DEVELOPMENT BANK OF ETHIOPIA

PROJECT REHABILITATION AND LOAN RECOVERY

S/PROCESS

FOLLOW-UP REPORT FORMAT

Project’s Name:- _Mesaco Global plc

Type of Project:- _Tannery

Loan Number:- ___AA11365c0128__

Follow up No. Since Receipt of file ___two_

Date of field Visit: - November 24 , 2014

Reported by: - ___ Team- A

Signature of Team Leader: - _____________________

Date: - _______________________
 Contents
1. Executive summery ……………………………………………………………………………………………………………………2
2. Background Information......................................................................................................................4
2.13Project Performance……………………………………………………………………………..12
2.14 Environmental Issues.....................................................................................................................20
2.15 Organization, Management and Manpower................................................................................20
2.16 SWOT Analysis...............................................................................................................................25
2.17 Mitigation Measures.......................................................................................................................26
2.18 Conclusions and Recommendations............................................................................................27

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PRLRP Team A
 1. Executive summery
Mesaco Global plc is located in Oromia Regional State, East Shewa Zone, Modjo Town.
It is established by two Ethiopian shareholders in 2001 with a capital of Birr 2million.
As per the minute of the company the paid up capital of the project is Birr 35 million,
of which Birr 34.6million is in cash and the remaining, Birr 400,000.00, is in kind

The project originally established to process sheep and goat skin up to wet blue and
pickle stage with a total cost of Birr 10.9million of which Birr 6.9million was DBE loan
and the remaining 4million was the promoter’s equity contribution. The purpose of the
loan was to cover costs of building and construction, machineries and equipments,
vehicles, office furniture, power installation and to cover partial requirement of
working capital. After utilization of loan and equity, the project commenced operation
on July 2005.

After most of the machineries were installed, the promoter requested for the
second time an additional working capital loan of Birr 5 million. The Case
Team after a thorough analyses and discussion with the promoter, proposed
Birr 5 million and the loan was approved on exceptional bases to release in two
disbursement.

The bank has disbursed the first loan disbursement of Birr 2,526,783 as per
the agreement. Out of the total disbursed loan the Plc allotted Birr
1,342,713.41 for purchase of raw hides & skins and chemicals as per the plan
and the remaining Birr 746,000 expend on over head costs which were out of
plan. And out of the remaining birr 438,069.59 only birr 263,428.37 is spent
for purchase of chemical but the remaining amount is used for other
unplanned expenses again.

Relating with the production, out of the total 20,978 psc of purchased raw
materials there is only 4,925 psc of raw materials in different process stages.
This shows that the difference in between the two figures has been brought to
the market, but the promoter is not volunteer to show the sales of the
company.

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PRLRP Team A
 Regarding the financial statement of the project the company didn’t submit the
audited financial statement instead it presents the provisional financial
statement of the company which shows the company was incurring a loss for
the past one year. According to this financial statement the company incurs a
loss of Birr 1,346,094.80 for the year 2014.

As at December 29, 2014 the company has a total loan outstanding of Birr
20,002,075.20 of which Birr 17,969,940.58 is principal and Birr 2,032,134.62 is
Interest. Out of this Birr 4,820,829.96 is principal in arrears and Birr 1,851,601.97 is
interest in arrears. This shows that the company has left behind three installments as
per the terms and conditions set by the loan agreement and the next payment is on
January 31, 2015.

During last follow up it was observed that the project is performing under capacity due
major machineries are uninstalled. Due to that the second approved disbursement
Birr 2.5 million of working capital, which was conditioned by the finalization of the
above stated machineries, was not recommended to be disbursed. Instead the PLC
managers are told to finalize the installation for coming for the aforementioned
disbursement. Accordingly currently the installation of these machineries is finalized
and the project is under operation during field visit on November 24, 2014 of current
follow up.

Generally, at this time the installation of most of the machineries are finalized
and the company is under operation. But due to unwillingness of the PLC
managers to abide to the terms and conditions that was agreed between them
and the Bank and not to give the sales of the company and utilization of the
loan the project can’t rehabilitate as required. And therefore to rehabilitate the
project ones for most the bank should inform the promoter to submit the sales
of the company and its utilization unless to settle the loan in arrears before
second disbursement.

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PRLRP Team A
 2. Background Information
2.1 The Client (Contract Person)
2.1.1 Name: Ato Mesifin Sahle
2.1.2 Nationality: Ethiopian
2.1.3 Address:
Region: A.A___________ Sub-city/Zone ________
Town: A.A _________ Woreda ______
Kebele: House No.
Tel. Office: _0111568119_ Mob. _0911212678
Fax: __________________ P.O. Box _________
E-Mail: ________________ Web Site
2.2 The Project
2.2.1 Name of the project: - Mesaco Global plc
2.2.2 Type of the project: - Tannery
2.2.3 Address
Region: Oromia____ Sub-city/Zone: - East Shoa
Town: Modjo Woreda __Lome_
Kebele: _____ House No. __________
Tel. Office: __0111568119 Res. __________
Fax: ________________ P.O.Box _____________
Email: _______________ Web Site

2.3 Original Form of Organization: Private Limited Company

2.3.1 Current form of organization: Private Limited Company

2.4 Objective of the project: To process finished hides and skins up.
2.5 Status of Business License
2.5.1 Date of original registration/issuance 20/10/1995
2.5.2 Date of Renewal:- _2005 E.C
2.5.3 Principal Registration Number:-09/2/13528/99

