Ecuador - Third Development Finance Companies Project

Report No. 1298b-EC FILE COPY Ecuador: Appraisal of the Third Development Banking Project December 9, 1976 Projects Department Latin America and the Caribbean Regional Office iOR O W:hLA. USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS All currency amounts are quoted in Sucres (SI) and US Dollars (US$) US$1 - SI 25.0 Sf 1 US$0.04 S/ 1,000,000 US$40,000 LIST OF ACRONYMS AID - Agency for International Development BCE - Banco Central del Ecuador BNF - Banco Nacional de Fomento CAF - Corporacion Andina de Fomento COFIEC - Ecuatoriana de Desarrollo S.A. - Compania Financiera CV-CFN - Comision de Valores - Corporacion Financiera Nacional DFC - Development Finance Company FNII - Fondo Nacional de Inversion Industrial FONADE - Fondo Nacional de Desarrollo FONAPRE - Fondo Nacional de Pre-inversi6n FOPEX - Fondo de Pron-ocion de Exportaciones IDB - Interamerican Development Bank IESS - Instituto Ecuatoriano de Seguro Social JUNAPLA - Junta Nacional de Planificaci6n KfW - Kreditanstalt fflE Wiederaufbau PEFCO - Private Export Funding Corporation FISCAL YEKAR January 1 to Decenber 31  FOR OFFICIAL USE ONLY ECUADOR APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT TABLE OF CONTENTS Page No. BASIC DATA ON DFCs i SUMMARY AND CONCLUSIONS ............................... ii-iv I. INTRODUCTION ......................................... I The First and Second DFC Loans (721-EC and 930-EC) 1 Objectives of the Proposed Loan .... .............. I II. THE ECONOMIC SETTING .................................. 2 General Outlook ................................... 2 Industrial Sector ................................ 3 The Financial Sector ............................. 5 Country Economic Policies, Interest Rates and the Availability of Industrial Credit .... .......... 6 III. CV-CFN - PAST PERFORMANCE AND PROSPECTS .... ........... 9 Organization, Management and Staff .... ........... 9 Policies and Procedures .......................... 9 Operations and Performance ..... .................. 10 Prospects ........... ............................. 11 IV. COFIEC - PAST PERFORMANCE AND PROSPECTS .... ........... 12 Organization, Management and Staff .... ........... 12 Policies and Procedures .......................... 12 Operations and Performance ....................... 13 Prospects ........................................ 14 V. PROPOSED BANK LOAN .................................... 15 VI. AGREEMENTS REACHED DURING NEGOTIATIONS .... ............ 18 This report is based on the findings of an appraisal mission composed of Messrs. C.W. Ludvik, A. Cracco, T. Hutcheson and E. Jurgensen, of the DFC Projects Division, LAC Regional Office, which visited Ecuador during April/ May and July 1976. The report was prepared by Messrs. Ludvik, Hutcheson and Jurgensen. This documwnt h a tatrkted ditubution and may be usWd by recipients only in the performAnce of their official dute. It contents may not otheirwise be disclosed without World Bank authoriation.  TABLE OF CONTENTS (Continued) LIST OF ANNEXES GENERAL 1. Interest and Rediscount Rates 2. Arrearages of Selected Banks and Financieras 3. The Financing of Gross Domestic Investment, 1970-1974 COMISION DE VALORES-CORPORACION FINANCIERA NACIONAL 4. Past Performance and Prospects 5. List of Board Members and Alternates as of April 29, 1976 6. Declaration of Policies and Procedures 7. Organization Chart 8. Audited Balance Sheets, 1972-1975 9. Audited Statements of Income and Expenses, 1972-1975 10. Summary Breakdown of Loans Approved During the 1972-1975 Period 11. Summary of Subloans Approved under Loans 721-EC and 930-EC 12. Equity Portfolio as of December 31, 1975 13. List and Characteristics of Foreign Loans and Credit Lines - December 31, 1975 14. Operational Strategy and Financial Objectives for 1977-81 15. Projected Industrial Operations - 1976-80 16. Projected Balance Sheets 1976-1980, Compared with 1975 17. Projected Statements of Income and Expenses 1976-1980, Compared with 1975 18. Projected Sources and Uses of Funds, 1976-1980 19. Projected Gap in Foreign Exchange Resources, 1976-1980 20. Past and Projected Financial Ratios, 1972-1980 ECUATORIANA DE DESARROLLO S.A. (COMPANIA FINANCIERA) 21. Past Performance and Prospects 22. List of Board Members and Alternates as of December 31, 1975 23. List of Major Shareholders as of December 31, 1975 24. Declaration of Policies and Operating Procedures 25. Organization Chart, March 31, 1976 26. Summary Breakdown of Loan Approvals During the 1972-75 Period 27. Summary Breakdown of Loan Approvals Under World Bank Loans 721-EC and 930-EC 28. Equity Portfolio 1972-75 29. Operational Strategy and Financial Objectives for 1976-80 30. Projected Operations 1976-1980, Compared to 1974 and 1975 31. Projected Balance Sheets 1976-80, Compared with Audited Balance Sheets 1972-75 32. Projected Income Statements 1976-80, Compared with Audited Income Statements 1972-75  TABLE OF CONTENTS (Continued) LIST OF ANNEXES (Continued) 33. Projected Sources and Applications of Funds 34. Projected Gap in Foreign Exchange Resources Over the Period 1976-1980 35. Past and Projected Financial Ratios, 1972-1980 THE PROPOSED LOAN 36. Possible Participants in the Proposed Loan 37. Estimated Schedule of Disbursements of the Proposed Loan   - i - ECUADOR: APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT Basic Data on DFCs, as of December 1975 CV-CFN COFIEC Established 1964 1966 Number of Shareholders I/ 323 Net Worth (S/ million) 981.2 184.1 Shareholdings as % of Total Share Capital 1. Private Ecuadorian Shareholders - 51.6 2. Public Ecuadorian Shareholders - 6.0 3. Foreign Controlled Ecuadorian Shareholders - 4.5 4. Foreign Shareholders - 30.2 5. IFC - 7.7 Assets (S/ million) Total Assets & Guarantees 3,184.2 1,745.5 Total Loans 1,934.9 838.4 Loans Maturing After 12 Months 1,441.5 368.2 Equity Investments 585.5 28.8 Other Portfolio 473.6 732.7 Net Working Capital 391.6 279.0 Liabilities (SI million) IBRD 221.7 327.5 Other Foreign Sources 739.0 49.4 Bonds 452.6 90.3 Equity Total Debt/Equitv 2.2 7.0 Equity Portfolio as % of Net Worth 59.7 15.6 Book Value as % of Par Value 127.8 130.7 Total Income (S/ million) 255.3 131.2 Net Income (S/ million) 74.3 32.1 Net Income as % of Average Net Worth 7.9 19.3 Total Assets 2.6 2.1 General Expenses as % of Average Total Assets 2.5 2.0 Dividends - - 1/ Government owned  - ii - SUMMARY AND CONCLUSIONS This report appraises a third project to assist Comision de Valores - Corporacion Financiera Nacional (CV-CFN), Ecuatoriana de Desarrollo, S.A. - Compania Financiera (COFIEC), and newly established DFCs that meet criteria for qualification, in providing long-term financing for the foreign exchange costs of industrial projects. A loan of US$26 million to the Republic of Ecuador is proposed. By making this loan the Bank would assist the parti- cipating DFCs in providing long-term financing on reasonable terms, thereby reducing industry's reliance on short-term credit, strengthen the DFCs' capa- bilities to appraise and supervise projects, and enhance the financial system's ability to mobilize medium- and long-term domestic resources. Furthermore, the Bank would aid Ecuador in developing policies to promote its capital market. ii. Before 1970, Ecuador was among the least developed countries in Latin America. The discovery of oil in 1971 and the subsequent increase in world oil prices opened up bright prospects for economic growth. High oil revenue expectations triggered consumption patterns which soon proved to ex- ceed the responsiveness