RESTRICTED Report No. TON: Ap-7 Report No. 6772-TON This Report has been prepared for ASIAN DEVELOPMENT BANK the exclusive use of the Bank. A P P R A I SA L OF THE THIRD MULTIPROJECT AND TONGA DEVELOPMENT BANK PROJECT IN TONGA May 1986 CURRENCY E UIVALENTS (As of 30 April 1986) Currency Unit X Pa'anga (T$) - 100 Seneti T$1.00 o US$0.7415 US$1.00 T$1.3486 The Pa'anga is tied to the value of the Australian dollar. For the purposes of calculation in this Report, an exchange rate of T$1.0 - US$0.71 has been used which was the rate prevailing at the time of the appraisal mission's visit. ABBREVIATIONS ADAB - Australian Development Assistance Bureau BOT - Bank of Tonga CFTC - Commonwealth Fund for Technical Cooperati.-a CPD - Central Planning Department DP4 - Fourth Five-Year Development Plan DP5 - Fifth Five-Year Development Plan EEC - European Economic Community FAO - Food and Agriculture Organization GDP - Gross Domestic Product HF - High Frequency HWD - Harbours and Wharves Department (within MOF) ILO - International Labor Organization 1MO - International Maritime Organization IPU - Industrial Promotion Unit JICA - Japanese International Cooperation Agency NLCI - Ministry of Labour, Commerce & Industries MOF - Ministry of Finance MOW - Ministry of Works PCC - Project Coordination Committee RDF - Rural Development Fund RDU - Rural Development Unit SIC - Small Industries Centre SPARTECA - South Pacific Regional Trade and Economic Cooperation Agreement SPF - Small Project Fund TDB - Tonga Development Bank TTC - Tonga Telecommunications Commission TTD - Telegraphs and Telephones Department UNDAT - lnited Nations Development Advisory Team UNDP - United Nations Development Programme VHF - Very High Frequency NOTES In this Report, $ refers to US dollars. The fiCcal year of thc Government ends on 30 June, and that of the Tonga Development Bank on 31 December. PROJECT FOCUS, DESI.N AND RATIONALE Tongs's main natural resources are agriculture, forestry and fisheries. The Government is attempting to develop these resoarces through selective investment in infrastructure and provisien of incentives to encourage diversification of agriculture and develoment of manufacturing. The economic development of the country is, however, constrained by its location and its physical and demographic characteristics: (i) it is far from the centacs of world trade and industry; (ii) its land area is fragmented by its archipelagic configuration; (ili) the population is dispersed; &nd (lv) the mall size of the domestic market -- which is scattered -- makes it difficult to attain economits of scale. The preparation of the Fifth Five-Year Development Plan (DP5), covering the period FY1985/86 to FT 1989/90, has been delaye4 and it has not yet been finalized. However, the Plan is expected to emphasize the same areas as the previous plan by giving the highest priority to agriculture and flsheries followed by industry, transport and communications and social services. An important objective of the Plan Is to promote balanced regional development by encouraging development of islands outside the main island of Tongatapu. In line with the above obJectives, the Government has identified a number of small, high-priority projects in the Industrial and transport and coummnications sectors and has requested Bank assistance to support these projects; in addition, the Government has requested a line of credit for Tonga Davelopment Bank to support general development of the economy. The mall projects have all been selected to support development of industry, regional development and development of agriculture; the lina of credit will similarly support development of industry and agriculture. In view of the asmll size of the individual projects, the multiproject lending modality is considered to be the most suitable method of preparing and implomenting these projects. To further simplify processing of the loan, the multiprojeet loan (the Multiproject) and the line of credit to Tonga Development Bank (the Line of Credit), have been combined into one set of loan documents (the Project). The Multiproject covers: (i) expansion of the existing Small Industries Centre (SIC) on the main island of Tongatapu; (il) establishment of a new SIC on the northern island group of Vava'u to cater mainly to small-scale service Industries w?iich serve the local market, (iii) improvement of Nafanue Harbour on 'Eu Island; (iv) contructlon of about 20 km of agricultural access roads on 'Zus Island; (v) upgrading telecomunications services between the capital city of Nuku'alofa and 'Rua Islands together with provision of local telephone services on the Island; and (vi) Improvement of about 30 km of rural roads on the main Island of Tongatapu. The Project also includes technical assistance for: (i) undertaking detailed preparation of the subprojects to be financed under the Multiprojsct; (il) providing Institutional strengthening to selected Implementing Agencies; (ill) providing appropriate expertise to advise the Governmnt on review of interest rate policies; and (iv) contributing to the further institution building of Tongs Development Bank. The total cost of the Multiproject Is estimated at $2.52 million, of which the foreign exchange cost is estimted at $2.00 millio and the local currency cost at $0.S2 million equivalent. It is proposed that the Bank provide a isan of $2.0 million equivalent from the Special Funds resources - representing about 79 per cent of the total cost of the Multiproject - to finance all of the foreign exchange costs, Including the service charge on the Bank loan during construction, and to provide an additional loan of $1.0 million equivalent from the Special Funds resources for the Line of Credit which the Government will re-lend to Tonga Development Bank for onlending to subprojects that meat appropriate development criteria. The Executing Agency for the Multiproject will be the MinLotry of Finance and the Secretary for Finance will serve as Project Coordinator for the Multiproject. The Project Coordinator will coordinate the preparation and presentation of the appraisal reports for ach of the subprojects to be financed under the Multiproject and will supervise the channelling of funds to the various Implementing Agencies which will be responsible for the implemanattion and execution of the Individual subprojects. The facilities to be financed under the Multiproject will encourage expansion of the industrial sector, support development of Eua Island (particularly of the agricultural sector) and will 4nprove access to the rural areas of Tongatapu. Provision has also been made in the Terms of Reference for consultants to ensure that adequate environmental protection measures are included In the design and implementation of each subproject. The subprojects are not expected to adversely affect women, and the Small Industries Centres subprojects will increase female employmnt. The major risk in the Multiproject is that implementation of subprojects may be delayed. To minimize this risk, the Goverment has initiated action to repossess the site required for establishment of the SIC on Vava'u, and technical assistance is being provided to assist the various Implementing Agencies in preparing the subproject appraisal reports and in providing construction supervision for improvement of Nafanua Harbour. (i) TABLE OF CONTENTS Pa8e Map - Location of Project Facilities (i'i) Proposed Agricultural Access Roads, 'Eua Island (iv) Proposed Five-Year Road Improvement Prooram, Tongatapu Island (v) I. INTRODUCTION 1 II. BACKGROUND 2 A. General 2 B. Rural and Regional Development 3 C. Agriculture, Forestry and Fisheries 3 D. Industry 5 E. Transport and Communications 6 F. Tourism 11 G. Finance 11 H. Construction and Consulting Industry 12 I. Need for Further Investment 13 PART A: THE MULTIPROJECT WAN 17 III. THE PROPOSED MULTIPROJECT 17 A. Objectives and Scope 17 B. Description of Subprojects 18 C. Cost Estimates 20 D. Financing Plan 23 1V. PROJECT IMPLEMENTATION 24 A. Executing Agency and Project Coordination 24 B. Implementing Agencies 25 C. Procurement 27 D. Design, Construction Supervision and Other Consulting Services 29 E. Implewentation Status of Previous Bank Projects 30 F. Implementation Schedule 31 G. Land Acquisition 31 H. Operation and Maintenance 32 I. Reports, Accounts and Audit 33 J. Project Benefit Monitoring and Evaluation 33 K. Considerations Concerning the Environment and Women 34 L. Project Administration 34 V. TECHNICAL ASSISTANCE 35 VI. JUSTIFICATION AND BENEFITS 37 A. General 37 B. Financial/Economic Evaluation 37 C. Risks 38 (ii) PART B: THE LINE OF CREDIT TO TONGA DEVELOPMENT BANK 39 VII. THE PROPOSED LINE OF CREDIT 39 A. Objective and Scope 33 B. Tha Proposed Loan 39 C. The Proposed Technical Assistance 42 D. Benefits and Risks 44 VIII. THE EXECUTING AGENCY 45 A. Organization and Management 45 1. History, Legal Framework, Share Capital and Relationship with the Government 45 2. Board of Directors, Organixation and Management 45 3. Staff and Training 47 B. Operations 48 1. Activities 48 2. Policies 49 3. Procedures 49 4. Operational Performance 50 5. Projected Operational Performance 52 C. Accounting, Audit and Financial Controls 52 D. Financial Performance 54 1. Interest Rate Structure 54 2. Past and Current Perfonmance 54 3. Portfolio Management 56 4. Projected Financial Performance and Resource Position 58 E. Implementation of Previous Bank Loans and Technical Assistance 60 IX. CONCLUSIONS AND RECOMMENDATIONS 63 APPENDIXES 66 Niaa&o 1140 160 Njua Toputep,. 160 ftm"| LOCATION OF PROJECT FACILITIES SboIn od b % G ~ROWm N 4 V_ fi;) Xoeols s I| d ! Ps O0 50 100 Hiw zaw I" Klometors Itr tet Ism Ilil '6pt LOCATION MAP 180 ?Ponualel 180 Tohu VAVAU G GROUP Vaau Hungo PanI/moiu Late NoapWu ttape Wfoontan KW~ Hoano Totua Foa IAVAPAI GRROUP LJ(utea Nomuba Lim Falcon Nomuete NoepWu ttap Ldalona Hanga Tonga Kelefe"efa lunHgaaHaapaa Aho. MuU,w Tongatapu TON HGATAPU GROUP L l""ea Kore Tonteteau -e _ [220 -22 Ago 1760 1740 1 2A-MM-e _- (Iv) PROPOSED AGRICULTURAL ACCESS ROADS 'EUA ISLAND rFouma o 1 2 3 4 / KtlonuiterS ( Natanua Harbour Sno~~nua TufuvAiU _lua Settlnemnt Kten ni i lorOt.ry Road (Apprormate Position) LEGEND; AgrIculturdi Road ------ Construction 3rd Multi Prolect Loan Settiements HaWlu a...|j Sultable tor food ando cash crop |Suitabe for coconut I 75dZOW 175001W PROPOSED FIVE YEAR ROAD IMPROVEMENT PROGRMME TONGATAPU ISLAND PA TATA It. Q Ate 1l. 0 /.|*a*afu~~~~ ° S ? II{ I' .I C I r J C' 0 U- f: . X /rtatau 0 I c 0 C E 1 N 01d11 !Po9oa ° Oneotl s.. NUkUnuku Ong*~~~~~~~~~~~~~~~~~~~M$uau . \ ~ ~ ~ ~ ~ ~ ~ ~~~~~~~~~~~QN Sv*4itd Vn:ue Talaft evlca=tm_olo >(3 LEGEND: /f% { 'oad uA f _ > Roods tontollvely propO#ed for funding under the 3rd Muni Project Lown\ tArr . To First Cost (P°riame) S4W ( \ / tFuso 1 2 .0 ..., ..To Second Coat (Slurry) S-48 \\0 1 2 3 4 s ^ Kilorreters 21015'S 21*15-5 S t0 1: 7' 8 P ,t t' } 1*' 1 (' ° t) V 't A\ -N/ 175020-W vW500i'w I. INTRODUCTION 1. The Government of Tonga has requested Bank assistance to finance a package of small projects of high priority and to provide a line of credit to Tonga Development Bank (TDB). These small projects, which are to be financed as subprojects under the Multiproject Loan, include expansion of an establi3hed Small Industries Centre (SIC), establishment of a new SIC, improvement of harbor facilities, construction of agricultural access roads, upgrading telecommunications facilities, and improvement of rural roads. The Government's request for a Multiproject and Development Bank loan (the Project) Is Igns1.stent with the Bank's approach to operations in the South Pacific.- 2. The Project was formulated during the visit of a Fact-Finding mission to Tonga fielded by the Bank's South Pacific Regional Office (SPRO) in June 1985. Two appraisal missions finalized the Project; the first, comprising M. Davey (Financial Analyst, Mission Leader), R. E. Bares (Senior Counsel) and J. Z. Mejia (Senior Assistant) visited Tonga from 13 to 29 January to appraise the line of credit for TDB; the second, comprising Ian G. Heggie (Senior Sector Planning Specialist, Mission Leader), R. E. Bares (Senior Counsel), H. J. Youn (Senior Economist) and M. G. Hunter (Staff Consultant) visited Tonga from 27 January to 13 February 1986 to appraise the Multiproject. This Report contains the findings of both Missions; the findings are based on discussions in the field with the Government and non-Government agencies concerned, on a review of all relevant documents and, in the case of the Multiproject, on a visit to all subproject sites. Chapters I and II are common to both parts of the loan; Part A (Chapters III to VI) describes the Multiproject, while Part B (Chapters VII and VIII) describes the line of credit to TDB. The final Chapter on Conclusions and Recommendations is common to both parts of the Project. 1/ Doc. R157-78, A Review of Bank Operations in the South Pacific Developing Member Countries, dated 14 December 1978; Doc. R39-83, Revision 1, A Review of Bank Operations in the South Pacific Developing Member Countries, dated 19 October 1983; and Doc. Sec M93-83, Addendum 1, South Pacific Regional Office, dated 28 December 1983. 2 11. BACKGROUND A. General 3. The Kingdom of Tonga, with a total land area of about 750 sq km, comprises 171 islands, of which 37 are Inhabited. The 1'ulk of the population lives in three maln Island groups - Tongatapu, Vava'u and Ha'apai which are scattered over roughly 360,000 sq km of territorial sea. The total population of Tonga is about 96,500 and has been growing at 0.9 per cent a year; 66,000 people live on the main Tongatapu group; 9,000 live on the scattered arebipelagic Ha'apai group; and 15,000 live on the northerly Tongan group of Vava'u. The remaindey, live on 'Eua Island (4,000) and on the Niuas group (2,500).- The population is predominantly rural; only 33 per cent of the population is classified as urban. 4i. Tonga is predominantly an agricultural country with a large subsistence sector and is economically dependent on agricultural exports: coconut, coconut products, bananas and vanilla are major sources of cash income and foreign exchange earnings. The country's forest resources are largely undeveloped and timber and wood products are lmported to meet local needs. The fishing industry is underdeveloped -- concentrating on reef fishaing -- and is geared to subsistence needs. Efforts have been made to diversify the economy by encouraging establishment of secondary industries, by an industrial development incentives policy and by establishment of small industries centers. New industrial opportunitie. are also opening up in Industries such as vanilla processing and the milling of senile coconut trees for structural timber. 5. The economic development of Tonga is constrained by its location, and its physical and demographic characteristics: (i) it is far from the centers of world trade and industry; (ii) its land area is fragmented by its archipelagic configuration; (i) the population is dispersed; and (iv) the small size of the domestic market - which is scattered -- makes it difficult to attain economies of scale. 6. The preparation of the Fifth Five-Year Development Plan (DP5), covering the period FY1985/86 to FY1989/90, has been delayed. However, the Plan is expected to continue with the same emphasis as the previous plan by giving the highest priority to agriculture and fisheries followed by transport and communications, and social services. An important objective of the Plan is to promote balanced regional development by encouraging development of islands outside the main island of Tongatapu which is already reasonably well-developed. Most development expenditure is financed through external aid. New Zealand and Australia are major sources of bilateral aid, with the Federal Republic of Germany assuming increasing importance. The major multilateral aid sources are the European Economic Community (EEC) and the Bank. Tonga has recently become a member of the World Bank and funds from this source may become important in future. I/ As recorded in the 1984 Mini-census. 3 B. Rural and Regional Development 7. The Fourth Five-Year Development Plan (DP4), FY1980/81 to FY1984/85, marked the beginning of the Government's active involvement in rural and regional development. The aim of the Government's efforts is to more actively involve the outer island regions and rural areas outside Tongatapu in the development process by integrating and coordinating the separate development efforts of all gov'r7ment departments. To this end, a Rural Development Unit (RDU)- was established within the Central Planning Department to manage and administer all rural and regional development activities. The RDU supports its programs through a Rural Development Fund (RDF) and a Small Project Fund (SPF). RDF assistance is for projects which directly generate income, but are of an innovative, high-risk nature; SPF assistance Is for proje'ets of a social nature which meet community needs, but do not generate income (e.g., village water supply schemes, agricultural roads, etc.). Between June 1979 and the end of 1985, 312 proqcts valued at $1.31 million received assistance under these schemes.- 8. The Government's regional development program initially concentrated on Vava'u, and a number of the projects identified as part of this inis?l effort were funded under the Bank's second Multiproject Loan.- In December 1981 a Regional Planning Workshop was held on 'Eua Island and the Central Planning Department followed this up by preparing an Integrated Regional Development Program for 'E.ua Island. Further assistance was provided in 1982 when the United Nations Development Advisory Team (ITNDAT) conducted a study of Island and prepared a report entitled "Development of 'Eua Island- which recommended a framework for developing agriculture. Similar Regional Development Programs have been prepared for Ha'apai, Vava'u and the Niuas. C. Agriculture, Forestry and Fisheries 9. Agriculture, forestry and fisheries accounted for 42.0 per cent of GDP in 1985; agriculture accounted for 33.0 per cent, forestry for 1.7 per cent, and fisheries for 7.3 per cent. The sector grew at a real rate of 11.4 per cent per annum between FY1974/75 and FY1983/84, with the fisheries subsector growing faster than agriculture and forestry. The rapid growth of fisheries appears to be attributable to the high level of investment in this subsector. I/ Established with support from ILO and UNDP. 2/ About $0.39 million was made available through RDF and $0.92 million through SPF. 3/ Multiproject II, Loan 540-TON(SF)p approved in 1Iovember 1981. The Project included: (i) vanilla development; (ii) a tourist and handicraft center; (Wii) health centers; (iv) road construction; and (v) fish marketing, processing and storage. 4/ Published In 1983. 4 10. The Tongan economy is heavily dependent on subsistence agriculture; it is estimated that about 70 per cent of the population depends primarily on it for its livelihood. The country's fertile soils and conducive climate offer potential for substantially increasing agricultural output, Approximately 90 per cent of the value of total crop production (fruit and vegetables) is consumed locally while the remainder is exported. Exports dropped sharply in FY1982/83 as a result of the cyclone in March 1982 which was followed by the worst drought in Tonga in over 40 years. The export of coconut and coconut products was badly affected and a large number of trees were damaged or blown down. In spite of this, there has been encouraging progress in agricultural diversification with the production and export of vanilla, which is intercropped with coconut, and the production and export of vegetables assuming increasing importance. A Coconut Replanting Scheme is being prepart? to renew senile palms and a Banana Export Revitalization Scheme- has been commenced to, inter alsa, remedy the damage done by the 1982 cyclone. The reforms to land leasing contained in the FY1983/84 Budget will also remove an important constraint to comercial agricultural development: a person can now leas/ up to ten rural tax allotments on 20-year leases at negotiated rents.- I1. The forestry industry is still small and relatively undeveloped; the Government's long-term aim is to achieve self-sufficiency in sawn timber. Present timber production is insuffici¶t for domestic needs and substantial imports are required.- The only milling of native hardwoods occurs on 'Eua Island; unexploited reserves exist in Ha'apai and Vava'u. Trial tree planting is being carried out on 'Eua Island and initial results are promising. It has been estimat2d that 600,000 senile coconut palms, capable of producing 100,000 cubic meters of sawn timber., were available for milling during DP4. The timber from these trees is being used for construction purposes and it is hoped that other uses -- including production of joinery items -- will develop in due course. 12. Fisheries contributed between 4 and 5 per cent of GDP until FY1978/79; this then rose to about 11 per cent where it has remained ever since. Although Tongs has substantial fishery resources, it is not self-sufficient, and imports of tinned fish and fish products amounted to $620,000 in 1982. There are three maln fishery areas: the inner reef area, the outer reef and deep water slopes, and the deep sea area. About 80 per cent of the present catch (roughly 1,200 tons per annum) is caught in the inner reef area, and this could be increased by about 1,000 tons per apum. In the outer reef and deep water slope areas, it is estimated- that about 1,000 1/ The program is being supported under New Zealand bilateral aid in an amount of $3.6 million over five years. 2/ No more than five allotments could proviously be held on 10-year leases at a fixed annual rental of $8.00. 3/ Domestic sawn timber production in 1983 was about 1,500 cubic meters; a further 6,000 cubic meters was imported. 4/ Estimated in an FAO/UNDP Marine Resources Development Report prepared In FY1976/77. 5 tons of bottom fish could be cauglht each year, together with 2,000 tons of seasonal species like skipjack and yellowfin tuna. The major potential lfs in the deep sea area where the minimum potential catch of albacore- and yellowfin tuna is estimated at 4,600 tons per annum; in addition, the potential seasonal catch of skipjack is estimated to be at least 10,000 tons per annum. There is thus good potential for self-sufficiency in the fisheries sector and, in the longer term, for developing exports. The Government operates a modern long-line fishing vessel (acquired in 1982) which is currently covering its operating costs; the Government is also considering licensing foreign fishing vessels to operate in Tonga's economic zone. However, the main thrust of Government policy is to develop an effective fleet of small (9 to 12 meter) fishing vessels. This is being encouraged by provision of a grant/loan scheme for construction of small fishing vessels, establishment of fisheries demonstration projects, provision of training to fishermen and improvement of fish handling, storage and marketing facilities. D. IndustEy 13. The industrial sector grew at a reel average annual rate of over five per cent between FY1980/81 and FY1984/85 and, in FY1984/85 accounted tor about eight per cent of GDP. Despite Its relatively modest contribution to GDP, the industrial sector has contributed increasingly to employment, domestic savings and foreign exchange earnings2/and has introduced new technology and helped diversify the economy.- The sector is predominantly privately-owned; public involvement is largely confined to the Tonga Commodities Board and the Oil Mills of Tonga Ltd. A Small Industries Centre (SIC) on Tongatapu, supported by the Bank, has been establishad to encourage development of small-scale industrial enterprises.- In mid-1985, all available factory sheds and nursery units in the SIC were fully occupied, and there were about 12 outstanding applications for space that could not be satisfied. Only three of the remaining serviced plots in the SIC are currently vacant. Total production from the SIC during FY1984/85 amounted to about $1.25 million (of which about $600,000 was exported) and it employed more than 330 people. 14. The establishment of the SIC was supported by the introduction in 1978 of an Industrial Development Incentives Act which accorded high priority to the development of private industry. This Act promoted investment by local firs and encouraged foreign investment which would contribute to the import of capital, technology, managerial know-how and would provide better access to 1/ A large pelagic tuna used for canning. 2/ In 1984 industrial enterprises (including agro-industry) employed more than 1,000 persons and produced output valued at $9 million. 3/ The SIC was established with Bank assistance under Loan No. 335-TON(SF) approved in December 1977 and expanded under Loan No. 435-TON(SF) approved in December 1979 and Loan No. 540-TON(SF) approved in November 1981. The SIC occupies a 20-acre site, but only 12 acres have been developed. The local and foreign-owned enterprises occupying the SIC are producing a variety of goods, including textiles, paints, sporting goods, tubular furniture, wooden toys, meta.. fabricated Items, etc. 6 overseas markets. Some of the major components of the Act were: (i) five-year income tax holidays; (ii) two-year duty-free importation of plant and equipment; (iII) reimbursement of duty paid on importod raw materials or products re-exported after processing; and (iv) repatriation of profits, capital and capital gains. The effectiveness of the Industrial Development Incentives Act is currently being reviewed by a consultant supported under technical assistance provided by the Commonwealth Secretariat. 15. Implementation of the Industrial Development Incentives Act is handled by an Industrial Promotion Unit (IPU) within the Ministry of Labour, Commerce and Industries (MLCI). The IPU fpnsists of an Assistant Secretary, an Industrial Promotion Officer,- an Assistant Industrial Promotion Officer and a Senior Executive Officer. The IPU augments MLCI's general promotional efforts in helping to attract and set up new industries and follows up projects already licensed under the Industrial Development Incentives Act. The IPU also provides business counselling services, and helps to identify prospective new industries and evaluate their suitability. The IPU is adequately staffed and fully competent to undertake these tasks. TDB provides financial support to assist development of the industrial sector, and the South Pacific Regional Trade and Economic Cooperation Agreement (SPARTECA) also facilitates development of manufacturing industry by offering various tariff preferences to Tongan goods in New Zealand and Australia. 16. The Government's major objectives for industrial development are to: (i) accelerate industrial growth in order to raise output, employment, foreign exchange earnings and to reduce dependence on imports; (ii) establish viable industries utilizing local resources to maximize domestic value-added; (iii) promote complementary economic activities essential to and supportive of local industry; and (iv) ensure to the extent possible balanced regional development of manufacturing, processing and assembly industries throughout the country. The Government is favorably disposed towards the establishment of industry by foreign entrepreneurs, but joint ventures are preferred. E. Transport & Communications 1. Roads and Road Transport 17. There are 332 km of formed roads in Tonga and over 1,400 km of earth tracks; nearly 204 km of formed road are on Tongatapu, 83 km are on Vava'u, 31 km are on 'Eua Island, 10 km are on Ha'apai and 4 km are on the Niuas. About 155 km of road are classed as main roads which link villages and towns; of this, 52 km have a bitumen surface, while the remainder have a crushed coral surface. In addition, there are 40 km of sealed secondary and town roads. The remaining roads generally link the main roads to groups of rural tax allotments and are all unsealed secondary roads with cotal or earth 1/ The current incumbent is an expatriate supported by the Commonwealth Secretariat. 7 surfaces. The number of registered vehicles at the end of 1983 was roughly 3,000, and the vehicle fleet has been growing at an average annual rate of about eight per cent since 1975; the vehicle fleet included, among other things, about 450 cars, 340 motorcycles and 1,350 trucks and buses. Annual surveys of road traffic carried out by the Ministry of Works (MOW) on Tongatapu suggest that traffic grew at over 13 per cent per annum between 1979 and 1984. 18. The Ministry ofjorks is responsible for the construction and maintenance of roads.