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PRLRP Team A
 2.6 Tax Identification Number (TIN): _0001600677
2.6.1 VAT registration Number:- _27888
2.6.2 Annual Tax payment Birr __________________
2.6.3 Paid up to year ____________________

2.7 Collateral Status

2.7.1 Total land holding: 15,000m2
2.7.2 Date of ownership registration: 1996 E.C.
2.7.3 Developed area: 15,000m2
2.7.4 Does the project acquire additional land apart originally
secured? NO. If yes is it registered and pledged to the loan? -

2.7.5 When collateral assets were last revalued? July 2013

2.7.6 Total amount of lease period of lease:- 35
2.7.7 Latest lease payment up to 2006 E.C
2.7.8 Status of royalty payment NA
2.7.9 Insurance renewal date October 4, 2013
Is the insurance premium on installment basis? No
Does the client renew insurance frequently on its own? Yes
2.7.10 Is the collateral free of any controversies legal or otherwise?
Yes
2.7.11 Status of utility bills particularly power supply
(Installation/consumption) The Company pays up to date all
the utility expense.

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PRLRP Team A
 Table 1: Status of Insurance, Revaluation, Property Registration &
Land Lease Payment
Property Land
Insuranc Business Revaluation
Registration leases
Type of collateral e expiry Mortgage expiry
Expiry Payment
date expiry date date
date arrears
Land 2006 E.C
Mach. and equipment 13/10/2015 20/3/2016 July 2014
Vehicles 14/10/2015 20/3/2016 July 2014
Building 13/10/2015 20/3/2016 July 2014
Bus. Mortgage 29/2/2011 E.C

The time interval for insurance renewal and collateral valuation is one year. Business and
property mortgage registration is five and ten years, respectively. Land lease fee is
normally every year depending upon who gives the land use right. If the land is rented
from farmers’ arrangements may vary as per the negotiation between the concerned
parties.

Table 2: Collateral Coverage

List of Coverage
Sr. Date of
Collateral Planned Actual Variation
No. Revaluation
Assets Birr % Birr % Br %
1 The project
1.1 Mach. and 67% (5,470,836.84) July 30, 2013
7,385,291 39% 12,856,127.84
equipment
1.2 Vehicles* 105,454 1% 282,908.99 1% (177,454.99) July30, 2013
1.3 Building 5,178,089 27% 4,167,938.85 22% 1,010,150.15 July 22, 2013
1.4 Power and
194,382 1% -
water installation
2 Outside
the project
2.1 -
Total 12,863,215 67% 17,306,975.68 87% (4,638,141.68)
Source: - Appraisal study held on 13/7/10 and Engineering evaluation of July 30, 2013
Reasons for Variation: The appraisal study held on 13/7/10 did not consider the
new machineries, which were bought for expansion.
Comment on collateral strength ()
- Strongly Secured (>150%) ___________
- Fully Secured (125 %< X<150%) _____________
- Partially Secured with modest risk (100 %< X<125%) __________
- Partially Secured with high risk (75 %< X<100%) ________√______
- Poorly Secured with a very high risk(X<75%) ___________

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 2.8 Equity, Loan And Credit Information
2.8.1 DBE Loan
2.8.1.1 Amount of original loan approved:-_6,900,000
2.8.1.2 Amount Disbursed:-_6,900,000
2.8.1.3 No loan rescheduled: - three
2.8.1.4 No of times additional loan injection: - two
2.8.2 Reallocation
2.8.2.1 No. of reallocation/rearrangement:- two
2.8.2.2 Type of reallocation
 Investment to working capital: Birr 21,394 from machinery
purchase to working capital.
 Working capital to fixed investment items: Birr 295,029.49 from
machinery purchase to transportation cost for machineries.
2.8.3 Amount of interest capitalized NA
2.8.4 Number of times interest capitalization:- NA
2.8.5 Total amount of NPLs _________
2.8.6 Amortization of interest ____No___

Table 3: NPLs Classification as per NBE’ Standard (as of December 30, 2014)
Amount (Birr) Age in current
Classification/category
Arrears/principal status (days)
Pass
Special Mention 4,820,829.96
Comment on NPLs loan classification
As per the NBE’s classification the loan with less than 180 days in arrears is classified as
pass status but since the project is rescheduled and is found in PRLRP it is categorized
under substandard.
2.8.7 Loan Collections (in Birr):- 7,637,922.04

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 2.8.8 Summary of Collection to date
Table 2: Loan collection summary ( as of December , 2014 )
Sr.
Description Date Principal Interest Total
No.
1 Collection up to last follow- January 31, 2014 2,866,349.29 4,771,572.75 7,637,922.04
up/inspection/ report
2 Collection after last report January 31, 2014 - - -

3 Planned Collection to-date December 12,2014 7,648,493.29 7,025,542.93 14,674,036.22

/demand
4 Recovery rate (Actual/Plan) 37% 68% 52%
Source:- Planned collection up to January 31,2014 is from previous follow up and After
this it has taken from Amended loan agreement held on December 6, 2013.

2.8.9 Number of follow up reports produced since loan disbursement:

four times in CP and two times in PRLRP.
2.8.10 Was there commissioning reports that list all the project items in
detail?Yes
2.8.11 Are all the conditions in the loan agreement complied? No

Comment on recovery rate and pattern of repayment: Currently the company

left behind by three repayments and the Fourth repayment is also expected to be paid on
January 31, 2015, a principal amount of Birr 1,195,536.

