Z~~~~07~~~~~)' Aq^2-iA ''.KB.' RESTRICTED Report No. DB-77a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRA'ISAL OF FIVE DEVELOPMENT FINANCE COMPANIES ]:N COLOMBIA April 30, 1971 Development Finance Companies CaURECY BUIVALENTS Currency Colombian Pesos (Col$) As of April 23, 1971 Col$19.42 - US$ 1.00 Col$ 1.00 - US$ 0.0515 Col$ 1,000,000 - Us$ 51,500 APPRAISAL OF FIVE DEVELOPMENT FBqANCE COMPANIES IN COLOMBIA Table of Contents Page Paragraph BASIC DATA - a - SUMMARY - iii i - xi I. INTRODUCTION 1 1.01 - 1.02 II. THE COLOMBIAN ECONOMY 1 - 4 2.01 - 2.14 Present Situation and Trends 1 - 2 2.01 - 2.03 Industrial Development 2 - 3 2.04 - 2.07 Government Policy Towards Industry 3 - 4 2.08 - 2.14 III. THE STRUCTURE OF INDUSTRIAL FINANCE 4 - 10 3.01 - 3.23 Internal and External Financing of Industry 4 -;5 3.01 Sources of Industrial Finance 5 - 7 3.02 - 3.15 Cost of Industrial Finance 7 - 9 3.16 - 3.18 Interest Rate for the Proposed Loan 9 - 10 3.19 - 3.23 IV. RESOURCE MOBILIZATION BY THE FIVE FINANC:[ERAS 10 - 12 4.01 - 4.10 V. RESOURCE ALLOCATION BY THE FIVE FINANCImRAS 12 - 21 5.01 - 5.38 Project Appraisal and Supervision 12 - 14 5.02 - 5.15 Lending Activities 14 - 17 5.16 - 5.24 Equity Investments and Promotion of Projects 17 - 18 5.25 - 5.29 Economic Impact of Lending and Investment Activities 18 - 20 5.30 - 5.37 Performance of Loan and Equity Portfolio 20 5.38 VI. THE FIVE FINANCIERAS 20 - 29 6.01 - 6.46 Colombiana 21 - 23 6.02 - 6.15 Nacional 23 - 24 6.16 - 6.24 Valle 24 - 25 6.25 - 6.31 Caldas 25 - 27 6.32 - 6.38 Norte 27 - 28 6,39 - 6.46 VII. PROSPECTS FOR THE FIVE FINANCIERAS 28 - 33 7.01 - 7.15 Economic Outlook 28 - 29 7.01 - 7.03 Business Prospects 29 - 32 7.04 - 7.13 Operational and Financial Forecast 32 - 33 7.14 - 7.15 rIII. CONCLUSIONS AND RECOMMENDATIONS 33 - 36 8.01 - 8.09 Evaluation of the Financieras 33 - 34 8.01 - 8.05 Need for Funds 34 - 35 8.06 - 8.07 Recommendations 35 - 36 8.08 - 8.09 ANNEXES This report was prepared by Messrs. Nilsson, Hughes and Knotter who visited Colombia from September 27 to November 7, 1970. - a - BASIC DATA Colombiana Nacional Valle Caldas Norte Established in 1959 1959 1961 1961 1963 As of December 1, 1970 Numnber of Shareholders 199 1b6 185 23h 548 Share Capital (in Col$ mil.) 137.8 115.8 99.5 96.4 46.4 Shareholdings as % of total share capital: 1. Colombian Private 52.9 559.5 65.4 65.2 40.0 2. Colombian Government 0.3 4. 2 7.2 10.3 12.8 3. Foreign controlled 3.2 1.9 1.8 - 4.8 4. Foreign 29.4 25.2 18.0 14.3 26.2 5. IFC 14.2 9.2 7.6 10.2 16.2 Assets (in Col$ mil.) 1110.5 666.3 621.8 439.1 269.2 Loans 633.7 m ,.2 441.9 204.7 Export-Import financing 210.7 21.8 111.3 24.2 31.0 Equity investments 181.8 96.6 35.3 127.5 19.0 Other assets 84.3 24.7 33.3 82.7 34.4 Liabilities (in Col$ mil.) 869.4 473.7 472.1 332.8 204.3 Borrowings Bonds 237.8 84.8 51.8 73.1 25.4 Central Bank 242.5 109.4 167.8 69.1 46.6 IBRD 188.1 208.3 103.8 48.6 73.0 Other 75.0 37.9 96.5 65.9 38.8 Other Liabilities 126.0 33.3 52.2 76.1 20.5 Equity (in Col$ mil.) 241.1 192.6 149.7 106.3 64.9 Total debt/equity 4.0 2.5 3.3 3.6 3.3 Equity portfolio as % of net worth 75.4 5C).2 22.3 119.9 29.3 Reserves and retained earn- ings as % of total portfolio 10.0 1L.9 8.5 2.7 7.8 Book value as % of par value 175.0 166.3 150.4 110.3 139.9 January-December 1970 Total Income (in Col$ mil.) 113.8 86.1 78.6 46.9 39.3 Net Income (in Col$ mil.) 27.8 3(04 22.5 3.6 8.2 Net Income as % of average: paid-in share capital 20.7 28.3 24.7 3.7 18.3 equity 12.2 17.4 17.0 3.4 13.4 total assets 2.8 5'.0 4.0 0.9 3.3 General expenses as % average total assets 1.5 1.1 1.6 - 2.3 Dividend on 1970 profits, as % of par value 12 17.6 12 0 12 Dividend pay-out % 59 67 53 0 68 IBRD/DFC April 23, 1971 APPRAISAL OF FIVE DEVELOPMENT FINANCE COMPANIES IN COLOMBIA SUMMARY i. The Bank Group has had close relations with Colombiana, Nacional, Valle, Caldas and Norte, the five oldest, and the leading private development finance companies (financieras) in Colombia since 1961. IFC is a shareholder in all of them. Through Colombia's central bank, Banco de la Republica (BR), the Bank has made three loans totalling US$62.5 million for use by the five companies. ii. In recent years, growth of Colombia's GDP in real terms has in- creased from a 4.4% annual average between 1965 and 1967, to 6.1% in 1968 and 6.5% in 1969, and has been well above the 3.3% annual growth rate of population. Other indications of Colombia's recent substantial economic progress are the success of the Government's anti-inflationary policies, higher investment levels of the private and public sectors and the im- provement of the country's net international reserves position. iii. With estimated 19.2% of GDP in 1969, the output of Colombia's manufacturing sector is still small, but its growth in 1969 and 1970 has apparently substantially exceeded the average of the economy. Exports of manufactured goods have doubled between 1964 and 1968. Consumer goods industries are still predominant but output of intermediate goods is grow- ing fastest. Although industry is important for achieving the Government's development goals, the Government's tight monetary policy has curtailed, in particular, the availability of industrial working capital finance and increased its cost. This complex problem, however, is being studied. The Government is also aware of the need to reconsider protectionist policies, which were introduced to change Colombia's balance of payments, but have led to high levels of protection for some sectors. iv. The five financieras are making a significant contribution to the Colombian economy; together with the government-owned Institute of Industrial Development (IFI), they are thet most important sources of industrial term finance for private industry. v. Government policy has created an interest rate structure, with lending rates to agriculture of around 0-14%, housing 9-18%, and the effec- tive cost for industry of 17-20% for funds; from the banking system and 24-36% from the "curb market" (the extra-bank market). Under the previous loan to the financieras the interest rate was 10% plus an 8% fee to BR if the ul- timate borrower did not want to take the exchange risk. In view of the current cost of loans to industry from the banking system of 17-20%, an in- terest rate of 18.75% to the ultimate borrower, as proposed by BR and the financieras seems also appropriate for the proposed loan. - ii - vi. A fair amount of domestic resources has been mobilized by the financieras through issues of their shares. Mainly due to tax exemption of government bonds, most financieras have not been very successful in marketing their bonds. The financieras have channeled to their clients external credits from international and national lending agencies and from foreign corunercial banks. vii. Resource allocation by the financieras, including equity invest- ments, and project appraisal, promotion and supervision have been benefi- cial for Colombia's economy. lowever, tihe appraisal and follow-up work of most financieras can he further improved. Aiaong other aspects, and as agreed during negotiations, more emphasis will be put on the economic merits of investment projects. viii. Overall, the financieras' lending grew rapidly in 1969 but levelled off in 1970. Their lending has reflected the existing structure of Colombian industry. The financieras have remained by far the most important institutional source of equity finance for private industry. They have financed firms whose products substituted for a fair amount of imports and were exported, which has constributed to improving Colombia's balance of payments. Through their projects, the financieras also helped create a substantial number of new jobs. ix. Except that of Caldas, the financieras' portfolios are generally sound, arrearage is not a major problem and the financieras have been reasonably profitable. In most cases, provisions for doubtful loans and investments are more than adequate. Caldas, alone among the financieras, has been in a difficult situation, with its liquidity threatened and its portfolio in bad shape. ifowever, new management has taken over and is taking corrective measures. The chances are good that the financiera will be able to solve its difficulties. To assure that adequate solutions have been found to the company's problems, it will have to be reviewed at a later date. x. The financieras' volume of loan commitments is expected to rise from Col$ 1,598 million in 1971 to Col$ 1,780 million in 1972, with annual growth rates ranging between 5.7% (Colombiana) and 41.1% (Norte). Over this period they would need US$45 million in foreign exchange, with the bank expected to provide US$40 million. To provide adequate local currency financing to their clients, the financieras, supported by adequate govern- nient measures, are expectedi to make more efforts to mobilize domestic re- sources in the market. xi. Excluding Caldas, the finiancieras have performed in a generally satisfactory manner. The financieras can therefore be considered to be creditworthy for additional loans. The final decision on Caldas will have to be based on a special review of the company. Thus, a loan of US$40 mil- lion is recommended, to be made to B3R for relending to the five financieras. - iii - US$20.0 million would be allocated in equal amounts among the five finan- cieras; any portions unused 12 months before the end date for project sub- mission would be transferred to the unallocated balance of US$20.0 million for projects on a first-come-first-served basis and for joint projects. The ultimate borrower would pay an interest rate that in addition to the Banks lending rate (7.25%) would cover a 0.5% administration fee for BIR and at least a 3.0% spread for the financieras. BR would be prepared to cover the exchange risk for a fee of 8% p.a. All financieras except Caldas would have equal free limits of US$250,000 and aggregate free limits of US$4.0 million; all of Caldas' projects would be reviewed by the Bank. Finally, not more than US$4.0 million of the costs of a single project, whether financed by one financiera individually or by a group combined, should be financed from the proceeds of this loan except when the project has a high economic priority and cannot be financed from other sources. I I. INTRODUCTION 1.01 Private developmenit finance companies (financieras) are a major source of industrial credit in Colombia. At present, 13 private financicras located in the country's four major cities - Bogota, Medellin, Cali and Barranquilla - and in Manizales, Bucaramanga, Pereira, Cucuta and Ibague, are in operation. The Bank has had close relations with the five oldest, and still the leading, companies. The oldest one, Corporacion Financiera Colombiana (Colombiana), started operations in Bogota in 1959; Corporacion Financiera Nacional (Nacional), in Medellin in 1960; Corporacion Financiera del Valle (Valle), in Cali in 1962; Corporacion Financiera de Caldas (Caldas), in Manizales in 1962; and Corporacion Financiera del Norte (Norte), in lBar- ranquilla in 1964. Thie Bank has already made three loans to Banco de la Republica (BR), Colombia's central bank, totalling US$62.5 million for use by these companies to assist them in finan,cing productive projects in the private sector, and IFC lhas made equity investments in all five of them. At the end of 1970, their assets amounted to Col$ 3.1 billion and accounted for about 85% of the assets of all 13 financieras. 1.02 Practically all Bank funds previously made available to the financieras were committed by mid-1970. lhus, the Government of Colombia and the five financieras have asked the Bank for a fourth loan. This report considers their application in the light of recent developments in the Colombian economy, and of the recent performance and prospects of the companies themselves. It focuses on the impact of the financieras' activi- ties on Colombia's economy, on the results of the financieras' resource mobilization and allocation policies, and on an assessment of the companies' institutional and financial performance, mainly since the previous appraisal report (No. DB-48a, May 27, 1969). Description of the financieras' organi- zation, financial structure and institutional aspects has been limited, because details on these aspects are given in previous appraisal reports and in the annexes to this report. A detailed description of the economic environment can be found in "Economic Growth of Colombia, Problems and Prospects", issued in 12 volumes as No. Wli-200a, November 1, 1970. II. TIE COLOMBIAN LCONOMY Present Situation and Trends 2.01 In recent years, Colombia has made substantial economic progress. Growth of GDP in real terms has been well above the 3.3% growth rate of Colombia's population and has slhown a marked acceleration from a rate of 4.4Z between 1965 and 1967 to 6.1% in 1968 and 6.5% in 1969. On a sector basis, agriculture and construction have expanded most. At present, real growtl is estimated at 7%. Improvement itn the Government's monetary, fis- cal and exchange rate policies, the rise in domestic savings to support increasing expenditures for fixed domestic investment, the rise in non- traditional exports, and favorable coffee prices have contributed to the acceleration of growth. Prospects for maintaining Colombia's comparatively high level of growth are good. 2.02 Apart from growth of GDP, several other indicators show the steady improvement of Colombia's economic situation. The Government's anti-inflationary policies have been successful. The rate of consumer price increases slowed down from about 16% in the early 1960's to 8.1% in 1967, 7.4% in 1968, 6.9% in 1969 and 6.3% in 1970. Both private and public sectors have raised gross investment levels. Gross fixed investment as a percentage of GDP has increased from 17.2X in 1965 to 19.5Z in 1968, and is estimated to have remained at the higher level mainly due to greater availability of foreign exchange. It is expected that investment at the higher level can be maintained. 2.03 Colombia's balance of payments problems are still a serious obstacle to economic growth. IHowever, the Government corrected one of the principal causes by introducing a flexible exchange rate in 1967. In 1968, for the first time since 1960, Colombia moved to a positive net international reserves position, with reserves amounting to US$35 million at the end of that year. This trend has since continued. Net interna- tional reserves amounted to US$97 million at the end of 1969 and to US$152 million at the end of 1970. Improvement of conditions for foreign capital has led to a substantial increase in total private foreign investment, mainly in manufacturing and mining, from US$20 million in 1967 to US$48 million in 1968 and an estimated US$50 million in 1969. It is not yet clear what effect the investment code recently agreed between representatives of the Andean Group countries might have on this development. (It will, of course, have no effect if it fails to receive the necessary ratification of all member countries.) Industrial Development 2.04 The manufacturing sector in Colombia is still small, relative to the country's total value added (estimated 19.2% of GDP in 1969), and is less important than in many other countries comparable in population and per capita income. However, annual growth is estimated at 8.8% in 1969 and 9.4% in 1970, which indicates that industry in 1969 and 1970 has been more dynamic than the average of the economy. 