of domestic supply and the country's foreign exchange payment capacity to import. Furthermore, actual oil revenues declined after July 1974 and estimated reserves were revised downward. The impact of these developments and of international price movements was reflected in a sudden increase in inflation to an annual rate of nearly 24% in 1974 and in a fall in foreign exchange reserves. iii. In mid-1975, the Ecuadorian Government instituted restrictive mone- tary measures, re-established prior import deposits, and curtailed public expenditures. Legal reserve requirements and ceilings on credit expansion restrained commercial bank credit. These measures and moderating interna- tional inflation helped to reduce the rate of domestic inflation to less than 16% in 1975 and to perhaps 10% in 1976. iv. Industry accounts for about 17% of GDP and agroindustries make up almost two-thirds of the sector's output. Exports are only 8% of industrial production. The sector receives fairly high protection from tariffs and im- port quotas and a number of major consumer goods are subject to price control. Nevertheless, there are unmistakable signs of industrial vitality and the out- look for the continued rapid growth of the sector is bright. v. The demand for industrial credit rose considerably as a result of the oil boom which spurred a doubling of gross domestic investment between 1972 and 1974. While the DFCs provide only about 3% of the financing of gross domestic investment, they have increased their participation in total industrial credit from 14% in 1972 to 29% in 1974, CV-CFN's share rising from 5% to 17% and COFIEC's from 9% to 12%. The commercial banking system has traditionally met the financing needs of industry with short-term credit. Except for direct foreign credit, the industrial sector relies almost ex- clusively on CV-CFN and COFIEC for their medium- and long-term credit needs.  - iii - As the Central Bank (BCE) restricted commercial bank credit in 1975, industry turned to alternative sources for its credit needs, predominantly foreign short-term financial and suppliers' credits, often channeled through or guaranteed by commercial banks and DFCs. vi. The ability of the DFCs to mobilize additional domestic medium- and long-term resources, particularly in the case of private DFCs, had been inhibited by the regulated interest rate and commission structure which did not allow an adequate financial spread on the intermediation of domestic long-term resources but rather favored intermediation of short-term external resources. Industrial demand for working capital and the need to protect its capital against erosion during a period of high inflation led COFIEC to engage heavily in profitable commercial-type operations based on short-term foreign resources. The viability of the private DFC system (COFIEC and the new DFCs) as development banks depended on changes in the interest rate structure which would make medium- and long-term lending at least as attract- ive as short-term lending. Ecuadorian monetary authorities have recognized this situation and, as a result, the Government raised the effective interest rates for medium- and long-term credit. vii. Both COFIEC and CV-CFN concentrate their lending on industry, yet there are many differences between them. CV-CFN, the government-owned DFC, operates with a relatively large equity base and low leverage and its projects are relatively large. Its total assets as of December 31, 1975 amounted to US$117 million equivalent. In recent years, CV-CFN has signifi- cantly upgraded the quality of its staff, strengthened its project appraisal capacity, increased the effectiveness of its supervision and improved its operating procedures. It has been fairly active in promoting new projects and in providing technical assistance to firms in its equity portfolio. viii. COFIEC, in contrast, is widely owned by private local and foreign investors, IFC holding 7.7% of the shares. It has had difficulty at times in maintaining its level of operations within the debt-to-equity limitation set in agreement with the Bank, currently 7:1. COFIEC's operations, in addition to those with the industrial sector, include livestock, construction, trans- portation and commerce. It generally finances smaller firms and projects than does CV-CFN. Its equity portfolio is small, 1.8% of the total portfolio, but moderately profitable. The increasing emphasis on short-term operations and the need to hold down costs strained the capacity of its staff and resulted in some deterioration in its appraisal capacity and, in particular, in the supervision of its portfolio. ix. The proposed loan of US$26.0 million would be channeled through BCE, as the government fiscal agent, to be relent to CV-CFN, COFIEC and new DFCs that qualify. The Government would assume the foreign exchange risk through its agent, BCE, who would pass to the participating DFCs a variable fee of 1.75% p.a. or 2% p.a. for this coverage. Bank funds would be available to industrial enterprises for the financing of foreign exchange costs of equip- ment and permanent working capital, through either loans or equity investments.  - iv - The proposed loan would be repayable within 15 years on a composite amortiza- tion basis including 3 years of grace. Bank funds would be relent at effec- tive interest rates ranging beween a minimum of 13% p.a. to a maximum of 16% p.a., depending mainly on the term of the subloans. x. The proposed loan would be allocated as follows: US$13 million to CV-CFN, US$10 million to COFIEC, and US$3 million to the new DFCs that qualify. Should no new DFC qualify under the proposed loan, the portion assigned to them would become available to CV-CFN and COFIEC in equal amounts. The loan would include provision for reimbursing COFIEC up to US$1 million for approved disbursements made between January 1, 1977 and the date of the loan agreement. xi. Provided the agreements listed in Chapter VI are reached, the project is suitable for a Bank loan of US$26 million on the terms and condi- tions listed in Chapter V and supplemented in Chapters II, III and IV.  ECUADOR APPRAISAL OF THE THIRD DEVELOPMENT BANKING PROJECT I. INTRODUCTION The First and Second DFC Loans (721-EC and 930-EC) 1.01 Comision de Valores-Corporacion Financiera Nacional (CV-CFN), a government-owned DFC, and Ecuatoriana de Desarrollo, S.A.-Compania Financiera (COFIEC), a privately owned DFC (IFC owns 7.7%), participated in two previous Bank DFC loans to the Government in 1970 and 1973 of US$8 million and US$20 million, respectively. Under the two Bank loans US$27.8 million had been approved for subloans by June 30, 1976, for a wide variety of industrial projects, over half being for industries based on agricultural and forestry raw materials. 