2.9 Credit Information with Other Banks and Suppliers Credit

2.9.1 Credit information (other banks)

Table 4: Credit Information as at December 12, 2014

Undue balance (Birr) Arrear Balance (Birr) Comm. Age of
Financing
Balance comm.
Loan Number Institution Principal Interest Principal Interest
(Birr) Bal.
AA11365C0128 DBE 13,149,110.62 180,532.65 4,820,829.96 1,851,601.97 2,473,217.38

2.9.2 Suppliers credit or any payables to other creditors/suppliers

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PRLRP Team A
 2.10 Capital of the Company
2.10.1 Authorized Birr: 35 million
2.10.2 Subscribed Birr: 35 million
2.10.3 Paid up Birr: 35 million
2.10.4 12% of the paid up capital invested in the project (N.B: as per the
Audited Financial Statement of the company (July 2012) the paid up
capital is only Birr 4, 060,000.00)

Table 5: Details of Capital Formation of the Company

S. No. of Per. Capital
Name
N Shares Value Paid up In kind Total
1 Ato Mesifin Sahle 21,000 1,000 20,750,000 250,000 21,000,000
2 W/ro Meaza Alemayehu 14,000 1,000 13,850,000 150,000 14,000,000
Total 35,000 34,600,00 400,000 35,000,000
0
Source: - the company minute

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PRLRP Team A
 2.11 Total Project Cost

Table 6: Total Investment Outlay (DBE loan and equity combined)

Planned Actual Variation
Descri Eq
Sr. No Loa Tota Eq Loa Tot Equi Lo Tota
ption uit
n l uity n al ty an l
y
Buildin 2,0 1,32 3,33 1,7 1,32 3,06 (270, - (270,
g 12, 3,20 5,78 41, 3,20 4,81 967. 967.
58 0 4.96 617 0 7.44 52) 52)
4.9 .44
6
Land 20, - 20,4 25, - 25,5 5,10 - 5,10
acquisit 40 00 500 00 0.00 0.00
ion 0
Machin 1,4 13,3 14,7 1,5 13,1 14,6 25,8 (1 (136,
ery & 76, 11,9 88,8 02, 49,4 52,1 80.1 62 712.
Equipm 85 95.5 46.5 731 02.6 33.7 2 ,5 80)
ent 1.0 4 4 .12 2 4 92
0 .9
2)
Furnitu 60, 60,0 65, - 65,9 5,95 - 5,95
re 00 00 956 56.2 6.23 6.23
0 .23 3
Vehicle 25 250, 527 - 527, 277, - 277,
0,0 000 ,26 269. 269. 269.
00 9.6 60 60 60
0
Machin 286,585 - 286,585 - - - (286, - (286,
ery 585. 585.
Installa 00) 00)
tion
and
commis
sioning
Electric - - - 286,280 - 286,280 286, - 286,
al 280. 280.

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PRLRP Team A
 Cables 00 00
and
conduit
s
Power 26 260, 242 - 242, (17,0 - (17,0
and 0,0 000 ,97 977 23.0 23.0
water 00 7 0) 0)
installat
ion
Pre- 39 392, 464 - 464, 72,1 - 72,1
product 2,0 000 ,11 118 18.0 18.0
ion 00 8 0 0
Costs
Workin 3,5 3,77 7,34 410 3,79 4,20 (3,16 21 (3,13
g 70, 6,80 7,10 ,15 8,19 8,34 0,15 ,3 8,76
Capital 30 0 8.00 0.4 4 4.47 7.53) 94 3.53)
8.0 7 .0
0 0
Total 8,3 18,4 26,7 5,2 18,2 23,5 (3,06 (1 (3,20
28, 11,9 40,7 66, 70,7 37,3 2,12 41 3,32
72 95.5 24.5 599 96.6 96.4 9.10) ,1 8.02)
8.9 4 0 .86 2 8 98
6 .9
2)
Debt Equity 31 69% 100 22 78% 100
ratio % % % %
Source: previous follow up reports and inspection reports

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PRLRP Team A
 2.11.1 Is equity contribution realistically fulfilled? No
2.11.2 Reason (s) for variation:

 During the original loan, Birr 21,394 was reallocated from machinery to working
capital and also the client has invested additional Birr 277,269.60 for
procurement of vehicles because of purchase of truck.
 During the first additional, for the construction of chemical store, it was planned
that, the promoter to contribute Birr 639,784.96 however, due to design change the
cost for chemical store construction decreased to Birr 381,002.44.
2.12 Actual project cost

Table 7: Total Investment Outlay (DBE loan and equity combined)

Sr. No Description Planned
1 Mach. and equipment 12,856,127.84
2 Vehicles 282,908.99
3 Building 4,167,938.85
4 Working Capital (stock) 1,764,630.08
Total 19,071,605.76
Loan 20,002,075.20
Equity -
Debt Equity ratio 100% /0%
Source: Mechanical and civil valuation report dated July 30,2013 and July 22,2013 respectively and Credit
information as at December 30, 2014 and Working capital is the stock value of raw materials and chemicals
from company’s report by the letter dated 16/04/2007 E.C.

NB: - The valuation of the project is out dated and should be evaluated as much as possible.

