Businessmen (FEBCO)
39. Monthly Statistical Report, April 1984.
EAPIDJanuary 1985
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