2.05 To achieve past growth rates of industrial output, a level of new fixed industrial investment of 16-17% of total fixed investment had to be maintained in the period 1965-1967. The figure for 1967, the latest year for which data are available, was 16.1% and was equivalent to US$150 million. Since then investment has probably risen slightly in real terms. 2.06 Colombia still produces mainly consumer goods (57% of total gross value). The production of intermediate goods, however, is the fastest growing sector. It has been an important factor in the rapid increase of - 3 - manufactured exports, which doubled in the period 1964 to 1968 and accouutcd for 41% of total non-traditional exports in the latter year. Tlhis trend has continued since, and future prospects for increase in manufacturing exports are good. 2.07 In 1970, total industrial employment reached only about 300,000 or 5% of the country's economically active population. The rate of indus- trial growth has not been sufficient adequtately Lo absorb the rapidly growing labor force and a higher growth rate of industry would therefore be desirable. Government Policy Towards Industry 2.08 Industry plays an important role in the achievement of the Gov- ernment's development goals. Lacking a clear-cut policy, the Government has acted in some ways to limit the funds available to industry, and in other ways to provide industry with additional funds. 2.09 The Government's tight monetary policy over the years has acted in general to channel funds primarily to agricultural borrowers, housing and other public sectors and to leave private industrial borrowers as residual claimants. The resulting credit squeeze has curtailed the avail- ability of working capital and increased its cost for industry. The Colom- bian authorities are aware of this complex problem and are presently study- ing the capital market and the adequacy of the interest rate structure for different borrowers. 2.10 Fiscal policy has been used to t:ransfer industrial revenues to the public sector through high corporate taxes which include, besides income taxes (36% of net profits over Col$ 1 million) and indirect sales taxes (about 4%), such measures as additional penalty taxes (up to 56%) levied only on corporation profits in excess of certain rates of return on net worth. 2.11 The Government has also recently acted to make public revenues available to industry. Social security ftnds, which were previously directed to the Central Mortgage Bank, are being channelled to Instituto de Fomento Industrial (IFI) for use in its financing of industry. In 1963, a Private Investment Fund (PIF) was created with the Banco de la Republica (BR) to receive direct foreign currency loans, and to act as a channel for both foreign exchange loans made to the Government and for counterpart funds in Col$. These funds are relent through the financieras, comercial banks and semi-official banks for the purpose of export diversification, import substitution and the elimination of bottlenecks necessary to achieve these aims. Recently, additional funds have been created to provide financing for small and medium-sized industry, and for urban development projects. In addition, the Government has granted incentives to exporters (tax credit certificates, exemption or refund of duties on imported inputs, export financing guaranteed by BR). 2.12 Recently, the Government has provided an incentive towards attracting private investment in shares of the financieras. By law, firms can put 5% of their net profit into an economic development reserve. These funds are tax exempt, and can be used for investment in designated institutions, among others, the financieras. This measure has been help- ful to the financieras, for two were able to place their shares above par. At the same time, however, the Government has also acted to improve the competitiveness of its own bonds in the capital market by granting a tax- exemption to increase the effective return to the purchaser. 2.13 Import restrictions, originally imposed to change the structure of Colombia's balance of payments have, as a secondary effect, resulted in high levels of protection for some rather efficient industrial enterprises and price levels for some industrial goods are unnecessarily high. On the other hand, many sectors are not high cost producers in spite of high tariffs. Given this situation, the Government has become more aware of the need to reconsider its protectionist policies in order to stimulate sound industrial development. 2.14 Present indications are that the new Government will adopt policies conducive to further growth of industry. In seeking to decrease unemploy- ment, it intends to follow a policy of encouragement to both public and private investment. It has also expressed the intention to rationalize taxes on industry, and to reduce the amount and term of deposits needed for industrial imports. Thus, further growth of industry can be foreseen for the next few years, with the principal role of the private sector in that growth receiving due recognition. Such a situation should provide a basis for expansion of financing opportunities for the financieras. III. THE STRUCTURE OF INDUSTRIAL FINANCE Internal and External Financing of Industry 3.01 Industrial enterprises have two basic sources of finance: inter- nal source of finance: i. e. retained earnings, and external sources, i.e. issues of share capital and borrowed funds. For most firms, both sources are rather limited. Internal cash generation, particularly of small corp- orations, is low, partly due to the structure of Colombian business taxes which do not allow revaluation of assets, a measure frequently adopted in inflationary economies to avoid high tax payments on inflated profits. This situation is aggravated by the Colombian shareholders' strong preference for cash dividends, as a result of which industrial enterprises distribute dividends of up to 40% of gross profits. Public share capital issues are mainly open to major industrial firms, and smaller firms often have to make great efforts to raise new equity from their shareholders. However, the shiortage of borrowed funds, especially for working capital finance, is most pressing. Thie inability of almost all industrial companies to obtain bor-- rowed funds is reflected in their balance sheets, which often show a debt- equity relationship of less than 1:1. This chapter concentrates on external financing of industry. Sources of Industrial Finance 3.02 Capital Market Instruments. The rapid pace of development of tl-le capital market in recent years has provided new sources of funds for indus- try. The value of turnover increased from Col$ 380 million in 1960 to Col$ 2,100 million in 1968. The principal instruments of investment included both those with a fixed and those with a variable return: shares and bonds of industrial companies, bonds of the Central Mortgage Bank, the Government's economic development bonds and tax credit certificates (CAT). These instru- ments provide resources for industry either directly, such as industrial shares and bond issues and tax credit certificates, or indirectly, such as government funds and mortgage bonds; these latter determine to a large ex- tent the price level in the capital market. 3.03 Trading of shares of corporations is confined to a few enterprises. About a dozen companies, or less than 10% of the companies which are listed on the stock exchange, are responsible for two-thirds of the exchange turn- over. However, the rapid expansion of mutual funds in recent years (from total assets of Col$ 2.5 million at the end of 1964 to around Col$ 1.5 bil- lion at December 31, 1970) attests to the considerable investor interest in this type of security. The issuing of new shares has shown a steady though lesser increase, from a total of new issues of Col$ 202 million in 1964 to Col$ 548 million in 1969. Although a satisfactory level of dividends (i.e. something over 12% p.a.) is now considered necessary for a newly-listed company to gain the interest of investors, such is not necessarily the case for established companies or banks, for which dividend rates vary considerably. 3.04 It would appear that floating bonds would be an attractive form for corporations of raising money on established stock exchanges, such as exist in Bogota and Medellin, since interests are tax deductible costs while dividends are not. However, although their issues were generally well received, only very few industrial companies such as Bavaria, Coltejer and Fabricato have floated bond issues, and these companies have relied much more heavily on share issues to provide them with needed funds. The most recent bond issue, by Bavaria in 1967, had a 16% coupon rate. The bonds were traded at a discount (95%) and so the effective return was about 17%. 3.05 Tax credit certificates were created by the Government as an in- centive for export promotion. BR issues these certificates to the exporter in an amount equal to 15% of the value in Col$ of the goods exported. The certificates are in "bearer" form and are thus freely negotiable on the stock exchanges. They are short-term (recently reduced from 12 to 9 months), pay an 11% coupon and can be used at maturity to pay national taxes. The market price is not supported by the Government and the discounted price varies inversely with the maturity. - 6 - 3.06 Central Mortgage Bank Bonds have a 20-year term and carry a 9-1/2% coupon, but the real interest is 11%, since the bonds are sold at a discount. A market price of 86% of thie face amount is maintained through the device of a redemption fund, whicth stands ready to buiy and sell the bonds at any time. Consequently, not only is a stable price assured, but liquidity as well, since any bondholder can convert his security to cash upon presentation at any of about 40 bank branclhes. The bonds are tax exempt and, assuming a 40% marginal tax rate, the effective return is 18.3%. 3.07 Economic Development Bonds are issued by the Colombian Govern- ment. The interest rate of these bonds is 11%; however, the real interest rate is slightly higher, since the market price of these bonds is also maintained (at 95% of par) by a redemption fund. The bonds are also tax- exempt. The public's response to these issues has not been as favorable as in the case of the Central Mortgage Bank. This is very probably due to the fact that they are sold only on the stock exchanges (90% on the Bogota exchange), and are therefore not as easily marketable to investors all over the country. 3.08 The Five Financieras and IFI. The most important institutional sources of term finance for Colombian private industry are the five finan- cieras and the government-owned IFI. A very substantial portion of IFI's financing is made to government-owned firms. The financieras still lead in providing medium- and long-term finance for private fixed industrial investment. 3.09 The most recent data for fixed industrial investment are for the year 1967. Assuming that fixed investment in industry has since kept pace with the growth of total gross fixed investment, industrial fixed investment amounted to Col$ 4,625 million in 1969. A fair estimate is that out of this, IFI financed about Col$ 850 million, or 18% and was the most important source of fixed industrial finance, followed by the financieras with Col$ 350 mil- lion, or 8%. IFI should continue to be the most important institutional source of finance for Colombian industry and, witlh the substantial govern- ment financial support at its disposal, is likely to grow faster than the financieras. The level of the financieras' lending in recent years (see paragraph 5.16) has been more a function of available resources than of demand for industrial finance. 3.10 IFI's operations have reached real importance only recently. The legal basis for the broadening of its role was provided by a law of 1963, wliich granted to IFI all the powers of a private "corporacion financiera". Other decrees in succeeding years authorized IFI to act as trustee for the Government in managing AID funds and public debentures. In 1966, IFI start- ed its rapid growth by the acquisition of substantial new funds. As of December 31, 1970, IFI's total assets amounted to Col$ 3.4 billion. The total assets of the five financieras at the same date were Col$ 3.1 billion. - 7 - 3.11 Commercial Banks. Colombia's well-developed commercial banklng system provides primarily short-term credits and is the principal supplier of working capital finance to industry, with the financieras also playing an important role. About two-thirds of the total loan portfolio of the commercial banking system is made up of loans to commerce and industry with the balance going to transportation, consumers, public services and other sectors. Total commercial bank loans at 1)ecember 31, 1970 to industry and mining (excluding construction) was Col$ 3 billion, as against Col$ 2.4 billion total loans made by the financieras. 3.12 Suppliers Credits. The precise impact of suppliers credits on industrial finance cannot be determined with any degree of real accuracy. Nevertheless, indications are that such credits contribute significantly to the financing of industry. Information available from IFI a year ago, indicated that up to 30% of its clients' future needs would be met by suppliers' credits. 3.13 More recent information has been provided by one of the finan- cieras, from a representative sample of 23 of its clients. These firms varied greatly in their use of suppliers' credits. Only three firms received no financing of this type. Five firms depended nominally (0.4 - 2.1% of total financing) on such credits, over one-third (eight firms) depended somewhat more heavily on them (5.3 - 16.0%), and almost another third (seven firms) relied considerably (26.0 - 42.7%) on suppliers' credits. 3.14 It is difficult to generalize from such scanty information; nevertheless, it indicates that at least one-third of the manufacturing firms in Colombia rely to an important degree on suppliers credits as a means of financing their operations. 3.15 Tlue "Curb Market". If a company is unable to satisfy its require- ments (particularly working capital) in the organized markets, it may have to obtain funds at rates of 24% and above in the "curb market". Even some prime borrowers have to resort to this market to meet expenses. For example, manufacturers of home appliances, who have to give their distributors and customers two-year terms, cannot obtain all the working capital they need from the banking system. The size of the "curb market" cannot be determined, but the extremely high rates of interest that are paid by borrowers indicate that demand far exceeds supply. Cost of Industrial Finance 3.16 Effects of Governnment Interest Policy. Levels and changes in interest rates and resources result more from Goventment policy than from market demand and supply movements. Monetary policy has placed strict requirements on financial intermediaries regarding the allocation of their fundls and the interest rates that they carL charge, with the result, in the case of commercial banks, that although interest rates are more favorable for industrial lending, the banks must maintain in their portfolios agricul- tural investments equal to at least one-fifth of total portfolio. The Gov- ernment has tried to limit the increase of interest rates, by requesting that all rates in the banking system be tied to the 14% short-term rate approved by the Junta Hlonetaria, but its success has been linmited. 