- The main aims of the Government's road development program are to: (i) upgrade and maintain the existing network of main roads at a suitable standard; (11) improve drainage to arrest deterioration; (iii) improve the extensive network of agricultural roads which link groups of individual rural tax allotments to the main road network; and (iv) support development of a viable and competitive road transport ixestry. The road construction program is financed entirely- through external assistance (grants and soft loans). DP5 includes a five-year road development program involving road improvements amounting to a total of $6.4 million. Most of this expenditure is concentrated on Tongatapu ($4.24 million), followed by Vsva'u ($1.02 million), Ha'apai ($668,000), 'Eua Island ($323,000) and the Niuas ($758,000); about $5.4 million has been allocated for improvement of rural roads. The maintenance program is financed under the Government's recurrent budget and the annual amount spent on road maintenance -- roughly $400,000 in FY1983/843T is sufficient to maintain the road network to an adequate standard.- It is estimated that in FY1983/84, road user charges in the form of fuel sales taxes, vehicle licenses and registration fees covered about a third of the road maintenance program. The Government is currently reviewing these charges with a view to raising more revenue from road users; fuel taxes have recently been raised and license fees have been increased, but the new rates are not -et effective (see para 84). 2. Ports and Shipping 19. Nuku'alofa, on Tongatapu, Is the country's main international port. During 1984, it handled 183 international vessels; imports through the port totalled about 63,000 tons, exports about 17,000 tons and 25,000 transit passengers from B cruise ships used the port. The Queen Salote Wharf project- Is naaring 1/ The Bank provided TA 109-TON, Road Improvement and Maintenance Study, approved In May 1974 to strengthen the road sector in Tonga and to prepare high-priority projects for possible consideration by external funding agencies. Some of the roads identified by this technical assistance study were financed under the First Multiproject Loan, Loan No. 435-TON(SF), approved in December 1979. 2/ Apart from Government counterpart funding. 3/ The average amount allocated per km of formed road Is $860. This is sufficient under Tongan conditions to maintain the roads to an adequate standard. In practice, road aintenance funds are sometimes diverted and used for other purposes. 4/ Financed under Australian bilateral aid. 8 completion and will provide two deepwater international berths, an interisland berth and a loading/unloading ramp; the project also includes provision of ancillary facilities and improved cargo handling equipment, particularly for containers. The fishing harbor of Fau'a, which is adjacent to the Queen Salote Wharf, is being constructed with assistance from the EEC, while extensive Zoreshore protection works in Nuku'alofa are being financed under German bilateral aid. Neiafu on Vava'u already has a deepwater harbor; the port has recently been upgraded with assistance from the EEC and can handle small- to medium- sized container vessdla and large international cruise ships can anchor in the approach channel. Tonga's remaining ports handle interisland vessels and act as transshipment ports for the small outlying islands. Pangai is being developed as the main port in the Ha'apai group and it is also being used as the main transshipment point for tha northern Ha'apai islands. Nuku'alofa acts as the 17ain transshipment point for the islands of Nomuka, Ha'afeva and 'Eua.- 20. Tongan ports are administered by the Ministry of Finance (MOF), through its Harbours and Wharves Department (HWD). The Government's development objectives for the sector are to: (i) provide regular, efficient and safe cargo and passenger transport, both internationally and locally; (ii) provide efficient, speedy and economic handling of cargo; (iii) ensure adequate shipping services and onshore facilities in outer islands to encourage development; and (iv) provide necessary land and facilities for storing and handling cargo in close proximity to wharves. The Controller of Customs is responsible for all of the charges specified under the Harbours Act and the Wharves Act and also for the administration of both Acts. Port construction and maintenance are under the jurisdiction of MOW and, although the Prime Minister is concurrently the Minister of Marine and is responsible for all fpipping matters, there is no Ministry of Marine. A previous study- suggested that the organizations dealing with the marine sector needed to be rationalized and that consideration should be given to establishing a semi autonomous Ports Authority. The Government has proposed instead that a Marine Department be established -- headed by a Director of Marine -- to take over responsibility for administering all port and shipping matters. This proposal is still under active consideratiol, and an adviser from the International Maritime Organization (IMO)- is helping to define the responsibilities of the new Department. The IMO adviser is also reviewing and upgrading the maritime legislation under the jurisdiction of the Minister of Marine. 1/ The Bank's First Multiproject Loan, Loan No. 435-TON(SF), included improvement of Nuku'alofa Landing Ramp, Ha'apai Wharf, and improvement of Niuatoputapu Wharf and Niuafolou Landing Ramp in the Niuas. 2/ Financed under Australian technical assistance and carried out in 1979/80. 3/ Financed under Norwegian bilateral aid, with UNDP as the executing agency. 9 21. At least seven major shipping lines providi1international services to Nuku'alofa (including container services);- olie of these - the Warner Pacific Line -- also provides an internatienal service to Neiafu. Major domestic services operate between Nuku'alofa and the regional ports of Pangai, Neiafu (including a weekly container service), Ha'afeva, Nomuka, and Nafanua (on 'Eua Island), *hile less frequent services operate to the Niuas. Small boat services operate between these ports and the smaller outer islands. The public sector is a major participant in both international and domestic shippil services. The Government is a shareholder of the Pacific Forum Line- and charters a Tongan vessel, the Fua Kavenga, out to the line. The Government also operates inter island services through the Shipping Corporation of Polynesia - 60 per cent is owned by the Government and 40 per cent by Columbus Line -- in competition with private operators which currently provide all other interisland services. 3. Telecommunications 22. Telecommunications services in Tonga are provided by the Tonga Telecommunications Commission (TTC) which was established as a public corporation in December 1983 and began operations in July 1984. Prior to that, telecommunications services were provided by the Telegraphs and Telephones Department (TTD) which was a government department. TTC acts as the licensing authority and discharges this function on behalf of the Prime Minister's Office under regulations promulgated by that Office. TTC is charged with operating, maintaining and developing the domestic telecommunications system in an efficient and profitable manner. International telecommunications services (both telephone and telex) are provided through a satellite ear5 station located in Nuku'alofa and operated by Cable and Wireless.- The telecommunications services connecting Tongatapu with Ha'apai and Vava'u are currently provided by a five-channel ultra high frequency radio link and a four-channel high frequency (HF) sideband radio link respectively. The capacity of these links is limited and service is poor. To improve the service, the Government has recently signed an agreement with Cable and Wireless u¶ er which the Company will install a tropo-scatter trunk line system- to replace these services. The system has a capacity of 48 circuits (there are two voice channels per 1/ They include Bali Hai Service (to/from Japan), Bank Line (to/from N. W. Europe), Kyawa Shipping Line (to/from S.E. Asia), Pacific Forum Line (to/from Australasia), South West Pacific Containers Line (to/from the South Pacific), Star Shipping Associates (to/from Honolulu and the South Pacific) and Warner Pacific Line (to/from Australasia). 2/ The shareholders are the Governments of Cook Islands, Fiji, Kiribati, Nauru, New Zealand, PNG, Solomon Islands, Tonga, Tuvalu and W. Samoa. Australia also makes ad hoc contributions to the line. 3/ A Public Limited Company registered in United Kingdom. 47 This system uses microwaves which are scattered by the troposphere (the lower portion of the atmosphere) and amplified at the receiving end. The normal microwave system involves direct transmission from one antenn to another. 10 circuit) and 24 are initially being dedicated to the Vava'u services and 12 to the Ha'apai service. One voice circuit -- equivalent to 24 teleprinter circuits -- will be leased to provide teleprinter/telex services to Vava'u. 23. The telecommunic,ptions network is well-developed on the main island of Tongatapu,- but services on the other islands are generally poor. Tongatapu has three automatic telephone exchanges with a capacity of 2,000 lines; Neiafu on Vava'u has a reconditioned 240-line manual exchange which was originally installed in Tongatapu in 1954 and later transferred to Neiafu; and Hatapai has a 150-line manual exchange. A very high frequency (VHF) radio system is used to connect the main island of Tongatapu to 'Eua Island and HF radio links are used to provide connections to other islands. 24. TTC has been examining ways of improving the nation} transmission network with the assistance of Australian bilateral ald- and a Corporate Plan (FY1984/85-FY1988/89) has now been prepared by TTC to guide its future development. Based on this, the corporation has prepared a Five-Year development program costing about $2.4 million for inclusion in DP5. Preparation of the development program was accompanied by revision of tariffs and improvements in accounting procedures. Tariffs are reviewed from time to time and are periodically adjusted to ensure that the corporation covers its costs (see Appendix 1 for TTC's accounts for its first financial year). 4. Civil Aviation 25. Fua'amotu airport on Tongatapu is Tonga's main international airport; in 1984 it accommodated 2,499 aircraft movements (1,412 international and 1,087 domestic) and handled 22,874 passenger arrivals and 21,938 departures. The country's second airport on Vava'u handled 1,041 aircraft movements in 1984 and 8,970 passengers (1,958 international and 7,012 domestic). Vava'u airport has a coral pavement which has recently been upgraded to give a 1,000-meter effective runway which can handle 40-seater aircraft without difficulty. The airport on Ha'apai has also recently been upgraded and can now handle 20-seater aircraft. The other airfields on 'Eua Island, Niuatoputapu and Niuafo'ou have relatively short, coral or grass runways and can only handle small aircraft. 26. Tonga currently relies on neighboring countries for international air service. Airlines providing international service include Air Pacific, Polynesian Airlines, Hawaiian Air and Air New Zealand. There are no direct services to Australia, although several I/ The Bank financed a Telecommunications Project, Loan No. 146-TON (SF), approved in November 1973, which replaced the Nuku'alofa exchange, relocated the manual exchange from Nuku'alofa to Vava'u, provided a manual exchange in Ha'apai and provided high-frequency links between Nuku'alofa, Vava'u, Ha'apai and 'Eua; a component of the First Multiproject, Loan No. 435-TON(SF), approved in December 1979, improved the link between Nuku'alofa and Vava'u. 2/ A Report, Feasibility of Inter-Island Telecoimunications, financed by the Australian Development Assistance Bureau (ADAB) was prepared in 1980. 11 airlines have requested permission from the Government to fly this sector. The Government recently established Its own airline - Friendly Island Airways. It will initially proy.de domestic services and will later expand to international routes.- The airline offers daily service to Vava'u and 'Eua Island, a twice-weekly service to Ha'apai and once-a-week service to Niuatoputapu. A service to Niuato'ou operates every other week. F. Tourism 27. The tourist industry has been slow to develop and the average annual growth in visitor arrivals between FY1980/81 and FY1984/85 was 4.5 per cent. During FY1984/85, 76.5 per cent of visitors consisted of passengers and crew from cruise ships. Such visitors stay for short periods of time (2-3 days) and spend relatively little money within the Tongan economy. Visitors arriving by air during FY1984/85 numbered 13,713 (16.2 per cent of total visitors) and stayed for an average of 7.2 nights. 28. A major constraint on the number of tourists visiting Tonga, and hence on the growth of the tourist industry, has been the rigid airfare structure that, until mid-1984, precluded the use of cheap promotional fares. This policy was effectively controlled by the major in-bound carrier, Air New Zealand. However, changes in the management styles of competing airlines such as Air Pacific, Hawaiian Air and Polynesian Airlines have now resulted in a more competitive environment. Both Ansett Airways and Trans Australia Airlines are currently negotiating for landing rights in Tonga and, with the expected substitution of Boeing 767s for the Boeing 737s currently used by Air New Zealand, a doubling in the number of in-bound passenger seats is likely. 29. Tourist facilities in Tonga are relatively scarce and are of uneven quality. There is no accommodation suitable for use by large tour groups and the total number of high-st&ndard beds available is estimated at 384. Suitable investment opportunities exist, particularly in the Vava'u and Ha'apai groups, for the establishment of small resorts with good tourist class accommodation and recreational facilities. A small number (6-8) of such resorts were established during FY1984/85 and they bave generally been successful. C. Finance 30. The financial sector consists primarily of the Bank of Tongs (BOT) and TDB. There are also a number of small credit unions engaged in small-scale savings and consumer finance operations, but their role is negligible. In prospect is the establishment of a Central Bank. If established, the Central Bank's primary role will be to hold the Kingdom's foreign exchange reserves, a function at present carried out by BOT. Although draft legislation has been prepared to establish the Central Bank, it is unlikely that a decision to proceed with the legislation will be taken during 1986. 17 Piloting and maintenance are carried out by personnel licensed in New Zealand and the operation of aircraft must comply with New Zealand rules and regulations. Inspectors from the New Zealand Civil Aviation Authority periodically check the operation of the aircraft. 12 31. BOT was established in mid-1974 as the country*s first and only commercial bank. In addition to providing the normal services of a commercial and savings bank, BOT is the holder of the Kingdom's foreign exchange reserves and performs the role of a monetary authority. At 30 September 1985, the total assets of BOT were T$41.2 million (US$29.4 million equivalent) which represented an increase of 105.0 per cent over the level of December 1980. At 30 September 1985, 36.4 per cent of BOT's resources were on-lent to the private sector within Tonga; 56.9 per cent were being held as investments and deposits in overseas financial markets. 32. Interest rate levels within Tonga are controlled under the Contracts Act of 1921 which sets a maximum interest rate level of 10 per cent. Appendix 2 provides details of interest rates currently prevailing in Tonga. BOT currently pays between 5.0 per cent and 6.75 per cent for deposits and charges between 8.0 per cent and 10 per cent for loans. TDB's lending rates range from 6 per cent to 10 per cent depending on the loan amount and the nature of the sector receiving thfi loan. A review of Tonga's interest rate structure during 1984- revealed that since 1970 the interest rate structure had resulted in negative real rates of return to savers; the rates ranged from minus 5.1 per cent to minus 9.35 per cent. This factor is considered to have contributed significantly to the low savings rate of about 9.0 per cent of national disposable income; this resulted in a resource gap for investment that averaged about 10 per cent of GDP between FY1980/81 and FY1983/84. 33. The authorities have recognized the problems created by current interest rate policies and are currently considering two areas of draft legislation that might improve matters. The first is amendment of the Contracts Act of 1921 to remove the current interest rate ceiling and to provide the Minister of Finance with powers to establish new interest rate ceilings as required. The second is establishment of a Central Monetary Authority. Under the second proposal, the proposed Central Monetary Authority would have powers to establish minimum and maximum interest rate levels within the financial sector. No decision has yet been made as to which of these options is preferable; other options may also be considered before a final decision is taken. H. Construction and Consulting Industry 34. MOW and the Tonga Construction Company (a branch of the Government-owned Commodities Board) have been the traditional sources of construction services in Tonga; MOW carries out a variety of civil works activities, while the Tonga Construction Company concentrates on building construction. MOW's resources are limited; it has one qualified engineer (who is Director of Works), no qualified architects or quantity surveyors and its heavy plant and equipment is only capable of undertaking certain types of civil works. The private sector has developed rapidly in recent years and there are now at least four small-sized local companies capable of carrying out 1/ Under Bank technical assistance, T.A. No. 510-TON, approved in April 1983. 13 all types of standard building work from construction of houses to industrial buildings. There is also one fIre which has the capacity to design, fabricate and erect steel-f ra buildings. This compoany, in association wlth another local firm, is currently negotiating for the consfjuction of a steel-frame aircraft hanger for Friendly Island Airways.- 35. The Government has decided that in the future more construction work should be undertaken by the private sector and that MOW should concentrate on maintenance of public facilities and on design and construction supervision of civil works projects. The Government wishes to e,youtage private contractors to acquire their own plant and equlpment,- and to this ead It is proposing to revise MOW's plant hire rates to set them on a more comercial bais. It is expected that this will encourage private Investment In the construction Industry and will make private contractors more competitive with MOW's force account work. 36. There ar several small consulting firms in Tong. The mot significant of thse has offices in Nuku'alofa and Neiafu and Is staffed by three qualified architects and other Tongan staff trained at Lae University of Teehnology In Papu" New Guinea. The firm has an associated office in Auckland, New Zealand. The services of structural englneers, mechanical/electrical engineers and quantity surveyors are provided by consultants In New Zealand as required. Their curret workload includes design and Implementation of school and church buildings, as well as the new Prime Minister's Office I Nuku'alofa. I. Need for Further Investment 37. Only three of the plots in the existing 12 cre SIC site on Tongatapu remain vacant for future developmet.- The present "pipeline" of applications for Industrial space at the SIC includes five applications for Nursery Units and five for Factory Sheds. A pipeline of siuilar enterprises has been identifid by NLCI, but the prima facie v ,bllity of these enterprises Is still being assessed by the Ministry.- Shortages of nursery/factory space and of serviced plots are becoming a constraint on development of further Industrial enterprises and there is now a need to extend the present 12-acro site Into the 8-acre reserve and to erect more nursery/factory sheds on the existing site. 38. The Government Is eager to extend its industrial development policy to other areas outside the main island of Tongatapu In an attempt to halt the steady drift of population from the outer Islands. During the past four yars, .the Commonwealth Fund for Technical Cooperation (CFTC) has supported two studies for Identifying the 11 Scan Tonga Engineering Ltd. 2/ One private company, Royco, already has a reasonable range of equipment some of which it leases to NOW. 3/ Two others are currently vacant, but are under offer. 4/ Applications have been received for repair of marine enIes, anufacture and printing of handicraft items, manufacture and rpair of shoes, fish processing, manufacture of autombile wheels, mwaufacture of detergent, manufacture of mails, upholstering, maufacture of spectacle cases and frmao, etc. 14 scope for developing new small-scale Industries /In Tonga in general, and In the northern islands in particular.- The studies identified four enterprises which prima facie appeared to be suitable for establishment on Vavalu, which has the second largest concentration of population In Tonga: (i) a timber treatment plant; (ii) manufacture of wooden furniture; (iii) an automotive repair workshop; and (iv) manufacture of polythene film and bags. Formal applications have already been submitted to NLCI for allocation of industrial space for repair and assembly of refrigeration units, manufacture of coral jewellery and manufacture of fencing materials. These three projects currently comprise the firm pipeline of projects for establishment on Vava'u. Informal expressions of interest have also been received concerning soft drink bottling, manufacture of rubber footwear, and frozen fruit juice and pulp extraction. Apart from fruit juice and pulp extraction, all of these enterprises are aimed at the domestic market. The need on Vava'u is thus for serviced industrial sites and associated workshop/factory buildings to serve small-scale service industries designed to serve the local market. In due course larger export-oriented industries may also wish to establish there. 39. When the SIC in Tongatapu was first established, it was envisaged that it would operate on a no-profit no-loss basis and would therefore require no subsidy from the Government. Rental fees were thus initially set at levels that provided for full cost recovery; it was planned to revise rental fees every five years. However, the operating costs of the SIC escalated more rapidly than expected and the SIC has not managed to break even. In 1985 it is expected to incur a net operating loss of about $16.000 (see Appendix 3) and rental fees would need to be raised by about 38 per cent to break even. The Bank'j Project Performance Audit Report on the Small Industries Centre- recommended more frequent review and adjustment of rental fees to reduce the subsidy element. There is thus a need to undertake a thorough review of rntal fee policy to identify the options available and the time horizon over which the fees might be implemented to help eliminate these subsidies (see para 83). 40. It is estimated that 'Eua Island has about 4,340 hectares of land considered arable by traditional methods of cultivation. By the end of 1985, 3,800 hectares had been allocated as rural tax allotments and a further 540 hectares were unallocated and were not being systematically cultivated. The Island has a limited system of coral and earth roads, a grass airfield and a small harbor at Nafanua. The harbor is small and can only accommodate small boats, and the entrance channel, which is exposed to strong westerly winds, is dangerous and difficult to enter (see Appendix 4 for a description of current port facilities). The Island is linked to Tongatapu by a small boat service and daily light aircraft service; there is a single telephone 1/ Action Plans for the getablishement of Small Industries In the Northern Islands Group, 1982, and Market Survey for Tonga e Processed AgRcultural Produce, 1913, Comonvalth Fund for Technical Cooperation. 21 PPAR No. PE-132, circulated to the Board in December, 1984. 15 connected to Tongatapu by a single channel VHF radio link. Agricultural support services are provided by an Agricultural Colle4, (which needs to be upgraded), four agricultural extension off ik.ers,-- a small produce market and a branch of TDB. Despite the Island's potential for development in agriculture, forestry and fisheries and its proximity to the main island of Tongatapu, it has the lowest per capita GDP in Tonga ($260 in FV1981/82 compared to the average GDP of $430). 41. To facilitate development of 'Eua Island, the Central Planning Department has prepared an integrated regional development program for the Island comprising road, Uarbor and telecoumunications improvements; oXtension and upgrading of the existing agricultural college; improvement of agricultural extension services and agricultural marketing facilities; provision of a bulk fuel store; establishment of a handicraft center; and improvement of water and power supplies. The initial phase of development, which is designed to remove key infrastructure constraints, comprises: (i) improvement of Nafanua Harbour; (ii) provision of additional agricultural access roads; and (iii) upgrading of telecommunications services. If the agricultural potential of 'Eua lsland is to be realized in terms of more intense utilization of the 3,800 hectares already cultivated as well as the additional 540 hectares awaiting allocation at, tax allotments, key infrastructure constraints need to be removed;- following that, agricultural support services and supportive social infrastructure facilities need to be upgraded. 42. The Government has prepared a five-year road program (see paragraph 18) which, among other things, allocates $4.24 million for improvment of trunk and feeder roads on Tongatapu. However, while the roads to be improved have been tentatively identified, there is a need to review them with a view to establishing investment priorities and preparing a phased program for their implementation over the five-year plan period. Once these priorities have been established, it is expected that New Zealand an.d Australia may support improvement of the main highway and trunk ro d network; the remaining need will then be to support improvement of reeder roads. 43. TDB supports the Government's development objectives through provision of medium- and long-term loans for projects that meet its investment criteria and contribute to the economic development of the Kingdom. TDB's approval levels have shown steady growth since 1983 and this growth is projected to continue. On the basis of its current pipeline of loan applications and its assessment of the likely investment needs of its client base, TDB is projecting total loan approvals of T$8.5 million (US$6.1 million equivalent) during FY1986/87 and FY1987/88. Of this amount, approximately T$3.8 million (US$2.7 million equivalent) will represent approvals for the purchase 17 There are no fisheries extension officers on the Island. 2/ The slngle-channel radio link is largely used for making business calls associated with the shipment of produce to Tongatapu for export (e.g. bananas), or for sale in the local market. 16 of imported Items. As of 31 December 1985, TDB had US$1.4 million in foreign exchange resources available for financing such loans, leaving a foreign exchange resource gap of approximately $1.3 million for the FY1986/87 and FY1987/88. Since current interest rate policies have led to a number of difficulties (see para 32), there is a need to undertake a review of these policies to assess the relative costs and benefits of the present and alternative interest rate regimes with a view to recommending future courses of action (see para 91). 17 PART A: THE MULTIPROJECT LOAN III. THE PROPOSED MULTIPROJECT A. Objectives and Scope 44. The Multiproject aims at assisting the Government in undertaking a number of high-priority development projects which are expected to be included in DP5. Each of the subprojects comprising the Multiproject will either by itself or in conjunction with other subprojects support one or more of the following Government objectives: (1) economic diversification and development of manufacturing; (ii) regional development, particularly the development of islands outside of Tongatapu; and (iii) development of agriculture and forestry. In this context, the considerations governing the selection of the subprojects included the following: (i) the subproject should be accorded high priority by the Government and should be consistent with its objectives. (ii) the subproject should prima facie be technical feasible, economically viable and suitable for Bank financing; and (ii) the subproject should not require further detailed, or time-consuming feasibility studies. 