ADDIS ABABA CHAMBER OF COMMERCE AND SECTORAL ASSOCIATIONS

MANUFACTURING SECTOR PROJECT FINANCE BY

DEVELOPMENT BANK OF ETHIOPIA

Prepared by: Tadesse Tolcha (M.A. in Economics)

Tel. 0922022146

Email: tadetolcha2015@gmail.com

OUTLINE

OVERVIEW OF CHANGES IN DBE CREDIT PRODUCTS AND SERVICES OF DBE LEASE FINANCE DISCUSSION PROJECT FINANCE DISCUSSION

PROJECT CYCLE REQUIREMENTS FROM CUSTOMERS DBE PERFORMANCE IN 2014/15 DBE PLAN FOR THE YEAR 2015/16 DISCUSSION

CHANGES IN DBE

የኢትዮጵያ ልማት ባንክ በብድር ፖሊሲ& በአደረጃጀትና በአሠራር

እንደገና ተዋቅ[ል::

CHANGES…

New Credit Policy approved in October 2015

About eight Directorates are newly established at Head

Office

In addition to the existing five districts, seven districts

are opened throughout the country

Seventy five new branches are also opened throughout

the country.

Employed 380 new fresh graduates

LEASE FINANCE

Lease Finance is a new product to be started by DBE currently.

“Lease financing” in the DBE context shall mean:

New capital goods/machinery purchase (local producers if available or import

otherwise)

Customers demand is considered while purchasing

Small and Medium Enterprises (SMEs) under “hire purchase” modality.

Graduates from micro and small enterprise to small and

medium enterprises,

as well as new enterprises.

LEASE…

• Under lease financing, ownership of the leased equipment shall be registered in the name of the Bank until final settlement of the loan.

• "Hire-purchase" means with each lease payment, an equal percentage of the ownership is transferred to the lessee and, upon effecting of the last payment, the ownership of the capital goods shall automatically be transferred to the lessee.

LEASE…

GOVERNMENT PRIORITY SECTORS FOR LEASE FINANCING SERVICES

i. Agro-processing industries;

ii. Manufacturing industries;

iii. Tour industries;

iv. Construction industries; and

v. Mining and quarries.

LEASE…

– ELIGIBILITY CRITERIA

• The applicant must be creditworthy and the project viable

• The applicant should Tax Identification Number (TIN).

• The lessee/applicant should submit:

– a well prepared business plan for requests up to Birr 10 million and

– well prepared feasibility study for requests of more than Birr 10

million in order to demonstrate his/her knowledge and understanding

in the area of the targeted project.

– The Bank will prepare a guideline for preparation of both business plan

and feasibility study.

LEASE…

In the context of DBE, Small and Medium Enterprises (SMEs) shall mean an operates with 6 employees and has total capital from Birr 500,000 to Birr 7.5 million.

• The Bank’s Lease Financing scheme shall:

–Support structural transformation objective;

–Promote import substitution;

–Create employment opportunity;

–Promote export promotion objective of the country and support foreign exchange earnings;

–Create access to finance for SMEs particularly the missing middle.

LEASE…

• The Bank provides lease financing service (for new and expansion projects) for SMEs customers.

– Checking of Application •

• The Bank shall not entertain request for refinancing for already purchased capital goods.

• The Bank shall not finance second hand capital goods/machinery.

LEASE…

• DEBT:EQUITY RATIO • 80% : 20%

– DEBT: MACHINERY COST AND ASSOCIATED EXPENSES

– EQUITY: WORKING CAPITAL

» SALARY

» RAW MATERIAL

» RENT

» OFFICE SUPPLIES, etc.

» 10 percent in cash and 10 percent in the form of in-kind contribution

» The in-kind contribution shall be in the form of working capital determined based on the requirement of the enterprise. The owner of all in-kind contribution shall be confirmed by the DBE.

LEASE…

– Exposure Limit

• The total liabilities to a single lessee/applicant resulting from

extension of one or more SMEs lease financing shall be limited

to Birr 1million- Birr 30million. All lending to SMEs shall only be

in the form of equipment/machinery.

LEASE…

• Interest rate = 9%.