3.17 The effect of Government policy has been to create a diverse rate structure. Current lending rates to agriculture are around 9-14%, to housing 9-18%, while for industry the effective cost of a loan from the banking system coulci be 17-20%, and is estimated at 24-36% for loans from the "cuirb market". In light of the more favorable rates for agriculture and housing, it may be argued that present interest rate policy discriminates againist the industrial sector and that an attempt ought to be made to redress the balance. Htowever, in present circumstances, a reduction in interest rates would result in an even stronger demand for industrial finance and supply would also have to be stimulated to provide the funds necessary to satisfy this demand. Since demand for funds is already high, and cannot be fully satisfied, the main obstacle to the growth of industrial sector finance appears to be the lack of new resources rather than the level of interest rates. 3.18 Cost of Peso Funds. Depending on the source, the cost of capital in Colombian Pesos varies widely. The availability of funds from the bank- ing system, eligibility for government finance, and the need to go outside the banking system, all involve different costs to the borrower. Therefore, industrial borrowers are faced with a number of cost alternatives, such as the following: a. Short-term working capital from a conmiercial bank may be obtained at a nominal rate of 14-15%, but it effectively would cost around 18%, depending upon the amount of com- pensating deposit balances required. b. Funds are presently available from BR for specific purposes and relent through the banking system at rates varying from 12% to 18%, depending on the source of funds and term of the loan. (18% is the cost not only of World Bank funds but also of a 10-year money under the most recent AID loan.) c. Like other financial institutions, the financieras keep nominal interest rates in line with government policy, and try to charge commissions as a means to raising the effec- tive return. Consequently, the effective cost to industrial companies of such loans would be about 18% for loans over one year. d. Although IFI's financing is in general directed towards firms which, due to either their size or complexity, are outside the scope of the financieras' operations, there is no prohi- bition against its financing any enterprise. IFI loans are available at rates of 14% for loans of up to one year, and 1/2% for each additional year, with a 20% maximum for an 8 - 10 year loan. e. A borrower can also try to sell shares or bonds on the capital market. In order to compete with Government bonds, industrial bonds must show an effective return about equal to the 18% return on the bonds of the Central Mortgage Bank. f. As a last resort, the "curb market" would be able to provide financing, often even to large firms with serious working capital shortages, at rates ranging from 24% to 36%, according to best estimates. Interest Rate for the Proposed Loan 3.19 Cost of Bank Funds in Foreign Echange. Fixing a price for the relending of Bank funds is difficult, given the problems of establishing an opportunity cost of capital and the rigidities imposed by the Govern- ment's monetary policy. One approach would be to add up the costs that have to be met before the funds reach their ultimate user. Thus, a loan in foreign exchange would include the following costs: a. the present cost of World Bank f unds is 7.25%; b. the 3% spread now allowed the fiLnancieras seems satisfactory to cover their expenses and provide a reasonable surplus; c. BR, as borrower, receives a fee of 0.5%, which seems adequate. The total cost in foreign exchange would be 10.75%. This compares with 10% under the present loan, the increase resulting from the rise in the interest rate on World Bank loans. 3.20 In practice, the interest rate on loans denominated in foreign currency has not been important; for in only one case has a client of a financiera been willing to assume the foreign exchange risk. 3.21 Exchange Risk Coverage. In the past two loans to the financieras, LR has been prepared to cover the foreign exchange risk at 8% p.a. The adequacy of the 8% fee is difficult to assess. The long-term aspect is simply not quantifiable, as may be seen by the actions of the financieras' clients. Historically, the devaluation of the Colombian peso in relation to the US dollar averaged 10.9% from 1959-1969 and 9.1% for the period 1967-1969, 1)uring these same periods, the consumer price index rose by average annual rates of 10.7% and 7.1%, respectively. In 1967, Colombia adopted the "crawling peg" system by wlich devaluation is carried out in regular steps. Since 1967, devaluation has slightly exceeded the rise in - 10 - consumer prices. Devaluation in Colombia has not taken into account the effect of inflation of the US dollar, and has not therefore been related to the net inflationary change resulting from a comparison of the changes in price indexes for the two currencies involved in the calculation. The best estimates are that the rate of inflationary advance will continue at about 7%. Due to the compounding effect on interests and varying time lags before conversion, the risk coverage should be slightly higher than actual devaluation and a continuation of the 8% clharge for foreign exchange risk could therefore be considered reasonable. Consequently, the total cost of World Bank funds, without foreign exchange risk, would be 18.75%. 3.22 Cost of Other Long-term Funds. Apart from the above cost calcu- lation for Bank funds, a comparison with other borrowing rates for industry may give a further idea as to the adequacy of a particular rate. Costs for the ultimate beneficiary of other PIF managed long-term hard currency funds (with or without foreign exchange risk coverage) are about in line with cost of World Bank funds. In relation to the cost of most short- and medium- term foreign exchange, World Bank funds are, apparently, not expensive, al- though suppliers' credits may sometimes be considerably cheaper. Ilowever, short- and medium-term rates fluctuate with the market to a wider extent than long-term rates and are therefore only of limited value for comparison. Thus, in general, a comparison of available market prices for foreign ex- change funds provides only an indication but not a very satisfactory basis for assessing the adequacy of the cost of Bank funds. In the case of local currency, a comparison can also be made with IFI's rates, which are 20% for long-term loans of 8 - 10 years. 3.23 Proposed Interest Rate. BR and the financieras reached agree- ment that the interest rate charged to the ultimate borrower for loans from World Bank resources should be 10.75%, and that if a borrower is not willing to take the exchange risk, BR would do so, for a fee of 8%. In the light of the considerations in the foregoing paragraphs, that arrange- ment is reasonable. IV. RESOURCE MOBILIZATION BY THE FIVE FINANCIERAS 4.01 The financieras have mobilized a fair amount of domestic resources through issues of bonds and shares. They have been successful in obtaining external credits through BR from international and foreign national lending agencies. In aedition, some of the financieras have tapped significant resources from foreign comnercial banks, used chiefly for export-import financing. The financieras' investment banking operations have not yet reached any real importance. Caldas has tried to mobilize resources through a "mutual fund" scheme. 4.02 Share Capital Issues. The financieras have been successful in raising share capital and have relied heavily on their own equity to finance operations. As of December 31, 1970, their paid-in share capital totalled Col$ 496 million and reserves and surplus of Col$ 259 million brought their equity to a total of ColS 755 million. Although Nacional's and Caldas' - 11 - shares are listed on stock exchanges, only Nacional's are being traded (at 130% of par). In addition, since the shares of the financieras were made eligible for investments with funds from t:he "reserva de fomento economico", the market for their shares has improved, as has the possibility of sell- ing shares at a premium. 4.03 Bond Issues. Only Colombiana lhas had any significant success in issuing its own bonds, perhaps because an important insurance company is on its board. From 1962 through 1970, Colombiana placed bonds amounting to Col$ 275 million, while the other four financieras combined placed bonds totalling Col$ 180 million. These bonds are not freely available ftunds. They are, rather, a vehicle for obtaining funds from insurance companies for working capital financing oE their clients. An arrangement is made in advance with an insurance company, which usually involves the purchase of some insurance in exchange for the discounting of the bond. The financieras have not been active in raising savings directly through public placement of their bonds. The largest financieras should now be in a position to do so. The possibility of their going to the market with negotiable "bearer" bonds is discussed in paragraph 7.12. 4.04 Funds Channelled Through BR. Resources made available through BR to the five financieras represented, art December 31, 1970, around 50% of all resources disbursed by them. Of these BR resources more than one- third represented World Bank loans, and about one-half loans from PIF, the special BR fund used to finance private enterprises. 4.05 The financieras have varied considerably in their use of World Bank funds, ranging from 11% to 26% of total resources disbursed by each financiera. As of January 31, 1971, amounts credited under the three loans together have been the following: Nacional US$18.3 million; Colom- biana, US$16.8 million; Valle, US$12.8 million; Norte, US$7.4 million; Caldas, US$5.2 million. 4.06 Besides local currency loans received from counterpart funds available to BR, the financieras have also utilized the proceeds of loans to BR from AID, KfW, and IDB. Total utilization of those resources has amounted to only about 6% of the total resources used by all the five. 4.07 In 1966, BR agreed to receive 10-year bonds in payment for amounts due to it under earlier credit lines to the financieras, thereby increasing considerably the term of this obligation. The financieras have been active in issuing such bonds. (Col$ 262 million was outstanding as of December 31, 1970.) In 1969, BR established an Industrial Financing Fund (IFF) to finance small- and medium-sized companies and an Urban Development Fund (UDF) for urban projects. The financieras have begun to use these resources, which add greatly to the flexibility of their financing and should play an in- creasingly important role in their lending operations. 4.08 Foreign Commercial Banks. All the financieras, but Colombiana, Norte and Valle in particular, have been able to raise short-term financing from foreign commercial banks for export-import financing. The total out- standing was Col$ 314 million as of December 31, 1970. - 12 - 4.09 Investment Banking. The financieras have not been active as investment bankers in the period under review. Nacional managed to place 50% of an issue on a "best efforts" basis, while Caldas was unable to place the shares of a company for which it lhad a firm underwriting commitment. 4.10 "Mutual Funds" Operations. In order to attract the interest of inv,estors to companies in its portfolio, Caldas began in 1966 to sell blocks, of Col$ 100,000 containing a mix of shares of 10 companies in Manizales. Caldas guaranteed a minimum return of 8% on the blocks, and agreed to split with the investor any return in excess of 8%. Caldas sold 35 blocks, but suspended further sales in 1967 when one of the companies fell into diffi- culties. V. RESOURCE ALLOCATION BY THE FIVE FINANCIERAS 5.01 An indication of how efficiently the financieras have allocated resources can be given by reviewing the quality and volume of the finan- cieras' appraisal and follow-up activities, the development and direction of their lending, their efforts to promote projects and make equity invest- ments, the economic implications of projects carried out with their assis- tance, and the overall performance of their portfolios. Project Appraisal and Supervision 5.02 Appraisal and follow-up standards of the financieras determine to a considerable extent the quality of resource allocation for Colombia's industry, given the relative importance of their lending and investment activities. The quality first of appraisal and then of follow-up work is therefore highlighted for each financiera. 5.03 Quality of Appraisal Work and Related Technical Assistance. Al- though most financieras have improved the quality of appraisal work, there is still room to better the appraisal techniques of all of them. In partic- ular, financial projections and market appraisals lhave sometimes been inade- quate. Also, considerable work needs to be douie tu up--,;rade the appraisal ot the economic merit of investment projects (see paragraph 5.31). During negotiations the financieras declared their intention to improve appraisal and follow-up, including giving increased emphasis to the economic aspects of investment projects. They will add to their studies of projects over US$250,000 a calculation of the effective rate of protection. 5.04 Valle's appraisals are generally well done. Its relatively small Technical Department often assists its customers substantially in the prep- aration of feasibility studies and in modifying projects. 5.05 Appraisals of projects recently submitted by Colombiana for Bank approval have also been of generally good quality. The financiera is pro- - 13 - viding a fair amount of technical assistance in the preparation of feasibility studies. Among the financieras, the quality of Colombiana's and Valle's appraisal are the best, overall. 5.06 Nacional's appraisal work is influenced by the facts that its business is focused on the Antioquian region and that its management main- tains a close relationship with all principal enterprises in the regiion. Consequently, appraisal staff can be kept small and formal appraisal reports are relatively thin. There is a tendency t-o rely largely on feasibility studies submitted to it by the large and well-established firms among its clients, rather than on Nacional's own critical faculties, and on Nacional's personal knowledge of the management and financial position of its clients. Due t.o the nature of most of Nacional's cl:Lentele, the extent of the finan- ciera's technical assistance is limited. As Nacional grows in size, this reliance on contact and relationships may become risky. More extensive technical work already is needed to help lay a basis for managerial judge- ment. The development of staff, especially on the technical side, and the employment of a top-ranking deputy to the President are matters of priority of which the President is aware. 