Documat of The World Bank FOR OFFMCIAL USE ONLY MICROFICHE COPY Report No. 10280-BD Type: (PCR) ANDERSON, / X31676 / T9 111/ OEDD2 ReporNo. 10280 PROJECT COMPLETIONREPORT BANGLADESH SECOND TEXTILE INDUSTRY REHABILITATION PROJECT (CREDIT 1477-BD/SF-022-BD) JANUARY 15, 1992 Industry and Energy Operations Division Country Department I South Asia This document has a restricteddistribution and may be used by recipientsonly in the performance of their oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
SECOND TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1477-BD/SF-022-BD)
JANUARY 15, 1992
Industry and Energy Operations DivisionCountry Department ISouth Asia
This document has a restricted distribution and may be used by recipients only in the performance oftheir oMcial duties. Its contents may not otherwise be disclosed without World Bank authorization.
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-URRENCY EQUIVALENTS
Currencv Unit Taka (Tk)USSl.C0 = Tk 34.90Tk 1.00 = USSO.0287
ABBREVIATIONS /ACRONYMS
3MR - Balancing. Modernization and ReplacementBSB - Bangladesh Shilpa BankBSRS - Bangladesh Shilpa Rin SangsthaBTMC - Bangladesh Textile Mills CorporationGOB - Government of BangladeshMOT Ministry of Textiles
SF = Special Fund'JNIDO - United Nations Industrial Development Organization1JNDP - United Nations Development Program
FISCAL YEAR
BTMC 5 July 1 to June 30GOB = July 1 to June 30
FOR OFmFCIAL USE ONLYTHE WORLD 8ANK
Washington. D.C 20433U.S A.
Office of Ourecut(WGeeaOperatkwo tva%uatk,n
January 15, 1992
MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT
SUBJECT: Project Completion Report on BangladeshSecond Textile Industry Rehabilitation
Proiect (Credit 1477-BD/SF-022-BD
Attached, for information, is a copy of a report entitled "ProjectCompletion Report on Bangladesh - Second Textile Industry Rehabilitation Project(Credit 1477-BD/SF-022-BD)" jointly prepared by the Industry and Energy Unit ofthe Resident Mission, Bangladesh, and the Industry and Energy Operations Divisionof Country Department 1, South Asia with Part II of the report contributed by theBorrower. No audit of this project has been made by the Operatiorns EvaluationDepartment at this time.
Attachment
This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
This dorument has a restricted distribution and may be used by recipients only in the performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.
Paae No.
Proiect Sustainabilitv .0
:ZA's Performance . .
3orrower's Performance :1
Project Relationship 11
Consultancy Services . . 11
Project Documentation and Data. 11
Lessons from the Project .12
improving Public Mill's Performance .12Project Design .12
PART ::: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE 14
PART :1I: STATISTICAL INFORMATION .15
Tables
1. Related Bank Loan .152. List of the Project Mills .163. Project Costs and Financing. 174. Subloan Relending Terms and Conditions .195. Project Timetable .206. Credit Disbursement .217. IDA vs. GOB's Reform Package .228. Project Implementation . 239. Indicators of Project Achievements .2410. Operational Performance of Public and Private
Project Mills .2511. Financial Performance of Public and Private
Project Mills .2712. Financial Performance of all Public
and Private Mills .30
13. Financial Restructuring .3114. Financial Rate of Return of Private Mill . . . . . 3215. Comparative Operational Performance of Public
and Private Mills (Y85-9)) . . . . . . . . . . . 3316. TA Studies .3417. Use of Bank Resources. 3518. Status of Compliance with Covenants .38
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PROJECT COMPLETION REPORT
BANGLADESH
SECOND TEXTILE INDUSTRY REHABILITATION PROJECT
(CREDIT 1477-BD/SF-022-BD)
PREFACE
This is the Project Completion Report (PCR) for the Second TextileIrtdustry Rehabilitation Project in Bangladesh for which Credit 1477-BD/SF-022-BD,in the amount of US $45.0 million, was approved on May 22, 1984. The Creditclosed on June 30, 1990, after a one year extension. On closing, US$24.0 millionof the Credit had been disbursed, and the balance of US$21.0 million wascanceled.
The PCR (Preface, Evaluation Summary and Parts I and III) was jointlyprepared by the Industry and Energy Unit of the Resident Mission, Bangladesh, andthe Industry and Energy Operations Division of Country Department 1, South Asia.
This PCR was prepared during FY91 and is based inter alia on theStaff Appraisal Report, the Development Credit and Project Agreements,supervision reports, correspondence between the IDA and the Borrower and internalIDA memoranda.
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PROJECT COMPLETION REPORT
BANGLADESH
SECOND TEXTILE INDUSTRY REHABILITATION PROJECT(CREDIT 1477-BD/SF-022-BD)
EVALUATION SUMMARY
Obiectives
1. The project's main objective (para. 3.1) was to make a group ofpreselected denationalized private mills and public sector mills of theBangladesh Textile Mills Corporation (BTMC) internationally competitive andfinancially viable through a program of equipment balancing, modernization andreplacement (BMR). This BMR program was supported by efforts to improve thesector's overall performance through the provision of technical assistance tostrengthen sectoral planning, improve the management capacities of BTMC andprivate mills, implement financial restructuring, and change yarn pricing anddistribution policies. This project was initiated two years after a firsttextile project (Credit 1205-BD) which has generally similar objectives exceptthat it focussed solely on public sector millb as there were no private mills atthat time.
2. The project included financing for the BMR of 22 mills -- 15 privateand 7 public -- and technical assistance to strengthen the BTMC TrainingInstitute's capabilities and undertake studies on the Handloom Sector and aConsumer Market Survey (para. 3.2). Total project costs "ere projected atUS$61.0 million, of which the IDA credit was to finance US$22.98 million, aSpecial Fund (SP) Credit US$22.02 million, UNDP US$1.0 million and BTHC andpublic mills US$15.0 million.
Implementation Experience
3. From the outset, the project's implementation by both the public andprivate mills was disappointing. The project's scope significantly changed dueto: (a) poor response from the private sector, largely because of failure ofpotential sub-borrowers to settle their overdues with the financing institutions(the number of participating private mills was reduced to four); and (b)denationalization of public mills, which reduced the number of original publicproject mills to four. However, because of procurement delays, only two privatemills were able to use the Credit funds. Later at BTMC's request, 15 additionalmills which could not be financed under the first project were included,increasing the number of public mills to 19 (para. 5.4). IDA agreed toreallocate SDR 15.0 million from the unutilized private sector component for thepublic mills' use. IDA also stipulated that before BTMC could use thesereallocated funds (para. 5.5), the Government of Bangladesh (GOB) /BTMC had to putin place a satisfactory package of reforms to enhance commercialization of publicmills and divest some BTMC enterprises. Because of inordinate procurement delay
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(para. 5.6) and inability to est..blish a saciofactory reform proposal, BTMC couldnot use the realloceted funds by the extended closing date.
4. At appraisal, it was envisaged that 59% of the _redit would be usedby the private mills and 36Z by the public mills; at closing, utilization (as aZ of the disbursed amount) was 79% by public and 21% by private mills. Althoughthe Handloom Study and Market Survey were undertaken, no effort was made todisseminate the findings of these studies or incorporate them in a Textile PolicyPaper subsequently prepared by the Ministry of Textile (MOT). Because of MOT'sand BTMC's failure to employ consultants, the Training Center's capability wasnot enhanced, and in-plant training was not provided to the extent envisaged(para. 6.18).
5. At closing, actual project costs were 52% of the appraisal estimates(para. 5.8), and US$24.0 million was disbursed (para. 5.9).
Result
6. Overall the project did not meet its objectives. It has littleimpact upon the reform of sectoral policies and procedures and achievedinadequate improvement in physical output and financial performance (paras. 6.2and 6.14). Incremental yarn production for the public and private project millsincreased by 7% and 21%, respectively and public mills' fabric productionincreased by 16%, compared to appraisal targets of 29% for yarn and 222 forfabric. Despite massive equity infusions BTMC's overall financial performance,and that of the project mills in particular, did not improve, and the mills didnot achieve viability; nine of the project mills had losses in five or more years(Table 9) during FY82-FY90. The institution building objectives for the mostpart were not achieved because of lack of Government/BTMC comitment. One of theproject's private mills forwhich information was available showed good financialperformance.
Sustainabilitv
7. Gains in productivity and profitability of the project's privatesector component will be sustainable. Although public project mills haveachieved some incremental improvement, given the continued policy, procedural andinstitutional constraints that face BTMC and the rehabilitated mills, theiroperations are unsustainable (para. 7.1).
Findings and Lessons Learned
8. Overall, the project's impact was disappointing. The project failedto meet its objectives and did little to address the more pervasi re issuesconstraining efficient performance by the public sector. IDA gave undue weightto physical rehabilitation of the mills (expectations were particularlyunrealistic as to what could be achieved through limited BMR rehabilitation) andto the Government's commitment to the project and policy reform, and too littleto the broader problems that constrained BTMC's ability to impl-ment the projectand operate commercially. This project and the first project were initiated whenthe Bank had more faith in the possibility of reforming public enterprises inBangladesh; experiences from both the projects has undermined this faith. The
most important lesson (paras. 13.2 through 13.6) learned from the project is thatinterventions in improving public sector performance have a high risk of failureunless actions have already been taken to ensure that: (a) a satisfactoryframework of autonomy/accountability exists through elimination of excessivegovernment controls; (b) enterprises are not used as vehicles of patronage; (c)the labor unions are not politicized; and (d) wage awards are based upon actualproductivity improvement. Equally importantly, unless there is a strongrationale for maintaining public participation in specific activities, the mainobjective of Bank involvement should be to encourage privatization.
PROJECT COMPLETION REPORT
BANGLADESH
SECOND TEXTILE INDUSTRY REHABILITATION PROJECT
(CREDIT 1477-BD/SF-022-BD)
PART I: PROJECT REVIEW FROM IDA'S PERSPECTIVE
1. PROJECT IDENTITY
Name Second Textils Industry Rehabilitation ProjectCredit No. 1477-BD/SF-022-BD (Code: 4BANPA106)RVP Unit Asia RegionCountry BangladeshSector : IndustrySubsector Textile
:I. BACKGROUND
2.1 At the time of project initiation in 1984/85. Bangladesh's textilesector accounted for about 302 of manufacturing value added, employed aboutone million people and provided about 852 of the country's total clothconsumption. The textile industry comprised the organized and decentralizedsectors. All 61 spinning and weaving mills were in the organized sector underboth public and private ownership. Thirty six public sector mills were underBangladesh Textile Mills Corporation (BTMC), but prior to denationalization in1982 all the private mills had also been in the public sector. In 1985, theorganized public and private sector mills represented 56Z and 442 of spinningand 522 and 48? of loom capacity, respectively; and provided about 102 of thetextile employment. The decentralized sector was mainly represented byhandloom weaving and a small power loom industry. It supplied almost 702 ofdomestic fabrics and provided about 80Z of textile employment. The ready-madegarments industry, which accounted for about 102 of textile employment, alsostarted gaining importance in the mid-1980s.