PROJECT FINANCE

• CREDIT PRODUCTS AND SERVICES

– LONG-TERM LOANS

• THE MAXIMUM LENGTH OF TIME THE BANK ADVANCES LONG TERM LOANS IS FIXED AT 20 YEARS INCLUDING ANY GRACE PERIOD.

• ANY ADDITIONAL LOANS OR RESCHEDULING MUST FALL WITHIN THE 20 YEARS

– MEDIUM-TERM LOANS

• THIS TYPE OF LOAN IS REPAYABLE WITHIN THREE TO FIVE YEARS INCLUDING ANY GRACE PERIOD

PROJECT…

• WORKING CAPITAL LOAN

– PERMANENT WORKING CAPITAL LOAN AS PART OF THE

LONG AND MEDIUMMTERM LOANS THAT WILL BE

RECOVERED WITHIN THE LOAN REPAYMENT PERIOD

PROJECT…

• THE SHORT TERM WORKING CAPITAL REQUIREMENT OF

OPERATIONAL PROJECTS FINANCED BY DBE SHALL BE CATERED

BY COMMERCIAL BANKS THROUGH A TRI-PARTITE AGREEMENT

ENTERED AMONG DBE, COMMERCIAL BANKS AND

BORROWERS. HOWEVER, THE CBE WOULD BE USED AS A LAST

RESORT IN CASE OF THE BORROWERS COULD NOT GET SHORT

TERM WORKING CAPITAL FROM ANY COMMERCIAL BANK.

PROJECT…

• SPECIAL LINE OF CREDIT

– EXPORT CREDIT

• For textile, garment and leather and leather products

• The loan is to be used for raw material purchase

• The borrowers and/or companies should secure sales contract from buyers in the international market

– INPUT FINANCING

• For pharmaceutical industries

• The purpose of the loan is for procurement of raw materials

• Tripartite agreement among DBE, borrowers and Pharmaceuticals Fund and Supply Agency.

PROJECT…

– CO-FINANCING/SYNDICATE FINANCING/

• For Mega Projects involving large amount of investment capital

• It can be with National Financial Institution (CBE) or International Financial Institutions (WB, AfDB)

• The purpose is to minimize risk, overcome occasional liquidity problems and to maintain the exposure limit.

PROJECT…

• Priority areas of the government/Bank:

i. Manufacturing industries;

ii. Agro-processing industries;

iii. Mining or extractive industries; and iv. Commercial agricultural projects.

PROJECT…

• Manufacturing and Extractive Industries – Projects that are power driven (Operated or controlled

by mechanical or electrical energy as distinct from manual labor) and employ at least ten persons fulfill the definition of manufacturing projects;

– Manufacturing projects are expected to have at least 30% value addition;

– the Bank favors projects which:

a. Utilize local resources; and

b. Produce export oriented products or substitute imports.

PROJECT…

• The debt-equity ratio for new projects: – Domestic Investors:75%: 25%

– Foreign Investors: 50% : 50%.

• The debt equity ratio for expansion projects:

– 60%: 40%

• Domestic investors engaged in export business:

– on textile, garment and leather and leather products that plan to expand through a backward or forward linkage under 70%: 30% debt to equity ratio.

PROJECT…

• Additional loans (for projects under implementation with justified reasons such as cost-over run):

– 75%: 25% for domestic investors

– 50%:50% for foreign investors

PROJECT…

• In-Kind Equity Contribution Policy is also approved

– Equipment, machinery, leased land, vehicles and building that are used/to be used for the sole purpose of the project to be financed by DBE.

• Book values of vehicles should not be less than 40% of original cost

• Leased land value should be determined by the lease amount paid instead of market price.

PROJECT…

– For existing inv’t projects that shift from service sector

to manufacturing, in-kind equity contributions brought

from the existing inv’t could be considered subject to

fitness for the purpose.

– The valuation of the in-kind contributions should be

conducted by the Bank’s professionals.

PROJECT…

• REVISED INTEREST RATES

– First Grade Exporters = 9%

• Export ≥ 80% of sales

– Second Grade Exporters = 9.5%

• Export accounts b/n 60% and 80% of sales

– Import Substitution industries = 9.5%

– Other than 1st grade exporter, 2nd grade exporter and import substitution = 10%

– Non-priority industries = 12%

PROJECT…

• PAID-UP CAPITAL OF DBE IS RAISED TO BIRR 7.5 BILLION

• SINGLE BORROWER LIMIT (25%) = BIRR 1.875 BILLION

– LOAN REQUESTS ABOVE BIRR 1.875 BILLION CAN BE ENTERTAINED BY CO-FINANCING SCHEME.