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PRLRP Team A
 2.13 Project Performance
2.1. Working Capital Loan Utilization

After most of the machineries were installed, the promoter requested for the second
time an additional working capital loan of Birr 5 million. The Case Team after a
thorough analyses and discussion with the promoter, proposed Birr 5 million and
the loan was approved on exceptional bases. That was due to the inability of the
PLC to contribute the required equity contribution of Birr 9.5 million through cash
up front and/or in kind. The loan contract was signed on October 25, 2013, after
the promoter paid interest arrears. However, the registration of the loan contract at
Modjo Municipality was finalized on December 3, 2013.

The bank has disbursed the first loan disbursement of Birr 2,526,783 as per the
agreement. Out of the total disbursed loan the Plc allotted Birr 1,342,713.41 for
purchase of raw hides & skins and chemicals as per the plan and the remaining
Birr 746,000 expend on over head costs which were out of plan. And out of the
remaining birr 438,069.59 only birr 263,428.37 is spent for purchase of chemical but
the remaining amount is used for other unplanned expenses again.

Table 8: Utilization of additional working capital loan

Description Total cost Bank Loan Equity contribution

Raw Hides and Skins 6,940,312.50 4,346,434.76 2,593,877.74
Chemicals 653,565.24 653,565.24 -
Others 6,936,456.91 6,936,456.91
Sub total 14,530,334.65 5,000,000.00 9,530,334.65
Debt Equity ration 34% 66%

It has to be note that out of Birr 5 million, Birr 2,200,000.00 was disbursed for the purchase
of raw hides and skins, and Birr 326,782.26 was disbursed for purchase of chemicals and
currently there is about Birr 2,473,217.38 in Commitment balance as of December 12,
2014.

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PRLRP Team A
 Table 8: Details of additional working capital utilization
Description Planned Actual Actual Variation
Disbursement Disbursement Utilization
1st Disbursement        
Raw hides and skins 2,200,000 2,200,000 1,013,822.10 1,186,177.90
Chemical purchase 326,782.26 326,782.26 328,891.31 (2,108.69)
Other over head costs -   746,000.00 (746,000.00)
Sub-total 2,526,782.26 2,526,782.26 2,088,713.41 438,068.85
2nd Disbursement        
Raw hides and skins 2,146,434.76 - - 2,146,434.76
Chemical purchase 326,782.26 - - (326,782.26)
Other over head costs - - - -
Sub-total 2,473,217.02     2,473,217.02
Total 5,000,000.00 2,526,782.26 2,088,713.41  
Reason for variation: There is a significant variation in between the actual disbursement and
actual utilization, which is because of promoter’s improper utilization of disbursed loan as
per the agreed terms and conditions. And additionally the second disbursement is not
effected due to delay by implementation and unwillingness of promoter to give required
information. On the other hand, Out of the remaining variation of Birr 438,068.85 only
birr 263,428.37 is allotted for intended purposes for purchase of chemicals, and the
remaining amount of birr 174,640.48 is utilized without the plan as described
below.

S.No Purpose Amount /Birr

1 Purchase of chemicals 263,428.37

2 For boiler and drum installation & soft 149,351.97

starter

3 Purchase of fuel, stationery and others 25,391.80

Sub Total 438,172.14

Other costs that are covered by the NA

promoter

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 2.2. Raw Material Purchased vs. stock balance of RM & Chemicals
2.2.1. Raw Materials
2.2.1.1 Raw Materials Purchased
Table 9: Raw Materials (Purchased from February 10 - April 07, 2014)
S.N Item Period Quantity Amount/Birr/

1 Wet salted sheep skin October 2013 6,600 pcs * 219,937.50

2 Sheep (Normal) Feb 10 .to April 7, 2014 11,720 pcs 761,800

3 Sheep (Reject) Feb 10 .to April 7, 2014 333 pcs 4,575.00

4 Goat (Normal) Feb 10 .to April 7, 2014 1,689 pcs 84,450.00

5 Goat (Reject) Feb 10 .to April 7, 2014 50 pcs 1,000.00

6 Hide (Normal) Feb 10 .to April 7, 2014 558 pcs 89,278.00

7 Hide (Reject) Feb 10 .to April 7, 2014 27.7 2,211.00

Vat, fuel & transportation 70,507.00

Total 20,978 pcs 1,233,758.50

Source: Inspection Reports

2.2.1.2 Raw materials in stock

Table 10. Inventory /stock balance/ of the company as of November 24, 2014

S.N Item Quantity Estimate

Values /Birr/
1 Pickle 982 pcs NA

2 Wet blue (sheep) 933 pcs NA

3 Wet blue (goat) 410 pcs NA

4 Wet blue (hide) reject 1500 pcs NA

5 Crust (upper) 1100 pcs NA

Total 4,925 pcs NA

Source:- which is the stock found in the company during field visit on November 24,2014.

The above figure shows that out of the total 20,978 psc of purchased raw materials there is only 4,925
psc of raw materials in different process stages. This shows that the difference in between the two
figures has been brought to the market, but the promoter is not volunteer to show the sales of the

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PRLRP Team A
 company. Additionally we can’t take the estimated value of the raw materials in terms of Birr because
of information constraint.