2.2 An IDA industrial sector review in the early 1970s identified theneed for a significant restructuring and rehabilitation of the mills under thecontrol of the BTMC and proposed a major program of balancing, modernizationand replacement (BMR). The recommendation was taken up under IDA's Fourththrough Eighth Imports Program Credits in the 1970s through action programs toimprove maintenance, increase the availability of spares. strengthenmanagement, restructure capital and formulate pricing poicies to improve theBTMC mills' financial viability. As part of these programs. the BTMC carriedout a detailed review of mill rehabilitation with technical assistance fromUNDPIUNIDO. This review. which was completed in 1979. led to the submissionto IDA of a project proposal by GOB and BTMC for the BMR of 50 BTMC mills.Given BTMC's limited implementation capability, IDA agreed to finance thisprogram in phases. Phase one, which was intended to cover rehabilitating15 selected mills, formed the basis of the first IDA-financ"d project --Textile Industry Rehabilitation Project, Credit 1205-BD (Table 1) which wasapproved in February 1982 and closed in December 1986; the PCR was completedin May 1990.
2.3 Shortly after the first Credit became effective in 1982. GOBdenationalized 22 BTMC mills. At the request of GOB/BTMC, IDA agreed to
support a second project to meet the BMR needs of the denationalized privatemills' and to provide turther support for the BMR of BTMC mills that could notbe accommodated under the first project. A UNDP/UNIDO team also helpedprepare the second project, and two projects were implemented largelysimultaneously.
2.4 Link with Industrial and Macro Policy Objectives. The proiectsupported the objectives of the '"w Industrial Policy announced in !982 underwhich GOB intended to expand t ivate sector's role by encouraging newprivate investment and privati.- -ion of public mills. It initiatedprivatization of textile mills by returning 22 mills to their previous owners.GOB believed that such a strategy would enable the textile sector to meetdomestic cloth consumption needs on a competitive basis and also help sustainemployment in the handloom sector. Rehabilitation and expansion of textilecapacity was envisaged as generating employment and improving incomedistribution in Bangladesh.
III. PROJECT OBJECTIVES AND DESCRIPTION
3.1 Objectives.The project's main objectives were to: (a) improve laborand machine productivity, capacity utilization and product quaiity to make thetextile mill sector (public and private) competitive and ultimately capable ofexports in selected product areas: (b) upgrade the managerial, administrativeand technical skills of private and public mills: (c) improve the policyenvironment to provide public encerprise managers greater autonomy; and (d)support GOB's privatization efforts. The first three of these cbjectives werevery similar to the objectives of the First Textile Rehabilitation Project.
3.2 Project Description. The project had two components: (a) aninvestment component to finance the BMR of seven public and 15 private mills(Table 2); and (b) a technical assistance component to assist private mills incarrying out their BMR and improving their production management systems,conduct a Handloom Sector Study and a Textile Consumer Market and DemandSurvey and enhance training capabilities of the BTMC's Savar TrainingInstitute.
3.3 Project Costs and Financing. Project costs were estimated at US$61.0illion, of which the IDA Credit was to finance US$22.98 million, a SpecialFund (SP) Credit US$22.02 million, a UNDP grant US$1.0 million and theremaining US$15.0 million by public and private mills (Table 3). Of the totalcredit amount, the private and public mills' investment components wereallocated 59Z and 36Z, respectively, 32 was allocated for consultancy and 22was unallocated. The financing for the investment component was provided assubloans to the mills. In the case of public sector mills, subloans wereprovided directly by the Government to BTMC which in turn channelled them toits mills. In the case of private mills, subloans were channelled through thetwo Government-owned Development Finance Institutions--Bangladesh Shilpa Bank(BSB) and Bangladesh Shilpa Rin Sangstha (BSRS). The terms and conditions ofsubloans are given in Table 4.
IV. PROJECT DESIGN AND ORGANIZATION
4.1 The project design sought primarily to address the need to improveprivate and public mills's productivity and profitability. Using BTMC's
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technical and financial parameters (based upon the UNDP/UNIDO BMR reviews)which were reviewed by IDA's technical consultants (Geerdes International),seven public mills were selected for rehabilitation. BMR parameters for theprivate mills were based on the mill-by-mill survey carried out by a UNDPteam, their BTMC counterparts and mill managements. The BMR program developedfor each mill was selective rather than comprehensive in scope, focussing onthe BMR modernization of old equipment with less emphasis given to the needsof balancing the entire producticn process and replacement (rather thanmodernization) of obsolete equipment.
4.2 The implementation arrangements of the project were as follows:(a) for public mills, the BTMC was responsible for the rehabilitationcomponent. The Project Implementatian Cell (PIC) created under the firstproject was to implement the second project as well, through BMR task forcesestablished within each mill, while a roving BTMC BMR task force would assistwith the more aifficult elements of each mill's program. Procurement was tobe hsndled by the Procurement Unit (PU) created within PIC; (b) private millmanagements were responsible for implementation of their own projects,including procurement. However, in the installation of equipment, they wereto be assisted by the consultants; and (c) the Planning Cell (PC) created inthe Ministry of Textiles (MOT) under the first project was responsible foranalysis and advice on sectoral issues and policy reforms.
V. PROJECT IMPLEMENTATION
5.1 Overall implementation of the project by both the public and privatesector mills was disappointing. The project did not meet its objectives andhad little impact on the sector's policy environment and operationalperformance. The reasons for the project's poor performance and slowimplementation aspects are discussed below. However, excessive reliance onGOB's commitments to implement the policy components of the action programresulted in inadequate consideration being given to safeguarding against theadverse effects of non-compliance in key areas in strengthening BTMC's weakimplementation capacity, increasing the autonomy of BTMC enterprises andsettlement of outstanding overdue debt of private mills.
5.2 Credit Effectiveness and Project Start up. The Credit was approvedon May 22, 1984 and signed on July 25, 1984 (Table 5). However, it did notbecome effective until June 6, 1985 due mainly to delays in governmentapproval of the project and finalizing of subloan lending arrangements.
5.3 Credit Suspension. During 1985, successive supervision missionsnoted the non-fulfillment of DCA conditions and delayed implementation ofaction program requirements under both BMR projects. However, undue reliancewas still placed upon GOB/BTMC's agreement to take rectifying action.Following a supervision mission in March 1986, IDA requested GOB to implementa package of policy reforms and actions that would: (a) provide BTMCenterprises with greater autonomy in revising labor incentive plans and fixingoutput prices; (b) further financially restructure the BTMC mills; (c) settlean ongoing dispute between BTMC and the country's major banks concerning theloan liabilities of BTMC's liquidated mills; and (d) reduce tariffs onimported raw cotton. GOB's reluctance to implement these reforms by DecemDer1986 led IDA not only to refuse further extension of the closing day forCredit 1205-BD, but also to suspend Credit 1477-BD/SF-022-BD. In September1987, GOB issued administrative orders to implement the above actions, and on
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the basis of these orders IDA lifted the suspension in October 1987. Inretrospect, the continuation of poor performance indicates that these actionswere inadequate to overcome BTMC's deep-seated problems.
5.4 Project Scspe. At appraisal, it was envisaged that the projectwould support BMR in a total of 22 mills, comprising 15 private mills and 7public mills. At the close of the project, BMR has been carried out in20 mills comprising two private mills and 18 public mills. There were twomain reasons for the variance in the number of mills. First the privatesector's response had been poor due to the failure of potential sub-borrowerst. settle their outstanding overdue debt with BSB/BSRS and investor demand waslower than anticipated because of a weak yarn/cloth market caused by theinflux of a large volume of smuggled goods during 1985-88. Second, the numberof public mills was initially reduced from seven to four as a result of thedenationalization of two mills and the use of Dutch technical assistance toundertake BMR for another. Subsequently the number of mills was increased to19 (Table 2) with the inclusion of mills appraised under the first project;18 mills actually used IDA funds.
5.5 In April 1989, because of savings in the private sector component,!DA agreed to BTMC's request to transfer SDR 15.0 million from the private tothe public sector component to finance completion of the first projects's BMRneeds. However, IDA stipulated that: (a) the funds would be available toboth public and private sector mills on a first-come-first-served basis; (b)SDR 3.9 million could be used without subproject reappraisals for 11 mills,each of which required a small amount of funds to complete their BMR; and (c)the remaining SDR 11.1 million could finance comprehensive BMR for 2-3 mills,for which subproject reappraisals would be required. Although BTMC submittedrevised proposals for 4 mills, they were not technically comprehensive and theassumptions underlying the future operational and financial performance werenot consistent with BTMC's past achievements. In the end, the transferredfunds remained largely unutilized.
5.6 Procurement. Procurement delay was a major reason for the poorproject implementation as it took BTMC almost three years to prepare and agreebid documents with IDA and to award contracts. This delay was subsequentlyexacerbated by modifications to bid documents, poor evaluation and to thelengthy approval procedures of BTMC's Board and MOT in approving contractawards. Delays were compounded by frequent exchanges between BTMC and IDA onproposed amendments. Moreover, mid-way through the project BTMC switched frommill-by-mill procurement to ordering machinery in bulk to reduce procurementcosts. This change delayed project implementatior. even more, disturbed thesequence of mill rehabilitation and led to mills having incomplete/partialBMR. The delay in procurement by private mills was caused by inadequate andinexperienced staff and lack of familiarity with IDA's procurement guidelines.
5.7 Implementation Schedule. The private sector component was scheduledto be completed by December 1987 and the public sector component by June 1988.However, by those dates neither of the components had been completed. For thepublic mills the main reasons were delays in effectiveness (para. 5.2),temporary Credit suspension (para. 5.3), the change in project scope(para. 5.4), frequent changes of management personnel, weak implementationcapacity and changes in the method of procurement (para. 5.6). Of the18 public mills, BMR for four mills was completed according to project design,while for the remaining fourteen mills it was only partially completed becauseof the inability of BTMC to utilize transferred funds (para. 5.5). In the
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case or private mills, the main reasons for delayed implementation were non-settlement of overdue loans and weak investor demand (para. 5.4), Of the twoprivate mills, one mill is completing BMR in phases through two separate sub-loans: implementation of the first phase BMR of this mill was completed inJune 1988: while the second phase is expected to be completed in Januarv 1991.The BMR for the other mill is expected to be completed in June 1991.
5.8 Project Costs. Actual project costs were USS31.6 million, about 52Zof the original estimate of US$61.0 million (Table 3), with the costs forpublic mills almost the same as the original estimate, while for privatemills, the actual costs were only about 23Z, mainly due to the fewer number ofprivate mills participating.
5.9 Disbursements. At appraisal, it was projected that disbursementswould begin at the end of FY84 and that the Credit would be fully disbursed byDecember 1988. However. the first disbursement was not made until the end ofFY87, and the final disbursement in FY91 (Table 6). Of the total credit ofUS$45.0 million, only US$24.0 million (53Z) was disbursed, and the balance ofUS$21.0 million was cancelled.