5.07 The quality of Norte's appraisal reports has varied but has im- proved overall. Reports sometimes still do not focus adequately on import- ant issues, especially market aspects. However, many projects submitted to Norte by its clients lack thorough preparation and, often, the financiera has to put them together from scratch. ThLs valuable technical assistance requires a considerable amount of staff time. 5.08 Caldas' appraisal work often appears to be hastily done. Invest- ment decisions have often been based, to an excessive extent, on management's and board's first-hand knowledge of the business community. The financiera's new management will have to base investment decisions on deeper study than has been the case in the recent past. 5.09 Project Supervision. Procedures, quality and extent of follow-up visits work differ among the financieras, but the following common features are noteworthy: in all the financieras, the number of follow-up visits has increased substantially during 1970 over the previous year's figures, but visits tend to be shorter; the financieras give priority to follow-up visits of Bank-financed projects over PIF and BR financed projects and projects financed from other sources. Clearly, this is an area in which all the financieras need to improve their work. 5.10 Colombiana hias made substantial efforts to improve its follow-up work. It has the largest loan portfolio of all the financieras, but also by far the largest professional staff to cope with appraisal and follow-up activities. Colombiana concentrates its follow-up work on firms in which it has a sigllificant exposure, on problem cases and on firms in the construc- tion stage. Follow-up reports for these special cases often analyze prob- lems and thieir possible solutions in great depth. - 14 - 5.11 Staff shortages limit Nacional's follow-up even more seriously than its appraisal work. The number of visits is comparatively small, and as in the case of appraisal work, follow-up rests primarily on continuing close, but often informal relationship with clients. Moreover, through the presence of the major regional banks on its board, Nacional can close the information gap regarding the current financial condition and prospects of its clients. Ilowever, this can not be relied on as Nacional grows and its operations become more complex, and a system of follow-up and prompt reporting wants urgently to be established. 5.12 A substantial improvement of Nacional's appraisal and follow-up work can be expected only after its professional staff is increased. i)uriiw nlegotiations, Nacioli sald tLiis matlutter would b1 gJvnl uirgtnt. aitLeultionl. 5.13 D)ue to staff limitations, Valle concentrates its efforts on appraisal work and the quality of its follow-up supervision is therefore less impressive. Valle regularly receives financial statements from all customers, but this information is not always analyzed, reflecting a ten- dency of Valle's management to rely to a considerable extent on first-hand information obtained through direct contact with its clients' senior manage- ment. Recently, showing the financiera's awareness of the need to improve its follow-up work, Valle began to set up a more efficient supervision system, the full implementation of which can be expected after the planned increase of the financiera's professional staff in the first half of 1971 (see paragraph 6.25). 5.14 Caldas has improved its follow-up activities. It now seeks regular financial information from its customers. The number of plant visits has increased considerably, after introduction of a system for follow-up visits which, however, has not always been adhered to. Visits are still made pri- marily to deal with problems, and are not geared to anticipating problems. Reports are often short and lacking in depth. It can be expected that the financiera's present difficulties will lead to a further concentration on, and improvement of, its follow-up activities. 5.15 Norte's follow-up work is quite good. The staff pays regular visits to customers and produces, in most cases, extensive follow-up reports of good quality. Norte closely checks the regular receipt of financial information, which is also thoroughly analyzed. Whenever visits and analyses show that a company is experiencing even minor difficulties, the financiera's findings and recommendations are discussed in detail with the client; thus, potential crisis situations are detected fairly early. Lending Activities 5.16 Loan approvals by the financieras soared from Col$ 771 million in 1968 to Col$ 1,048 million in 1969, an increase of 36%. The level of approvals - 15 - in 1970 Col$ 1,072 million was about equal to 1969. However, there have been marked differences in the development of lending by the individual financieras. 5.17 Development of Lending Operations by Financiera. Colombiana approved loans of Col$ 356 million in 1969, an increase of 72% over 1968. During 1970, the financiera about maintained the 1969 level of approvals. The number of loans approved has actually decreased somewhat; but the aver- age size of a loan has increased fast. Loans approved averaged Col$ 1.1 million in size in 1968, and soared to Col$ 2.5 million in 1969 and Col$ 3.0 million in 1970. Colombiana is leading by far in the average size of loans approved. About three-fourths of its loans continue to go to chemical, textile and food/beverage/tobacco firms and to manufacturers of metal products. Increasingly, Colombiana has been lending as follows: (1) to firms in its home province of Cundinamarca; (2) for working capital purposes; (3) to existing firms (see Annex 4). However, Colombiana's loan portfolio is still the most geographically widespread of the financieras and it is trying for business in other Departments even more aggressively than before (see paragraph 6.02). 5.18 Mainly as a result of concentrating on lending with terms over 2 years, Nacional's loan approvals fell from Col$ 204 million in 1968 to Col$ 195 million in 1969 and to Col$ 190 million in 1970. The average size of loans approved increased slightly from Col$ 716,000 in 1968 to Col$ 752,000 in 1969; this trend has continued in 1970. Nacional's lending operations continue to be concentrated in the Antioquia area, with an emphasis on tex- tile firms and a preference for existing rather than new companies. Almost all of Nacional's loans are for two years and more, and nearly half continue to be for working capital (see Annex 14). 5.19 Valle's lending operations have expanded rapidly. Loan approvals in 19I70 amounting to Col$ 254.5 million were 38% over the Col$ 184.6 million in 1969, which was up 10% over the 1968 approvals. The average size of loan approved rose from Col$ 526,000 in 1968, to Col$ 592,000 in the follow- ing year and Col$ 695,000 in 1970. Valle's lending activities are almost entirely limited to existing enterprises in the Cauca Valley. Although a considerable portion of its lending activity continues to be heavily concen- trated in the textile and food/beverage/tobacco sectors, loans to manufac- turers of metal products increased substantially in 1969 and 1970. Working capital lending operations continue to form a sizeable portion of Valle's portfolio; during the last two years 61% of loans were granted for this purpose. Loans with a maturity of less than two years still form a substan- tial portion of Valle's lending (see Annex 24). 5.20 After a peak in 1968, Caldas' loan approvals slowed down in 1969 to about the 1967 level. They amnounted to Col$ 95.1 million in 1969 and Col$ 97.5 million in 1970 compared with Col$ 124.1 million in 1968 and Col$ 92.5 milllon In 1967. Ilowever, Caldas has been steadily increasing the terns of its loans, 61% of which in 1970 were for two years or more (56% in 1969 and 46% in 1968). The average loan approved increased from - 16 - Cal$ 465,000 in 1968 to Col$ 602,000 in 1969 and to Col$ 793,000 in 1970. Caldas' financing of workIng capital still exceeds its lending for fixed assets. As in the past, about two-tlhirds of its lending goes to textile and clemical firmrs and to manufacturers of metal products, and more than three-quarters to enterprises located in Caldas (see Annex 34). 5.21 During 1970, Norte's loan approvals totalled Col$ 189.5 million. However, the level of approvals was considerably higher in 1969, Col$ 217.4. The average loan approved was Col$ 0.8 million in 1968 and rose to more than double this sum in 1969 and 1970; this average is second only to that of Colombiana. The composition of Norte's lending is similar to that of the other financieras. In 1969, 57% of tlhe loans approved were for enterprises in the textile, food/beverage/tobacco, metal manufacturing and clemical sectors. The financing of two large pulp and paper projects in 1970 resulted in a commitment to this sector of one-fifth of all loans granted in 1970. Although 47% of loans in 1969 and 27% in 1970 were for working capital pur- poses, over 60% of all loans made 1969 and 1970 had maturities of two years or more. Tllis trend is more or less in line with past operations. Almost a half of Norte's loans were granted to firms in Atlantico and Bolivar, which is less than in previous years. A considerable portion of loans made outside the Atlantic coast region involves large projects in which Norte has participated with other financieras (see Annex 44). 5.22 Geographic Distribution. The five financieras as a whole have been criticized for concentrating their lending operations too heavily in their own Departments and for not responding adequately to the needs in other regions. Between January 1, 1968, and June 30, 1970, 84.9% of the financieras' loans were for enterprises located in their "home" provinces: Antioquia (Nacional), Atlantico (Norte), Caldas (Caldas), Cundinamarca (Colombiana) and Valle (Valle). (See Annex 51.) Hlowever, thiese provinces (with the exception of Caldas) are also Colombia's main industrial regions and accounted for 83.2% of total employment in manufacturing, 80.3% of total value added by manufacturing and 53.9% of total population. Within the above period, the geographiical concentration of the financieras' lending has beeni roughly in line with the regional distribution of enployment and value added in manufacturing, in most provinces. By comparison, lending for industry by the commercial banking system has been much more hteavily concentrated in Cundlinamarca (Bogota) whichi is clearly favored even over the other relatively industrialized departments. 5.23 It is notable that the concentration of the financieras in their "home" departments has grown recently. Lending in these five regions went up from 77.8% before 1967 to 84.9% since then. This development is, in part, due to scarcity of resources. Local borrowers are clearly in a better position to answer questions and puslh their projects than those some distance awav. It is encoturaging, however, that the financieras are alive to the m, il to ii ntiace nat ioi-wlIle Colombia's industrv and Colomibiana is taking I ioat 1t- I II ft; Idt ii u lg oper;3t I ons (see paragraplh 6.0 2) '?.24 ,iSector iistribu1tion. In tlhe 1967 - 1969 period, producers of intermediate goods received slighltly over 50% of loans, non-durable consumer - 17 - goods industry about one-third, durable consumer goods 6% and capital goods industry 2% of total lending (see Annex 52). In 1970, a marked swing away from financing of non-durable consumer goods industry to the other sectors occurred, but it is still too early to conclude whether this is permanent shift. In the absence of information on a sector distribution of fixed investment, a comparison of other indicators of industrialization (such as v:alue added, gross value of production, and employment in manufacturing) with disbursements of the financieras is of interest. It shows that, over the past 3-1/2 years, the financieras have preferred intermediate goods and, in particular, the textile industry, against financing non-durable consumer goods industries. Overall, the industrial sector distribution of the financieras' loans reflects to a large extent the existing distribution of industrial activity in Colombia. Equity Investments and Promotion of Projects 5.25 The five financieras have made substantial equity investments in the past. As of December 31, 1970, these investments in private enter- prises totalled Col$ 460.2 million, or 61% of the financieras' combined networth totalling Col$ 754.6 million. In comparison with IFI and the commercial banks, the financieras remain by far the most important insti- tutional source of equity finance for private industry. As of December 31, 1970, IFI's equity investment portfolio amounted to Col$ 969.4 million, of which Col$ 710.0 million was invested in one publicly owned enterprise, Planta de Soda. Commercial banks have practically no industrial enterprises in their investment portfolios and their main contribution to equity finance of industry is made by being important shareholders in the private finan- cieras. 5.26 The relation of the financieras' equity portfolio to their total equity and term loan portfolio shows considerable differences. At the end of 1970, it reached 38.4% in the case of Caldas, followed by Colom- biana's 22.2%, Nacional's 15.5%, and finally Norte's with 9.3% and Valle's 7.3%. However, these percentages are only a limited indicator of the pro- motional efforts of each financiera. Only a small portion of the equity investments of some of thie financieras are in enterprises which they have promoted. Overall, the major part of their investment portfolios, with the exception of Caldas, consists of share subscriptions in already existing enterprises. 5.27 Caldas was establislhed in order to support and stimulate the economic diversification of a predominantly coffee-growing region. Its impact on the development of regional indu!stry has been considerable. In pursuit of its developmental role, Caldas' operations have been largely promotional and regionally oriented, witth the bulk of its financial assistance being confined to companies located in thie Manizales area. Sucii concentration of investment activity in all area lacking industrial tradition has made Caldas' task singularly difficult. In addition to this unfavorable environment, Caldas' project analysis was sometimes insufficient, and its - 18 - investment judgement faulty. As a result, Caldas had to assume controlling interest in several new or reorganized companies and to provide financial, managerial and technical assistance far exceeding its ability to do so. 5.28 Up to 1966, Colombiana was very promotion-minded. Circumstances led it to follow, thereafter, a more cautious policy of consolidation; and it has provided, to a considerable degree, financial and technical assistance to companies experiencing difficulties in which it already had a considerable exposure. The recent increase in Colombiana's equity portfolio is accounted for mainly by investments in already existing companies. 