2.2.2. Chemicals in Stock as of November 24,2014

Sr.No Description Unit of Stock Value in

Measurement /Birr/
1 Sodium hydro sulfide KG 525 NA
2 Ammonium Sulphate ” 800 NA
3 Sod.Meta Bisulphate ” 125 NA
4 Ric Acid Brown- RNG ” 100 NA
5 ’’ -HBR ” 100 NA
6 Sodium Acitate Trihydrate ” 25 NA
7 Sodium Formate ” 750 NA
8 Alluminium Sulphate ” 50 NA
9 Sodash ” 400 NA
10 Formic Acid ” 1000 NA
11 Sodium Bicarbonate ” - NA
12 Sodium Silco Floride ” 900 NA
13 Lime Pclr ” 3050 NA
14 Synek tan- CSS ” 200 NA
15 ” - TB ” 525 NA
16 Pp-25-824 ” - NA
17 Bemanol p-10 ” 50 NA
18 Sulphric Acid ” 37 NA
19 Tan chrome –Ab ” 550 NA
20 Sodium Sulphide ” 1075 NA
21 Oxalic Acid ” 50 NA
22 Corlin – VSN ” 270 NA
23 Neutractan –CA ” 175 NA
24 Renactan – DCT ” 175 NA
25 Luster Acid Yellow – GIR ” 25 NA
26 Drasile – 8 –N ” 145 NA
27 Synektam – F ” 225 NA
28 Memosa – ME ” 275 NA
29 Salt ” 180 NA
Source: - stock found in the company during field visit dated November 24,2014

N.B:- But by the letter dated 16/04/2007 E.C Ref.No. መግ/0991/07 the company reported
the stock of the project as follows.

Finished Goods Hides and Skins as of November 30, 2014

S.N Item Quantity Estimate

Values /Birr/
1 Wet blue Goat skin 1580 pcs 153,594.35

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PRLRP Team A
 2 Sheep crust skin 6230 pcs 1,270,555.73

3 Total 1,424,150.08

Chemicals on stock as of November 30,2014

Sr.No Description Unit of Stock Value

Measurement in /Birr/
1 Sodium hydro sulfide KG 525 7350
2 Ammonium Sulphate ” 800 17600
3 Sod.Meta Bisulphate ” 125 2125
4 Ric Acid Brown- RNG ” 100 7000
5 Sodium Formate ” 725 12325
6 Sodium Acitate Trihydrate ” 25 750
7 Soda Ash ” 400 7600
8 Alluminium Sulphate ” 50 2250
9 Formic Acid ” 875 23625
10 Sodium Silco Floride ” 900 22500
11 Lime Powder ” 3050 39650
12 Synktan- CSS ” 200 15000
13 ” - TB ” 500 37500
14 Bemanol p-10 ” 25 2375
15 Sulphric Acid ” 37 407
16 Tan chrome –Ab ” 525 21000
17 Sodium Sulphide ” 1075 32250
18 Oxalic Acid ” 50 1650
19 Corlin – VSN ” 270 17010
20 Neutrican –CA ” 150 9000
21 Renectan – DCT ” 150 9900
22 Luster Acid Yellow – GIR ” 22 4488
23 Drasil – 800–N ” 145 11165
24 Synktan – F ” 200 9200
25 Memosa – ME ” 275 13200
26 Salt ” 180 360
27 Black Dyestuff ” 100 13200
Total 340,480.00
Source:- report of the company by the letter dated December 16,2007 E.C

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PRLRP Team A
 The recommendation of last follow up and current condition of the project

1. Recommendation and action plan of last follow up

Last follow up was held on June 2014 with the following recommendations and action plans.

 The company should finalize finishing part of primary treatment plant, even if it
started to use it;
 The borrower should finalize the installation of the PP drum boiler and
measuring machine should be repaired;
 The company should start to sale its products as much as possible, and repay
the due loan amount;
 The case team should discuss with the management of the company before July
20,2014;
 The Bank should communicate with stake holders like LIDI, Ministry of
Industry and the others regarding the specific problems of the company and
how to overcome them;
 The company should be audited by an external auditor and summit the audit
report to the bank; and also it needs to submit provisional financial statement
monthly; and
 If the project is not revitalized as per the plan after undertaking the above
measures the bank should think for other mitigating measures.
Additionally it was planned to take action according to the following action plan program

 Call the promoters Before July 15, 2014 for discussion on the way to rehabilitate and bring the project
in normal truck and loan recovery.
 Communicating with the stake holders like LIDI, Ministry of Industry Before August 31, 2014
regarding the company’s problem.
 Installation of the PP drum, boiler, measuring machine and finalize finishing
part of primary treatment plant Before September 30, 2014.
 Valuation of the company Before December 31, 2014.
 Start to sale its products Before November 30, 2014.
 Deliver audited financial statement Before September 30, 2014. And
 The promoter has to give attention to successfully rehabilitate the project continuously.

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PRLRP Team A
 2. Current conditions of the company in relation with the above
recommendations and action plans of last follow up.
A. Actions planned to be performed by the bank and their implementation stage
 It was planned to call the promoters Before July 15, 2014 for discussion on the way to
rehabilitate and bring the project in normal truck and loan recovery. Accordingly the case team
has discussed with the promoters with the specified time limit as a result the promoters agreed
to take actions according to the action plan set by the follow up.
 It was intended to communicate with the stake holders Before August 31, 2014
regarding the company’s problem so same was done by the case team by creating discussion
session with LIDI regarding the specific problems of the tanneries in the process as well.
 At last it was aimed to Valuate of the company Before December 31, 2014 and
this is not done yet because the Engineers of the process was occupied by different Jobs but
there is a chance for handling this action within the period set.
B. Actions planned to be performed by the promoter and their implementation
stage.
 It was planned to finalize Installation of the PP drum, boiler,
measuring machine and finishing part of primary treatment plant
Before September 30, 2014. Accordingly installation of Pp drum and finishing
part of primary treatment plant has done except the boiler which its
assembly of different pipes has done but not yet start to used.
 It was targeted to start sale its products Before November 30, 2014. As a result
the company has started to sale its products before the date but not willing full to show its
sales to the bank.
 The bank has notified the company to Deliver audited financial statement Before September
30, 2014 by the letter dated July 28,2006 E.C but still the company didn’t bring the audited
financial statement.