5.10 Closing Date. Given the delays in project implementation(para. 5.7), the original Closing Date of June 30, 1989 was first extended byone year. GOB requested a further extension of one year which was notapproved because of the continued poor project implementation performance andGOB's unwillingness to put in place a reform package comprising:(a) partially (49Z) privatizing of three to four successful BTMC mills;(b) inclusion of two to three private sector members on the Enterprise Boardof each BTMC mills; (c) the granting to the Boards of subproject mills thesame powers available to the Boards of Directors of companies incorporatedunder Company's Act of 1913; and (d) the improvement of BTMC's operatingenvironment by retaining enterprise managers for at least three years andgranting them autonomy in procurement, output pricing, recruitment andincentive bonus packages. GOB proposed an alternative reform package to IDA(Table 7), but its scop.e was much narrower than the reform package proposed byIDA.
5.11 Risk Identification. The main project risks identified at appraisalwere: (a) weak implementation capability of private mills; (b) inability ofprivate sponsors to contribute 30Z to subproject costs; and (c) lack oftrained manpower and managerial weaknesses in private and public mills. Theproject design accommodated these risks by : (a) making provision forconsultants to advise private mills at the trial stage, before equipment wasaccepted as meeting performance criteria; (b) calculating overall projectcosts on a conservative basis, recognizing that a few of the expected BMRinvestments might not materialize due to insufficient equity; and (c)providing consultancy services to private and public mills to upgrademanagerial capacity and in-plant training to technicians. However, inadequateconsideration was given to assessing the adverse impact of non compliance withagreed commitments upon: (a) BTMC's implementation capacity; (b) theprocurement methods used by BTMC, i.e. bulk procurement on the basis ofsubprocess, rather than mill-by-mill; (c) the liquidity of the BTMC andprivate mills; (d) the considerable political and trade union pressure on BTMCin running of its mills, which undermined commercial operations dnd thesequential mill-by-mill BMR implementation; (el the scope and timing ofnieasures to increase public mill management's autonomy on key matters such aspricing, production and worker incentives; (f) the merits of selecting fewer
BTMC mills for comprehensive BMR in view of the risks associated withselective BMR; (g) the settlement of outstanding overdue debt of privatemills, which prevented a sizable number of potential sub-borrowers fromavailing themselves of the Credit; and (h) the implementation capability ofprivate mills especially in preparation and evaluation of bids.
5.12 Health, Safety and Environment. It was envisaged and incorporatedinto the design of the project, that the BMR program would includerequirements for improving pollution control and health and safety standardsfor dyeing and finishing mills which were surveyed by the EnvironmentalPollution Control Department. BTMC carried out some low cost investments suchas installation of fire fighting equipment and central dust collectingfacilities to improve health and safety standards of a number of mills.However, BTMC has been slow in implementing the survey recommendations.
VI. PROJECT RESULTS
6.1 In the prevailing climate of reluztant privatization/-commercialization of the sector by GOB, the project had little real hope forsuccess and failed to meet many of its objectives including improvingproductivity and quality, strengthening BTMC's management capability,improving the policy environment to provide public enterprise managers greaterautonomy with accountability and to support p-ivatization efforts. In thepublic sector, the project w.s able to arrest further deterioration of projectmills and improve certain areas of operational and financial performance (seeChap. 6-9) while some improvement in operational and financial performance wasachieved in the private sector.
A. Physical/Financial Performance of Public Sector Mills
6.2 Overall Physical Results. The project targeted to modernize 331,630spindles and install 151,340 new spindles. At the completion (by June 1991)of the BMR programs in the public and private mills, it is expected that85,056 spindles will be modernized and 15,504 new spindles will be installedi.e. 26Z and 102 of the respective targets will be met (Tables 2 and 8).About 90Z of the modernized spindles are in the public mills, whileinstallation of the new spindles has been undertaken entirely by the privatemills.
6.3 Physical Performance. In Epinning, it was envisaged that 113,480spindles would be modernized and 32,396 new spindles would be added to balancethe production processes. The actual number of spindles modernized was76,464, while no new spindles were installed (Table 8). The project mills'capacity utilization increased from 80Z (pre-BMR) to 83Z (post -BMR), as aresult of some improvement in process balancing. The attained capacityutilization was much lower than the appraisal target of 89Z (Table 9). Thiswas due to raw material shortage, power failure, labor absenteeism andmachinery breakdown. Actual increase in spindle productivity was only 0.42,whereas it was expected to increase by 29.3Z. Because of the failure toattain productivity, capacity utilization and spindle capacity targets, yarnproduction only increased by about 7Z compared to an envisaged increase of29Z. About 52Z, 23Z and 25Z of this shortfall in yarn production was due toshortfall in productivity, lower capacity utilization and reduced number ofspindles, respectively. A noteworthy achievement was the significantreduction, of about 7Z, in spinning wastage.
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6.4 In weaving, no loom rehabilitation was originally envisaged but, asa result of subsequent repairs and replacement of some preparatory machinery,capacity utilization increased by 10Z, loom productivity by 7? and productionby 16Z (Table 9), but these were much lower than the anticipated targetedincreases of 172, 22Z and 22Z, respectively. About 39Z, 33Z and 28Z of theshortfall in production were on account of shortfalls in productivity,capacity utilization and reduced number of looms, respectively. Twonoteworthy achievements were reduction in wastage by about 26Z and improvementin fabric quality.
6.5 The Intra-inill comparison of the 18 project mills (Table 10) andinter-mill comparison between BMR and non-BMR mills gives confusing results.The mills with incomplete BMR have higher increases in spinning capacityutilization and productivity, equal increase in production and greaterreduction in wastage than the mills with completed BMR. In weaving, theincomplete BMR mills also performed better than the completed mills. Theproject mills' operational performance, while mixed, was generally better thanBTMC's non-BMR mills. In spinning, the project mills' productivity and wastereduction were higher but capacity utilization was lower. In weaving, theproject mill's capacity utilization was higher but the productivity andwastage level were lower than the non-BMR mills. This suggests that while BMRwould certainly have made a positive contribution, performance of mills didnot depend on whether or not BMR was completed or undertaken, but that otherfactors contributed more to performance than the physical condition ofmachinery. These included autonomy, quality and efficiency of millmanagement, market determined production planning, skill of operatives,regular maintenance, low absenteeism and good labor relations.
6.6 Financial Performance.Financial performance of public mills has beenanalyzed in the following manner: (a) performance of BTMC's project mills; (b)comparison of BTMC project mills among themselves and with non-project mills;(c) overall performance of BTMC mills; (d) impact of financial restructuringof BTMC mills; and (e) financial rates of return of BTMC project mills.
6.7 The BTMC project mills were unprofitable before BMR and continued tolose money after BMR (Table 11). In FY90, only six mills had an operatingprofit, and nine mills have had losses in five or more years during FY82-FY90.Analysis of performance over the last decade suggests that mills turnprofitable only when the labor, conversion and raw material costs together areless than 90Z of sales. Labor costs during FY89-90 were about 30Z of sales,or about 7Z higher than the pre-project level. At appraisal, labor costs wereprojected to decline to 10? of sales through retrenchment and stricter controlof wage increase. However, continued excess employment and unwarrantedincreases in public sector wages in recent years suggest that labor costs areunlikely to decline significantly in the future. Other conversion costs wereprojected to decline to about 8Z after BMR. During FY89-90, these costs wereabout 18Z; the anticipated reduction did not take place due to failure toarrest increases of maintenance, utilities and depreciation costs. Rawmaterial costs averaged about 53Z of sales during FY82-90. With a total laborand conversion costs of about 48Z of sales, the raw material costs must beless than 42Z of sales for mills to be profitable. However, in seven out ofnine years, the raw material costs to sales ratio has been over 45Z, and it isunlikely that a ratio of 42Z can be achieved on a sustained basis. Thus,unless there is a significant labor rationalization, substantial increases inproductivity and product quality and a quantum increase in managementefficiency together with increase in managerial autonomy (to buy raw
materials, adjust product prices according to market demand, have independentrecruitment policy having their own compensation structure and incentivepolicy), it is unlikely that BTMC or the individual mills will emerge asprofitable entities on a sustained basis.
6.8 Inter and Intra-mill Comparison. An inter-mill comparison of keyfinancial ratios (Table 11) shows a mixed performance. 'Incomplete" projectmills were able to reduce their cost of sales to sales ratio significantly andas a result showed a better financial performance than completed BMR mills.This suggests that the relationship between financial performance and BMR isat best tenuous and the other factors (para. 6.6) are equally important. Whileintra-mill comparison (Table 11) suggests that the project mills have betterperformance than non-BMR mills, this improved performance cannot be fullyattributed to the BMR program.
6.9 Review of BTMC's overall financial performance (Table 12) indicatesthat only one mill has consistently made a profit in the last nine years(FY82-90), while 22 mills have had losses in six or more years. As in thecase of project mills, most BTMC mills made profits in those years when thethree key cost items (para. 6.8) amounted to less than 90Z of sales. As it ishighly unlikely that this break even cost to sales ratio would be achieved inthe future, most BTMC mills are likely to continue to operate unprofitably.
6.10 As part of the financial restructuring program agreed under Credit1205-BD, GOB provided Tk.1.6 billion (USS million) through cash infusionsand conversion of debt to equity (Table 13). This capital infusion did notimprove BTMC's financial viability, as continuing losses contributed to thefurther worsening of financial performance, leading to the failure to achievea 70:30 debt/equity ratio by FY86 as projec,.ed. As of June 30, 1990 only fivemills had met this target. Because of liquidity problems, few of the millsare servicing their subloans, forcing BTMC to reschedule its loan to GOB.
6.11 Ex-post financial rates of return (FRR) have not been estimated forBTMC project mills, as they continue to show losses. While for some projectmills, there has been a reduction in net losses, it is unlikely to besustained. It is difficult to conclude that much of this reduction in losseswas directly due to the BMR program (para. 6.8).
B. Physical/Financial Performance of Private Sector Mills
6.12 Only two private mills are implementing BMR programs (para. 5.7). ByJune 1991 it is expected that 8,592 spindles would be modernized and 15,504new spindles installed in the two mills (Table 8). Unlike the public mills,it is difficult to ascertain the reliability of the information supplied bythe private project mills and the published data on the private sector, andtherefore their performance assessment needs to the interpreted with caution.
6.13 Physical Performance. Physical performance is assessed in the caseof one of the mills which has completed its first phase BMR program, which wasentirely focused on the spinning section. This mill's spinning capacityutilization has increased by about 11X, production by about 21Z, productivityby 6Z, while its wastage has been reduced by about 9Z (Table 9). Althoughthese achievements are significant, they fell snort of the appraisal targets,which were 14Z for capacity utilization and 29Z each for production andproductivity.
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6.14 Financial perfomance. The project mills' financial performance hasbeen good (Table 11). During last eight years (FY83-90), they continued to beprofitable exceot in one year when one of the project mills incurred 3 loss.The project. mill which completed first phase BMR consistently made profitsduring this period and marginally decreased conversion costs (labor plus othercosts) from 25Z to 24Z. While its wage cost as a percentage of salesincreased from 12Z to 15Z during BMR, other costs decreased significantly from13% to 9Z. This mill's lower conversion costs has been the key factorunderlying its profitability; its subloan is in the repayment stage and isbeing repaid on time. The estimated ex-post FRR for the private mill whichhas completed its first phase BMR is about 18Z (Table 14).