45. The subprojects selected on the above basis for inclusion in the Multiproject are as follows: 1. Small Industries Centre (SIC) Expansion (Tongatapu) 2. Small Industries Centre (SIC) Establishment (Vava'u) 3. Nafanua Harbour Improvement ('Eua Island) 4. Agricultural Access Roads ('Eua Island) 5. Telecommunications System Upgrading ('Eua Island) 6. Rural Roads Improvement CTongatapu) 46. These subprojects are expected to increase employment, to earn or save foreign exchange, and to facilitate self-sufficiency in food production; all of them are prima facie suitable for Bank financing. However, before final approval is given, individual appraisal reports will be prenared by the Government with the assistance of consultants to be engaged under the proposed technical assistance to be provided by the Bank and by the Australian Development Assistance Bureau (ADAB) (see paras 91-93). The appraisal report for each subproject will be submitted to the Bank for review and approval before any funds are released for the subproject. The aubproject appraisal report will include, among other things, the following: (i) a complete description of the subproject; (ii) confirmation of the technical soundness of the subproject; (iii) detailed cost estimates, showing foreign and local costs and physical and price contingencies; (iv) designation of the Implementing Agency and detailed implementation arrangements, including a description of the proposed procurement procedures; (v) a detailed implementation schedule; (vi) financial and/or economic justification for the subproject; and (vii) an assessment of the 18 environmental impact of the subproject and proposals for minimizing any adverse environmental 1ffects during the construction and operation of the subproject.- In the case of Subproject No. 5 (Telecommunications System Upgradlig on 'Eua Island), the subproject appraisal report will provide additional justification to show thMt the exchange and radio equipment proposed represents the most co -effective solution. B. Description of Subprojects 1. SICEnnsio Ta.tu 47. This subproject has two components: (i) development of the remaining eight-acre SIC site to provide an additional 12 to 14 serviced plots; and (ii) erection of two factory sheds (2 x 286 eq m), one nursery building (429 sq m), const1uction of a combined bonded warehouse/site office/meeting room,- and provision of equipment. The new factory/nursery buildings will provide space for seven new enterprises on the site. Site development includes land cleartin, filling and grading of the site, demarcation of plots, provision of access roads. provision of a stormvater drain and installation of utilities. To simplify design, the dimensions and size of the new sheds are to be the sat as those constructed under the Bank's Second Multiproject Loan.- The present capacity of utilities on Tongatapu (namely power, water, and telecommunications) ts adequate to service the expanded SIC site, and utilities expenditure will be limited to expansion of distribution and supply lines. The site has Its own sewage treatment plant with adequate capacity to service the expanded site. 48. The SIC is under the administrative control of MLCI and the day-to-dAy running of the estate is handled by an Estate Manager, who is assisted by an accountant and seven supporting staff. There are plans to create a new post of Maintenance Officer in FY1986/87 to deal with the maintenance and repair of buildings and utilities. 2. SIC Establishment (Vavatu) 49. This subproject includes acquisition of a thirteen-acre site in Neiafu, development of an initial eight acres of the site to provide 12 to 14 serviced plots, erection of two multi-purpose workshop/factory buildings (2 x 286 sq m), and provision of a small office, common wasbroom facilities, a vehicle and equipment. Selection of a suitable site will be a malor factor in the success of the SIC, and It was consequently agreed that leasing or making other final arrangements for a suitable site (see para 81) would be a 1/ Loan Agreement, Schedule 1, paras 1 and 3 and Schedule 5, para 5. I/ One unit in a Nursery Building Is currently used as the site office; once permanent office space has been provided, this would be re-used as nursery space. I/ Loan No. 540-TON(SF), approved in 1981. 19 condition of Bank financing of this subproject.-L Site development includes land clearing, gradlng, demarcation of plots, fencing, construction of access roads and installation of utilitles. The buildings will be designed to minimize costs and permit flexible use. The present capacity of power and water supplies on Vava'u is adequate to serve the proposed SIC and, since supply lines run close to the site boundary, no connection problems are anticipated. Sewage will be disposed of by means of septic tanks serving each of the workshop/factory buildings; this is considered the most cost-effective solution for this item. 50. The proposed SIC will be admlnistered by MLCI, and the Government proposes to appoint a qualified Deputy Estate Manager to deal with the day-to-day management and operation of the site under the general guidance of the Estate Manager on Tongatapu. The Vava'u SIC will also receive support In the form of accounting services, etc. from the Estate Office on Tongatapu. 3. Nafanua Harbour Improvement ('Eua Island) 51. This subproject involves improvement of Nafanua Harbour;-/ the detailed engineering and construction supervision for this subproject are to be financed by Australia under parallel financing arrangements (see para 92). The subproject includes provfiding an adequate basin for maneuvering vessels, constructing a wharf and loading ramp, providing a cargo and passenger handling and storage area, widening the harbor entrance, providing necessary navigational beacons, and constructing a small boat landing ramp. The harbor will be administered by MWD within MOF. 4. Agricultural Access Roads ('Eua Island) 52. This subproject consists of construction of about 20 km of agricultural access roads with a 4-i formation width and 4-m pavement. The sections of road to be constructed run along established rights-of-way (only two short sections still need to be surveyed) and will open up areas of agricultural potential not currently accessible except on foot or horseback. The Government has undertaken to finance the entire local cost of the roads to be constructed under the Multiproject and will ensure that MOW ass ujs responsibility for maintaining the roads to an adequate standard.- 1/ Loan Agreemnt, Schedule 3, para 5(i). A suitable site has already been identified in Neiafu on the outskirts of the bullt-up are (See Appendix 5). 2/ A description of existing harbor facilities is given in Appendix 4. 3/I Loan Agreement, Schedule 5, para 13. Agricultural access roads are normally constructed on a cost-sharing basis; the Government finances 90 per cent of the cost and the smallholders finance the remalning 10 per cent. The maintenance of these roads is left to the _allholders. The system does not work satisfactorily; it leads to considerable implementation delays while smallbolders are contacted and sked for their contribution, and the roads are rarely aaintained. 20 5. Telecommunications System Upgrading ('Eua Island) 53. This subproject involves establishing a multiplex channel radio link between 'Eua Island and Nuku'alofa, together with installation of a 128-line automatic telephone exchange in 'Ohonua. The subproject includes provision of an automatic exchange, an exchange building, a radio and associated multiplex equipment, a small Power supply f or periods of the day when the main supply is shut JOWU,-t a limited distribution network, cable laying, staff training and engineering, furnishing and installation. That part of the Loan proceeds to be allocated for financing this subproject will be relent .y the Government to TTC under a Subsidiary Loan Agreement. Execution, delivery and effectiveness of a Subsidiary Loan Agreement by the Government and TTC, containing terms and conditions satisfactory to the Governments the Bvk and TTC, will be a condition of Bank financing of this subproject.- It has also been agreed tat the onlending rate will be 8 per cent per annum and that the loan will be repaid over 15 years with a three-year grace period. The foreign exchange risk with 3espect to the repayment of the loan will be borne by the Government.- 6. Rural Roads Improvement (Tongatapu) 54. This subproject includes improvement of about 30 km of road on Tongatapu to all-weather coral standard (6 m formation width and 6 m pavement width). The road sections to be improved will be selected from the Government's indicative five-year road program and the viability of improving these roads will be established under the Bank financed technical assistance (see paras 91-93). The roads improved under this subproject will be maintained by MOW as part of their regular road maintenance program for Tongatapu. C. Cost Estimates 55. The total cost of the Multiproject is estimated at $2.52 million equivalent (inclusive of taxes and duties) of which the foreign exchange cost is $2.00 million (about 79 per cent) including about $22,000 for the service charge on the Bank loan during construction; the local cost is $0.52 million equivalent (about 21 per cent). The cost estimates for the Tongatapu SIC expansion, establishment of the new SIC on Vava'v and road works on Tongatapu and 'Eut Island, were derived from estimates prepared by MOW and were adjusted to end-1985 prices. Since MOW's unit rates for selected construction work are to be reviewed under the Bank technical assistance (see para 91), a ten per cent allowance was made for physical contingencies on these items. The cost of the telephone exchange and radio equipment was based on quotations from suppliers and was likewise adjusted to end-1985 prices. The costs for Nafanua Harbour were based on an engineering reconnaisance study carried out by I/ The maim power supply, which has plenty of spare capacity, operates from 6 am to 12 am and from 4 pm to 12 pm. 2/ Loan Agreement, Schedule 3, para 5 (iii). 3/ Loan Agreement, Schedule 5, para 14. 21 consultants / and financed under technical assistance provided by ADAB. These cost estimates are tentative since they were prepared without detailed site investigations. A 15 per cent allowance has therefore been made for physical contingencies on this item. A summary of the cost estimates Is given in Table I (see Appendix 6 for detailed cost estimates). 1/ Connell, Eddie, Riedel and Byrne (Australia). 22 Table 1. Summary Cost Estimates of the Multiproject ($'000 at end-1985 prices) Foreign Local Exchange Currency Total Cost Cost Cost Base Cos0t: 1. Small Industries Centre Expansion 263.4 151.4 414.8 2. Small Industries Centre Establishment 115.0 61.0 176.0 3. Nafanua Harbour Improvement 529.6 85.3 614.9 4. Agricultural Access Roads 116.9 34.4 151.3 5. Telecommunications System Upgrading 248.3 9.0 257.3 6. Rural Roads Improvement 281.5 82.8 364.3 Total Base Cost 1,554.7 423.9 1,978.6 Physical Contingency 169.5 46.3 215.8- Price Contingency 249.4 52.3 301.7k/ Service Charge on the Bank Loan During Construction 22.2 0 22.2 Total-' l,995.8 522.5 2,518.3 a/ Physical contingencies are 10 per cent for Subproject Nos. 1, 2, 4 and 6. They are 15 per cent for Subproject No. 3, and 5 per cent for Subproject No. 5. b/ Price contingencies are based on the following price escalation factors: foreign exchange costs, 7,0 per cent for 1986 and 1987 and 7.5 per cent for 1988; local costs, 7.0 per cent for 1986, 1987 and 1988. c/ Excluding the cost of consulting services to be financed under Bank advisory technical assistance and by ADAB under parallel financing arrangments. 23 D. Financing Plan 56. The financing plan is shown in Table 2. It is proposed that the Bank provide a loan of $2.0 million equivalent from Its Special Funds resources which represents about 79 per cent of the total cost of the Multiproject. The loan will finance the entire foreign exchange cost of the Multiproject, including the service charge on the Bank loan during construction. To facilitate prompt disbursement of the loan proceeda, the Government has requested establishment of an Imprest account and statement of expenditure which will be setlyp under appropriate procedures as a matter of project administration.- Table 2: Project F*nancing Plan ($'000) Foreign Local Exchange Currency Total ._ Cost Cost Cost Per Cent Bank Loan 2,000 - 2,000 79.4 Government Financing - 520 520 20.6 Total 2,000 520 2,520 100.0 57. The borrower of the Bank loan will be the Kingdom of Tonga. The Government has assured the Bank that all funds needed to implement the Multiproject in addition to those provided under the Bank lo10 will be made available on a timely basis from its own resources.- For this purpose, the Government has already Included necessary funds in the national budget for FY 1986/87 and has agreed to make a similar provision in future years. 58. If after the Government or the Bank has reviewed an individual appraisal report, it is found that a subproject is not suitable for implementation, it will be deleted from the Multiproject. A substitute subproject may then be included in the Multiproject pr9vided the Government and the Bank agroe that: (i) it mets the selection criteria applied in identifying the subprojects (see para 44); (ii) it is appraised under the same procedures applied to the original aubprojects (see para 46); and (iii) the required financing is consistent with he limits of the proposed financing available under the Bank loan.- 1/ Loan Agreement, Schedule 5, pars 8. 2/ Loan Agreement, Section 4.02(a). 3/ Loan Agreement, Schedule 1, para 2, and Schedule 5, pare 5. 24 IV. PROJECT IMPLEMENTATION!' A. Executing Agency and Project Coordination 59. The Executing Agency for the Multiproject will be MOF. Each subproject will be implemented by a designated Implementing Agency (see ection B below). The Secretary for Finance has been designated as Project Coordinator and will be responsible for the overall coordination and execution of the Project; the Goverment has agreed to consult the Bank2prior to making any changes in the position of Project Coordinator.- The Project Coordinator will coordinate the preparation of each subproject and present it to the Bank for approval, and will supervise the channelling of loan proceeds to the respective Implementing Agencies. The Project Coordinator will consult and be assisted and supported by the Central Planning Department (CPD) In the coordination of the Multiproject. The Project Coordinator will also3pct as the liaison between the Implementing Agencies and the Bank.- 60. To assist the Project Coordinator in carrying out his responsibilities, the Government has agreed to establish a Project Coordination Committee (PCC) by 31 July 1986. The Project Coordinator will serve as Chairman of the PCC which will also have as members the Deputy Secretary for Finance (as member and secretary for the PCC), the Secretary of Labour, Commerce and Industries, the Director of Works, the Director of Planning and the General Manager of TTC. The PCC will meet at least once every two months and will be responsible for the overall planning and scheduling of all subproject activities, for the periodic review and monitoring of the progress (f individual/ subprojects and for progress on the Nultiproject as a whole.- 61. The above arrangements are expected t: ensure more effective coor0ination and follow-up than would be possible If there were a number of separate executing agencies. This arrangement. excluding the establishment of a PCC, has been successfully used in the two previous Multiproject loans (see para 77). The designation of MOF as Ewecvting Agency should also ensure that the Multiproject costs are kept within reasonable limits and local funds are provided promptly. MOF Is suitably staffed; it includes a Secretary, Deputy Secretary and Assistant Secretary for Finance, an Accountant-General, an Accountant for Development Projects, an Economist, two accountants, a senior accounting officer, six accounting officers and a chief clerk who supervises a support staff of about 34. MOF also has subtreasury officers stationed on 'Eua Island and in Nelafu. _/ Section E summarizes the implementation status of previous Bank projects. 2 Loan Agreement, Schedule 5, para 3. 3/ Loan Agreement, Schedule 5, para 1. 4/ Loan Agreement, Schedule 5, para 4. 25 B. Implementing Agencies 62. The implementation of the individual subprojects, including all technical, constructon and procurement activities will be done by the following Agencies:- (1) Ministry of Labour, Commerce and Industries: Subproject No. 1 - Small Industries Centre Expansion (Tongatapu) Subproject No. 2 - Small Industries Centre Establishment (Vava'u) (il) Ministry of Works: Subproject Nos. 3, 4 and 6 - Nafanua Harbour Improvement and Agricultural Access Roads ('Eua Island) and Rural Roads Improvement (Tongatapu) (iii) Tonga TelecoLmmnications Commission: Subproject No. 5 - Telecommunications System Upgrading ('Eua Island) 1. Ministry of Labour, Commerce and Industries GMLCI) 63. MLCI implemented the previous SIC subprojects satisfactorily-' and will act as Implementing Agency for the two SIC subprojects to be financed under the Multiproject. The Secretary of MLCI will be responsible for overall implementation of the subprojects and for coordination with other Government ministries and agencies. The Estate Manager, who is responsible for the day-to-day operation of the existing SIC in Tongatapu, will help implement the proposed SIC subprojects. He is assisted by an accountant, two secretaries and two supporting staff. The Estate Manager will report to the Secretary, MLCI, who will continue to be responsible for the promotional and marketing aspects of the SIC and will also be responsible for planning an# implementing development of future SIC's throughout the country. NCI has the capacity to satisfactorily implement both the SIC Expansion on Tongatapu and the SIC Establishment on Vava'u. 2. Ministry of Works (MOW) 64. MOW is responsible for the planning, design, construction and maintenance of practically all public works in Tonga, including 1/ The Government has agreed to inform the Bank of any changes in key personnel In these Implementing Agencies. Loan Agreement, Schedule 5, para 3. 2/ Small Industries Centre Project, Loan No. 335-TON(SF), approved in December 1977, and the SIC expansion subprojects included in the Multiproject Loans No. 435-TON(SP), approved in December 1979, and No. 540-TON(SF), approved in November 1981. 26 roads, ports, airports, and public buildings. MOW's operations also include plant and vehicle maintenance for other government departments, and operation of a concrete block manufacturing plant. MOW has been the Implementing Agency for several subprojects under the Bank's earlier Multiproject loans. 65. The Ministry is headed by the Minister of Works and has five sections in Tongatapu, covering administration, road construction and maintenance , government stores, mechanical services, and architectural building services. Permanent works supervision units have been set up on the islands of Vava'u, Ha'apai, 'Eua and Niuatoputapu and Niuafo'ou. These sections, which operate under the Director of Works, had an established staff level of 193 at the end of 1984. In addition, four professional grade, three supervisory and two technical training staff were provided under external aid programs. MOW's construction capacity was strengthened following receipt of construction equipment provided under EEC aid. Plant and equipment continue to be located in 'Eua and Vava'u to allow work to be carried out on these islands. 66. MOW's Architectural Divisior., which is responsible for construction and maintenaqp of all Government buildings, consists of a Governfnt Architect,- three local architects, a quantity surveyor,- and three trainee quantity surveyors. It also includes a number of building foremen and building tradesmen. The Roads Division is responsible for the construction and maintenance of the road network, including construction of agricultural and community roads. The Roads Division is also responsible for coral quarry production and for implementing special projects. In recent years this has involved a considerable amount of work on the Queen Salote Wharf project and on foreshore protection works in Nuku'alofa. The Roads Division has one structural engineer, three engineers trained at Lae University of Technology In Papue New Guinea and six overseers and foremen. NOW has the capacity to satisfactorily handle the improvament of Nafanus Harbor on 'Eua Island, the construction of Agricultural Access Roads on 'Eua Island, and the improvement of Rural Roads on Tongatapu. 3. TonMa Telecommunications Commission (TTC) 67. TTC was established as a semi autonomous goverwnent statutory body on 1 July 1984. Previous to that it operated as a Government department. TTC is responsible for the operation, maintenance and development of the domestic telecommunications system in the country. TTC's Board consists of the Prime Minister as Chairman, the Minister of Fimnace, the Secretary to Government, TTC's General Manager and three representative subscribers. TTC's General Manager is the former TTD Superintendent and most TTD staff and persomnnl transferred to TTC when It was formed. The General Manager is supported by a Finance and Administration Manager, an Engineering Branch Manager and a Traffic Officer. Further, a Training Manager, responsible for TTC's Technical Training Center, is due to be appointed to assist the General Manager. I/ Thse posts are currently vacant. 27 68. The Finance and Administration Manager is assisted by an Accountant and a Personnel Officer, and the Engineering Branch Manager is assisted by five Controllers responsible respectively for Northern Operations, the Radio Section, Internal Plant, External Plant and the Planning Section. At present, TTC's total staff, including administration, technical and service personnel, is 166. There is one New Zealander expert acting as the Finance and Administration Manager, and two Australian experts who act as the Engineering Branch Manager and the Radio Section Controller. The caliber of TTC's technical staff is continually improving. Further steps have been taken to ensure that relevant upgrading courses will be available and that Tongan personnel receive the appropriate technical qualifications and management1rkills to enable them to ev-ntually take over all senior positions.- 69. The Bank-financed Telecommunications Project [Loan No. 146-TON(SF), approved in November 1973] and the telecommunications subproject financed under the first Multiproject Loan [Loan No. 435-TON(SF), approved in December 19791 were both implemented by TTD and its performance was satisfactory. C. Procurement 70. Procurement of all Bank-financed goods and services for the Multiproject will be carried out in accordance with the Bank's Guidelines for Procurement, by the implementing agencies concern> under the overall coordination of the Project Coordinator.- Specifically, with the exception of minor items, procurement of goods and services for the various subprojects will be as follows (see Appendix 7 for a breakdown of the amount of 3Phe project to be implemented under various procurement procedures):- Subproject No. 1 (Expansion of SIC, Tongatapu) 1. Grading and site preparation .................... ,A 2. Construction of buildings .......e........... LCB 3. Utilities . . . ... .. .. ...... ......... FA Subproject No. 2 (Establishment of SIC, Vava'u) 1. Grading and site preparation .................... FA 2. Construction of buildings LCB 3. Utilities ...........FA 11 An agreement has recently been signed with Telecom Australia which provides for technical training of TTC staff. 2/ Loan Agreement, Schedule 4, para 2, and Schedule 5, paras 1 and 2. 3/ Loan Agreement, Schedule 4, paras 4(a) and 5 to 8. LCB - Local Competitive Bidding, FA - Force Account, ICB - International Competitive Bidding, IS - International Shopping, PP - Proprietary Procurement. 28 Subproject No. 3 (Construction of Nafanua Harbour, 'Eua Island) Improvement of the harbor ........................ ICB Subproject No. 4 (Construction of Agricultural Access Roads, 'Eua Island) Road construction .0...... .A......... .... FA Subproject No. 5 (Telecomnunications System Upgrading, 'Eua Island) 1. Automatic exchange, radio and multiplex equipment, and training .......................... PP 2. All other equipment ..........**.*o.....*****e .. IS 3. Construction of Exchange Building ................ LCB 4. Laying of cable and connection of lines .......... FA Sub-project No. 6 (Construction of Rural Roads, Tongatapu) Road construction ........*. ............ .* .. . FA 71. The utility connections for Subproject Hos. 1 and 2 (SIC Expansion, Tongatapu, and SIC Establishment, Vava'u) will be undertaken by TTC, Tonga Water Board and Tongs Electric Power Board. The cable laying for Subproject No. 5 (Telecommunications System Upgrading, 'Eua Island) will be undertaken by TTC. All the remaining force account work will be undertaken by MOW. In all these cases, the size, nature and location of the works make them unsuitable for construction under competitive bidding procedures. Foreign contractors would not be interested in these jobs, while Tongan contractors are not equipped to carry out this kind of work. TTC, the Water Board, the Electric Power Board and MOW, on the other hand, do have the necessary construction facilities and will be able to undertake the works expeditiously and at reasonable cost. About 30 per cent of the base cost of the Multiproject will be carried out under force account. 72. To ensure that the force account work on Subproject Nos. 4 and 6 to be undertaken by MOW is based on a satisfactory record of actual costs Incurred, it. has been agreed that MOW will establish an engineering charging system with respect to these subprojects which is satisfactory to the Government and the Bank prior to any disbursements being made 1from the loan account to meet the cost of these subprojects.- The consultants to be appointed under the technical assistance component of the Multiproject will assist MOW in implementing this charging system. To ensure this does not lead to any implementation delays, the consultants are beitg recruited under the Bank's advance recruitment procedures (see para 93). It Is expected that establishment of the engineering charging system will have been completed by September 1986. 17 Loan Agrem_nt, Schedule 3, para 5(il). 29 73. The Government requested the use of LCB !or the packepes of civil works iuteutiied for procurement by this method in Subproject Nos. 1, 2 and 5. This method is appropriate since tihe size and nature of the work is such that foreign contractors are unlikely to be interested in biddiog; however, local construction facllities are available at reasonable cost and are efficient and have adequate capacity (see para 34). The Government will use its usual LCB procedures, which are acceptable to the Bank, to select contractors. 74. Proprietary procurement is appropriate only for the tpecitic equipment so indicated in Subproject No. 5. In these cases, proprietary procuremeut would belp standardize uew equipment with existing equipment, minimize maintenance problems and avoid the need to keep an excessive stock of spare parts. The amount of the M!ilLiproject to be procured on a proprietary basis amounts to just over ten per cent of the base costs. International Shopping is likewise justified for the equipment Identified for procuremnt by this method In Subproject No.5 since the package are not large ew4h to attract suppliers under international competitive biddting procedures. As in past multiprojects, procurement of midor ltems, which in this case mean items costing less than US$10,000 equivalent, may be carried out by the implviueau. agencl concerned without prior approval from the Bank. D. Design, Construction Supervision and Other Consulting Services 75. The Government requested technical assistance to finance all foreign consulting services (see paras 91-93) other than those financed by ADAB under parallel financing arrangemets. The arrangements for provision of the remaining engineering services are as follows: (1) the demarcation of boundarles, site surveys and preparation of contour maps for Subproject Nos. 1 and 2 (SIC Expansion, Tongatapu, and SIC Establishment, Vava'u) will be undertaken by the Ministry of Lands, Survey and Natural Resources before the consultants to be appolnted under the Bank technical assistance for preparatil o. the U Jte Master Plans (see para 93) start their fieldwork;- (ii) MOW will provide construction supervision for the force account work to be dome under Subproject Nos. 1 and 2 (SIC Expansion, Tongatapu, and SIC Establishbent, Vava'u); (iii) MOW will evaluate and let tenders under LCB procedures and provide construction supervision for the buildings to be constructed under Subproject Nos. I and 2 (SIC Expanelon, Tongatapu, and SIC Establishment, Vava'u); (iv) the necessary topographic and marine surveys needed for the design of Subproject No. 3 (Nafanua Harbour Iprovemant, 'Eua lsland) will be carried out by the Ministry of Lands, Survey and Natural Resources and HWD wore the consultants to be fInanced by ADAB start their fieldwork;- (v) MOW will evaluate and let tenders under ICB procedures for Subproject No. 3 (Nafanua Harbour Improvemmnt, 'Eua Island); (vi) the Ministry of Lands, Survey and Natural Resources will set out the rights-of-way for all roads to be constructed under Subprojey No. 4 (Construction of Agricultural Access Roads, 'Eu Island);- and (vii) MOW will design and provide construction 1/ Technical Assistance Agreement (for Multiproject part), Schedule 3. 