Problems encountered, proposed solution and the way forward

1. Problems encountered
After the last follow up report the captioned project has faced the following
problems.

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  Unwillingness and delay in giving appropriate information on time.
 Unwillingness to show the sales of the company.
 Miss utilization of first disbursed loan as per agreed terms and
conditions.
 Inefficiency to meet its dept obligation due to this currently, the project is
three repayments behind schedule.
2. Proposed solution.
 The bank has informed the company to give the required information on
time repeatedly both orally and by the letter.
 The company was agreed to utilize the loan for the intended purpose only
by the under taking signed in between the bank and the PLC dated
December 06, 2013.
 The bank has informed the company to service its debt on time.
3. The way forward
 The company didn’t cooperate with the bank and is not voluntary to give
the activities of the company and the necessary information on time
therefore the bank should think of other mitigating measures.

2.14 Environmental Issues

The wastes that are released from the tannery factory are known to be highly toxic for human
health and animals unlike. Currently most of the demolished part of treatment plant is
maintained there were no significant leakages to the surrounding environment.

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 2.15 Organization, Management and Manpower

4.1. Organization

The existing organizational structure of the project is depicted as follows.

General
Manager

Finance Dept. & Administration & Technical

Commercial general service Department

4.2. Project management

The project is being managed by one of the shareholder, Ato Mesifin Sahle. He has BA Degree in
Business Administration and over 30 years of experience in different business areas. With the support
of LIDI an Indian production/technical manager of the project has been recruited even if the company
didn’t submit the curriculum vita/CV/ of the employee.
4.3. Man Power of the company as of Nov. 24, 2014
Sr. Temporary Permanent Daily Total
Description
No. laborers laborers
1 Male 14 19 33
2 Female 8 8 16
Total 22 33 49

Additionally currently the company employed an Indian production manager with the
advice and support of LIDI which helps the company to manage its production quality and
overall production process of the company.

2.2 Financial Performance

2.2.1 Investment cost
Table 17: Comparison of Planned and Actual Investment Costs
Sr. Variance
Item Plan (Birr) Actual (Birr)
No (Birr)

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 1 Building 4,167,938.85 4,167,938.85 -
2 Machinery & Equip. 12,826,050.84 12,826,050.84 -
3 Furniture and Fixture 30,077.00 30,077.00 -
4 Vehicle 282,908.99 282,908.99 -
5 Pre-production costs -
6 Working Capital 14,530,334.65
7 Others
Total
Source: Mechanical valuation dated July 30,2013 and civil valuation report dated July 22,2013 and the
rescheduling proposal held on October 2013.

Comments on Variation (if any): The reduced amount is due to depreciation. Whereas
furniture and fixture are not evaluated by the engineers and the working capital is not
determined

2.2.2 Financial Results

2.2.2.1 Number of project audit in since formation of the project? The
audited report was not frequently submitted to the Bank.
2.2.2.2 Period of the latest audit report :- two Year & above

2.2.2.3 Profitability (income statement)

Table 18: comparison of Planned and Actual Profitability (that OF 2011)
Sr. Projected Actual Variation
Description
No (Birr) (Birr) (Birr)
1 Sales Revenue 51,002,996.99 249,464.75 -50,753,532.24

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 2 Other Income - 309,642.65 309,642.65

Total Income 51,002,996.99 559,107.40 -50,443,889.59

3 Cost of good sales 36,657,653.58 253,343.36 -36,404,310.22

4 Gross profit 14,345,343.41 305,764.04 -14,039,579.37

5 General and administrative - 660,426.99 660,426.99

expense
6 PBIT* 12,796,339.90 (354,662.95) -13,151,002.85

7 Interest & Bank Charges 1,549,003.52 1,428,044.02 -120,959.50

8 PBT** 11,245,748.37 (1,782,706.97) -13,028,455.34

9 Less income Tax (30%) 3,936,011.93 - -3,936,011.93

10 Profit after tax 7,309,736.44 (1,782,706.97) -9,092,443.41

11 Recovery of Previous year -

loss
12 Net profit/loss 7,309,736.44 (1,782,706.97) -9,092,443.41

Source: The projected fig is from Working capital loan and loan repayment Rescheduling
proposal dated October 2013 and the actual figure is from the Provisional financial
statement of companies report.