C. Public vs. Private Mill Compar:ison
6.15 It is difficult to draw firm conclusions from a comparison ofperformance between public and private sectors due to questionable reliabilityof the private sector data. However, a mill-by-mill review of key statisticssuggests that there are some good mills in both the public and private sectorswhich performed significantly better than the rest of the mills.
6.16 Operational Performance. Comparison of BTMC project mills with theprivate project mill shows that the BTMC project mills' capacity utilization,productivity and production were respectively 9Z, 6Z and 13Z lower than thatof private mills, while reduction in wastage was about 2Z higher (Table 10).However, for the entire public sector mills' operational performance inspinning and weaving was better than that of the private mills during FY85-90(Table 15). This is probably due to the poor condition of private mills'machinery, most of which was installed in the 1960s and which has not beensubstantially modernized or rehabilitated since then.
6.17 Financial Performance of both public and private mills is poor. Inthe public sector, only one mill has consistently made a profit during thelast nine years, while 22 mills have had losses in six or more years. Amongthe reporting private mills, during FY85-90, two mills (one of which is aproject mill) have made profit consistently, while 11 mills incurred losses infcur or more years (Table 12). It is not clear how these private mills cancontinue operations, unless they have been defaulting on payments to financialinstitutions. However, it is quite possible that reported profits are notaccurate and that there are hidden profits which are helping to sustain theiroperations.
D. Policy and Institutional Components
6.18 Institution Building efforts comprised training, strengthening ofplanning capabilities and studies. These efforts have not had the desiredimpact: (i) While a substantial number of technicians from both public andprivate sector mills were providing in-plant and management developmenttraining at the Savar Training Center, the quality and scope of training ofthe Center did not develop as consultants to be employed under the Credit tohelp develop training capabilities were not engaged: (ii) the IndustrialEconomist remained on employment in MOT for only 27 months (out of 42 months)from the effectiveness of the project and his services were not utilized inbuilding up th'e MOT's capacity for policy analysis and reforms; and (iii) twostudies, a Handloom Sector Study and a Consumer Demand and Market Survey, wereconducted under the project. The handloom study was intended to formulate a
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program and institutional arrangements to enable this sector to play animportant role in product areas where it could remain competitive. Theconsumer demand and market Ftudy was to establish the basis for the industry'sexpansion, particularly into non-traditional product lines. A Policy Paperprepared in 1988 was intended to take full benefit of the findings of thesestudies. However, a review of this paper suggests that these studies'findings and recommendations were not taken into account (Table 16).Moreover, the policy paper neither fully addressed many of the importantissues nor was effective in translating broad goals into implementableprograms.
6.19 International Competitiveness. A major objective of the project wasto assist the spinning and weaving sector to become intcrnationallycompetitive. Based upon available data, a number of private project and non-project mills are engaged in direct or indirect exports, and therefore must beinternationally competitive. However, public sector mills are notinternationally competitive and given the current cost structure of BTMCproducts and the inefficient operations of the large majority of BTMC mills,they are unlikely to be internationally competitive without a fundamentalchange in BTMC operations.
6.20 BTMC's Marketing System reform focussed on changing distribution andpricirig policies. While some changes were made in the yarn distributionsvstec., it is still not based on sound commercial grounds and is used as asource of patronage. The present distribution system prevents the enterprisemanagers from responding to changes in market demand and prices, andconsequently benefits accruing from increases in market prices largely go tothe distributors. Although pricing policies were changed tc give partialautonomy to the enterprise managers to change prices according to the marketconditions, this autonomy wras not adequate to respond fully and in a timelymanner to market conditions. Moreover, in many cases enterprise managers arehesitant to even use the limited autonomy available.
VII. PROJECT SUSTAINABILITY
7.1 The project's sustainability has been assessed separately for theprivate and public mills. Gains in productivity and profitability of theproject's private sector component appear to be sustainable based on theresults of discussions with the private mill managements and review of theirpast operations (para. 6.13). However, because of the public mills' continuedpoor performance and lack of sustained efforts and commitment of GOB/BTMC topolicy reform, there is no assurance that the public project mills can becomefinancially sound and commercially viable entities on a sustained basis.
VIII. IDA'S PERFORMANCE
8.1 During the 61 months between the Credit's effectiveness and itsclosing, IDA formally supervised the project 14 times (Table 17) in additionto intermittent follow-up by the Resident Mission. Some of these supervisionswere carried out jointly for Credit 1205-BD and Credit 1477-BD/SF-022-BD.However, effectiveness of the project supervision was significantly reducedby: (a) inadequate technical staffing (eight out of 14 missions did notinclude technical staff). Although the last few missions included technicalstaff, by then it was too late to make any technical change in the project
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design; (b) IDA's failure to enforce remedial measures to improve procurement.Use of standard bid documents for procurement agreed by IDA and BTMC andestablishment of a PU with a Procurement Specialist within PIC did not receivepriority. BTMC's failure to comply with these had a serious impact on projectimplementation; and (c) undue reliance placed on the UNDP/UNIDO technicalteams. During the supervision missions, the technical design and mill coststructure should have been updated and monitored closely.
8.2 On two occasions IDA took a firm stand after GOB/BTMC failed toaddress the issues which led to poor project performance, suspending creditdisbursements in 1987 and refusing to extend the Credit Closing Date inMay 1990 until GOB adopted a reform package along the lines recommended byIDA. However, even these decisions did not provide sufficient incentive forGOB to take adequate steps to improve the BTMC's performance, and consequentlyIDA closed both projects and cancelled all undisbursed funds.
8.3 At the institutional level, BTMC, BSB and BSRS's performances weremixed. During project preparation, these institutions cooperated effectivelyin providing technical and financial information to support project appraisal.However, during project implementation, their performances wereunsatisfactory. BTMC did not strengthen its implementation capacity(para. 6.20) or achieve satisfactory operational/financial performance(paras. 6.3-6.6) while GCB was slow in pressing institutional and policyreforms (paras. 6.18-6.20). BSB and BSRS could have made greater efforts toencourage potential sub-borrowers identified during project preparation andappraisal to use Credit funds.
8.4 The relationships between IDA and GOB/BTMC/BSB/BSRS were cordialduring project preparation and for most of the implementation stage. Thisrelationship deteriorated towards the Credit Closing Date, when IDA indicatedto GOB/BTMC that it would not extend the Credit (para. 5.10). GOB/BTMC feltthat IDA was often inflexibLe in its position, and failed to recognizeoperating realities during project implementation, and as a result,implementation was impeded. BSB/BSRS felt that the Credit was untimelyterminated without proper consultation with them, at a time, when thepotential sub-borrowers were showing keen interest to avail of the Creditfund.
8.5 The agreed IDA, BTMC, BSB and BSRS's project documents provided asound basis for project implementation. However, while the Project Agreement(PA) and Development Credit Agreement (DCA) were adequate for implementationof the project's hardware component, they should have contained, as datedcovenants, specific policy reform actions, although even if more appropriatereforms had been incorporated in specific covenants, it is unclear whetherGOB/BTMC was sufficiently committed to reform to implement them consistentlyand effectively.
IX. CONSULTANCY SERVICES
9.1 The implementation of the consultancy services component was alsounsatisfactory: (i) the completion of the Handloom Sector and Market DemandStudies was delayed by a year because of inability to undertake field surveydue to severe floods in the country. These studies were undertaken by a localeconomic research institution which was selected on the basis of ICB. Whilethe consultants followed closely the studies' TORs, the recommendations and
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action programs were weak in certain areas (para. 6.18); and (ii) althoughforty-eight months of consultancy services were provided under the Credit(para. 5.11), no efforts were made from MOT and BTMC to employ theconsultants. However, UNDP grant funds were used to employ a consultant for24 months to improve the operational efficiency of private mills' dyeing andfinishing units. The failure to employ consultants prevented at least twoprivate mills from carrying out procurement in time to apply for Credit funds,as these mills did not have in-house capability to prepare and evaluate bids.Moreover, the capability of BTMC's Training Center at Savar did not fullydevelop (para. 6.18).
X. LESSONS FROM THE PROJECT
10.1 A number of important lessons were learned from implementation ofthe first project and reflected in its PCR. These lessons apply equally totha first and second project and are therefore reiterated in this PCR.
10.2 Improving public mills' performance. Both projects aimed atimproving BTMC's performance. The failure to achieve this objective clearlyindicates that for public mills the technical upgrading of capacity andfinancial restructuring are unlikely to yield benefits unless the followingimprovements can be ensured: (a) less political and bureaucratic interventionsin the enterprises' operational matters such as procurement, output pricing,staffing and compensation; (b) preventing politicization of labor unions anduse of enterprises as a vehicle for patronage; (c) provision of fulloperational autonomy to managers, concomitantly with establishment ofeffective management accountability systems and a rewards/penalties basedcompensation package for managers and labor; and (d) strengthening managementand selecting qualified persons for management positions.
10.3 Both the first and second projects were initiated when IDA had morefaith in the possibility of reforming public enterprise to improve theirefficiency. Experiences such as those under these two projects haveundermined this faith. Unless there is a strong rationale for maintainingpublic participation in specific activities, the main objective of IDA'sinvolvement should be to encourage privatization. Thus before embarking on apublic enterprise restructuring project the Government's commitment andwillingness to implement privatization and measures of the type noted. Ifthere are any doubts about a government's long-term commitment to take thenecessary actions, the project should include significant up-front actions(i.e. prior to Board presentation) rather than studies and agreements onfuture changes. Thus, public enterprise reform projects should typicallyrequire a combination of privatization, policy/institutional measures as wellas investments. The alternative of supporting reform through adjustment orhybrid operations rather than an investment project should be carefullyconsidered.
10.4 Project Design. The implementation capacity of the private sectorwas untested, while for the public sector it was poor. This project's scopewas too ambitious and unrealistic as was that of the first project, given thelimited implementation capacity of BTMC and other Government agencies involvedin the textile sector. Importantly, BTMC's managerial capabilities were weak,and it operated in a very constrained environment. In retrospect, in asituation involving a public sector with a poor past record, resources andsupervision efforts should have been concentrated on selected mills to which
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good managers were posted. in this way 'model' public sector mills might havebeen established, and this strategy could have been extended to the otherpublic mills. At the same time, more specific dated covenants should havebeen established, to improve the autonomy/accountability framework of thepublic mills. This would have created a more competitive operatingenvironmient for both the private and public mills,
10.5 Another design weakness was the failure to provide for or request aformal mid-term review to enable a reformulation of the original projectconcept to reflect major physical changes or to include the BMR of machineswhich became obsolete during the proposed five year implementation period.
10.6 Considering the past pcor performance of BTMC mills at the time ofappraisal, the spindle productivity and capacity utilization targets (based onnorms in Ildia, Hong kong and Thailand) were optimistic. Moreover, it wasoptimistically assumed that BTMC would achieve financial profitability fromFY81 onward, when in fact in the previous 10 years BTMC as a whole only madeprofits in two odd years when the ratio of raw material costs to sales wasabnormally low.