5.29 Nacional, Valle and Norte have not been particularly active in promoting projects. They have generally linmited themselves to investing in existing enterprises and to participating in projects promoted by other financieras. Economic Impact of Lending and Investment Activities 5.30 Protection Enjoyed by the Financieras' Clients. Colombian manu- facturers are protected by a combination of ad valorem tariffs, a system of quantitative import restrictions embodied in an import licensing system and a system of prior deposits. Since these elements make it difficult to calculate levels of effective protection for the various industrial sub- sectors to which the financieras lend, an indication of their clients' pro- tection is given by the nominal tariff rates. A rough analysis of the financieras' lending shows that in the 3-1/2 years from January 1, 1967 to June 30, 1970, 32% of their total disbursements were made to enterprises in the up-to-50% tariff bracket (basis 1970), 58% to industries in the 51-100% range, and 10% to industries protected by nominal tariff rates over 100%. Over this period, a slight tendency has developed to finance sectors with lower nominal tariff rates. The table below also shows that the disbursements of Norte, Valle and Colombiana, are more or less in line with the above totals, whereas Caldas' lending operations have been more concentrated in the lower tariff bracket and Nacional's in the medium range. Hlowever, this is obviously due to the different industrial patterns of their clients, rather than to their lending policies. Disbursements to Clients in Various Tariff Brackets, January 1, 1967 - June 30, 1970 (in percentages) Average nominal tariff (%) Colombiana Nacional Valle Caldas Norte Total 0 50 38 23 29 42 29 32 51 - 100 54 68 59 44 61 58 over 100 8 9 12 14 10 10 100 100 100 10(0 100 10 - 19 - 5.31 The tariff level is only a limited indicator of the cost and price level of industrial sectors, and, although tariff protection for Colombian industries is relatively high, many sectors are efficient and are not high cost producers. However, to avoid investing in less effi- cient industries whose efficiency may be concealed by excessive protection, it is important that the financieras focus witht increasing sharpness on economic criteria in making their investment decisions. At present, invest- ment decisions of financieras are mainly based on analysis of financial, marketing, technical and management aspect:s. 5.32 Financing of Export-Oriented and Tourism Projects. Colombia's vigorous efforts to increase non-traditional exports have recently been successful, with minor exports in 1969 growing by 22% over their 1968 level. Reported total exports of all the financieras' clients grew 53% from US$53.4 million in 1968 to US$81.7 million in 1969, at a rate much faster than Colombia's minor exports, and represented 35.8% of Colombia's minor exports in 1968/1969 and 11.5% of the couintry's total exports during this period. 5.33 Tourism has only recently been given attention in Colombia. The country has considerable potential for international tourism development. Financing tourism does not yet form an important part of the financierasW operations, since it was only in 1968 that a law was passed authorizing the financieras to finance projects in this field. One particular project is worth mentioning as an indication of future possibilities: Compania de Desarrollo de lioteles de Turismo (Hioturismo), in which all financieras are engaged, except Caldas, and in which IFC is also a shareholder. Iloturismo's goal is to set up major hotels in Medellin, Cali, Santa Marta, Cartagena, San Andres and Bogota. With the financieras' participation, it has promoted the new Intercontinental in Medellin and one which is being built in Cali. 5.34 Foreign Exchange Earnings and Savings. Although the financieras have not pushed exports strongly, they have nevertheless made some contrib- ution to improving the country's balance of payments by financing customers who realized foreign exchange earnings and savings. Estimated net foreign exchange earnings 1/ through exports by enterprises financed by the finan- cieras amounted to US$47.8 million in 1968 and reached US$74.0 million in the following year. 1/ i.atimaten of imported Inputs are based on Information provided by the financieras, on analyses of thcelr customers' profit and loss statements, and on percentages of imported input in industrial production publist)ed in Statistics Department (DANE), Monthly Statistics Bulletin, March 1970. - 20 - 5.35 The financieras' clients sell their products mainly in the domestic market. These products have undoubtedly substituted for a fair amount of imports. Import substitution of a sample of projects mainly carried out for this purpose, reached US$23.8 million in 1968 and US$28.8 million in 1969 and net foreign exchange savings amounted to US$16.4 mil- lion and US$18.0 million respectively. The total import substitution by all their clients is probably substantially higher since industry's total hypothetical foreign exchange savings were US$179.2 million for 1967. 1/ 5.36 Additional Employment. 10-15% open urban unemployment and another 10% technically unemployed make unemployment one of the most serious chal- lenges which Colombia faces today. The new government has stated its deter- mination to encourage public and private investment that will contribute to an overall solution of the unemployment problem. In appraising projects, the financieras are also becoming increasingly concerned with the employ- ment effect of their financing. For example, in the case of some IFF-financed loans, the capital investment per worker must not exceed Col$ 100,000 and the financieras have to report on the effective creation of employment. 5.37 Over the past years, projects that the financieras have partly or fully financed, have created a substantial number 2/ of jobs which rose from 6,127 in 1966, to 6,356 in 1967, 8,288 in 1968 and 8,977 in 1969. During this period, Colombia's total industrial labor force remained at about 300,000. Performance of Loan and Equity Portfolio 5.38 The quality of financieras' loan and equity portfolios provides an- otlier indication of the effectiveness of their resource allocation. This aspect will be dealt with in detail for each company in the following section. With the exception of Caldas, the financieras' portfolios generally contain sound companies and relatively few of their customers experience repayment difficulties. VI. THE FIVE FINANCIERAS 6.01 The following paragraphs indicate important developments in the financieras in the past two years, and provide an assessment of their pre- sent situations. 1/ IBRD Report W11-200a, November 1970. "Economic Growth of Colombia: Problems and Prospects", Vol. IV: Industry: Manufacturing and Mining. 2/ The figures are estimates since, in most cases, job creation was assumed as stated in project appraisal and for the year of the project approval. Double counts for joint projects could not be eliminated from available data. - 21 - Colombiana 6.02 The Institution. Colombiana's Board has been increased by one seat to include a representative for European shareholders (see Annexes 1 and 2). Only one major managerial change has occurred since the end of 1968. This involved the elimination of the office of Executive Vice Pres- ident. The company's three Vice-Presidents now report directly to the President, Mr. Ignacio Copete. Colombiana's organization has been expanded with the establishment of three regional representatives and of one European representative, in an effort to broaden its activities outside the Bogota area. Colombiana's professional staff remains large in comparison with other financieras. 6.03 Lending Operations. The quality of Colombiana's loan portfolio (Col$ 633.7 million as of December 31, 1970) has improved. With one except- ion (see paragraph 6.06), Colombiana's total exposure in any one client does not exceed 15% of its own equity. Tle total outstanding loan principal of clients in arrears slhows a sharp decline from the situation in August 1968, when they involved an amount of Col$ 229 million. The comparable figure on December 31, 1970 was Col$ 11 million. Some of this reduction was brought about by rescheduling a number of loans to firms in which Colom- biana had large exposures. As of December 31, 1970 arrears for more than 3 months amounted to Col$ 2.6 million out of a total principal outstanding to these clients of Col$ 10.6 million. Write-offs in 1969 on defaulted loans amounted to Col$ 3.7 million for three cases and to Col$ 0.3 million in 1970 for one company. 6.04 Equity Investments. The total balance sheet value at December 31, 1970 (see Annexes 3 and 5) of Colombiana's equity investment portfolio has shown a 19% increase since the end of 1969. 6.05 Investments in firms under construction or with profitable opera- tions total Col$ 111.6 million. Investmer-ts in three firms (Tolcemento, Forjas, El Labrador) with operating difficulties amount to Col$ 70.3 wil- lioii antd the total exposure in these compaknies to Col$ 232.3 million. 6.06 A continuing matter of concern is Colombiana's substantial expo- sure (69.9% of its own net worth) in Tolce!mento. Its profits have not been sufficient to repay debt maturities. Tolcemento expects to break even in 1971. Profit margins will, however, be small for a number of years there- after. 6.07 Serious problems still exist for ForJas. Substantial funds will be needed to keep it operating. While it is recognized by all concerned that Forjas could contribute significantly to the country's economy, there are problems of developing an appropriate market both within Colombia and outside. Colombiana also considers the survival of the enterprise of great importance to Colombia's economy and is preepared to make a limited increase of its exposure in Forjas, subject to adequiiate Government support and a workable proposal for a long-range solution of Forjas' problems. There - 22 - have been encouraging efforts by the various shareholders to develop a workable proposal for a long-range solution. At the mloment, hiowever, Forjas continues to operate at reduced capacity at a loss and additional investment could hardly be justified. IFC is also a shareholder in this company. 6.08 El Labrador is an agricultural enterprise which is now shedding its unprofitable production lines at a loss; Colonmbiana's loss is expected to amount to Col$ 4.0 million. El Labrador's prospects appear more promis- ing after this transaction, and it has recently slhowed some operatiLng profit. 6.09 Equity investments written-off in 1969 amounted to Col$ 2.3 mil- lion for three cases; no write-off was made in 1970. 6.10 Total reserves and unallocated earnings amounted to Col$ 103.3 million (Col$ 86.8 million after dividends) at December 31, 1970 (see Annex 5). Colombiana has an exposure in firms with unresolved operating problems of Col$ 232.3 million and a total portfolio of Col$ 1,029.0 mil- lioni. Present reserves miglit be large enough to provide protection from the risk inherent in these very large exposures; the reserves, however, hlave been kept at the same percentage of thie portfolio, and Lhe dividend payouL ratio has beten high in recent years. Colombiana's reserve policy was therefore reviewed and reconsidered during negotiations. It was agreed that Colombiana's Board of Directors, until otherwise agreed with the Bank, shall every year recommend to the shareholders to set aside 30% of the year's net profit to a reserve for portfolio protection plus such additional amounts that shall appear appropriate in the light of the current condition of the portfolio. The 30% allocation will not include any amounts set aside for other purposes. 6.11 Other Operations. Colombiana has not been active in underwriting, and guarantee operations have only increased from Col$ 86.8 million out- standing at December 31, 1969 to Col$ 97.7 million at December 31, 1970. 6.12 Colombiana has, with some success, issued bonds for working cap- ital financing. One of Colombia's most important insurance companies is a principal shareholder and is on Colombiana's Board; it has taken up most of the issues and has undoubtedly been instrumental in the success of this operation. In 1970, Colombiana carried out bond issues of Col$ 80 mil- lion. 6.13 Financial Results. Colombiana's recent operating results (see Annex 6) have been satisfactory, with net income of Col$ 23.2 million in 1969 (up 30% over 1968) and Col$ 27.8 million in 1970. Return on assets, paid-in capital, equity, and capital employed have shown an increasing trend. Administrative costs, in proportion to average total assets, con- tinue to be high (1.5%) compared with other development finance companies of the same size and age. - 23 - 6.14 Colombiana's payout on 1968 net profits was 57.2% (equal to an 8% dividend), and in March 1970, the stockholders voted to distribute 56.7% of 1969 net profits, equal to a 10% dividend. 6.15 Colombiana's shares are not listed on any stock exchange. Since the end of 1968, about 1,000,000 shares have changed hands in private transactions, mostly at par. The book value of the shares is 175% of par. Nacional 6.16 The Institution. No significant organizational changes have occurred recently (see Annexes 11 and 12). For a company the size of Nacional, it lacks depth of management. The Technical Vice-Presidency remains vacant. Although the growth of Nacional's operations has been considerable in recent years, the number of professional staff has remained the same, with the result that both appraisal and follow-up of Nacional's projects suffer. (See paragraphs 5.06 and 5.11.) 6.17 Lending Operations. Nacional has a sound loan portfolio (Col$ 633.7 million as of December 31, 1970). Loans in arrears more than 3 months are nominal; however, 4 loans totalling only Col$ 2.7 million have been rescheduled and no losses are expected. Loan portfolio write-offs in 1969 and 1970 were nominal. 6.18 Equity Investments. Equity participation in industrial companies has not been an important part of Nacional's activities. The net increase in total equity portfolio was only 7% in 1970, and chiefly involved firms whose shares were already held by Nacional. A single investment of Col$ 0.4 million was written off in 1970. The quality of Nacional's equity portfolio has improved (see Annex 13). Although Nacional's total exposure in any one company is less than 18% of its own net worth, it does have sizeable investments in five companies which have had operating problems in the past but, with the exception of Forjas, are out of the red. 6.19 Nacional is well secured, and reserves and retained earnings of Col$ 56.3 million (see Annex 15) would be more than sufficient to cover anticipated portfolio losses. 6.20 Othier Operations. Nacional lhas not acted as underwriter for securities issues. However, it did assist in marketing one share issue on a "best efforts" basis; it was able to place 50% of the shares with other inivestors. 6.21 Financial Results. Although Nacional receives most of its income from its lending operations, it receives a greater return on its equity portfolio than does any of the other financieras. Equity invest- ments, which made up 20% of total loan-equity portfolio in 1969, produced 12% of Nacional's gross income (including dividends and capital gains). In 1970 equity investments decreased to 16% of total portfolio but provided 13% of gross income. - 24 - 6.22 Nacional continues to be thie most profitable of the financieras (see Annex 16), both in absolute terms (a net profit of Co.l$ 23.6 million in 1969 and Col$ 30.4 nmillion in 1970), and as return on capital employed (12% in 1969 and 13% in 1970). Its administrative costs, 1.1% of average total assets for both periods, were also relatively the lowest. 