* Stands for profit before interest and tax** Stands for profit before tax

2.2.3 Asset and capital Structure (Balance Sheet)

Table 20: Comparison of Planned Balance sheet
Sr. Projected Actual Variation
Description
No. (Birr) (Birr) (Birr)
1 Assets

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 Current Assets
Stock and goods in transit 14,637,725.62 15,628,511.86
Debtors and prepayments 215,268.28
Shareholders account 371,846.99
Associated Company
Value added tax receivable 297,401.70
Cash and bank balance 552,573.17
Total Current Asset 14,637,725.65 17,065,602.00 2,427,876.35
Fixed Asset 15,756,384.16 2,726,427.59
Establishment Cost 3,062,507.53
Total Asset 30,394,109.81 22,854,537.12 -7,539,572.69
Liabilities and Capital
1 Liabilities
Current liabilities 3,125,000.00 2,182,816.21 - 942,183.79
Long term Liability 13,555,916.00 17,931,241.20 4,375,325.20
Total Liabilities 16,680,916.00 20,114,057.41 3,433,141.41
2 Capital
Paid up capital
Accumulated Loss/retained earning 9,174,306.51 5,787,021.42 -3,387,285.09
Shareholders account(owners’ equity) 4,538,887.30 8,423,376.13 3,884,488.83
Total Liabilities and capital 30,394,109.81 34,324,454.96 3,930,345.15
Source:- The projected fig is from Working capital loan and loan repayment Rescheduling
proposal dated October 2013 and the actual figure is from the Provisional financial statement of
companies report.
NB.:-The figure on actual stock balance is out of reality and it is not found in the company during
field visit or else it should shown in cash or inform of receivables but not. And also the same
problem is seen on share holders account which is out of reality.
Comments on Variation:- During the Rescheduling proposal it was assumed that the
company finish implementation at this time but due to the several reasons the company
didn’t finish installation of machineries this brings a great deference between actual and
planned one. Additionally since the audited financial statement is not submitted we can’t say
that the difference occurred is only raised from implementation impediment.
2.2.4 Ratio Analysis
Table 21: Comparison of Ratio Analysis

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 Sr. Remark
Description Projected Actual Variation
No
1 Return on asset 0.37 -0.08 0.45 ROA=PBT/Total Asset

2 Return on Equity 2.48 -0.21 2.69 ROE=PBT/Total Equity

3 Profit Margin 3.33 PM=Net profit/ Total

0.14 -3.19 Sales
4 Current ratio -3.13 CR= Current Asset/
4.68 7.82 Current Liabilities
5 Debt Equity Ratio 3.68 2.39 1.29 DER= Total liability
/share holders Equity

Analysis and Reasons for variation:

 During the Working capital loan and loan repayment Rescheduling proposal stage it was
assumed that the project would generate profit of Birr 0.37 for each 1 Birr
investment in asset. However, in actual case the company is generating a loss
of -0.08 Birr for the 1 Birr investment on the asset.
 Concerning the Return on Equity, during the Working capital loan and loan
repayment Rescheduling proposal stage it was projected that the company can earn
2.48 Birr for each 1 Birr investment on shareholders’ equity. Whereas the
actual ROE depicts that the share holders profit for each 1 Birr they invested
is -0.21.
 The profit margin measures how much earnings the company keeps out of
every one Birr of sales. The projected profit margin was 0.14. Currently, as per
the provisional financial statement of the company there is a cumulative loss
for the past year. Thus the company didn’t incur net profit for the year 2014.
 The current ratio shows the company’s ability to pay back short term liabilities
within its short term assets. Even though the acceptable current ratio varies
by industry, any figure greater than one is acceptable. Accordingly, as per the
company’s provisional financial statement of the year 2014, company the
actual current ratio is 7.84 This shows that, the current asset of the company
is enough to cover the current liability.
 Finally the actual debt equity ratio is 2.39 this shows that; the company debt
is high as compared to equity contribution.

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 2.16 SWOT Analysis
Strength Weakness
1. Defaulted loan repayment

1. Qualification and experience of 2. Unable to fulfill preconditions set by the Bank to command on the
second disbursement
the general manager and finance
manager.
3. Improper use of the first disbursement and difficulty of rectifying it
4. Unable to complete the implementation as per the plan
2. Employing qualified production
manager 5. There is no export of finished leather
6. Low Employment creation
7. Lack of willingness to give information and audited financial
statements
8. Unavailability of systemized recording system
9. Low equity base
Opportunities Threats

1. The Ethiopian leather product is 1. Power interruption

acceptable at international market.
2. Increase in exchange rate for the purchase of chemicals
2. Through LIDI different training and
3. Strong competition from similar factories
support are being given to leather
industry.
4. High competition for raw materials
3. Education being given at BSC level on 5. Frequent machinery breakage
leather technology, which will help to
have a leather technologist.
4. Availability market opportunity like
AGOA.

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 2.17 Mitigation Measures

The installation of all machineries that are purchased through Bank loan are believed to help produce
high quantity finished leather and expected to increase the sales volume of the company. The
company can operate properly and settle the loan beyond generating foreign currency to the country
and employee more labor power. But, the major machineries of the company has not yet installed.
Thus, the company has to install machineries properly as per the signed undertaking and discussing
openly with the Bank if any problem exists.

The company expected not to face problems regarding the market since Ethiopian leather products are
being expected at international market on the condition that the products have necessary quality. The
Plc should keep the financial and operational record of the company. It needs to avail the audited
financial statement to the Bank on time as per the agreement it entered with Bank. It needs to report
all problems that it might face in due course of operation.

Regarding the utilization of the disbursed loan the company is expected to submit the utilization of
loan unless the bank should take an immediate action.

As per the loan agreement held on December 06, 2013 the company has left three loan repayments
behind as per the agreed terms and conditions.

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 3. Conclusions and Recommendations
3.1 Conclusions

The project was originally established to process sheep and goat skin up to wet blue and
pickle stage for export market. The total cost of the project is Birr 10.9 million, of which
Birr 6.9 million is DBE loan and the remaining Birr 4 million is the promoter’s equity
contribution. The purpose of the loan was to cover costs of building and construction,
machineries and equipments, vehicles, office furniture, power installation and to cover
partial requirement of working capital. After utilization of loan and equity, the project
commenced operation on July 2005.