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PART II - PROJECT REVIEW FROM BORROWER'S PERSPECTIVE
A. ANALYSIS OF KEY ISSUES
1. The Textile Industry Rehabilitation Project Phase-II originallycomprised BMR of 7 mills which were scheduled for financing under Credits1477-BD and SF-22-BD. These Credits were signed on July 25, 1984 with thefollowing conditions for effectiveness to be fulfilled by GOB/BTMC:
(a) appointment of Industrial Economist;(b) appointment of BTMC consultants;(c) arrangements for an UNDP productivity Team to assist the private
mills;(d) approval of Project Proforma; and(e) signing of Administrative Agreements between GOB and GOB/BSRS and
subsidiary loan agreements between GOB and BTMC.
The credit was declared effective June 5, 1985 (i.e. after 14 months) onfuifillment of the above conditions.
2. An allocation of SDR 15.042 million was made for 7 mills (namelyR.R, Carillon, Olympia. Magna. Caldera, Eagle Star and Pahartali T.M.) of BTMCbut subsequently two mills, namely Eagle Star and Pahartali, weredenationalized and another mill--Caldera Textile Mills--was removed from theIDA credit and its BME. was financed under a Dutch Grant. which left a balanceof four mills under this credit.
3. On completing the necessary formalities for InternationalCompetitive Bidding for the procurement of machinery, including preparation oftender specifications and obtaining approval by BTMC, GOB and IDA; BTMCfloated international tenders on June 5, 1985 and December 18, 1985 which werethen opened on March 18, 1986. Technical evaluation of the bid documents tookfive months (July 1986 to December 1986) and after obtaining BTMC and GOBapproval, these were submitted to the World Bank over the period September1985 to December 1986. Because of a delay by GOB in fulfilling the sixconditions imposed by IDA for extension of the Credit closing date (Cr. 1205-BD) by one year to December 31, 1986, the Bank returned the bidding documentson January 28, 1987 and cancelled the un-utilized Credit amount of SDR19.158 million effective 1 January, 1987 (total credit amountSDR 26.10 million) even though the evaluated bid documents for the machineryfor the remaining mills under the project were with the Bank pending approval.As a result, completion of the balance of BMR works for three mills (AhmedBawany, Dhaka Cotton and eenat Textile Mills) and the entire BMR works forthe mills under TIRP-Phase I became uncertain. Under these conditions, IDA,on request of GOB, agreed in principle in November 1987 to finance the balanceof work required for these BMR mills out of the unutilized private sectorallocation of Credits 1477-BD and SF-22-BD. As a result both projects(balance of work under TIRP-Phase 1 and entire work under TIRP-Phase II) werescheduled for funding under Crs. 1477-BD and SF-22-BD. Due to the inclusionof the balance of unfinished BKiR work under TIRP-Phase I, the volume ofphysical works increased considerably which resulted in an increasedrequirement for funds which exceeded the original allocation of SDR 15.042million for public sector mills under these credits. At the request of GOB,IDA, in principle, agreed to divert an additional SDR 15.0 million from the
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unutilized funds for the private sector to finance the balance of work underTIRP-Phase II which included BMR of the 15 mills originally included inTIRP-Phase I subject to fulfillment of five preconditions by these mills.
4. The total allocation for BMR of 19 BMR mills (15 mills under TIRP-Phase I and 4 mills under TIRP-Phase II) was SDR 30.042 million (15.042 +15.00). It should be pointed out that IDA imposed no conditions forutilization of funds for BMR works for 11 selected mills provided theamendment letters to the Project Agreement and DCA were siRned by BTMC/GOBrespectively and the credit made effective. These amendment letter weresigned on 27th and 29th April, 1989 by GOB & BTMC respectively, and declaredeffective.
5. For the BMR of the remaining eight mills (19-11 unconditional) BTMCsubmitted additional appraisal reports well ahead of time frame previouslyapproved by the IDA. Despite BTMC's arguments/requests in favor ofimplementing the balance of work for eight sub-projects as earlier approved byIDA, IDA missions visiting Dhaka during 1988-89 and 1989-90 wereuncompromising with respect to implementation of the BMR program approvedearlier by IDA as well as the new proposal by IDA for comprehensive BMR of 2-3 mills. The missions, ignoring IDA's earlier decision and time constraintsfor fresh appraisal and re-appraisals for comprehensive BMR proposal of threesub-projects forced BTMC to undergo lengthy time consuming appraisalexercises. The mission members gave BTMC the impression that formulation ofcomprehi:' sive BMR although time consuming, would not be difficult to implementbecause extension of the Credit closing date would not be a problem. Withthis in mind, BTMC undertook fresh appraisal of the three sub-projects whichwere revised per instructions by IDA's Resident Mission in Bangladesh andsubmitted for approval within the scheduled time. IDA was then only willingto finance comprehensive BMR of two or three mills on fulfillment ofadditional conditions such as:
(a) Privatization of at least 3-4 successful BTMC mills within 9-12 months beginning October, 1989 and privatization of 3 sub-projects within a short period upon completion of the BMR programme;
(b) inclusion of 2-3 members of the private sector on each enterpriseboard;
(c) giving the Board of sub-project mills the same power available toBoard of Directors under the Company's Act; and
(d) other conditions such as retaining existing top management for atleast three years, providing additional incentives, full autonomy inpricing of raw materials, procurement etc.
6. It is pointed out that GOB agreed on an action program to implementa considerable portion of these conditions and this program was forwarded toIDA on time. In response, IDA opined that GOB's program was unlikely to bringabout a fundamental change in the environment in which the public sector millsoperate and, based on this, IDA decided not to extend the Credit closing date.This action jeopardized TIRP-Phase I and Phase II projects, thereby creatinguncertainty and leaving most of the BMR works incomplete and imbalanced.
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B. BANK'S PERFORMANCE
7. IDA's original conception was to rehabilitate the war ravagedtextile industry in Bangladesh and indicated an interest in financing arehabilitation program over a phased period In order to ascertain priorityfor sub-projects u..der the program, a mill by mill survey was undertaken byBTMC with arsistance from a UNDP productivity team per IDA guidelines. Thesurvey results indicated a need for immediate implementation of BMR for alarge number of existing antiquated units of BTMC. A BTMC/UNDP productivityteam established under guidelines provided by IDA supervision missions,conducted a techno-economic appraisal of 50 old enterprises to determinepriority for rehabilitation. After evaluating the appraisal reports for eachof the individual mills, IDA allocated SDR 26.10 million under Credit 1205-BDto finance Phase I of the project which comprised BMR of 15 mills. The secondproject, Phase II, initially comprised seven mills but only four mills wereselected. The legal documents for .DA Credits 1477-BD and SF-22-BD weresigned on July 25, 1984 subject to fulfillment of certain conditions. Thecredit was declared effective June 6, 1985 after fulfillment of conditions,which IDA could have waived for the sake of timely implementation of theproject. Again the conditions imposed for extension of the Credit closingdate for Credit 1205-BD were also made applicable for the Phase II project(Credits 1477-BD and SF-22-BD). Thus, with the termination of Credit 1205-BDon January 1, 1987, the execution of sub-projects under Phase II weresuspended from January 1, 1987 to October 1987 for reasons best known to IDA.This caused serious problems for Phase II implementation delaying it by anadditional ten months. Due to the cancellation of the un-utilized funds underCredit 1205-BD, GOB requested that SDR 15.00 million be diverted from theprivate sector unutilized allocation under Credits 1477-BD and SF-22-BD tocomplete the balance of BMR for sub-projects under Phase I. The decisionregarding reallocation of funds was time consuming and unnecessarily lengthydue to the Bank's repeated requests to appraise and reappraise the sub-projects at the final hour of execution, after BTMC had earlier prepared theseafter discussion with UNDP experts and IDA missions, who had approved thesame. Moreover, imposition of additional conditions regarding diversion ofprivate sector funds for completing remaining BMR works unaer the Phase Iproject did not reflect the assistance and logical approach of IDA in timelycompletion of the project. With only 15 months left for project completionafter signing the amended DCA, IDA un-compromisingly compelled BTMC toundertake comprehensive BMR of two-three mills with so many conditions,knowing full well that implementation of these new programs would not bepossible for BTMC to accomplish within the credit validity period.
8. Once again, the unconditional allocation of SDR 3.892 million couldnot be utilized as IDA came up with additional conditions requiring tenders tobe done under IDA's revised guidelines and bidding procedures, after BTMC hadalready completed tendering and evaluation under IDA's previousguidelines/procedures. Prior to signing the amended PA and DCA, BTMC floatedtenders on December 5, 1988 and February 28, 1989 for procurement of machineryutilizing the unconditional allocation. After technical evaluation of thebids and obtaining approval from GOB, BTMC submitted same to IDA on August 9,1989. IDA, at such a critical point, refused to clear the bids on the groundsthat the tender should be floated again per revised IDA guidelines andprescribed bidding documents. Accordingly, BTMC invited fresh bids onNovember 16, 1989 and after technical and financial evaluation and obtainingGOB's approval submitted it to the Bank cn March 5, 1990 for clearance. TheBank in a letter dated May 8, 1990 indicated that extension of the Credit
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beyond June 30. 1990 was not possible, leaving execution of BMR works for thesub-projects under TIRP-Phase I and Phase II incomplete. This action createdalarm among BTMC's concerned sub-project mills that most of them were unableto procure the required productive machinery, such as ringframes/modernization of ring frames etc., thereby causing the additionalproduction envisaged in the appraisal report not being achieved afterconsiderable investment had already been made in the back process sections.
9. The additional debt burden this decision created on half completedBMR works will not improve the mills financial performance; rather this hasput the mills in a difficult position with respect to repayment of long termdebt obligations.
C. BANK OFFICIALS
10. Quite a number of Bank officials, including mission members, wereinvolved with the implementation of the project. Most missions were composedof officials with finance and economic backgrounds. Of the supervisionmissions connected with implementation of the project, only three includedmembers with a textile background. The BMR program of sub-projects under theprojects were designed by representatives from the BTMC/UNDP productivity teamand World Bank textile experts. At the end of implementation, ResidentMission members proposed a comprehensive BMR of 2-3 mills against the approvedBMR program for the remaining eight mills which were approved earlier by GOBand IDA. The revised comprehensive BMR program proposals, imposed by IDA,were contrary to Government policy and lead to a gross deviation from theearlier decision of EC/NEC (the highest approving authority of the GOB). Thecomplex.ties that might arise in connection with approval of such a revisedBMR program by the EC/NEC, in such a short period of time, were explained tomission members but, surprisingly, they did not seem to pay any attention tothe reasons put forward by BTMC officials. It has always been observed thatin cases of chaiiges in the implementation program and extension of creditclos;ng dates or diversion of funds from one category of expenditure toanother, the Bank seemed to come up with a complete new set of conditionsthereby hindered progress and inhibiting timely implementation of theprojects.