6.23 Nacional declared a 17.6% dividend on 1970 earnings, which re- quired a payout of 67% of net profit. A 14.4% dividend, paid on 1969 earn- ings, involved a 55% payout. 6.24 The shares of Nacional are listed on botlh the Bogota and Medellin stock exchanges. Since the beginning of 1969, 758,000 slhares have been traded. Until August 1969 the selling price varied between Colt 9.90 and Col$ 10.50 per share, on a par value of Col$ 10 per share. Since that time almost all trades have been made at Col$ 13 per share. Since the end of 1968 Nacional has issued over 1,000,000 shares of Col$ 10 per share. Nacional has, with only limited success, tried to market 1,054,000 new shares at a price of Col$ 16 per share, to investors who are looking for tax-free investments from the Reserva de Fomento Economico. Valle 6.25 The Institution. IFC purchased an 8% interest in Valle in 1969, and Valle's Board was enlarged by one seat to include IFC's representative (see Annexes 21 and 22). Valle's Executive Vice-President resigned in the same year, and at that time a decision was made to eliminate this position. As a result, Valle's two Vice-Presidents now report directly to the President, Mr. Benjamin Martinez Moriones. Valle's professional staff of 19 has been hard pressed to handle the company's rapidly increas- ing volume of operations, and plans have been made to hiire additional professional staff whien the financiera moves to more spacious offices in 1971. 6.26 Lending Operations. Valle's loan portfolio (Col$ 441.9 million at December 31, 1970) is basically sound. As of December 31, 1970 total loans in arrears more than 12 months amounted to Col$ 4.2 million, all granted to Sucroquimica Colombiana (in which Valle holds shares of Col$ 3.5 million). A further Col$ 0.3 million was owed to Valle by several firms in arrears more than three months. As a result the total principal outstanding of all clients in arrears over 3 months was Col$ 7.4 million. The total amount at risk in these enterprises was Col$ 10.9 million. 6.2i Equity Investments. The net value of Valle's equity portfolio has not increased in 1970 (see Annex 23). It amounts to only 22% of its own net worth, and less than 7% of its total loan/equity portfolio. Valle hlas had considerable success in selling one of the items in its portfolio at a profit; 186,000 shares of Siderurgica del Pacifico have been sold at Col$ 17-18 per share (purchased at Col$ 15 per share), and at the same time Valle has acquired 7,000 additional shares at the par value of Col$ 10. - 25 - 6.28 Three companies in which Valle holds equity totalling Col$ 3.8 million are in liquidation. The balance of Valle's portfolio is basicallv sound, and, with the exception of Sucroqutimica, its exposure In firms wlhlch are experiencing operating difficulties is small. Vnlle's portfolto hI diversified, and only in the case of one company does Itst totel expo,11:1#' of loans equity and guarantees slightly exceed 10% of Its owoi eqttity. PorL- folio losses should be limited to the Col$ 3.8 million invested in the three firms in liquidation mentioned above. Valle's reserves and retained earnings of Col$ 35.4 million are adequate to cover loan and equity portfolio losses. 6.29 Other Operations. Valle has not undertaken any underwriting operations. Since the end of 1968, Valle has issued US$ guarantees to four companies totalling the equivalent of Col$ 7.1 million. 6.30 Financial Results. Net profit (see Annex 26) in 1969 was Col$ 14.3 million, up 52% from 1968, and was Col$ 22.5 million in 1970, up 57% over 1969. Assets and equity have increased considerably since the end of 1969 (see Annex 25), and at the same time the company has maintained its satisfactory rate of return on assets, capital employed and equity. Non-financial costs grew at a slower rate, and administrative costs as a percentage of average total assets declined from 1.9% of average total assets in 1968 to 1.6% in 1969 and 1970. 6.31 Valle declared a 12% cash dividend on 1970 earnings, equivalent to 53% of net profits. During 1969, Col$ 4.3 million of total Col$ 4.5 million dividends were taken in stock. In addition, new shares totalling Col$ 22.2 million were issued and subscriLbed at par, of which IFC subscribed Col$ 7.5 million. Valle's subscribed share capital increased 48% in 1969 over the previous year's and in 1970 its paid-in share capital increased 21% to Col$ 98.2 million. Valle's shares are not listed on any stock ex- change. Private trades have been made at Col$ 12 per share. Caldas 6.32 The Institution. Some time af;ter the last Bank loan was made in mid-1969, the situation of Caldas began to deteriorate. The main symptons were portfolio losses and a critical illiquidity. Several of Caldas' senior staff resigned; and, in response to a growing lack of confidence on the part of the Board, the President, Mr. Roberto Ocampo Mejia, resigned in October 1970. A new President, Mr. Eduardo Arango Restrepo, took office on November 2, 1970. 6.33 Operations and financial results. As of December 31, 1970, almost a third of Caldas' loan portfolio (Col$ 228.9 million) consisted of loans granted to clients in arrears and to clients with loans rescheduled. Much of these appear to be doubtful debts since in many cases collateral is in- sufficient or the loans are unsecured. 6.34 The situation of the equity portfolio was no better. Caldas in- creased its equity investments by 25% in 1970 (mainly to help enterprises in trouble), and its investments stood at Col$ 132.9 million at the end of the year (see Annex 33). This was Col$ 26.6 million in excess of its own net worth. Nine firms in which Caldas had equity investments of Col$ 15.8 - 26 - million (representing some 11% of equity portfolio) and loan/guarantees of Col$ 25.2 million, are in bankruptcy or liquidation. Thirty percent of Caldas' equity portfolio is invested in 15 firms which are operating at a loss. These investments amounted to Col$ 42.5 million and Caldas' total exposure was Col$ 109.8 million. Some 42% of the equity investments are in companies operating profitably and another 17% in preoperating stages. 6.35 Administrative expenses have been high, amounting to 27% of in- come in 1969. The company's accounts for 1969 showed a profit of Col$ 8.9 million. Caldas' auditors, Price Waterhouse & Co., were unable to issue an unqualified opinion on the accounts since loans to companies in liquida- tion (Col$ 9.6 million) had not been written off. Despite doubtful profit- ability, Caldas paid a dividend of 8% on 1969 earnings, 7% in shares and 1% in cash or shares. 6.36 Reconstruction of Caldas. The new President is a capable person with both industrial and international experience. He has shown consid- erable vigor and initiative in rapidly tackling Caldas' critical problems. Among others, he appointed Mr. Hernan Jaramillo, former Minister of Finance and a respected consultant, to help him with reorganizing the company. Caldas and its two main shareholders requested the help of the Bank in October 1970 to investigate Caldas' problems. In response, and in agree- ment with BR, the Bank appointed Mr. Justo Garcia Rayneri, formerly of the Bank Group staff, to conduct an investigation. A special audit of the Company was also undertaken by Price Waterhouse. Mr. Garcia worked closely with Mr. Arango, Mr. Jaramillo, and with officials of BR. 6.37 As a result, important actions and decisions have been taken or are in process, to restore Caldas' health. These include the following: a. Caldas has succeeded in selling some notes and bonds and obtain- ing some deposits with the assistance of its main Colombian shareholders. This has helped stave-off the liquidity crisis. Realistic cash flows are to be made periodically and closely reviewed. b. BR has granted Caldas a five-year loan of US$ 4.0 million with one year grace, at 4% out of coffee compensation balances, which Caldas has arranged to convert into cash at a 13.5% discount. BR will carry the exchange risk for a fee of not more than 9%. c. In order to bring its equity investments within the total of its own equity and to raise new cash, the company has begun to take action on a program to sell some of its equity investments. d. Caldas' two main Colombian shareholders, Federacion Nacional de Cafeteros and Banco Cafetero (see Annex 31) have stated their intentions to subscribe about Col$ 10 million each to Caldas' share capital. e. Administrative expenses have already been reduced significantly, the Bogota office was closed down, new promotions are suspended, and the Shareholder's meeting in February decided to declare no dividends for 1970. f. Caldas has systematically reviewed its portfolio and, based on the new audit, intends to make appropriate write-offs and pro- visions in its accounts for 1970. - 27 - g. To increase the effectiveness of the Board, its number has been reduced from 11 to 7 Principals (see Annex 32) and some changes in membership have been made. Mr. Jaramillo wtll contitite to be the advisor to Caldas' Board and management. The administration will be further strengthened, procedures streamlined and internal consultation improved. 6.38 Participation in Bank loan. Although Caldas' situation looked critical at the end of 1970, the actions mentioned above have set the com- pany on the way to recovery. The Bank's continued support will be crucial to that recovery. However, at the present: time it cannot yet be considered in a condition which would justify its beiLng given access to a new Bank loan. Therefore, its situation should be reviewed by a Bank mission, not earlier than July 1, in order to determine whether the actions agreed have been taken and whether its situation has :Lmproved to a point at which it can receive Bank funds. More specifically, before allowing Caldas to use the loan, it should have been determined Ito the Bank's satisfaction that: a. the liquidity of the financiera has been restored and realistic projections of the Company's business over the next five years show satisfactory cash flows; b. fresh injections of equity have been provided or have been irre- vocably committed to Caldas in adequate amounts; C. the administrative organization, the internal control of invest- ments and the financial condition have been improved; d. Caldas has acted on such recommendations as might emerge from the special review. Norte 6.39 The Institution. In 1969 IFC purchased an interest in Norte (see Annex 41) and is the largest individual shareholder (16.2% of total shares). Norte's Board was enlarged by one seat to include IFC (see Annex 42). 6.40 Lending Operations. The loan portfolio (Col$ 215.8 million at December 31, 1970) is sound. Loans in arrears more than six months amount to Col$ 5.8 million; total principal outstanding of those clients was Col$ 6.8 million. 6.41 Equity Investments. During 1969, Norte earned a capital gain of Col$ 1.1 million on the liquidation of one of its investments which cost Col$ 3.8 million. The equity portfolio has increased only 9% from the end of 1969 to December 31, 1970 (see Annex 43) and the total of Norte's equity portfolio is only 29% of its own net worth. 6.42 Norte's equity portfolio is soiund overall, and two-thirds of its investments are in companies which are olperating profitably. The largest single total exposure as of December 31, 1970 was Col$ 12.7 million or 20% of Norte's own net worth. 6.43 Retained earnings and reserves of Col$ 18.5 million (see Annex 45) are sufficient to cover anticipated portfolio losses and doubtful loans. - 28 - 6(.44 Otlher Operations. Nortc has not engaged in und]erwriting or othter activities in the capital market, and recent g,uarantee operations hiave been nominal. 6. 4') Financial Results. Norte's net income in 1970 was 34, over the previous years, rising from Col$ 6.1 million to Col$ 3.2 million (see Annex 46). Return on assets, equity and paid-in capital have fluctuate(d recently but are satisfactory. Administrative costs as a percentage of average total assets were 2.3%o at the end of 1970. 6. 4*t) A 12% dividenid (leclared for 1970 was equal to 68% payout of that years earnings. Norte's shares are not listed on any stock exchange. Since the end of 1968, around 250,000 shares have changed lhands in private trans- actions (106,000 in an inter-company transaction), and almost 1.8 million new shares have been issued, of which IFC purclhased 750,000. The book value as of December 31, 1970 of the shares is 140% of par. VII. PROSPECTS FOR THE FIVE FINANCIERAS Economic Outlook 7.01 The Government has attempted to create a broader-based growth by promoting non-traditional exports. It has helped to make Colombian exports more competitive by granting tax incentives to exporters and matching de- valuations of the Col$ with inflationary price advances. At the same time, the Government has tried to stimulate public investment through increases in public sector savings and income. These policies are being effective. The sharp rise in public investment reflects Colombia's increased capacity to undertake development projects, and has resulted in an increase in fixed capital investment, to levels (18% in 1968 and 19% in 1969) higlher than the recent historical average (16.1% for 1963-67). Also, an expansion of non- traditional exports and a rise in world coffee prices in 1969 have resulted in a reduction in the overall foreign exchange constraint to growth. Con- sequently, a basis has been laid for a continuation of a high rate of growth, at least during the next several years. 7.02 Political uncertainty, hiowever, clouds the economic picture. A period of political unity and stability may be conming to an end, since the National Coalition of Conservative and Liberal Parties, which has ruled Colombia under a constitutional mandate since 1958, is in its last term of office. It is unlikely that there will be a joint Conservative-Liberal candidate in the 1974 election. 7.03 Within the incentives and constraints mentioned above, industry in Colombia should continue to grow. Changes in the market demand for manu- factures have tended to follow changes in GDP, and there are indications - 29 - that GDP can follow the present 7% growth rate. 1/ The sustained high growth rates of the past several years (see paragraph 2.01) have led to a rise in real income. The associated increase in consumer demand provided new investment opportunities and has led to pent-up demand for industrial financing, which, given additional resources, could lead to further expan- sion in industrial investment. Although the Government is easing some re- strictions on industry, sucli as prior deposits for imports, credit remains tight. In order to provide the financial assistance their clients require, the financieras must increase their investrent activity in both foreign and local currency resources. Their prospects for doing so are discussed below. Business Prospects 7.04 A nuimber of factors indicate that industry's deriand for funds in Colombia is high: a. Not only are the poorer credit risks willing to pay the high rates in the "curb market", but apparently also large finns with serious working capital shortages. b. Financial institutions are able without losing business to increase substantially the effective cost of their funds tihrough the use of comntissions, fees, compensating deposit balances and other mechianisms. c. Industrial companies which have access to the capital market for shares, have had to finance a greater proportion of their activities with equity rather than debt. As a result most of these companies have a debt-equity relationship of less than 1:1. 