• TOTAL LIABILITIES TO RELATED PARTIES (35%) = BIRR 2.625 BILLION

PROJECT…

• PROJECT CYCLE

– PROJECT IDEA

• EXPERIENCE/EXPERTISE

• EXPOSURE

• EDUCATION

• GOVERNMENT STRATEGIC PLAN

– FEASIBILITY STUDY (PROJECT PLAN)

• PROJECT BACKGROUND

• TECHNICAL STUDY – LOCATION/SITE AND ITS SUITABILITY

– BUILDING AND CONSTRUCTION TYPES, SIZES, CAPACITY, ETC.

PROJECT…

– TECHNICAL STUDY…

• MACHINERY TYPE, COST, CAPACITY, etc.

• WORKING CAPITAL REQUIREMENT AND COST, SOURCE, AVAILABILITY, SUSTAINABILITY OF SUPPLY, etc.

TOTAL FINANCIAL REQUIREMENT (TFR)

TFR = (BUILDING COST + MACHINERY + WORKING CAPITAL)

25% = EQUITY

75% = DEBT/LOAN/CREDIT

PROJECT…

• MARKET STUDY – LOCAL MARKET vis-à-vis EXPORT MARKET

– IF BOTH, %AGE OF LOCAL MARKET AND EXPORT MARKET

– MARKETING STRATEGY

– PRICE (LOCAL AS WELL AS EXPORT)

• SUCCESS AND RISK FACTORS – STRENGTHENING SUCCESS FACTORS

– MITIGATING RISK FACTORS

PROJECT…

• PROJECT MANAGEMENT

– ORGANIZATION STRUCTURE

– OWNERS’ EDUCATION LEVEL AND RELEVANT EXPERIENCE

– PROJECT MANAGER MUST HAVE RELEVANT EDUCATION AND WORK EXPERIENCE

– OTHER DEPARTMENT MANGERS MAUST ALSO HAVE RELEVANT EDUCATION AND WORK EXPERIENCE

PROJECT…

• APPRAISAL (BANK INTERVENTION)

• IMPLEMENTATION

– UNDERTAKING BUILDING AND CONSTRUCTION

– MACHINERY PURCHASE, INSTALLATION, TEST RUN AND COMMISSIONING

• MONITORING AND EVALUATION

– OPERATION

PROJECT…

• Areas Targeted under Manufacturing and Extractive Industries

1) Manufacturing of beverages, minerals and bottled water;

2) Manufacturing of textiles and fabrics;

3) Industry scale wearing apparel factory (garment factory);

4) Tanning of finished leather and leather products;

5) Paper and paper products (converting) factory;

6) Chemicals and chemical products factory;

PROJECT…

7) Rubber and rubber products factory;

8) Non-metallic and other construction material products factory:

a. Cement production;

b. Gypsum production;

c. Marble production;

d. Bricks production;

e. Glass and glass ware production etc.

9) Manufacturing and processing of base metal and steel products;

PROJECT…

10) Precious and base metal mining factory:

a. Gemstones production;

b. Tantalum production;

c. Gold production etc.

11) Fabricated metal products factory;

12)Motor vehicles, trailers and semi-trailers assembly;

13) Sugar and sugar by products factory:

a. Ethanol production;

b. Confectionary production;

PROJECT…

14)Pharmaceuticals factory;

15) Packing materials production;

16)Electrical power generation from geothermal, wind, solar etc.;

17) Micro dams for power generating plants;

18) Electrical and electrical apparatus and appliance manufacturing;

PROJECT…

19) Sanitary materials factory;

20) Other manufacturing and extractive industries falling within the priority area of the Bank;

21) New manufacturing and extractive industries shall be identified and released for financing by the Research Process as and when required; and

22) Applicable and relevant concentration risk rulings of the Bank related to geographical and commodity concentration risk should be continuously monitored.