D. EVALUATION OF BORROWER'S OWN PERFORMANCE
11. The Textile Industry Rehabilitation Project Phase II was taken upfor the implementation of BMR cf seven sub-projects for BTMC under Credits1477-BD and SF-22-BD. Since the carried over BMR programs of Phase I weremixed up with the fresh BMR program of Phase !I, BTMC, with the consent of theBank, followed the same approach of section-wide procurement of machineryinstead of a project-wide procurement approach. This procurement approachultimately led to the sub-projects being incomplete, although a considerableamount of the Credit funds were utilized within the validity period of theCredit. The denationalization process also posed problems in projectimplementation at different stages. Moreover, since the procurement processwas very cumbersome and time consuming, including obtaining GOB and IDAapproval. BTMC could not handle the activities concerned with procurementprocessing per the schedule which resulted in an unusual delay in machineryprocurement. To allow for timely implementation of such a project, it wouldhave been better had the concerned officials of the implementing agency, soon
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after signing the Credit been given proper guidelines and training in the
practical problems and conditionalities.
E. ASSESSMENT OF EFFECTIVENESS OF THE RELATIONSHIP BETWEENTHE BANK AND THE BORROWER
12. The relationship between Bank Officials/mission members andofficials of BTMC and GOB were cordial at the personal level. Bank officials,as a donor, were initially found to be very cooperative in problem solving butas the execution of the program continued, the Bank officials started to showrigidity in their attitude to solving problems as well as fulfillingconditions leading to serious confusion and impediments in projectimplementation.
F. BANGLADESH SHILPA BANK - HEAD OFFICE DHAKAPROJECT IMPLEMENTATION DEPARTMENT
13. A Development Credit Agreement for Special Drawing Right (SDR)21.600 million (Credit No. 1477-BD) and a Special Fund Credit Agreement(Credit SF-22-BD) for SDR 20.700 million were executed between GOB and IDA onJuly 25. 1984. Subsequently, an Administrative Agreement for this project wassigned between the Government of the People's Republic of Bangladesh andBangladesh Shilpa 3ank on 25th April, 1985. As per the AdministrativeAgreement, IDA agreed to extend to the Government a Credit, in variouscurrencies, equivalent to SDR 21.600 million, known as IDA Development Creditand SDR 20.700 million as Special Fund Credit totalling SDR 42.300 million(approximately), out of which SDR 26.318 million was earmarked for financingthe BMR of private sector textile mills, on June 6, 1985. Of this amount,Bangladesh Bank allocated a sum of SDR 13.159 million each to BSB and BSRS.
14. Sixteen Textile mills from BSB's portfolio were identified for BMRfinancing. Of these, two were finally financed and the remaining 14 caseswere either closed or the sponsors did not seek utilization of the creditfacilities for various reasons. Details on the 14 closed cases, givingreasons for not utilizing the credit facilities, are furnished inAttachment 1.
15. The BMR proposals of M/S Eagle Star Textile Mills Ltd., Chittagongand M/S Jalil Textile Mills Ltd., Chittagong were approved by the formerInvestment Board on certain conditions. After fulfilling these conditions,BSB sent appraisal reports on these projects to the World Bank for approval.IDA conveyed its approval for withdrawal authorization as follows:-
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Nome *nd Location Date of Amount of Amount of loanof the Projects Approval Loan Sanctioned Approved Stages of Implwmentation
1. M/S Eagle StarTextile Mills d.Chittagong
1st Phase 11/09/86 Y. 344,318,838 SOR 1,878,000 The complete range ofA (USS 2,290,130) machinery imported under the
US2815,758.69 Phase I BUR Scheme are(Total now under commercialUSS 1,977,727 operation and Phase IIeqvt. Tk 60.998 BMR Scheme machinery hasmillion) already undergone
2. M/S Jalil Textile US32,696,981 SDR 2,800,000 All machinery except oneMills Ltd. (Eqvt. (USS 3,389,048) simplex fly frame wereChittagong 14/09/86 Tk. 84.071 min) shipped within the
extended last date ofTotal: USS5,881,461 US86,785,921 negotiation, i.e. 30/10/90.
(Eqvt. (Eqvt. Construction is progressingTk. 179.95 min) Tk. 215.09 min) satisfactorily. The unit
has now requested BSB toarrange funding for importof one simplex fly fromeimmediately to enable theunit to implement therehabilitation programsuccessfully.
16. From funds of SDR 13.159 million only two projects ultimately used
this credit line, amoui,ting to SDR 4.453 million (MIS Eagle Star Textile Mills
Ltd. - SDR 2.596 million and M/S Jalil Textile Mills Ltd. - SDR 1.947 million)
leaving a balance of SDR 8.616 (13.159 - 4.543) million. Per procurement
procedures, the mills prepared bid documents and submitted same to BSB. BSB
sent these to the World Bank Resident Mission for clearance/approval before
publication in the newspaper inviting tenders. Likewise, price proposals were
also first examined by the mills and submitted to BSB; BSB sent those to the
World Bank Resident Mission for decision/approval before obtaining final
quotation and establishment of L/C. Because of the inability of sponsors to
open L/Cs in time and the delayed shipment of machinery, required a time
extension which IDA generously allowed. But even then, M/S Jalil Textile
Mills Ltd., Chittagong, could not utilize the funds for the last shipment of
one simplex machine amounting to IRS. 721,112.00, i.e. US$39,130.00. For
import of this machine, the sponsors requested BSB to arrange funds so the
rehabilitation might be implemented successfully. IDA may consider extending
the validity of the credit line for the said amount, allowing the above
mentioned machinery to be imported by M/S Jalil Textile Mills Ltd.
G. BANGLADESH SHILPA RIN SANGTMA - HEAD OFFICE DHAKA
FINANCIAL RESOURCES DEPARTMENT
17. A Development Credit Agreement for Special Drawing Right (SDR)
21.600 million (Credit No. 1477-BD) and Special Fund Credit Agreement for SDR
20.700 million (Credit No SF-22-BD) were executed between GOB and IDA on
- 20 -
25.07.1984. Subsequently, an Administrative Agreement for Second TextileRehabilitation Project was signed between the Governmet.t of the People'sRepublic of Bangladesh and Bangladesh Shilpa Rin Sangstha on 25th May, 1985.It was mentioned in the Administrative 4tgreement that IDA agreed to extend toGOB in various currencies the equivalent of twenty one million six hundredthousand Special Drawing Rights (SDR 21,600,000) as IDA credit and twentymillion seven hundred thousand Special Drawing Rights (SDR 20,700,000) asSpecial Fund Credit totalling SDR 42.300 (approximately), of whichSDR 26.000 million (approximately) was earmarked for financing the BMR of theprivate sector textile mills, effective June 6, 1985.
18. Seven textile mills ii BSRS's portfolio were initially identifiedfor BMR financing, out of which one unit, Chittagong Textile Mills Limited,Chittagong, was sanctioned a F.C. loan of USS3,000,000 million under CreditNo. 1477-BD on 05.03.86. The remaining six BMR cases were closed for variousreasons (see Attachment 2).
19. The BMR proposal was approved by the Investment Board onSeptember 14, 1986 with certain conditions. After fulfilling theseconditions, BSRS sent appraisal reports to the World Bank for approval onMarch 31, 1987. IDA in a telex dated the 22nd September 1987 conveyed itsapproval for withdrawal of SDR 2.300 million (US$3,000,000 million) in respectof Chittagong Textile Mills Limited, Chittagong. Subsequently, BSRS requestedapproval by the Finance Division, Ministry of Finance, in a letter datedSeptember 29, 1987. The Finance Division, Ministry of Finance, gave itsapproval for BMR financing in a letter dated June 1, 1988. It should bementioned here that the last date for disbursement under Credit 1477-BD wasJune 30, 1989. The World Bank Resident Mission in Bangladesh communicated thedecision of the last date for disbursements under Credit 1477-BD to June 30,1990.
Procedural Problems
20. For financing projects under the IDA credit, project appraisalreports (PAR) had to be prepared following IDA guidelines. In this context apreferred presentation format was supplied by the IDA. Following this format,the PAR was be prepared showing projections for 15 years from the startingyear of the project. Further, for calculating conversion cost and preparingrevenue statements the following had to be calculated:
(a) Spinning conversion costs had to be allocated to each county inproportion to the quantity of equivalent 32 Ne year produced;
(b) weaving conversion costs had to be allocated to each construction inpropcrtion to the number of yards at equivalent 54 picks;
(c) bleaching, dyeing & printing costs had to be allocated to eachconstruction in proportion to the number of actual yards processed;and
(d) division of fixed and variable costs had to be determined frommills' records.
Following these guidelines, a detailed and elaborate PAR was prepared in atotally different format than is normally followed by BSRS. Extra time was
- 21 -
required for BSRS people to become acquainted with IDA guidelines andcalculate the numerous figures necessitated by IDA's guidelines.
21. In this case, Chittagong Textile Mills Limited, the only eligibleproject awaiting IDA funds, could not complete selection of machinery withinthe given time limit, i.e., by the 30th June, 1990. Even the same has not yetbeen finished by the borrowers, thereby by the Sangstha. As IDA did not agreeto extend the utilization date of the credit line, these funds col'ld not beutilized.
H. BANGLADESH INSTITUTE OF DEVELOPMENT STUDIES
22. The two research contracts, secured by BIDS (under the SecondTextile Industry Rehabilitation Project, Credit No. 1477-BD) were bided forglobally. Award of the research contracts to BIDS was a unique example ofutilizing national expertise under technical assistance (TA).
23. BIDS's in-nouse professionals and consultants labored for two yearsto produce a comprehensive and substantive set of reports (each prefaced by anexecutive summary) in eight volumes about supply, demand and institutionalaspects of the entire textile sector. For dissemination of the researchoutput a day-long policy seminar with participation by all concerned parties,was organized following completion of the Droject. Successful completion ofthis research assigrunent within the stipulated time and budgetary limits wassignificant. The efficient support services provided by the World Bank, inthis regard, are gratefully acknowledged.
24. The studies could have been further enhanced had there been agreater degree of systematic interaction between the Textile Ministry and theWorld Bank during the execution phase. Unfortunately, the Textile Ministry,particularly as a major stakeholder in the studies, gave little input within apre-designed institutional format. As a result, the Textile Ministry couldnot exploit the research findings to maximum benefit while drawing up theTextile Policy of 1988.
25. There was also little professional interaction between BIDS and theWorld Bank. BIDS had hoped that as the institutional supervisor, the Bankwould invest in a detailed technical evaluation of BIDS products. The reviewby IDA staff was basically confined to an expression of interest as an end-user of the findings of the studies.
26. The experience concretely suggests that:
(a) Under IDA technical assistance, there is scope to successfullyutilize national expertise for high quality professional work;
(b) there should be in-built mechanism for professional (not regulatory)interaction between the major stakehol(iers of the project; and
(c) IDA should equally invest in exploiting the project output as in theproject implementation.