7.05 Nevertheless, forecasting the annual volume of the financieras' operations on the basis of demand for funds is difficult. The financieras have gone to considerable effort to establish a pipeline of projects re- quiring foreign exchange financing, since they know that a careful justi- fication for requests for Bank financing must be provided. 1However, since they have not had the samne incentive in regard to thieir local currency needs, they liave tended to neglect this aspect in their projections. T'ie desirability of operations forecasting as an instrumenit of benefit to them- selves has been impressed on the financieras. 1/ IBRD Report WlI-200a, November 1970. "Economic Growth of Colombia: Problems and Prospects", Vol. I: The Overall View. - 30 - 7.06 As a result, a reasonably good estimate can be made only of the foreign exchange needs of the financieras. The financieras requirements will be dealt with separately: on the basis of a well-defined pipeline in the case of foreign exchange needs and, in the case of local currency requirements, on the basis of expected development of overall demand in the industrial sector. 7.07 Demand for Forein Exchan_Resources. Projects under study bv the financieras on October 31, 1970 required foreign exchange financing of US$38.8 million, of which projects requiring US$19.0 million were re- ceived during the six-month period ending October 30. This flow may have been stimulatecd in part by the coffee boom, partly by the recent change of government and partly by the knowledge that a new loan from the World Bank was pending; and there is reason to believe that the flow of new projects may slow down, as reflected in the financieras' forecasts. The financieras expect to receive further applications of US$30 million, in time to be submitted to the Bank before the end of 1972, the proposed terminal date of project submdssion. The total US$68.8 million of expected applications is subject to a considerable uncertainty as to what projects will be judged sound and bankable. On the assumption that 75% of applica- tions are approved, and, in addition, that 90% of this amount is eventually committed, actual demand for the financing of fixed assets could amount to about US$45 million for commitment up to the end of 1972. 7.08 Availability of Foreign Exchange Resources. Virtually no funds are now available to the financieras under existing World Bank loans. In fact, by May 1970 (except for a portion of Norte's tranche of US$1.5 mil- lion), BR had received more than enough projects to use tup the full amount of Loan 625-CO. This accounts for the relatively large size of the present backlog of projects. Like other financial institutions in Colombia, the financieras have access on a first-come-first-served basis, through BR, to funds provided by IDB, AID and Kfll; but, except for the most recent AID loan, these loans have been fully utilized. At the encd of October 1970, US$6 million was available under the AID loan; however, this is of limited utility since the loan is tied to US exports. Thus, a foreign e-ichange gap of about US$40 million seems evident and a Bank loan for this amount is reasonable. 7.09 Demand for Local Currency_Resources. As mentioned above, the financieras did not provide an estimate of the demand of their clients for local currency financing. They projected use of local currency re- sources on the basis of the expected availability of resources rather than of the demand for funds. For industry as a whole, however, the present high level of demand (particularly for working capital) is expected to continue, and the financieras have had to consider how to meet this situa- tion by increasing their resources. 7.10 Availability of Local Currency Resources. Most of the finan- cieras' medium- and long-term resources are obtained from their own funds or from BR. Since BR finances particular kinds of local costs through special funds set up for that purpose, the financieras must use their own - 31 - funds for most of working capital loans. The financieras are precise about the earnings they visualize anad the share capital that they expect to raise. However, as the availability cf resources from BR is more uncer- tain, the financieras have been conservative in their projected utilization of BR funds. 7.11 The result of projecting operations on the basis of a combination of demand for foreign exchange and of resource availability for local cur- rency is that the financieras have projected a considerable increase in the utilization of Bank funds over the next four years as a proportion of their total funds. This is likely to have an important effect on the kind of operations that the financieras will be able to finance; as the foreign exchange financing of projects increases, more and more of the financieras' scarce peso resources will probably be used for financing peso requirements of these same projects. Although the financieras usually provide rather little initial working capital financing for projects which receive financing from the World Bank, a considerable portion of their lend- ing is used for the continuing working capital needs of these projects once they are in operation. But, since the financieras do not expect to be able to raise any significant amount of funds through share capital increases or portfolio sales, the overall contribution of their own funds to resource requirements will be moderate. It is probable that the clients with projects financed partly with World Bank funds will be adequately financed but that at least some of their other customers will not be able to obtain the work- ing capital they need on a continuing basis. Unless the financieras take steps at this time to widen their resource base by acquiring additional local currency resources, their capacity to provide a range of financing to all their clients could be impaired. 7.12 In the absence of financing by the Government, the financieras would have to look to abroad, which woulcl be difficult, or attempt to raise funds directly from local investors. Raising local savings through the issuing of securities in "bearer" form would have several advantages. Aside from providing the financieras with the resources they need, it would help develop the capital market. The largest and oldest of the financieras may now be in a position to do something in this area, given proper support from the Government necessary to make securities issued by the financieras competitive with other negotiable instruments. The Government has already taken some action in this regard. Early in 1970, Colombian financieras were desig-nated as eligible to receive investments in their share capital of funds which are deductible from taxable income (see para- graph 2.12). This action has enabled two of the financieras (the only two who have attempted to do so) to sell their shares above par (see paragraplhs 6.24 and 6.31). 7.13 During negotiations the question of local resource requirements for industry and what measures might be appropriate to assure its avail- ability in adequate amounts (through the financieras or by other means) was discussed with the Colombian Government and the financieras. The Government representatives indicated that this question was under active consideration - 32 - in Colombia as part of a study of the interest rate structure and capital market, and they agreed that the matter would be reviewed again with the Bank when the study was completed. Operational and Financial Forecast 7.14 Projected Operations. On the basis of the demand and resource consideration discussed above, loan commitments for the five financieras are expected to amount to Col$ 1,598 million in 1971 and Col$ 1,780 million in 1972. 1/ The financieras anticipate that one-fourth of these commitments will require Bank financing. In 1970, Bank funds amounted to 16% of the total amount committed by the financieras. Some comments can be made re- garding possible slippage in forecasted growth trends. For example, Colombiana's growth rate is projected to slow down but may maintain itself at more than the projected 5.7% since Colombiana is making new efforts to expand its business in other regions. Nacional might be expected to slow down its growth rate to one more in line with its experience in 1965-69, but a growth rate of around 20% is justifiable given the expected continua- tion of the present expansion of industry in Medellin. The growth of in- dustry in the Cauca Valley has been second only to the metropolitan area of Bogota, and Valle should be able to sustain its originally projected growth rate if it obtains additional share capital. The growth of Caldas' and Norte's operations may be difficult to maintain at the projected rates over the entire period, since suitable projects in the respective regions are not so easily identifiable and gaps could occur in project submission. Actual and projected growth rates of the financieras' portfolios are as follows: Average Annual Growth Rates of Portfolio 1965-69 1969-70 1971-72 (actual) (actual) (projected) Colombiana 8.6% 17.2% 5.7% Nacional 14.1% 21.6% 23.1% Valle 73.7% 39.6% 40.8% Caldas 26.3% 16.7% 23.8% Norte 60.0% 25.8% 41.1% 1/ Annexes 7, 17, 27, 37, 47. - 33 - 7.15 Projected Financial Results. 'Te projected profit and loss statements 1/ and balance sheets 2/ of the financieras are derived from and are conditional upon achievement of the projected evolution of resource development 3/ and operational volume. 4/ Given such an evolution, Colombiana, Nacional, Valle and Norte expect a continuation of the rising trend in the profitability. As operations grow, so will costs, and the financieras have not projected any appreciable increase in return on total assets. Since thp four companies, in particular Norte and Valle, will be attempting to get more leverage on their capital by increasing their debt, return on capital and equity is expected to increase. As volume increases, adminis- trative expenses, which are more fixed than variable, will be reduced as a percentage of total assets. Colombiana is the only company which, accord- ing to its projections, will not be able to reduce the relationship of administrative expenses to total assets, mainly because cost savings in Bogota will be off-set by the cost of maintaining its new regional representative offices. All four companies intend to maintain a fairly high level of dividend payout. As already recommended, Colombiana should reduce its payout to conform with a more stringent policy of reserve allocation. For Caldas, return on operations, at least until 1972, is expected to be re(luced considerablv. Caldas should stop dividends for an indefinite period, and allocate all net profits to portfolio reserves. VIII. CONCLUSIONS AND RECOM1TENDATIONS Evaluation of the Financieras 8.01 The financieras are a diverse group of institutions which have developed in areas characterized by differences in natural resources and tradition. They have mobilized substantial financial and human resources, and invested them generally in an effective way; and they are thereby ful- fil]ing an important role in the economic development of Colombia. Their financial and promotional activities have contributedl significantly to a balanced growth of industry and have created additional employment and increased savings and earnings of foreign exchange. They have also con- tribtuted to improve the standards of project appraisal techniques in Colombia. 1/ Annexes 9, 19, 29, 39, 49. 2/ Annexes 8, 18, 28, 38, 48. 3/ Annexes 10, 20, 30, 40, 50. 4/ Annexes 7, 17, 27, 37, 47. - 34 - 8.02 The oldest of the financieras, Colombiana and Nacional, have recently completed their first decade of operation, and have achieved well-established positions in the financial coinunity. Valle is 8 years old, and is showing evidence of growth equal to the two larger companies. Norte is 6 years old and is still a relatively smriall company; some time and effort will be necessary to increase its scale of operations. Caldas is presently attempting to resolve serious operating and financial prob- lems. 8.03 Colombiana, Nacional, Valle and Norte are effectively organized and have well-established operating policies and procedures. All require improvement in the areas of project appraisal and follow-up. 8.04 These four financieras have also acquired a diversified port- folio composed chiefly of sound companies. Nacional's portfolio has the best overall quality. Colombiana has a considerable exposure in com- panies with operating difficulties, and needs to pay particular attention to increasing reserves. Valle and Norte have only minor portfolio problems. Wlhile continuing to grow, these financieras have established an increasing trend of profitability, and are sound financially. They hlave demonstrated their creditworthiness for a fourtlh Bank loan. 8.05 Caldas' situation while improving, is still uncertain. One impor- tant factor in producing this situation was no doubt Caldas' excessive pro- motional activity in an area where both industry andl industrial entrepre- neurship are conspicuously absent. Weakness of management and staff problems aggravated the underlying situation. Caldas' new President has taken steps to correct the financiera's organizational problems, to find the finance needed to meet its current obligations and to obtain new capital with which to buttress its poor investmrents. The Bank had a consultant report independ- ently on the situation (see paragraph 6.36). The new Bank loan would be made available to Caldas when the evidence is satisfactory that its creditworthiness has been restored. Need for Funds 8.06 Projections of their activities made by the financieras leave much to be desired. llowever, based on projects now before them and a reasonable estimate of additional projects that might be submitted in the period until December 31, 1972, the financieras are likely to be able to commit about $45 million in the period. Since only a small amount of foreign exchange might be provided by sources other than the World liank, a new loan of US$40 to cover foreign exchange costs of projects com- initted to the end of 1972 would be appropriate. 