2/ Loan Agreement, Schedule 5, para 11. 3 Loan Agreement, Schedule 5, para 12. 30 supervision for the force account work to be carried out under Subproject Nos. 4 and 6 (Construction of Agricultural Access Roads, 'Eua Island, and Improvement of Rural Roads, Tongatapu). The exchange building to be constructed as part of Subproject No. 5 (Telecommunications System Upgrading, 'Eua Island) will be designed, and the ensuing construction will be supervised, by competent local arehitect. to be recruited by TTC. E. Implementation Status of Previous Bank Projects 76. The Bank's first loan to Tongs was for a Telecommunicetions Project, Loan No. 146-TON(SF), approved in November 1973. A Project Performance Audit Report (PPAR) was circulated to the Board in July 1982 whieh noted that although there was an Initial ¢qlay caused by revision and curtailment of the scope of the project,- the main physical and financial objectives of the project were su87tantially met. The financial performance of the executing agency- was better than expected and there was significant organizational improvement, particularly on the accconting side. 77. The first Multiproject loan, Loan No. 435-TON(SF), approved in December 1979, was examined in a PPAR circalated to the Board in April 1984. The main issues noted in tte PPAR were: (i) the Multiproject loan modality helped the developmezt of the Bank's South Pacific DNCs, and in this case resulted in significant administrative cost savings; (ii) the project as a whole experienced a cost overrun of about 17 per cent and implementation was delayed by 18 months; (ifti) a clearer definition of the Consultants' responsibilities in the Terms of Reference, combined with more careful selection of consultants, mlght have reduced implementation problems; (iv) the civil works carried out by the Ministry of Works (MOW) under force account stretched its available manpower and equipment capacity and this led to delays in construction of subprojects; and (v) the executing at* implementation arrangements were judged to be satisfactory.- 78. The first loan to help establish the SIC in Tongatapu, Loan No. 335-TON(SF) approved in December 1977, was examined in a PPAR circulated to the Board in December 1984. The PPAR noted that: (i) the success of the project was attributable to comprehensive project preparation, provision of consulting services for implementation and operation, and judicious administration by MLCI staff; (il) there was a cost overrun of about 12 per cent, but this was mostly due to the higher-than-expected cost of site development and infrastructure 1/ Due to a large cost overrun caused by an unusual escalation In prices. 2/ The Telegraphs & Telophones Department. 3/ The Ministry of Finance was nominated as Executing Agency with the Secretary for Finance as Project Coordinator. The tmplementing agencies for the separate subprojects were MOW, the Telegraphs & Telephones Department, MLCI, the Ministry of Health, and the Tonga Water Board. 31 development;y (iii) implementation was delayed by 10 months due to a shortage of experienced engineers; and (iv) the Bank should continue to monitor the progress of the SIC to ensure the project achieves a no-profit no-loss financial position. 79. The main lessons learned from implement dtion of past Bank projects in Tonga is that: (i) the multiproject lending modality is an appropriate way of supporting the Government's development program; (ii) the appointment of the Ministry of Finance as Executing Agency, together with implementing agencies for separate subprojects, has worked successfully in previous loans; (iII) consultants play a key role in helping implement subprojects on time, and their effectiveness is improved if the Terms of Reference are well-drafted and the consultants are carefully selected; and (iv) MOW has limited capacity to undertake force account work and subprojects must consequently be formulated so as not to exceed this capacity. F. Iplemntation Schdule 80. The Multiproject as a whole vill be implemented over a period of nearly three years, in accordance with the implementation schedule (Appendix 8). The implementation schedules for individual subprojects vary, depending on the particular circumstances of each subproject. G. Land Acquisition 81. There are no major issues with regard to the acquisition of land. The land required for expansion of the SIC on Tongatapu is already leased by the Government and is in its possession. The land required for establishment of the SIC on Vava'u is owned by the Government and, although the three sites considered suitable are subject to the rights of third parffes, the Government has already taken steps to repossess one of them.- The site needed for improving Nafanua I,rbour lies in the foreshore area and is already owned by the Government, the Agricultural Access Roads on 'Eua Island will all follow established rights-of-way, and the Rural Roads on Tongatapu also all follow establisted rights-of-way. The land required for the telephone exchange on 'RuN Island is owned by the Government and is already occupied by a wooden exchange building owned by TTC; all telephone lines follow estabLished rights-of-way within existing road reserves. The Government ha agreed to ensure that all lands, rights in lands, and other rights and privileges required for the subprojects will be acquired and3lade available on a timely basis to avoid any implementation delay.- 1/ The PCR consldered that alternative designs for the electrification and sewerage components could have reduced this cost. 2/ Leasing, or making other final definitive arrangements for a suitable site is a condition of Bank financing this Subproject. Loan Agreement, Schedule 3, para 5(i). 3/ Loan Agreement, Schedule 5, para 7. 32 H. Operation and Msintena$ce 82. The Government has agreed to ensure that the equipment and facilities provided, constructed or upgraded under the Multiproject will be adequately operated, waged, mintained and repaired in accordance with sound practices.- For this purpose, the Government will make available, promptly as needed -- either directly or as sole shareholder of TTC - sufficient funds and other resources required for the proper oration and maintenance of the Multiproject's equipmene and facilities.- In particular: (1) MLCI will be responsible for the operation and maintenance of the SIC Expansion on Tongatapu and the SIC Establishment on Vava'u; (il) HWD within MOP will be responsible for the operation of Nafanua Harbour which is to be improved under the Project; (iii) MOW will be responsible for maintenance of Nafanua Harbour and for all the roads on 'Eua Island and on Tongatapu to be constructed, or improved under the Multiproject; and (iv) TTC will be responsible ¢or operation and maintenance of all telecomunications facilities to be upgraded under the Multiproject. 83. The Government agreed that part of the technical assistance for the Project (see para 91) will include a study of the rental structure of the SIC plots and buildings. The study will identify suitable means for incieasing rents at the existing SIC on Totsem. .DB .. - iperienced difficulties in recruiting a suitably-c -ilfied Finance Manager from within Tonga and, as a consequence, the Australian Government has agreed to provide an expatriate accountant under technical assistance to fill the position for a two-year period. At the time of the Mission, a shortlist of candidates had been submitted to TDB, and an appointment is expected to be made soon. To address the long-term position, a senior member of TDB's accounting staff is studying, with financial assistance from TDB, for an accounting degree at the University of the South Pacific (see para 155). The Economics and Research Manager position is vacant as a result of recent promotions within TDB. This vacancy is less critical as TDB's economist is well-qualified and capable of handling TDB's ongoing requirements for economic evaluation, monitoring of the econvaic climate and compiling and reporting on various statistics. However, if TDB is to become more actively involved in sector research, project identification and project promotion activities, an Economics and Research Manager needs to be appointed. TDB has applied to the Commonwealth Fund for Technical Cooperation (CFTC) for technical assistance to fill the position, although the results of that application are not yet known. 131. The Government will, before making any appointment to the position of Managing Director or Deputy Managing Director, consult the Bank regarding the qualifications, experience and tenure of office of the candidate 11. 17 L.A.L chedule 6, para 4. 47 3. Staff and Training 132. TDB's total staff increased from 52 (including 28 professionals) as of 30 September 1982, to 88 (including 32 professionals) as of 31 December 1985. Staff turnover levels within TDB have been low in the past, although staff turnover has increased recently from 14 per cent during 1982 to 24 per cent during 1985. Most of this turnover has been among supporting staff and only four professional staff had left TDB's employ between the time of TDB's establishment and 31 December 1985. Most of the increase in TDB's staff resulted from increased administrative staff numbers. This increase in supporting staff numbers resulted partly from the requirement for more accounting staff for operating TDB's manual accounting system. However, the Mission expressed the view, and TDB's management agreed, that the rapid overall increase in TDB's supporting staff numbers was difficult to justify in terms of a compensatory increase in the volume of loan- related transactions. Overstaffing has therefore been allowed to develop In some areas of.TDB's operations. 133. On the other hand, the increase in professional staff numbers over the period since 1982 has been relatively small, and it is apparent that some important functional areas of TDB's operation are understaffed. In particular, two senior loan officer positions, the position of rehabilitation officer and two staff training officer positions are vacant. As a result, TDB's loan appraisal and supervision capabilities are overtaxed atid internal staff training programs have lapsed. TDB has encountered difficulties in recruiting personnel for these positions, partly because the remuneration levels offered do not compare favorably with remuneration levels within the private sector in Tonga, particularly within the Bank of Tonga. 134. It is apparent from TDB's staffing situation that TDB's personnel management policies and procedures are in urgent need of improvement. TDB's management fully agrees with this assessment and attaches high priority to the need for the technical assistance proposed in para 118. The results of that technical assistance and TDB's plans for implementing the consultant's recommendations will be discussed with the Bank within three months of the completion of the consulting servicesl/. 135. TDB's in-house staff training activities are at present restricted to on-the-job training. This is supplemented by attendance of professional staff at overseas training courses organized by, among others, the Bank2/. Twelve staff members attended such training courses during 1984 and 1985. The lack of formal in-house training has resulted from difficulties experienced in recruiting a suitable training officer. However, CFTC has approved provision of technical assistance that will provide a staff training expert to TDB for a two-year period. This appointment is expected to be made during the first half of 1986. The 17 P.A. Schedule, para 9. 2/ Three Tongans attended the Bank's Training Assistance Unit courses during 1984 and four during 1985. 48 Mission considers that the proposed CPTC assistance will Improve TDB'a staff training procedures. The Mission also found that, as a result of the relatively long tenure of many of TDB's professional staff, the general skill levels of staff are high and satisfactory for TDB's current operations. TDB will continue to give high priority to itaff training activities, will keep the Bank infored of its staff training program on an annual basiss1/ and will continue to take all necessary measures to ensure that Its staff is adequately qualified2/. B. Operations 1. Activities 136. Although TDB is empowered to carry out a full range of lending and other support activities,3/ it has mailly been involved In providing term loans for projects in agriculture and industry. TDB has thus far made five equity investments. TDB will seek the Bank's prior agreement before establishing or acquiring any subsidiary companyl/. 137. TDB's project admlaistration capabilities have also been utilized in the implementation of projects as follows: (i) as agent to the New Zealand Government for the Pacific Islands Industrial Development Scheme; (ii) as the executing agency for the Artisanal Fleet Development Plan under which 40 fishing vessels are being financed by the Government and the United Nations Capital Development Fund; and (iii) as the executing agency for the Bank's credit line to assist private vanilla growers in the development of vanilla curing facilities, on-farm facilities and extension services. TDB also acts as a commission agent for insurance services to its borrowers. TDB, as agent, does not assume any liability under the insurance policies. 138. The provision of relatively small medium-term loans to a large number of borrowers remain TDB's predominant activity. The appraisal and supervision of a large number of such loans is a costly undertaking, particularly in view of the need for TDB to provide loan services to widely-dispersed geographic areas. As a result, TDB's administrative costs are high in relation to the value of its portfolio (see pare 162). The Mission considers, and TDB's management agrees, that TDB should develop avenues for widening the scope of its activities so as to make more efficient use of its staff and other resources. As well as improving TDB's potential profitability, a wider scope of activities (including, for example, provision of hire purchase and lease financing, and providing loans for property purchase) could result in TDB being a more efficient financial intermediary. In addition, TDB has yet to develop a domestic funding base independent of equity contributions from the Government and the Bank of Tonga, and in the interest of promoting its own maturity as a financial institution, such independent funding sources should be developed. 17 P.A. Schedule, para 8. 2/ L.A. Schedule 6, para 5; and P.A. Schedule, pars 7. 3/ Under the TDB Act, TDB can lend to all types of development projects, participate in equity investments and issue guarantees. 4/ P.A. Section 3.08(c) (11). 49 139. As an initial step in developing a wider and more appropriate range of activities, TDB has agreed to adopt an operatiug strategy statement by 31 December 1986 that would also formalize a specific profit objective for FYs 1987 through 1990. The new strategy statement will outline the means for improving TDB's profitability, including any necessary changes in the scope and method of Its operationsl/. 2. Policies 140. The basic document guiding TDB's operations is its Policy Statement which remains unchanged and continues to provide satisfactory guidance (see Appendix 15). Any substantial amendment in TDB's Policy Statement will be effected only with the prior agreement of the Bank2/. 3. Procedures 141. TDB's operational procedures for loan processing, documentation, procurement, disbursement and supervision are generally adequate. Loan approval limits of TDB's officers have been reviewed since the appraisal of the second loan. The Managing Director's loan approval limit remains. unchanged at T$15,000, the Deputy Managing Director's loan approval limit has been increased from T$7,500 to T$I0,000, and Operations Managers can now approve loans of up to T$5,000. The Mission considers these limits to be appropriate. 142. The only major change in TDB's approval procedures since the appraisal of the Bank's second loan has been the establishment of a loan review committee which is comprised of the Managing Director, Deputy Managing Director, Operations Managers, Administration Manager and the Economist. This committee reviews all loan proposals of T$15,000 or more at an early stage of loan processing. Loan supervision procedures have, however, been significantly Improved. In recognition of the inadequate attention given to loan supervision prior to FY1984, and in response to a growing arrears problem (see para 166), TDB's management established a rehabilitation section to handle problem loans of T$*5,000 or greater, and introduced administrative procedures that ensure that the required project visits are made and appropriate follow-up actions formulated. The Mission is satisfied that TDB's loan supervision procedures are satisfactory, but considers that the Improved arrears information that will result from a computerized accounting system will make TDB more responsive to emerging problem situations and further improve the quality of TDB's loan portfolio. 143. TDB's loan appraisal procedures benefitted significatly from the work of the consultant under the Bank's T.A. No. 510-TON. As a result of this technical assistance, economic evaluation aspects of the appraisal of loans of T$10,000 or more has improved, more attention is being paid to marketing aspects and sector issues, and financial 17 P.A. Schedule, para 13. 2/ L.A. Schedule 6, para 3; and P.A. Section 3.01(c). 50 analyses are more detailed. In addition, an adviser currently seconded to TDB for a two-year period from the New Zealand Rural Banking and Finance Corporation has introduced improvements to the appraisal of agricultural loans. The Nission is satisfied with the quality of TDB's loan appraisals and was particularly impressed by the improvement in loan appraisal standards that resulted from the employment during the last three years of the current Acting Deputy Managing Director and the Operations Manager for Industries and Commerce. 4. Operational Performance a. Overview 144. Highlights of TDB's lending during FY1981-1985 are summarized in Table 3. A detailed analysis of approvals by sector,type of borrower, geographic location, size and maturity of loan is provided in Appendix 18. Table 3: §ummzy of Low and Fm 98L-1m Pye ndig 31 Dec. 1981 1982 B 1984 1985 No. Am- No. Nuxm No. Ammt ND. Awt No. hAmt Ariculdmwe 2,728 1,261 2,965 1,707 2,233 1,300 2,544 1,967 2,488 1,880 ndustry and hbs s 347 1,198 427 1,134 312 1,113 369 1,427 303 1,690 Staff a/ 71 78 39 38 103 47 180 98 270 128 Equity bwetzumnts 1 25 - - 1 20 1 35 - - Total 3,147 2 - 2879 W W -3 3527 3 E W 3 3,4~~~ - - -._- - - Amwel Gwth Rate (Z) 24.9 12.4 (13.9) 42.2 4.8 a7 trn. areovId to staff on a lUdtd basis to assist wih pKonaral axpetes. Ia mea these loim are dert-tem salazy advane to mist with day-to-day finaing r {drEns,but thWy als include larger-tam lams for huse andor vdcle pase. 145. Between FYs1981 and 1985, TDB's approval levels grew at an average annual rate of 9.6 per cent. A 13.9 per cent decline in approvals occurred during FY1983, largely as a result of cyclone Isaac and the subsequent disruption to the economy. With an infusion of funds by way of additional equity from the Government and credit lines from the Bank and the European Investment Bank during late 1983 and early 1984, lending levels were able to recover strongly during FY1984. 146. TDB's equity investment operations, which commenced in 1978, have been of minor importance. As of 31 December 1985, TDB had approved six equity investments with a total value of T$141,000. Of these, one investment of T$20,000 was not disbursed, two investments totalling T$53,500 have failed and been written-off, three investments totalling T$32,000 are in profitable operation and one investment of T$35,000 is still In its Initial expansion program. Appendix 19 provides further details of TDB's equity investment portfolio. 51 b. Type of Borrower) Geographic Locatlon, Loan Size and Maturity 147. A high proportion of TDB's clients are repeat borrowers. During FY1985 only 30 per cent of TDB's loan approvals by number and 32 per cent by value were mwde to new borrowers. This is partly a result of TDB's "Aim High" lending promotion which encourages quick repayment of loans to qualify for a subsequent loan for further investment purposes. 148. TDB's lending has been concentrated in the main island of Tongatapu which accounted for 73.7 per cent of approvals by value during fiscal year 1985. The geographic spread of TDB's lending corresponds with the population spread between the various islands and also with the availability of better infrastructure and the larger market within Tongatapu. 149. The average size of loan approved by TDB increased from T$814 during FY1981 to T$1,208 partly as a result of inflation, but also as a result of TDB's increasing emphasis on lending to commercial agriculture as opposed to subsistence agriculture projects. However, during FY1985 2,680 loans or 87.5 per cent of the total loans by number were for T$1,000 or less. This is a large volume of loans for a small DFI to process, and is the prime cause of TDB's relatively high staff costs. 150. Between FY1981 and FY1985 there was a gradual increase in the proportion of loans made with longer maturities. Despite this, 88.6 per cent of the loans made by TDB during FY1985 had a maturity of less than two years. This reflects the small size of the loans and also the purpose of many loans which were made to facilitate the planting and harvesting of short-term crops. However, to promote longer-term development of productive resources and also to allow TDB's interest earning portfolio to increase to a more profitable level, TDB needs to increase the average maturity period of its loans. This is recognized by TDB's management, and top priority has been given to the identification of projects requiring long-term financing. c. Sectoral Distribution 151. A detailed sectoral classification of approvals for the period FY1981-1985 Is provided in Appendix 20. The sectoral distribution of TDB's leandlg reflects the importance of the agriculture sector in Tonga's economy, with 53.6 per cent of total approvals during the five- year period being made to agriculture projects. Financing of crops is the dominant form of agriculture lending with 27.3 per cent of total lending for the period. This is followed by farm, plant and equipment financing with 15.4 per cent of total approvals. Despite the high priority given to the identification and promotion of industrial projects by both TDB and the Government, only 10.1 per cent of TDB's approvals during the five-year period were to manufacturing projects. The small domestic market within Tonga and high transport costs for exported products have the Inevitable result that new manufacturing industries are difficult to establish. In addition, a sbortage of 52 local entrepreneurs and technicians results in a situation in which a relatively low proportion of TDB's lending is to industrial projects. The tourism industry was the next most Important recipient of TDB's loans, receiving 7.8 per cent of total approvals over the five-year period. This reflects the steady growth of small-scale tourist facilities within Tonga. 5. Projected Operational Performance 152. The projected lending and equity investment operations of TDB for FY1986-1990 are summarized in Table 4. Table 4: TDB's Projected Loan and Equity Investment Approvals (T$'O0O) Year ending 31 Dec. 1986 1987 1988 1989 1990 Total 2 Agriculture 29100 2,218 2,307 2,415 2,514 11,554 44.5 Industry and business 2,028 2,028 2,682 3,084 3,547 13,673 52.7 Staff 75 78 82 86 90 411 1.6 Equity Investments 50 50 75 75 75 325 1.2 Total 4,253 4,678 5,146 5 660 6,266 25 963 T-1.0 US$ Equivalent 3,037 34 3,673 5 4,447 153. Of TDB's total projected loan and equity approvals of T$26.0 million during FY1986-1990, the agriculture sector will account for 44.5 per cent, followed by the industry and business sectors (52 per cent), staff loans (1.6 per cent),: and equity investments (1.2 per cent). The projected approvals for 1986 are based on TDB's operational plan and pipeline of projects and will represent an increase of 15 per cent over 1985. Thereafter, projected approvals are expected to increase at an annual rate of 10 per cent. These projections, vhich take into account the envisaged capital outlays it the country, the operational performance of TDB during 1985 and its existing pipeline, are considered reasonable and realistic. C. Accounting, Audit and Financlal Controls 154. TDB's accounts are maintained in accordance with the requirements under the TDB Act. The accounting system iS centralized at the headquarters office, although the Vava'u office maintalis its own loans ledger. The accounting system is msnually operated and utilizes three NCR accounting machines. Income is reported on an accrual basis; the format of the accounting system would make it difficult for income to be reported on a cash basis. The accounting system currently in use has remalied basically unchanged since TDB was established and is no longer appropriate to TD'sa requirements, given the large number of loan accounts and the large number of transactions handled each month. In 53 particular, the system does not allow for variable interest rates to be charged, does not automatically compute penalty interest or interest to be charged on overdue installments and arrears; such information must be laboriously extracted by anually checking all loan ledger cards. As a result, arrears reports are often up to two months late. 155. The senior accounting officers are adequately trained and have shown themselves capable of operating the current system in a manner that allows acceptable accounting information to be generated for the day-to-day operation of TDB. In addition, monthly, quarterly and annual income accounts and balance sheets are generated In a timely manner. TDB will continue to provide the Bank with its financial projections for the succeeding three years within six months of the completion of each fiscal year 1/. TDB has encountered difficulties since its establiahuent, however, in recruiting a sufficiently experienced and qualified Finance Manager. The position was most recently filled (until November 1985) by a US Peace Corps volunteer who performed her day-to-day duties adequately, but was unable to introduce needed improvements into the accounting system and was also unable to fulfill that part of her terms of reference that required an updated accounting procedures manual to be prepared. As a long-term solution to filling this vacancy, a TDB staff member is currently at the University of the South Pacific studying for an accounting degree with financial support from TDB. An interim Finance Manager is currently being recruited for a two-year term under Australian Government technical assistance. 156. The need for TDP to purchase and introduce an appropriate computerized accounting system is urgent and Bank technical assistance Is proposed for that purpose (see para 117). 157. TDB employs a full-time internal auditor who reports directly to the Managing Director. He undertakes acceptable checks and prepares appropriate reports on the manner in which TDB's operating procedures are followed and accounting transactions conducted. Appropriate actions are taken by TDB's management to follow up on the internal auditor's recommendations. 158. TDB confirmed that its accounts will continue to be audited by an independent private auditor acceptable to the Bank, and that a copy of the audited accounts and the auditor's report will be furnished to the Bank within six months after the end of TDB's financial year2/. It was further agreed that the audit report would include a separate long form audit report containing (i) the scope of audit, and adequacy of internal control procedures; (ii) a quality classification of TDB's loan and equity portfolio; (iii) the auditor's opinion regarding the adequacy of TDB's balance sheet provisions; (iv) an analysis of arrears; (v) the auditor's evaluation of the adequacy of TDB's accounting systems and procedures and of its financial management; and (vi) the auditor's opinion as to whether the covenants of major borrowings have been complied with so that their maturities are not likely to be 1/ P.A. Schedule, para 10. 21 P.A. Section 3.06 (a). 54 acceleratedl/. TDB will also authorize the Bank to discuss its financial alfairs from time to time with TDB's independent auditors 2/. The Mission considers TDB's current audit arrangements satisfactory. D. Financial Performance 1. Interest Rate Structure 159. The interest rates charged by TDB vary between 6 per cent and 10 per cent per annum depending on the type of project being financed and the size of the loan. The lowest rates are charged on loans provided to top-priority projects for development of the agriculture, fisheries, livestock and natural resource sectors. TDB's current interest rate structure (see Appendix 2) was adopted on 1 October 1984 following a review of its interest rate policies conducted by the consultant under the Bank T.A. No. 510-TON. The consultant recommended that concessional interest rates should continue to be charged in accordance with sectoral prioritisE as defined under the Government's development plans. TDB has agreed to review and revise its interest rate structure In consultation with the Bank within one month of any changes being wade in the Goverrment's interest rate policy, law or regulations 3/. 