1/ The average economic rate of return on subprojects submitted for approval was over 30%. The total project cost per job created directly by Bank-financed subprojects was US$15.9 thousand. Furthermore, 49% of the amount approved has been for subloans oriented mainly to substitute imports and 34% has been for projects which have had both import substitution and export characteristics. Taken together, the two DFCs have increased their participation in total industrial credit from 14% in 1972 to 29% in 1974, of which over two-thirds has been in the form of medium- and long-term credit. The DFCs' capabilities to appraise and supervise industrial projects also were strengthened significantly during the commitment of the two Bank loans, although some backsliding has occurred recently in COFIEC (para. 4.03). Thus, previous Bank loans have largely met two of their objectives: (i) to provide long-term financing to industry on reasonable terms to cover foreign exchange costs of efficient investment projects; and (ii) to strengthen COFIEC and CV-CFN's appraisal and supervision capabilities, with particular emphasis on assessment of the economic merit of projects. Progress toward meeting the Bank's third objective--promoting a change in the structure of industrial finance by substituting long-term funds for short-term credits--while noticeable, was inhibited by constraints on the DFCs' ability to mobilize long-term resources (para. 2.13). Objectives of the Proposed Loan 1.02 The proposed loan of US$26 million would be relent by the Government to CV-CFN, COFIEC, and other newly established DFCs (para. 2.15) which meet the criteria for participation in the loan. CV-CFN would be allocated US$13 million of the proposed loan, COFIEC, US$10 million, and other qualifying DFCs, US$3 million. The Bank would also help the Government in identifying, selecting, and implementing policies conducive to the long-term development of Ecuador's capital market. Thus, the Bank and the Government would exchange views on the terms of reference and the qualifications of experts who would 1/ Food, beverages, tobacco, textiles, leather products, wood products, and paper.  - 2 - carry out capital market studies, offer comments on the research scope and methodology, and give technical advice on the resulting regulatory proposals. Hence, by making this loan, the Bank would accomplish the following: (a) continue to provide long-term financing to industry on reason- able terms to cover foreign exchange costs of efficient invest- ment projects for the expansion of existing firms and the establishment of new enterprises; (b) strengthen further the capabilities of Ecuadorian DFCs to appraise the financial and economic merits of industrial proj- ects and to supervise projects they finance; (c) promote a change in the structure of industrial finance by sub- stituting long-term funds for short-term credits; (d) enhance the ability of the Ecuadorian financial system to mobilize resources for medium- and long-term lending through discussion with the Government on (i) improving the term structure of interest and commission rates; (ii) ensuring the private DFCs a reasonably attractive effective spread between the cost of their domestic borrowing and lending; and (iii) limiting the involvement of DFCs in short-term operations; (e) contribute to the development of Ecuador's capital market. 1.03 This report is based on the findings of an appraisal mission composed of Messrs. C.W. Ludvik, A. Cracco, T. Hutcheson and E. Jurgensen, of the DFC Projects Division, LAC Regional Office, which visited Ecuador during April/May and July 1976. This report was prepared by Messrs. Ludvik, Hutcheson and Jurgensen. II. THE ECONOMIC SETTING General Outlook 2.01 The economic situation and prospects of Ecuador have been modified since 1972 by the emergence of oil as a major source of exports and of public sector revenues. The subsequent increase in world oil prices boosted further the prospects for economic growth and industrialization. On the basis of current export prospects, moderate capital inflows, and an adequate policy to channel oil revenues into industrial investment, Ecuador's economy may grow at about 7% per annum through 1980. Oil exports are not expected to increase rapidly after 1976 and the expansion of the economy will continue to require additional net external borrowing through 1980 to help finance development projects. Since oil revenues accrue entirely to the public sector, growth prospects are ultimately dependent on how the Central Government and other public agencies use their resources in expenditures and transfers to the private sector.  2.02 The advent of oil has brightened prospects but it has also brought to light the need for institutional adjustmenits without which the new revenues would fail to impart a new dynamism to the economy. While in the past the role of the public sector in the economy has been modest, the Government is aware of the need to adapt the institutional structure to the new circum- stances and is setting up the required framework for a rational allocation of the new revenues. Among these, there is need to provide appropriate tax, credit and price incentives to increase private investment and savings, and to improve the institutional and financial framework within which these re- sources-will be transferred to priority industries. Industrial Sector 2.03 The Industrial Sector Report on Ecuador of June 1, 1976, (1186-EC), indicates that industry has grown rapidly in the 1965-75 decade, averaging 9.4% per annum compared to 5.4% for GDP. Still, the sector accounted for only 17.2% of GDP in 1974 at current prices and for only 11.5% of total employment in the country, reflecting its incipient development and the limited size of the market. Recent rapid economic growth has stimulated investment in indus- tries serving the local market, including consumer goods, construction mate- rials, and some simple capital goods. The expansion in capacity, however, does not yet appear to be reflected in changes in output due to problems that include a shortage of skilled technical and managerial personnel. Present production rates are mostly the result of a better utilization of previously existing capacity. 2.04 The structure of industry is consistent with Ecuador's level of development. It is concentrated in consumer goods (60% of total value added is represented by food, beverages, tobacco, clothing, shoes, and furniture); the manufacturing establishments are relatively small and family oriented (only 74 manufacturing enterprises had a gross value of output exceeding US$2 million in 1973); domestic manufacturing linkages are limited to agricultural and forest materials and non-metallic minerals; and it is highly dependent on foreign raw materials and technology (49% of the sector's raw material require- ment was imported in 1973). Manufactured exports represented only 8% of the gross value of the sector's output in 1973 and are composed of such traditional items as sugar and related products, and processed cacao. Of the total indus- trial employment, 75% is in small and handicraft enterprises that generate only 30% of the value added in the sector. In spite of these characteristics, recent years have shown unequivocal signs of an emergent industrial vitality, with growth particularly marked in branches supplying the construction indus- tries (plywood, cement, glass, metal bars, etc.) and some simple mechanical engineering industries. The expansion of the industrial sector between 1973 and 1975 (11% p.a.) has been higher than the growth target set in the 1973- 1977 Development Plan. In the context of Ecuador's favorable position within the Andean Common Market, the industrial sector expanded its exports of manu- factured products including some advanced ones such as domestic appliances and metal products. Ecuadorian exports to Andean Pact countries of 37 selected industrial products increased from US$5 million in 1970 to US$17.4 million in 1974.  - 4 - 2.05 Comprehensive industrial development laws have been in force since the first law was enacted in 1957; modifications have been introduced period- ically, and in 1973 a major revision was undertaken which emphasized regional decentralization of new industry. Another feature of the 1973 investment law was the expansion of a limited direct incentive system for non-traditional exports which had been instituted in 1971. Under the new system, incentives are given to manufactured exports in accordance with past performance up to a maximum of 15% of the gross value; non-processed, non-traditional agricul- tural exports receive a fixed subsidy of 4%. Furthermore, the new incentives virtually eliminated the restrictions on imports of raw materials and capital goods, opened somewhat the policy towards foreign investment, and exonerated small- and medium-sized industries and artisan activities from taxes and tariffs. Imports were considerably liberalized in 1973 but the subsequent re-emergence of the foreign exchange gap led, in mid-1975, to an increase in tariffs, some prohibitions on imports of consumer goods and a selective tariff surcharge of 30%, as well as an increase in prior deposits. 2.06 Existing tariff regulations, price controls, and incentive legisla- tion may result in some distortions by stimulating investment in ineffecient industries. Besides weakening the tax base and distorting the allocation mechanism, these features tend to favor capital-intensive industries. Also, a number of major consumer goods are subject to price ceilings and price supports especially in the case of sugar, plywood, soybeans, vegetable oils and related products. Scarcities and overproduction of the commodities affected result from prices that are too low or too high. A dialogue between the Bank and Ecuadorian public institutions that influence the industrial sector has started on the basis of the findings put forward in the Industrial Sector Report. Views have been exchanged on the diagnostic aspects of the report and on the industrial implications of the existing schemes on tax in- centives, tariff protections, price controls and export promotion. The Bank will continue intensifying these discussions with a view to contributing to positive revisions of these policies. In the context of the proposed loan, the above analysis supports the need to calculate economic rates of return on the larger investment projects in the sector (paras. 3.03 and 4.03). 2.07 The principal areas of potential growth are being examined in light of Ecuador's need to develop industries that provide wide employment oppor- tunities leading to an improvement of income distribution and to a reduction of regional disparities. Attention should be focused on the agroindustrial sector oriented to exportable products, on the small-scale and artisan industry and, also, on the economically efficient import-substitution industries. Agro- industries with particular expansion possibilities are sugar refining, fish products, fruit and vegetable processing, forestry, as well as some non-food agroindustrial products. Industries related with construction, such as cement, glass, ceramics, structural steel and hardware, offer good possibilities to substitute imports. On the basis of the past performance of the DFCs, it is expected that the proposed loan will be largely used by agroindustries and efficient import-substitution industries.  -5- The Financial Sector 2.08 Four components can be identified in the financial system of Ecuador: (a) The Monetary Board, the highest monetary authority, which regulates the volume and distribution of money and credit. (b) The banking system, which is made up of the Central Bank (BCE), the commercial banks (18 national and 4 foreign), and the National Development Bank (BNF), a public institution primarily oriented toward agriculture and small enterprises. BCE, with assets in 1974 almost equal to the sum of the commercial banks combined, adminis- ters eight financial funds that provide rediscounting facilities to commercial and development banks and keeps the accounts of the National Investment Fund (FONADE). The latter fund receives a portion of the Government's tax receipts in oil exports, and its resources are allocated by an interministerial commission to developmental projects of top priority. (c) Other financial intermediaries, which include the DFCs, savings and loan associations, cooperative banks, insurance companies and the Ecuadorian Social Security Institute (IESS). (d) Ancillary organizations such as stock exchanges, special funds, and the unsupervised market. Both Quito and Guayaquil have had stock exchanges since 1970 but they are still in their infancy. Special funds include the Export Promotion Fund (FOPEX), admin- istered by CV-CFN, and the National Preinvestment Fund (FONAPRE), set up to finance feasibility studies. The unsupervised market is small, in the opinion of public officials and bank represen- tatives. 2.09 The most striking change in the financing of gross domestic invest- ment (GDI) between 1970 and 1974 is the increase in the participation of the Central Government from less than 1% to 28% (Annex 3), due largely to oil revenues. Little of this amount has been directly channeled to the non- petroleum industrial sector. In addition, BNF's share in the financing of GDI rose from 1% in 1970 to 10% in 1974, with nearly all of the increase channeled to the agricultural sector. The share of GDI financing provided by commercial banks and DFCs increased from 9% to 16% in the same period (a seven-fold increase in absolute terms). This change in financial flows is largely explained by GDI increasing much faster than corporate financing out of internal cash generation and, also, by the decline in direct foreign investment levels since 1970-71, when the bulk of investment for oil exploit- ation took place. 2.10 The commercial banking system has traditionally met the financing needs of industry with short-term credit while CV-CFN and COFIEC, within their resource constraints, have provided term loans to medium- and large-sized com- panies. Except for direct foreign credit, the industrial sector relies almost exclusively on the two DFCs for their medium- and long-term credit needs.  -6 - While the DFCs finance an average of only about 3% of GDI, they have increased their participation in total industrial credit from 14% in 1972 to 29% in 1974, CV-CFN's share rising from 5% to 17% and COFIEC's from 9% to 12%. 1/ Country Economic Policies, Interest Rates and the Availability of Industrial Credit 2.11 High oil revenue expectations triggered consumption patterns which soon proved to exceed the responsiveness of domestic supply and the country's capacity to import. Furthermore, actual oil revenues declined after July 1974 and estimates of reserves were revised downwards. The impact of these devel- opments and the rapid increase in import prices was reflected in an accelera- tion in inflation to an annual rate of 23.4% in 1974, in a difficult fiscal situation, and in a drastic fall in foreign exchange reserves. 2.12 To counteract these developments, in mid-1975 the Ecuadorian Govern- ment instituted restrictive monetary measures to contain aggregate demand, reduced oil taxation, increased prior deposits on imports, and reduced public expenditures. Commercial bank credit was curtailed by higher legal reserve requirements and ceilings on credit expansion. These measures and a modera- ting rate of increase in import prices helped reduce the rate of inflation to 15.7% in 1975 and perhaps 10% for 1976, but at the same time they aggravated distortions in industrial financing. 