- 22 -ATTACHMENT 1Page 1 of 2
DETAXILS OF THE 14 CLOSED CASES SHOWING THE REASONS FOR NOTAVAILING OF THE CREDIT FACILITY
NAME OF LOCATIONOF THE PROJECTS REASONS FOR CLOSURE
M. H/S Al-Haj Textile Mills The appraisal report was sent to IDALimited, Padna. on 05/25/90. IDA, in a letter dated
07/10/90 did not approve thisproject for funding.
2. MIS Bogra Cotton Spinning Mills The company had a large liabilityLtd., Bogra. with Sonali Bank and could not
submit no objection certificate(NOC) from said Bank. They alsofailed to make required projectdeposit with BSB and the case was,therefore, closed.
3. M/S Calico Cotton Mills Ltd., Sanction was withdrawn when sponsorsPadna. did not complete documentation
formalities.
4. M/S Mainamoti Textile Mills Sanction was withdrawn when sponsorsLtd., Chittagong. did not complete documentation
formalities.
5. M/S Ibrahim Textile Mills Ltd., Sanction was withdrawn due toChittagong. sponsor failing to comply with terms
and conditions of the loan.
6. M/S Mowla Textile Mills Ltd., The loan proposal was closed as theDhaka. sponsors would not agree to the pre-
sanction terms and conditions of theloan.
7. M/S Raj Textile Mills Ltd., The case was closed due to non-Jessore. regularization of loan A/Cs of other
BSB financed projects.
8. M/S Habibur Rahman Textile The case was not considered forMills Ltd., Comilla. additional financing because of
sponsor's failure to arrive at anamicable settlement regarding theirswelled-up dues.
9. M/S Muslin Cotton Mills Ltd., The case was not considered forKaligonj. additional financing because of
sponsor's failure to arrive at anamicable settlement regarding theirswelled-up dues.
- 23 -
ATTACHMENT 1Page 2 of 2
NAME OF LOCATIONOF THE PROJECTS REASONS FOR CLOSURE
10. M/S Chand Textile (Spinning) The sponsors were not interested inMills Ltd., Dhaka. availing themselves of the funds for
BMR of their existing unit.
11. M/S Gawsia Cotton Spinning Mills The case was not considered forLtd., Dhaka. additional financing because of
sponsor's failure to arrive at anamicable settlement regarding theirswelled-up dues.
12. M/S Jabe Textile Mills Ltd., The sponsors did not apply formallyNarshingdi. for loan co BSB.
13. M/S Halima Textile Mills Ltd., The sponsors did not apply formallyComilla. for loan to BSB.
'4. M/S Goalundo Textile Mills Ltd., Sponscrs' procurement proposalRajbari. approved by BSB was sent to IDA for
approval. The amount of procurementincreased to eqvt. US$ 2.28 millionas against IDA approval ofUS$ 1.30 million. Considering theimpact of increased cost on projectviability and limited time leftbefore the closing date of thecredit, IDA did not approve of theprocurement proposal.
BANGLADESH SHILPA RIN SANOSTHA
REASONS FOR CLOSURE OF SIX BMRE PROPOSALS UNDER IDA TEXTILE BMR CREDIT
Si. Existing Capacity Proposed Expansion Other Components Current StatusNO. Name of Mill Looms Spindle Looms Spindle of the Project of the Project Remarks
1. M/S Asiatic Cotton Mills 207 Nos 26,808 Nos. 160 Nos Nil Small finishing unit In view of apparent The equity depositLimited, Panchisish, like calendaring, excess capacity in was refunded andChittagong folding A inspect- the country for the project
ing. finishing of cloth, proposal wasBSRS Board at its treated as closedmeeting held on with effect from10/27/88 advised to 02/11/87.process the OMRproposal withoutfinishing unit. Thecompany did not agreeto the proposal andrequested to refund thepart equity depositkept with BSRS.
2. u/S Ashraf Textiles Nil 37,440 Nos. Nil 3380 -- The company did not The proposal wasMills Ltd., Tongi, Dhaka come forward for closed in October
execution of docu- 1985.ments.
3. M/S Afser Cotton Mills Nil 12,480 Nos. Nil 12480 -- The company could not The proposal wascome forward for closed in Marchsettlement of their 1988.post loan liabilitieswith the BSRS.
4. M/S Qussee Cotton Mills Nil 12,628 Nos. Nil 9072 Nos -- The company had to The proposal wassettle their past closed in Marchloan liabiliti-s with 1988.BSRS. The companycould not fulfill thisrequiremsent.
6. M/S Serajgong Cotton Nil 12,400 Nos. Nil 9800 -- There were disputes The proposal wasSpinning Mills Ltd. among the Directors closed in AugustSerajgong, Padna of the company. BSRS 1988.
could process thecase only on settlementof the dispute whichwas not done in due time.
8. M/S Cotton Spinning Co. 204 Nos 20,000 Nos. Nil 4800 Nos -- -- Because ofnegative networth, BSRS couldnot process thecase and treatedit as closed.
- 25 -
PART III: STATISTICAL INFORMATION
TABLE 1: RELATED BANK LOANS
No. Loa,s/Cr.dit Purpose Year of StatusTitle Approval
1206-BD T*xt i ls Industry To rehabilitate toxtile 1981 CompletedRehabilitation Project. capacity of STLC in order
to improve quantity andquality of output andimprove institutionaldolivories.
Follow on Project: None. Because of the GOB'c reluctance to undertake major reforms ofthe public sector to mprove environment as to operate public millscoiaercially, no project is conceptualized in the next five yearscredit pipeline.
- 26 -
TABLE 2: LIST OF PROJECT MILLS
BMR Hills Status of BMR
A. Public Sector Mills
1. Original Credit 1477-BD/SF-022-BD
1. Karilin Silk Partially completed2. Monno Textile w3. Olympia Textile a
4. R.R. Textile a
2. Credit 1205-BD
1. Ahmed Bawani Textile Partially completed2. Bangladesh Textile Completed3. Chittaranjan Cotton a
1. Eagle Star Textile Under implementation 11(Phase I and II)
2. Jalil Textile a
1/ Phase I is completed.
_ 27 -
TAM 8: P0JWT COSTS AMO fNANCI0
A. PwROJr COS
Local Foreign Local foroign
Item Coots Eachangn Costs Total Cos" Exchnnge Cost. Total
BIM - Private Hil II 7.7 28.7 31.4 2.7 5.6 8.5
am - Public Mills 4.7 17.6 22.3 6.1 16.3 22.4
T'ichnicml Assistaence
ConfuItaniep 0.1 1.4 1.8 - 0.1 0.1
Handloan Study 0.1 0.2 0.3 - 0.2 0.2
Maret Study 0.1 0 3 0.4 - 0.4 0.4
Total 12.S 48.2 61.0 8.8 22.6 31.6
1. Sinc 008 provided the sntirs equito contribution. it is pemsu_o that the incremental
working capital for all WflC sills hs been fully provided for.
2. Dooe not include interest during construction (MDA), which was not included in
appraisal estimate. STIC stimatem interest of about IJSU.6 million.
1. PROJWr FD4ICDVS
Actual
Planned as S of
Source (Croed; A4reeian) Actual Eaeoti_t
Local Foreign Total LosoI Foreign Total
MDAjSF 1/ 2.9 42.1 45.0 1.1 22.2 2S.3 81.6
LOW - 1.0 1.0 - 0. 0.6 60.0
0CoS1CIiI; IIs 9.e 6.1 15.0 7.7 - 7.7 51.8
Totel 12.6 48.2 61.0 6.S 22.6 31.6 51.6
I/ UF: Special Fund
- 28 -
TABLE 4: SUBLOAND RELENDING TERMS AND CONDITIONS
The Credit was relent to BTMC and the participating private Millspursuant to Sections 3.01 and 3.02 of the Development Credit Agreement, interalia, on the following terms and conditions:
1. Interest rates: 14.5Z per annum (for BTMC and theparticipating Mills located in developedareas (as defined by the Borrower)) and13.3Z per annum (for the participatingMills located in other areas), all subjectto adjustment, as needed, such adjustmentto yield positive rates in real terms.
2. Spread to private 2.5Z per annum charge as an administrationsector implem'enting fee out of interest realizable from eachagencies, BSB and BSRS: subloan.
3. Repayment period: not exceeding 15 years, including a graceperiod not exceeding 4 years.
4. Collateral: to be given by the participating PrivateMills.
5. Foreign Exchange Risk: to be borne by the Borrower upon paymentof an additional fee of 2.52 per annum onthe principal amounts relent andoutstanding from time to time.
- 29 -
TABLE 5: PROJECT TIMETABLE
Date DateItem Planned Actual
Identification
Preparation December, 1980
Appraisal Mission September. 1983
Loan/Credit Negotiations April 6, 1984
Board Approval May 22, 1984
Loan/Credit Signature August 25, 1984
Loan/Credit Effectiveness July 6, 1984 June 6, 1985 1
Loan/Credit Closing June 30, 1989 June 30, 1990
Loan/Credit Completion October 31, 1989 June 30, 1990
1/ Loan effectiveness was delayed because GOB did not secure timelyapproval of Project Proformas from the Planning Commission and executedSubsidiary Loan Agreement (SLA) with BTMC and Administrative Agreementwith BSR and BSRS.
- 30 -
TABLE 6
Credit Dlsburommnt
Cumlativo Estimated and Actual Disbure.eet.rus U Million)
Aegroiall I Stimnte ActualBank Fiscal Yea quarterly iuim;at-e X Qu rO wly Cumulatlve Actual X ofand Quarter Dlabuesnto Eatimated Deburieto Estimated
Si. IDA's Proposed Reform GOB's Reform ProgramNo. Elements
1. Full or partial (49Z) Partial (49Z)privatization of 3-4 BTMC's privatization of 1 or 2successful mills, including 3 mills and furthersub-projects for wh4ch IDA commitment to partiallyfunds would be used to privatize 3 sub-undertake comprehensive BMR. projects.
2. Each Enterprise Board of BTMC Willingness to includemills should include 2-3 private sector member inprivate sector members. 3 sub-project mills;
numbers to be includedis not mentioned.
3. Transfer of the sub-project Not agreed.mills under Companies Act of1913, and provide EnterpriseBoard the power availableunder the Act.
4. Tmprovements in the operating Willingness to delegateenvironment, preferably for greater authority onall mills but least for the (a) procurement andmills to be privatized and the (b) pricing and sale offuture sub-project mills, yarn to the Enterprisewhich include: (i) retained Board of 3 sub-projectsexisting General Managers for mills. Further, GOBat least three years; (ii) an would take measures toadditional incentive scheme (a) ensure continuity offor meeting targeted profit; services of senior level(iii) full autonomy in Officers for at leastpricing; and (iv) full three years; and (b)autonomy in raw material expand incentive scheme.procurement.
TABLE 8: PROJECT IMPLEMENTATION
Indicator Appraisal Estimate Actual(or PCR Estimates) Z of Achievement-------------------------------------------------------------- __-------------__-----------------------------
a. Rehabilitation of 15 private a. 2 private mill's 13Zmills. rehaibliation is under
implementation.
Indicator 1
b. Rehabilitation of 7 public b. 18 public mills are 2.6 timesmills. rehabilitated (4
completely and 14partially).
a. Modernization of 331,360 a. A total of 85,056spindles. spindles is expected to
be modernized (76,464spindles in public and 26Z2592 spindles in privatemills have already beenmodernized).
