Evaluation Team

This report was prepared by Mrs. G. HALL-YIRGA, Principal Evaluation Officer, Operations Evaluation Department, (OPEV) and Mr. Akinola AKINTUNDE (Consultant), following a field mission to East Africa. Any further matters relating to this report may be referred to Mr. D. A. BARNETT, Acting Director, OPEV or to Mrs. HALL-YIRGA

Objective

LOC I was designed with the policy objective of providing term credit to SMEs. However, in line with PTA Bank’s mandate , most of the sub-projects financed under this LOC were medium- and large-scale enterprises whose capital requirements were over US$200,000. The evaluation, therefore, draws attention to the fact that the term credit and technical assistance needs of small and micro-enterprises in the sub-region remain largely unmet

Main Findings

• LOC I was extended to PTA Bank at a time when structural adjustment programmes were being implemented in member states. The resulting economic liberalisation increased the demand for term credit to finance projects in the sub-region. The provision of the line of credit from ADB, therefore, assisted PTA Bank to meet part of this demand.
   
• PTA Bank had in the past serious governance issues and weak financial performance that adversely affected the preparation, appraisal and monitoring of the sub-projects. A major recommendation of the PCR prepared in 1999 was that, since PTA Bank was confronted with serious institutional crises, a diagnostic study should be undertaken to review the  management and operations of PTA Bank as a matter of urgency. The study was carried out and the recommendations have been implemented with results that helped transform PTA Bank to a well-managed and financially healthy institution. LOC I have served as a catalyst to encourage the reforms and the flow of resources from other donors.
   
• LOC substantially achieved the objectives set at appraisal in the provision of term credit to the private sector. Most of the sub-projects financed were mainly local raw material users thus creating the necessary backward linkages. Forward linkages were also realized through supply of finished products in the region that contributed to earning or saving foreign currency. Employment creation by the performing sub-projects was also significant. The completely failed sub-projects account for 12% of the total number of sub-projects financed. The major factors that contributed to the poor performance of the sub-projects relate to high fixed interest rates on the foreign loans (12%) at a time when rates were declining in the market; unfavourable weather conditions and inadequate working capital for the horticulture sub-projects; and, lack of 20 entrepreneurial and managerial capacities in the indigenous new enterprises. To date about 50% of the sub-projects have fully or substantially repaid their loans, while systematic debt recovery is being pursued for the outstanding balance. LOC I is rated satisfactory with respect to relevancy, efficacy, institutional development impact and sustainability. It is rated unsatisfactory with respect to efficiency. The aggregate evaluation of the LOC I is satisfactory, considering the overall achievements. On the other hand, Borrower and Bank performance on LOC I’s implementation are both rated unsatisfactory.
   
• In line with PTA Bank’s mandate , most of the sub-projects financed under the first LOC were medium and large-scale enterprises. The needs of new enterprises with capital requirements below US$200,000 were not covered under the LOC. This implies that sub regional banks, such as PTA Bank, might not be well equipped to meet the financial (particularly local currency) and technical assistance needs of small and micro-enterprises.

Main Lessons

• Although PTA Bank’s portfolio management function has improved in recent years, there is need to enhance quality-at-entry and monitoring and reporting systems.
   
• Financial reporting from some sub-projects is suspect. In spite of sub-projects’ sustained performance, their financial accounts show deficits or very modest profits. Such an accounting practice does not allow capital build up for sustainability and counters development objectives. It is for the tax authorities in the respective countries to review accounting practices of resident companies and reassess company results for tax purposes.

• A major initial advantage of LOC I was its low interest rate at the time relative to the then prevailing market conditions, which enabled PTA Bank to pass on the funds to borrowers at competitive rates. Over the life of the line of credit, however, PTA Bank found its fixed rate to be very constraining in view of the significant changes in the interest rate structure in the market following liberalization policies of member states. Moreover, some sub-projects needed term credit in local currency. In recent years, ADB has adopted variable interest rates but provision of local currency loans has not yet been entertained.

• The limit set on sub-regional development banks, such as PTA Bank, to finance specific sub-projects is too low for exercising their broader mandate of promoting regional integration. Neither is it of much help in relieving ADB from going into smaller size projects for direct financing. On the other hand, such banks are not effectively structured to meet the fundamental needs of small and micro enterprises (such as local currency term credit, working capital and capacity building support).

• The main challenges facing PTA Bank are augmenting its capital base regularly, improving its asset base steadily, and mobilising resources to meet its mandate sustainably.
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Main Recommendations

Recommendation(s) to the Bank:

• ADB’s future interventions should critically assess that best business practices and good governance are fully institutionalized and sustained at PTA Bank.

• ADB should, in particular, ascertain that PTA Bank has enhanced monitoring and reporting systems that capture information and data on the performance of the subprojects and the development outcomes of the LOCs.

• As part of the governance issue, ADB needs to assist member states to have better functioning tax and regulatory bodies to oversee the performance of the private sector

• ADB’s future interventions need to include conditions requiring PTA Bank to ensure that sub-projects financed under its LOC submit audited financial accounts prepared on the basis of accepted financial accounting principles and practices.

• The application of variable interest rates by ADB and EADB in recent years is encouraging and should continue with up to date systems in place to make timely adjustments to changes in market rates.

• ADB needs to consider local currency financing at sub-regional level through cofinancing with commercial banks; or through guarantees to repay foreign currency loans and raise working capital to SMEs, particularly indigenous ones. In addition, the possibility of swapping foreign currency loan to local currency loan, should be explored to mitigate exchange risks.

• ADB needs to enhance its financial intermediation for channelling bulk resources through sub-regional development banks, so the latter could, in turn, on lend to national financial intermediaries, including micro-finance institutions. The subregional development banks could then focus on direct financing of medium to largescale projects at the national level and on co-financing large-scale sub-regional project while national DFIs attend to small and micro enterprises.

• ADB should forge partnership with and establish appropriate linkages to small enterprises development agencies and NGOs that provide technical assistance services to micro and small enterprises in areas such as business plan development, loan application procedures and processes, accounting practices and financial reporting.

• There is, therefore. a need to revisit ADB’s financial intermediation policy and strategy with a view to designing appropriate financial products and technical assistance to sub-regional and national DFIs

• ADB needs to enhance its dialogue with COMESA members on ways of mobilizing concessional resources for PTA Bank and raising funds from local bond markets to lower PTA Bank’s on lending costs.