2.13 Prior to the recent modification of the interest rate structure in the country (para. 2.16), prevailing interest rates inhibited the ability of private DFCs 2/ to mobilize domestic medium- and long-term resources. The official maximum lending rate affecting all credit operations in the country was 12% irrespective of maturities (Annex 1). Higher effective interest rates could be obtained by commercial banks through devices such as compensating balances, discounting, and advance interest payments, making their short-term credit carry an effective interest rate of 14% to 16%. On credit from external sources, which industry has used extensively in recent years, the financial intermediary can pass on the actual cost to the borrower and charge a commis- sion of up to 4% on short-term financial instruments such as letters of credit with refinancing, acceptances, and guarantees. In contrast, long-term credit financed by private DFCs (COFIEC) with domestic bonds provided only a 2% in- terest rate spread through allowable commissions. 2.14 Given the past interest rate and commission structure, a private DFC such as COFIEC, which must maintain an attractive real return on its equity, 1/ Banking statistics show credit extended rather than credit outstanding to each sector, thus overstating the relative importance of shorter term commercial bank operations. 2/ CV-CFN can issue tax-free domestic bonds, therefore its cost of raising funds is lower than the cost to private DFCs.  had little alternative but to base its operations on the type of short-term external resources on which a high commission could be charged (letters of credit, acceptances, guarantees). This was possible since DFCs were exempt from the credit restrictions imposed on commercial banks. Thus, the interest structure, the restrictive credit measures on commercial banks, the exemption of DFCs from credit restrictions and the profitability of commercially oriented activities together caused COFIEC to turn to short-term operations. Under the interest and commission structure existing before November 1976, a private DFC could not realistically be expected to fulfill its developmental purpose, except to the extent that it had access to long-term resources such as the Bank loan. CV-CFN did not have to face this dilemma because of its access to subsidized resources. However, due to the smaller likelihood of getting new capital contributions of the same magnitude as in the past (para. 3.11), it also would have been adversely affected by the previously existing inte- rest rate regulations (para. 3.13). 2.15 Several new DFCs are in operation or in the process of being estab- lished (Annex 36), partially in response to the Government's emphasis on re- gional decentralization and to tax and other incentives, but also in response to the credit restrictions on commercial banks. While the creation of new DFCs may have positive institutional effects within the financial system in Ecuador, these institutions should be directed at mobilizing resources for long-term industrial financing rather than expanding commercial operations. 2.16 The future viability of the private DFC system (COFIEC and the new DFCs) and the effectiveness of CV-CFN depended on changes in the interest rate structure which would make medium- and long-term lending at least as attractive as short-term lending. Ecuadorian monetary authorities have recognized this situation and on November 9, 1976 the Monetary Board issued Resolution No. 927-76 which introduced a graduated structure of allowable commission charges on medium- and long-term lending. According to the new regulations both the banking system and DFCs are allowed to charge, in addition to the (unchanged) 12% interest rate, the following maximum commissions on new contracts: Commission on: Loans financed Loans financed with Original final maturity with bonds other resources More than 3 years and up to 5 years 2.5% 2.0% More than 5 years and up to 8 years 3.5% 3.0% More than 8 years 4.5% 4.0% The new interest and commission structure provides both the public and private DFCs with a reasonable effective interest rate spread. Given the current 11.9% market rate on bonds issued by private DFCs, the average of the maximum allowable spreads on term lending financed with these instruments is 3.6 per- centage points. An additional attractive feature of the new structure of interest rates is its adequate term differentiation between medium- and long- term operations. It also reduces the interest rate differential between  - 8 - short- and long-term lending and between types of operations. In particular, the effective spread on term lending financed with bonds will range between 3.7% and 4.2% given the current 12% market rate for these instruments (Annex 1). 2.17 While the new rate structure does not provide financial inter- mediaries with a clear premium for medium- and long-term lending compared to short-term operations, it does represent a major step toward equalization of the financial return on the two types of operations. The Government agreed with the Bank's view that without a premium for medium- and long-term lending, it is necessary to restrict the short-term operations of DFCs to insure that the primary emphasis of their operations will be in medium- and long-term lending. So long as no adequate regulations prevent DFCs from assuming an overly commercial orientation, short- and medium-term operations, i.e. all portfolio operations with original final maturities of less than 5 years, of the DFCs participating under the proposed loan would be limited to four times their equity. An agreement to this effect was reached with CV-CFN, COFIEC and the Government regarding new DFCs during negotiations. 2.18 Although the new commissions and the proposed restriction on the short-term operations of DFCs are essential first steps in the Government's efforts to foster the capital market, Ecuadorian monetary authorities also agreed with the Bank that these actions have to be complemented with more extensive research and, possibly, with other institutional modifications. Consistent with this view, the Bank and the Government agreed during nego- tiations that the latter would carry out such specialized studies to provide a technical basis to identify, select and implement capital market policies conducive to channeling a substantially large share of domestic savings into long-term industrial financing. Specifically, the Government intends to (i) review and update past studies on the Ecuadorian capital market, (ii) conduct new studies as necessary, and (iii) prepare selective legislative and regu- latory proposals. New regulations on DFC operations, further studies on the interest rate structure, as well as research on new and improved financial instruments, on private savings and its intermediation, on a wider distribu- tion of ownership of firms, and on a better functioning of the secondary markets, are considered priority topics. 2.19 For the purpose of carrying out the capital market studies, a capital market office would be created by the Government in the near future. This office would be headed by a coordinator who would prepare a work program and seek the manpower necessary to ensure an adequate implementation of such program. An agreement on this setup was reached with the Government during negotiations. Accordingly, the Government would afford the Bank a reasonable opportunity to comment on the qualifications and terms of reference of the experts who would carry out the studies, and on the resulting regulatory proposals before their enactment. 1/ 1/ In response to requests from Ecuadorian authorities in the past, IFC has contributed to the analytical groundwork related to the development of the Ecuadorian securities market. For the purpose of commenting on the recommendations resulting from the technical studies, the Bank would seek the counsel and cooperation of IFC.  - 9 - III. CV-CFN - PAST PERFORMANCE AND PROSPECTS 1/ Organization, Management and Staff 3.01 CV-CFN is a wholly government-owned DFC that, although oriented toward the private sector of the economy, broadly reflects the social and economic objectives of the Government. Seven of the nine members of the Board are ministers of state and the Chairman is appointed by the President of Ecuador. The Corporation's top managers are talented and professionally inspired and the staff is well qualified and motivated. Policies and Procedures 3.02 CV-CFN has conducted its operations according to its Declaration of Policies and Procedures. However, in view of the Corporation's larger role in promoting Ecuadorian exports and of the fund for this purpose set up outside of but associated with CV-CFN (FOPEX), an agreement was reached during negotiations to specifically incorporate this activity in the Declaration of Policies and Procedures, with due regard to the fund's autonomy, before disbursement for subprojects submitted by CV-CFN. 3.03 CV-CFN has adequate methods to appraise projects. However, in order to detect investment in inefficient industries, the economic rate of return would be calculated on all projects involving a total investment above US$500,000 equivalent, whether or not financed with Bank funds. This under- taking, which in the previous loan was limited to Bank-financed projects only, was confirmed during negotiations. The project supervision procedures and reports are also adequate but a supervision manual would facilitate this function. Along this same line, a manual for disbursement procedures would facilitate the application of the Corporation's strict disbursement rules and conditions. An agreement that both of these manuals would be submitted to the Bank for approval within six months of loan signing was reached during negotiations. With regard to procurement, CV-CFN's engineers satisfy them- selves of the technical adequacy of the equipment financed. In the case of large imports of used equipment, management requests the opinion of an inde- pendent technical authority. The project and control departments of the Corporation review the reasonableness of the prices of the goods and services procured. Operations and Performance 3.04 The operations have expanded rapidly, with 1975 loan approvals reach- ing S/ 1.4 billion. Increasingly, a large proportion of the loans has been for sizable and long-term operations, but also for working capital. Due to the relatively large size of CV-CFN's past subloans, it was agreed to limit sublending of Bank funds to individual firms to a maximum of US$3 million equivalent. Although four-fifths of its lending is still concentrated in the 1/ This chapter is a summary of issues discussed in Annex 4.  - 10 - two major economic poles of the country, the industrial diversification of the portfolio is considerable. Industries processing agricultural raw materials accounted for 38% of total loans. Equity investments constitute an important part of CV-CFN's activities, largely as a result of its own promotional effort. A considerable proportion of these investments, however, is concentrated in a few firms. CV-CFN also administers five special public funds but their combined resources represent less than 5% of the Corporation's assets. 3.05 Foreign loans constituted an important source of funds of the company between 1972 and 1975, but most of the Corporation's expansion was financed with bonds and domestic credits. Bank resources were used to finance 30.3% of an aggregate project value of US$44.6 million equivalent. 3.06 Portfolio quality and audit. As of March 31, 1976, 3.1% of the portfolio was in arrears above three months (up from 2.3% at the end of 1974), representing 10.5% of the clients. Even though these percentages reveal a slight deterioration of CV-CFN's portfolio compared to previous years, there are strong indications that this change is of a temporary nature related to a general lack of liquidity throughout the economy. Furthermore, management is aggressive in pursuing accounts in arrears. Although estimated losses are covered by provisions, the safety margin for future eventualities is smaller than in the past. Therefore, an understanding was reached during negotiations that provisions as a percentage of portfolio would be increased from 1% to at least 1.5% by the end of 1978. CV-CFN's accounts are satis- factorily audited annually by Price Waterhouse and Co. 3.07 Profitability and financial condition. In 1975, 71% of total reve- nues came from loans, and the average return on assets was 9.1%. Net income was 2.6% of assets, which was also the average for the last five years. CV-CFN's annual return on equity averaged 6.1% between 1968 and 1975. In real terms, however, the profitability has been negative. Three main factors have led to CV-CFN's negative real return on equity. First, the company has allo- cated more resources to low-yielding assets than it has borrowed on a subsi- dized basis. Second, the debt-to-equity ratio has been relatively low (1.5 on the average and 2.2 at year end 1975). Third, inflation has been excep- tionally high during this period. The erosion of CV-CFN's capital base was offset by an infusion of fresh capital in 1974. 3.08 Even though the Corporation's liquidity has declined, its position is still adequate considering the predictability of its financial flows, its access to rediscounting facilities at BCE, and the favorable relation between the maturities of its loans and borrowings. An improved budgetary mechanism, however, should ensure against occasional liquidity constraints. An understanding concerning the implementation of such a system was reached during negotiations. Because CV-CFN carries the exchange risk on its foreign borrowings other than the Bank loans (US$29.6 million equivalent in 1975), and has sustained losses (Annex 4, para. 23), an agreement was reached with the Government, as in the case of the Second DFC Loan, on protecting CV-CFN's capital from possible exchange losses that exceed CV-CFN's net profits and  - 11 - free reserves. In addition, it was agreed with CV-CFN during negotiations that foreign exchange losses (profits) would be treated as an expense (income) in the year in which foreign currency rates change. This accounting practice departs from the current one which treats foreign exchange losses (profits) as assets (liabilities) subject to gradual amortizations. Prospects 3.09 Operations and resources. The Corporation's forecast operations are reasonable, consistent with its strategy, and well within its handling capa- city. The volume of loan disbursements is expected to grow at 12% p.a. be- tween 1977 and 1980. The project pipeline submitted to the Bank in February 1976 contained 80 loans amounting to almost S/ 700 million; three-quarters of this amount would go to existing firms and the balance to new enterprises. 