Indicator 2
b. Installation of 159,640 new b. A total of 16,504spindles. new spindles is expected
to be installed in 1OZprivate sector (5,320new spindles havealready been installed).
1/ A marginal imorovement in the rat.o of *sles resulted largely due to a eiQnficiant reduction in raw cotton pricee
in FY89 an4 FY90. This ham reduced lo ese of the oroject mills by 72%.
2/ Non EH mi I ll- These are mi lls for which no 8N was undertaken since their nationalization in 1972.
3/ Private i l l: Finenciel date presented here i for one project si l, in which Phase I of SW was completed in
early 1988; financial inforeation for this mill is available for FY86 and FY89. For the other Sill. implementation
of PP is expected to be co,aleted in Jwne 1991; financial information for FY89 is partially available, whilt for
the provisional accouht ia yet to be completed.
- 38 -
TA8LE 11
Financial rforserne of Project Killed
C. Conversion Costs (as S of Seles)
19 Mille
Pro GM After SW
FY92-8U FY89-90
(Actual) (Actul)
Public Mills -
Labour
Other
28 18
Total - -
41 48
Privte mill
Labor 12 15
Other 13 9
Total 25 24
0. Raw sateriel (R/1) Costs (as 7 of Sales)
Public Mills
FY82 FY83 FY84 FY85 F FY88 FY87 FYo8 FY89 FY90 Average
R/N Coat
as lof soles 72 58 Si 63 54 38 45 41 47 3
Private 4ill 1I/
R/M Cost
as S eSof sle 77 67 59 70 50 55 S 47 51 59
1/ Production cost date is analyzed for one will only, for which
the first. phase am one i 9 laentedl.
-39 -
TABLE 12
Financial Performance of all Public and Private Mills
A. No of Mills Showing Profit/Loss
FY82 FY83 FY84 FY85 FY86 FY87 FY88 FY89 FY90
Public Mills
No. of Mills 40 30 33 36 37 38 37 39 39No. of Profitable Mills 2 14 25 17 3 10 6 17 10No. of Loss Making Mills 28 16 8 19 34 28 31 22 29
Private Mills 1/
1lo. of Mills - - - 21 21 21 21 18 18No. of Profitable Mills - - - 11 6 8 5 4 5No. of Loss Making Mills - - - 10 15 13 16 14 13
B. No of Mills Meeting Financial Ratio Covenants 2/
Public Mills____________
Debt/Equity Ratio 21 19 19 20 19 21 21 10 11Current Ratio 3 5 2 2 4 6 5 8 4No. of Mills with negativeEquity Ratio 7 6 4 4 8 10 15 14 20
Private Project Mills_____________________
Debt/Equity Ratio 2 2 2 2 2 2 2 2 2Current Ratio - 1 1 1 2 1 - 2 2No. of Mills with negative
Equity Rate - - - - - - -
____________
1/ Information on private mills are obtained from Bangladesh Textile MillsAssociation (BJMA). Information obtained is not complete for all privatemills, therefore, the number of profitable mills given here is based onreporting mills.
- 40 -
TABLE 13: FINANCIAL RESTRUCTURING
AAA. Cash Infusion and Conversion of ADP Loan to Equity for BTMC Mills(FY 82-89)
(Tk. Mlillion)
Annual Actual Contribution X ofYear Contribution Cash Infusion Conversion Total Estimated
1/ Revised ERR has not been calculated because these are not likely to be toodifferent from the revised IRR.
Underlying Assumptions:
1. Project life is considered for a period of 15 years.
2. All project costs are assumed to be incurred in one year, prior to theyear when project benefit started to flow.
3. Project benefits are calculated on the basis of incremental productionbefore BMR (FY82-87) and after BMR (FY88-90).
4. Net profit margin (i.e. net benefit) has been estimated at 20Z of sales.Tihis is based on average net profit margin for last two years (FY88-90).
5. Price premium of yarns is assumed to be an average of 5Z of the totalgross sales.
6. Annual benefit steam (Col. 2) comprises two benefit streams:(i) increment productinn (Item 3) x net profit margin (Item 4) x FY90unit sales price; and (ii) FY90 gross sales x price premium (Item 5).
7. No salvage value of the project is considered.
- 42 -
TABLE 15
Cou..e.t.v. 00orstiorfi Perforeance of
Public and Peivate Sector 1Hill- (FY1.-O0)
Public Mill Private Mill*
SPINN4I
Capacity utilizatiwi (1) 76 83
Production (Mill lb*) so 47.97
Producti'nn/Spindlo/Yoor (lb-) 147.3 117.3
Production/Work.r/Y.ar (lb.) 2360 2338
Soindle Productruly (oz/sh ift/wPindle) 2.62 2.09
WEAVING
Capacity utilisation (S) 75 62
Production (Mill. m*tor) 43.48 23.87
Production/Laoo/Year (a/year) 16027 12349
Loco productrul (m/loou/ohift) 20.03 13.72
- 43 -TABLE 16: TA STUDIES
TA Studies
Volum stu " Purpose Status Impact ofoNo, the Study
Bangladesh Handloom Soctor Study
1. Bangladesh landloe. Examines structural (loom ComplOtAX n Partly implemented.Induotry: Annlysis of its and product use, labor February 1988 Some of thoStructural Adjustment, use pattern, etc) and recommondation ofRolativo Efficioncy and financiol (rate of this study In theStrategic Options for roturne) foatureo and Textilo Policy, 1988Future Developoent Institutional deliveries
of the handloom sector.
II. Bangladesh Handloom Anolyeis of nominal and February 1988 Not ImplementedIndustry: Analysis of *ffective rates ofFinance, Assistance Policy protection and creditand Financial relations.Instrumentalities for theDevelopment of Handloom inBangladesh.
III. Bangladesh Handloom Providoe technological February 1988 Not implomentedIndustry: Towards Achieving instrumentalitios toa More Productive revive the sector,Technologiceal basis. focussing on skill
IV. Market Structure of Imports Provideo Character of February 1908 Not implementedand output, Marketing markets, markotingPotential and ralitios and potentialInstrumntalities. Including export.
V. An Investment Program for Present six interventions October 1988 Party ImplementedBangladesh Handloom on investment proj3etsIndustry. involving institutional
reorganization, loommodern Izaton,Improvement of productdesign, entreprenourialskills, marketing andinstitutional supports.
Consumer Demand and Market Survey.
I. Domestic Doemnd for Textile Estimates level and October 1988 Not implementedProducts in Bangladesh - an composition, analysesExercise Into its Evolving determinants and provide,Structure. projection of textile
demands upto years 2000.
II. Bangladesh's Textile Examines performance of October, 1988 Not implementedEconomy and World Market a garmnts Industry andmid Evolving Trade external environmentRegulation, facing export expansion
of garments, fabrics andyarn.
III. Understanding Prices and Formulates a model of October, 1988 Not impleontedReforming Pricing Policies textile sector infor Textiles in Bangladesh. Bangladesh; deals with
Issues of price formationand competitive structureof the fabric market; andputs forward a pricingpolicy for the textilesector.
- 44 -
TABLE 17: USE OF BANK RESOURCES
A. Staff Inputs
(Staff Week)
Stage ofProject Cycle Planned Final
Through Appraisal 81.8
Appraisal throughBoard Approval 16.1
Supervi sion 83.6
TOTAL 181.5----------------- -------------- _-- -- _ _ -----------
_ 45 -
TABLE 17: MISSION DATA
Stage of Month/ Number of SW in Specialiaation Performance Types ofProject Cycle Year Persons Field Repreoentod Rating Prob I sm
Post-Appraisal 02/84 4 2 Economist - Cost estimate of private millsFinancial Analyst - Revaluation of assets ofToxtile Enrineer private mills
- request for TA fund forHandloom sector study.
Follow-up 08/84 4 3 Financial Ana ysto - Appointment of IndustrialTextile Engineer Economist.Economist - approval of project proforms
- Signing of SLA betwen OBand BSB/BSRS.
Supervision 10/84 3 3 Financial Analysts NA - approval of PP- Signing of SLA- Funding arrangement with UNOPfor (a) Handloom, (b) marketstudy and (c) productivitytem.
Supervision 03/85 2 3 FInsncial Analysts NA - Signing of SLA- UNDP funding agreement- signing of administrativeagrement.
08/86 1 1 Financial Analysts 2 - Slow impleiontation of recomm-ondation of EnvironmentPollution Control Department
on a roform packageenabling privatization ofsom -TMC mil ls a andproviding enterpriseosautonomy.
Final 07/90 2 2 Textile Specialist 4 - slow procure- ntSupervision Financial Analyst - poor utilization of
credit by public and privatesectors.
- 47 -
TABLE 18: STATUS OF COMPLIANCE WITH COVENANTS
Covenant Statue
1. ection 3.01 DCA (): The Borrower declaresits commi nt to the obj ctive of the Projectas set forth in Schedul- 2 to this Agreemntand, to this end will:
Part A: Balance Modernize and Replacemnt Part AfacilitiSt at (I) about 7 Public milln, and N_u-br of mills for which BMR will be(ii) about 16 Private mills through (a) undertaken was amended on April 27, 1989carrying out of renovation and extension works replacing the numbers 175 and ,165 by '22 andand (b) provision of equipment, spare part, *6 respectivoly for public and private sector.raw materials and othar facilities. Utilization of Credit, particularly by private
sector; is disappointing. Only two millsavailed the Credit.
Part B: Technical Assistance and Studies Part a
Provision of consult nto services to assist in:
(i) carrying out Part A (ii) of the Project: (i) Implemented.
(ii) improving production management system (ii) Implemnted.within tho Private mills
(iii) carrying out a handloom sector study: (iii) Study carried out by BIDS; reportcompleted. Implementation of therecommendations provided in the study reporthas not been undertaken.
(iv) conducting a market and (iv) Study carried out by BIDS; reportdemand survey: and completed. Implementation of the
recommondations made in the study report hasnot been undertaken.
(v) carrying out inservice training at the (v) Training of STMC mid-level technicians inSavor Training Institute batches had been contuning at tho Institute.
2. Section 4.01 DCA (c): The Borrower shall: Separate audit reports for each of the 19(i) -haehe Maccounts for each fiscal year project mills were submitted in april 1990.audited, in accordance with appropriate Audited report for FY89 and provisionalauditing principles consistently applied, by accounts for FY90 for entire BTMC are rec,ivedindependent auditors acceptable to the in October, 1990.Association; (;i) furnish to the Association,as soon as available, but In any case not laterthan six months after the end of each year, acertified copy of the report of such audit bysuch auditors, of such scope and In such dot ilas the Association shall have reasonablyrequested.3. Section 4.02. (a): By September 30, 1984, or Report submitted to BTMC but implemntation ofsuch lter date as the Association may agree, findings are considerably behind schedule.furnish or cause to be furnished to thoAssociation for ito comente the findings andrecommendations baosd on the rosults of thereview carried out by the Borrower'sEnvironmental Pollution Control Dopartment and