8.07 Thie increased level of financing the import requirements of projects will require the financieras to raise considerable amounts of local financing, so as to meet the local currency needs of their clients. Tthe financieras have not been able effectively to estimate the volume of demliand on them for peso resources. It is likely, however, that they will have no difficulty putting to effective ,se any amounts they can realisti- cally be expected to raise. There are savings airailable to be tapped in Colombia, and at least the two largest and most well-known of the finan- cieras, Colom-biana and Nacional, shoul1d be able to tan them. The finan- cieras should step up their efforts to raise peso funds on the market. Their ability to do so will depend on their ability to compete with securi- ties which so far receive preferential treatment from Government. Recommendations 8.08 The Loan. A loan of US$40 million to BR to cover foreign exchange cost of import requirements of productive projects to the end of 1972, is recommended, the proceeds to be available to the five financieras, subject, however, to the reservation in paragraph 8.09 g. below. The terms and condi- tions of the loan should include those nonnally applied in lending to dev- elopment finance companies, including standard commitment charge, 8.09 During negotiations the follcwing was agreed: a. Of the proposed loan, US$4 million would be allocated to each of the five financieras. b. The remaining US$20 million wouldl be used for joint projects which involve three or more financieras, and as required by each individual financiera on a first-come-first-served basis, after its allocation under . has been exhausted. c. Any amounts allocated under a. or b. above which remain un- saed at June 30, 1972, i.e. twelvze months prior to the closing date for submission of projects, would be merged in a single fund to be used as explained under b. d. As agreed between BR and the finanrcieras, BR would charge the financieras the interest rate applicable to the Bank loan plus a 0.5% p.a. to cover administrative costs and the finan- cieras would add at least 3% p.a. to the ultimate borrower. In practice the financieras would charge 10.75%. The ultimate borrower would have the option of paying 10.75% and taking the exchange risk or, if it did not wish to take it, BR would do so, for a fee of 8%. e. The limit for projects not needing the Bank's prior approval would be US$250,000 and the aggregate free limit US$4 million for Colom- biana, Nacional, Valle and Norte. All of Caldas' projects would be submitted to the Bank for approval. f. The proceeds of the Bank loan would be used to finance only up to US$4 million of the cost of a sinLgle project, except where the project is of a high economic priority and there is demonstrably no alternative source of financing available. - 36 - g. The Special Case of Caldas. While a portion of the proposed loan would be allocated for Caldas, it would not be available to Caldas until a special review, to be undertaken as soon after July 1, 1971 as Caldas indicates it is ready, shall have determined to the Bank's satisfaction that: i. the liquidity of the financiera has been restored and realistic projections of the Company's business over the next five years show satisfactory cash flows; ii. fresh injections of equity have been provided or have been ir- revocably committed to Caldas in adequate amounts; iii. the administrative organization, the internal control of invest- ments and the financial condition have been improved; iv. Caldas Board has adopted such policy guidelines as the special review may find necessary. FIVE DEVELOPMENT FINANCE COMPANIES IN COLOMBIA LIST OF ANNE_ES I. CORPORACION FINANCIERA COLOMBIANA 1. List of Major Shareholders 2. Board of Directors as of December 31, 1970 3. Status of Equity Investments 4. Analysis of Loans Approved 5. Balance Sheets as of December 31, 1967- 1970 6. Profit and Loss Statements for Periods ended December 31, 1967- 1970 7. Projections of Operations 1970-1975 8. Projected Balance Sheets as of December 31, 1971-1975, compared with December 31, 1970 (Actual) 9. Projected Profit and Loss Statements January-December 1971- 1975, compared with 1970 (Actual) 10. Projected Sources and Uses of Funds January-December 1971-1975, compared with 1970 (Actual) II. CORPORACION FINANCIERA NACIONAL 11. List of Major Shareholders 12. Board of Directors as of December 31, 1970 13. Status of Equity Investments as of December 31, 1970 1h. Analysis of Loans Approved 15. Balance Sheets as of December 31, 1967-1970 16. Profit and Loss Statements for Periods ended December 31, 1967- 1970 17. Projections of Operations 1-970-1974 18. Projected Balance Sheets as of December 31, 1971-1974, compared with December 31, 1970 (Actual) 19. Projected Profit and Loss Statements January-December 1971-1974, compared with 1970 (Actual) 20. Projected Sources and Uses of Funds January-December 1971-1974., compared with 1970 (Actuaal) III. CORPORACION FINANCIERA DEL VALLE 21. List of Major Shareholders 22. Board of Directors as of December 31, 1970 23. Status of Equity Investments 24. Analysis of Loans Approved, 25. Balance Sheets as of Decei,ber 31, 1967-1970 26. Profit and Loss Statementas for Periods ended December 31, 1967- 1970 27. Projections of Operations 1970-1974 28. Projected Balance Sheets ELs of December 31, 1971-1974, compared with December 31, 1970 (Actual) 29. Projected Profit and Loss Statements January-December 1971-1974, compared with 1970 (Actual) 30. Projected Sources and Uses of Funds January-December 1971-197h, compared with 1970 (Actbual) IV. CORPORACION FINANCIERA DE CALDAS 31. List of Major Shareholders 32. Board of Directors as of February 23, 1971 33. Status of Equity Investanents 34. Analysis of Loans Approved 35. Balance Sheets as of December 31, 1967-1]70 36. Profit and Loss Statements for Periods ended December 31, 1967- 1970 37. Projections of Operations 1970-1975 38. Projected Balance Sheets as of December 31, 1971-1975, compare(I with December 31, 1970 (Actual) 39. Projected Profit and Loss Statements January-December 1971-1975, compared with 1970 (Actual) o0. Projected Sources and Uses of Funds January-December 1970-1975, V. CORPORACION FINANCIERA DEL NORTE 41. Lis , or >tjor onareholders 42. Board of Directors as December 31, 1970 43. Status of Equity Investments 44. Analysis of Loans Approved 45. Balance Sheets as of December 31, 1967-1970 46. Profit and Loss Statements for Periods ended December 31, 1967- 1970 47. Projections of Operations 1970-1975 48. Projected Balance Sheets as of December 31, 1971-1975, compared with December 31, 1970 (Actual) 49. Projected Profit and Loss Statements January-December 1971-1975, compared with 1970 (Actual) 50. Projected Sources and Uses of Funds January-December 1971-1975, compared with 1970 (Actual) VI. FIVE DEVELOPMENT FINANCE COMPANIES IN COLOMBIA 51. Geographical Distribution of Loans Approved and Economic Indicators by Departments 52. Sector Distribution of Loans Disbursed and Key Industrial Sector Indicators 53. Schedule of Disbursements ANNEI 1 Page 1 COAPOIACION FINA.NCIERA COLOMBIANA List of Ma.or Shareholders (as of necember 31, 1970) Number of Shares % of (Col$ 10 par value) Total I. Private Colombian Shareholders 1. Banco de Bogota 2,541,328 18.44 2. C;a Colombiana de Seguros 1,887,717 13.70 3. Sociedad de Capitalizacion y Ahorro Bol. 576,747 4;18 4. C;a. de Seguros Bolivar 511,825 3.71 5. Seguros Comerciales Bolivar 511,824 3.71 6. Cia Colombiana de Ind. e Inver. 320,544 2.33 7. Acerias Paz del lio 125,928 0.91 8. Banco de Colombia 113,569 0.82 9. Restrepo Arenas Elkin 95,764 0.69 10. Nacional de Construcciones S.A. 84,849 0.62 11. Eternit Colombiana S.A. 78,137 0.57 12. Banco de Santander 38,942 0.28 13. Cerveceria Andina S.A. 28,557 0.20 14. Caja de Auxilios y Prest. de Acdac. 25,942 0.19 15. Garcia V. de Tamara 14aria 25,186 0.18 16. Banco de la Sabana 24,211 0.17 153 Private Colombian Shareholders with less than 20,000 shares 303,872 2.20 Sub-total 7.294,942 52.90 II. Governmental Shareholders 1. Empresa Licorera del Norte de Santander 32,400 0.24 2. Electrificadora de Boyaca S.A. 11,880 0.09 Sub-total 44,280 0.33 III. Foreign Controlled Shareholders2/ 1. Esso Andina Inc. 235,008 1.70 2. Banco Frances e Italiano 124,555 0.90 3. Reynolds Aluminum 34,344 0.25 4. Banque Nationale de Paris 30,992 0.22 5. Cart6n de Colombia S.A. 12,970 0.09 Sub-total 437,869 3.16 g Conpanies with 506 or more of their share capital owned by foreign partners. ANNE 1. page 2 Numbe:' of Shares % of (Col$ 10 par value) Total IV. Foreign Shareholders 1. Balfor Williamson & Co. Ltd. 1,274,400 9.25 2. Manufacturers Hanover Banking Corp. 775,527 5.63 3. The First Pennsylvania Overseas Finance Corp. 378,000 2.74 4. ADELA Investment Company S.A. 376,665 2.73 5. Brown Boveri y Cia A. 0. 138,553 1.01 6. Thyssenrohr International Ombh 138,553 1.01 7. Wlimpey & Co. Ltd. 105,754 0.77 8. The English Electric Col. Ltd. 97,200 0.71 9. Simon Engineering Co. Ltd. 97,200 0.71 10. Fletcher & Stewart Ltd. 97,200 0.71 11. Didier Werke A.G. 83,132 o.60 12. Hocbtief A.G. 83,132 o.60 13. Kloeckner Humboldt Deutz A.G. 83,132 o.60 14. Siemaq Maschinenbau Gmbh 83,132 o.60 15. Dresdr1z- -2 4Ui. 16. Detusche Bank A.G. 62,802 o.46 17. Citizens and Southern In*t..Corp. 29,200 0.21 18. Financiera Banamex S.A. 21,574 0.16 19. Bureckhard & Co. 16,632 0.12 20. Ibero Amerika Bank A.G. 16,632 0.12 21. Sal Oppenheim Jr. & Cie. 16,632 0.12 22. Kuelh Hermann 11,750 0.09 Sub-total 4,049,604 29.41 V. International Organizations International Finance Corporation i,956,960 14.20 Sub-total 1,956,960 14.20 GRAND TOTAL 13i783,655 100.00 IBRD/DFC April 23, 1971 ANNEX 2 CORPORACI1)N ?IANCIERA COL01BIANA Board of Directors as of December 31. 1970 Principals Description Jorge MJejia Salazar Presiclent, Banco de Bogoti (Chairman) Javier Ramirez Soto Presiclent, Compaiuia Colombiana de (Vice -Chairman) Seguros Jose Alejandro Cortes President, Seguros Bolivar James R. Greene Senior Vice-President, Manufacturers T3anover Trust Company Jack Aahworth Director, Bank of London and Ilontreal (LiJma) Ernst W. lormsen President of Thysaenrohr International GmbH Alternates Roberto Pardo Vargas Vice-President, Banco de BogotA Carlos Serna Cortes Boardi member, Compafzia Colombiana de Segurlos Rodrigo Jaramillo Vice-President, Seguros Bolivar Alberto Vargas !Iartinez Vice-President, Petroqu.mica Colombiana S.A. Jose Games Pinzon PresiLdent, CuelLar Serrano G6mez Alfredo Miani General Manager, Banco Frances e Italiano para la Ameirica del Sud 1BRD/DFC April 23, 1971 CORPORACION FINANCIMRA COLOMBIANA Status of Equity Investments (As of December 31, 1970) (in Thousands of Col$) % of 1970 Cost of Total Dividends Loans Guarantees Total Name Sector Status Shares Ownership Received Granted Outstanding Exposure Cales y Cementos de Non-metallic minerals Operating at a loss 49,185 76 107,035 12,399 168,619 Toluviejo S.A. Abonos Colombianos S.A. Chemical (fertilizers) Operating profitably 35,134 33 4,518 39,652 Industria Ganaiera Colombiana S.A. Cattle raising Operating profitably 16,919 39 1,500 18,419 El Labrador S.A. Agriculture Operating profitably 12,023 48 24,438 36,461 Nylon Colombiana S.A. Textiles Operating profitably 11,690 33 1,376 17,925 29,615 Forjas de Colombia S.A. Metal products (stamp Operating at a loss 9,044 10 18,174 27,218 forge) Ternessee Colombiana S.A. Mining (petroleum) In development 4,250 7 2,778 7,028 Financiera Centro- Finance Company Operating profitably 3,867 30 3,867 amerioana de Desarrollo S.A. Petroquimica Colombiana Chemicals Operating profitably 3,864 10 2,315 6,179 S.A. Adela Investment Finance Company Operating at a profit 3,462 190 3,462 Coaqany Hilanderias del Fonce S.A. Textiles Operating at a profit 2,196 34 576 9,301 11,497 Industrias Metalur- Metal products Operating at a profit 2,841 10 410 2,841 gicas Apolo S.A. V. Burrowes-Industrias Chemicals Operating at a loss 1,500 21 30 1,500 El Frayle S.A. Petroleos Nacionales Mining (petroleum) In promotion 4,500 38 4,500 Pro-Hoteles Hotels In promotion 1,034 6,046 7,080 Others (under Col$ 800,000) 3,102 3 2,486 5,588 TOTAL 164,611 2,929 196,516 12,399 373,526 IBRD DFC April 23, 1971 SiNk 4 OR NAU 5L ehIl LUUBLI]M AnapsiA of keans AVprPved 1968 1969 1970 2otai si-s lnception No. Value No. Value No. Value No. Amout 9 Amout i Amount 7 Amont 5 By Sloe - Col$ 500,000 76 13.3 6 43 13.6 4 23 6.5 2 853 176.4 9 Cnl8 500,001- Col$ 1,000,000 33 20.0 10 33 28.8 8 17 10.8 3 257 18o.5 10 Col$ 1,000,001 - 0oli 5,000,000 70 016.9 56 46 109.4 31 55 118.7 35 366 728.0 40 Col$ 5,000,001 - 6 57.0 28 18 204.3 57 18 _204.4 60 65 754.' 41 Total 185 207.2 100 140 356.1 100 113 _40.4 1000 1,5hl 181L2Z. 1U(Q By DLurtion 1 your to 2 years 67 56.i 27 45 77.0 22 34 33.5 10 486 365.9 20 2 yoars to 5 y..rs 74 78.9 38 71 122.6 34 54 133.9 40 786 679.6 37 Moor than 5 years 44 72.2 35 24 156.5 44 25 173.0 50 269 793.4 43 Total 165 207.2 100 140 356.1 100 1.J 340.4 100 1 1438.9 100 Fuods Used 0Ow foods 67 56.1 27 43 77.0 22 36 44.5 13 486 376.9 21 Bonds 43 49.7 24 40 75.6 21 33 108.4 32 314 352.0 19 BR oredit 2o 27 27.7 13 7 11.0 3 423 264.6 14 th_pIr 30 12.1 6 5 50.6 14 10 53.2 16 144 309.3 17 BR-;DF 1 20.0 6 1 3.0 1 2 23.0 1 BR-IFF 4 1.5 1 27 15.9 4 19 14.5 4 50 31.9 2 8R0IBRD 14 60.1 29 17 106 .0 30 14 116.8 34 7140 4724 26 Oth- ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 8 7.2 - Oth.er Total 1L8 207.2 100 140 356.1 100 113 340.4 loo 1.541 1,839.9 100 Fi oec/dorkirg Capital Fixec capital 75 lCl.4 49 29 167.6 47 25 173.0 S1 694 1,053.5 50 Working capital 110 1C5.8 51 11l 188.5 53 88 167.4 49 847 779.4 42 Total 185 207.2 100 140 356.1 100 113 340.4 100 1,541 1,838.9 10o lanres cC FProjeoto Noo Onterprises 9 9.7 5 8 51.6 14 7 19.7 6 71 272.2 15 Ooisnli.goz.nterprtseo 176 197.5 95 132 304.5 86 106 320.7 94 1.470 i.566.7 es Total 185 207.2 10 140 356.1 100 113 340.4 100 1.541 1,838.9 10 Manufacturing Food, bereroges and tobaoco 29 33.5 16 18 40.8 11 9 20.3 6 194 211.2 11 Textiles and apparel 25 51.0 24 22 85.2 24 15 26.2 8 175 250.6 14 Paper and priotiog 6 13.8 7 8 13.7 5 6 32.4 10 78 139.0 7 Loather goods 4 5.7 3 2 2.5 1 4 1.9 - 47 30.3 2 ahbber goods 3 3.6 2 1 1.9 1 2 20.3 6 25 56.5 3 Ghedicals 29 38.6 19 32 88.9 25 18 40.1 12 184 291.8 16 Wood prodncts 9 6.7 3 1 0.3 - 3 2.3 1 42 25.5 1 NOn-oetalllo sloerolo 4 4.8 2 13 15.2 4 15 83.6 05 138 102.5 9 Metal, and engineering 23 22.0 11 29 65.5 08 23 55.4 16 290 306.5 17 Others 11 9.6 5 _ 35.o 10 8 38.4 11 103 019 Subtotal 143 189.3 92 131 349.0 99 103 320.9 95 1.276 1.59Sm. .6 Other Seotors Mines and potroleu.c 3 2.8 1 1 1.6 - 2 8.3 2 18 33.2 2 Eleotrioity 2 6.5 2 15 11.4 1 Agricult-re 38 10.2 5 6 4.o 1 5 3.2 1 1l7 170.5 9 Li.estook 1 4.9 2 2 1.5 _ 0 1.5 - 45 29.0 2 Others Subtotal 42 17.9 8 9 7.1 1 10 19.5 5 065 24.1 _l Total 185 207.2 100 140 356.1 100 113 340.4 100 1i,5. 1,838.9 100 By Location (Deparscynts) Adtioquia 53 48.5 23 18 71.9 20 7 13.3 4 187 227.6 12 Atlantico 5 4.3 2 4 4.4 1 2 5.2 2 60 50.L 3 Bolivar 2 4.0 2 1 0.5 - 1 1.0 - 29 89.0 5 Boyaca 2 0.3 - 3 1.6 - 2 6.5 2 38 24.9 1 Caldas 2 2.0 1 1 7.8 2 15 18.0 1 Cordoba - - - 1 0.1 - CuLdiamoec 100 100.7 48 91 217.8 61 78 245.1 72 858 929.6 51 Huila 3 3.5 2 3 2.4 1 2 0.8 - 29 10.2 1 Magdale.a 5 5.7 3 1 1.1 - 2 2.5 1 48 55.0 3 meta 3 1.5 Naris 2 4.0 1 2 4.0 Nootn de Santander 1 0.5 - 2 4.0 1 37 62.7 3 Quidio 5 7 - lisaralda 1 0.3 - 11 2.9 - Santoader 6 15.8 8 3 1.5 1 3 2.1 1 92 114.5 6 lanes 1 1.5 1 5 10.5 3 8 33.5 2 Tolima 20 4.9 - Vaile del Cauao 8 24.1 12 12 50.9 14 6 37.6 11 97 210.8 12 Intendenciao (S. Adres) . 1 .2 Total 185 007.2 100 140 ( 356.1 100 113 340.4 100 1,541 1,838.9 100 IBBD/DFC April 23, 1971 ANNE 5 CORPORACION FINANCIERA COLOMBIANA Balance Sheets as of December 31 1967-1970 (in Co1 million) - 1967 1968 1969 1970 (Audited) (Audited) (Audited) (Unaudited) ASSETS Cash and banks 16.9 22.7 10.6 9.3 Accounts receivable 22.1 18.6 24.o 15.9 Portfolio Loans 333,5 463.)4 565.5 633.7 Equity investments (at cost) 14a2.7 155.8 153.0 181.8 Other investments 14.3 19.0 19.2 2.8 Export-Import financing 194 .5 127.4 100.2 210.7 Total Portfolio 77.0 767-Z
Группа Всемирного банка · Staff Appraisal Report
Colombia - Fourth Development Finance Companies Project
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