3.10 Equity investments are expected to more than triple by 1980, with more than one-third of the expansion going for companies promoted by the Corporation. CV-CFN also plans to take more active steps in developing the capital market in Ecuador. Possible plans include setting up one or more equity funds with its own portfolio, assisting new DFCs, issuing financial instruments with new features, and also increasing somewhat their current very small short-term portfolio, which is well below the maximum agreed with CV-CFN and the other participating DFCs (para. 2.17). Some of CV-CFN's envisaged roles would eventually require changes in its Declaration of Policies and Procedures. Therefore, it was agreed that any change in the Declaration would have to be acceptable to the Bank. 3.11 Planned operations for 1976-80 call for S/ 13.6 billion of indus- trial financing. While most of the required resources would be generated internally (retained earnings and loan amortizations), one-fourth would come from foreign sources (US$137 million). CV-CFN has already arranged credits in the amount of US$59 million, leaving a foreign exchange gap of US$78 mil- lion through 1980 (Annex 4, para. 28). The proposed loan would cover 17% of this gap. The Corporation's projections include systematic equity additions from the Government of S/ 300 million starting in 1977. Although management still considers these capital increases as resource targets, their amounts are subject to reductions. 3.12 Financial projections. The Corporation's operating plan, if realized, would more than triple assets by 1980 and satisfactory financial positions would parallel this expansion. To cope with a possible equity restriction, it was agreed at negotiations to raise the overall debt-to-equity limit from 4:1 to a still reasonable 6:1 ratio. This change would be incor- porated in the Corporation's Declaration of Policies and Procedures as a condition of disbursement for CV-CFN financed projects. 3.13 CV-CFN projects a contraction in net income as a percentage of assets from 2.3% average in the past to 1.5% in the next five years. This  - 12 - fall is largely explained by an increase in financial expenses. However, the new minimum commissions agreed with "he Bank (para. 5.05), which are expected to be applied also to loans `lanced from non-Bank sources, would eventually increase CV-CFN's financial ;-ead by 1.6 percentage point, raising the expected average return on equitv' ro'l 6.4% to 12.6%. A slightly higher leverage would increase the profitaib,ity further. In contrast with the negative returns in the past, the projected real return on equity would rise to 5.2%. IV. COFIEC - PAST PERFORMANCE AND PROSPECTS 1/ Organization, Management and Staff 4.01 COFIEC is widely owned by some 300 private institutions and indivi- duals, CV-CFN, and IFC. The President is responsible to the Executive Com- mittee of the Board of Directors for management of the Company. Some con- flicts exist between central administrative functions and the Quito regional functions, but management is delineating responsibilities by introducing changes in the organization, departmentalization, and job descriptions of the Company. These changes were reviewed at negotiations and an understanding was reached on putting them into effect within six months of loan signing. Policies and Procedures 4.02 COFIEC has generally conducted its business within the framework of its Policy Statement. In view of its need to mobilize long-term resources for long-term lending, COFIEC would remove from the Statement the 4:1 limitation on its long-term debt-to-equity ratio, but the Company would remain subject to an overall debt-to-equity limit (para. 4.09 and 4.14). It would likewise introduce a limitation on short- and medium-term operations (para. 4.12), and any further change would have to be acceptable to the Bank. These changes were agreed upon during negotiations. 4.03 The Company's ability to appraise projects has shown continuing improvement during the commitment of the Second DFC Loan, although there has been some backsliding recently. COFIEC's follow-up on loans has been uneven, although in important cases it has been very good. More clearly defined responsibilities should improve supervision. Aware of the need to strengthen both appraisal and supervision, management has been taking steps to these ends. An understanding concerning their full implementation within six months of loan signing was reached during negotiations (Annex 20, para. 5). Appraisal capacity will need to be strengthened as well, in order to extend the calculation of the economic rate of return to a larger number of projects. 1/ A more detailed discussion of COFIEC's part performance and prospects is set out in Annex 21.  - 13 - Under the proposed loan, this calculation would be made for all projects involving an investment in excess of US$500,000 equivalent or more than US$250,000 equivalent for Bank-financed projects. Agreement on this point was also reached at negotiations. 4.04 COFIEC's disbursement procedures are adequate. To satisfy itself that items procured are competitive in price, it requires evidence that its clients have canvassed alternatives and it ensures the suitability of the items procured. Operations and Performance 4.05 Operations. In spite of inflation COFIEC has been able to almost double the real value of its portfolio since 1972, with the term structure of its operations mirroring that of its resources. Disbursements for letters of credit and guarantees make up 63%; loans 36%; and equity investment only 1% of total disbursements. The sectoral distribution of COFIEC's lending is well diversified, with industries processing agricultural and forestry raw materials receiving almost half of its industrial credit. 4.06 Resources. COFIEC's medium- and long-term resource availability has been about as forecast. The principal sources have been Bank DFC loans, equity increases, bond issues, and loans from IESS and AID. To maintain profitability the Company had to mobilize a greater volume of short-term resources than expected, mainly by drawing on foreign bank lines of credit to finance letters of credit and guarantees. 4.07 Financial conditions. COFIEC's financial statements are satisfac- torily audited by Price Waterhouse & Co. and the audits now include an assess- ment of the provisions for portfolio losses. While still considered adequate, provisions have fallen as a percentage of portfolio and currently barely exceed estimated losses. COFIEC's arrears have increased to 5.2% of portfolio, from 3.6% in 1974, as a result, among other things, of tight credit throughout the economy stemming from Central Bank restrictions (para. 2.12). In light of these circumstances COFIEC's management has undertaken a program for increasing provisions for bad debts, and a timetable for putting it into effect was agreed upon during negotiations (Annex 21, para. 16). 4.08 Maintaining adequate liquidity has been a continuing problem for COFIEC, notwithstanding its practice of matching loan repayments by its clients with payments to its creditors. The Company has recently centralized the management of its lines of credit in a new resources department and this should aid in liquidity management. 4.09 COFIEC has had difficulty in maintaining its level of operations within the debt-to-equity limitation set in agreement with the Bank. In addition, there had been discrepancies with COFIEC as to the inclusion of refinanced letters of credit in the definition of debt. Under the proposed loan the outstanding amount corresponding to such transactions would be  - 14 - included in the debt-to-equity calculation and an agreement was reached with COFIEC during negotiations on a full accounting disclosure of these transactions. To avoid forcing a reduction in COFIEC's operations, however, an increase in the debt-to-equity limitation from 7:1 to 8:1 was agreed upon at negotiations, representing de facto only a slight increase in leverage. 