The government of Ethiopia has imposed 150% tax on export of semi-processed hides
and skins, which required the PLC to upgrade its final product from wet blue and pickle
to finished leather. But that has created a financial problem on the PLC. To minimize
the financial problem, the promoter requested an additional loan to upgrade the finished
leather and leather products.

By appraising the request of the promoter, the Bank approved Birr 11.5million for the
purchase of machineries on the loan contract signed on October 2011 in order to cover
the production of crust, as an additional loan, and from the promoter equity it was
planned to construct an additional building for chemical store and for the purchase of
some machineries from local market. All the required machineries were purchased and
the planned construction for chemical store also constructed. Currently, all of the
required machineries are purchased and installed except PP dyeing & re-tanning drum,
and boiler.

Since its establishment, the Bank injected two additional loans and allowed
three loan repayment rescheduling. On the other hand, the total loan collection
of the project is Birr 7.6 million and currently the project is three loan
repayments behind schedule and the next payment is going to due on January,
2015.

By a loan contract signed on October 25, 2014 the bank approved the second
additional working capital loan of Birr 5 million. Which was planned to be

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 disbursed in two faces of this currently around 2.5 million Birr is disbursed for
purchase of raw materials and chemicals.

Starting from January 2014 up to June 2014 the company bought around
14,377.70 pcs of raw hides and skins, out of which, 586, 12,053 and 1739 pcs
are Number of hides and sheep and goat skins respectively, which the company
paid a total of Birr 1,013,821.60 for the same. But after February 2014 onwards
there is no information regarding purchase of raw materials, and a chemical of
Birr 681,487.98 is bought within the same period.

As of November 24, 2014 the stock balance of the company is 1500 pcs of raw
hides at wet blue stage and 1343 pcs of goat and sheep skin at wet blue stage.
Additionally there are about 982 and 1100 number of pickle and shave sheep
skins, respectively.

Regarding the management and manpower, the company has qualified and
experienced personnel, and currently, they have opened employment opportunity
for 49 workers. Additionally the company has got an Indian production Manger
by the support of LIDI.
The company didn’t submit the audited financial statement due to this reason it
is difficult to compare the financial status of the company in relation with the
planned financial statement of the project. Even if the provisional financial
statement of the company has submitted since its reliability is in question and
most of the report is out of reality it is difficult to take it as real financial
statement of the company.

As of December 30, 2014 the total outstanding loan balance of the company is
Birr 20,002,075.20, of which Birr 13,149,110.62 is undue principal, Birr
180,532.65 is undue interest and, Birr 4,820,829.96 and 1,851,601.97 are
due principal and interest, respectively.

On the other hand, the evaluation of collateral of the project was done before a year on
July 2013, as per this valuation the collateral coverage of the project is 87% ((fixed

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 asset) 17,306,975.68/current loan outstanding (20,002,075.20)), which can be said as
Partially Secured with high risk, as per the risk parameter of the Bank.

On the other hand on the last follow up to rehabilitate the project and to bring it
to the right track It was planned to communicate with the stake holders and the promoters to
discuss on the way to rehabilitate and bring the project in normal truck and loan recovery. Accordingly the
case team has discussed with the promoters and LIDI with the specified time limit as a result the promoters
agreed to take actions according to the action plan set by the follow up.

During last follow up it was observed that the project is performing under capacity due
major machineries are uninstalled. Due to that the second approved disbursement Birr
2.5 million of working capital, which was conditioned by the finalization of the above
stated machineries, will not recommended to be disbursed. The PLC managers are told
to finalize the installation for coming for the aforementioned disbursement. But currently
the installation of these machineries is finalized and the project is under operation
during field visit on November 24, 2014 of current follow up.

Generally, even if the installation most of the machineries are finalized company
is operating under performance and not performing as per the plan, and the bank
has exerted the possible maximum effort to rehabilitate the project but due to
unwillingness of the PLC managers to abide to the terms and conditions that was
agreed between them and the Bank the project cant rehabilitate as required. In
addition to this the promoters are not willing to give appropriate information to
the bank which hinders the rehabilitation of the company.

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 3.2 Recommendations

The responsible case team after checking the current condition of the company and
discussed on the details of this follow-up report, it recommended the following:

 The company should give appropriate information relating to the sales of the
company product and the general utilization of first disbursed loan.
 The company should be audited by an external auditor and summit the audit
report to the bank; and also it needs to submit provisional financial statement
monthly; and
 The valuation of the project should be done before December 31, 2014.
 If the project is not revitalized as per the above recommendations it is not
recommended to release the requested second disbursement and the bank
should think for other mitigating measures.

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 Name and Signature of Team members:
Name Position Signature Date

1. Ato Sisay Biru Team Leader __________ __________

2. Ato Engeda Lakew Sr. Officer __________ __________
3. Ato Shibeshi Zerihun Sr.Officer __________ __________
4. Ato Yifredew Adamu Officer __________ __________
5. Ato Yilikal Tefera Officer __________ __________
6. Ato Birhanu Ararsa Officer __________ __________
7. Ato wasie Mohammed Officer __________ __________

Comments by the Process Manager:-

_______________________________________________________
___________________________________________________
___________________________________________________
___________________________________________________
___________________________________________________

Name Taye Jiru

Signature
Date _______________________

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