160. Under the current interest rate structure, it is expected that TDB will have a projected average onlending rate of 8.5 per cent per annum to its borrowers. This rate is comparable with the average lending rate of BOT which is expected to be 9 to 9.5 per cent. The margin provided to TDB under the proposed loan of 5.5 per cent is adequate to meet TDB's projlcted costs. 2. Past and Current Performance 161. Table 5 summarizes TDB's financial performance for FYs1981 through 1985. The detailed financial statements are given in Appendixes 21, 22 and 23. 1/ P.A. Section 3.0 (b). 2/ P.A. Section 3.06 (c). 3/ P.A. Schedule, para 2. 55 Table 5: Sumary of Financial Performance FY1981-1985 (T$'0O) Year ending 31 December 1981 1982 1983 1984 1985 Total assets 3,734 5,176 5,679 7,046 8,149 Total portfolio 2,872 3,789 4,136 5,626 6,389 Total long term debt 2,050 2,484 2,711 3,388 4,256 Tozal equity 1,571 2,557 29848 3,237 3,618 Income from loans 218 299 375 405 517 Operating expenses 165 196 264 360 423 Interest on borrowings 57 71 72 86 110 Net income 17 34 31 22 30 Ratios: Debt:equity a/ 1.3:1 1.0:1 0.9:1 1.0:1 1.2:1 Debt-service coverage (times) 26 25 18 5.9 8.2 Return on av. equity 1.1 1.3 1.1 0.7 0.9 Operating expenses to average total portfolio 6.9 6.0 6.7 7.5 7.0 lnterest spread b/ 6.1 6.3 6.8 5.6 5.8 Earnings spread c/ 7.7 7.1 8.1 7.6 8.2 Current ratio dr 6.7:1 7.3;1 8.2:1 2.2:1 4.8:1 Long-term liabilities less current portion of long-term debt: total equity. b/ Income from portfolio as a percentage of average portfolio minus Interest on borrowings as a percentage of average borrowings. c/ Total income as a percentage of average total loans and Investments minus Interest and operating expenses as a percentage of average loans and investments. d/ Current assets:Current liabilities. 162. TDB has maintained margitally acceptable profitability during the period FY1981-1985 with a return on average equity varying between 0.7 per cent and 1.3 per cent. This relatively low return on equity is a reflection partly of. TDB's low debt:equity ratio which has been maintained at close to unity and of TDB's relatively high personnel costs. These high costs are a result of the large number of small loans handled by TDB, but also of inadequate staffing policies whieh may have resulted in an overstaffing situation in some areas of TDB's operation (see para 132). 163. TDB has maintained strong liquidity over the period. Although TDB's debt-service coverage ratio has reduced during FYs1984 and 1985 from very high earlier levels reflecting the end of grace periods on earlier borrowings, it still reflects a strong position at 8.2 times for FY1985. The debt:equity ratio has rmained well wi.this the coveinated maxwmum of 3:1. 56 164. TDB's source and application of funds during FYs1981-1985 are summarized in Table 6. Details of TDB's borrowings as of 31 December 1985 are given in Appendix 24. During the period, loan disbursements constituted the bulk of the total fund requirements accounting for 87.1 per cent. Debt service requirements were light (5.5 per cent), reflecting the long-term nature of TDBts borrowings with grace periods ranging from five to ten years. Internal cash generation and loan collections accounted for a relatively high 62.5 per cent of TDB's resource requirements over the period, reflecting the relatively short maturity of TDB's loans. Table 6: Summar of TDB's Sources and ApplIcation of Funds (FY 1981-1985) (T$_'000) Year ending 31 December 1981-1985 % Sources of Funds: Internal cash generation 1,047 7.2 Loan collections 8,049 55.3 Borrowings 2,963 20.3 Share capital increase 1,929 13.3 Increase in current liabilities 566 3.9 Total 14,554 100.0 Application of Funds: Loan disbursements 12*673 87.1 Debt service 798 5.5 Acquisition of fixed assets 917 6.3 Increase in current assets 166 1.1 Total 14,554 1B675 3. Portfolio Management 165. An analysis of TDB's loan collection performance and a sectoral analysis of TDB's portfolio for the period PYs1981-1985 is provided in Appendix 25. As of 31 December 1985, TDB's loan portfolio totalled T$6.3 million and accounted for 77.8 per cent of total assets. Between FYs1981 and 1985, TDB's loan portfolio increased in line with its lending operations. The share of agriculture loans by amount in the total portfolio increased only marginally from 37.6 per cent to 39.8 per cent despite the higher proportion of approvals to the agriculture sector during the period. This is a reflection of the generally longer-term average maturities for industrial and commercial loans. 166. TDh's loan collection performance deteriorated between FYs1981 and 1983. During FY1981,, TDB achieved a good collection ratio of 78.5 per cant and this had declined to 62.6 per cent by the end of FY1983. External causes of this deterioration included the effects of the 57 cyclone in 1982, a prolonged drought during 1983 and the adverse impact of worldwide economic recession since 1981. Within TDB, Inadequate loan supervision procedures that were exacerbated by the steadily increasing number of loans in TDB's portfolio were also an important cause of the increasing arrears levels. TDB's management recognized this problem during 1984 and appointed an arrears task force to develop remedial action. This remedial action included the establishment of a loan rehabilitation section to handle larger problem loans and to maintain a watching brief over the staff's performance In meeting its loan supervision requirements. In addition, improved administrative procedures for loan supervision have been developed and implemented. 167. The Mission found that TDB's management has now taken appropriate action to improve loan supervision and as a result. TDB's cash collection ratio has improved to 67.2 per cent during FT1985. This improvement has occurred despite a prolonged drought In Tonga during 1985 that affected the performance of a large number of the projects stupported by TDB. To encourage further improvements in TDB's collection performance, a covenant to the proposed loan will require TDB to further improve its minimum annual cash collection ratio, calculated on a rolling quarterly basis, to 70 per cent by the end of 1986 and to 75 per cent by the end of 1987 and thereafter 1/. 168. A detailed analysis of TDB's arrears is provided in Appendix 26. Total arrears increased from T$0.189 million as of 31 December 1981 to T$0.523 million LB of 31 December 1985. At that date, 68.4 per cent of arrears by value were from agriculture loans which, In addition to being the sector worst affected by cyclones and drought, are the most difficult to supervise. TDB's overall arrears ratio (the ratio of arrears to total portfolio) has, however, improved significantly from 12.57 per cent at 31 December 1983 to 8.3 per cent at 31 December 1985, mainly as a result of the improved loan supervision. 169. The category of TDB's arrears that is in most need of attention is the hardcore arrears that are 12 months or more overdue. The arrears in this category increased from 1.3 per cent of total portfolio value at 31 December 1981 to 5.9 per cent at 31 December 1983, and have since declined to 3.8 per cent at 31 December 1985. A high proportion of these arrears are well secured under chattels securities and/or meaningful personal guarantees. TDB has previously been reluctant to enforce such securities In a businesslike manner, although a stronger attitude has been adopted recently. The Mission feels, however, that high priority should be given to reducing the hardcore arrears which at 31 December 1985, were equivalent to 45.5 per cent of total arrears. Accordingly, a covenant to the proposed loan will require TDB to reduce the ratio of hardcore arrears to total loan portfolio value, calculated on an annual basis, to a maximum of 3.0 per cent by 31 D,cember 1986, and to a maximu of 2.0 per cent by 31 December 1987 and thereafter 2/. In the event that TDB fails to meet these targets, or the minlmum annual cash collection ratios (see para 167), disbursements under the proposed loan could be halted 3/. 1' P.A. Schedule, para 11 (a). 2/ P.A. Schedule, pare 11 (b). 31 L.A. Schedule 3, para 9; and P.A. Schedule, para 12. 58 170. TDB'a provision for doubtful debts as of 31 December 1985 was T$396,000, equivalent to 75.7 per cent of total arrears. Given the generally good security held by TDB over its loans and the good repayment ethic present within Tongan society, the Mission considers this provision to be acceptable. 4. Projected Financial Performance and Resource Position 171. A summary of TDB's projected financial performance for FYs1986 through 1990 Is given in Table 7, and details are given in Appendixes 21, 22 and 23. The major assumptions for the projections are given in Appendix 27. Table 7: Swima of Prolected Financial Performance FY1986-1990 Year ending 31 December 1986 1987 1988 1989 1990 Total assets 9s786 10,304 10*802 11,856 13,618 Total portfolio 7,607 8,377 9,519 11,131 13,066 Total long-term debts 5,788 6,164 6,405 7,056 8,059 Equity 3,798 3,950 4,091 4,492 5,105 Income from loans 656 746 831 954 1,116 Operating expenses 505 545 576 606 667 Interest on borrowings 146 170 178 194 222 Net Income 38 52 41 51 63 Ratios: a/ Debt:equity 1.5:1 1.6:1 1.6:1 1.6:1 1.6:1 Debt service coverage (times) 7.4 7.9 7.2 6.0 4.8 Return on average equity 1.0 1.3 1.0 1.2 1.3 Return on equity before provisions 4.1 5.4 5.9 f.9 7.8 Operating expenses to average total portfolio 7.2 6.8 6.4 5.9 5.5 Interest spread 6.6 6.7 6.7 6.6 6.6 Earnings spread 8.2 8.1 8.2 8.3 8.3 Current ratio 8.9:1 8.3:1 3.6:1 2.4:1 1.7:1 a/ Ratios calculated as in Tale 5. 172. TDB is projecting a continuation of marginally acceptable profitability. Net income as a percentage of average equity is not projected to increase significantly despite good projected portfolio growth and an average Interest spread of around 6.6 per cent. However, the projections reflect the requirement for TDB to commence paying 59 income tax from FY1988 1/. Under Tongan law, tax is calculated on net income before provisions for doubtful debts. In the case of TDB, 75 per cent of projected net income before tax is transferred to the provision for doubtful debts. As result, a high rate of tax on net profit after provisions Is projected. TDB's return on equity before provisions is projected to show a more satisfactory increase from 4.1 per cent in FY1986 to 7.8 per cent in FY1990. 173. The Mission considers that TDEBs operational efficiency would benefit from the commercial discipline that would follow from the adoption of a more challenging profit objective. A coveuant to the proposed loan will require that TDB adopt a new operating strategy statement prior to 31 December 1986 that incorporates such a profitability objective for FYs1987 through 1990 and the proposed means for achieving it 2/. 174. TDB is projecting a continuation of its satisfactory liquidity position with projected debt service coverage well above the covenanted minimum of 1.5 times cover 3/. TDB's financial structure is also projected to remain strong and the projected debt:equity ratio remains below the covenanted maximum of 3.0:1 41. The Mission considers that TDB's policy of appropriating 75 per cent of pre-tax profit to its provision for doubtful debts should provide adequate protection against potential bad debts in forseeable circumstances. In addition, TDB's auditors will in the future be required to provide their assessment of the adequacy of TDB's provisions 5/. The projections show thi.s provision increasing to T$1,135 millia by 31 December 1990, equivalent to 8.7 per cent of total projected portfolio value. 175. The Government has given satisfactory assurances with regard to meeting TDB's local currency requirements 6/. TDB's projected financing plan for the period FY1986-1990 is summarized in Table 8. 1/ TDB was awarded a ten-year tax holiday at the time of its establishment. 2/ P.A. Schedule, para 13. 3/ P.A. Schedule, Section 3.09. /I P.A. Schedule, Section 3.09. 51 P.A. Section 3.06 (b). T/ L.A. Section 4.02 (b). 60 Table 8: TD's FinancIEg Plan for FY1986-1990 (T11000) Year ending $1 December 1986-1990 2 Sources of Funds Internal cash generation 2,159 9.1 Loan collections 14,656 61.6 Borrowings 5,538 23.3 Share capital increases 1,242 5.2 Increase in current liabilities 179 0.8 23,774 100.0 Application of Funds Loan and equity disbursements 21,333 89.7 Debt service 2,641 11.1 Acquisition of fixed assets 380 1.6 Increase in current assets 580) (2.4) Z3,7 4 -100. 176. Total disbursements of loans and equity investments for the period are projected to amount to T$21.3 million, of which the foreign currency portion will account for about 40 per cent. TDB's total debt service requirement will Increase significantly to 11, 1 per cent of total fund requiremante as a result of the ending of the grace periods on various borrowings, but will still be a relatively low proportion of TDB's outgoings. The major sources of finance will be from internal cash generation and loan collections (70.7 per cent) followed by new borrowings (23.3 per cent). The Mission considers that TDB's financing plan is sound. E. Implemetation of Previous Bank Loans and Teehnical Assistance 1. General 177. The details of the Bank loans and their utilization are given in Appendixes 28 and 29. The Bank has provided for TDB from Special Funds, loans totalling US$2.5 million the overall utilization of which has been satisfactory. The first Bank loan has been fully utilized and closed. Comitments under the second loan of US$1.0 million amounted to $0.646 million as of 31 December 1985, and It Is expected to be fully committed as of 31 May 1986. All disburcements under the Bank loans thus far have been on a reimbureemet basis, mainly for off-the-shalf purcbaess. An manlysis for the two Bank loans of procureant by country of origin Is given in Appesdix 30. By amount, the loading countries were Japan, Australia and New Zealand. 61 2. Nature of Subloans 178. TDB has financed 1,410 subloans under the two Bank loans as of 31 December 1985. By number, 91.9 per cent were approved for the agriculture sector, followed by 7.0 per cent for the service sector and 1.1 per cent for the manufacturing sector. The average size of subloan under the first loan was $1,458 and $1,543 under the second loan. Reflecting this relatively small average size of subloans, 92.4 per cent of subloans under the first loan and 77.7 per cent of subloans under the second loan were for a term of two years or less. Subprojects financed under the two loans were mainly located in Tongatapu and Vava'u. 3. Financial and Socioeconomic Performance of Subprojecte 179. It is difficult to assess the financial and socioeconomic performance of subprojects financed under the loan due to the nature of the subprojects, a paucity of relevant data and the large number of small borrowers involved. However, all apart from 13 of the 57 subloans of over T$5,000 financed under the first loan have since been repaid; this implies generally satisfactory financial performance. As of 31 December 1985, 16 of the 64 subloans of over T$5,000 financed under the second loan were in arrears, a proportion which is generally in line with the performance of TDB's overall portfolio. 180. The consultant employed under the Bank's T.A. No. 510-TON evaluated data on the expected socioeconomic contribution of loans of over $10,000 provided by TDB since its establishment. The consultant found that such loans had an aggregate amount of T$6.7 million and were expected to generate (i) incremental sales value of T$23.9 million, (ii) incremental value added of T$7.9 million; (iii) net foreign exchange earnings/savings of T$6.6 million; and (iv) add!tional employment of 805 people. The subloans of over $10,000 approved under the two Bank loans accounted for 23.0 per cent of this financing and therefore have resulted in significant economic benefits to Tonga. For the purpose of the proposed loan, TDB has agreed to introduce an improved project benefit monitoring system to allow an improved assessment of the loan's financial and socioeconomic performance 1/. 4. Implementation of Technical Assistance 181. The first two technical assistance grants provided by the Bank to TDB enabled a senior development banking expert to be employed to assist the establishment of TDB and the initial management of TDB's operations. This technical assistance made an Important contribution to the subsequent satisfactory performance of TDB. The technical assistance provided under the second loan was originally intended to provide accounting as well as economic evaluation expertise to strengthen TDB's operations. However, a US Peace Corps volunteer with appropriate qualifications became available to TDB, and the full nine man-months of the Bank's technical assistance were utilized to Improve TDB's economic evaluation capabilities. This technical assistance was successfully completed, and related changes have since been made to TDB's policies and procedures. 1/ P.A. Schedule, para 5. 62 5. Lessons Learned from the Previous Bank Loans 182. The sajor recomendations of the Project Completion and Project Performance Audit Reports covering the first Bauk loan were as follows: (1) The Bank should cosider the provision of further institution-building technical assistance to TDB following an li-depth analysis of TDB's key constralits and potentials; (ii) TDBts institutional productivity should be laproved through an improvement of personnel mangemnt policies and procedures, through a widening of the scope of TDB's operations, and through a review of TDB's isetitutional structure; (iii) a thorough study of the causes and implications of TDB's hardeore arrears Is necessary; and (iv) the government should improve the effectiveness of Its Interest rate policies. 183. The Mission undertook its appraisal for the proposed loan within the context of these recommendations and ldentifled the key constraints to TD)B's operations as being its inadequate accounting system, inadequate personnel mauagement policies and procedures, and the restrictive Interest rate enviroment. Appropriate technical assistance is proposed to help overcome these constraints. The recomendation that the scope of TDB's operations be reviwed and widened was addressed during detailed discussion with the Government and TDB. A videaning of the scope of TDB's operations could include TDB's inolvemet in hire purchase and lease activities and possibly the provision of home finance. In addition, TDB could hecome lvolved In taking deposits from the private sector. A covenant requiring TDB to review its operating strategy was developed in this regard 1/. The Mission found that appropriate analysis of TDB's arrears sltuation has been undertaken by TDB's management and appropriate corrective action taken (see paras 166 an4 167). 6. Compliance with Previous Bank Loan Covenants 184. All covenants under the Bank's loans to TDB have been complied with (see Appendix 31). 17 P.A. Schedule, para 13. 63 VII. CONCLUSIONS AND RECOMMENDATIONS 185. The scattered nature of the Tongan island groups and the small size of the country's population means that development projects are smalU and have to be designed to fit within the capacity of the Imple_enting Agencies. In this context, the Project has been fomulatted as a Multiproject and a Line of Credit to TDB. The proposed loan of $3.0 million from the Bank's Special Funds Resources - $2.0 million to support the Multiprojece and $1.0 million to provide the line of credit -- is considered suitable for this purpose. the Project also provides for technical assistance grants totalling $381,000 to provide consulting services to assist in implementing the subprojects to be financed under the Multiproject, to enable the Government to review its interest rate policies, and to provide institutional strengthening to selected implementing agencies and TDB. 186. The Multiproject will support implementation of a number of small, high-priority subprojects in the industrial and infrastructure sectors; the subprojects will support development of manufacturing, the Goverrment's regional development policy, and development of agriculture. The line of credit to TDB will also generally support development of manufacturing and agriculture. In designing the subprojects to be financed under the Multiproject, due attention has been paid to Government priorities, technical feasibility, economic viability and the state of project preparation; they have also been formulated to ensure they are within the capacity of the implementing agencies. 187. TDB's institutional and operational aspects continue to be satisfactory although TDB's accounting system and personnel policies and procedures are in urgent need of strengthening. Apart from these deficiencies, TDB has developed as a well-performing development finance institution with potential for further growth and has a sound financial position. Covenants to the proposed loan will ensure that TDB will continue to maintain a sound financial position and will encourage further improvement in TDB's profitability and a broadening of its scope of activities. 188. In addition to the standard provisions and requirements Included in the Bank's loan documents, specific assurances have been received from the Borrower with respect to the following: A. For the Multiproject: (i) Each subproject will be subject to individual appraisal by the Borrower and the financing of a subproject under the loan will be conditional on the Bank's approval of the subproject on the basis of the appraisal report submitted by the Borrower (Loan Agreement, Schedule 1, para 1). (il) By agreement between the Bank and the Borrower, subprojects may be added to, or substituted for those subprojects listed in the Attachment to Schedule 1 of the Loan Agreement, provided that the 64 identification, preparation and implementation arrangements are carried out in accordance with criteria acceptable to the Borrower aud the Bank, and the required finap ng for the Multiproject does not exceed the amount of the Loan (Loan Agreement, Schedule 1, paras 1 and 2). (iii) No withdrawals will be made from the Loan Account for expenditures incurred In carrying out work on Subproject Nos. 4 and 6 (Agricultural Acess Roads, 'Eua Island, and Rural Roads Improvement, Tongatapu) until satisfactory evidence has been presented to the Bank that an engineering charging system satisfactory to the Borrower and the Bank will have been implemented with respect to these subprojects by MOW [Loan Agreement, Schedule 3, para 5 (it)]. (iv) Not later than one month after the consultants to be financed under the Bank technical assistance grant for the Multiproject have completed their final report on the study to be undertaken of the Tongatapu SIC rental structure, representatives of the Borrower will meet with representatives of the Bank to develop necessary revisions to the rental scheme for the Tongatapu SIC, including a phased program for increasing rental fee levels which will ensure that the Tongatapu SIC will operas, on a no-profit no-loss basis (Loan Agreement, Schedule 5, para 9).- (v) The Borrower will institute a system of tariffs for use of coastal port facilities in Tonga which will set tariff levels that: (a) are, by the completion of Nafanua Harbour, adequate to recover at least the cost of operation and maintenance of Nafanua Harbour; and (b) are, within a period of time satisfactory to the Borrower and the Bank, adequate to recover an agreed-upon percentage of the capital cost of the coastal ports (Loan Agreement, Schedule 5, para 15). (vi) Within two months of the completion of the review of the Government's interest rate policies, the Government will discuss the report's recommendations with the Bank and will implement agreed-upon changes within a timeframe satisfactory to the Bank (Loan Agreament, Schedule 6, para 6). B. For the line of credit: 189. (i) In the event that Tonga's interest rate policy, law or regulations are amended to allow higher lending rates to be charged by TDB, the onlending rate will be reviewed and revised in consultation with the Bank (Loan Agreement, Schedule 6, para 2; Project Agreement, Schedule, para 2). (ii) Within three months of the completion of the consulting services funded under the Bank technical assistance for reviewing TDB's personnel management policies and procedures, the consultant's recommendations will be discussed with the Bank (Project Agreement, Schedule, para 9). 17 A similar covenant requires the Borrower to ensure that the Vava'u SIC operates on a no-profit no-loss basis. 65 (MA) As initial step in developing a wider end more appropriate rnge of activites, TDB hs agreed to adopt en operatin strateg by 31 December 1986 that vili formaliz a more specfic profit objective for the flimcial yars 1987-1990 (Project Agreemnt, Schedule, para 13). (iv) To encouroge further improvemnts In TDB's collection perfomnce, TDB will be required to meet minimum anul cash collectlon ratio targets of 70 per cent by the end of 1986 and 75 per cent by the end of 1987. Also, In order to focus loan supervilso efforts on TDB's hardcore arrears, TDB il be required to reduce the ratio of hardcore arrears to total portfolio to 3.0 per cent by the and of 1986 and to 2.0 per cent by the end of 1987J (Project Agst Schedule, para 11). Except as the Bank may otherwie agree, couitusats will be balted in the event these targets are not not (Loan Agre t, Schedule 3, pare 9; Project Agreamt, Schedule, pares 11 (a) end 12). 