4.10 Profitability. Inflation has had a debilitating effect on COFIEC's profitability. In 1973-75 the average real return on equity was negative. To deal with this, the Company was under pressure to increase short-term operations, its most profitable lines, and to cut costs. In so doing, the gross spread was maintained in the range of 4.4% to 4.9% of assets, while administrative expenses and provisions were reduced, perhaps too rapidly, to 2.3% of assets. The flexibility of COFIEC's management prevented a more pre- cipitous fall in real profits at the expense of downplaying COFIEC's role as a development bank. Prospects 4.11 The following is based on projections made by COFIEC; they are somewhat conservative since they do not fully reflect the new possibilities that are opened to the Company by the new commission structure (para. 2.16) and the agreements reached on COFIEC's financial policy during negotiations. The projections are consistent with COFIEC's newly prepared Strategy Paper (Annex 29). 4.12 The rapid growth of the Ecuadorian economy is creating new demands for COFIEC's services. Through 1978, total disbursements are projected to rise at almost 9% p.a. in real terms and the Company expects long-term lending to grow faster than any other type. These projected operations, while represent- ing an improvement over recent years, would nevertheless result in COFIEC having only about one-third of its portfolio in long-term operations by 1978. But in view of the new commissions the Company believes that it can increase its long-term activity still more (to 50% of its portfolio in 1978) and reduce its short- and medium-term operations to no more than four times equity by the end of 1978. An agreement on this limitation was reached during negotiations and the end of 1978 was set as a deadline for achieving it. 4.13 Resource requirements. To meet its clients' needs for short- and medium-term financing, COFIEC will continue to rely on foreign lines of credit, BCE discounts and acceptances, and loans from IESS and AID. It will supplement them by issuing medium-term financial certificates. Together, additional short- and medium-term resources would make up about half of the total resources needed through 1978. Long-term resources would come from much larger bond sales, equity increases (mainly from retained earnings), and the proposed loan. Total foreign exchange needs during 1976-80 come to US$46 million but the Company has identified new resources of US$8 million, leaving a gap of US$38 million. The US$10 million portion of the proposed Bank loan allocated to COFIEC would fill only 26% of the projected foreign exchange  - 15 - gap and the remainder would be filled mainly by using bond sales to purchase foreign exchange and by other foreign borrowings. Thus, any substantial shortfall from COFIEC's ambitious resource mobilization program would result in curtailed lending. 4.14 Financial projections. According to its projections, COFIEC's assets will grow at 10% p.a. in real terms through 1978 and, allowing for revisions to reflect the limit on short- and medium-term operations, long-term operations would comprise over one-half of the total portfolio in 1978 as against 28% in 1975. After 1978, growth would slow down in line with slower growth in equity. To avoid forcing COFIEC to hold back its mobilization of long-term resources, the 8:1 debt-to-equity limit could be raised in steps to 10:1 after periodic reviews which should satisfy the Bank that: (a) short- and medium-term operations do not exceed four times equity; (b) portfolio quality is satisfactory; (c) liquidity management, appraisal capacity, and supervision have improved to the satisfaction of the Bank; (d) most of the additional resources will be mobilized domestically by issuing bonds, finan- cial certificates, or similar instruments. Agreement on the application of these criteria was reached during negotiations. 4.15 The gross spread is projected to remain around 4.4% of assets and administrative expenses would rise as more resources are devoted to appraisal and supervision, but the new commission structure should allow the spread to increase to around 5%. Profitability nevertheless would remain modest. The nominal return on equity would be in line with the recent past but COFIEC would be making a sizable contribution to the long-term financial needs of Ecuadorian industry. Due to lower projected inflation, the real return on equity would average around 11% p.a. compared to negative returns of the last three years. V. PROPOSED BANK LOAN 5.01 The project. The proposed loan of US$26 million to be granted to the Republic of Ecuador would be channeled through BCE as the government fiscal agent 1/ to be relent to CV-CFN, COFIEC and new DFCs which meet the qualification criteria (para. 5.02). Bank funds would be available to qualifying industrial enterprises whether privately or publicly owned, for the financing of foreign exchange costs of equipment and permanent working capital, through either loans or equity investments. The proposed loan would be repayable within 15 years on a composite amortization basis including 3 years of grace. The terminal date for submission of subprojects would be June 30, 1979, the closing date for disbursements, June 30, 1981. (Annex 37). 1/ BCE's function is to act as the Government's financial agent with res- ponsibility limited to handling disbursements and repayments of subloans.  - 16 - 5.02 Participation of new DFCs. The Bank will determine which of the new DFCs meet the requirements for participation in the proposed loan through a review of qualifying DFCs in the second semester after loan signing. In order to qualify for review, new DFCs would have to meet the following conditions: (a) minimum paid-in equity of S/ 20 million (US$800,000); (b) total debt-to-equity ratio not greater than 4:1; (c) a loan portfolio that includes at least five development lending operations having original maturities greater than 5 years; and (d) short- and medium-term operations would be limited to four times equity. The Bank's review of the qualifying DFCs would focus on (i) the adequacy of management and administrative procedures, (ii) the overall financial and economic soundness of the institution, (iii) the capability to prepare, evaluate, and supervise investment, and (iv) the size and characteristics of the project pipeline. Two or three new DFCs may be expected to qualify for review. All subloans made by new DFCs would be subject to approval by the Bank. New DFCs would enter into a Project Agreement with the Bank substantially along the lines of those signed with CV-CFN and COFIEC. 5.03 Allocation of loan. In line with the expected volume of operations of each DFC, the proposed loan of US$26 million would be allocated as follows: US$13 million to CV-CFN, US$10 million to COFIEC, and US$3 million to the new DFCs that meet the requirements for participation. The allocation of the US$3 million to the new participating DFCs would be determined, after exchanging views with the Government, by the Bank on the basis of its reviews of these DFCs to take place not later than March 31, 1978. Any portion not assigned to the new DFCs would become available to CV-CFN and COFIEC in equal amounts. Any amounts uncommitted by the DFCs six months before the end of the commit- ment period could be reallocated among them by the Bank after consultation with the Government. 5.04 Free limits. The following free limits and aggregate free limits would assure Bank review of a reasonable portion of the financing undertaken with Bank funds by each institution. CV-CFN COFIEC New DFCs - - - - -u $ - - - - --US$