REQUIREMENTS FROM CUSTOMERS

• Loan Application

– All loan applicants who seek the service of the Bank need to submit a formal request in writing indicating the amount of the loan together with its intended use or purpose;

REQUIREMENTS …

• Licenses – Items to be submitted along with the written loan request;

a. Temporary or permanent work permit (for foreign investors); b. Investment certificate; c. Principal registration certificate; and d. Tax payer identification number (TIN). e. Moreover, TIN is also required from: i. Major shareholders of PLCs, share companies, partnerships

and corporations, who have a minimum of 5% of the prescribed capital of the business organization; and

ii. Spouse of the applicant in the case of sole proprietorship; f. Applicants from the mining sector are required to submit the

necessary documents verifying that they are legally registered with the relevant government authority and have permission to undertake investment activity in the sector. Such documents include:

REQUIREMENTS …

i. Documents from Ministry of Mines or regional mines and energy bureau regarding the potential of the minerals intended to be extracted or mined; and

ii. Contractual agreement entered with the relevant government organs on the extraction and utilization of the mineral resources.

REQUIREMENTS …

• Land

– Applicants are required to submit contractual land lease agreement that extends to at least 5 years beyond the repayment period of the loan or a title deed certificate or proof of land ownership approved by the appropriate Government authority;

– The contractual land lease agreement is required in order to ensure legality of ownership and for registration as collateral;

REQUIREMENTS …

• Construction and Engineering Documents

– For Industrial Projects

• approved blue prints of architectural, structural, sanitary, electrical and mechanical drawings,

• bill of quantities,

• take-off sheets (in hard copies and soft copies);

• approved site plan and construction permits

REQUIREMENTS …

• Proforma Invoices

– Customers need to submit Proforma invoices for the following major items:

REQUIREMENTS FROM CUSTOMERS

• Proforma Invoices from legitimate suppliers/manufacturers for machinery

– Major specifications (capacity), quantity, quality, cost, etc.

– All capital goods purchase shall be from local producers if available at the required quality and quantity. If the machinery/equipment could not be found locally, it can be imported from abroad.

REQUIREMENTS…

• Building and construction – Drawings (blue prints)- hard and soft copies

• Structural, architectural and sanitary

– BOQ-hard and soft copies

– Takeoff sheet – hard and soft copies

– Steel structure proforma (if necessary)

– Construction permit

• Feasibility Study done by consultants

• Environmental Impact Assessment

• EEPCO Letter showing availability and cost of power supply

REQUIREMENTS…

• TERMS AND CONDITIONS OF LOANS – Maintaining accurate and adequate financial records

– Provide annual business plan and annual audited financial statements

– Open current account with the Bank after the loan contract is signed and prior to any equity release or loan disbursement

– Borrowers shall always process their export transactions (L/C) through DBE

– Insuring of projects

– Collateral assets inventory report each year

DBE PERFORMANCE IN 2014/15

• SOCIO-ECONOMIC BENEFITS

– Employment = over 100 thousand permanent and temporary

– Tax revenue for government = Birr 2.4 Billion

– Foreign Exchange Generation = Birr 1.7 Billion

DBE PERFORMANCE…

• REGIONAL DEVELOPMENT

–Regional Distribution of DBE Loans (2014/15)

• Oromia = 63.71%

• Gambella = 23.38%

• Tigray = 7.39%,

• Addis Ababa = 2.95%,

• Amhara = 1.26%,

• Others = 1.31%

DBE PERFORMANCE…

• PRIVATE SECTOR DEVELOPMENT

– Total loan outstanding (2014/15) = Birr 27.4 billion

• Private sectors = Birr 20.84 billion (76.2%),

• Public sector = Birr 3.34 Billion (12.2%),

• Micro finance = Birr 3.04 Billion (11.1%)

• cooperatives = Birr 136.1 Million (0.5%)

• The lion’s share of DBE Loans goes to private sectors

DBE PERFORMANCE…

–LOAL PORTFOLIO BY FOREIGN/LOCAL INVESTORS (2014/15)

•72.6% = local investors.

•27.4% = foreign investors

–TURKEY (59.28%)

–INDIA (30.67%)

–OTHERS (10.05%)

DBE PERFORMANCE…

DBE PLAN IN 2015/16

• Loan Approval = Birr 14.82 billion

– Manufacturing (private sector.) = Birr 6.73 billion

• Loan Disbursement = Birr 13.54 billion

– Manufacturing (private sector) = 4.806 billion

THANK YOU