66 LIST OF APPENDIXES ApRendix Page A. Background 1 Tonga Telecomunications Commission 68 2 Interest Rates Prevailing in Tonga 69 3 Income Statement: Tongatapu SIC 70 B. The Multiproject 4 Nafanua Harbour Improvement, 'Rua Island 71 5 Small Industries Centre, Vava'u 73 6 Detailed Cost Estimates of the Multiproject 75 7 Amount of the Project to be Implemented Under Different Procurement Procedures 77 8 Implementation Schedule 78 9 Outline Terms of Reference for Appraisal of Subprojects under Multiproject Loan and for a Review of Government Interest Rate Policies 79 10 Outline Terms of Reference for Development of Nafanua Harbour 87 11 Estimated Cost of Proposed Technical Assistance 90 12 Economic Evaluation of Nafanua Harbour and Agricultural Access Roads on 'Eua Island 91 C. The Line of Credit 13 Outline Terms of Reference for Proposed Technical Assistance to TDB 100 14 Cost Estimates for Proposed Technical Assistance to TDB 104 15 Statement of Operating Policies 105 16 Members of Tonga Development Bank's Board of Directors 110 17 Organization Chart for Tonga Development Bank 111 18 Analysis of Loan and Equity Investment Approvals 112 67 Appendix Paie 19 Equity Investment Portfolio 113 20 Analysis of Approvals by Industrial Sector 114 21 Actual and Projected Income Statements 115 22 Actual and Projected Balance Sheets 116 23 Actual and Projected Cash Flow Statements 117 24 Details of Major Borrowings 118 25 Analysis of Collection Performance and Sectoral Analysis of Portfolio 119 26 Analysis of Arrears 120 27 List of Major Assumptions for Financial and Operational Projections 121 28 Details of Previous Bank Loans 123 29 Analysis of Subloans Provided Under the EarlUer Bank Loans 124 30 Procurement by Country Under Previous Bank Loans 125 31 Compliance with Covenants Under the Earlier Bank Loans 126 68 Appendix 1 TONGA TELECOMMUNICATIONS COMMISSION Profit and Loss Statement for the Year EndinR 30 June 198- (T$)- 1985 1984 REVENUE Telephone Meter Calls 608,773 *53,852 Telephone Rental 172,582 129,588 Radio Telephone Calls 92,964 54,991 Connection Fees and Other Parges 29,175 19,189 Terminal Share & Royalties- 184,040 358,646 Telegrams 88,841 79,449 Miscellaneous 106,869 41,685 TOTAL REVPNUE 1,283,244 1,137,400 EXPENSES Payroll 499,491 290,845 Utilities 74,447 40,208 Travelling & Transport 66,725 36,968 Accommodation 10,913 60,646 Subscription & Donations 21,250 14,813 Repair & Maintenance 116,778 118,009 Legal & Audict$g Charges 21,976 29,892 Depreciation- 238,840 201,171 Amortisation of Consultancy Cost 43,231 43,231 Miscellaneous 42,879 67,157 TOTAL EXPENDITURE 1,136,530 902*940 Operating Pro5)t Before Abnormal Item 146,714 234,640 Abnormal Item- 52,992 _ _ Operating Profit After Abnormal Item 93,722 234,640 Prior Period Adjustment 1,295 - Operating Profit Before Tax 92,427 234,640 Income Tax 23,107 - Net Profit After Tax 69,320 234,640 Dividend to Government 34,660 - Net Profit After Dlyidend Transferred to General Reserve- 34,660 - a/ This refers to the first full year of the Commission's operation as a Public Corporation. b/ The Commission receives a 15 per cent share of the revenue earned from the international calls operated by Cable & Wireless (UK) under a franchise agreement. c/ Calculated on the basis of historical costs. d/ Mainly writing off obsolete stock. e/ The debts of the previous Telegraphs and Telephones Department were transferred to the Corporation as an Interest-free Treasury Loan; no Interest charges are therefore shown in the accounts. (Reference In text: page 10, para 24) 69 Appendix 2 INTEREST RATES PREVAILING IN TONGA as of 31 December- 1985 (T and per cent) BANK OF TONGA Per Cent Per Annum Under T$100,000 $100,000 and-over Deposit Interest rate. Savings accounts 5.0 5.0 Term Deposits 3 months 5.25 6.00 6 months 5.50 6.25 12 months 5.75 6.50 24 months 6.00 6.50 36 months 6.50 6.75 LendinS Rates (rates applying as from 1 July 1985) Purpose Housing - ordinary 8.0 - Investment 10.0 Personal - general purpose 9.5 - unsecured 9.5 - motor vehicle 9.5 Comercial- all loan 10.0 Overdrafts 10.0 TONGA DEVOPEN BAN Top prioriy sectors Below $2,000 6.0 flat rate $2,000 and above 6.0 reducing balance Bigh priority sectors Below $2,000 8.0 flat rate $2,000 and above 8.0 reducing balance All other industrial and comercal lomn Below $2,000 10.0 flat rate $2,000 and above 10.0 reducing balance (Reference in text: page 12, para 32) 19789 9/80 198/81 1981/82 1982/83 198/ 1916 A. Xpsmdn - 1,180 14,738 25,769 35,50 37,276 42,018 56935 0 4,375 11,822 19,208 1,660 25,369 28,716 29,163 3Z,750 - - 3,121 1,367 1,766 3X26 4,516 2,800 o 1am af lad 1,875 2,500 250 2,50 4,00D 4,00 Q4 4,0Q0 553 165 501 795 713 1l __ bb"toSal 6,250 14,875 25,694 23,028 31,930 36,705 38,929 40,90 945 14A49 i_2_4 27_4 __10 __ 37_ btl Fap MP= 192935 43.694 50,6272 59,514 63-515 060 at;qmmtfm bo (Ddtdt) (7,195) (28,01) (,) 4 (24(2006 (M (26M1) (21,795) Int a cm Dabe III 1,823111 2,611 3,491 7,711 8,518 UD, 88 a 11 m 0iit) (7.30 (30,017) C31567) (28344) (31,m) (34,757) (37939) C34,9 Dt 8azvat - - - - - - - - Cl ciMM of t ftnt Do&t Ion star In 19O8, with nI=Mk of VAUD36. . , .. , . ~~~~~~~~~~ 71 dpenix 4 Page I NAFANUA HARBOUR IMPROV1MENT, 'EUA ISLAND Nafanua Harbour is located on the West Coast of 'Eua Island. The coastline In this area runs in a north-northeast/south-southwest direction. The foreshore is made up of old coral reef material and the harbor consists of a small basin in the foreshore. The basin is part natural and it has been extended artificlal?; the present port facilities are located in the extension. The basin is at the mouth of a natural watercourse which only carries water during and after heavy rain. A narrow channel through the coral connects the basin with the open sea. A section of reef between the natural basin and the extension lies opposite the entrance channel and seriously restricts the maneuvering room available for vessels entering and leaving the harbor. The coastline in the area is featureless and has no bays or headlands. The harbor entrance is consequently exposed and receives no protection from waves, or swells from the sector between north-northeast/south-southwest; this creates difficulties for vessels entering and leaving the harbor. The prevailing winds in the area are the southeast trades. Winds from south through east to northeast, and of strength greater than 10 knots, blow about 85 per cent of the time; average wind strength from this sector is about 12 knots. The area is subject to cyclonic weather from November/December to March. The coast appears to be periodically subject to heavy swells from the north/northeast. These swells appear to be generated by east and southeast winds and are refracted and/or diffracted around the northern tip of the island. This swell, together with westerly wind waves, produce the vorst conditions at the harbor entrance. About five times a year, the harbor is closed to shipping due to rough sea conditions, for about two days each time. The restricted room inside the harbor makes conditions worse when vessels enter the thirbor with a following sea. In such cases, vessels are compelled to reduce ahead power earlier than desirable to enable tthem to make a turning maneuver. The vessels presently using the harbor are launches approximately 15-18 m in length which carry both passengers and cargo; a regular service is operated by the Shipping Corporation of Polynesia in a vessel that carries 60 passengers and five tons of cargo. At least four others are owned privately, or by local churches and serve the port on an irregular basis. The Shipping Corporation of Polynesia also operates an 18 m self-propelled barge-type vessel with a bow loading ramp; it has a cargo-carrying capacity of 27 tons. A rough estimate of present per annum cargo and passenger traffic through the port is 30,000 passengers and 7,300 tons of cargo. The present port facilities consist of two berths and a loading/unloading ramp. One berth, approximately 30 m long, has failed structurally and is used only by small fishing boats. The (Reference in text: page 14, para 40 and page 19, para 51) 72 A_pendix 4 Page 2 other berth io appoxiately 25 a long and io used by the launches. This berth has a siding derrick with a bhd wineb of about two tons capacltye, but it appears to be little used. The loading romp is used by the self-propelled barge. The harbor Is also used by several small fishing boats and these supply fish to the local population. These boats moor in the natural basin, some distance from the port facilities. 73 Appendix 5 I(LL INDUSTRIES CENTRE, VAVA'U Page 1 Selection of a Suitable Site for the Saall Industries Centre Several sites were sugsted to the Missiong they are all lot'at!ed to the North of Neiafu and have good road access. However, since the Sall Industries Contra (SIC) i likely to be primrily used to accomodate service industries (e.g., automotive repair. servicng electrical appliancea, servlcing and repairing of moll mschadcal equipmet, etc., it needs to be located close to the built-up area In Neiafu. With this in mind, three sites were selected for closer lmpection as follows: A. Situ Imediately adjacent to the town boundary This site consists of two blocks of Goverment land with a total area of over 13 acres. Both blocks are currently rented by private lindviduals. The site has road access on t% sides. Laitone road runs a1o" the eastern boundary and a legal road on the southern boundary connects Laitoue road to the extesion of King Street which Is the main road leading to the airport. The site falls gently from one corner (northwest) to the opposite corner (southeast). There are soe smll rises and depresions, but these could be re8raded with a minimum of earthwork. The lad Is not utilind apart from one relatively small section of cltivatio Vegetation cover consists of well-spaced trees with scrub growth beneath. Site preparation would be miniml and would inolve: (1) claring of trees and vegetation (ii) a mall amount of ertbworks to trim building sites and ensure good drainge; and (iii) construction of access roads. The Ministry of Works has equipment to do this work and bas a quarry for supplying coral witbin two km of the site. A three-phase power supily (230V phase/neutral) is available at the soutbast cornr of the site end the circuit appears to have spare capacity. A three-phase (600V phase/neutral) supply is also avalab1e close to the site and the line capacity could be readily licreased. A 50-em water main with spare capacity runs within 100 m of the suthern boundary of the site. Avallablity of water could also be radlly Increased from other mains in the vicinity. B. Site on the eastern side of the road to the aport. This site consists of four blocks of Goverment lend with a total area of 33 acres. It gi within 800 m of the town boundary and is immediatoly east of the extension of King Street which rmu north to the airport. Access Is available from there and from Laitone road. 'There s a samill on one of the blocks and part of the land is being cultivated. (Reference in text: page 19, para 49) 74 &2endix 5 The site is mostly evenly graded with gentle falls; there are some steeper areas with large changes in level (up to 15-18 m) in one corner. Vegetation cover is similar to site A. Water is available from the same point as in the first site and the water main would have to be extended--by about one km. Power is available along the road adjacent to the site. C. Site on the western side of the road to fzhe airgort. This site consists of two blocks of Government land with a total area of 16-1/2 acres. It is on the western side of the road leading to the airport, from which it gains access and is approximately the same distance from the town boundary as site B. Some of the site is under cultivation and the topography and vegetation cover is similar to site B. Power and water are available as for site B. All three sites would be suitable for development of a Small Industries Centre, but site A is considered the most suitable. 75 4Ppendix 6 Page 1 DETAILED COST ESTIMATES OF THE MULTIPROJECT $ at end-1985 prices) TOTAL FOREIGN . LOCAL TOTAL 1. Small Industries Centre Expansion, Tongatapu Land Clearing,Grading, Filling, 24,000 6,000 30,000 Demarcation of Plots Construction of Access Roads & 32,000 8,000 40,000 Installation of Utilities Stormnater Drain (0.25 km) 6,400 1,600 8,000 Two Factory Sheds (2*286 sq a) 72,000 48,000 120,000 One Nursery Building (429 sq m) 57,000 38,000 95,000 Warehouse/Admin. Office/Meeting 60,000 40,000 100,000 Room Equipment 12,000 0 12,000 Supervision by MOW (2.5 2) 0 9,825 9,825 Subtotal 263,400 151,425 414,825 Contingencies (102) 26,340 15,143 41,483 2. Small Industries Centre Establishment, Vava'u Land Clearing, Grading, 8,000 2,000 10,000 Demarcation of Plots aad Fencing Construction of Access Roads 20,000 5,000 25,000 and Installation of Utilities Two Multipurpose Buildings 75,000 50,000 125,000 (2*286 sq m) and an office Vehicle and Equipment 12,000 0 12,000 Supervision by MOW (2.5 2) 0 4,000 4,000 Subtotal 115,000 61,000 176,000 Contingencies (10X) 11,500 6,100 17,600 3. Nafanua Harbour Development, 'Eua Island Site Establishment 79680 7,680 15,360 Drilling/Blasting 18,974 3,886 22,860 Excavation,Haulage and Sorting 279,000 21,000 300,000 Breakwaters 28,830 2,170 31,000 Fil1 and Grading 21,260 1,600 22,860 Forming Wharf 156,000 44,000 200,000 Boat Ramp 17,831 5,029 22,860 Subtotal 529,574 85,366 614,940 Contingencies (15%) 79,436 12,805 92,241 (Reference in text: page 21, para 55) 76 Appendix 6 Page 2 DETAILED COST ESTIMATES OF THE MULTIPROJECT ( at end-1985 Prices) TOTAL FOREIGN LOCAL TOTAL 4. Agricultural Access Roads, 'Eua Island Clearing and Formation 31,200 7,800 39,000 Supplying Coral at Site 52,880 13,220 66,100 Construct Pavement 15,920 3,980 19,900 Surcharge for Work on 'Eua (10%) 10,000 2,500 12,500 Overheads and Supervision (10X) 6,875 6,875 13,750 Subtotal 116,875 34,375 151,250 Contingencies (101) 11,688 3,438 15,125 5. Telecommunications System Upgrading, 'Rua Island Automatic Exchange 65,000 0 65,000 Exchange Building 6,000 4,000 10,000 Radio and PCM Equipment 115,000 0 115,000 Standby Power Supply 10,000 0 10.000 Distribution Network 26,000 0 26,000 Lable Laying 0 5,000 5,000 Tralning 6,300 0 6,300 Engineering, Furnishing & 20,000 0 20,000 Installation Subtotal 248,300 9,000 257,300 Co-,^tingencies (5%) 12,415 450 12,865 6. Rural Roads Improvement, Tongatapu Clearing and Formation 60,480 15,120 75,600 Supplying Coral at Site 162,480 40,620 203,100 Construct Pavement 42,000 10,500 52,500 Overheads and Supervision (101) 16,560 16,560 33,120 Subtotal 281,520 82,800 364,320 Contingencies (101) 28,152 8,280 36,432 Total Base Coat 1,554,669 423,966 1,978,635 Physical Contingencies 169,531 46,215 215,746 Price Contingencies 249,399 52,337 301,736 Interest During Construction 22,159 0 22,159 Total-/ 19522.517 2.518.2 8/ Numbers do not add up exactly due to rounding. 77 Appedix 7 AMOUNT OF THE PROJECT TO B D E NDER DIFFRN PROCURBENUT RCDIS (bse costs at end-1985 PRi5es) ICB 614S940 31.1 LCB 450,000 22.8 Force Accou5ti/ 633,570 32.0 Proprietary Procurement 206,300 10.4 IS & Other 73,825 3.7 Total Base Cost I,978S635 100.0 a/ Incliideg DintallatIon work done by Tbga ElectrIC Por Board, Tonga Water Board and Tonsa Toleeatic&tions wlon. (Reference in text: paeo 27, per 70) IMPLEMENTATION SCHEDULE OURATION (IN MONTHS J I FlA AMJ JA I S jO iqN D JA F A JN J Aj SO NOiS JAUA J !JA 0II 1936 13? - .8S A. SUB-PROJECTS 1. SIC EI.uFon A -Site il DE A 2. SIC E. bNsbme IC I I- I 2 2. S C E lE{ l l l C j Not3.mmlwm HwL~or Imuprowameram 4. Actitutal AcceRoads IM c 5. tcsmm inRtio"n System A TJI DE C up-ag Mm L E no m o .l R Rsmo B. TECHNICAL ASSISTANCE 1. Ibaft TodmW AsionecC S 2. ARA TcdIAovsI su_maau 2.AOAB C = = = = = = T- =~~~~I I I I I I I I SC - otlw9 Cof_G=Ukts A - Apprail C- Cor8tvctlwn and Spply of Equipmw n FS- FidSw*fm DE O d b usslnuarn DOes i CtS- Csuvttm Sem*Ion T/A - T.idgAwswrd of Conta 79 Appendix 9 Page 1 OUTLINE TERMS OF REFERENCE Appraisal of Subprogects Under Nultlprolect Loan and for a Review of Government Interest Rate Policies I. Introduction The Asian Development Bank is providing technical assistance to assist the Government of Tonga to: (i) assist the Ministry of Works (MOW) to establish unit rates for road construction work carried out on a force account basis; (ii) help prepare and implement selected subprojects t3 be financed under the Bank's Third Multiproject loan; and (iii) undertake a review of the Government's interest rate policies. The components to be included in the Multiproject have already been tentatively identified. However, if any of these subprojects turns out to be unsuitable for implementation, the Government may delete the subproject from the Multiproject. A substitute subproject may then be included in the Multiproject provided that the Government and the Bank agree on its suitability. In the case of such substitution, the Terms of Reference for Part A of this technical assistance may be amended by aegotiation to include work on the substitute subproject. A firm of consultants will be appointed to undertake the studies and other work to be financed under the technical assistance. The consultants will report to the Secretary for Finance who will coordinate the work of the consultants through a joint steering committee comprising the Ministry of Works (MOW), the Ministry of Labour, Commerce and Industries (MLCI) and the Central Planning Department (CPD). II. Objectives The technical assistance will be undertaken in two Parts, as follows: Part A Under Part A the consultants will: (a) Establish unit rates for road construction work undertaken by MOW. (b) Prepare a Master Plan for development of the new eight-acre SIC site in Ma'ufanga, Tongatapu and prepare specifications, quantities and other necessary documents for development of the site and coijtruction of two factory sheds and one nursery building.- 1/ MOW will prequality tenderers, let tenders and provide construction supervision. (Reference in text: page 34, para 88, page 35, para 91 and page 37, para 96) 80 Appendix 9 Page 2 (c) Prepare a Master Plan for development of the 13-acre SIC site in Neiafu, Vava'u and prepare specifications, quantities and other necessary documents for development of the M/te and construction of two workshop/factory buildings.- (d) Review the rental fees charged at the Tongatapu SIC and make recommendations regarding their level and structure; also recommend suitable rental fees for use of the Vava'u SIC. (e) Set priorities for the Government's five-year road development program on Tongatapu and select about 30 km of rural roads from this program to be Improved under the Project. Part B Under Part B the consultants will: (a) Assess the extent to which interest rates have been, and are currently used as an economic policy instrument and review the effectiveness of such use. (b) Assess the extent to which interest rate levels have been and are currently affecting national savings, consumption and investment levels and the efficiency with which investment expenditure is allocated. (c) Define and assess the advantages that could be gained by the Government's use of the interest rate as a policy instrument for achiev.g its objectives under the fifth development plan. In particular, the consultants will assess the potential advantages of using the interest rate to achieve national saving targets and investment targets in high-priority sectors. (d) Recommend appropriate policy, legislative, regulatory and administrative measures that could be initiated by the Government. Such measures should promote the development of financial markets within the Kingdom and lead to an interest rate regime which would (i) encourage resource mobilization; (ii) improve resource allocation by enabling the private sector to respond more rapidly to market forces; (Ili) strengthen the use of the interest r'ate as a policy instrument; (iv) enhance efficiency in financial intermediation through requiring financial institutions to more effectively meet the diverse needs of savers and investors; and (v) lead to an activatiov of capital/money markets. 1/ MOW will prequality tenderers, let tenders and provide construction supervision. 81 Apefndlx 9 Page 3 III. cope of Work Part A 1. Unit Rates for Selected Construction Work Unit rates are required for the road construction york undertaken by MOW on a force account basis. The work will include, among other things, the following tasks: (a) Review of the existing charging procedures used by MOW -- particularly those for charging for plant and equipment -- together with their proposals for revising them to put them on a more commercial basis. (b) Establishing a framework of cost headings Including overheads for civil works, with all materials, plant and labor costs allocated for work under each heading (including provision of design services, construction supervision and general overheads). Cc) Establishing plant bire rates for MOW plat which cover all costs (including depreciation, based on annual revalued replacement costs) and costs for all other materials, plant and labor. (d) Using the above information, the consultants will arrive at the best estimates of the cost per km of constructing highways, trunk roads, feeder roads, agricultural access roads and other access roads on Tonsatapu, Vava'u and 'Rua Island. 2. Master Plan for SIC on Tongatagu and Bid Document,o for New Factory Sheds and Nursery Buildin& The Master Plan will cover the eight-acre site which has not yet been developed. The new buildings to be constructed (two factory sheas and one nursery building) will be located on the existing 12-acre site. The work will include, among other things, the following tasks: (a) Review of the Master Plan used for development of the existing 12-acre site and development of an appropriate Master Plan for development of the adjacent 8-acre site. The Master Plan must include access roads, utilities, sewer connections, plot boundaries and other ncessary facilities and be designed -- as far as possible - In a way that protects and enhances the environment (e.g. by preserving mature trees). 82 Page4 (b) Preparation of detailed drawings, specifications and quantities suitable for use by NOW which will undertake the site development work; in the case of utilities, the drawings and specifications should be suitable for use by Tongs Electric Power Board, Tonga Telecommunications Commission and the Tonga Water Board which will undertake the work. (c) Review of the existing building designs and discussion of their suitability with prospective users Identified by the Manager of the SIC and by MLCI. In the light of this, the consultants will revise the designs as necessary. (d) Preparation of bid documents for the two factory sheds and one nursery building to enable these to be constructed unCzr Local Competitive Bidding (LCB) procedures. 3. Master Plan for SIC on Vava'u and Bid Documents for Worshop/Facor-y Buildigs- A 13-acre site will be acquired for the new SIC on Vava'u; it is proposed to initially develop 8 acres of t4e site. Although the eight-acre site could accommodate about 12 workshop buildings, it is proposed to start by constructing two multi-purpose workshop/factory buildings (286 sq m each), a small office and a common washroom facility. The technical work to be undertaken will Include, among other things, the following tasks: (a) Preparation of a Master Plan for development of the entire 13-acre site, showing access roads, utilities, sewer arrangements (by sept:'c tank), plot boundaries and other necessary facilities; the development should be designed to protect - and where possible - to enhance the environment by protecting mature trees, etc.. (b) Preparation of detailed drawings, specifications and quantities for development of the initial eight-acre site suitable for use by MOW which will undertake the site development work; similar documents will be prepared for utilities; the work on the latter will be undertaken by the Tonga Electric Power Board, the Tonga Water Board and Tonga Telecommunications Commission. (c) PreparLtion of detailed designs, specifications and bid documents for the two multi-purpose workshop/factory buildings, office and washroom facilities. The design should pay special attention to economy, flexibility and the local building vernacular. The bid documents should be prepared in a way that would allow the buildings to be constructed under LCB procedures. 83 Appendix 9 Page 5 4. Review of SIC Rentals and Recommendations When the Tongstapu SIC was first established, the Government's objective was that it should not be subsidized, and that it should operate on a no-profit no-loss basis. This has not been realized; the sub-leases for the SIC, which may limit rent revisions to once every five years, combined with the incidence of inflation, has meant that rental levels have risen less rapidly than expenditure and, as a result, the SIC now makes a significant loss. The purpose of this Study is to review MLCI' s rental fee policy and to make suggestions for consideration by the Government and the Bank. The study will examine the following issues: (a) How significant are rental payments for existing users of the Tongatapu SIC? How do they compare with rental fees outside this SIC? Are they an inducement to locate on this SIC and would higher rentals be affordable? (b) Could rentals be raised each year and still remain consistent with the Land Act? (c) Would it be desirable to have a two-part tariff -- one charge for the site and another for the building -- in which the building rental was (i) revised each year; and (li) set at a level to recover all costs to encourage sTZ users to erect their own factory sheds? Would such an arrangement (in the context of (b) above] require the Government to write off some, or all of the site development costs? (d) Would rentals be more affordable for newcomers to a SIC if there were a promotional rate (possibly 75 per cent of the full rate) applicable for as long as the industry enjoyed tax-free status? Should the Government reimburse the SIC concerned directly for such promotional inducements? (e) What relationship should rentals at the SIC on Vava'u bear to those at the SIC on Tongatapu? (f) Finally, taking all the above into account, what rental fee levels appear to be realistic and affordabls at each SIC and over which time scale might they be introduced? 84 Appendix 9 Page 6 5. Identification of Roads to be Improved on Tongatapu This subproject involves establishing investment priorities for the roads to be improved under the Government's five-year road development plan on Tongatapu. The road improvements need to be justified in economic terms by showing that the benefits of improvement (in terms of vehicle operating cost savings, net induced agricultural production and other benefits) give an economic internal rate of return of at least nine per cent. In addition, this study is expected to produce a simplified method of establishing improvement priorities on roads where vehicle operating cost savings are the dominant, or only source of benefits. The work to be undertaken will Include, among other things, the following tasks: (a) Review of the draft five-year road development program prepared by the Government. (b) Identification of the characteristics of the vehicle fleet, selection of a range of typical vehiclee (cars, light trucks, trucku and buses) and estimation or typical vehicle operating costs. (c) Relating these vehicle operating costs to roughness of the road surface using the World Bank's HDM model, or the Transport and Road Research Laboratory's RTIM model. (d) Using these vehicle operating costs, together with the typical cost of upgrading different classes of road prepared by MOW (and updated in the light of item (1) of the Scope of Workl, prepare charts, or tables showing vhen, in terms of average traffic volumes, each class of road justifies upgrading to the next higher standard. (e) Reviewing the trunk/access/feeder roads tentatively Identified by the Government for improvement under the five-year road program and, using the charts/tables developed under (d) above, together with an assessment of any induced agricultural production and other benefits, recommend investment priorities. (f) Selection of a package of roads, totalling about 30 km. for improvement under this Multiproject Loan. (g) Estimating the costs of improving this package of roads and summarize the costs, benefits and internal rate of return for each section of road. (h) Checking each section of road to be improved to esteure that all necessary precautions are taken to avoid any adverse environmental impact. 85 Appendix 9 Page 7 Part B Review of Government Interest Rate Policies (a) Determination of the present structure and levels of lending and deposit interest rates prevailing in the Kingdom and in those overseas financial markets currently holding financial Investments and assets of Tongan citizens, Tongan legal entities and the Government. (b) Evaluation of the effects that interest rate levels within the Kingdom have had and are having on saving levels, and the likely effect on future saving levels of alternative deposit interest rate regimes. (c) Evaluation of the effect that interest rate levels within the Kingdom have had and are having on levels of national consumption and investment, and the likely effect on future national consumption and investment levels of alternative lending interest rate regimes. (d) Identification and evaluation of the effect on national income levels of inefficiencies in resource allocation that may have occurred as a result of current interest rate levels during the period of the Fourth Development Plan. In particular, evaluation of the contribution of interest rate levels to the underachievement of natiowal savings targets and investment targets in high-priority sectors in terms of the effect of this underachievement on current and future national income levels. (e) Definition and evaluation of the role that interest rate levels could play as a more actively-used policy instrument within the Government's overall economic policy framework. In particular, evaluation of the the likely costs and benefits of alternative interest rate scenarios that could be promoted by the Government in its pursuit of economic growth objectives during the period of the Fifth Development Plan. (f) Recomendation of administrative mechanism and procedures for establishing and setting interest rate levels within Tonga. Such mechanisms and procedures should encourage the development of financial markets and market-determined interest rates and should also take account of the possible est&olisbment of a Central Bank. (g) Development of a feasible program for the lplementation of recommendations. 86 Appedix 9 .Page 13 IV. Consultant Services The above consultant services will be carried out by a firm recruited according to the Bank's Guidelines on the Use of Consultants. The firm wili submit biodta for the consultant nominated to carry out Part B of the Terms of Reference; If the Bank considers the biodata unsuitable, it reserves the right to recruit an individual consultant to undertake this work. It is envisaged that about 12 man-months of consultant services will be required covering engineering costing, architectural design, cost accounting, rental fee policy, transport economics and intere)st rate pollcy. The consultant services are expected to start in August 1986. Part A, item (1) of the Scope of Work should be completed by the end of September 1986, Part A, items (2), (3), (4) and (5) and Part B by the end of December 1986. 87 Appendix 10 OUTLINE TERMS OF REFERENCE FOR DEmVLOPMENT OF NAFANUA HARBOUR I. Tntroduction Along with agricultural and other development on 'Eua Island, the Government proposes to construct improved facilities at Nafanua Harbour. Consulting services are required for development of the project from site investigations and assessment of conditions, to design of suitable facilities and supervision of the ensuing construction. Construction of new facilities is to be financed by the Bank, while the consulting services are to be financed under Australian bilateral aid. II. Scope of Work The consulting services are to be provided in three phases: Phase I covers site investigations and preparation of preliminary designs; Phase II covers detailed engineering and, when relevant, preparation of bid documents and provision of assistance for pre-qualifying contraccors and evaluating bids; Phase III covers construction supervision. At the end of Phase I, a tripartite meeting will be convened among the Government, representatives from the Australian Development Assistance Bureau, and the Bank to consider the consultant's preliminary recommendations. The meeting will review the alternatives proposed and will select the option to be studied in further detail during Phase II. The work to be undertaken by 1t9e consultants will include, among other things, the following tasks:- Part I (i) Assessment of hydrographic data and data on sea conditions collected by the Harbour and Wharves Department within the Ministry of Finance. (ii) Assembling of all available data (from the Central Planning Department, the Shipping Corporation of Polynesla, etc.) on cargo and passenger movements through the port, and preparation of forecasts of likely future traffic flows up to the year 2006, taking account of the expected economic development of 'Eua Island over this time period. (iii) Carrying out of all necessary gootechnical investigations of the site, including test drillings of the rock in the harbor basin to establish, among other things, the best method of excavation. 17 A preliminary engineering study prepared by Connel, Eddie, Riedel & Byrne (International) is available on request. (Reference in text: page 34, para 88 and page 35, para 92) 88 Appendix 10 Page 2 (iv) Based on the above data, preparation of preliminary designs of alternative layouts of harbor and port facilities that meet cargo and passenger needs at minimum cost, ensuring in the procr?s t4at the designs minimize adverse environmental impacts.- (v) Preparation of preliminary engineering designs for all necessary structures and preparation of preliminary estimates of construction costs for each layout; cost estimates should be accurate within 20 per cent. (vi) Evaluation, to the extent possible, of each of the alternative layouts, describing their advantages and disadvantages in terms of: (a) service to cargo and passengers, vessel operation and cargo handling; (b) overall cost and cost effectiveness; (c) flexibility in adapting to different types/volumes of cargo; and (d) their ease of construction. (vii) Recommending the best method of having the new facilities conatruc.ed, including: (a) letting the works as a single construction contract awarded under the International Competitive Bidding (ICB) procedures of the ADB; (b) letting the wrorks as a single construction contract awarded under the International Shopping (IS) procedures of the ADB; (c) dividing the works into several subcontracts to be let under ICB or IS procedures; or (d) dividing the works into several packagas to be let as subcontracts under ICB/IS procedures, or carried out by force account by MOW. Part It (i) Preparation of the final designs for all structures, including wharves, wave protection structures, turning basin, navigational aids, cargo storage areas, etc. (ii) Preparation of engineering drawings, specifications and quantities in sufficient detail to enable the work to be carried out in the manner agreed-upon with the Bank at the end of Phase I. 17 The preliminary engineering study carried out by Connel, Eddie, Riedel & Byrne includes a short section on possible environmental impacts; these should be taken into account in preparing engineering designs. 2/ In this regard, the Bank's Guidelines for Procurement are to be followed at all times. In particular, tender deposits, performance bonds and other conditions should be consistent with these guidelines. 89 Appendix 10 Page 3 (iiI) Where nternational Competitive Bidding proceduresY are to be used, assisting the Ministry of Works In prequalifying all potential contractors, preparation of evaluation criteria for use in the bid selection of contractors, preparation of all bid documents (including General and Special Conditions, Specifications, Schedule of Quantities, etc.), ensuring that all necessary environueutal safeguards identified in the design phase are Included In the documents, preparation of reports on site Investigations for use by tenderers, and assisting the Ministry of Works, as necessary, in evaluating tenders. Part III (i) Providing site staff for supervision of construction and administration of the contract. , It is expected that selected Ministry of Works staff will be seconded to the consultants for purposes of on-the-job training. II1. Time Schedule The servicern of the consultants are expected to start Epprohimately In Septeiber 1986. It is expected that Phase I will be completed by the end of November 1986, and that Phase II will be completed by about March 1987, The construction supervision (Phase III) Is expected to start approximately In September 1987 and to last about nine moutbs. 90 Appendix 11 ESTIMATED COST OF PROPOSED TECHNICAL ASSISTANCE (15 A. Bank Financing: Foreign Exchange Cost: 1, Remuneration 137,000 2. Internataqnal Travel 19,000 °e Per Diem- 26,000 4. Reports and Communication 10,000 5. Contingencies (about 15 per cent) 29000 221,000 B. Government Financing: Local Cost: 1. Office Accommodation, Counterpart Services and Facilities 7,000 2. Local Travel for Site Visits (car and domestic air fares) 4,500 3. Local Communications 2,000 4. Contingencies (about 15 per cent) 2,500 16,000 TOTAL COST (A + B) 237,000 a/ Calculated on the basis of $71.00 per day. (Reference in text: page 36, para 93) 91 Appendix 12 ECONOMIC EVALUATION OF NAFANUA HARBOUR AND ABRICULTuRAL ACCESS ROADS ON 'EUA ISLAND The lack of adequate harbor facilities on 'Eua Island constrains development of the Island's agricultural resources. The harbor is small, has a dangerous entrance and provides no shelter during rough weather. As a result, the only regular shipping services connecting 'Eua Island to Nuku'alofa on Tongatapu are provided by small, old vessels; newer vessels are unwilling to risk using the harbor. The present vessels are loaded by hand; vegetables and other goods are manhandled over the ship's rail and are then stacked on deck. Produce is frequently damaged during the course of loading/unloading and much of it reaches Nuku'alofa in poor condition. Apart from top quality export bananas and copra which are shipped In boxes and bags by the Commodities Board, farmers generally accompany their produce to Nuku'alofa and sell it themselves in the main market at Talamahu. The ships provide standing room only and the trip takes three hours each way through rough seas. As a result, only the most determined farmers sell their surplus produce in Nuku'alofa. Improved harbor facilities is a prerequisite to further development of 'Eua Island. Provision of a safer entrance channel, with appropriate navigational beacons, a small turning basin and sheltered anchorage would make it possible to operate nawer and more suitable vessels; they would not necessarily be larger, but the service would probably be more frequent. Such services, particularly if combined with equipment for loadIng/unloading produce, would result in less wstage and spoilage, especially of fresh produce. It would also enable farmers to get higher prices for their products in Talamahu market. It is conservatively estimated that less wastage and spoilage, combined with higher prices, would increase the value of agricultural output by between 5 and 10 per cent. Table 1 shows the amount of land currently allocated as rural tax allotments that is being cultivated. It shows the area under various crops, including fallow land, together with the average yield associated with this type of cultivation. Table 2 shows the average real price (1982-1986) for the major crops produced; the figures were supplied by Central Planning Department (CPD) and, although some of them relate to only a few mvwNhs in each year, CPD considers them reasonaoly representative of thn year as a whole. Table 3 estimates the impact of an average 7.5 per cent increase in output for the major crop types. The calculation of net value added in the Table assumes that Incremental (paid) labor inputs are zero, that incremental transport and yvrketing costs amount to about about 20 per cent of market value,- and that other costs are negligible. These assumptions are considered to be reasonable. The EIRR for the barbor improvement is calculated in Table 4 using an economic life for the 1/ eased on a detailed study carried out by the Commodities Board: 'Bua Farm Project, 1986. (Reference in text: page 37, pars 96) 92 Appendix 12 Page 2 harbor facilitles of 20 years. The costs shown in the Table include detailed engineering and construction supervision (to be financed by ADAB under parallel financing arrangements), civil works costs (including contingencies) and operating and maintenance costs. The benefits, In the form of the net value added estimated in Table 3, are assumed to develop over a five-year gestation period after which they remain constant. The resulting EIRR is 11.3 per cent which given the conservative nature of the assumptions is considered satisfactory. The 20 km of roads proposed to be constructed on 'Eua Islal run along one side of an estimated 256 standard-sized allotmet t- with a total land area of 855 ha. The alignments for these roads tsee Map on page (v)J were selected aver studying large-scale, colored aerial photographs of the Island;- the roads were then located to provide access to those areas where: (1) the bull type was kfp to be suitable for general cultivation, or for growing coconuts;- and (ii) the photographs showed that half, or more of the area was currently not under cultivation. The aerial photographs showed that land was intensively cultivated in the vicinity of existing agricultural access roads. Cultivation drops off quite sharply away from these roads and gives way to scrub containing limited pockets of land which appear to be cultivated on a shifting basis by farmers who have no legal title to th. land. This pattern of cultivation was confirmed durlng the Appraisal Mission's field visit to 'Rue Island. Since only about half the area affected by the new agricultural access roads is currently cultivated, provision of these roads ahould enable the other half to be cultivated as well. Table 5 estimates what effect this is likely to have on the output of the main crops grown on the Island. tie calculation of net value added in the Table makes the fo'.lowing assumptions: (i) each addition# allotment cultivated requires an annual labor input of T$2,000;- (ii) transport costs amount to about 20 per cent of market value; and (1ii) othex inputs (planting materials, seeds, fertillers and pesticides) amount to about 25 per cent of market value.- These atsumptions are considered to be conservative. The EIRR of the new agricultural roads is calculated in Table 6 using an economic life for the roads of ten years. The costs shown in the Table include construction supervision, road construction costs, routine road maintenance and periodic re-gravelling. The benefits, in the form of the net value added estimated in Table 5, are assumed to develop over a five-year gestation period after which they remain constant. The resulting EIRR is 15.0 per cent which is considered to be satisfactory. 1/ A standard allotment measures 8.25 acres (roughly 3.3 ha). 2/ At a scale of about 1:3000. 3/ Soils of 'Eua Island, New Zealand Soil Survey Report, 1983. 41 This corresponds to two laborers who are paid T$1000 each and are also allowed to grow their own subsistence crops on the allotment. 5/ Based on a detailed study carried out by the Commodities Board: 'Eua Farm Project, 1986. 93 rndx 12 Page 3 In view of the sisple nature of the above analysto of the now agricultural access roads, and the rather conservative asumptions used, no sensitivity analysis bas been corried out on these roads. At 15.0 per cent the EIRR Is relatively high, ad the mjor risk -' which is the possibility of delayed implementation - will have very little effect on the EIRR. The major risk associated with Nafanua Harbour, Is the possibility of a cost overrun. The impact of this on the EIRR has been tested by assming that civil works costs are 15 per cent higher than expected; this causes the tIRR to fall by 1.2 per cent to 10.1 per cent which is still considered to be satisfactory. There are no other major risks which might adversely affect the EIR. 9~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ 94 Page 4 Table 1. Area Under Ion. by Croo TvDe and AL*r ae onld. 'ea IslMad (hectare and tone/ha/year) Area Under Cuti~vatio~n NoBt1ad (ct } (Per Cent Of Yield C r 0 Chetaresj!~ total alloagted) (tons/a/veaIr) Yaw 196 6.9 10 Taro Tonga 125 4e4 10 Taro Fortuna 280 9.9 10 Tapioca 178 6.3 10 Swet Potato 45 1.6 10 Plantain 21 0.7 10 Banana 35 1.3 10 Giant Taro 5 0.2 10 Corn 1 - 2 Vegetables 6 0.2 3 Vanlla 8 0.3 1 Coconut 980 34.6 0.5 Estimted Fallow 952 33.6 - Total 2__32_/ 100.0 a/ Basd on a survey carried out by staff of the Minstry of Agriculture. Forestry 8 Fisheries in May 1982; the area cultivated Is not thought to have been affected by the cyclone. b/ Taken from a report on agriculture In Tongp prepared by the Food and Agiculture OrganizatIon. C/ From Kindom Of Mm: Develent of 'Be Islad, U.N. Developmnt Advlsory Toms, 1953. 95 Appendix 12 Page 5 Table 2. Prices of Main Agricultural Products Talauahu Market. Nukulalofs (T$ per kg) P r i c ea/ 1982 983k' 1984k 198S/ 98d Product 1982 1983E 1984 19861/ 1982-1986 Yaws 0.69 1.20 1.19 0.93 0.97 1.00 Taro Tonga 0.41 0.33 0.40 0.32 0.37 0.37 Taro Fortuna 0.38 0.34 0.40 0.22 0.22 0.31 Tapioca 0.20 0.19 0.15 0.05 0.09. 0.14 Sweet Potato 0.37 0.30 0.21 0.30 0.29 0.29 Platain 0.35 0.30 0.30 0.23 0.20 0.28 Banana - - - 0.23e/ 0.23 Coconut (Copra) - - - - 0.30e/ 0.30 _i Market prices, adjusted to 1985 levels by the Consumer Price Index for Food items. b/ Mean prices for January-April. _/ mean price for September. dt Moan price for Jauary. .1 Prices paid by the Tonga Coumodities Board for export quality bananas and for Grade A copra. Table 3. Fatlmted Increase In Value Added as a Pesilt of ruprwed Hstbor Faclities (T$ pere) InfTu,e area of TrAewta1 Viel t rket Prlce Value of Cot Of NTcrease the led in l of timil in valu Harbr Ara ouWp 0x of o£ x hmetares) (tows/bayear) ( per Wg (W000 per year) (W$'000 per year) (T'W per yew) Yams 196 0.75 1.00 147.0 - Ibro T4a 125 0.75 0.37 34.7 - - Taro Fbrba 280 0.75 0.31 65.1 - - qbpoca" 178 0.75 0.14 18.7 - - met Psto 45 0.75 0.29 9.8 - - Mlantain 21 0.75 0.28 4.4 - - snn0-n 35 0.75 0.23 6.0 _ rCoom,z (Qpra) 980 0.038 0.30 11.2 - _ btal 1,860 - - 296.9 59.4 237.5 a/ Fcm Tabe 1; uzh rcrop md fAl w groud bwe bow dtted. b Ihis asane. an in yields of 7.5 per cam due to the barbor luprovuwnt. cPans Tabl !.. I This sus thn are no Inaraemtal lbor costs, that "m;port/mmiattrg costs anxmt to 20 per cmt of inmiut value (fram 8a Oxoditts baDd PAo;t, 'Rs F ProJect, 1986) and that other ixpits are t4gligible. 97 Appendix 12 Page 7 Table 4. Calculation of Internal Rate of Return on Nafanua Harbour Improvement (US$) Operatita & Net Increase Capital MNantenance in Val? of Net Costs§/ Costs Output- Bsnefits 1986 60.0 -60.0 1987 246.2 - -246.2 1988 581.0 - - -5810C 1989 - 15.0 33.9 18.9 1990 - 15.0 67.8 52,8 1991 - 15.0 101.7 86.7 1992 - 15.0 135.6 -120.6 '-93 - 15.0 169.6 154.6 1994 - 15.0 169.6 154.6 1995 - 15.0 169.6 154.6 1996 - 15.0 169.6 154.6 1997 - 15.0 169.6 154.6 1998 - 15.0 169.6 154.6 2000 - 15.0 169.6 154.6 2001 - 15.0 169.6 154.6 2002 - 15.0 169.6 154.6 2003 - 15.0 169.6 154.6 2004 - 15.0 169.6 154.6 2005 - 15.0 169.6 154.6 2006 - 15.0 169.6 154.6 2007 - 15.0 169.6 154.6 2008 - 15.0 169.6 154.6 2009 - 15.0 169.6 154.6 a/ Including detailed engineering and construction supervision. i/ Assumes a five-year gestation period before all benefits are realized. KIRK e 11.3 per cent. Mabe 5. Fatlaed bIcr e in Value as a 8siult of Now Rd (biuctim CL$ par year) Tnhuie Area Aea fipected Fatimated. Yield Mat Pie Value of Ct Of Jit b e of the to be Qltivated Ci NeIlm& yatsd of rIead hx"runuw1 In Value dua to Prswm a lamt=Tuts-a of ,a (bectares) of New P1ad ( ) ( per ('000 per yer) (T$'000 per year) '000 per er) Yawu 59.0 29.5 10 1.00 295.0 - - MarD Ibqa 37.6 18.8 10 0.37 69.6 - - Ibro Fbrtuna 84.7 42.4 10 0.31 131.3 - - TSpicCS 53.9 27.0 10 0.14 37.7 - - gent potato 13.7 6.9 10 0.29 19.9 - - Plantain 6.0 3.0 10 0.28 8.4 - - rAnnna 11.1 5.6 10 0.23 12.8 - - lbtal 266.0 133.2 - - 574.7 485.9 88.8 a/ Tbe 20 km of nw av icultral roads vll provide aoces to an estimgtd 256 aord-stizu atsll ts totalling 855 ba. Ihf ma inKuer each crp is calaiated fra Table 1; a m cps, co0nat anid £fU gm-d bwe been amned. b/ Aerial ptog abs *bv that Only abt half the area affeed by the nw roads Is crratly cultivated; tbese calculatimns asmam t*it provision of - acrm roads uvulA enoble the otber half to be cltlivated as wiL c, PFku TIble 2. I lebor inputs are estianted to mimt to I$2000 per aflobmt. cces amnt to about 20 per cent of wmrit value, t&isl otier ilpsts amt tOD dxxit a further 20 per cet of wrist value (fron the Qxmvditias BoErd Report, 'Eua FaI Projea 1986). c 0 aDf> 99 Appendix 12 Page 9 Table 6. Calculation of Internal Rate of Return on Agricultural AcCess Roads Operating & Net Increase Capit,t Maintena?e in Value c Net Costs_ Costs- Output-' Benefits 1987 151.3 - -151.3 1!88 - 10.0 12.7 2.7 1989 - 10.0 25.4 15.4 1990 - 10.0 38.1 28.1 1991 - 10.0 50.8 40.8 1992 40.0 10.0 63.4 13.4 1993 - 10.0 63.4 53.4 1994 - 10.0 63.4 53.4 1995 - 10.0 63.4 53.4 1996 - 10.0 63.4 53.4 1997 - 10.0 63.4 53.4 a/ Including construction supervision. b/ Road maintenance costs are based on $500 per km, together with $2000 per km for re-gravelling every five years. c/ Assumes a five-year gestation period before all benefits are realized. EIRR - 15.0 per cent. 100 pendl13 OUTLINE TERMS OF REERENCE FOR PROPOSED TECHNICAL ASSISTANCE TO TONGA DEVELOPMET A - I. Torms of Reference for the Desin, Specification and Im_lomntation of Comuterized Accountln, Loan n and hifomation Satems for theo a Develo sent BiB A. Obaective The objective of the proposed tochnical assistance is to replace TDB's current mXally-operated loan administration, accountin and operational statistics systems with fully-computerized systeme. The technical assistance will utilize as a starting point the results of the study of TDB'e electronic d*ta processing (EDP) requireonts undertaken by the Japanese International Cooperation Agency (JICA) during 1983. B. Scope The proposed technical assistance will undertake all necessary tasks for the design and Implementation of an EDP system that will fully replace TDB's current manual sy6tems and that fully meets TDBts management information and reporting requirements. These tasks will include systems design, programming and modification of software, program testing, staff training, initial data input, Initial running tests and bandover of the system in full running order. Hardware, software and ancillary equipment purchase will be undertaken by TDB's management In accordance with a pre-determined workplan for the technical assistance project. C. Detailed Terms of Reference The consultants will: 1. In consultation with the Finance Manager and TDB's senior management, define necessary alterations and improveents to TDB's current data processing and accounting system necessary for fulfilling the various functions required of these systems by TDB's operations and management. 2. Undertake the detailed systems analysis necessary for the computerization process. 3. Select appropriate hardware and software that will meet the systems' requirments. While having full regard for the technical requlrments of the proposed system, the selectlon process should facilitate the use of comparative pricing procedures by TDB's manageent In the final selection of equipment. (Reference in text: page 43, para 119) 101 Appendlx 13 Page 2 4. Make on-site preparations for installation of hardware, and upon arrival, install and test all equipment. 5. Install required software. 6. Undertake the detailed systems design required to integrate the software purctased into the required Input/output systems. 7. Undertake system programming and software modification as required. 8. Undertake necessary training of TDB staff to allow independent operation of the new system by TDB without undue recourse to outside expertise. 9. Input initial data to facilitate comissioning of the new systems. 10. Following confirmation of defect-free operation of the systems, undertake for an appropriate period parallel running of the new systems alongside the present manual systems. 11. Handover the new systems on a fully-operational basis, including provision of detailed operating manuals. D. Manpowr Keguirements and Time Schedule The assistance will be provided by a team of at least two consultants with extensive experienco and knowledge in the areas of accounting, systems analysis and the implementation and operation of EDP systoe. One member of the team should have appropriate staff training experlence to enable the full development of TDB's staff capabilities to operate the new systems. TDB's Finace Manager and the other local counterpart who will eventually be designated as EDP Manager will make available at least half of their work time during the technical assistance project in order to provide lialson between the operation of the old and new system, and to assist with systems specification. During the period of the technical assistance project, the Finance Manager will prepare a detailed accountitg manual setting out the Bank's accounting policies and procedures on the basis of the operation of the new system. It Is esitmted that the consulting team will require eight man-months to complete the technical saistance project. E. Usporting The consultants will be required to prepare for 2DB and for the Bank: 1. An inception report within one week of the beginning of field work setting out a proposed work program. 102 Appendix 13 Page 3 2. A final report at the completion of the study detailing the consulting team's achievements in terms of the original work program. The consultants will also prepare other reports, as necessary, for TDB's management to enable relevant decisions to be made. II. Terms of Reference for a Review of Tonga Development Bank's Personnel Management Policies A. Objective The objectives of the review are to provide an informed basis for establishing personnel management policies, systems and procedures that will enable TDB's management to maintain closer control of staffing levels within the context of pre-determined budgets and plans, to improve staff development planning procedures and to overcome the recruitment problems currently being experienced. B. Scope The review will focus initially on the manner in which TDB's personnel management functions are organized, Including the place of personnel management functions within TDB's organitational structure. It will then undertake an all-encompassing review of TDh's current personnel recruitments staff planning, performance review, remuneration and staff development policies and procedures with the objective of identifying areas for improvement that would enable TDB's management to seek improved utilization of its staff resource and a reduction in operating costs, strengthening of staff resources In area, that are currently deficient, a more structured approach to developing staff resources to meet TDB's current and future needs, and the development of a well-defined career path for personnel. C. Detailed Terms of Reference The consultant will: 1. Define the current personnel managemnt policies and procedures followed by TDB. 2. Within the context of the staffing procedures of Institutions similar to TDB, and taking into account the particular characteristics of TDB's operations, define a procedure for measuring the staffing requirements of the various functional areas of TDB's operation that will allow TDB to operate efficiently at current and projected levels of operation. 103 oppzdi 13 Pass 4 3. Evaluate the effectivenees of TDI's current personnel emnt policies and procedures In match#& TDh's staff resources to Its requirements, 4. Identify area for Improvement In ThD'a personnl mangement policies and procedures, and in consultation with TDB's managment, develop appropriate procedures for tbese ar"s. Iu developing such procedures, the cosultante's task wili be to undertake all analysis necess"ry for making recemedations to TDE's Board of Directors regarding policy chages. In addition, the consultant will be required to doesg appropriate procedures that will allowe TDB to mplemet Improved persomel management system and procedures during and at the completion of the technical assistance. D. Manpoer RequiremenLts and Tim. Schedule The assistance will be provided by one consultant with extensive knowledge and experience in determination of personnl managment policies, operation of personel m procedures and staff development prograe. The consultant will also have extensive experience In the operation of development finance Instltutions and/or similar intitutions. TDB's Administration Manager will be required to work closely with the consultant on a counterpart basis. It is estImted that the consultant will require two na-months to complete the assignment. E. Meortjn The consultant will be required to prepare for TDB's management and the Bank: 1l An inceptleon report whicb sets out a proposd work program within one week of the begInn of field work. 2. An Interim report following completion of Items (1), (2) and (3) of the detailed terms of reference; this reprt will detail conclusions and recoienntlons and set out a revised work program for completlon of the assoi t. 3. A final report at the completion of the study. A draft of this report wll be made available to ThD's manag t and the Baok for discussion before completio. The finl report sbould be submitted simultaneously to TDB and th Beank within three mnths of the comne of work on the revie. The consultant should be prepared to participate In a tripartite meeting with representatives of teb a and TI's ama ment a the eand of the as t. 104 A2pendix 14 TWA MNrN BA Cost a*Afor ; I~ I yve Toui 3'r A*1 t to IB 1suls of lrmm O _ eBMt &oii AEV A. LmVoM 2!2! T cd~ost P_Cicn 23,000 92,000 Per dim a lume 4,500 17,0OO trae 2,500 5,000 as 5 000 11,000 125,000 B. Imlan u DC 6 er ~~~~~~500 1,000 Office an secretaial 1,000 4,000 500 1,000 Total (A + B) 37#000 131,000 tal X X % Bgnk TA, 160,000 95.2 35,000 94.5 125,000 95.4 1B 8 000 4.8 2 000 5.5 6,000 4A (eferece tet pe 4m 11)M (Reference in text: page 43, para 119) 105 Appendix 15 Page 1 TONGA DEVLOPMENT BAIK Statemnto GEraMcfios A. The Bank Tonga Development Bank was established under the Tonga Development Bank Act 1977 as an independent statutory body. The functions of the Bank are to promote the expansion of the economy of Tonga for the economic and social advancemat of the people of Tonga by giving financial and advisory assistance In Its discretion to any enterprise operating or about to operate In Tonga. In carrying out its functions the Bank will be guided by the following general operational, fimacial and promotlonal policies. B. Scoe of Activities 1. The Bank will conduct its operations within the gneral frameork of the Government's economic policies, plans and priorities. 2. Although the primary role of the Bank is to promote economic development and production In the private sector, the existence of Government or other public ownership In an enterprise will not preclude that enterprise from being assisted by the Bank. 3. The Bank will finance projects aimed at increasig production and development in the fields of agriculture including horticulture, livestock and fishing; timber extraction and reforestation; quarrying, industry, manufacture and processing of all kinds; tourism; commerce; transport and comuncation; and service Industries including professions. 4. The Bank will finance both new enterprises and the expansion or modernization of existing enterprises (the work "enterprise" as used In this Policy Statement having the same ueaning as is defined in the Tonga Development Bank Act 1977 and includes cooperatives and community activities). Particular attention will be given to promotion of the entry of new entrepreneurs into the field of productive endeavour and the development of managerial and entrepreneurial skills6 5. The Bank will provide financial and other fonm of assistance in the following ways: (a) extending loans; (b) making equity participation; (e) guaranteeing the finance provided by other sources; (d) providing tecanicals, managerial and financial consultancy services; (e) assisting In the identification, formulation and promotion of new projects. (Reference in text: page 45, para 126) 106 Appndix15 Page2 6. The Bank's financial assistance will be primarill for the acquisition of fixed assets. However, the Bank may in deserving caes also finance seasonal and short-term credit requirements in the agricultural sector as well as working capital requirements in any sector. C. Development Policies and Operatlin Princlles 7. It will be one of the Bank's important aims to investigate and identlfy investment opportunities, and to promote and assist In the establishment of enterprises of Importance to the economy. 8. In addition to the operating principles mentioned under Section 6 of the Development Bank Act 1977, the Bank will also give preference, in determining whether or not assistance is to be given to any enterprise, to enterprises which will- - (a) use local raw materials in processing and muaufacture; (b) make use of labor intensive technologies and provide more opportunities for employment and training of local people; (c) contribute effectively to broadening the base of local entrepreneurship and ownersihip; (d) have a good potential for expanding exports or decreasing Imports; (e) lower costs and improve the efficiency or standards of goods and services; (f) lead to an increase in the incomes and living standards of people, particularly of those at the village or grass roots level. 9. The Bank will carry out its operations as a development finance institution in accordance with sound banking and business practices. 10. The Bank will provide financial assistance only to those projects which, on the basis of its own analysis, appear to be economically justified, technically feasible, financially viable and profitable. Special attention will be given to the quality of managsemnt of the enterprise and to the market prospects of the project. 11. The Bank will eadeavour to secure its loans and gusrantees In accordance with sound banking practices, but in doing so the Bank will have due regard to its functional requirement to promote the economy for the economic and social advancement of the people of Tonga. 12. Applicats will be required to provide a reasonable equity in the enterprise to ensure that they have an appropriate stake In their own venture. They will also have to ensure that the total financial requirement for the successful implementation of the project will be available. 107 AMndlx 15 Page 3 13. The Bank will ensure, in making its financial assistance available to any borrower, that the financial requirement for the completion and commissioning of the project is appropriately covered, Including due allowance for possible cost overruns. 14. Normally, loans will be disbursed after the promoter has made his own financial contribution to the project and after ensuring that such disbursement is in accord with the requirements of the financial plan approved for the project. 15. The repayment period of a loan made by the Bank, Including a grace period as appropriate and needed, will be determined taklng into account; (a) the repayment capacity of the enterprise; (b) a reasonable payout to the promoter during the term of the loan; and (c) the optimum use of the Bank's own funds In maximizing the turnover of Its portfolio. 16. The Bank will supervise closely the use of its funds, the progress of the project financed and the performance of the enterprise, to ensure that remedial action is taken promptly should circumstances so warrant. 17. The Boak will require its borrowers to keep records and accounts in accordance with sound and generally accepted accounting principles, and to furnish whatever Information on their operations and accounts that it deems appropriate. The Bank will also maittain the right to inspect the enterprises it finances, as well as their operations, records and books of accounts. 18. The Bank will endeavour to assist farmers and entrepreneurs with the provision of managerial, financial, technical and other advisory services. It is the aim of the Bank to help its borrowers towards the successful completion of their projects. 19. The Bank will continue to build up an effective organization and develop an adequate and technically qualified staff, In order to carry out its functions efficiently and to assist its clients In the formulation and conduct of their projects. 20. Business secrets and other private information furnished to the Bank by clients will be treated as confidential. D. Diversification of Portfolio 21. In order to reduce the concentration of risk, the Bank will seek to diversify its portfolio by sectors of operation and by avolding Inappropriately large livestment in any one project. In view of its developmental function, the Bank will also pursue geographical diversification of its portfolio. 108 Appendlx 15 Page 4 22. The Bank's equity investments shall service mainly as a catalytic agent for the establishment as well as for the expansion of enterprises. The Bank will normally dispose of such investments to Tongan nationals when appropriate. The Bank's equity investment shall not normally exceed 25 per cent of the paid In capital of the assisted enterprise. 23. The Bank will not normally commit to a single enterprise in the form of equity participation more than 10 per cent of its unimpaired paid in 3hare Capital and Reserve Fund. The aggregate equity investment of the Bank at any time shall not exceed 25 per cent of It paid in Share Capital and Reserve Fund. 24. The Bank's total comuitment in the form of loans, equity investment and guarantees in a single project or enterprise shall not exceed; (a) 25 per cent of the total of the Bank's unimpaired Share Capital and Reserve Fund; and (b) 75 per cent of the tangible assets of such enterprise including the Bank's own investment. 25. In exceptional cases meriting special consideration, limits under Clause 24 (b) may be exceeded provided the loan is covered by adequate additional security over assets not forming part of the project. 26. In financing worthwhile projects requiring more than its maximum lending limits under Clause 24, the Bank may seek a syndicated cooperation of other institutions, both domestic and foreign, limiting the Bank's liability in such cases to the ceiling referred to under such Clause. E. Financial Guidelines 27. The Bank will review and determine from time to time the rate of interest and fees to be applied to Its advances in the light of prevailing Government policy and developments in the capital market, with due consideration to the costs of its own borrowings. 28. The Bank will not carry the exchange risk on its debts payable in foreign currency. 29. The Bank will not seek to take a controlling interest or management of any enterprise in which it has invested, other than by representation on the board of directors (or similar committee) In appropriate cases. However, should it become necessary to protect its own interest, the Bank may take such action as it considers appropriate In the circumstances. 109 30. The Bank will not undertake long-term borrowing obligationso, including guarantees, that In the aggregate would exceed three times the total of Its unimpaired paid In Share Capltal and Reserve Fund. 31. The Bank will maintain accounting records adequate to reflect ib business operations In accordance with sound and geerally accepted accounting principles and practices. F. Provisions and Reserves 32. The Bank shall set aside in each year at least 50 per cent of its operating profit In that year as a provision against bad and doubtful debts until such tiae as the provisioons equal 10 per cent of its loans, equity investments and gurantees outstanding, and will thereafter set aside annually such amounts as are sufficient to maintain the provisions at least at that level. 33. The Bank shall set aside annually to its General Reserve the whole of its net income during the first five year of its operation and, thereafter annually, at least 50 per cent of its net Icome until such tire as its General Reserve Is equal to the asount of its paid in Share Capital. 110 Appendix 16 TONGA DEVELOPMT BANK Members of the Board of Directors (As of 31 December 1985) Name Date of Appointment Occupation 1. Non. James C. Cocker 20 March 1982 Minister of Finance 2. Baron Vaea 3 September 1984 Minister of Labor, Commerce & Industries 3. Tomasi T. Simiki 5 August 1977 Director of Agriculture 4, Tsutouu Nakao 28 November 1977 Businesman 5. Masao Soakai 5 August 1977 Businessman 6. Selwyn Jones 1 November 1984 Secretary of Finance 7. Peter Jones 27 February 1985 Chief Manager, Bank of Tonga 8. Lisiate 'A. 'Akolo 19 March 1982 Managing Director (Reference in text: page 45, para 127) ,-:MA JE: ;b4 ^A?K Was~~~~s l' >t - - rn~ 1 K LCAIS toAm GFRMU U- [ i~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~z 1~. 1 a...1 , g1 ~~, ,ha L _,m | "_*U .AW S*U - r---~ ~ ~ ~ ~~ ~~~lfeec in- text:z ---e -5 pr 128) 112 Jauyi of 1udv1maa1 ppwl PTO 1981 - 198 FY ailing 31 DeIuer lb. AMM No. / ut . h o. h¢mt No. h AcorEgm to Sector Agritdture 2,728 1,261 2,956 1,707 2,233 1,300 2,544 1,967 2,488 1,880 I&Ustry andl bwizm 348 1,223 427 1,134 313 1,133 370 1,462 303 1,690 Staff 71 78 39 38 103 47 180 98 270 128 Accordir~ to D~e of UorOM HurTican_ rb- - 673 232 - - - - - - Nw borrowers 1,466 907 1,062 801 805 867 949 1,447 944 1,202 Repeat borr 920 410 1,051 515 1,197 458 1,471 761 1,766 883 Coest oaerrw 279 44 208 56 17 6 - - - - "Aim ltW" Secmd 374 489 287 598 383 535 584 972 306 1,090 "Aim W1i" lhidl 87 290 114 468 145 249 - - - - "Alm Htt" Fouth 21 422 22 195 73 331 - - - - "Alm IW I Pfth - - 5 14 27 30 84 295 44 i18 "Alm HWl Sixth - - - - 1 2 - - - - "Aim IiW" Seventh-t - - - - 1 2 5 17 1 5 Others - - - - - - 1 35 - - 3,147 2=6 3,422 2,2W 2 2,64 T. 3=52 -3,0rT,61 9 8 Accordlrg to 2!qdcaEl locatict. TuatqxW 2,201 1,773 2,263 1,955 1,436 1,810 1,889 2,553 1,835 2,726 lk'pai 231 107 228 109 331 95 216 119 313 149 Vava'u 595 632 627 724 610 479 714 710 548 666 Others 120 50 304 91 m 96 275 145 365 157 to"d SIze up to $1,000 2,886 680 3,108 796 2,379 702 2,621 875 2,680 837 Mhm to $2,500 111 170 156 254 146 237 233 359 214 334 Tha to $5,000 - - - - 68 267 118 461 65 250 hen to $10,000 127 650 131 559 32 233 86 587 64 440 Thm to$ 50,0CD 19 491 20 518 19 401 29 596 28 449 Ihn to $100,000 2 121 2 105 - - 7 649 3 246 MW er$100,000 2 45D 5 647 5 640 - - 7 1,142 Up to I yeaw 2,022 764 1,694 630 1,385 527 1,300 654 1,429 715 Ihb to 2 year 946 516 1,404 655 1,043 595 1,352 868 1,282 774 Thi to 3 years 134 480 267 540 178 588 365 1,007 288 811 lhn to 5years 31 273 42 573 35 324 55 354 47 605 hlntoDl0ye6rs 8 420 7 265 6 425 17 518 13 771 Oer lOgyes 5 84 8 216 1 1 4 91 2 22 E ty 1s I 25 - - 1 2D 1 35 - - ,W7 TV3B TM !E TW I 3 T27 3,61- :3 (Reference in text: page 50, para 144) 113 Appendix 1¶' I ii~~~I N IQI~ i Hi: 10:12 B N~~~ Ic~ 4~~~a (Reference in text: page 50, para 146) Ta IELi T B} hiulysls of 4~provds b~y lz-trial Sector lYe 1981 - 1965 1981 1982 1983 1984 1985 TOl Ammt Percet Amouct Perf w Nroui Amut Pe;;;;,; Alx Peru Amm ecn Agr~icuure TI {D Root crops, Sies, fruits * ~viand v 1t 308 12.0 422 14.7 460 18.5 1,591 45.1 1,352 36.6 4,133 27.3 Fa pl.t, tools td e* amndegt 680 26.5 952 33.1 668 26.9 18 0.5 9 0.2 2,327 15.4 |t IYAi~lb 177 6.9 197 6.3 141 5.7 244 6.9 277 7.5 1,036 6.8 ,*t IIvestck 96 3.8 136 4.7 31 1.3 114 3.2 242 6.5 619 4.1 Stow 1,261 49.2 153 1,300 32 1,967 55.8 T§ 50.8 8,115 53.6 _ *- - _ I=sIwtry and msImes s. * Rewtal, viiasale trade 247 9.6 451 15.7 280 11.3 615 17.4 278 7-5 1,671 12.4 v t aot" "e and bhtels 398 15.5 65 2.3 14 0.6 264 7.5 437 11.8 1,178 7.8 7 SsTrmport ad stoxne 200 7.8 259 9.0 273 11.0 310 8.8 165 4.5 1,207 7.9 .s 1q:uinzfacter1 216 8.4 88 3.0 432 17.4 116 3.3 677 18.3 1,529 10.1 .i Otbers 162 6.3 271 9.4 134 5.4 157 4.4 133 3.6 857 5.6 b Siss-*cl~~~~~122 47.7 T,5 1,13 4 X .M W7S =,462 r-45.,M -77 =4 43.8 VI Z Staff Tinw 78 3.1 38 1.3 47 1.9 9B 2.8 1i 3.5 389 2.6 Total 2ID62 100.0 2.879 100.0 ° 1000 3.527 0 3 15.46 100.0 115 21 Actual and Projeted StatmIts FYs 1981-1990 Actual ofProjected Year menft 31 Dsoabe 1981 1982 1983 1984 1985 1986 1987 1988 1989 90 Lierest anloa 218 299 375 405 517 656 746 831 954 1,116 Tnterest an' 63 47 46 42 57 73 85 68 39 26 DI)videns 2 2 2 7 3 3 3 3 4 4 ote 9 22 38 79 75 72 90 91 100 118 Total Tncame 29 3i 33 W N W 1,097 1TW P.rtx --l 104 130 158 217 265 336 357 381 406 447 Odw _Midstratim eqxmm 48 52 72 100 114 115 129 138 152 169 13 14 34 43 44 54 59 57 48 51 Total .1.es I 1 i ^ M 360 W 357 B W Provsin for d1tfu nacomts 53 69 94 65 89 115 157 124 L52 191 CDst of£bormz 57 71 72 86 110 146 170 178 194 222 Total lcpues 7 336 W 511 622 766 7 W5 95-2 Iixtat 74 94 121 NetrPmfit 17 31 22 -3 38 52 1F -I _ atlos: Reitur catavr eqity M) 1.1 1.3 1.1 0.7 0.9 1.0 1.3 1.0 1.2 1.3 Adm. .pwes/aw. totl portfolio (1b 6.9 6.0 6.7 7.5 7.0 7.2 6.8 6.4 5.9 5.5 Interest sd b 6.1 6.3 6.8 5.6 5.8 6.6 6.7 6.7 6.6 6.6 Erg spredS 7.7 7.1 8.1 7.6 8.2 8.2 8.1 8.2 8.3 8.3 a/ UwAited. b nterest Ca lam portfolo _ erst hAV Lam pErio v. borrwiz4 cl Total i interest Am diidmd plid Ai. him po+br + bea diasIts + eA. bonmwl%o + eqi (Reference in text: page 54, para 161) 116 ?WG WevELM 1 DM Appendix 22 Acla im Peced , e ,, ,tSh lye 1981-1990 C!00oo) Year eua 31 Doh11 98 1984 -I9W 1986 1987 1988 1989 1990 CO& h lWd Inban 3 13 421 341 338 422 203 227 255 273 Short-tlln uvssunt 725 t 525 50( 950 1,300 1,300 800 400 400 1amns Xoeivble vdtn an yew 1,686 1,621 1,561 2,318 2,207 3,385 3,410 3,257 3,170 3,615 Accouts receivables & Pray.}te 25 18 34 67 45 70 75 75 80 80 Toti QAumt Asts T2,4 -2,613 ;T 3,2 3,540 3157 T,9 4,r 339 4,368 I 2,790 3,707 4,104 5,559 6,322 7,490 8,210 9,722 10,814 12,674 Bqui t 83 82 32 67 67 117 167 242 317 392 TOal Ptfolio 2,87 3,789 ;3 5,626 6,389 7,0 8;77 9.5-19 =1TT,6 tos: Ptwvlim for &uhtful eco0 206 271 243 307 396 511 688 792 944 1,135 'am --aei,bJe wltbid one r 1 686 1 627 1,561 2,318 2,207 3,385 3,41 3,257 3 170 3,615 Total NetTkroio 9& D O, 1 3,0 3,786 MI3, 1 4W 5 ,703 7,017 8,316 Find Aaets 315 672 806 819 823 898 1 017 973 934 934 Total Asse;t 3 =5,176 5 767 ; 8,4 fiB 10,802,8 13,618 L15UfmU AND Y OXM=t Uei3±ltiAS Emkwedz ef 44 42 34 125 - - - - - - Acw4te payble' 69 93 86 296 275 200 190 232 214 333 Tom botrwphdus vitbha as yew - 24 177 201 206 274 309 399 547 65 Pwiali for lt1o*s - - - - - - - 74 94 121 Total Ozreat L1ttiItN D !W1B M 9 79 EN3 TW Bmeumm (AM) 1,117 1,265 1,265 1,744 2,038 2,451 2,317 2,179 2,012 1,816 Qivemnm (1% 550 550 527 502 453 402 349 295 239 183 Goer t (Aitulia) 250 25r 250 250 250 250 250 222 193 163 hwpemi Cdc 01 3m1ty 133 133 133 1 1 133 133 133 131 127 aEin Iwesuot Bu t - 286 286 534 844 1,057 995 931 811 688 BUIk ofTlh - - 250 225 200 175 150 125 100 75 I=D - - - - 338 1,020 1,02D 1,020 1,02D 907 Pim b ordp 2 300 950 1,500 255 4,1IO Total lorTom Liabilities 2. 2, 711 3,388 3;7 , 1 7,M le*. Due vithin con r - 24 177 201 20 6 274 309 399 547 605 Total Not 1cTGM Ud3itlas 2,S4 TM I 4,050 51 3g 6% 6,i 7; Srha Capitl 1,527 2,478 2,738 3,105 3,456 3,598 3,698 3,M8 4,148 4,698 Gl rem/arstnm profits 44 79 110 132 162 20D 252 293 344 407 Tt I1ity T3.! 2,557 T.= 3,237 3,618 3,798 T; 4,9 ; ff 31,M Total LtablJ±das a Ity 3,734 5,176 5,679 7,046 8,149 9,786 10,3 10,802 8 13,618 Netics: WW*d.t ato bJ 1.3:1 1.0:1 0.9:#1 1.0:1 1.1:1 1.5:1 1.5:1 1.5:1 1.4:1 1.5sl QEYIt ratio c/ 21.6:1 16.4:1 8.6:1 5.2:1 7.4:1 10.9:1 10.0:1 6.2:1 4.6:1 4.1:1 .1TOW;34rst Ial tiptsan l. o Orrmt Ama (Reference in text: page 54, para 161) asrr i i. 117 243 C"1000) Actual ,rolectea Year 1uMh 31 Dww 11982 1 4 18 197 198i 1989 1990 Net Pzdfit (befor pwidsm) 70 103 125 86 119 153 209 239 297 375 I etot - - - - - - - (74) (94) (121) N _m-cad s 13 14 34 43 44 54 59 57 48 51 CoLlctim of pricpal 1,348 1,565 1,534 1,327 2,275 2,243 3,08 3,102 3,046 3,187 antee an barr p 57 n 72 86 110 146 174 178 186 222 h,aMUb fcr &bt euvecinT TWT75 ;7l Tom I;U T; 3,5T TI T714 -Ism In pai-1n cqdal - 951 26 367 351 142 100 100 350 550 ikubm of bor g 421 435 250 788 1,069 1,438 - - - - Pzr borwI - - - - - 300 650 550 1,050 1,550 increae IincutllaW.i 1ims 77 23 12D 367 2 Q) AO) 116 2 146 Total S&iree 4,88 s hpyutof bornudvo prbn dl ad Intee: 57 71 96 263 311 352 448 487 585 769 Louis 2,166 2,487 2,137 2,783 3,038 3,411 3,798 4,169 4,583 5,047 .eqty1 uest s 25 - - 35 - 50 50 75 75 75 Aoflsit uo fixasnsta 274 371 168 56 48 129 178 13 9 51 bmr in maurt sonts (36) (7) 16 33 (22) 25 5 - 5 - (2e In liqd assats (502) 240 _22) (0) 572 434 (219) (476) ( 18 Debt/servIe w e (tim)l 26 25 18 5.9 8.2 7.4 7.9 7.2 6.0 4.8 v UudJted. b/ lAb fm (ef t pt ae5 pr_6 R p_Imt of bmur4 ,,: i) ~a (Reference In texct: page 54, para. 161) AS 4oE 31 198 DNA of h=Mt umt yet uWtmt h ntarm L Dran2dam to be Draw 1$) (fttmfJ TerM I] l.ac sorces 1iom hmut (1$) C1*) Gri Perld (.) A US$ 1500,00a/ 2D Dec. 1978 1,265,374 - 1,077,308 15 ( 6)- yas 3 AD SDR 918,OOQ/ 6 May 1983 910,254 152,000 910,254 40 (10) years 3 A D US$ 307,838./ 15 N4w. 1983 50,00D 392,000 50,000 15 ( 6) years 3 U> 1K Ts 550,000./ 4 Sept. 1979 550,OOD - 452,697 15 ( 5) years 3 E9C EMC I,0ob/ 23 Jan. 1980 133,217 - 133,217 40 (111) years 1-1/2 A hstrall T$ 250,000./ 28 July 1980 250,000 - 250,00D 15 ( 7) years 3 t EIBI NJ eJs0,00/ 1 Sept. 1981 468,855 - 468,855 12 ( 5) years 2-1/2 EIB 11 HU 700,00(b/ 14 Feb. 1984 375,177 212,823 375,177 15 ( 5) years 2-1/2 o E) ir 1$ 250,009/ 29 May 1982 250,000 - 2i0,000 10 yes e2 TMD S 950,000./ 4 N4w. 1985 337,607 682,000 337,606 14 ( 4) years 3s TUOL 4,590,483 1,438,823 4,255,114 a / Lot to iarnmmn of Tcp, rDet to M. tenut directly to T2p Dwelcpunt BL. 119 Appendix 25 TONGA DEVELOPMENT BANK Analysis of Collection Performance and Sectoral Analysis of Portfolio FYs 1981-1985 (T$'000) Collection of Loans Year ending 31 December 1981 1982 1983 1984 1985 Arrears at the beginning of the period 68 189 282 516 559 Current dues during the period 2,699 2,768 3,060 3,644 3,861 Total dues for collection 2,767 2,957 3,342 4,160 4,420 Loans rescheduled a/ 405 726 734 968 927 Cash collection 2,173 1,949 2,092 2,633 2,970 Arrears at the end of the period 189 282 516 559 523 Percentage Comparison Cash collection/total dues for collection 78.5 65.9 62.6 63.3 67.2 As TDB's accounting system does not explicitly record the amount of interest that is rescheduled, these figures are estimates. The Mission is satisfied with the validity of the estimation procedure followed. Sectoral Analysis of Loan Portfolio Year ending 31 December 1981 1982 1983 1984 1985 Agriculture 1,050 1,509 1,640 2,403 2,515 Industry and comwerce 1,792 2,311 2,552 3,142 3,719 Government fund a/ 29 20 21 21 - Staff loan 107 127 144 210 250 Less: Unearned interest b/ (188) (260) (253) (217) (162) Total 2,790 3,707 4,104 5,559 a/ Loans originally made by the Government and transferred to TDB after TDB's establishment. b/ Interest which is debited to loan account but not yet accrued. This relates to loans with flat interest rates. (Reference in text: page 56, para 165) 120 Apex 26 M Dm BSANK M#g of Are FYs 1981 - 1985 (T$'OOQ) 1981 1982 1983 1984 1985 As of 31 DeceuIer No. A im t No. Amoait No. Amtmt No. hiAmt No. hiAnmt By Sector Agriculture 313 66 410 115 777 260 947 317 1,053 358 Industry and service 40 123 64 167 162 256 201 242 186 165 Total 353 189 W 282 939 516 55 T29 ;523 By AlE 3- 6 rmmths 238 42 322 60 483 114 376 139 324 113 6- 9 manits 59 107 69 31 239 84 201 96 241 108 9-12 mxmts 9 3 27 15 71 74 181 92 202 64 Over 12nmoths 9 19 29 156 89 211 351 220 445 210 Legl Actin 38 18 27 20 57 33 39 21 27 28 Total 353 189 474 282 939 516 1 559 1,239 523 By Area Tcxiwaeapu 183 151 299 .03 557 386 632 393 674 343 ' Fix 31 3 33 4 40 7 32 7 37 5 Niua - - - - - - - - 4 2 H1'apai 30 6 32 22 108 39 87 15 84 13 Vava'u 109 29 110 53 234 84 397 144 440 160 Total 353 189 474 M 939 3I6 1,148 559 1,239 523 Total Loan Pbrtfolio 2,785 2,790 3,329 3,707 3,302 4,104 3,864 5,559 5,233 6 322 Provision for bad debts 206 271- 2 - 307 Provisimo for bad debts as Z of total loan portfolio 7.38 7.31 5.92 5.52 6.3 Hardce arrers a/ as Z of totalportfolio 1.3 4.7 5.9 4.3 3.8 Arrears rato (%) b/ 6.77 7.61 12.57 10.06 8.3 a/ Hardcore arrea include overdUe of more than 12 mmths plus cases under legal actim. b/ Total Arars x 100 Total loan portfolio (Reference in text: page 57, para 168) 121 Page 1 TONGA DEVELOPMENT BANK List of Major Assumptions for Operational and Financial Projections (FY 1986-1990) I. Operational Projections A. Approvals Total loan approvals are assumed to increase at an annual rate of 15 per cent in 1986 and 10 per cent per annum to 1990. Agriculture loans are expected to increase at an average annual rate of 6 per cent to 1990. Business and industry loans are assumed to increase 20 per cent in 1986 and 15 per cent per annum to 1990. B. Disbursements Based on past experience, the following assumptions are applied: a) For loans, 85 per cent of the total approvals will result in net approvals, and 53 per cent will be disbursed in the same year. The balance of the disbursement will be made in the following year, with the total disbursement representing 82 per cent of the approved amount. b) Equity investments are assumed to be disbursed in the year of approval. C. Repayments Repayment of existing loans is assumed to be on the basis of actual amortization. For new loans, an estimated amortization schedule is assumed as follows: For loans For loans over T$5,000 up to T$5,000 1st year 20% 302 2nd year 302 50% 3rd year 19% 202 4th year 10% 5th year 5% II. Financial ProJections A. Income Statement (i) Interest Income (a) Loans: 8.5 per cent interest per annum on average portfolio. (Reference in text: page 58, para 171) 122 Appendlx 27 Page 2 (b) Term Deposits: 6.5 per cent Interest per annum on average balances. (ii) Other Income (a) Letter of Credit (L/C) Guarantees: 1 per cent (b) Premiums on Collected Insurances: 10 per cent (c) Rental received from three Government Departments occupying the top floor of the Bank's building. (iii) Administrative Expenses (a) Travel, administration and auditing costs will increase by 11 per cent per annum as in 1985. (b) Personnel costs will increase by 6 per cent per annum to 1990 as in 1985. (iv) Cost of Borrowings UK, ADB and Australia at 3 per cent per annum, EEC at 1.5 per cent per annum, European Investment Bank at 2.5 per cent per annum, BOT at 8 per cent per annum, new borrowing at 3 per cent per annum on average outstanding balances. (v) Application of Accumulated Profits TDB will continue its policy of transferring at least 75 per cent per annum of operating profit to provisions for doubtful accounts with the objective of increasing the value of the provision figure to 10 per cent of outstanding loans and equity investments. B. Cash Flow (i) Increase in Capital The following equity injections from TDB's shareholders have been projected: 1986 - T$142,000 1987 - T$100,000 1988 - T$100,000 1989 - T$350,000 1990 - T$550,000 (ii) Repayments of Borrowings As per repayment schedules in the subsidiary loan agreements. Repayments of new borrowings are assumed to be on a similar basis as for existing loans. 123 Appendix 28 TONGA DEVELOn4EWT BANK Details of Previous Bank Loans As of 31 December 1985 ($) Loan 376-TON(SP) Loan 624-TON(SF) Loan Amount $1,500,000 $1,000,000 Date of Approval 7 December 1978 26 April 1983 Date of Effectiveness 17 January 1979 4 August 1983 Closing date for submission of subloans 17 July 1982 4 August 1986 Closing date for disbursement 15 June 1983 4 August 1987 Amount credited $1,445,151 $646,669 Amount disbursed $1,445,151 $646,669 Number of subproject financed 991 419 Free limit amount $30,000 $40,000 Subloan above free limit number 11 1 amount $696,911 $43,825 (Reference in text: page 60, para 177) 124 Appendix 29 TONGA DEVELOPNENT BANK Analysis of Subloans Provided Under the Earlier Bank Loans As of 31 December 1985 ($'O00) Loan 376-TON(SF) Loan 624-TON(SF) No. Amount % No. Amount X Secroral Distribution Manufacturing industry 9 424.8 29.4 6 53.6 8.3 Service industry 44 527.9 36.5 55 258.9 40.0 Agriculture 938 492.5 34.1 358 334.2 51.7 WT 1,445.2 100.0 TI 646.7 100.0 Geographical Distribution Tongatapu 765 1,236.3 85.6 252 603.6 93.3 'Eua 23 25.1 1.7 17 5.8 0.9 Ha'apai 40 66.6 4.6 40 18.7 2.9 Vava'u 163 117.2 8.1 110 18.6 2.9 d91 1,445.2 100.0 19 64h6.7 10.0 Maturity Up to 1 year 496 114.4 7.9 164 62.7 9.7 2 years 420 214.9 14.9 141 73.9 11.4 3 years 56 443.1 30.7 107 447.7 69.2 4 years 7 108.3 7.5 3 19.4 3.0 5 years 7 284.7 19.7 3 19.9 3.1 6 years 3 75.1 5.2 1 23.1 3.6 7 years 1 30.5 2.1 - - - 8 years 1 174.2 12.0 - - - Size Up to $2.5 922 273.1 18.9 342 175.9 27.2 Over $ 2.5 - 5.0 17 70.0 4.8 11 30.9 4.8 Over $ 5.0 - 10.0 27 189.4 13.1 52 252.2 39.0 Over $10.0 - 20.0 13 174.8 12.1 11 96.3 14.9 Over $20.0 - 50.0 8 271.6 18.8 3 91.4 14.1 Over $50.0 4 466.3 32.3 - - - 91 1,445.2 100.0 TI -646.7 100.0 Status of Subloans T$5,000 and above Projects Completed 57 794.9 64 442.8 - satisfactory operation T7 695.4 417.9 - problems in operations 10 99.5 4 26.8 Projects Under Construction - - 1 4.1 Projects with Arrears 13 16.9 16 13.8 - less than 6 months 12 16.3 4 11.9 - 6-12 months 1 0.6 2 1.9 (Reference in text: page 60, para 177) 125 Appendix 30 TONGA DEVELOPMENT BANK Procurement by Country Under Previous Bank Loans As of 31 December 1985 ($'000) Loan 376-TON(SP) Loan 624-TON(SP) Total Country of Origin Amount % Amount x Amount X Australia 396.4 27.4 47.5 7.3 443.9 21.2 New Zealand 347.6 24.1 83.3 12.9 430.9 20.6 Japan 304.3 21.1 512.7 79.3 817.0 39.1 Fiji 98.7 6.8 - - 98.7 4.7 United States 36.2 2.5 - - 36.2 1.7 United Kingdom 30.3 2.1 0.7 0.1 31.0 1.5 Other 231.7 16.0 2.5 0.4 234.2 11.2 Total 1,445.2 100.0 646.7 100.0 2,091.9 100.0 (Reference in text: page 60, para 177) 126 Appendix 31 Page 1 TOIA PEVEOP_T 3N Comlionce wlth Coveanto Under the Erlirlank Len Covenants URforsene to Loan a/ Covenanto . Doct ^ t Statt A. Obligation of the Exeuting gcp (TO) 1. Except as the Dank may otherwis, agree, TOD shall P.A. Section 3.01(c) Complied With not substantally mnd le Artles of AssocltSton or Its Policy Stateamt. 2. TDB shall furnioh to the lank all sucb reports P.A. Section 3.05(a) Complied with and informtion as the Dank ohall reasonably request on the lo* and On the eubloans. 3. TO) sball furnich to the lbank quartorly reports P.A. Section 3.05(b) Complid With on the executlon of the projects sad on the opetation ad Management of TOD. 4. ?VD shall furnish Its finneal statements certified P.A. Sectio 3.06 CoMplied with by Independent auditors acceptable to the lank within six monthe after the close of the finaenil Year. S. Except as the lank nd T) shall otbhws" agre. P.A. Section 3.08 Complied with TDv s11 not (1) cell. le&",, transfer or other- WIse dlp"os of any of teo assets, except In the ordinry course of Its buoness, or (11) establsh or acquire any subsdtiay. 6. DS ohll maintain a debt/equity ratio of P.A. Section 3.09 Compiled with 3:1 and a debt-vervice ratio of not le tbhn 1.5 time. 7. TDB shall reviev its interost rate structure P.A. Schedule Complled wlth and subcit tho result to the Bnk for coments. Para 2 8. TDB ohall consult the Bank prior to affecting P.A. Schedule Complied with any ebange in the Interest rate. Para 2 9. tn the seiact1on of oubprojects. TOD sholl give M. L. P. Complied with prioritl s; to maller enterprieos end enterprises Pars a to be set in the Small Industries Centre. 10. TDB shall appoint an economist wlthin six momths P.A. Schedule Complled with frot the date of loan effectiveness, and appolnt Pare 6 an accountant as soon as possible. 11. TDO shall furnish to the ank Its flnancial P.A. Schedule . Complied with projections vithin the first sly months of each Para 7 :lscal year. (Reference in text: page 62, para 184) 127 Appendix 3L Page 2 te'ference to Loan s/ Covenant. Doceuanto Status O Obligations of the Borrover (Goverrment) . The 3orrower shall cause TDB to CaTNr Out the L.A. Section 4.01 Complied vith Project vith due diligence and efficiency and in conformity with sound adminlstrative, financial, business and development policies and practices. 2. The Borrower shall tale all action, including L.A. Section 4.02(b) complied with the provision of funds, facilities, ervlces and other resources. which shall be nece*sary on Its part to meet the resource requirments of TDB ln order to enable TDB to perform Its obligation under the Project Agreement, and shal; not take or permit any action on Its part which would interfere with the performance of such obligations. 3. The Borrower shall furnish or tause to be furnished L.A. Section 4.01 Complled with to the ank all informatlon as the Bank shall reasonably request on the loan and financial and economic condition of longa. 4. The Borrowe shall cause TDB to review its Interest L.A. Scbedule 6 Complied vith rote strueture and submit the results of such revewv Pars 2 to the Bank for coGooats. 5. The Borrower shall cause ?DB to consult the bank prior L.A. Sheodule 6 Complied with to effecting any change it the Interest rates. Pare 2 6. The Borrover shall not permit ?DB to make any L.A. Schedule 6 Complied with substantial amendment to its Policy Statement Pars 3 without prior agreement of the Borrower and the Bnk. 7. The Bot ower shall, prior to making any appointeant L.A. Schedule 6 Complted With to the position of Managing Director or Deputy Par. 4 Managing Director of TDB, consult the Bank regarding the qualifications, experience and tenure of office of the person proposed for appointment. 8. The Borrower shall take all necessary measures L.A. Schedule 6 Complled vith to ensure that TDB continues to be staffed by suitably- Pars S qualified professionals with adequate experience and technica: expertise. a/ P.A. - Project Agreerent; L.A. - Loan Agreement; M.L.N. - inutes of Loan Neoptiations.